When and How to Pay Tax on Interest Earned from a Loan

Quick Overview

• Interest on a loan is taxed as income.
• For a standard loan between two individuals, the lender includes the interest in their tax return and taxes it at a rate of 15%, or 23% for the portion of the tax base exceeding the statutory limit.
• If a legal entity pays interest to an individual, a 15% withholding tax is often applied, which is paid by the borrower.
• An interest-free loan does not generate interest income on its own, but it may have other tax implications for non-related parties or employee loans.

If you are dealing with a loan between a partner and a company, a loan to an employee, or interest from abroad, it is worth verifying the procedure in advance. Our attorneys will help you draft a loan agreement and establish a tax-compliant method for paying interest so that no issues arise later during a tax audit.

Interest Tax for Individuals

If a loan is provided by an individual who is not a business owner, the interest on the loan is considered “other income” under the Income Tax Act. Such income is taxable and must be reported on a tax return. Interest from a loan is taxable income regardless of the amount. The obligation to file a tax return generally arises when annual taxable income exceeds 50,000 CZK.

A special rule applies to employees: If they have only income from employment and their other taxable income (e.g., interest on a loan) does not exceed 20,000 CZK for the year, they are not required to file a tax return and may ask their employer for an annual tax settlement.

How this works in practice: If you lend a friend 200,000 Kč at 5% annual interest, you’ll earn 10,000 Kč per year. This income is subject to personal income tax. You do not pay it through withholding tax, but you include it in your tax return and pay tax at a 15% rate. If your total annual taxable income for 2026 exceeds 1,762,812 CZK, a higher rate of 23% will apply to the portion of your taxable income above that threshold. This does not mean that the entire income is taxed at 23%, but only the portion above the statutory limit.

An individual must provide documentation of interest income in some form, such as a loan agreement and bank statements showing the account to which the interest was credited.

We know from experience that problems often do not arise at the time the loan is granted, but only later, when the tax office or the other party retroactively determines whether the payment was a principal repayment, interest, a gift, or other income. A common mistake is the lack of a written agreement and payments without a clear indication of what constitutes a loan repayment and what constitutes interest.

Therefore, a verbal agreement or a note in online banking is not sufficient. If you are lending a larger amount, have a written loan agreement prepared that clearly specifies the principal, interest, due date, and payment method.

Interest Tax for Entrepreneurs and Legal Entities

If the loan is provided by an entrepreneur or a legal entity (such as a limited liability company), the interest on the loan is part of their taxable income. In this case, interest on the loan is taxed as standard through the corporate or individual income tax return.

Interest income is recorded as revenue and is subject to a tax rate of 21% (for legal entities) or 15% (for individuals—entrepreneurs). However, if the creditor is an individual and the debtor is a corporation, a withholding tax obligation often arises, which the debtor must pay.

Withholding Tax on Interest

In certain cases, interest tax is withheld at the source, i.e., directly by the debtor. A typical example is a situation where a limited liability company (s. r. o.) pays interest to an individual. In such a case, the company is the tax payer; it withholds 15% of the interest, remits it to the tax authority, and pays the individual the interest after taxes have been deducted. This procedure is governed by Section 36 of the Income Tax Act.

However, if the loan is provided between two non-business-owning individuals, withholding tax does not apply, and the interest recipient must handle the taxation themselves by filing a tax return.

For loans between a partner and a company, we recommend always determining in advance who is the recipient of the interest, who is responsible for paying the tax, and how the payment will be accounted for. An error in withholding tax can primarily affect the payer—that is, the person who was supposed to withhold and remit the tax.

Interest-Free Loans and Gift Tax

What if the loan is interest-free? In that case, no income is generated, and therefore no tax liability arises. At first glance, it’s simple. However, if an interest-free loan is made between individuals who are not close relatives, the tax authority may begin to investigate whether it constitutes a gift subject to gift tax (which is currently included in income tax). Therefore, whenever you lend money to someone, always carefully consider whether an interest-free loan could pose tax risks.

What About Interest Paid to or Received from Abroad?

If a person from abroad grants or receives a loan, they will need to address international taxation issues. The Czech Income Tax Act and international double taxation treaties govern in which country tax on interest from the loan is paid. Typically, the tax is collected in the country where the interest recipient is a tax resident.

For example, a Czech tax resident receives interest on a loan provided to a company in Germany. Under the double taxation treaty, the income is taxed in the Czech Republic, but Germany may withhold tax, which the Czech taxpayer can then claim as a credit.

With foreign loans, the greatest risk is that the parties rely solely on Czech rules and overlook the double taxation treaty. The treaty may specify a different procedure or allow for the credit of tax withheld abroad.

For cross-border loans, we recommend not relying on estimates. We’ll help you verify the double taxation treaty, set up the necessary documentation, and prevent you from taxing the same interest incorrectly or twice.

Real-World Examples

Example 1: An individual lends money to another individual

Mr. Novák, an ordinary citizen (not an entrepreneur), lent his acquaintance 500,000 CZK for a period of two years. In the agreement, they agreed on an annual interest rate of 5%. This means that each year, Mr. Novák will receive 25,000 CZK in interest (500,000 CZK × 5%).

From the perspective of the Income Tax Act, for a non-business-owning individual, this is generally considered income from capital assets under Section 8. Mr. Novák must therefore determine whether he is required to file a tax return and report the interest on it. Interest on a loan is not considered a repayment of the principal—only the interest itself is taxable.

At a tax rate of 15%, he will pay 3,750 Kč in tax each year (15% of 25,000 Kč). If Mr. Novák were in a higher tax bracket (e.g., if he had very high income from business or employment), a higher rate of 23% would apply to the amount exceeding the limit.

In addition, he must be prepared to prove the source of the income—that is, to provide the loan agreement or, if applicable, bank statements showing that he actually received the interest.

Example 2: A Company Lends to a Partner

ABC s. r. o. granted its partner (for example, Mr. Dvořák) a loan of 1,000,000 CZK at an annual interest rate of 4%. It therefore expects annual interest income of 40,000 Kč.

From the company’s perspective, this is standard income from the loan, which is recorded in the company’s books and subsequently included in its taxable income. This amount is therefore taxed at the corporate income tax rate, which is currently 21%.

If the recipient of the interest is a partner—a natural person (e.g., a non-business owner)—they are required to withhold a 15% withholding tax on the interest. As the tax payer, the company will therefore withhold 6,000 CZK from the 40,000 CZK in interest and remit it to the tax authority. The shareholder will receive only the net interest of 34,000 CZK into their account.

The company is also required to prepare a withholding tax report and maintain records for audit purposes. If the partner were a self-employed individual, the withholding tax would not apply, and the partner would report the income on their own tax return.

Example 3: An Employer Provides an Employee with a Preferential Loan

XYZ s. r. o. provided its employee, Mr. Svoboda, with a special-purpose loan for the purchase of a home. The loan amount is 600,000 CZK. The interest rate agreed upon by the company in the contract with Mr. Svoboda is only 1% per year.

However, the law stipulates that if an employee is granted a loan at an interest rate lower than the market rate (for example, 5% on the open market), the employee receives non-monetary income. This non-monetary income corresponds to the difference between the agreed-upon interest rate (1%) and the customary interest rate (5%).

In practice, this means that the company must calculate the difference in interest rates each year (in this case, 600,000 CZK × (5% – 1%) = 24,000 CZK) and include this amount in the employee’s wages as non-monetary compensation. The following taxes are then withheld from this amount:

• personal income tax (15%, or 23% above the threshold),
• social security and health insurance, just as with regular wages.

The employer therefore also bears additional payroll costs. At the same time, Mr. Svoboda does not need to report this amount anywhere on his tax return; it is taxed directly by the employer as part of his paycheck.

This mechanism is intended to prevent “tax optimization” in the form of interest-free or low-interest loans, which would otherwise constitute an unreported benefit for the employee.

Summary

In 2026, tax on interest from a loan is payable when the lender receives interest from the loan as taxable income. For an individual who is not engaged in business, this is generally considered income from capital assets under Section 8 of the Income Tax Act, which must be reported on the tax return unless it is subject to withholding tax. For loans between two individuals, the recipient of the interest usually handles the taxation themselves. If, for example, a limited liability company (s. r. o.) pays interest to an individual, a 15% withholding tax may apply, which the borrower, as the taxpayer, is responsible for remitting. Entrepreneurs and legal entities include interest in their income or revenue; the basic corporate income tax rate is 21%. An interest-free loan does not generate interest income, but it may have other tax implications in the case of unrelated parties, related parties, or employer-employee relationships. For foreign loans, it is also necessary to verify the applicable double taxation treaty. Always keep the loan agreement, repayment schedule, and account statements on file so that it is clear what constitutes principal and what constitutes interest.