Changes to the "Lump Sum Tax" for sole proprietorships in 2023

2023-11-16 10:56:54

From 2023, the income limit for the possibility of being a single tax payer has been increased to 2 million kronor, with three levels of taxation introduced.

When switching to a flat rate tax system (paušální daň), a self-employed person (OSVČ) gets rid of the obligation to declare income tax and to report to the social and health insurance authorities using three different forms. On the other hand, the sole proprietor in this case loses the possibility to apply tax rebates and use tax credits and bonuses for children.

Under what conditions can a sole proprietor use the flat tax? 

The flat tax rate in 2023 may be applied by individual entrepreneurs:

– who have an income of up to 2 million kronor (until now the limit was 1 million kronor);

– are not VAT payers, have no VAT registration obligation except for the obligation to register as an identified person;

– the sole proprietor must not be a debtor subject to insolvency proceedings (insolvenční řízení);

– A sole proprietor cannot be a founder of a veřejné obchodní společnosti or a partner of a limited partnership (komplementářem komanditní společnosti);

– A sole proprietor also cannot have income from employment (ze závislé činnosti), except for income on which tax is levied in the form of srážkové daně. I.e. a sole proprietor carrying out entrepreneurial activity may be simultaneously employed only on a DPČ contract with remuneration up to CZK 3,500 (from 2023 up to CZK 4,000) or a DPP contract up to CZK 10,000 per month, on which tax is levied in the form of srážkové dani.

Is it possible to have income under Sections 8, 9 and 10 of the Income Tax Act and pay a flat tax?

Yes, it is possible to have income under § 8 of the Income Tax Act (income from capital investments), § 9 (rental income) and/or § 10 (other income) as long as it does not exceed the threshold of CZK 50,000. Otherwise, the sole proprietor will have to file a tax return at the end of the year and tax all his income in the “normal” way. 

What will the flat tax rate be in 2023?

There are three flat tax rates in 2023.

The 1st rate of CZK 6,208 per month may be applied by sole proprietors:

– with business income up to CZK 1 million, and for these entrepreneurs it does not matter from which business activity they derive their income. 

– with income of up to CZK 1.5 million, if lump sum costs at the rate of 80% or 60% can be applied to at least 75% of this income.

– with income up to CZK 2 million, if at least 75% of this income is income to which lump-sum costs at the rate of 80% may be applied (handicrafts, farming). 

The 2nd rate of CZK 16,000 per month can be used by the taxpayer:

– whose business income did not exceed CZK 1.5 million in the previous tax period, regardless of the type of business activity. 

– with income of up to CZK 2 million, if lump sum costs at the rate of 80% or 60% can be applied to at least 75% of this income.

The 3rd rate of CZK 26,000 per month for all taxpayers who meet the conditions for entry into the single tax regime and whose business income does not exceed CZK 2 million. 

The amount of the flat rate is determined by the income earned in the previous tax period and not by an assumption about future income. For example, if your income is subject to lump sum expenses of 40% (financial activities, doctor, lawyer, etc.) and in 2022 your income amounted to CZK 1.3 million and you know that in 2023 your income will be below CZK 1 million, choosing the flat tax regime, you should still enter at least the second group with a monthly payment of CZK 16,000. 

If a sole proprietor elects the flat tax regime from 2023, does he/she still have to file returns and reports for 2022?

Yes, a sole proprietor must file returns and reports with Social Security and Medicare for 2022.

If a sole proprietor is already in the flat tax regime in 2022 and wishes to remain in it, do I need to do anything?

It depends on how much income the sole proprietor will have in 2022. If the income does not exceed CZK 1 million, nothing needs to be done and the following year the FE remains in the first flat rate of CZK 6,208 per month.

If a self-employed person’s income in 2022 exceeded 1 million kronor, but at the same time did not exceed 2 million kronor, he/she may choose the flat tax regime for 2023, but must first submit a notice of termination of the flat tax regime (as he/she did not fulfill the condition of not exceeding the turnover of 1 million kronor in 2022), then submit a personal income tax return for 2022 and reports to the social security and health insurance authorities. The individual must then submit a notice to the tax inspector to switch to the flat tax regime in 2023, selecting the tax rate according to the income earned in 2022.

What if, at the end of 2023, the UI finds that it has a higher income than is possible in this range?

In such a case, the individual entrepreneur must submit a notice of a different amount of the flat tax rate, the conditions of which his income meets. The difference must be paid before the deadline for filing a tax return.

What if, at the end of 2023, the sole proprietor finds that his income is lower?

At the end of a tax period, an individual entrepreneur may submit a notification of a different amount of single tax and will be entitled to a refund of the overpayment.

What are the liabilities associated with a flat tax?

A taxpayer who is under the flat rate tax regime does not have to file tax returns and reports on insurance contributions, but keeping records of IE income is obligatory. It is necessary to keep appropriate records for the correct determination of the fixed tax rate or turnover for compulsory registration to VAT.  

How do I register for the flat tax regime?

IEs wishing to become flat-rate tax payers from 2023 must submit a notification to the tax authority by January 10, 2023. The taxpayer must provide their identification and contact details, social and health insurance registration data, and information on the amount of the flat rate.

There is no need to contact the social security and health insurance authorities in person; the authorities pass on the information themselves.

Can those who were VAT payers in 2022 switch to a flat tax?

As the threshold for mandatory registration for VAT has also increased to 2 million from 2023, some entrepreneurs who were VAT payers in 2022 can register for the flat tax regime. However, they had to apply for deregistration from VAT registration by December 8. If the application was submitted by the deadline, the sole proprietor is not considered a VAT payer for the purposes of the flat tax regime from January 1, 2023, provided that he receives notification of the decision to deregister as a VAT payer by January 16, 2023.

Payment of tax.

The fixed tax is payable monthly by the 20th day of the current month. For January 2023, the tax must be paid by January 20. 

Transition from lump sum costs.

It should not be forgotten that in some cases sole proprietors must adjust the tax base and file an additional tax return when switching to the flat rate regime. 

Withdrawal from the flat tax rate regime:

– If an individual entrepreneur decides to withdraw from the flat tax regime, it is necessary to notify the tax administration by January 10, 2023.

– If the conditions of the fixed tax regime have not been met, the entrepreneur must notify the tax inspector within fifteen days.

DoMyTax specialists will take into account all the peculiarities of your business and, taking into account all tax rebates and tax bonus, will select the most favorable tax option for you for 2023.

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