The proposal of the Ministry of Finance on lump sum tax for entrepreneurs and other self-employed individuals was negotiated and approved by the Parliament and headed to the Senate. The go live of the lump sum tax scheme is expected as of 1 January 2021.
In this article, we will cover the main principles of the lump sum tax and for whom their implementation will be beneficial.
The main limitation on the utilization of the lump sum tax is the amount of annual gross income, which cannot exceed CZK 1 million. Another important limitation is that the lump sum tax can only be adopted by entrepreneurs who are not VAT payers and do not have a registration duty.
Lump sum tax is voluntary. Every self-employed individual can decide for themselves whether to adopt it or not. In 2021, the lump sum tax should amount to CZK 5,469 a month. One of the advantages of the lump sum tax is that there is no obligation to file an annual tax return or social security / health insurance statements. All the tax obligations are fulfilled through the lump tax sum. The lump sum tax payment of CZK 5,469 for 2021 includes:
- Health insurance payment of CZK 2,393,
- Social security exceeding the minimum advance by 15%, of CZK 2,976
- Individual income tax of CZK 100 (this symbolic amount should compensate the increase in the social security payment of 15%)
In the following years the lump sum tax payment will increase depending on development of various macroeconomic indicators.
According to the Ministry of Finance, the payment of lump sum tax should significantly decrease the administrative burden for small entrepreneurs, reduce tax compliance costs and also reduce scope for errors in tax returns, social security and health insurance statements. Payers of lump sum tax are unlikely to be audited by tax authorities.
The main disadvantage of the lump sum tax is that the entrepreneurs will not be able to use tax credits. For self-employed individuals that apply tax bonus for children or tax credit for a spouse, the tax lump sum tax will likely not be beneficial. The lump sum tax will thus likely be beneficial only for childless single entrepreneurs with gross income of up to CZK 1 million a year.
Based on the current wording of the law, the entrepreneurs will not be able to apply the following tax credits:
- Default tax credit,
- For spouse,
- For spouse that is disabled,
- Partial/full disability pension,
- Proof of disability-related,
- Kindergarten credit-related,
- Records of Sales-related,
- Tax credit or bonus for children.
Over 369 thousand self-employed individuals should be able to fulfill conditions for the lump sum tax but it can be expected that many will be put off by the inability to use the various tax credits. This is why the Ministry of Finance estimates that around 127 thousand entrepreneurs are likely to enroll in the scheme.
As we stated in the beginning, the lump sum tax law has not yet been through the entire legislative process and so there is still scope for further amendments of this draft law.