When withholding tax will be deducted from income in 2026 and what it actually means

We’ll tell you when the tax is deducted directly at source and why it matters, who pays the withholding tax, and how withholding tax differs from advance payment tax. We’ll also cover typical situations: fixed and temporary employment, bank interest, dividends and profit shares, royalties and other income where the withholding regime is most common.

Withholding tax: what it is and who is the payer and taxpayer

There are always two roles for withholding tax:

1. The taxpayer is the one who receives the income (employee on a FIT, partner receiving a dividend, author receiving royalties…).
2. The taxpayer is the one who pays the income and withholds and pays the tax (employer, bank, corporation paying a share of profits, competition organiser, etc.).

The legal logic is simple: the state will say “it is more practical to collect tax at source on this income”. The tax is then levied at a predetermined rate and is often a finite amount.

Withholding tax vs. advance tax: why there is a difference

In the case of advance tax (typically on ordinary wages with a signed taxpayer declaration), advances are made during the year and this is topped up at the end of the year via the annual return or tax return. With withholding tax, on the other hand, once the tax is withheld, it’s often settled – and you don’t have to do anything else.

But be aware of an important exception: you can voluntarily include some income taxed by withholding on your tax return and offset the tax withheld, provided you meet the conditions. The law provides for this, especially for income that was a separate taxable amount taxed at a special rate.

What is taxed by withholding

Withholding tax applies to a range of situations. The most common ones you will encounter are:

Withholding tax on FTEs and FTEs

Withholding tax mainly arises with agreements (typically a work performance agreement – WPA) when you do not have a signed taxpayer’s declaration (pink declaration) with your employer and the conditions for the income to be taxed by withholding as a separate tax base are met. The key point is that the law works with a limit, which is set at 12,000 CZK for 2026.

What does this mean in practice? If you earn, for example, CZK 8,000 on a DPP with one employer and you haven’t signed a pink slip, your employer will deduct tax from your pay and you won’t have to worry about anything else – you’ll see the tax deducted and the net amount paid on the slip. However, once you get to £12,000 and above (or sign a declaration), the scheme breaks down: typically it’s no longer withholding tax, but advance tax (and at the same time the premium is dealt with under the insurance participation rules).

The logic is very similar for a contract of employment (FTE). Here, the law links participation in sickness insurance (and thus the payment of insurance premiums) to the attainment of a decisive amount. For 2026, the limit is CZK 4,500 per month.

Dividend withholding tax and calculation of withholding tax on profit sharing

For companies, the classic scenario is simple: the company pays a share of profit (dividend) to a partner or shareholder and, as the payer of the income, is obliged to withhold tax from the profit share and pay it to the tax authorities. In practice, the most common rate is 15%, but the law also provides for schemes where a higher rate applies.

Practical example:

A company approves the payment of a profit share of CZK 100,000 to an individual – a Czech tax resident.

The company, as the payer, will make the deduction:

• withholding tax: 100 000 × 15% = CZK 15 000
• the shareholder receives CZK 85 000
• cZK 15 000 will be paid by the company to the tax office.

The calculation is simple. But the tricky part may lie elsewhere: in assessing whether an exception, exemption or other regime applies (typically for corporations, EU parent and subsidiary companies, etc., or foreign recipients).

Withholding tax on interest (especially for banks)

In the case of interest on bank products (savings accounts, fixed-term deposits, etc.), the typical procedure is that the bank credits the interest after tax because it deducts tax from the interest income and remits it to the state. Thus, you don’t have to put anything on your return just for the interest because the tax is sorted out at source.

Practical example:

You have a fixed deposit and the bank calculates the interest at CZK 2,000 per year. The bank deducts tax (typically 15%) and credits your account with CZK 1 700. You will often only see the net interest credited in online banking and somewhere in the details you will also see information about the deduction.

Licence fees, withholding tax and other specific income

For royalties (typically when you pay for software, know-how, brand, database, copyright, etc.), withholding tax mainly appears in situations where a Czech entity pays royalties abroad. The practical logic is the same: the paying entity (Czech company) withholds tax from the amount and pays it to the Czech tax authorities.

Practical example:

A Czech company pays a foreign company a licence fee of CZK 100,000 for the use of software. If the income is subject to withholding tax and the conditions for the application of the benefits of a double taxation treaty are not met (for example, because the recipient has not provided the necessary tax residency certificate or the treaty rate is not applicable), the Czech company may be obliged to withhold tax from the payment.

Withholding tax on tax returns: when can you get a refund?

You can proceed with withholding tax on the income you collect by voluntarily including it in your tax return. The result can be surprisingly pleasant – the tax withheld is added to your annual tax liability and if you end up with a low (or zero) tax bill after allowances and deductions have been applied, you may have an overpayment and the tax office will refund it to you.

What does it mean to voluntarily include it in your return?

From a legal perspective, it is important to understand the difference between the two situations:

1. In the first situation, the tax withheld is final for you and the income is typically not discussed further.
2. In the second situation, for selected types of income taxed by withholding, the law allows you to include it on your tax return: you list both the income and the tax withheld and it is added to your total annual tax liability. If the tax comes out lower after applying allowances and deductions, you may end up with an overpayment.

Practical example: several DPPs without declarations

Imagine that you only had part-time jobs during the year:

• 3 months of DPP at different companies, each time with a remuneration of CZK 10,000;
• you did not sign a taxpayer’s declaration anywhere;
• each employer withheld 15% tax (simplified to CZK 1 500 per month);
• In total, you earned CZK 30 000 and had CZK 4 500 withheld in tax.

If you file a tax return and claim the basic taxpayer discount of CZK 30,840, your calculated annual tax will typically be zero on such a low income (the discount is higher than the calculated tax). And because your employers have already withheld CZK 4,500, you will have an overpayment of CZK 4,500 which you can get back.

Withholding tax: calculation and rounding

There are two questions that are often asked about withholding tax: what is the basis and how is it rounded.

Withholding tax is determined by taking the gross amount (e.g. the wages of a part-time job) and calculating the tax on that. So it doesn’t address what your costs are, whether you had to buy something, whether you invested time or money in it. It is simply the income that is taken into account and the tax base is determined from that.

The law also lays down rules for rounding withholding tax: the tax base is typically rounded down to whole crowns, and the special rate tax itself is rounded down to whole crowns (with specific exceptions for certain capital income and securities).

Summary

Withholding tax is a method of taxation at source: the payer of the income (employer, bank, profit-sharing company, etc.) withholds the tax directly at the time of payment and remits it to the state so that you receive the net amount. Compared to advance tax, this usually closes the tax liability on many incomes as soon as it is paid.

But beware of the exception: some income taxed by withholding can be voluntarily included in your tax return and the tax withheld can be offset, which can lead to a refund – typically for part-time jobs without a signed declaration, where the rebates result in low or no tax for the year.