Part II

Developments in the Member States

ratio dropped further in 2009 due to the cut in the social contributions rate. The ITR on labour income increased in
2010 from the level of 37.6 % to 39 % probably following the increase of the social contributions base. This level
is still comparatively high, more than 5 percentage points above the EU-27 average. The elevated ratio is due to the
high level of social security contributions.

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The ITR on capital increased gradually from 2000 to 2003, but then the trend inverted. During 20042010, the ITR
on capital declined to 16.7 % (6.6 percentage points below the EU-25 average (EU-27 not available). The marked
decline as of 2008 could be largely explained by the cut of the CIT rate in the last three years under observation.
Environmental taxes represent 2.4 % of GDP. This value is slightly below the EU average (2.6 %) and has
remained roughly constant in the last decade. As in the majority of Member States, most of this revenue is realised
on energy (2.2 % of GDP).

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Current topics and prospects; policy orientation

In 2008 a tax reform introduced important changes in the tax system of the country. Furthermore, in 2010 the
corporate income tax rate was cut to 19 % and the value added tax rate was increased by 1 %. The basic VAT rate
is currently set at 20 %, while the reduced rate was increased from 10 % to 14 % in 2012. For 2013 the unification
of the VAT rates at 17.5 % is foreseen. Changes to the VAT rates are to cover the fallout of revenues from the
social insurance in relation to the introduction of the second pension pillar.
A comprehensive tax reform was adopted on 27 December 2011 and the changes will generally apply from 1
January 2015. In the area of individual taxation it foresees, among others, the introduction of a 19 % personal
income tax rate, changes in the tax base and tax deductable amounts, health insurance contributions at 6.5 % of the
contribution base, a new tax relief in the form an employment tax credit. As far as corporate taxation is concerned,
the reform envisages replacement of the social and health insurance contributions paid by employers with a 32.5 %
payroll tax. Also, the rate applicable to income derived by collective investment vehicles is reduced from 5 % to
0 %. Finally, flat inheritance and gift tax rates of 9.5 % and 19 % respectively will be introduced and the amount
up to which movable personal belongings and financial means are exempt will be increased.
The reform also introduces a one-stop-shop for all taxes, duties, and social security and health insurance
contributions.

Main features of the tax system

Personal income tax
Until 2007, the Czech Republic applied progressive personal income taxation with four brackets, where the top rate
was 32 %. A flat tax rate of 15 % was introduced in 2008. The tax base for income from employment is a so-called
super gross wage (a gross wage increased by the amount corresponding to social insurance and general health
insurance, which is paid from the said income by the employer). Business, rent and other personal income is
usually taxed via filing a personal income tax return in which the respective income is declared. The expenditure
lump-sums valid for 2012 are 80 % for incomes from agriculture and crafts, 60 % for businesses except the crafts
and 40 % for other incomes.
Recently introduced tax reform envisages that as of 2015 the personal income tax rate will be increased to 19 %
and social security and health insurance contributions paid by the employer (or the newly introduced payroll tax)
will not be included in the tax base. The deductable amount of mortgage interest for the taxpayer's main residence
is reduced up to CZK 80 000 ( 3 023) per year (currently, CZK 300 000). The currently applicable 10 %
deduction of the tax base for qualifying donations is increased to 15 %. However, the amount of in-kind benefits
that could be exempt from the individual income tax is reduced to up to CZK 10 000 ( 378) per year (currently,
CZK 20 000). Also, a new tax relief in the form of an employment tax credit of up to CZK 3 000 ( 113) will be
introduced and if the amount of the tax credit exceeds the employee's tax liability the difference will be refunded.
The basic tax credit could be claimed only by taxpayer whose individual income tax base did not exceed four times
the average annual salary. Finally, dividends and other profit distributions will be exempt. This exemption will not

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Taxation trends in the European Union