Tax savings for employee profit sharing arrangements in the Czech Republic
Since 1 January 2014 Czech law has allowed part of a company’s profit to be shared with persons other than the company’s shareholders (e.g. an employee, a board member or any other person), if permitted by the company’s articles of association. However, the tax treatment of such profit share depends on whether it is provided directly by the employer or by another group company, such as the parent company.
If the profit share is provided by the direct employer, the payment is subject to social security and health insurance contributions payable by both the employee and the employer, as well as to personal income tax (at the same rate as the individual’s wages). However, if the share of the profit is provided by a different group company the payment is only subject to personal income tax at a rate of 15% (or 22% if over the annual threshold) and no social security or health insurance contributions are required. In order to benefit from this treatment, the relevant profits (after deduction of corporate income tax) would need to be distributed to the parent company in the form of a dividend and then paid to the employee by the parent company.
This method of payment brings significant tax savings for both the employee and the employing company. For example, the Czech company wants to provide the employee with profit share of CZK 100,000 (approx. EUR 3,670) net. If provided directly by the legal employer, the total costs for the employer would amount to CZK 195,000 (approx. EUR 7,155) taking into account all mandatory contributions and taxes. However, if the profit were transferred to a parent company in the form of a dividend and then paid to the employee by that company, the total costs would only amount to CZK 145,000 (approx. EUR 5,320).
Companies who wish to provide profit sharing arrangements for their employees or board members must ensure that such provisions are included in their articles of association.
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