You should consider tax residency in Czech for digital nomads if you plan to spend a decent amount of time in the country. You might want to move to the buzzing city of Prague or explore some of the countryside of the Czech Republic. In any case, you should think about the tax consequences this might have for you.
Living in Czech
Czech or the Czech Republic is part of the European Union and also from the Schengen Area. This means that if you are a citizen of another Schengen country, you can go there without any issues. However, if you spend more than three months in the country, you should register yourself with the local authorities.
If you don’t hold a passport of one of the countries of the Schengen Area, you might need a visa to enter Czech. In this case, the Czech digital nomad visa is something to look into.
Czech Tax Rules
Tax Residency in Czech
The Czech Republic considers you a tax resident if you spend 183 or more days there during a calendar year. The same applies if you have a permanent home available in the country, owned or rented, and you have the intention to live there.
Tax residency in Czech for Digital Nomads: Tax Rates
The Czech Republic applies two tax brackets. On the first amount of 1.600.000 Czech Korunas (indexed yearly) – about kEUR 62 – you pay 15% in income taxes. On any income above that threshold, a tax rate of 23% applies.
On most investment income you will pay a flat tax rate of 15%.
However, capital gains on securities can be exempt from taxes if you held them for more than three years.
Tax Residency in Czech for Digital Nomads: Social Contributions
For employees, the social contributions are split between the employee and the employer.
The employee pays 7,1% in social security and 4,5% for health insurance or a total amount of 11,6%.
The employer pays 24,8% in social security and 9% for health insurance or a total amount of 33,8%.
Thus, the total contributions for employees amount to a whopping 45,4%!
Social contributions for self-employed persons in Czech amount to 29,2% (1). However, this is calculated on 55% of your taxable income bringing the actual rate to around 16%.
Furthermore, you can opt to voluntarily join sickness insurance. The rate for the sickness insurance is 2,1%. This would bring the total rate to 31,3%.
However, on top of this you also need to pay health insurance contributions at a rate of 13,5%. These are calculated on 50% of your taxable income, halving the rate.
Note that the taxable basis is not necessarily your full income. If you are self-employed you can get lump sum cost deduction which will also lower the taxable basis for calculating your social contributions.
Furthermore, social security contributions are calculated on a maximum of 48 times the minimal wage, equaling around 2.150.000 Czech Korunas (~kEUR 84) in total.
Lump Sum Taxation for Self-Employed Individuals
Self-employed individuals can opt for lump sum taxation under certain conditions. The most important condition is that you only qualify if you have a revenue of less than 2 million Czech Korunas (~kEUR 80) per year. Apart from this, other conditions apply.
Basically there are two categories of which you can be part under this regime depending on the income you generated (during the last year).
You fall within the first category if you made less than 1,5 million CZK (~kEUR 60). If you qualify for this category, you will pay a lump sum for income taxes and social contributions of around 7.500 CZK (~€300) per month or 90.000 CZK per year.
Your actual tax rate will depend on how much you make but if you are just under the maximum threshold you’ll end up paying just 6% in taxes!
The second category is for people exceeding the first threshold but making less than 2 million CZK (~kEUR 80). In this category, your monthly lump sum payment equals to around 17.000 CZK (~€670) per month or around 204.000 CZK per year.
In this case your effective lowest tax rate is just over 10%.
By applying for the lump sum taxation regime you can lower your tax rate massively as long as you don’t exceed the maximum income level.
It is nice to know that if you fall within the scope of this regime, you also don’t need to charge VAT. This is mainly an advantage is you work for clients who can’t reclaim VAT, like private individuals.
60/40 Method for Freelancers
The most popular setup is the 60/40 setup for freelancers.
This tax regime is called like that because it offers you the possibility to deduct 60% of your revenue as a lump sum cost deduction. Consequently, you only pay tax on 40% of your income.
Yet, there is a limit to this. You will only benefit from this lump sum cost deduction up to an amount of 2 million Czech Korunas (~kEUR 80).
This does not mean that if you make more than this amount, you can’t use this method. It just means that your revenue above that threshold will be taken into account in full to determine your tax rate.
After applying this lump sum cost deduction, the net result is subject to the standard tax rates. This means that if you have an income of around €80.000 you will pay around 14% in total in income taxes and social contributions.
Setting up a Company in Czech
Instead of doing business in your personal name, you could also opt to work with a Czech company.
Yet, corporate taxes in Czech are 21%. On top of that, you will pay 15% withholding tax.
For this reason, I don’t recommend using a Czech company in your tax setup.
Tax Residency in Czech for Digital Nomads: Conclusion
If you just look at the general income tax rates in the Czech Republic, you will come to the conclusion isn’t the greatest country to set up your tax residency but not the worst either. Also the social contributions seem to be on the high side.
However, because of the way of calculating and the maximum thresholds that apply it can actually offer you a good deal.
Nevertheless, you should think about applying the lump sum taxation regime for self-employed people. In this way, you can lower your overall tax rate to as low as 6% depending on your income level.
