Milestones of Czech tax law

https://doi.org/10.63189/UYLQ6423

The Czech Republic is a relatively young country – it was founded in 1993. It should be highlighted that, until 1992, there was one state including both Czechs and Slovaks, called Czechoslovakia. For more than 40 years, until November 1989, Czechoslovakia was a communist country. The political regime influenced taxation greatly; not only was the tax system based on the regulative and fiscal functions of taxes, but the state was influencing the economy using taxes for political measures (e.g., to limit private business). After the Velvet Revolution of November 1989, it was necessary to change the economic system, along with the tax system. Despite the fact that most taxes and tax acts remained in force, they were significantly amended in the 1990s. These changes were aimed at the key tax reform being prepared for 1993. In August 1992, the decision to split Czechoslovakia was announced and, on 1 January 1993, the independent Czech Republic was established, with a completely new tax system. Interestingly, all tax acts for the independent Czech Republic were adopted during the existence of Czechoslovakia, that is in 1992, by the Czech National Council to become effective on 1 January 1993.

1. Milestone 1993

The new tax system was a fundamental reform aiming to link tax revenues and GDP, incorporate tax justice and fair competition principles, allow foreign investments, and open the country to European and international markets. It also reduced the social criteria in taxation. The most significant direct taxes were personal income tax and corporate income tax. They were regulated by one act – the Income Taxes Act – due to many common construction components and the need for amendments in just one act in case of legislative changes. The new personal income tax unified all previous types of taxes on individuals and set five objects of taxation (partial tax bases): incomes from dependent activities, business incomes, capital incomes, rental incomes, and all other incomes. Generally, the partial tax base was the income lowered by expenses (in the case of dependent activities, the expenses were the social and health contributions paid by the employee). Every taxpayer could use a non-taxable minimum. Additional non-taxable items were applicable for taxpayers with dependent persons (students, babies), disabled persons, etc. The tax rate was progressive between 15 and 47%.

Similarly to personal income tax, the corporate income tax unified all previous types of taxes on legal persons. The tax rate was linear at 45%. Additionally, in immovable property taxation, unification was applied; immovable property tax included the land tax and the building tax. Newly, the tax was paid by both natural and legal persons to municipal budgets (regardless of whether the state tax offices administered it). Property taxation was based on the unit system (square meters) with meagre tax rates. Some former notary charges were transformed into transfer taxes (inheritance tax, gift tax, immovable property transfer tax). The system of property taxes was enhanced with the tax on motor vehicles based on engine capacity (personal cars) or a combination of axles and weight (all other vehicles).

The most crucial indirect tax was the newly introduced value-added tax, replacing the turnover tax. The tax was inspired by European legal regulations, with the vision of joining the European Union soon. VAT had two rates: the basic one of 22% and a reduced one of 5%. The indirect tax system was supplemented by five specific (selected) indirect taxes – excise taxes on fuels, spirits, beer, wine, and tobacco products.

Besides taxes, (local, court, and administrative) charges were also collected. The tax procedure was generally regulated by the newly adopted tax code (Act on Tax and Charges Administration); however, the specifics were mentioned in the substantive tax law acts.

2. Milestone 2003

The tax reform in 2003 is connected with the Czech Republic’s accession to the European Union on 1 May 2004, when it was necessary to harmonise the tax system in accordance with the requirements of EU directives. The national regulations were adapted to the European ones over time, meaning that no dramatic changes occurred by the date of the Czech Republic’s accession to the European Union. Nevertheless, it was decided to prepare a completely new legislation in the field of indirect taxes, which would clarify and better systematise the existing legal regulations and eliminate some partial differences in the application of value-added tax and excise duties compared to the directives.

The newly adopted value-added tax legislation was fully harmonised in line with EU rules, with the exception of a few provisions for which the Czech Republic succeeded in the accession negotiations with a request for a transitional period (e.g., the permanent exemption concerning the reduction of the turnover level for compulsory registration to EUR 35,000). The legal regulation of selective excise duties was fully harmonised with European law by the new law. Excise duty rates have been aligned to the minimum rates set by the directives, except for cigarettes, for which a temporary exemption was negotiated. It was also agreed that the group of energy taxes would not be implemented into the Czech tax system until 1 January 2008.

3. Milestone 2008

The tax reform, often referred to as ‘Topolánek's backpack’, was based on a reduction in direct taxes and an increase in indirect taxes. Tax brackets for personal income tax (12–32%) were abolished and the tax rate was unified at 15%. The so-called super gross wages (i.e., gross wages plus social and health insurance paid by the employer) were used as a partial basis for personal income tax from dependent activities. Tax relief and the tax allowance for children were significantly increased.

The role of municipalities has been strengthened in terms of property tax; in particular, municipalities have been empowered to introduce a local coefficient multiplying the resulting tax by up to five times. New selective excise duties on natural and certain other gases, solid fuels, and electricity also had to be introduced from 1 January 2008, given the expiry of the exemption from European law. The reform also introduced new health charges: for doctor visits, items on prescription, hospital stays, and emergency room visits.

4. Milestone 2014

At the beginning of 2014, the civil law reform took place, which affected tax law not only terminologically but also indirectly in terms of substance. One of the most significant changes was the abolition of the inheritance tax and the gift tax. The transfer tax on the transfer of immovable property for consideration was retained but under a new name – the tax on acquisition of immovable property – and with modified structural components. The transfer tax was definitely abolished in 2020, officially because of the COVID-19 pandemic. The same, but unrelated, reasoning was used as an argument for the abolition of road tax on passenger cars, buses, and trucks up to 12 tonnes (2022) or the abolition of super gross wages as a basis for personal income tax on dependent activities (2021).

5. Conclusions

As argued above, tax law is not amended over certain periods of time. However, the field of tax law is extremely lively. Not only does it have to respond to economic developments at home and worldwide, but it is also strongly influenced by the views and ambitions of political representatives. This is probably most evident in the shifting (or not) of tax rates, where tax rates are often lowered not only for objective reasons (e.g., in response to falling rates in other countries as part of the tax competition fight) but also as a political calculation.

It should be highlighted that the Czech tax reform effective from 1 January 1993 is one of the most comprehensive tax reforms in the world. Generally, what to tax and how to tax was not changed dramatically. Of course, some taxes were abolished (transfer taxes), and some were newly introduced (energy taxes, new types of taxes on tobacco products, windfall tax). However, the structure of taxes and their crucial structural components remained the same. Additionally, in the area of procedural law, the new Tax Code, effective from 2011, was not a reform of procedural tax law; owing to identical starting points and principles, it was possible to continue the proceedings without significant problems. Moreover, most of the legal foundations of case law connected with the previous tax code apply to the new tax code.

It is clear that the legal regulations of tax law will continue to evolve. However, the weakest link in the legislative process in the field of tax law is more or less the lay intervention by legislators, also in view of the deadlines associated with the approval of tax laws and the State Budget Act. In order for the annual tax packages to be approved on time and take effect before 1 January of the following year, the Ministry of Finance must submit them by the end of May at the latest. This is followed by discussions in the committees of the Legislative Council of the Government and the Legislative Council of the Government itself, in the Cabinet, and in both chambers of Parliament. By contrast, the State Budget Law is usually not submitted until August, as it is discussed only in the Government and the Chamber of Deputies. There is no guarantee that the tax revenues envisaged in the draft budget will actually be approved in the form of tax laws at the level envisaged and necessary in the tax package. It is the responsibility of the legislators (both government and opposition MPs and Senators) to ensure that the assumed budget revenues are adequately reflected in the tax laws. There must be no misuse of the national social situation (pandemic, economic crisis, etc.) or changes in other legislation (e.g., civil law reform) to reduce taxes senselessly for the sole purpose of getting elected.

There is no doubt that frequent amendments to tax laws will be necessary in the future, given the need to implement European directives into national law, combat new forms of tax evasion and circumvention of tax law, respond to technical and technological developments, court case law, etc. The implementation of ecological elements in all taxes is very likely. Further changes will undoubtedly cause a rapidly growing structural deficit of public funds. It should also be borne in mind that taxes are politicum, and, therefore, the ideological aspects of political parties will always be reflected in their legal regulation.