Amendment to the VAT Act 2025 – Part II.

In the previous edition of the Forvis Mazars Tax View we commented on the planned changes of the VAT Act (herein VATA), which are expected to be brought by the amendment (Parliamentary Document Nr. 726) effective as of 1 January 2025. In this second part we would like to continue commenting on this amendment with focus on the changes that will be effective in a later.

There will be significant changes concerning real estate in the middle of 2025, changes to the export of goods by travellers from third countries as of the beginning of 2026, the exemption of financial activities and the introduction of a refund of unduly paid tax. From the beginning of 2027, the measure which limits the amount of the VAT deduction from the purchase of selected passenger cars, introduced in last year’s consolidation package, will be abolished. Due to the wide range of changes, we comment below only on the most significant changes, often with a certain degree of simplification.

Real estate 

With effect as of 1 July 2025, the conditions for application of the exemption on supply of real estate and some terminology definitions will be modified. The aim of most of the changes is to align Czech legislation with the case law of the Court of Justice of the EU (herein CJEU). The most significant change in real estate will be the abolition of the five-year time test for the VAT exemption and introduction of the principle of taxing only the first supply of immovable property which occurs by the end of the 23rd calendar month following the month in which the building is completed or in which a substantial change is done. The substantial change will newly be a change aimed at changing the use or conditions of occupation of the building provided that the cost of such change exceeds 30% of the tax base at the time of supply. This limit shall include only the costs incurred by the person supplying the immovable property.

Furthermore, the definition of a building for housing will be modified, which will no longer take the definition from the Building Act, but it will be linked to the information recorded in the basic register of territorial identification, addresses and real estate.

The reduced rate will continue to apply to a supply of social housing or provision of construction or installation work on a completed housing or a social housing. However, the definition of what constitutes the social housing will change, whereas it will be sufficient if more than half of the floor area is social housing space (previously a residential building was not considered a social housing if it contained even a single living space exceeding 120 m²). Similarly, in the case of other social housing listed in the Act (e.g. social services facilities, hospices, etc.), it will be sufficient to qualify the entire building as a social housing if the living spaces for social housing exceeds 50% of the total floor area.

Section 36a of the VAT Act lists specific cases in which the arms-length principles are applied on a   tax base among the related parties. Such rules   apply  if actual consideration for a taxable supply between related parties is lower than the arms-length  price and the recipient of the supply is not  entitled to a full deduction, or where the  deviation of the actual consideration from the arms-length  price could potentially lead to an  increase of the  input VAT coefficient, either by overvaluing  the consideration for the taxable supply or by decreasing the consideration  on  exempt supplies. With effect from 1 January 2025, the above rule will be extended to the supply of real estate by an employer to an employee or a close person to an employee. However, other supplies to employees, such as the provision of meals for a lower that the arms-length price will continue not to be subject to this rule.

Export of goods by passengers from third countries in personal luggage

From 1 January 2026, a change will occur in the export of goods by passengers from third countries in their personal luggage. If a traveller residing in a third country intends to export goods in personal luggage, the seller is obliged to issue a "sales document" upon request. The mandatory requirements of this sales document will be extended to include the passenger's travel document number, the country code indicated in the travel document and the currency of the transaction.

With the amendment coming into force, the seller will also be obliged to immediately notify the information mentioned on the sales document to the Customs Administration of the Czech Republic via the information system for the VAT refund to the traveller. As soon as the taxpayer does so, he or she will receive an electronic confirmation from the information system that the data provided have been received by the Customs Administration. In the case that the information system does not confirm the receipt of the data (e.g. for technical reasons), the taxpayer will be obliged to issue a sales document in paper form and enter the data into the information system on the day following the day of delivery of the goods at the latest.

The data from the sales document will be automatically available to the passenger at the airport at the Customs Office kiosk, where the goods will be confirmed as leaving the territory of the European Union and then sent to the seller. As well as now, the traveller will be then able to claim the refund of the tax paid based on the request to the seller within six months since the tax point of the taxable transaction. It should be noted that the seller can only apply for a VAT refund once it has proof of the exit of the goods from the European Union and return of the amount of tax to the traveller.

Exemption for financial activities

As of 1 January 2026, the exemption for several types of financial activities will be abolished to bring Czech legislation in line with the European VAT Directive and the case law of the CJEU. Thus, the services   of arranging collections, collection of radio or television fees, payment of pension benefits or the collection of recurrent payments from the public and keeping of records of investment instruments will no longer be VAT exempt. In addition to the above, the exemption on the management of customer’s assets will also be abolished with the effect as of 1 January 2025, i.e., one year earlier.

Refund of unduly paid tax

The VAT payer in the position of the customer can only claim input VAT in the maximum amount calculated in accordance with the VATA. The difference between the correctly assessed VAT and the amount of VAT actually paid by the customer to the supplier (e.g. due to incorrectly applied tax rate) is referred to as unduly paid tax.

Standard commercial practice is that the customer and the supplier agree on correction of the amount of the unduly applied VAT and the supplier refunds the tax to the customer. If the supplier refuses to refund the unduly paid tax to the customer, the customer may seek reimbursement of the tax through a civil action to claim unjustified enrichment. However, in the event of the supplier's insolvency, all efforts to recover the tax are limited, which, inter alia, breaches the neutrality of VAT as a fundamental principle of this tax.

With effect from 1 January 2026, it will be possible to request the tax administrator to refund this duly paid tax under very specific conditions defined in Section 81 of the VATA. In general, the draft amendment lists three situations in which a refund of such a tax can be requested. The first situation is when the supplier incorrectly states a tax, higher than it should be, on the tax document. It covers the abovementioned example of incorrectly applied tax rate. The other situations cover cases where the supplier should not pay the tax at all. This may occur if the supply is not a taxable supply at all (i.e. it is, for example, VAT exempt or not subject to VAT in the Czech Republic at all) or if the VAT should be paid by the customer instead of the supplier. In addition to several further conditions that will have to be cumulatively fulfilled and which the law will contain to prevent abuse of this provision, the customer will have to be able to prove that the amount claimed is paid to the supplier and must have a final court decision according to which the supplier is obliged to hand over the unjustified enrichment.

The right to a refund of unduly paid tax will be limited by a four-year time limit, which will start on the last day of the calendar year following the calendar year in which the transaction will be carried out. However, this time limit will not run for the duration of any judicial, administrative or arbitration proceedings.

Finally, we would like to point out that at the time of the preparation of this article, the amendment to the Act had already been approved by the Senate of the Parliament of the Czech Republic, however, has not been yet signed by the President. However, it is very unlikely that the President will veto this amendment. If you are interested in further information on the planned changes in VAT or in training aimed on the amendment of the VAT Act tailored to your needs, please do not hesitate to contact us at any time.

Authors: 

Milena Drábová, Tax Department Manager

Daniel Šmíd, Junior Consultant, Tax Department