Change in the income tax base for foreign employees

The new year has not brought many legislative changes related to the income tax yet – these will be included in the 2019 tax package which is now being discussed. However, in this article we would like to introduce to you one important change that came into effect on 1 January 2019.

In December last year, the Czech president managed to approve an amendment that changes the method of setting the income tax base for foreign persons who have income from employment in the territory of the Czech Republic. However, this change only applies to those foreign employees who are partly or wholly subject to the obligation to participate in foreign insurance of the same kind (i.e. health and social insurance), if this insurance is governed by the regulations of another Member State of the EU or of a state constituting the EEA other than the Czech Republic or the Swiss Confederation.

For simplicity’s sake, the income tax base for employees is set as the sum of income from employment activity and social security and health insurance paid for the employee by the employer. Under the previous legislation in force, the income tax base for the aforementioned foreign employees was set in the same way, i.e. as the sum of income from employment activity and hypothetical contributions to social security and health insurance in the amount of 34% of gross income. Hypothetical contributions correspond with the amount of the insurance that the employer would pay for a foreign employee if such an employee participated in the Czech social system. Using the super gross salary determined this way, an income tax prepayment was deducted from the foreign employee’s monthly income.

The new legislation stipulates that, instead of the hypothetical social security and health insurance, the employee’s gross salary will be increased by the actually paid social security and health insurance in the state where it is paid, i.e. not by the hypothetical premium amount. Income tax prepayments calculated for January 2019 will already be based on this method.

We would like to emphasise that only the health, sickness and pension insurance premiums paid and the contribution to the state employment policy will be included in the tax base. Other compulsory or voluntary contributions by the employer under foreign legislation will not be included in the tax base.

It is also important to note that the employee’s place of residence is not decisive for determining the state where the person is a member of social insurance. For example, a US resident may be a participant in the German social insurance, and the amendment will apply to his/her Czech employment income. However, for a Slovak resident insured in Canada, the amendment will have no effect on taxation of his/her income from employment in the Czech Republic, and his/her income will be taxed as before.

In conclusion, we would like to add that the paid foreign premiums will of course need to be converted to Czech crowns. The exchange rate set by the Czech National Bank, valid on the day of the last calendar month preceding the month in which the premium is deducted, will be used for the correct conversion of foreign premiums. For example, the exchange rate as of 31 January will be used for processing January salaries.