Value Added Tax (VAT) is the main type of indirect taxation in the Czech Republic and in other European Union (EU) countries.
It is a tax on consumption which is applied during the production and distribution process to most goods and services. It is also applied to goods, and certain services, entering the country. Although VAT is ultimately borne by the consumer by being included in the price paid, the responsibility for charging, collecting and paying it to the tax authority at each stage of the process rests with the business making the supply, ie the sale.
A business registered for the tax will charge VAT (output tax) on its sales, and incur VAT (input tax) on its purchases (including any VAT paid at importation). The difference between the output tax and the deductible input tax in each accounting period will be the amount of VAT payable by the business to the tax authority. Where the input tax exceeds the output tax, a refund can be claimed.
A transaction is within the scope of Czech VAT if the following conditions are met:
There are three rates of VAT that are applied to goods and services in the Czech Republic; the standard rate and two reduced rates. In addition, some goods and services are exempted from the tax.
Businesses that make exempt supplies with no right to the VAT claim are unable to claim all or a part of the input tax that they incur, so the VAT paid to suppliers will be a ‘real’ cost.
Most goods imported into the Czech Republic from outside the EU are subject to VAT. The tax will have to be paid by the importer at the time of importation. Where the importation is for business purposes and the importer is registered for VAT, it may be possible to reclaim the tax (subject to certain rules).
It is also important to note the interaction between VAT and Customs duty. Customs duty is levied across the EU at the place where goods are imported into the community. It is levied in order to bring the costs of goods produced outside the EU up to the same level as those produced within it. Once duty (and VAT) has been paid by the importer, the goods are in ‘free circulation’ and they can then be released for use in the home market. Unlike other indirect taxes, such as VAT, once duty has been paid it is not usually recoverable by the importer. It therefore represents a bottom line cost to the importing business if it cannot be passed on in higher prices.
It is therefore very important to ensure that the correct rate of duty is applied. VAT is charged on the value of the importation, including any custom duty.
Another important Czech Republic indirect tax is excise duty levied on tobacco, beer, wine, spirits and crude oil products. There is also another indirect tax on energy products.
A ‘person’ who makes taxable supplies of goods or services in the course of a business must register for VAT if the value of its taxable supplies in the Czech Republic exceeds the annual registration limit of CZK 1,000,000 (approximately €40,000). A business can register on a voluntary basis even if the registration limit has not been exceeded.
For these purposes, a ‘person’ includes any legal entity. Therefore, once a person is registered for VAT, all of their business activities will be covered by the registration – even if the nature of some of those activities are very different.
Two or more corporate bodies can be registered together as a VAT group if:
A corporate body cannot be treated as a member of more than one VAT group at a time.
The main advantage of the VAT group registration is that supplies of goods or services by a member of the group to another member of the group are disregarded for the
VAT purposes. This may prove advantageous if some of the members of the VAT group do not have full VAT claim entitlement and from the VAT cash flow point of view.
However, there are some disadvantages and any decision on whether to group register should be taken with care. For example, all VAT group members (including former members) are jointly and severally liable for the VAT debt of the group during the period of their membership.
A penalty may be assessed by the tax authority if a business fails to register at the correct time.
Normal VAT registration limit does not apply to businesses that are not established in the Czech Republic, but for the purposes of the tax are making taxable supplies there. Those businesses will need to register for the VAT as soon as they commence trading in the Czech Republic, irrespective of the level of turnover (certain exceptions, however, do apply).
From July 2021 there is a uniform EU-wide distance selling threshold of EUR 10,000 (net) per calendar year, above which cross-border B2C sales to the Czech Republic must be taxed in the Czech Republic (if OSS is not used, VAT registration may arise).
Since 2015, the place of supply of telecommunications, broadcasting and electronically supplied services (“TBE services”) supplied to private consumers (B2C) is the place where the customer resides. Therefore, TBE services supplied to the Czech consumers shall be taxable in the Czech Republic. To lower the administrative burden on the foreign providers, the EU VAT MOSS simplification scheme with a single EU registration was adopted. From 1. 7. 2021 the MOSS regime has been replaced by OSS regime, broadening the scope to all B2C services and distant sales of goods. OSS regime is optional and the non-EU suppliers without any establishment in the EU are free to select any EU Member State in which they register to OSS for the whole EU.
The concept of a fiscal representative is not defined in the Czech Republic VAT law. However, the non-established business may arrange for a representative based on a power of attorney.
Most commonly, VAT returns have to be submitted on a monthly basis. Based on application and meeting certain conditions required the entity may apply for a quarterly tax period. All VAT returns have to be submitted within 25 days after the end of the relevant tax period, together with any tax due. VAT payers not established in the Czech Republic are not obliged to submit nil VAT returns in periods in which no supplies occur.
A penalty will be imposed by the tax authority if VAT returns are not submitted on time, or the related tax is not paid by the due date.
If the VAT return is not filed in time a 0.05% tax liability (maximum 5%) per day penalty is imposed from the 6th working day. Delayed payment interest is assessed in the annual rate of the Czech National Bank repo rate plus 8% and is imposed from the 4th day after the due date.
Businesses that are registered for VAT in the Czech Republic, and make supplies of goods or services to entities registered for the tax in other EU countries are required to complete and submit EC Sales Lists (ECSL). The ECSL must show details of the recipients of the goods and services.
Generally, the ECSL must be submitted each calendar month. If just services under the reverse charge regime are supplied the ECSL is submitted in the same period as the tax return.
In addition, if the value of the intra-EU trade in goods dispatched or arriving from other EU is above an annual threshold (CZK 12 mil.), a supplementary declaration (referred to as an Intrastat declaration) has to be submitted for either or both. These declarations have to be submitted on a monthly basis.
As of January 2016 the taxable persons registered for the VAT in the Czech Republic are obliged to submit VAT Control Statement in addition to regular VAT return. In this statement, detailed data about the individual VAT related output and input transactions are reported.
Besides penalties stated above, a penalty is imposed if tax is additionally assessed by the tax authority. This penalty amounts to 20% of the tax additionally assessed or VAT claim reduced by the tax administrator. Criminal proceedings may be brought in the case of matters that are more serious. If VAT Control Statement is not submitted on time the following penalties will be imposed:
A tax administrator imposes a fine up to CZK 50,000 to the entity that upon a call does not amend incorrect data
submitted through the Control Statement. A fine up to CZK 500,000 will be assessed to the entity that by not filing a Control Statement complicates or foils the administration of taxes.
Yes, it is possible to reclaim CZ VAT incurred in certain circumstances.
Two schemes exist, one for businesses established in the EU and another for businesses established elsewhere.
The EU cross border refund scheme is available in all EU member States, and enables a business established in an EU country to recover VAT incurred in another member State. To be eligible to make a claim in CZ, the claimant must be a taxable person established in an EU member State, and:
The amount refundable is determined by the VAT deduction rules that apply in CZ. The claim is submitted electronically from the member State where the entity is established to the Czech tax administration.
The refund period must not cover more than one calendar year or less than three calendar months – unless it is covering the remainder of a calendar year. The claim has to be made by 30 September of the year following that in which the VAT has been incurred.
Businesses established outside of the EU can, subject to certain conditions, also reclaim the VAT incurred on imports into the Czech Republic or purchases of goods and services used in the Czech Republic. The scheme is available to any person carrying on a business established in a third country ie outside the EU, provided that in the period of the claim the person:
The number of countries eligible for this refund is very limited (Great Britain, Switzerland, Norway and Macedonia).
A VAT invoice must show:
The invoice shall also include the following information:
VAT invoices can be issued, received and stored in an electronic format. Electronic invoices must contain the same information as paper invoices. The method used to ensure the authenticity of origin, the integrity of content and legibility of the invoices is a business choice and can be achieved by any methods that create a reliable audit trail between an invoice and a supply of goods or services.
Currently not in CZ. The Control Statement is a detailed list of the individual VAT related transactions submitted electronically to the tax authority usually once a month.
Since 2016, the sales of individual entrepreneurs or legal entities paid by cash, cheque, gift card or similar instrument have to be recorded electronically and immediately (or within 48 hours during an internet outage) sent to the government database (electronic registration of sales – EET). A code confirming the registration of the sale is then immediately printed on the receipt. However, this obligation is currently suspended due to the COVID-19 pandemic and the EET is only on a voluntary basis until 31 December 2022.
According to the announcement of the incoming government, it can be expected that the entire EET obligation will be abolished.
For further information on indirect tax in the Czech Republic please contact:
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Richard Knobloch |
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