The Ministry of Finance of the Czech Republic has proposed a comprehensive amendment to the Value Added Tax (VAT) Act, slated to take effect on January 1, 2025. This significant overhaul aims to align with European directives and recent rulings from the Court of Justice of the European Union (CJEU). Below are the most notable changes outlined in the forthcoming amendment:
Deadline for Claiming Tax Deductions and Correcting the Tax Base
The amendment proposes a reduction in the period for claiming tax deductions from three years to two years. For deductions based on a bill of exchange, this period will be further reduced to 12 months. However, for transactions where the recipient is liable to pay tax, the three-year period will remain unchanged.
Conversely, the period for correcting the taxable amount will be extended from three to seven years from the original supply date, and this period will no longer be interrupted during court proceedings.
Obligation to Reimburse Tax Deductions for Unpaid Claims
Under the new rules, if a debtor fails to settle a claim within six months of its due date, they will be required to adjust and potentially reduce their tax deduction proportionally. Should the debtor subsequently make a partial or full payment, the taxpayer can then increase the deduction accordingly.
Changes to VAT on Immovable Property
The test period for claiming exemption on the supply of immovable property will be shortened. According to the updated law, the supply of completed immovable property will generally be exempt from VAT, except for the first supply of the property. For leasing, lessees will now have the option to apply VAT to leases involving persons registered for tax in another EU Member State.
To apply the reduced VAT rate, the terms ‘buildings for housing’ or ‘buildings for social housing’ will now be defined based on their usage as recorded in the register of territorial identification, addresses, and immovable property.
Benefits Provided to Employees at a Discount
Currently, VAT is calculated based on the price paid by employees for discounted benefits. The amendment will likely require VAT to be calculated on the normal market price of these benefits.
Change in the VAT Registration Limit
The turnover threshold for VAT registration will be recalculated annually. If turnover from January to December exceeds CZK 2,000,000, the taxpayer must register for VAT from the start of the following year. If turnover exceeds CZK 2,536,500, VAT registration will be required from the second day after this limit is surpassed.
Introduction of a Limit for Small Enterprises
A new scheme will exempt small enterprises, with turnover not exceeding CZK 2,000,000 in the preceding 12 months, from VAT obligations. These small enterprises, particularly those established in another Member State, will be exempt from the domestic VAT system, simplifying their tax responsibilities.
Additional Selected Changes
- Limitation on Tax Deductions for Cars: The deduction limit for cars over CZK 2 million will be lifted for racing cars in 2025 and entirely abolished by 2027.
- Reverse Charge Mechanism: This will now apply to certain cleaning services.
- Abolition of Self-Created Assets: The concept of self-created assets will be removed.
These amendments reflect a broader effort to modernize the VAT system in the Czech Republic, ensuring compliance with EU directives while addressing the needs of local taxpayers. Businesses should prepare for these changes to optimize their tax strategies and ensure compliance from the outset of 2025.
The proposed amendments to the VAT Act in the Czech Republic represent a significant shift in the tax landscape, with implications for businesses across various sectors. Companies should stay informed and seek professional advice to navigate these changes effectively. The Ministry of Finance’s proactive approach ensures that the Czech tax system remains robust, fair, and aligned with European standards.
