To get a one-off annual bonus may not pay off for companies or employees now. Why? The reason is the introduction of the “solidarity tax increase”, also called millionaire’s tax. This means not only higher tax but also a duty to file a personal income tax return.
The annual amount of income for solidarity tax is determined as the 48 multiple of the average salary, which equals the cap for the social security insurance and which amounts to CZK 1,242,432 for 2013. However, if an employee exceeds 1/12 of this income, be it in one of the twelve months, they will be obliged to file a tax return even if their annual income amount does not reach this limit. This construction will then mean that there will be many more persons filing tax returns than persons having “the above average income deserving extra taxation” because filing a tax return will now also apply to employees who will have their annual bonus, based on their good results from the last year, credited by the employer this year, for example in April. It is no longer so unusual that a bonus and a salary together exceed the magical limit of CZK 103,536, which implies a duty to pay the solidarity tax increase in tax advances. In addition, the income amount includes various other benefits that are not exempt from tax and are subject to tax, such as 1% of the purchase price of a car used for private purposes, exercised options if they are included in employee income, accommodation benefits taxed later, etc. The positive thing about this fact is that if the annual income does not reach the annual amount for solidarity tax, the already withheld and paid advance on solidarity tax will be returned to the taxpayer as an overpayment after they file a tax return.
We would like to remind you that solidarity tax will only be calculated from the positive difference between income included in employment income and the limit mentioned above; therefore, this is not the “super gross salary”. Unlike rental income, capital gains or other income, solidarity tax will affect income from business activities, so the tax base of income from business activities must also be considered in the annual income. The whole thing, however, will be enhanced by the fact that the maximum assessment base for health insurance is not in force for the period of 2013-2015. Therefore, this will be a cruel premiere for self-employed persons because they have always had caps for insurance, unlike employees.
Although it seems that there are formulas for paying a bonus without the solidarity tax increase in 2013 despite a salary which was accounted for in 2012 but has not yet been paid out, it is not likely that we find other options for tax optimisation in 2014 and 2015.
Solidarity tax increase, foreign income and international taxation
Although it is not quite apparent, the explanatory memorandum and the General Financial Directorate confirm that the solidarity tax increase is tax. This classification has a significant effect in international taxation because it means that in the case of tax residents:
- who will have income from abroad and will use the exemption method to avoid double taxation of foreign income, the solidarity tax increase should be applied after exempting foreign income.
- who will have income from abroad and will use the credit method to avoid double taxation of foreign income, the solidarity tax increase should be, in accordance with the text of the explanatory memorandum, part of the tax duty where the amount of the tax paid abroad will be credited.
On the contrary, i.e. in the case of foreigners – non-resident taxpayers who will reach income exceeding the set limit and this income will be subject to the solidarity tax increase in the Czech Republic, the tax administrator shall issue a certificate of tax payment in the Czech Republic relating to the whole amount including the solidarity tax increase.
Please do not hesitate to contact us if solidarity tax affects you or your employees and have any questions.
For more information please contact us.