Flat-rate tax at the end of the first year

The first year of operation of the new flat-rate tax is behind us, and the first taxpayers who applied at the beginning of 2021 (or during the year in the case of business start-ups) for the flat-rate scheme will see whether their tax liability and contributions to public insurance for 2021 will actually be settled by a flat-rate tax, or if they will be obliged to submit tax returns and reports.

In order to make the whole thing more complicated, during the tax period, facts could arise that require only the filing of a tax return for a given tax period while maintaining the flat-rate scheme, or also circumstances that lead to the termination of the whole flat-rate scheme (however, even under this scenario, the tax can still be settled by a flat-rate tax under certain circumstances). Below we will discuss the individual situations in more detail.

The tax is settled by a flat-rate tax 

The simplest situation occurred when the conditions under which the taxpayer applied for the flat-rate scheme at the beginning of the year were also valid at the end of the year and the purpose of the flat-rate tax was therefore fulfilled. This happened if the taxpayer remained a self-employed person subject to statutory health and social insurance regulations, is not a VAT payer, is not a member of a general partnership or a general partner of a limited partnership, is not a debtor against whom insolvency proceedings have been initiated, whose income from a business activity (except for the tax-exempt or taxed income by the withholding tax) did not exceed CZK 1 million, does not have income from dependent activities (except for those taxed by withholding tax) and whose income from capital assets, rent and other income did not exceed CZK 15,000 in total.

In this case, the taxpayer does not have to do anything (i.e., file a tax return and a statement of insurance premiums) and his/her tax and insurance obligations will be settled by the flat-rate advance payments made on the last date of the deadline for submitting the return. The tax administrator itself will transfer the amounts corresponding to health and social insurance to the relevant institutions.

Nevertheless, this variant is not completely "painless". The taxpayer must not forget the obligation to make any adjustments to the tax base in the transition from the standard methods of determining the tax base to the flat-rate tax. The specific adjustment of the tax base depends on whether the taxpayer has kept accounts, tax records or applied lump sum expenses during the previous period, and the tax base is adjusted, for example, by balances of provisions, adjustments, receivables, debts or inventory. The adjustment of the tax base shall be carried out in the form of an additional tax return for the period preceding the period in which the tax is equal to the flat-rate tax, whereas the taxpayer shall be perceived as not being late in submitting this additional return.

Submission of the tax return while maintaining the flat-rate scheme 

If the taxpayer finds at the end of the year that its income from capital assets, from rent and other income (e.g., non-exempt income from the sale of real estate or securities) exceeded a total of CZK 15,000, or received income from dependent activity (other than that taxed by withholding tax, i.e., income from an agreement to perform work up to CZK 10,000), the flat-rate scheme will not be terminated (i.e., the taxpayer will be able to continue the payment of flat-rate advances the following year), but the taxpayer will be obliged to file a return and reports in the standard scheme for the given year.

This obligation can bring some more challenging moments at this time. The first is how the taxpayer will be able to determine the tax base, since it was not obliged to keep tax records under the flat-rate tax scheme. If this taxation method would differ from the previous year (in our situation since 2020 when, for example, the tax base was established on the basis of the tax records, but for 2021, the taxpayer will only be able to apply lump sum expenses), tax base adjustments would be used once again in the additional tax return for the previous year. Furthermore, the taxpayer will have to divide the paid flat-rate advance payments into the tax part and the advance payments on health insurance and social insurance (the flat-rate advance consists of a CZK 100 advance on tax, the minimum advance on health insurance and the minimum advance on pension insurance increased by 15%). If there have been any arrears on the advance payment, these arrears should be divided between the three components of the flat-rate advance in the same ratios.

On the other hand, the advantage of submitting a tax return may be the possibility of applying any tax credits and deductions from the tax base, which are not possible for the flat-rate tax.

Submission of a tax return while terminating the flat-rate scheme 

During the course of or at the end of the year, circumstances may have arisen which, in addition to the “mere” impossibility of settling the flat-rate tax, led to the termination of the whole flat-rate scheme. These circumstances may be a situation where the income from business activities for the tax period exceeded CZK 1 million, the taxpayer became a VAT payer, became a member of a general partnership or a general partner of a limited partnership, the decision on the bankruptcy of the taxpayer came into effect and the insolvency proceedings were not terminated, the taxpayer has ceased to be covered by the Czech regulations on health and social insurance, or the taxpayer has ceased to be a Czech tax resident and has ceased to carry out a business activity on the territory of the Czech Republic. 

These circumstances, in addition to the aforementioned obligation to file returns and reports in the standard scheme, have the consequence that the taxpayer is obliged to announce these facts to the tax authorities within 15 days of the date on which this fact occurred. Furthermore, in this situation the taxpayer must not forget to renew the payment of standard advances on tax and insurance premiums, as has emerged from the last returns and overviews for 2020. 

The flat-rate scheme was terminated, but the tax is settled by a flat-rate tax 

Finally, there may have been circumstances in which, although the flat-rate scheme is terminated, the tax for this period would still be settled by a flat-rate tax, if (i) the taxpayer interrupts his/her independent activity, but re-starts it by the date for submitting the return, while not breaching any other conditions, or (ii) the decision on the bankruptcy of the taxpayer has become effective and insolvency proceedings have not been completed or (iii) he/she voluntarily withdraws from the flat-rate scheme, while maintaining the other conditions for applying the flat-rate tax.

Are you unsure of the situation you have found yourself in? 

Since the flat-rate tax is a completely new, unfamiliar form of income taxation, we recommend for you to consult with an expert if you have actually met the conditions for applying for the flat-rate tax for 2021 and you are not obliged to file a tax return.

Flat-rate tax in 2022

If you are not yet in the flat-rate scheme and are considering the flat-rate tax, you need to assess at the end of this year whether a flat-rate tax is worthwhile for you in 2022. The taxpayer's advance payment in the flat-rate scheme in the advance period of 2022 will be CZK 5,994 per month, i.e., CZK 71,928 per year (from which there is a CZK 100 advance on income tax, a CZK 3,267 advance on pension insurance and a CZK 2.627 advance on health insurance). For comparison, in 2021 the monthly amount was CZK 5,469, thus the annual amount was CZK 65,628.

You have only a very short time to make a decision in January, just 10 days, i.e., until 10/1/2022. You also have the same time limit for any announcement of the voluntary withdrawal from the flat-rate scheme.