3-Year Time Test in the Czech Republic: When and How Does It Exempt from Income Tax?

Introduction

In the Czech Republic, there is an institution known as the 3-year time test, which applies to income from the sale of securities such as stocks and bonds. This test is relevant for individuals and serves to exempt them from income tax. In this article, we will explain in detail how this test works, the differences between capital gains and dividends, and what withholding tax is.

When is the 3-Year Time Test Applicable?

The 3-year time test applies when selling securities if the security has been held for more than three years. If you meet this condition, you do not have to pay income tax on capital gains. Conversely, if the security is held for less than three years, you will be subject to a 15% income tax on the capital gain.

How Does Exemption from Tax Work?

• Example: If you buy ČEZ shares (ticker: ČEZ) for 5000 CZK in 2020 and sell them for 10000 CZK in 2024, you are exempt from income tax because you have owned the shares for more than three years.
• Conversely: If you sell them in 2022, you would have a gain of 5000 CZK (10000 CZK - 5000 CZK), which would be taxed at 15%, resulting in a tax liability of 750 CZK.

FIFO vs LIFO in Calculating Gains

Another important term is the method of accounting for costs applied when selling securities:

• FIFO (First In, First Out): This means that the first securities you purchased are also the first you sell. For example, if you bought 100 AAPL shares in 2021 and another 100 AAPL shares in 2022, when selling 100 shares, you will use the purchase price of the first 100 shares from 2021.
• LIFO (Last In, First Out): This means that when selling securities, you sell the newest ones first. So, when selling 100 AAPL shares, you would use the purchase price from 2022.

It is important to realize that the method you choose to report your gains can have a direct impact on your tax obligations.

Capital Gains vs Dividends

Both investment incomes - capital gains and dividends - are subject to different tax conditions:

• Capital Gains: As mentioned earlier, if you have held the security for at least three years, you are exempt from tax. If not, the gain cannot be excluded, and you must pay 15% tax.
• Dividends: These incomes are always taxed at a flat withholding tax rate of 15%, regardless of how long you have held the stock.

Withholding Tax of 15%

The 15% withholding tax applies to dividends paid by Czech companies. For example, dividends from ČEZ, where each shareholder receives a dividend reduced by this tax. This means if the dividend is 100 CZK per share, you actually receive only 85 CZK since 15 CZK is withheld as tax.

Declaration of Income

If you are subject to income tax on capital gains (i.e., if you sell securities you held for less than three years), it is necessary to report this income on your tax return. Again, if you invested in securities that are tax-exempt, you do not have to include them in your tax return.

Where to find this in QMA

On the QMA platform, you can track your investments and utilize features like the Screener, which helps you find stocks that meet your investment criteria, and the 5-pillar score, which shows the strengths and weaknesses of stocks. You can also track Smart Money and recommendations in QMA Picks to stay informed about the market.

Conclusion

This article clarified how the 3-year time test works in the Czech Republic and its implications for tax obligations on capital gains and dividends. With our knowledge, you can better manage your investments and tax burden.

Disclaimer

This article is for informational purposes only and should not be regarded as tax advice. It is advisable to consult with a financial advisor or tax specialist for specific situations and advice.