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October 8th, 2008
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Foreigners panic over changes in tax law

Deduction rules may mean lower paychecks and more paperwork for expat workers

By Michael Heitmann
Staff Writer, The Prague Post
January 30th, 2008 issue

About tax residency

Foreigners living in the Czech Republic are now required to claim tax residency to receive the monthly personal allowance deduction
Without the deduction, taxes for foreigners will increase 2,070 Kč per month, an amount that can be reclaimed only at year's end
Tax residency is simple to prove for those with local addresses, though cautious businesses may ask employees to certify their status at local tax authorities

Over the past few weeks, rumors began to circulate among expats about a mystery tax that seemed to only apply to foreigners. Online forums were awash with speculation as to why some employers had announced that their foreign workers would potentially see their tax payments increase 2,070 Kč ($116) a month.
One poster wondered if all Americans would be losing this money. Another foreign resident, who asked not to be named, confirmed to The Prague Post that he even turned to the European Commission for advice.
“I have been informed by my employer in the Czech Republic that this year all my tax relief will be withheld as I am not a permanent resident of the Czech Republic,” he wrote in an email. “I pay the same taxes as a [normal] Czech citizen and thought that the same laws should apply to me, even though my nationality is Irish.”
Such uncertainty is bound to continue over the next few months, as businesses and employees sort through the ramifications of the public finance reforms. Both native and foreign residents remain nervous that their first paychecks for 2008 — the reforms came into effect Jan. 1 — will be altered by the new flat-rate income tax, among other changes.
Tony Marlow, who runs an accounting service with his Czech wife, helped clarify the rumors running rampant.
“This 2,070 Kč refers to the new personal allowance [deduction],” Marlow said. The crux of the issue lies in the difference between tax residents and tax non residents, he found. Only the former get the personal allowance of 2,070 Kč with their monthly paycheck, while the latter gain the credit upon filing their income taxes for 2008 — provided they fulfill the criteria newly introduced by the reforms.
Now tax non-residents must “prove that at least 90 percent of their worldwide income is generated here [to get the allowance],” Marlow said. “It is only my opinion, but if we assume employers are acting honestly, then it must be they are just not willing to make a mistake and are therefore unnecessarily asking all people to verify tax residency.
“The real concern is about non tax residents who have to prove that 90 percent of their income is generated here, or new employees who have not been here 183 days. It should certainly not be about people who were previously assumed to be tax residents,” he said. “Just having an employment contract and a local address should be enough to satisfy the law,” he added.
The basic personal allowance has been raised from 7,200 to 24,840 Kč in 2008 as part of the reform process, confirmed Petr Frisch, who heads the personal income tax department at PricewaterhouseCoopers in Prague.
Since the year isn’t over yet, it’s too early to tell whether 90 percent of an employee’s annual income will indeed originate with Czech sources, Frisch said, which means that, in effect, tax non residents do not qualify for the monthly deduction.
Qualifying as a tax resident should not be difficult for foreigners, however. Anyone living and working in the Czech Republic, who has family here and spends more than 183 days in a calendar year in the country, will almost certainly qualify. “The issue, however, is how to prove this to the payroll department,” Frisch said.
The most obvious way to go about this is to get written confirmation from local tax authorities. Beyond that, employers could accept a simple declaration from the employee, though they may wish to assess the facts and circumstances of each individual case. Once the employer has satisfactory evidence at hand, there really is no need to require additional confirmation from the tax office, Frisch said.
It will be natural for many foreigners living in the country to claim the personal allowance by certifying themselves as tax residents, but this could lead to other side effects. Anyone seen as a tax resident then gives authorities permission to tax their worldwide income, according to the government.
Frisch suspects that in the past some foreign residents might have tried to get away with deregistering their tax residency in their home countries without subsequently declaring their worldwide income in the Czech Republic.
“This would, in many cases, qualify as tax evasion under Czech law,” he said.

Michael Heitmann can be reached at mheitmann@praguepost.com


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