Taxation of other income

Taxation of other income

Barbora Halousková
Taxation of other income
Within the partial tax base from so-called other income (regulated in §10 of Act No. 586/1992 Coll., on Income Taxes, hereinafter referred to as "ITA"), the income taxed is usually not regular and that is the reason why there is often confusion as to how - and if at all - to tax such income. Therefore, in today's article, we will summarise the general rules and follow up with a summary of the most common areas of specific taxation.

Let's start with a relatively simple rule, namely that this provision covers only and exclusively the income of individuals (completely different rules apply to legal entities), while it includes all other income that increases the taxpayer's assets (in the sense of "wealth") and which at the same time cannot be classified as any other type of income under the previous provisions (§6 for income from employment, §7 for business income, §8 for capital income and §9 for rental income).

Firstly, we would like to remind you that since the beginning of 2021, the solidarity tax rate of 7%, which was applied only to income from employment and from business activities, has been abolished and, on the contrary, a second tax rate of 23% has been introduced, applicable to the total tax base, i.e., the aggregate of the tax bases according to §6-10 of the ITA. Income exceeding 48 times the average wage will therefore be taxed at this higher rate. 

The partial tax base from the so-called other income according to § 10 of the ITA is determined as income reduced by the expenses that demonstrably incurred to achieve it. These expenses within a specific type of income cannot exceed the relevant income for the given tax period. It can therefore be said that it is not possible to declare a loss under § 10.

However, as usual in the Czech legal system, nothing is without exception. If expenses related to statutory specified other income exceed such income in the given taxable period, and in the following period additional income is generated, expenses from previous periods may be claimed, up to the amount of income in the respective following taxable period. It is therefore advisable to keep a record of expenses for the following period.

Specific category type of income

What is meant under the specific category of income? As an example, General Financial Directorate´s Instruction D-22 lists income from the sale of real estate sale of movables, sale of securities, from occasional activities, occasional rent of movable property, and so on.

Within each specific category of income, it is possible to offset the gain from one income (transaction) against the loss made on the other income (transaction). Let's give an example in the area of cryptocurrencies, which are viewed as a specific category of other income. If there is a loss on the sale of Ethereum, this loss can be offset against the gain on the sale of Bitcoin. Remember also that cryptocurrencies are not securities! Read more about their taxation in our article Cryptocurrencies and Taxes.

In the following text, we will look at the most common categories of other income.

Income from transfer for consideration

A common income that appears on tax return is income from a transfer for consideration. In this respect, the law speaks of transfer (sale) of immovable property, securities, or other property (this can be movable property as well as various rights with a value, such as the aforementioned cryptocurrencies).

This income can be reduced by expenses that are specified by law. These include, in particular, the acquisition price of the object of the transfer, or the price determined if it was acquired free of charge (e.g. as part of an inheritance), the residual value of the depreciated tangible property if it was used for business purposes (the condition is that it is included in business property) or for rental, as well as services related to the acquisition or sale (real estate or brokerage services, etc.).

However, we recommend checking first whether the income is not considered to be tax-exempt income. In case of securities, the income may be tax-exempt in the following cases:

  • the income does not exceed the limit of CZK 100,000 (does not apply to securities included in the business property within 3 years after the termination of the activity; for a counterfoil, the time limit of 5 years applies), or
  • the time test for exemption, which is 3 years (5 years for the equity certificate), has been met.

Read more in our article on exempt income from the sale of property, which includes information about the announcement of exempt income.

Occasional income

In this case, the law explicitly enumerates the category of income to which it applies. This covers income:

  • from occasional activities (irregular income, must not be earned on a regular basis) or
  • from the occasional rental of movable property (immovable property is excluded)
  • from agricultural production and forestry and water management not carried out by the entrepreneur (a lump sum expenses of 80 % may be applied), and
  • from the operation of electricity-generating plants for which a license granted by the Energy Regulatory Authority is not required.

The aforementioned income is exempt if it does not exceed CZK 30,000 in total for the calendar year.

Income from the transfer of a shareholding

This income includes shareholding in a limited liability company, limited partners in a limited partnership, and transfer of share in a cooperative. The exemption can be also applied to the income in question under the 5-year time test. When the time test period can be shortened and what is not covered by the exemption is set out in § 4(1)(s) of the ITA.

Gratuitous income

This represents income from inheritance, donations, and other proprietary benefits unless it is income from employment or business.  A list of those incomes that are exempt can be found in the ITA. These include inter alia income from the close family or income acquired occasionally, provided that the amount received from the same taxpayer in a calendar year does not exceed CZK 15,000.

Gambling winnings

This category distinguishes between various sources of income: lotteries and raffles, odds betting and sweepstakes, technical games, live games except for small-scale tournaments, and winnings from gambling games other than those already mentioned (specified in Act No. 186/2016 Coll., on gambling).

This income must be declared in your tax return if it exceeds the threshold of CZK 1,000,000. Up to this amount, the income is tax exempted.

Winnings from advertising, public, sport and bill lotteries

The exact wording of the law stipulates following: prizes from advertising competitions and advertising draws, prizes from the receipt (bill) lottery, from public competitions, from sport competitions, and prizes from competitions in which the number of competitors is limited by the conditions of the competition or the competitors are selected by the organizer of the competition.

The tax treatment within this point is different in the sense that income is taxed at a special tax rate of 15%, i.e., via the so-called withholding tax. Further specifics on this income can be found below.

  • Prize paid in cash – the organizer of the competition (the payer) will tax the prize at the above rate and pay the prize to the winner net of tax.
  • Prize in kind (e.g., goods or services) - the taxable amount is the value of the prize in kind. Again, withholding tax must be paid by the taxpayer and it is therefore the liability of the person awarding the prize.

Income from sources abroad

in case of selected types of income derived from sources abroad, the income can be included in the reintroduced so-called separate tax base, which is taxed at a rate of 15%. The advantage of this method of taxation is possibility to avoid the progressive tax rate of 23% if the tax base would exceed 48 times the average wage. On the other hand, the disadvantage is the very limited possibility of claiming related expenses or tax credits.

The remaining categories of other incomes

In addition to the income listed above, you should always consider the possible taxation of the income listed below, as very specific rules often apply to this income as well. Therefore, do not hesitate to contact a tax advisor if you have received any of the following income:

  • income from inherited industrial and other intellectual property rights, including copyright and rights related to copyright;
  • received alimony, pensions, and similar recurrent benefits;
  • liquidation balance share of a member of a corporation, except a member of a public company and a general partner of a limited partnership, or a holder of an equity certificate attributable to an equity certificate upon the dissolution of a share fund except for a merger or consolidation of a share fund;
  • income received by a member of a public company or general partner of a limited partnership in connection with the termination of participation in a public company or limited partnership from a person other than the public company or limited partnership in which the member terminated the participation;
  • income from the transfer of assets to a shareholder and income from a settlement under special legislation;
  • income from a lump-sum compensation with the nature of a recurring benefit under an arrangement between the injured party and the insurer;
  • income from the life tenancy;
  • income of the beneficiary from the trust fund;
  • income from the dissolution of a reserve fund created from profits or from the dissolution of a similar fund.

Have you received taxable income and you are surprised by the amount of your tax liability which you do not currently have the funds to pay? Don't forget that with a tax advisor you are not only able to optimize your tax liability, but you can also postpone the deadline for submission of tax return and thus, also for payment of your tax liability, by up to 3 months and thanks to that, to avoid penalties!

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Andrea Kleinová
Andrea Kleinová
Certified Tax Advisor