Progressive Tax 2025

Tax Progression for 2025: What's New and Who Will It Affect?

For employees with monthly tax advances, the threshold for applying the 23% rate has been moved to CZK 139,671. It is important to note that the higher rate applies only to the portion of income that exceeds this limit, not to the entire tax base.

This system has a significant impact on all taxpayers who previously might have considered passive income to be less risky from a tax perspective. Unlike the so-called solidarity tax, which in the past only applied to income from employment and business activities, progressive taxation now applies to the aggregate of all taxable income. This means that income from capital investments (Section 8 of the Income Tax Act) and other income (from the sale of property, rent, etc., under Section 10 of the Income Tax Act) are also included in the total tax base. 

It can therefore easily happen that even a person with a "normal" high salary will be pushed into the 23% tax bracket due to a one-off gain from the sale of a share, dividends, or real estate. For these situations, precise tax and legal optimization is essential to prevent unexpected tax liabilities.

Fundamental Changes in Investments: New Exemption Limit

One of the most significant changes for investors is the introduction of a limit for the exemption of income from the sale of securities and shares in business corporations. While previously it was possible to exempt this income from tax without any limitation if the so-called holding period test was met (3 years for securities, 5 years for shares), from 1 January 2025, an aggregate limit of CZK 40 million per tax period applies. Any income above this threshold will be subject to the standard personal income tax rate.

Furthermore, for the application of this limit, the key moment is when the income is actually received, not when the sale occurred. This means that if the sale of a share took place at the end of 2024, but the purchase price is paid in 2025, the new limit will already apply to such a transaction. 

This fact dramatically changes the strategy for business owners preparing for a sale. Whereas previously the sale of a company for any price could be completely tax-exempt if the holding period test was met, this transaction is now taxable, which needs to be considered in the sales strategy.

How to deal with this risk? Against the taxable income exceeding CZK 40 million, it is possible to claim the acquisition cost of the security or share, or its market value determined as of 31 December 2024.

It is advisable to substantiate this value with an expert valuation report. Using a valuation report ensures that only the increase in the asset's value that occurred from 1 January 2025 is taxed. Another optimization option is to spread the purchase price over time into multiple tax periods so that no single installment exceeds the annual limit of CZK 40 million.

Changes in Compensation and Benefits for Employees

From 1 January 2025, significant adjustments have been made to non-monetary benefits that companies provide to their employees. Benefits are now divided into two basic groups with different limits for exemption from tax and contributions. The first group consists of so-called "health benefits," such as contributions for rehabilitation services or medical devices. These benefits are newly exempt from tax and contributions up to the amount of the average wage, which for 2025 is CZK 46,557. 

The second group includes other benefits, such as contributions for recreation, culture, sports events, or education, and these are exempt only up to half of the average wage, i.e., up to CZK 23,278.50. For business owners and managers, these changes present an opportunity to strategically increase the attractiveness of corporate employee healthcare programs. Offering more expensive and higher-quality health services, which is tax-efficient, can become a significant competitive advantage in the labor market. 

The amendment to the Income Tax Act responds to the growing interest in well-being programs and gives companies a tool to invest in them without an additional tax burden. Our Prague-based legal team, who regularly deal with this issue, can assist with drafting internal guidelines and rules for employee benefits.

For tailored legal solutions that protect against fines and audits, write to us at konzultace@arws.cz.

Penalties and Fines: Avoid Unnecessary Problems

The Czech Tax Code stipulates strict penalties for late or incorrect fulfillment of tax obligations. For each day of delay exceeding five working days, a fine of 0.05% of the assessed tax is imposed. The maximum fine can reach up to 5% of the assessed tax, with an upper limit of CZK 300,000. If the tax authority assesses additional tax during a tax audit, a penalty of 20% of the additionally assessed amount is imposed. In addition, late payment interest is charged, calculated from the fourth day after the original due date, at a rate of 8% + the CNB repo rate.

One of the most significant changes with a direct impact on cash flow management is a new rule in VAT. From 1 January 2025, VAT payers are obliged to return a previously claimed VAT deduction on invoices that have not been paid within six months of their due date. This rule introduces a significant risk to businesses, as even a seemingly simple administrative error or a client's insolvency can result in additional financial loss and significantly affect the company's financial stability. Legal and tax prevention thus becomes an absolute necessity.

How to Prepare for 2025? ARROWS Will Help You Navigate the Tax Labyrinth

The new tax environment requires active management and planning. A proactive approach is key to avoiding unexpected tax liabilities, fines, and other penalties. The ARROWS legal team regularly deals with tax law and corporate finance issues and can help you with the preparation of legal documentation, contract reviews, tax and legal opinions, or the drafting of internal guidelines.

Thanks to the ARROWS International network, built over ten years, and our practical experience with international elements, we can provide legal services even outside the Czech Republic. Our lawyers handle tax matters with an international element on a daily basis. Our clients include more than 150 joint-stock companies, 250 limited liability companies (s.r.o.), and 51 municipalities and regions, which testifies to the broad scope of our expertise. 

We provide representation before registers and regulators, including fulfilling obligations, arrange expert training for employees or management (including certification), and offer legal advice on obtaining permits and licenses. Our portfolio includes a wide range of clients who regularly turn to us with questions on how to correctly and effectively prepare for tax changes and mitigate risks.

In addition to legal advice, we can also connect clients with each other if they have interesting investment or business opportunities. And we are always happy to hear about interesting entrepreneurial or business ideas. Leave your tax worries to us. Our team is ready to help you.