Accompanying Law to SMER: Key Changes in the Income Tax Act

Along with the introduction of the single monthly employer reporting system (hereinafter „SMER“), which we informed you about in a separate article HERE, an extensive accompanying Act No. 360/2025 Coll. was adopted, amending certain acts in connection with the adoption of the Act on SMER (hereinafter “Act”). This Act represents a comprehensive intervention in a whole range of legal regulations related to labour relations, employee records, social security and tax administration.

Given that the scope of the accompanying law is very broad, this article focuses exclusively on changes to the Income Tax Act.

Gradual Abolition of Withholding Tax

One of the most significant changes is the gradual abolition of withholding tax on income from dependent activities. From 1 January 2026, withholding tax will be abolished on income paid to Czech non-residents as remuneration for the activities of members of statutory and other bodies of legal entities. Until now, this income has been subject to a 15% withholding tax regardless of the amount of remuneration received. From 2026, this income will be taxed through monthly tax advances. If the total annual amount of this income exceeds 36 times the average wage (for 2026, this threshold is CZK 1,762,812), the person concerned will be required to file a tax return.

From 1 January 2027, there will be a further step – the abolition of withholding tax on agreements on work performed and small-scale employment. Until now, withholding tax has been applied in cases where income has not reached the specified monthly amount and the employee has not signed a taxpayer's declaration. From 2027, this income will also be subject to monthly tax advances. However, employees with such secondary income (e.g. part-time workers, students or pensioners with additional income) will not be automatically required to file a tax return and may continue to decide voluntarily whether to include this income in their tax return, for example in order to claim discounts or children tax allowance, or not.

Abolition of the Annual Limit for Exemption of Income from Sale of Securities and Shares

With effect from 1 January 2026, the annual limit of CZK 40 million for the exemption of income from the sale of securities and shares in commercial corporations generated by the individuals will be abolished. This limit was only introduced in 2025 as part of the consolidation package and, in practice, caused considerable complications, particularly when selling significant shares in family businesses or in larger investment transactions.

From 2026, the original situation will return, whereby income from the sale of securities (after a three-year holding period) and business shares (after a five-year holding period) will be exempt from tax regardless of the amount of income generated. However, the limit of CZK 40 million remains in place for income from the sale of crypto assets, where the restriction on the amount of exempt income will continue to apply regardless of the holding period.

Clarification of Rules for Employee Benefits

The amendment provides important clarification of the definition of non-monetary benefits that may be exempt from tax for employees as health and leisure benefits. The law now expressly stipulates that such benefits must not constitute wages, salaries, remuneration or compensation for lost income. Employee benefits are benefits that an employer provides to an employee in addition to their regular wages, salary or remuneration, with the aim of, for example, increasing the employer's attractiveness on the labour market or promoting employee loyalty.

The aim of the new legislation is to ensure that the tax exemption actually applies only to benefits that do not constitute remuneration for work performed. The General Financial Directorate has issued methodological information (HERE) on this change to help employers correctly interpret the new provision.

Abolition of the Obligation to Deduct Advance Payments for Assigned Employees

In the past, there was inconsistent interpretation by the Financial Administration regarding the obligation to deduct income tax advances from income of the employees who were Czech tax residents and who were assigned to another entity abroad as part of international labour leasing.

The amendment clearly states that the legal employer is not obliged to withhold income tax advances from the income of the employees who perform work abroad as part of international lease of labour. This automatically eliminates the obligation to request the tax administrator to cancel this obligation.

Extension of Tax Deduction for Research and Development

The tax deduction for research and development expenses is also undergoing a significant change. From 2026, it will be possible to claim a deduction of 150% of the expenses incurred, but only up to a limit of CZK 50 million. This limit should include expenses incurred by the entire deduction unit, including the controlling entity and all controlled entities. If the expenses incurred exceed this limit, the deduction will be reduced to the 100% of the excess (instead of current 110%).

At the same time, the possibility of applying a deferred deduction is extended from the current three years to five years, and restrictions related to a low tax base or tax loss are abolished. The application of the deduction for research and development will thus function in a similar way to the application of a tax loss, which will give companies greater flexibility in using this tax relief.

Changes in Employee Share Plans

The accompanying law also introduces further changes in the area of employee share and option plans (ESOPs). The deadline for taxing income from ESOPs is extended from ten to fifteen years from the acquisition of the share or option. The amendment also removes taxation at the moment when the employer or employee ceases to be a Czech tax resident, as this trigger has proven problematic in practice.

A new category of so-called qualified employee options is also being introduced. This type of option is subject to preferential taxation – income from their realisation is taxed as other income under Section 10 of the Income Tax Act, which means that it is not subject to social security and health insurance contributions. However, this regime is subject to certain requirements, such as a minimum option holding period, maximum annual turnover and maximum total employer assets, as well as the obligation to inform the tax administrator of the granting of a qualified employee option.

New Rules for the Obligation to File a Tax Return

The amendment also expands the range of situations in which a taxpayer is required to file a tax return. In addition to the already mentioned case of a Czech tax non-resident with income in the form of remuneration as a member of a collective body of a legal entity exceeding 36 times the average wage, the obligation to file a tax return is now expressly stipulated for taxpayers who were in the flat-tax regime for at least part of the calendar year and whose tax for the given year is not equal to the flat tax. The new provision therefore only formally confirms the procedure that has been commonly applied to date.

Abolition of the Employer Registration Obligation

The amendment abolishes the obligation of taxpayers who are payers of income from dependent activity to submit an application for employment tax registration to the relevant tax administrator. However, this obligation does not actually cease to exist – it is only transferred to the SMER Act as of 1 April 2026. The registration of employers will therefore be handled within the framework of the single monthly employer reporting system.

Impact on the Annual Employment Tax Settlement

For employers, it is important to note that the obligation to file the Annual Employment Tax Settlement remains in place for the time being. Employers will submit their last standard settlements for 2026 (i.e. at the beginning of 2027). The reason for this one-year delay is the technical inability of the Financial Administration to process retroactively supplied data for the first quarter of 2026.

From the 2027 tax period onwards, this obligation will be completely abolished, as the Financial Administration will continuously receive all required data through the SMER. At the same time, employers will no longer be required to issue the confirmation of taxable income to the employees. As all income data from all jobs will be centralised in the SMER database, employees will be able to generate the necessary documents for their tax returns themselves via the Financial Administration portal.

In the second phase of the project, planned for 2027, the centralised data collected on a monthly basis will enable the Financial Administration to offer a pre-filled annual income tax return service. Employees will then only need to check the pre-filled data on income from employment, tax advances paid and discounts applied, add any other income and submit their returns.

Conclusion

The accompanying act to the SMER introduces a comprehensive set of legislative changes affecting multiple areas of tax law. While several amendments are directly linked to the implementation of the Single Monthly Employer Reporting system, others constitute separate tax reforms aimed at addressing practical issues and eliminating interpretative uncertainties. It is important for both employers and employees to recognise that, in addition to the administrative changes associated with SMER, the legislation also brings significant amendments to the taxation of various types of income, which should be taken into account when planning for the 2026 tax year.

If necessary, we are available to provide consultation and support in implementing these changes.

Authors:

Gabriela Ivanco, Tax Department Manager

Anna Klímová, Newsletter Editor