On 20 November 2020, the Senate discussed the tax law amendment implementing the lump sum tax as of 1 January 2021. The Senate fully endorsed the lump sum tax in the form endorsed by the Parliament, which is why the go live of the lump sum tax as of 2021 is almost certain.

In order to apply for the lump sum taxation regime, the Ministry of Finance has published a form, the so-called Declaration of entry into the lump sum regime, which is currently under preparation. This declaration has to be filed by 10 January 2021 at the latest. If a new self-employed individual starting business activities wants to apply for the new regime, they will have to do so by the day of starting their business activities at the latest.

The lump sum tax will significantly simplify administration and can also bring significant savings. A self-employed individual paying lump-sum tax will not file a personal income tax return or social security and health insurance income statements. All tax obligations will thus be fulfilled through the regular lump sum tax payment.

What to know before applying for the lump sum taxation regime:

• Lump sum taxation regime can be entered into by all entrepreneurs whose annual business income does not exceed CZK 1,000,000 in 2020;
• The entrepreneur cannot be a VAT payer;
• The entrepreneur is not employed as of 1 January 2021, apart from type of employment where the income is taxed through a withholding tax (typically a one-off work arrangement of up to CZK 10,000, or one for up to CZK 2,999 until 31 December 2020 and CZK 3,499 afterwards, in cases where the taxpayer did not sign an Income Declaration);
• In 2021 when the entrepreneur wants to use lump-sum taxation, he or she can no longer have income other than the following:
  • Income from business of up to CZK 1,000,000;
  • Income subject to withholding tax;
  • Income exempt from tax or income not subject to tax;
  • Income from capital, rent or other income not exceeding CZK 15,000 a year. A self-employed individual thus also cannot have any employment income (apart from income subject to withholding tax);
  • Lump sum tax is paid monthly and is due by the 20^th day of each month;
  • In 2021, the monthly payment of lump sum tax shall amount to CZK 5,469.

It is equally necessary to pay close attention to the transition between the year 2020, before the new regime was implemented, and 2021, if the taxpayer enrolls in the new lump sum tax regime. Based on the transitional provisions, it will be required to include, in 2020 tax return, also income that was already billed in 2020, but had not yet been paid by year end. This income will then be subject to the standard lump sum deduction, or will be lowered by the sum of unpaid liabilities, which would have otherwise been tax effective in 2021. This is a standard tax adjustment procedure that will be well known to those who switched from a lump sum deduction to actual costs, or vice versa, in the past.

As we already stated, a disadvantage of entering into the lump sum regime is the loss of ability to use tax credits or bonuses. These include the default tax credit, tax credit for a spouse, children, or for disability. Similarly, it will not be possible to deduct interest from mortgage or contributions towards pension and life insurance, or any other tax credits. This is the main reason why the transition to a lump sum regime may not be beneficial for everyone.