Effective January 1, 2025, significant amendments to the Czech VAT Act (Act No. 235/2004 Coll.) have come into force, aimed at streamlining tax administration and aligning with European regulations. Below is an overview of the key updates, some of which take effect on January 1, 2025, while others will apply from July 1, 2025.
1. Changes to Mandatory VAT Registration Thresholds
Starting January 1, 2025, turnover for VAT registration purposes will be calculated based on the calendar year rather than the previous 12 months. This change simplifies turnover tracking for businesses. For the first time in the Czech Republic, two registration thresholds have been introduced:
- Turnover between CZK 2,000,000 and CZK 2,536,000: mandatory registration applies from January 1 of the following year. However, businesses can opt for earlier registration (effective the day after exceeding the threshold) by selecting the appropriate option when submitting the registration form.
- Turnover exceeding CZK 2,536,000: mandatory registration applies immediately, on the day following the threshold breach.
VAT registration applications must be submitted within 10 business days of crossing the relevant threshold.
2. Shortened Timeframe for Claiming VAT Deductions
As of January 1, 2025, the period for claiming VAT deductions will be reduced from three to two years. This means businesses can claim a deduction up to the end of the second calendar year following the year in which the right to deduct arose. This change applies to transactions carried out from January 1, 2025, and excludes transactions under the reverse charge mechanism.
3. Mandatory VAT Deduction Reversal for Unpaid Invoices
If the recipient of goods or services fails to pay an invoice within six months of its due date, they are required to reverse any previously claimed VAT deduction. Once the invoice is paid, the right to deduct VAT can be reinstated. This rule applies to invoices issued from January 1, 2025, onward. The new requirement is expected to significantly increase the administrative workload for accountants.
Tax advisors remain divided on whether this obligation also applies to invoices under the reverse charge mechanism. An official statement from the tax authorities is anticipated to clarify this point.
4. Extended Period for Adjusting the Tax Base
The period for making adjustments to the tax base has been extended from three to seven years. This applies to transactions carried out from January 1, 2025, and allows for adjustments such as discounts or returns to be accounted for over a longer timeframe.
H2 5. Simplified Tax Base Adjustments for Small Bad Debts
A simplified procedure has been introduced for adjusting the tax base on small bad debts of up to CZK 10,000, provided that:
- The debt has been overdue for more than six months
- The debtor has received at least two written reminders
- The total outstanding debt owed by that debtor does not exceed CZK 20,000
Before January 1, 2025, VAT on bad debts could only be written off under strict conditions, such as the completion of enforcement proceedings with a declaration of uncollectibility, which made the process lengthy and complex.
6. New EU VAT Scheme for Small Enterprises
Starting January 1, 2025, the European Union will introduce a new VAT scheme for small enterprises (režim malého podníku), designed to ease administrative burdens and simplify cross-border operations within the EU.
Key features of the scheme include:
- Voluntary participation: Enterprises can choose whether or not to opt into the scheme.
- Turnover threshold: To qualify, the total annual turnover across the EU must not exceed EUR 100,000.
- Registration: Businesses must register in their home country and obtain a special VAT identifier.
- VAT exemption: Participants are exempt from mandatory VAT registration in other EU countries, provided certain conditions are met.
- Reporting: Quarterly electronic reports must be submitted for transactions carried out within the EU.
This scheme offers small businesses the opportunity to expand their operations across the EU without undergoing complex VAT registration procedures in each country where they operate.
7. Changes to VAT Treatment of Real Estate Transactions
From July 1, 2025, significant changes to the VAT treatment of real estate transactions in the Czech Republic will come into effect under the VAT Act.
Key updates include:
- Shortened VAT period for property sales:
The amended law stipulates that VAT applies only to the first transfer of completed (finished) property if the sale takes place within 23 months of the completion of construction or major reconstruction. After this period, subsequent sales are exempt from VAT. This means that secondary sales of property will be VAT-exempt regardless of timing.
!!! Sales of unfinished property remain subject to VAT.
A new concept is introduced: “first supply after significant modification of the property.” If structural alterations fundamentally change the nature of the real estate, the first sale following such modifications will be subject to VAT.
What qualifies as a significant modification?
- Structural alterations requiring approval by the building authority (subject to occupancy approval).
- Alterations that enable permanent residence but do not require formal approval.
Sellers may also opt to apply VAT voluntarily even to sales that would otherwise be exempt. This can be beneficial for preserving the right to deduct input VAT on related expenses.
- Definition of “significant modification of property”:
A significant reconstruction refers to construction works that alter the use or living conditions of the property, where the cost of such works exceeds 30% of the property’s selling price excluding VAT.
In the previous version of the VAT Act, there was no clear definition of what constituted a significant reconstruction, creating uncertainty for taxpayers and complicating proper tax compliance. - New definition of “building plot”:
A building plot is now defined as land on which, according to urban planning documents, designated development zones, or decisions by the building authority, construction of a building is permitted. Land is also considered a building plot if construction work is being carried out on or near it with the intent of future development.
This clarification aims to remove previous legal uncertainties and may increase the number of plots subject to VAT upon sale. - Revised criteria for defining residential and social housing properties:
Eligibility for reduced VAT rates will now be determined based on records in the Register of Territorial Identification, Addresses, and Real Estate (RÚIAN).
The reduced VAT rate applies to:
- The construction and supply of social housing units, including apartments up to 120 m² and houses up to 350 m².
- Construction and installation works on completed residential buildings, regardless of their size, provided they are designated for housing.
For example, the construction of a new apartment with an area of 170 m² will be subject to the standard VAT rate of 21%, while renovation work on the same apartment after completion will qualify for the reduced VAT rate of 12%.
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