Lending money to a friend, business partner or your own company may seem like a simple and common step at first glance. However, if the loan is interest-bearing, you will be liable to tax on the interest. Interest on a loan is taxable income for individuals, businesses and corporations. In this article, we’ll look at when you’re liable to pay tax on interest on a loan, who pays it and what to look out for to ensure everything is in line with the law.
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If a loan is granted by a natural person who is not an entrepreneur, the interest on the loan is so-called other income for that person under Section 10 of the Income Tax Act. Such income is taxable if it exceeds CZK 6,000 per year and must be reported in the tax return.
How it works in practice: if you lend CZK 200,000 to a friend at 5% annual interest, you will receive CZK 10,000 per year. This income is subject to personal income tax. You do not withhold it, but include it in your tax return and tax it at 15%. If the total annual tax base exceeds four times the average salary (for 2025 the threshold is about CZK 1.9 million), the higher rate of 23% applies to the part exceeding that.
The individual must prove the interest income in some way, for example by a loan agreement and statements from the account to which the interest was credited.
If the loan is made by an entrepreneur or a legal person (e.g. an LLC), the interest on the loan is part of their taxable income. In this case, the interest on the loan is taxed as standard in the corporate or personal income tax return.
The interest income is booked as income and subject to a tax rate of 19% (corporations) or 15% (individuals – entrepreneurs). However, if the creditor is a natural person and the debtor is a legal person, withholding tax is often due from the debtor.
In certain cases, tax on interest is withheld at source, i.e. directly by the debtor. A typical example is where an LLC pays interest to an individual. In this case, the company is the taxpayer, withholds 15% of the interest, remits it to the tax office and pays the interest to the individual after tax. This procedure is governed by Section 36 of the Income Tax Act.
However, if the loan is granted between two non-business individuals, withholding tax does not apply and the recipient of the interest has to arrange the taxation himself by filing a tax return.
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What if the loan is interest-free? In such a case, no income and therefore no tax liability arises. On the face of it, it’s simple. However, if the interest-free loan is between people who are not close, the tax authorities may start to look into whether it is a gift that is subject to gift tax (which is now included under income tax). Therefore, always consider carefully if you are lending to someone whether an interest-free loan will raise tax risks.
If the loan is made or received by a person from abroad, they will need to sort out international taxation. The Czech Income Tax Act and international double taxation treaties regulate in which country tax is due on the interest on the loan. Typically, the tax is levied in the state where the recipient of the interest is tax resident.
For example, a Czech tax resident receives interest on a loan granted to a company in Germany. Under a double tax treaty, the income is taxed in the Czech Republic, but Germany may apply a withholding which the Czech taxpayer can offset.
Example 1: An individual lends to another individual
Mr. Novák, an ordinary citizen (non-businessman), lent CZK 500,000 to an acquaintance for a period of two years. In the contract they agreed on an annual interest rate of 5%. This means that each year Mr Novák receives CZK 25 000 (CZK 500 000 × 5%) as interest.
In terms of the Income Tax Act, this is other income. As the interest on the loan exceeds CZK 6 000 per calendar year, this income is not exempt and Mr Novák is obliged to include this income in his tax return.
At a tax rate of 15%, he will pay tax of CZK 3 750 (15% of CZK 25 000) for each year. If Mr Novák was in a higher tax bracket (e.g. had very high business or employment income), the higher rate of 23% would apply to the amount over the limit.
In addition, he must be prepared to prove the source of the income – i.e. provide a loan agreement or bank statements showing that he actually received the interest.
Example 2: A company lends to a shareholder
ABC s.r.o. has granted a loan of CZK 1 000 000 to its partner (for example, Mr Dvořák) at an interest rate of 4% per annum. He therefore expects interest income of CZK 40 000 per year.
From the company’s point of view, this is standard income from the loan, which enters the company’s accounts and subsequently the income tax base. This amount is therefore taxed at the corporate tax rate, currently 19 %.
If the recipient of the interest is a partner – an individual (e.g. a non-businessman), he or she is obliged to withhold withholding tax on the interest at the rate of 15%. The company, as a taxpayer, therefore withholds CZK 6,000 from the CZK 40,000 interest and pays it to the tax office. The shareholder receives only the net interest of CZK 34,000.
The company is also obliged to make a notice of tax withheld and keep records for audit purposes. If the partner were an individual entrepreneur, withholding tax would not apply and he would tax the income himself on his tax return.
Example 3: An employer provides a soft loan to an employee
Company XYZ Ltd. has provided its employee, Mr Svoboda, with a special purpose loan to purchase a home. The amount of the loan is CZK 600 000. The interest rate agreed in the contract with Mr Svoboda is only 1% per annum.
However, the law provides that if an employee is granted a loan at an interest rate lower than the normal rate (for example, 5% on the open market), the employee generates non-cash income. This non-cash income corresponds to the difference between the agreed interest (1 %) and the normal interest (5 %).
In practice, this means that the company must calculate the difference in interest each year (in this case, CZK 600 000 × (5% – 1%) = CZK 24 000) and include this amount in the employee’s salary as a non-cash benefit. A deduction is then made on this amount:
The employer also bears the additional wage costs. At the same time, Mr Svoboda does not have to declare this amount anywhere in his tax return, it is taxed directly by his employer as part of his salary.
This mechanism is intended to prevent “tax optimisation” in the form of interest-free or under-interested loans, which would otherwise result in an unrecognised benefit for the employee.
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Tax is payable on interest on a loan where the lender receives taxable income from the loan. In the case of individuals – non-business persons, it is other income according to Section 10 of the Income Tax Act, which is taxable at an annual interest rate above CZK 6,000 and is reported in the tax return, usually taxed at a rate of 15%, or 23% for high incomes. Entrepreneurs and legal entities include the interest in the income they tax at the standard rate (19% for legal entities, 15% for entrepreneurs). In certain cases – typically when an LLC pays interest to an individual – a withholding tax of 15% applies, which is paid by the payer (borrower). An interest-free loan is not subject to tax but may be treated as a gift between non-relatives. Cross-border loans depend on double taxation treaties – usually taxed in the recipient’s country of tax residence. Tax liability must be supported by documentation (contract, statements).
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