Amendment to the Income Tax Act: Supporting Old-Age Savings
Dear Readers,
This article is to inform you about changes in the Czech Income Tax Act, which came to force as of 1 January 2024 as part of the law in connection with the financial market’s enhancement and support of old-age savings (Act No. 462/2023 Coll.).
Amendment Related to Promotion of Old-Age Savings
In this amendment, changes have been made in supporting old-age savings. Three officially supported old-age saving products existed until 2023: supplementary pension schemes, supplementary pension savings, and private life assurance. The law’s amendment has introduced a new product called “a long-term investment product” (the “LTIP”) since 1 January 2024 to accompany the existing products; in tax terms, long-term care insurance will also be supported under the amendment. In addition to this, changes were made in all products.
LONG-TERM INVESTMENT PRODUCT (LTIP)
The LTIP is a product, the purpose of which is to enable investing in a wide range of financial instruments (such as stock, bonds and mutual funds). One individual can have more than one LTIP. No contribution for this product will be provided by the state. A taxpayer will prove the LTIP’s existence to the tax administrator with the use of a long-term investment product agreement together with an annually presented confirmation of the level of contributions paid from the provider.
In a situation where income will be generated by a taxpayer as a result of selling a financial instrument included in the LTIP (and where exemption cannot be applied), the taxpayer should pay such tax liability from his or her property other than the LTIP. Otherwise, the condition of an early drawing of assets from the LTIP would be violated. However, reallocation of all finance from one (cancelled) LTIP to a new one should not be considered violation of this condition.
What should also be noted in connection with the LTIP is taxation of received dividends or interest on the investments held. As a matter of standard, income from dividends and locally generated interest income is subject to withholding tax at 15%, and the taxpayer receives the income “netted of” such tax in this case. If, however, such income is generated abroad, it has to be reported in a tax return.
LONG-TERM CARE INSURANCE
The amendment introduces long-term care insurance as part of insurance supported in tax terms. This insurance applies to cases of the policyholder’s or his or her close person’s dependence in case of a long-term adverse medical condition involving dependence (of level III or IV pursuant to the Act on Social Services) on another person’s assistance.
The insurance will be supported in tax terms in the event that periodic payment of a monthly claim, and/or care provided to the insured is agreed, or that claims will be paid in the form of compensation for costs of the care provided to the insured.
The insurance has to be taken out with an insurance company authorised to operate insurance business in the EU/EEA.
ADDITIONAL INFORMATION
The law’s amendment has brought one aggregate threshold for all products in the amount of CZK 48,000, which can be distributed by the taxpayer, at his or her discretion, among products currently supported in tax terms and deducted from the tax base. Tax savings can amount to CZK 7,200 on an annual basis where the threshold is applied to the maximum extent.
The tax saving can be applied on the condition of refraining from early drawing. Newly, the agreement must specify that the taxpayer is able to draw finance only after reaching 60 years of age and after a minimum of ten years of the agreement’s existence (from the current five years). If this condition is violated, the tax deduction will have to be taxed on an additional basis (no greater than ten years back). This would constitute other income pursuant to Section 10 of the Income Tax Act, and any employer’s contributions would be considered income from a dependent activity pursuant to Section 6 of the law.
What continues to apply is that contributions, which, as a total, exceed contributions eligible for a state contribution, can be deducted from the tax base in the case of supplementary pension schemes and supplementary pension savings.
In case of supplementary pension schemes and supplementary pension savings, a state contribution will newly be, effective from 1 July 2024, provided in the maximum amount of CZK 340 monthly (the current contribution amounts to CZK 230). This maximum contribution will be available to a taxpayer, whose contribution will be CZK 1,700 a month. For a participant to be entitled to the state contribution, the level of the monthly contribution must be at least CZK 500 (CZK 300 until 30 June 2024). As a consequence, it will newly be possible to deduct contributions exceeding the amount of CZK 1,700 from the tax base.
In addition to the taxpayer’s contribution, the employer’s contribution to old-age savings is also supported. The annual threshold in the amount of CZK 50,000, which applies to the sum of employer’s contributions to all old-age saving products of an employee supported in tax terms, continues to apply. On the employee’s part, contributions below the above-specified threshold are tax exempt.
The above is a summary of fundamental information, which is not exhaustive and does not include a tax advisor’s opinion. Hence, if you are interested in obtaining more information on this topic, please feel free to contact us. We will be happy to help you.
Stela Bartošová Michaela Kozminská
bartosova@clarksonhyde.cz kozminska@clarksonhyde.cz
