Single tax flat rate (paušální daň) for Individual Entrepreneurs
Starting from January 1, 2021, Czech individual entrepreneurs will be able to voluntarily choose a new system of paying for the income tax and transferring monthly premiums to social and health insurance funds. This means there will be one combined payment instead of three (as before); and there will be no need to file your annual tax returns nor reports to the social and health insurance authorities, so called “single tax flat rate” report (paušální daň).
The Entrepreneurs do not have much time to determine the benefits and disadvantages of payment the single tax (flat sum) option, because in order to be able to use the new payment format, the Entrepreneur will have to submit a formal application to the Czech tax office before January 10, 2021.
In order to start using the single tax mode that became in effect since 1.1.2021, an individual Entrepreneur business activity have to meet certain conditions:
· Entrepreneurial income in 2021 shall not exceed 1 million CZK.
· The Entrepreneur is not a classic VAT payer by 1.1.2021 (except for IEs who are Identified persons to VAT)
· The Entrepreneur will not receive an income from classical employment in 2021 (as a hired FT employee).
· The Entrepreneur can assume that the total amount from any other additional income (i.e. financial activities in accordance with § 8 of the Income Tax Act + rental income § 9 + other income § 10) in the whole 2021 will NOT exceed 15 000 CZK (however, 15 000 CZK limit does not include the “tax exempted” income and the income that is subject to the withholding tax, so called “srážkovou daní”). If this limit is exceeded, the Entrepreneur will be obliged to submit an income tax report and separate reports to the social and health insurance authorities as well as to pay additional taxes and insurance premiums while taking into account the payments made and included in monthly advances that were a part of paying the single tax. This scenario will not be considered as a violation nor there will be sanctions, but compliance with tax and other obligations will be even more complex than under the standard method.
The size of the single tax
In 2021, the single tax monthly payment is 5 469 CZK, this amount consists of:
• Monthly Income tax deposit in the amount of 100 CZK
• Monthly Social security fund deposit for 2 976 CZK. This amount made of the minimum deposit for 2021 social security multiplied by 15% (for Czech Entrepreneurs in 2021 the minimum monthly Social security deposit is 2 588 CZK).
• Monthly deposit for health insurance fund 2 393 CZK. It is the amount equal to the 2021 minimum monthly health insurance deposit for Entrepreneurs in the Czech Republic.
Who will benefit from using the single tax system and why?
The main advantage of a combined flat tax is its simplicity, which saves several hours of paperwork a year. First, it can be beneficial to Entrepreneurs who are using lower rates of flat rate calculations (paušál system), in the amount of 40 percent. These are Entrepreneurs with the so-called liberal professions, such as lawyers, architects, doctors, notaries, appraisers, translators, bailiff’s executors, veterinarians and, for example, auditors. The 30% flat rate tax (paušál system) usually applies mainly to rental income.
- A Notary Public, who is officially not employed in any organization, has an annual income of 800 000 CZK, and when currently applying a flat rate of 40% paušál system, will save 7 001 CZK per month or 84 012 CZK a year, thanks to the introduction of transition to a single tax system.
- For Individual Entrepreneurs, who are using a flat rate of 60% paušál system, the single tax system will be beneficial only if they do not apply for yearly reimbursement for the dependent children bonus or do not claim the discount on the dependent wife (husband), and their yearly income is around 483 000 CZK.
- According to experts, a single tax system will be disadvantageous, for farmers and handiwork type activity Entrepreneurs, who already are using a flat rate of 80% paušál system. Other professions in this sector are hairdressers, locksmiths, carpenters, butchers, bakers, brewers, goldsmiths, blacksmiths, bricklayers, plumbers, watch repairer, and auto repair mechanics.
There are many questions remain:
- How will the Government check whether the Individual Entrepreneur has exceeded the limit of 1 million CZK in yearly earnings, and whether the conditions were initially met for enrollment into the single tax system, or whether the Entrepreneur was obliged to register and become a classic VAT payer?
- The Chamber of Tax Advisers or the Association of Small and Medium Enterprises cautions that the law does not contain any specific guarantee that would allow an Entrepreneur using a single tax system option to avoid controlling review, although this advantage has been repeatedly emphasized by the Finance Minister Schillerova.
- The Chamber of Commerce and other business associations draw their attention to the possible difficulties that Entrepreneurs may face if they want to get bank loans or mortgages. How to get those without the yearly Income Tax return?
- How will Individual Entrepreneurs-foreigners show their income earned when renewing residence or business visas?
We are ready to analyze your specific situation and offer the best option for you. Order the Annual report for an Individual Entrepreneur for 2020 from DoMyTax Accounting, by providing information about your business activity for the 2020 tax period, and the detailed analysis will be provided to you absolutely for free.