Long-Term Investment Product
As part of the amendment to the law on investment on capital market and the associated amendment to the income tax law, a new product for saving for old age, a long-term investment product (hereinafter as "LTIP"), has been introduced. It is intended to function as an alternative to old age saving products that are already tax supported, such as products in the third pension pillar (pension insurance and supplementary pension savings) and life insurance.
What is LTIP and who Can Provide It?
LTIP is a collective term for investment or savings products that contribute to old age security and may now benefit from tax support. LTIP can be arranged from 1 January 2024, based on a contract between the client and the LTIP provider. The LTIP provider must be registered in the list of LTIP providers maintained by the Czech National Bank and can be:
- Bank,
- Savings and credit union,
- Securities broker,
- Investment company,
- Self-governing investment fund,
- Similar foreign entity authorized to provide its services in the Czech Republic.
Options for Investments within LTIP
LTIP, in contrast to other old age savings products, is attractive due to its wide range of investment instruments that can be utilized for savings within the LTIP. Financial instruments where you can invest your funds include:
- Cash (funds in a savings account, term deposit, etc.),
- Shares and bonds traded on the stock exchange, including foreign ones, or government bonds or covered bonds (e.g., mortgage-backed securities) from EU countries,
- Investment fund units,
- Derivatives used to hedge currency or interest rate risks.
Conditions for Deducting LTIP from Taxable Income
The taxpayer can deduct contributions to all tax-supported old age savings products and tax-supported long-term care insurance from the tax base, up to CZK 48,000 per year. Entitlement to the deduction will have to be proved by the LTIP contract and a certificate of the amount of participant’s contributions issued by the company providing the product. In order to maintain the tax support, the distribution of the funds from the LTIP must occur more than 10 years after the product is set up, but no earlier than in the calendar year in which the taxpayer reaches age of 60. The law also provides for other situations, such as the termination of the product. In the event that the product is terminated by the provider (e.g. by bankruptcy of the company), the tax support can be maintained, but only if the funds paid out are reinvested in another LTIP within one month.
Conditions for the Contributions of Employer Being Tax-free
The law also allows tax exemption of employer contributions paid on behalf of employees to any tax-supported old age savings product or tax-supported long-term care insurance up to an annual amount of CZK 50,000 in total for all types of products.
Breach of Conditions for Drawing Tax Support
If the conditions are not met, the tax deductions taken in the last 10 years prior to the payment of the funds out of LTIP will have to be taxed as other income pursuant to Section 10 of the Income Tax Act. At the same time, any employer contributions provided as tax-free benefit will have to be taxed as employment income pursuant to Section 6 of the Income Tax Act. Again, the tax treatment applies only to contributions made in the last 10 years prior to the payment, but please note that if the employer contributions are taxed, the filling a tax return is automatically obligatory regardless the amount of such benefit.
Trading within LTIP and Taxation of Capital Income
Under the LTIP, it is possible to trade and generate capital income in the individual titles while maintaining the tax benefits associated with the investment of the funds. However, it is important to note that such income and transactions will be subject to standard taxation. If there is a tax liability arising from the sale of assets within the LTIP (the three-year time test is not met, or the annual limit of CZK 100,000 is exceeded), the income tax must be paid from assets outside the LTIP to avoid the loss of previously claimed tax advantages.
The option to secure one's old age through LTIP is certainly an interesting alternative to existing products. However, participants should carefully consider the selection of individual investments, taking into account not only returns but also overall optimization of tax support.
If you have any questions regarding the above-mentioned issues, do not hesitate to contact our experts.
Authors:
Gabriela Ivanco, Tax Manager
Anna Klímová, Tax Senior, Editor Mazars Tax View
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