Czech Republic: Draft amendment to VAT law includes changes to treatment of construction sector

A draft amendment to the value added tax (VAT) law includes changes to the treatment of the construction sector. 

Definition of buildings designated for housing purposes

The amendment would clarify the definitions of buildings for housing and social housing purposes. The VAT law would no longer refer to the Construction Act, but directly to the information entered in the real estate register that would now have to be used when assessing specific real property. The same would apply to buildings intended for social housing. 

Internally produced fixed assets

The concept of internally produced fixed assets when taxpayers claim full VAT deduction during construction and reduce it only at the time the fixed assets are put into use would be eliminated. A VAT payer who self-manufactures fixed assets (or carries out technical improvement to these assets by their own activity) while purchasing goods and services for this purpose would reduce the VAT deduction on these received supplies already at the time of claiming the VAT deduction.

Supply of real property exempt from VAT

The amendment would eliminate the five-year time test for VAT exemption of the supply of selected real property. Only the first supply after the completion of a construction or its substantial change, before the end of the second year after completion, would be taxed. Each subsequent supply would be exempt from VAT while the possibility of taxation remains in application.

The amendment to the VAT law would also provide a new definition of a “substantial change,” which slightly differs from its definition in the General Financial Directorate’s Information on Application of VAT Act on Real Property. A change that seeks to modify the use or conditions of occupancy of a building would be considered substantial if the price after the change increases by 30% compared to the price of the selected real property before the change (the current threshold is 50% of the ascertained price or reference value).  If this condition is not met, the taxpayer may decide that the change is substantial in the case of an addition of at least one story or an extension of the floor area by more than 50%.

Other selected changes related to real property

It would be newly stipulated directly in the VAT law that if as a result of construction or assembly work, the purpose of a building which is a building for housing or social housing changes, and the character of the building changes so that it can no longer be considered a building for (social) housing, the standard VAT rate would apply to that work.

The right to deduct VAT when registering for VAT would also change: under the amendment, it would be possible to claim a deduction even if the fixed assets being acquired are only put into use after the person has become a VAT payer. In the case of company conversions, it would also be possible to claim a deduction on supplies received by a person who was not a VAT payer on the day preceding the date of registration (for the period to which the registration date falls).

Read an April 2024 report prepared by the KPMG member firm in the Czech Republic