Value Added Tax (VAT) is a tax that is applied at every stage of the production and sale of goods and services. However, VAT payers are entitled to a refund for this tax from the budget of Czechia. In this article, we will talk about the terms and conditions that must be observed in order to receive a VAT refund.
Principle of VAT neutrality
VAT operates on the principle of neutrality, which means that the VAT payer has the right to deduct the tax paid on the purchase of goods and services (i.e. taxable transactions) from the taxed amount on the sale of their goods and services (also taxable transactions). Thus, the payer is taxed only the added value, and not the entire amount of VAT that they may have paid.
Conditions for obtaining a VAT refund
The right to a VAT refund only arises if the taxable purchases are used to provide taxable sales that give rise to the right to a VAT refund. This includes the following situations:
- Taxable transactions with the place of the transaction being within Czechia (the delivery of goods or provision of services within the country).
- VAT-exempt transactions with the place of business in the Czechia, if they are eligible for a VAT refund (sale of goods to VAT payers within the EU).
- Taxable transactions outside of Czechia, if the location of the transaction within Czechia would give the right to a VAT refund.
- Taxable transactions related to the export of goods.
The key point is the causal relationship between taxable inputs (for example, purchasing goods) and taxable outputs (for example, selling these goods). If such a connection is clear, and the transactions meet the previously mentioned conditions, then the payer can claim a VAT refund.
Technical aspects of VAT refund
The right to a VAT refund occurs from the moment the tax document is received from the supplier. It’s important to note that the actual receipt date of the document may differ from the stated delivery date (DUZP). If the document was issued on 06/29/2023, but it was actually received on 07/02/2023, then the eligibility for a refund arises in the tax period not earlier than July 2023. At the same time, it is not necessary to request a VAT refund immediately in the first month or quarter (for quarterly payers), when this is legally possible. In terms of time, a VAT payer can apply for a VAT refund within 3 years.
This period starts from the first day of the month following the tax period in which the right to VAT refund arose.
In order to claim a VAT refund, the payer must have a tax document. For the Czech Republic, the primary tax document is an invoice (faktura-daňový doklad). There are other tax documents, such as the daňový doklad for advance payment paid. If doubts arise from the tax authorities, the payer is obliged to prove their right to a VAT refund, including confirmation of receipt of the document, its compliance with the law, as well as proof that the purchases were used for its economic activity with a causal relationship.
In which cases can you never claim a VAT refund?
There are transactions for which you cannot ask for a VAT refund under any circumstances. First of these are tax-free receipts, which are purchases from a VAT evader (or from an identified person) or VAT-exempt transactions.
Another category of receipts without the right to a VAT refund are purchases that, although subject to VAT, are not used for the purposes listed in §72 of the VAT Legal Code. These are, for example, transactions that were intended for personal use by employees of a company (if they are not invoiced again or planned for reimbursement), as well as free donation transactions or staffing for the purposes of a presentation or demonstration (with the exception of a gift provided free of charge as part of economic activity of up to 500 CZK excluding VAT or commercial samples of unlimited value).
In addition to the above, these are also purchases that are related to VAT-exempt sales without the right to a VAT refund, listed in §51 of the VAT legal code. For example, if a taxpayer only rents residential apartments, then this rent is exempt from VAT in accordance with the VAT Legal Code. And at the same time, the taxpayer is not entitled to a VAT refund arising from related costs (e.g. utility costs, travel expenses to properties, legal advice, etc). Exempt activities without eligibility for a VAT refund also include financial services, education and training services, social assistance, or medical services.
Right to a partial VAT refund
If the VAT payer uses the purchase only for conducting business/carrying out economic activities, and it is used only to provide transactions subject to VAT, then they are entitled to a VAT refund in full.
However, there are situations when the purchases are not fully used for the economic activities of the payer (for example, a purchased car is used both for an entrepreneur’s business needs as well as for their personal needs), or situations when the purchases are used for activities subject to VAT and are exempted without the right to a refund (for example, you use the car exclusively for business purposes, but partly for trading in goods and partly for visiting tenants of the property that you rent out and lease in question is exempt from VAT).
In both of the cases mentioned, you can only claim a partial VAT refund (and not the entire VAT from the received tax document).
In order to correctly determine the amount for the right to a VAT refund, the so-called proportionality coefficient is used, which is based on the results of economic and non-economic activities. The ratio should indicate the percentage of granted transactions related to business activities in the total amount of all granted transactions. Its calculation is not defined by law, but it should be based on a reasonable logical basis – for example, a travel log for company-owned vehicles and a division between work and personal trips.
If purchases are used both for transactions that are eligible and exempt, then the obligation to apply the so-called reduction factor arises. The reduction factor indicates the extent to which purchases are related to revenue subject to VAT. Thus, keeping the reduction coefficient in mind, it is beneficial for the payer to have a higher proportion of revenues that give the right to a VAT refund, compared to transactions that do not have the right to a refund.
We would like to draw your attention to the fact that for all transactions the same reduction coefficient is used, which is recalculated at the end of the calendar year.
Refunding VAT back to the state
In some situations, you may be obligated to return VAT.
For example, purchases of real estate and vehicles need to track VAT refund eligibility for 5 and 10 years, respectively.
That is to say, the car is tracked for five years whether or not it’s used for business activities subject to VAT. In case of non-use, it is necessary to return VAT (1/5) back to tax for a particular year.
It may also be necessary to return VAT if you cease or have ceased to be a VAT payer.
The right to a VAT refund is a complex and in some cases very complicated topic, which is also confirmed by the large amount of published legal documentation on the subject. However, the basic principles of its application are clear. As long as the payer has the appropriate tax documents and complies with the above conditions for applying the right to a VAT refund, they significantly reduce the risk of any possible questions from the tax inspector.
By entrusting comprehensive accounting and tax support for your business to our company’s specialists, you’ll receive all the necessary information and assistance in the matter of VAT refunds in a prompt and timely manner.