When you hear the word tax, most of you think of payroll deductions, annual returns or a price on a bill with VAT hidden in it. Direct taxes fall directly on you – you pay them on your income or assets. Indirect taxes, on the other hand, are paid in the price of the goods and services you buy. They are collected by businesses and traders, but economically borne by all of us as consumers.
In this article, we summarize what exactly direct and indirect taxes are, what the rates are today and what’s new for 2025, and how these taxes affect the economy and the state budget.
Indirect taxes are taxes associated with production and imports – primarily value added tax(VAT) and excise taxes. Direct taxes, on the other hand, are taxes on income and property (typically income tax, property tax).
It is important to distinguish between them: with indirect taxes, the person who economically bears the tax usually does not pay it – the business pays it, but passes it on to the consumer in prices (this is called “tax incidence” in economics). Direct taxes are harder to pass on, because they target the income or assets of a particular person.
We can help you navigate the law, whether it’s dealing with a specific tax situation, preparing for an audit by the tax authority or defending yourself in court.
Direct taxes affect income (wages, profits, capital gains) or property (e.g. land, buildings). For these taxes, there is a direct relationship taxpayer → tax authority: the obligation to pay falls directly on the person who has the income or property. Typically, personal income tax, corporate income tax, real estate tax and road tax.
Personal income tax taxes income from employment, business income, capital income, rents and other income. The tax base is the sum of the sub-bases after deduction of expenses and non-taxable parts; the calculated tax is then reduced by tax credits. For employees, the tax is deducted and paid by the employer on an ongoing basis and may be subject to annual settlements. You only file a tax return if you meet the legal conditions (e.g. self-employed, multiple employers, other taxable income, etc.).
Who is affected by the tax return and what deadlines apply? Our article will answer that.
In 2025, there are two rates: 15% for the part of the tax base up to 36 times the average wage, and 23% for the part above this threshold. The consolidation package effective from 1 January 2024 reduced the threshold for the 23% rate (from four times to three times theaverage wage). In practice, this means that the 23% rate will hit more high-income taxpayers.
Example: a high-income employee will pay 15% on the portion of the base up to the limit and 23% on the portion above the limit. For the self-employed, expenses (actual or flat-rate) and insurance contributions are added, but the 15% and 23% rates work the same.
Taxes the profits of a legal entity (typically an LLC, a corporation, a partnership, etc.). The tax base follows the accounting result adjusted for tax items.
The basic rate is 21% (formerly 19%). Special rates: 5% for a basic investment fund and 0% for a fund of a pension company or similar institution.
Example: a small Ltd. with a positive economic result calculates the tax base on the accounting profit after adjustments and applies the 21% rate.
Taxes the ownership of land and buildings (or units – flats, non-residential premises).
The amount of the tax depends on the basic rate and coefficients (part is set by law, part may be adjusted by the municipality by ordinance).
How the property tax was increased and the specific coefficients can be found in our next article.
Example: do you own a flat in a municipality that has increased the local coefficient? The annual tax is based on floor area, rate and coefficients – a change in the municipality’s ordinance can shift the amount even if the apartment itself has not changed.
Road tax is a direct tax imposed on selected road and trailer vehicles used in road transport. The subject of the tax are trucks of categories N2 and N3 and their trailers of categories O3 and O4, if they are registered in the register of road vehicles in the Czech Republic. Passenger cars and light commercial vehicles up to 3.5 t are not taxable vehicles.
The taxpayer is usually the person who is registered in the register as the operator of the vehicle; exceptionally, another person (e.g. the user of the vehicle if the operator has ceased to exist). In addition, a vehicle is not taxable for a calendar month in which the taxable facts (typically the withdrawal from service according to the register) have not been fulfilled at all.
The amount of tax is determined according to the number of axles and the weight.
For the sake of clarity, we remind you that the real estate transfer tax was abolished in 2020. Inheritance tax was abolished in 2014 and gifting has been assessed under income tax since then.
Indirect taxes are collected by the “middleman” (supplier, trader) and passed on in the price. You pay them indirectly at the time of purchase or consumption. The main indirect taxes are VAT (value added tax) and excise duties (alcohol, tobacco, energy).
This is a broad tax that is applied along the supply chain and feeds into the price to the end customer.
From 1 January 2024, we have two VAT rates: a basic 21% and a reduced 12% rate (the previous two reduced rates have been merged). Books are now exempt with a deduction – effectively 0% VAT. The changes were brought about by the consolidation package and the General Tax Directorate has issued a detailed methodology on them (what all falls under the 12% and how to apply the exemption to books).
Specifically, what falls within the 12%: in particular, foodstuffs (excluding most beverages), accommodation and selected food services, water and sewerage charges, public transport, specified cultural services and selected construction work for social housing. Non-alcoholic beverages (excluding selected) now fall under 21 %.
Example: you buy groceries for CZK 1,120 – CZK 134 is 12% VAT. you buy a soda for CZK 60 – includes 21% VAT (approximately CZK 10.41). So you often see lines for both 12% and 21% on your receipt.
The VAT rates and calculations are discussed in detail in another article.
Excise duties in the Czech Republic include taxes on mineral oils, on alcohol, on beer, on wine and intermediate products, on tobacco products and on raw tobacco (now also on heated tobacco products and other tobacco products). Excise duties are mainly administered by the Customs Administration of the Czech Republic.
They have both a fiscal and a regulatory purpose – typically to limit the consumption of goods with social costs (alcohol, tobacco) or to reflect environmental policy.
Rates are harmonised at EU level but are administered by national authorities (in our case the Customs Administration). Taxation is often calculated “per unit/volume/content” (e.g. CZK/litre, CZK/1,000 cigarettes).
Example: In addition to VAT, the price of petrol or cigarettes also includes excise duty, which takes into account the fiscal, health and environmental objectives of the state. The EU sets minimum levels of taxation for selected categories (e.g. cigarettes).
Since 2008, we also have three environmental taxes: a tax on electricity, a tax on natural gas and certain other gases, and a tax on solid fuels. It is administered by the Customs Administration.
This is due to the broader base, the relative stability of collections and the lower sensitivity to the cycle than for corporate profits; at the same time, progressive direct taxes help to stabilise the business cycle. The combination of both types of taxes therefore creates a balanced tax mix.
Not necessarily. As long as you meet the conditions for annual accounts (income from only one employer in the period, etc.), your employer can do them, even if you’re above the 23% threshold.
The threshold is 36 times the average wage. For the year 2025 it is therefore CZK 1 676 052 per year. Above this part of the base, a rate of 23% applies.
There are two thresholds: CZK 2,000,000 (payer from 1 January of the following year, or earlier voluntarily) and CZK 2,536,500 (compulsory payer from the day after exceeding it).
Taxes are the backbone of public budgets. They fund schools, hospitals, transport infrastructure, police and courts, social benefits and defence. In terms of public finance, the budget has three main functions: allocation (providing public services and goods), redistribution (redistributing income and helping the weak) and stabilisation (cushioning economic fluctuations).
For a quick orientation, just look at the breakdown of the state budget: the state budget revenues for 2025 are projected at CZK 2 086 billion. Of these, VAT is the largest single tax item – CZK 414 billion (19.8% of the state budget revenue). This is followed by corporate income tax – CZK 244 billion (11.7%), personal income tax – CZK 184 billion (8.9%) and excise duties – CZK 161 billion (7.7%). In addition to taxes, social security contributions (which are not formally a tax, but a compulsory levy) are also a significant block – CZK 809 billion (38.8%).
We can help you navigate the law, whether it’s dealing with a specific tax situation, preparing for an audit by the tax authority or defending yourself in court.
Direct taxes are aimed directly at the income or assets of a particular person or company. They are crucial for at least three reasons:
The downside of direct taxes: their returns fluctuate with the cycle – corporate taxes have the highest volatility (corporate profits disappear quickly in an economic downturn), personal income tax is more stable, but wages and employment play a role there too. Profit taxes are therefore the most volatile, while excise/consumption taxes tend to be more stable.
Indirect taxes are levied as part of the prices of goods and services. Budgetary implications:
Disadvantage of indirect taxes: their impact on low-income people is often debated. It depends on how we measure – when comparing the burden to income, they tend to be regressive; when to expenditure, they tend to be neutral to slightly progressive.
The state does not play one card, but combines revenue-generating and stable taxes with taxes that are more supportive of fairness and automatically stabilize the economy.
The result? A sensible tax mix: VAT ensures large and stable output, personal income tax brings stability and fairness, corporate income tax ensures corporate participation in the financing of public goods, excise duties help to target consumption.
“Property taxes are still paid.” – It doesn’t. It was abolished in 2020.
“Inheritances and gifts are subject to a special tax.” – Inheritance tax was abolished in 2014; gifts are taxed under income tax, with a number of exemptions (e.g. between relatives).
“Road tax is paid by every business with a car.” – No. Most cars and light vehicles are no longer subject to road tax; what remains is primarily heavy goods transport.
“All books have 12% VAT.” – No. Books are exempt from tax from 1/1/2024 with a deduction (effectively 0%).
Direct taxes are aimed at the income and assets of a specific person, where the taxpayer is the one who actually bears the tax. For 2025, the personal income tax rates are 15% and 23%, with a lower threshold for the higher rate; the corporate income tax is 21% (with special rates of 5% and 0%). For indirect taxes, the tax is reflected in the prices of goods and services and collected by the ‘middleman’: VAT has been levied from 1 January 2012. 1. 2024 there are two rates of 21% and 12% (0% on the books) and the 12% rate covers mainly food, accommodation, public transport, water/footage and selected cultural services; excise taxes target fuel, tobacco, alcohol, etc.; there are also three energy taxes. Real estate acquisition tax (2020) and inheritance tax (2014) have been abolished.
VAT forms the backbone of state budget revenues (CZK 414 billion), followed by personal and corporate income taxes and excise duties; social security contributions are the single largest compulsory levy. Direct taxes promote fairness and act as automatic stabilisers, but their revenue is more volatile. Indirect taxes have a broader and more stable base and also allow for targeted regulation of consumption. The combination of the two types gives a sensible tax mix: stability and predictability of collection (VAT, excise), together with fairness and a stabilising function and involvement of firms.
Inheritances are exempt from income tax; gifts are gratuitous income under the income tax regime with a number of statutory exemptions (especially close relatives).
You will probably become an identified person and declare the tax in the Czech Republic on the services you receive; you will file the return for the month in which the liability arose.
In the tax calendar of the Tax Administration (online, continuously updated).
Not sure how to do your taxes correctly so you don’t get it wrong? We can help you navigate the law, whether it’s dealing with a specific tax situation, preparing for an audit by the tax authority or defending yourself in court.
Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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