We often deal with questions from clients doing business in hospitality, services or retail regarding so called tips. You would look in vain in the Czech legal order for specific legislation of tips. It is an institute that is not explicitly regulated by any Czech legislation. In this article, we would like to outline the possibilities of interpretation of some problems related to tips, especially in relation to accepting the tips by an entrepreneur or his employee.
General legal assessment of the tips
The cornerstone of the accident in the legislation in the field of tips is seen primarily in the fact that no Czech legislation directly regulates it, as mentioned above. This can put it in the grey area of legislation. The only legislative reference to the tips is based on the explanatory memorandum and the methodology for the draft Czech Act on Electronic Sales Registration (EET).
The legal qualification and the tips scheme must, therefore, be inferred through the general provisions of the relevant legislation. From the point of view of general legal assessment, tips can be considered as a special remuneration (gift) according to the provisions of § 2060 of the Czech Civil Code.
What about taxes and EET?
It is more interesting to assess the nature of the tips according to tax legislation, especially in a situation where the entrepreneur is dealing with how to dispose of the obtained tax tips so as not to circumvent or violate the tax liability, which covered.
For proper assessment, it is necessary to distinguish who is the actual recipient of the tips. That is, whether the tip is the direct income of the entrepreneur’s employee (typically a waiter, shop assistant, etc.) or whether the tip is the income of the entrepreneur himself (the staff does not receive the collected tip).
If the recipient of the tips is an employee, it is, according to the interpretative practice, an income received in connection with the performance of the dependent activity and is subject to the personal income tax according to the provisions of Section 6 par. d) of the Czech Income Tax Act.
On the other hand, if the recipient is an entrepreneur, the acceptance of the tips are taken as income from an independent activity subject to corporation tax pursuant to Section 17 et seq. of the Czech Income Tax Act
In view of the above, it should be concluded and stated that any acceptance of tips is usually a taxable income under the Czech Income Tax Act and should be subject to tax if the statutory conditions are met.
Another question mark in the situation about tips is the act of accepting the tips as a receipt and its subsequent transfer to the electronic record of sales. Again, it is necessary to distinguish the acceptance of tips directly by the employee and the acceptance of tips by the entrepreneur.
In the case of a tips received by an employee, it is not a payment that is included in the electronic records of the entrepreneur’s sales, so it is not a recorded payment (sales).
In the case of a tips received by an entrepreneur, if his activity is subject to electronic sales records, the tips are subject to registration, so it is an income that needs to be registered as revenue within the EET.
According to experience in practice, the tax administration does not currently address the issue of tips and its taxation and electronic records very much, especially if it is to assess the tax on tips income.
Possible solutions
Is it necessary to take a tips as the so called white elephant? Above all, it depends on the internal setting of processes at the entrepreneur who decided to solve the issue of tips, i.e. whether it was received in cash or by credit card or bank transfer.
One option is not to accept cash tips from customers and, for example, to place an information board on the cash desk stating that neither employees nor entrepreneurs accept tips from customers. How to react if the tips, which (even involuntarily by employees) remain on the cash desk after the customer leaves? The situation can be solved by an information board with another wording, which will inform the customer about the fact that the tips are not the income of the entrepreneur but of the employee himself. If the entrepreneur is not the recipient of such tips and if the employee retains it, such tips must be regarded as income from the dependent activity of the employee, i.e. taxable income. The employee should then declare such income in the tax return and tax it.
Of course, the entrepreneur can accept the tips openly, but he should at the same time properly record, tax and take it into account when fulfilling the EET obligations.
An alternative way of solving cash tips is to model that tips are admitted as income of entrepreneur and then donated to charity on behalf of the entrepreneur or leaving the tips to fall in the so-called grey zone and letting the redistributing onto employees, which may carry the entrepreneur’s responsibility risks.
Tips for card payments must be reliably accounted for as business income – that is, the taxable income of the entrepreneur and also to be admitted within the EET.
Tips for transfer payments must be accounted for and either (a) kept as business income – that is, the taxable income of the entrepreneur and acknowledged under the EET, or (b) returned to the payer under unjust enrichment. However, this case of the tips is probably rather sporadic and well solvable.
In case of any questions connected with the mentioned issues we are at your disposal, please do not hesitate to contact us.
Mgr. Jakub Málek, partner – malek@plegal.cz
Eliška Vetýšková, legal assistant – vetyskova@plegal.cz
29. 11. 2019