TAXATION ON INCOMES OF NATURAL PERSONS IN THE CZECH AND SLOVAK REPUBLICS - COMPARISON

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1 TAXATION ON INCOMES OF NATURAL PERSONS IN THE CZECH AND SLOVAK REPUBLICS - COMPARISON Karel BRYCHTA Brno University of Technology, Faculty of Business and Management, Kolejní 2906/4, Brno, the Czech Republic brychta@fbm.vutbr.cz Abstract This paper deals with a comparison of certain aspects of taxation of incomes of natural persons in the Czech and Slovak Republics respectively in the legislation lex lata from 2008 to the present. The comparison is aimed at the regulation contained in the basic substantive standards governing the given problematic, i.e. income tax acts of the aforementioned countries. Prior to the actual implementation of the comparison, a general evaluation is performed of the question of the influence of European Union legislation in the given area. The following part then focuses on and compares selected basic provisions. First attention is focused on defining tax residency criteria in Visegrád Group countries. For the Visegrád Group countries, there is also listed the composition of incomes considered to be a subject of taxation for taxing natural persons (personal) income. Partial tax bases for incomes are elaborated, which form a subject of taxation based on the Czech and Slovak Income Tax Acts, respectively. The next chapter deals with the basic means of tax optimization namely the nontaxable parts of the tax base and tax abatements. After its final summary, the paper also discusses questions regarding the possibility for further research in the area of natural persons income tax aimed at comparing taxation of natural persons incomes. Keywords: Czech Republic, Natural Persons Incomes, Slovak Republic, Natural Persons Taxation 1 INTRODUCTION Though taxes are generally unpopular, it is a fact that without their existence a State would not be capable of fulfilling the functions for which it originated and exists. Taxes are the main means of financing public goods, without providing them, the platform of a social contract according to the ideas of philosophers such as J. J. Rousseau, T. Hobbes or J. Lock would surely be unacceptable. The State as the

2 TAXATION ON INCOMES OF NATURAL PERSONS IN THE CZECH AND SLOVAK REPUBLICS - COMPARISON sovereign within its own territory fulfills, or should fulfill, an entire series of irreplaceable functions, including acting as a guarantor of a certain minimum social standard for its citizens. All this requires essential finances, the need of which of course differs according to the scope of provided public goods. So theory and practice understandably dedicate significant attention not only to the description of the existing status, but also to searching for answers to questions of how to optimize the tax system. Another partial question is assessing the structure of tax incomes. In this respect, one may observe a general trend in the area of tax collection, which is the growing relative share of indirect taxes. It is nevertheless necessary in this aspect to emphasize that direct taxes play and will continue to play a vital role. We list natural persons income tax within the stated category of taxes, i.e. direct taxes, whose legislative regulation in the Czech and Slovak Republics is the subject of interest of this paper. Taxation on income of natural persons in the Czech Republic is regulated by Act no. 586/1992 Coll. on Income Taxes, as amended (hereinafter referred to as Czech Income Tax Act or Czech ITA ) and in the Slovak Republic by Act no. 595/2003 Coll. on Income Tax, as amended (hereinafter referred to as Slovak Income Tax Act or Slovak ITA ). This paper discusses selected aspects of natural persons taxation in these two mentioned Member States of the European Union, which are close not only in terms of geography, but also history and culture. 1.1 Objectives of the paper and elaboration method The objective of this paper is mainly to perform a comparison of selected relevant provisions of the Czech ITA with the legislation contained in the Slovak ITA for 2008 and following years. For the years 2008 and 2009, the legal status is taken into account that is valid and effective to of the applicable year, for 2010 the legal status that is valid and effective to If not stated otherwise, the data listed is based on the status to For ascertaining the applicable legal regulation, the computerized legal information system ASPI was applied. For selected questions, a comparison has been performed with other countries of the Visegrád Group, i.e. Hungary and Poland. In the first part of this paper, general questions are discussed relating to membership in the European Union and its impact on the legislative regulation of natural persons income taxation. The following part then discusses the actual comparison of selected provisions of the acts in question. Attention is focused on defining the criteria of tax residency in countries of the Visegrád Group, followed by a listing of tax non-residency criteria for the Czech and Slovak legal regulations, respectively. For the Visegrád Group countries, there is listed the composition of incomes considered to be a subject of taxation for natural persons income taxation. Partial tax bases for incomes are elaborated, which form a subject of taxation according to Czech and Slovak Income Tax Acts, respectively. The next chapter deals with the basic means of tax optimization namely the nontaxable parts of the tax base and tax

3 abatements. In the final part of this paper, aside from the actual summary, another area for research activity is shown, which is offered in the area of natural persons income taxation with the objective of comparing taxation of this category of tax payers in various countries. 2 NATURAL PERSONS TAXATION WITHIN THE CONTEXT OF EU MEMBERSHIP Taxation on personal income of natural persons is and continues to be an intensely political matter. Thus unfortunately, natural persons income tax in many aspects does not fulfill the stabilizing function that it should generally have. This fact, although on a more general level, has been pointed out by Vančurová a Láchová (2010). If we do not focus on previous considerations and questions, which they understandably evoke, but concentrate rather on the actual regulation of natural persons income taxation in individual European Union Member States, then it is necessary to state their significant differences (see for example Široký (2010) or Kesti (2009)). The differences of legal regulations may basically be judged by a number of factors of varying importance, including for example the specific historical development in each individual country (proof of which for example may be in a study by Vítek (2001)), the economic situation of the country, the political system and its stability, the level and scope of provided public goods, etc. But on the other hand one may observe a number of common features and similar legal institutions, as demonstrated by the results of the performed comparison listed hereunder. 2.1 General principles of European Union legislation In relation to the Lisbon Treaty coming into effect, it occurred that on December 1, 2009, the European Union assumed legal personality, and other important changes also took place. The function of the European Union however continues to remain founded upon four essential fundamental freedoms freedom of the movement of goods (see Article of the Treaty on the Functioning of the European Union) of persons, of capital and of services (See Article Treaty on the Functioning of the European Union). In like fashion, the principles of subsidiarity and proportionality are preserved as the core principles for creating European Union legislation. These principles are currently anchored in Article 5 of the Treaty on European Union, where it is primarily established that: The limits of Union competences are governed by the principle of conferral. The use of Union competences is governed by the principles of subsidiarity and proportionality.. Pursuant to Article 5(2) of the Treaty on European Union, it is furthermore valid that: Under the principle of conferral, the Union shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein. Competences not conferred upon the Union in the Treaties remain with the Member States.. The principle of subsidiarity and proportionality are laid out in provisions of Article 5 (3) and (4) of the

4 TAXATION ON INCOMES OF NATURAL PERSONS IN THE CZECH AND SLOVAK REPUBLICS - COMPARISON Treaty on European Union. The principle of subsidiarity consists in the fact that: in areas which do not fall within its exclusive competence, the Union shall act only if and in so far as the objectives of the proposed action cannot be sufficiently achieved by the Member States, either at central level or at regional and local level, but can rather, by reason of the scale or effects of the proposed action, be better achieved at Union level.. The principle of proportionality may be considered as a complementary principle towards it, which establishes that neither content nor form of activity of the Union shall exceed the framework of what is essential to achieve the objectives of this Treaty. 2.2 Tax provisions in the Treaty on the Functioning of the European Union Tax provisions are contained in Articles of the Treaty on the Functioning of the European Union. Of these provisions, namely Article 113, authority of the European Union is explicitly provided in relation to indirect taxes. These do not concern the question of direct taxes. Nevertheless to judge on the absence of intervention by the European Union in the area of direct taxes would be unfounded. As an example, it is possible to mention Council Directive 90/435/EEC of 23 July 1990 on the common system of taxation in the case of parent companies and subsidiaries of different Member States, as amended by Council Directive 2003/123/EC and Council Directive 2006/98/EC. But if we are to focus on taxation on incomes of natural persons and classic incomes such as incomes from employment and self-employment, it may be stated that there exists no legal source (either primary or secondary legislation) of the European Union, which would govern or intervene in the given area. This conclusion is also presented for example in the publication European Tax Handbook 2009 (see Kesti (2009)). Of course on the other hand it is not possible to forget another important element functioning within the European Union. It is the Court of Justice of the European Union, generally referred to as the European Court of Justice (hereinafter referred to as the ECJ ). This plays an important role in the area of taxes as well. In its rulings on preliminary questions and those in specific cases of complaints, an interpretation of the Treaties is provided, upon which it is possible to successfully base such rulings upon application of cases with similar merits. For the area of natural persons taxation we may mention the case of Schumacker (Case C-279/93) or the case of Gerritse (Case C ). These rulings of the ECJ concern questions of the rights of tax non-residents in the case of taxing their incomes. 3 THE TAXPAYER AND SUBJECT OF TAXATION Defining a taxpayer and the subject of taxation is undoubtedly an essential part of every tax law. Without defining these two basic categories, the subjects would definitely find themselves in an undesirable and unacceptable situation, which aside from this would also be in conflict with the basic principles of the functioning of the legal system.

5 3.1 Taxpayer Taxpayers themselves may be divided into two basic categories natural persons and legal entities. Within the framework of these partial sub-groups we generally distinguish them further as so-called tax residents and tax non-residents. The latter categories of taxpayers differ from one another in terms of the scope of tax liability. Tax residents have a tax liability, which is bound to their worldwide incomes, whereas tax non-residents have the obligation of claiming and assessing only incomes from sources of the applicable country. For countries that have concluded a Treaty for Avoidance of Double Taxation (hereinafter referred to as TADT ), the question of tax residency is regulated in standard fashion in its Article 4. This provision prevents the situation where the taxpayer is considered to be a tax resident of both States that are parties to relevant TADT. For comparison, criteria of tax residency for the States of the Visegrád Group (listed alphabetically Czech Republic, Hungary, Poland and Slovakia) are listed in Table 1.

6 SK PL HU CZ TAXATION ON INCOMES OF NATURAL PERSONS IN THE CZECH AND SLOVAK REPUBLICS - COMPARISON Table 1: Tax residency criteria of Visegrád Group countries Country Criterion domicile (permanent habitation under circumstances from which it is possible to judge the taxpayer s intention of residing in such habitation). habitual presence (the taxpayer stays within the territory of the CR at least 183 days in the given calendar year, either all at one time or over several periods). citizen of Hungary (unless the taxpayer is also a citizen of another State and has neither a permanent domicile nor a habitual abode in Hungary) citizen of a foreign country or an entity without nationality having a residency permit to stay within the territory of Hungary natural person staying within the territory of Hungary for longer than 183 days (including days of arrival and departure) natural person having a permanent domicile only in Hungary natural person not having a permanent domicile only in Hungary or not having a permanent domicile in Hungary, but the center of the person s life interests are found in Hungary natural person not having a permanent domicile only in Hungary or not having a permanent domicile in Hungary, it is not possible to define Hungary as the center of the person s life interests, but the person regularly resides in Hungary the center of a person s personal or economic interests is found in Poland residency within the territory of Poland is longer than 183 days in the tax year permanent domicile (governed by Act no. 253/1998 Coll.) habitual residency (the taxpayer stays within the territory of the Slovak Republic at least 183 days in the given calendar year, either all at one time or over several periods). Source: 1. Czech ITA 2. Slovak ITA 3. Kesti, J. (ed.) (2009). European Tax Handbook IBFD, Amsterdam. 4. Act no. 253/1998 Slovak Collection of Acts Personal elaboration using the aforementioned sources. On the basis of the performed comparison it is possible, despite many commonalities, to state the varying composition of criteria of tax residency in the Visegrád Group countries. The widest scope of criteria is found in the Hungarian legal regulation. But not even a wide scope of criteria necessarily means a move of the tax residency statute to the applicable country. The reason is the application of Art. 4 of the applicable TADT.

7 Each country is entitled, of course within the framework of its international obligations, to establish its own tax residency criteria. From them then a contrario arise criteria for tax non-residency. These are usually augmented explicitly by yet other situations, which the applicable legislature considered appropriate to amend differently as opposed to general rules (e. g. ordinary presence within the territory of the applicable country only for reasons of study). A comparison for the Czech and Slovak Republics is listed in Table 2. Table 2: Categories of tax non-residents based on Czech and Slovak ITA Czech ITA Slovak ITA The taxpayer does not have a domicile in the CR and is not ordinarily present in the CR. If an international treaty thus establishes (regulated generally in Art. 4 of the TADT) The taxpayer resides in the CR only for the purpose of studying or undergoing health treatment. The taxpayer does not have permanent residency in the SR and is also not ordinarily present in the SR. The taxpayer is only present in the SR only for the purpose of studying or undergoing health treatment. A taxpayer who crosses the border into the Slovak Republic in agreed time periods only for the purpose of employment performance (wage earning), the source of which is within the territory of the Slovak Republic. From Sec 1(2) of the Slovak ITA arises the precedence of international treaties and thus also Art. 4 of the TADT, which governs the problematic of determining tax residency. Source: 1. Czech ITA 2. Slovak ITA Defining criteria of tax residency and tax non-residency in Czech and Slovak legislation respectively is stable and no changes occurred over the monitored period. That is, this concerns definition of basic and general criteria where changes are not necessary. 3.2 Subject of taxation The subject of taxation defines the categories of incomes into which material competence of the ITA falls. Definitions of basic categories of incomes that are considered to be the subject of taxation are listed for the Visegrád Group in Table 3.

8 TAXATION ON INCOMES OF NATURAL PERSONS IN THE CZECH AND SLOVAK REPUBLICS - COMPARISON Table 3: Incomes forming the subject of taxation in Visegrád Group countries Country Income category incomes from employment and emoluments incomes from enterprising and other self-employment activities CZ incomes from capital assets incomes from rent other incomes aggregate income, including income from dependent personal services, income from independent personal services and other aggregate income entrepreneurial income capital gains on movable and immovable property income from capital, including dividends, interest and capital gains on HU securities benefits in kind income from the receipt of securities, options and similar rights miscellaneous income (e. g. small receipts and rental income from immovable property) income from dependent services, including employment and pension income income from personally performed professional activities (professional income) income from non-agricultural business activities (business income) PL income from particular agricultural sectors income from immovable property (rental income) income from capital and property rights (investment income) income from the sale of immovable property, property rights and movables other income incomes from employment and emoluments incomes from enterprising and other self-employment activities and rent SK income incomes from capital assets other incomes Source: 1. Czech ITA 2. Slovak ITA 3. Kesti, J. (ed.) (2009). European Tax Handbook IBFD, Amsterdam. Personal elaboration using the aforementioned sources. Despite the variance in the number and names of categories it is possible to state that the subject of taxation, i.e. definition of incomes, which are subject to natural persons income tax, is at the very least very similar. The variance in defining partial

9 categories however projects legislatively in the laying out of differing rules for taxation of the applicable income type. In Table 4 and Table 5 there are listed the conceptions of establishing the partial tax base based on the Czech and Slovak ITA respectively. Table 5: Partial tax bases according to Czech ITA Provision Sec 6 - Incomes from employment and emoluments Sec 7 - Incomes from enterprising and other selfemployment activities Sec 8 Incomes from capital assets Sec 9 Incomes from rent Sec 10 Other incomes Concept of establishing the partial tax base Incomes from employment or emoluments + social security and health insurance paid by the employer (so-called super-gross wage). This concerns the concept of a partial tax base valid as of Incomes - expenses. It is possible to claim a flat rate expenses: - 80 % (incomes from agricultural production, forest and water management, vocational trades) - 60 % (trades other than vocational), - 40 % (incomes from so-called independent professions [doctors, lawyers, etc.]; incomes from use or provision of industrial or intellectual property rights). The amount of fixed expenses already includes social security and health insurance (valid as of ). Mostly gross income, i.e. without possibility of claiming expenses. Incomes - expenses. It is possible to claim a 30% flat rate expenses. Incomes - expenses. This concerns incomes that do not fall into a category according to Sec 6 Sec 9 of the Czech ITA (e. g. incomes from occasional activities, occasional rent of moveable assets, incomes from sale of immovable assets if they are not exempted, etc.). Expenses exceeding incomes are not taken into account. Source: author s elaboration using Czech ITA. In the relation to flat rate expenses for business income (Sec 7 Czech ITA), significant changes have occurred in Czech legislation. Some of these changes took the form of expanding the spectrum of incomes, on which it was possible to claim flat rate expenses. Nevertheless it is possible in principle to attribute this fact only to legislative changes that expanded the categories of independent professions. Nevertheless, changes occurred also at the level of the amount of flat rate expenses. To the rates were 40%, 50 %, 60 % and 80 %. The flat rate expenses in the amount of 50 % was claimed for trades other than vocational. The appurtenance of other rates was the same as listed in Table 5 (state as of ). Based on the status that was valid and effective in 2009 (i.e. to ), the situation for taxpayers by virtue of flat rate expenses was even more advantageous. In the given tax

10 TAXATION ON INCOMES OF NATURAL PERSONS IN THE CZECH AND SLOVAK REPUBLICS - COMPARISON period, the rates were 60 % and 80 %, whereas the first of them was applied to all incomes, aside from those from agricultural production, forest and water management and vocational trades, to which a higher rate applied. Table 6: Partial tax bases according to Slovak ITA Provision Sec 5 - Incomes from employment and emoluments Sec 6 - Incomes from enterprising and other selfemployment activities and rent income Sec 7 Incomes from capital assets Sec 8 Other incomes Concept of establishing the partial tax base Incomes from independent activity decreased by social security and health insurance and contributions that the employee is required to pay. An employee who performs a health-field occupation (doctor, dentist, nurse or midwife) may deduct from their incomes payments for further education in an accredited study program of the Ministry of Health (the amount is limited and it also must be paid). Incomes - expenses. If the taxpayer is not a VAT payer or is a VAT payer for only part of the tax year, he may claim flat rate expenses in an amount of 40%, for incomes from vocational trade it is 60 %. The amount of flat rate expenses does not include paid insurance (social security and health insurance) and contributions that the taxpayer is required to pay. Mostly gross income subject to withholding tax pursuant to Sec 43 of the Slovak ITA. Incomes - expenses. The category and scope of incomes are very similar to those defined in Sec 10 of the Czech ITA. Expenses exceeding incomes are not taken into account. Source: author s elaboration using Slovak ITA. In the provisions of Sec 5 Slovak ITA, interest is expressed by Slovak legislature in increasing the education of employees working in health care, who may, under conditions stipulated by law, deduct payments for further education from their taxable income pursuant to Sec 5 Slovak ITA. The Czech ITA contains provisions (See Sec 15(8) of Czech ITA), in which it sets forth that it is possible to deduct payments for tests verifying the results of further education from the tax base (again this is understandably bound to satisfying the terms of the Act). In relation to flat rate expenses from business income, no change occurred in the amount of flat rates in the monitored period. The Slovak legislature, however, showed a higher degree of foresight, when it made applying flat rate expenses conditional that the taxpayer cannot be a payer of VAT or can be a VAT payer, but only for part of the tax period.

11 4 POSSIBILITIES OF TAX OPTIMIZATION The resulting tax burden on the taxpayer is the result of an entire series of variables. It is true that one of the most important of these is the nominal tax rate. Nevertheless this is a non-predicative indicator in and of itself, and an ill-suited indicator for comparing the tax burden of taxpayers in time and between countries. As pointed out by Schratzenstaller (2005), the nominal tax rate from the aspect of judging and comparing the true tax burden is non-predicative, due to the influence of nontaxable parts of the tax base and tax abatements, which strongly influence the resulting effective tax rate. 4.1 Nontaxable parts of the tax base in Czech legal regulation Deducting nontaxable parts of the tax base and items directly decreasing the amount of tax (tax abatements, child tax allowances, etc.) may doubtlessly be considered a fundamental means of tax optimization. The Czech and Slovak ITA both contain a number of such provisions. Table 7 and Table 8 contain specific data on nontaxable parts of the tax base and tax abatements in the Czech Republic. These are clearly important items that fundamentally influence the resulting effective tax rate. Table 7: Nontaxable parts of the tax base according to Czech ITA in (data in CZK) Nontaxable parts of the tax base (Sec 15 ITA) Amount Min. 2 % of tax base or Gifts CZK 1,000; max. 10 % of tax base Interest from building savings and mortgage loan (max.) Supplemental pension insurance Private life insurance Payments for testing (relating to further education) basic amount if it concerns a disabled person if it concerns a severely disabled person Source: author s elaboration using Czech ITA. From Table 7 it is seen that in the monitored period, no changes occurred for the listed nontaxable parts of the tax base, the same as for the nominal natural persons income tax rate, which has remained unchanged since 2008 at an amount of 15 %. In relation to resolving the dissatisfactory state of public finances, there is nevertheless ongoing discussion on the decrease or even elimination of certain nontaxable parts of the tax base.

12 TAXATION ON INCOMES OF NATURAL PERSONS IN THE CZECH AND SLOVAK REPUBLICS - COMPARISON Other important items influencing the effective tax rate indicator are tax abatements (see Table 8) and child tax allowance. Table 8: Tax abatements according to Czech ITA in (data in CZK) Tax abatement according to Sec 35ba ITA Amount Per taxpayer Per spouse not attaining the legally established income basic amount if he/she is a ZTP-P (disabled) card-holder For a taxpayer receiving an invalidity pension partial full For a taxpayer who is a ZTP-P (disabled) cardholder For a taxpayer who is a student Source: author s elaboration using Czech ITA. Also the amount of tax abatement did not see any changes in the monitored period. But a small change nevertheless occurred for the child tax allowance (Sec 35(c) Czech ITA). The amount of this allowance in 2008 and 2009 amounted to CZK 10,680 per child. For 2010 it has been increased to an amount of CZK 11,604 per child. 4.2 Nontaxable parts of the tax base in Slovak legal regulation The concept of determining nontaxable parts of the tax base and items decreasing the resulting tax liability in Slovak legislation is established in an entirely different manner. That is to say, the amount of basic nontaxable parts of the tax base is based on multiples of the valid living minimum.

13 Table 9: Nontaxable parts of the tax base according to Slovak ITA in 2008 Nontaxable part of the tax base Amount (Sec 11 Slovak ITA) Basic nontaxable part of the tax base per taxpayer tax base is equal to or lower than 100 times the living minimum 19.2 times the living minimum tax base is higher than 100 times the living minimum Max (0; [44.2 times the living minimum - ¼ of the tax base]) Nontaxable part of the tax base for spouse living in common household The taxpayer alone has an income equal to or lower than times the living minimum spouse having no income 19.2 times the living minimum spouse has attained income not (19.2 times the living minimum personal income exceeding the amount of 19.2 achieved by spouse) times the living minimum spouse s income exceeded times the living minimum The taxpayer alone has an income higher than times the living minimum spouse has no personal income spouse has personal income Contributions to supplemental retirement savings Finances for utility savings Life insurance premiums Source: author s elaboration using Slovak ITA. Max (0; [63.4 times the living minimum - ¼ of the taxpayer s tax base]) Max (0; [63.4 times the living minimum - ¼ of the taxpayer s tax base spouse s personal income]) totaling a maximum of SKK 12,000 per annum For the tax period 2009 and 2010, different rules are set out in the transitional provisions of the Slovak ITA for the amounts of nontaxable parts of the tax base, see Table 10. Aside from this, according to Sec 52(h) Slovak ITA (Transitional provisions to amendments effective as of ) in order to calculate the amount of nontaxable part of the tax base for the tax period of 2010, the living minimum is used, valid as of , in an amount of EUR

14 TAXATION ON INCOMES OF NATURAL PERSONS IN THE CZECH AND SLOVAK REPUBLICS - COMPARISON Table 10: Nontaxable parts of the tax base according to Slovak ITA in Nontaxable parts of the tax base (Sec 52(g) ITA Transitional Amount provisions) Basic nontaxable part of the tax base per taxpayer tax base is equal to or lower than 86 times the living minimum tax base is higher than 86 times the living minimum 22.5 times the living minimum Max (0; [44 times the living minimum - ¼ of the tax base]) Nontaxable part of the tax base for spouse living in common household The taxpayer alone has an income equal to or lower than 176 times the living minimum spouse having no income 22.5 times the living minimum spouse has attained income not (22.5 times the living minimum personal income exceeding the amount of 22.5 achieved by spouse) times the living minimum spouse s income exceeded times the living minimum The taxpayer alone has an income higher than 176 times the living minimum spouse has no personal income spouse has personal income Contributions to supplemental retirement savings Finances for utility savings Life insurance premiums Source: author s elaboration using Slovak ITA. Max (0; [66.5 times the living minimum - ¼ of the taxpayer s tax base]) Max (0; [66.5 times the living minimum - ¼ of the taxpayer s tax base spouse s personal income]) totaling a maximum of EUR per annum In terms of a child tax allowance, pursuant to Sec 33 Slovak ITA, this amounted in 2008 to a annual total amount of SKK 6,480 per child, in 2009 and 2010 EUR per child per month, i.e. EUR per annum per child. The actual income tax rate amounted to 19% throughout the monitored period. 5 CONCLUSION The problematic of natural persons income tax is a very extensive area and very interesting from the aspect of analysis. In light of its scope, this paper deals with just a

15 small part covering the comparison of selected provisions of the legislative regulation of two Member States of the European Union the Czech and Slovak Republics. The comparison was performed for the criteria of tax residency, tax non-residency, the subject of tax and basic means of tax optimization. In the case of criteria of tax residency and the subject of tax, comparison was also performed with the other Visegrád Group countries. Based on the performed comparison, it is possible to state several conclusions. Firstly, it is possible to observe similarities between Czech and Slovak legal regulation, which may be attributed to the same legal foundation, from which both basic substantive standards arose. But on the other hand, several differences may be identified. These are given by the fact that Member States of the European Union may and do apply their own sovereignty, which here, as opposed to indirect taxes, in principle is not limited and determined by the law of the European Union. The nominal tax rates differ by 4% - the nominal tax rate for taxing incomes on natural persons in the Czech Republic amounted to 15% in the monitored period, as opposed to 19% in the Slovak Republic. What is interesting is that the rate of 19% is valid for both natural persons and legal entities. One may also consider as fundamental the differences in the concept of basic means of tax optimization, i.e. nontaxable parts of the tax base and tax abatements. In Czech legislation, a number of nontaxable parts of the tax base effective since 2006 were transformed into the form of tax abatements. From the aspect of the number of nontaxable parts of the tax base items and items decreasing tax directly, it is possible to consider the Slovak Act to be simpler. The Slovak ITA also differs in its concept of the nontaxable part of the tax base per taxpayer and per the other spouse living in a common household. The amounts of these tax allowances are based on the amount of the valid living minimum. The findings ascertained may be considered as an input for further, deeper analysis, within the framework of which it is possible to perform comparison of a socalled effective tax rate. As expressed in the reading above, the indicator of the effective tax rate represents, as opposed to the nominal tax rate indicator, a suitable platform for implementing a comparative analysis both in time and for comparison between individual countries. The relation for determining the effective rate indicator is as follows: T ETR [%] (1), GI where ETR means the Effective Tax Rate, T means the resulting tax liability (Tax) and GI means Gross Income. From the aspect of assessing the impact of payments stipulated by law, it would be appropriate to include into indicator T both the personal tax liability based on the applicable income tax act, and the sum of social security and health insurance payments paid by the employee. The reason for including these payments is in part the congruity of certain indicators with taxes, and in part the

16 TAXATION ON INCOMES OF NATURAL PERSONS IN THE CZECH AND SLOVAK REPUBLICS - COMPARISON objective of describing the overall impact of legally stipulated payments on the taxpayer s disposable income. In the area of analysis of natural persons income tax, a number of questions and problems to be resolved are understandably offered. One of them for example is the comparison of selected institutes and provisions of tax acts of various countries. In relation to natural persons income tax, one must not forget in any case the problematic of social security and health insurance, which is very closely tied to natural persons income tax. This may be proven by just Czech and Slovak legal regulations. Acknowledgement: Having come into being with the financial support of GA ČR (Czech Science Foundation), this paper represents a partial output of the current project No. 402/09/P469 - Development and Competitiveness of the Czech Tax System in the Area of Taxation of Natural Persons Incomes. This paper was created also as a partial output of a project of specific university research at the Brno University of Technology in Brno, registration no.: FP-S Development of findings for perfecting information support for economic management of the development of an enterprise in accordance with the development of the entrepreneurial environment. REFERENCES [1] ASPI. Automatizovaný Systém Právních Informací. Wolters Kluwer, a. s [Computerized Legal Information System] [2] Case C-234/01. Arnoud Gerritse v Finanzamt Neukölln-Nord (Income tax Non-residents Article 59 of the EC Treaty (now, after amendment, Article 49 EC) and Article 60 of the EC Treaty (now Article 50 EC). Available at: < echtype=rech_mot&submit=search> [cited ] [3] Case C-279/93. Finanzamt Köln-Altstadt v. Roland Schumacker (Article 48 of the EEC Treaty - Principle of equal treatment - Taxation of the income of nonresidents). Available at: < n&rechtype=rech_mot&submit=search> [cited ] [4] Consolidated Version of the Treaty on European Union. In Official Journal of the European Union. Available at: < DF> [cited ] [5] Consolidated Version of the Treaty on the Functioning of the European Union. In Official Journal of the European Union. Available at: < DF> [cited ]

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