Comprehensive tax reform on the horizon
At the end of February 2019, the Ministry of Finance presented a proposal relating to changes in taxation in order to reduce the tax burden on work. The loss of tax revenue due to lower taxation of labour would be compensated partly by a higher tax on capital and operations of companies, and partly by the fight against tax fraud and grey economy.
The proposed measures of the Ministry can be divided into three main categories:
– measures involving personal income tax and taxation of labour,
– measures involving taxation of capital income and income from renting out property for the natural persons, and
– measures involving corporate income tax.
1.) Measures involving personal income tax and taxation of labour include lowering the lower limits of individual personal income tax brackets and decreasing tax rates of some brackets. In addition, there would be an increase in general tax relief and additional general tax relief. These personal income tax changes would be introduced in 2020.
Furthermore, the plan is to reduce the burden on holiday pay. According to the new legislation, the holiday pay of up to average gross salary (which is currently not subject to the personal income tax) is exempt from the payment of the social security contributions, in other words, the workers would receive an entire amount tax-free. It is a wish of the Ministry that this measure would enter into force already in 2019. The upper limit for the exemption of the business performance bonus from the personal income tax would be increased. Currently, this upper limit stands at 100% of the average gross salary, but it is planned to be gradually increased to 150% in 2020, to 175% in 2021 and, finally, to 200% in 2022.
2.) In the area of taxation of capital income for the natural persons, the Ministry proposal keeps the flat rate tax for capital income (interests and dividends) as well as for the income from renting out property. However, the Ministry proposes an increase in the tax rate from the current 25% to 30% in 2020.
The capital gains would still be taxed at a flat rate; however, in 2020 tax rates would change. Under the current system the tax rate is decreasing depending on the duration of the capital ownership, which is 25% for the first 5 years of ownership, after 5 years the rate falls to 15%, after 10 years to 10%, after 15 years to 5% and after 20 years to 0%. The Ministry proposes that according to the new regulation the rate would be 30% for the first 10 years of capital ownership, and after 10 years the rate would fall to 15%. As such change affects the rights of taxable persons who already acquired a right to use a tax rate lower than 15%, it will be crucial how the transitory provisions of the adopted amendment will regulate the status and rights of these persons.
3.) The amendment also includes the increase of the corporate income tax, from the current 19% to 20% in 2020, then to 21% in 2021 and, finally, to 22% in 2022. Even though all the tax reliefs and possibilities to carry losses forward are planned to stay effective, an additional safeguard is provided according to which effective taxation with the corporate income tax (i.e. after claiming tax reliefs and losses carried forward) should not be less than 5%.
The Ministry estimates that the state would lose approximately 270 million EUR in tax revenues by the more favourable taxation of the active income and by changing the personal income tax scale, but would compensate those losses by higher taxation of the capital in the amount of additional 110 million EUR in tax revenue. The state would cover the difference (160 million EUR) by fighting tax fraud, grey economy and social fraud.
