Amendment to the VAT Act 2025

This is certainly positive news, given the large scope of the amendment (460 amendment points) and the likely, as usual, very short timeframe between final approval of the amendment and its entry into force on 1 January 2025. Given that the draft amendment came in the first half of September only through a second reading in the Chamber of Deputies of the Parliament of the Czech Republic, the final wording of the amendment is still uncertain. 

A number of amendment points, especially concerning changes in the area of real estate, should have a delayed effect until 1 July 2025, while other changes, for example in the area of VAT refunds to foreign tourists and VAT exemptions for financial activities, should be effective only from 1 January 2026. The amendment also provides for the planned abolition of the limitation of the deduction for cars to CZK 420,000 from 1 January 2027. 

Due to the large number of amendment points and their different effective dates, we consider it appropriate to focus in this article only on some of the more significant changes that will affect VAT payers as of 1 January 2025. We will be happy to inform you about the changes with delayed effectiveness in the next issue of Forvis Mazars Tax View, where we will also inform you about possible changes in the proposed regulation.

Changes in VAT registration

The current domestic turnover limit of CZK 2,000,000, which, if exceeded, will oblige a taxable person to register for VAT in the Czech Republic, should be newly assessed on a calendar year basis, with the taxable person becoming a taxable person from the first day of the calendar year following the year in which the threshold is exceeded. This will apply only if the turnover in a given calendar year does not exceed CZK 2 536 500. In such a case (or if the taxable person decides to do so voluntarily if the threshold of CZK 2 000 000 is exceeded), he or she will become a taxable person on the day following the day on which the turnover is exceeded.

Whether the obligation to register is caused by exceeding any of the stated turnover levels, the application for registration will need to be submitted within 10 working days since the date of exceeding the turnover level. 

The same rules should now also apply to persons established in another Member State registered under the small business scheme for domestic companies.

Cross-border regime for small businesses

Persons who do not have their seat or VAT establishment in the Czech Republic now become taxpayers or identified persons when they carry out or receive even a single taxable supply, regardless of the amount of their turnover. A similar situation then applies to domestic entities in other Member States, where even a single taxable supply may oblige a domestic taxable person to register or identify himself in another Member State according to legislation of that Member State. 

The introduction of separate rules for these two groups should be achieved through the implementation of a special cross-border regime for small businesses. This voluntary scheme, consisting of an exemption from compulsory VAT registration and other related obligations, aims to reduce the administrative burden on small businesses.

The scheme will be available to taxable persons in all Member States except the Member State where they are established for VAT purposes, provided that: 

(i) The person‘s turnover in the European Union does not exceed EUR 100,000 in the relevant or immediately preceding calendar year, 

(ii) The turnover of that person in the Member State in which he wishes to take advantage of, or is taking advantage of, the small business scheme (the so-called ‚State of exemption‘) does not exceed a threshold set by that other Member State, and 

(iii) That person meets other conditions, if any, set by the State of exemption.

For the sake of completeness, the cross-border scheme for small businesses is not compatible with the import regime of the special scheme of the one-stop shop and will not be available either to members of the VAT group or to the VAT group itself.

If a taxable person who meets the statutory conditions decides to take advantage of the cross-border small business scheme, he is obliged to register for this scheme by submitting an application for registration to the tax administration in the State of establishment. In the registration decision, the tax administration will assign the registered person a special tax identification number ending with the code ‚-EX‘, which could be verified in a register similar to the VIES. 

Thereafter, a person registered in the cross-border regime for small businesses will be obliged to submit quarterly notifications in which he/she will indicate the total amount of transactions entering into the turnover with a distinction by individual Member States (including the domestic one). The notified data will be used by the tax authorities to check whether any of the turnover thresholds have been exceeded. If a Member State sets more than one threshold, it will be necessary to indicate the amount for each turnover threshold separately in the notification.

Extension of the deadline for correcting the tax base

The current three-year period for correcting the tax base should be extended to seven calendar years. In addition to the extension itself, the point in time determining the start of the period should also be changed. The period for correcting the tax base should newly  start on the last day of the calendar year in which the obligation to declare tax on the original taxable supply will arise. The actual length of the period may thus approach eight years for transactions carried out in January. The reason for the extension of the time limit is mainly in response to commercial practice, where a number of supplies (in particular construction work) may be the subject of a claim even after the expiry of the current three-year time limit. On the other hand, however, the legislator already considers the seven-year time limit to be long enough to cover court, arbitration or insolvency proceedings, which should not suspend this time limit since the amendment will come into force.

Refund of VAT deduction for non-payment of liability

The amendment should introduce an obligation for debtors to correct the tax deduction on received supplies not paid even after the expiry of a statutory six-month period. The period should start on the last day of the month in which the liability become due. If the claim is not satisfied by the end of that period, the debtor should be obliged to correct the deduction in the tax period to which the last day of the six-month period belongs. For example, a deduction from an unpaid received taxable supply due in January 2025 should be corrected by the taxpayer in the July 2025 tax return.

Bad debts

The output VAT paid should be much easier to recover in the case of bad debts.  For corrections of the taxable amount for receivables in execution proceedings, it should be sufficient that at least 1 year has elapsed since the first execution order was issued instead of the original 2 years.

However, the amendment will most significantly interfere the corrections of receivables up to CZK 10,000 that are more than six months overdue and whose total amount against one debtor does not exceed CZK 20,000. In these cases, the creditor should newly only need to appeal the debtor twice in writing to pay the claim in order to correct the tax base. Although the appeal should be in writing, the creditor will not be obliged to prove the delivery of the appeal - according to the proposed legislation, it will be sufficient for the debtor to make an effort to deliver it.

Shortening the time limit for claiming the deduction

Concurrently with the shortening of the current three-year period for claiming the VAT deduction to two years, the point in time from which this period start to run should also be changed. Until now, the start of the period is determined by the first day of the month following the tax year in which the deduction is claimed. Newly, the possibility of claiming the deduction should expire at the end of the second calendar year following the calendar year in which entitlement to claim for VAT deduction arose. However, the right to deduct will continue to exist beyond this period whenever the recipient has incurred the obligation to account for output VAT on the supply, i.e. in the case of in-land reverse charge, reverse charge, intra-Community acquisition and import of goods.

Real Estate

The effectiveness of the changes concerning immovable property has been postponed until the second half of 2025. The exception is the abolition of the concept of self-created property. Thus, putting into use of self-created fixed assets for which the taxpayer is entitled to a partial deduction will not be considered as a supply of goods. Moreover, in practice, this will mean that taxpayers will have to reduce/proportionally claim the deduction continuously during the acquisition of individual inputs, not only at the moment of putting the created fixed assets into use.

If you are interested in more information about the planned changes in the field of VAT or training on the amendment to the VAT Act tailored to your needs, please do not hesitate to contact us at any time.

Authors: 

Milena Drábová, Tax Manager

Daniel Šmíd, Tax Assistant