Global Daily Tax News, Czech Republic Urged To Broaden Indirect Taxes, (Mar 7, 2025)

In its newly released Economic Survey report for the nation, the OECD has said the Czech Republic should shift the tax burden away from social security contributions towards indirect taxes, environmental taxes, and property taxes.

The report notes that while the fiscal position deteriorated markedly between 2019 and 2023, owing to support measures put in place in response to COVID-19, the Government has begun to bring down the fiscal deficit, with a number of tax regime changes instituted in 2024.

These 2024 tax policy changes included an increase to the corporate income tax rate from 19 percent to 21 percent. Employee sickness insurance contributions were raised, along with immovable property tax rates, and the number of VAT rates was reduced from three to two. In addition, the progressivity of the personal income tax (PIT) system was increased by lowering the threshold for the top marginal tax rate, and the tax base was broadened by reducing some tax exemptions.

For 2025 onwards, the report says "A combination of tax and spending reforms can help ensure fiscal sustainability without harming growth." It observes: "The tax burden is comparable to the OECD average, but the revenue structure is biased towards social security contributions. Tax revenues as a share of GDP stood at 33.7 percent of GDP in 2023, close to the OECD average (33.9 percent of GDP). However, Czechia relies significantly more on social security contributions and less on personal income taxes (PIT) and property taxes than other OECD countries."

The OECD said: "As pointed out in previous OECD Surveys, a lower reliance on social security contributions and higher revenues from property taxes and indirect taxes, including environmental taxes, would make the tax system more growth-friendly and reduce the exposure of government revenue to ageing."

The OECD has recommended that Czech authorities implement the following reforms:

• introduce angel investor tax breaks;

• phase out fossil fuel subsidies and raise effective carbon prices in sectors outside the EU Emissions Trading Scheme;

• further increase recurrent taxes on immovable property and base them on regularly updated market values;

• review inefficient VAT exemptions and reduced rates;

• consider lowering the relatively high VAT registration threshold, which was raised to CZK2m in 2022 (about USD86,000).

On the potential change to the VAT registration threshold, the OECD said: "While this reduces the tax administration and compliance costs for SMEs, it can have a negative impact on revenues and introduces a competitive distortion. A number of OECD countries combine a low VAT registration and collection threshold with simplified procedures to calculate the VAT liability for SMEs."