The consolidation package presented by the government at the end of May, which is expected to come into force from 1 January 2024, includes changes in the taxation of employee benefits. What specifically should employees and their employers prepare for?
Changes in the taxation of benefits from the perspective of employees
From the employee’s point of view, there will be a fundamental change in the complete abolition of Section 6(9)(d) of the Income Tax Act, which is used to exempt most of today’s benefits from taxation. This will abolish the personal income tax exemption for all non-monetary benefits provided to employees and/or their family members in culture, sports, education, purchase of medical services and equipment, recreational facilities, tours, etc. The exemption for non-monetary gifts under CZK 2,000 provided from the cultural and social needs fund and for social assistance will also be abolished; this provision can be currently used to provide to employees fulfilment with a total value of up to CZK 500,000 and meal vouchers above this limit, provided the conditions of the law are met.
In the case of meal vouchers, the provision will be newly aligned with the so-called “meal voucher lump sum”, which means that the upper limit for the exemption will be 70% of meal allowances for business trips of 5–12 hours. The current regulation makes it possible to exempt from personal income tax the value of all meals provided as a non-monetary fulfilment from the employer towards the employees for consumption at the workplace, or through meal vouchers from other entities, without any limitations. Under the new regulation, for instance, even small snacks (fruit, biscuits, etc.) provided by the employer during meetings in the workplace will also be included in the limit. Given that this will be very difficult to track in practice, we expect this provision to be amended.
In principle, the abolition of the tax exemption for these benefits means that the non-monetary benefits listed above will be subject to personal income tax as wages, and will be included in the calculation of contributions to the social and health insurance system as well.
It will, however, be difficult to determine the value of certain benefits provided to employees in the field of culture, sports, education, etc., because these can be bought in bulk at special, typically discounted prices, subsidised in various ways, e.g. through the company’s own recreational facilities, etc.
Employers also commonly use so-called cafeteria systems or benefit cards, which can be used to collect points and exchange them for real benefits in a different period than the one in which the points were credited to the employee by the employer. Under the transitional provisions, benefits provided before the end of 2023 should be fully exempt from tax for the employee. It is not, however, quite clear what will be considered the moment when the benefit is provided – it can be either when the points are credited to the benefit card or account, or when the employee actually exchanges the points for a fulfilment (e.g. purchases a ticket or trip). If it is the latter, it is unclear how the points not used by 31 December 2023 should be taxed (in one lump sum or gradually as they are used?).
One piece of good news is that, for example, interest-free loans under CZK 300,000 will still be exempt from tax, and from the employer’s perspective will be much easier to implement. If certain conditions are met, all these benefits provided to employees (but not their family members) without limitations will be tax deductible for employers, if they are identified in a collective agreement, internal regulations, employment contract or other kind of agreement as expenses for working and social conditions, healthcare or a means for extending rest time for employees.
Unfortunately, the final wording of the Income Tax Act is not yet available because the legislative process is still in its early stages.