How does the VAT Act amendment impact real property?

The tax package, which includes an amendment to the VAT Act, has passed all hurdles in the legislative journey from bill to law. What are the main consequences for the VAT treatment of real estate?

A current amendment to the VAT Act imposes special restrictions in the area of real property, regarding the application of value-added tax to leases between two VAT payers and the rules for input tax deduction within the context of repairwork on real property.

Under current law, one VAT payer who rents out to another VAT payer may decide to apply value-added tax, but this exception from the general principle (whereby the lease of real property is principally VAT-exempt) is now being curbed. The lawmaker has decided that it will no longer allow the application of VAT in the case of real property which serves as living space or has been categorized as residential premises. However, this restriction has potential consequences also for non-residential premises, given that the list of affected real property given in the draft bill includes “structures in which at least 60% of the floor space within the building (or part of building, in the event that only this part is being let) is residential space”.

In other words, if both residential space and commercial space are being rented out in the above-specified ratio within the walls of one and the same building, VAT may not be applied even to the premises which the landlord rents out for commercial purposes.

Trouble is ahead for taxpayers who repaired a piece of real property, if the net value of all taxable services and supplies which they received exceeds CZK 200,000 and the taxpayers have claimed an input tax deduction: if they then decide to sell the piece of real property within 10 years from having performed the repairwork in excess of the above-mentioned threshold value, they must review whether reasons exist to adjust the input tax claim made in connection with the repairs. This is a rather fundamental change: under the previous regime, taxpayers never adjusted their input tax claims in connection with repairs of real property, simply because such repairs (unless appreciation through so-called “technical upvaluation”) do not qualify as long-term assets under tax law. As to repairwork which was started prior to, but not yet completed by, the effective date of the new rules, the taxpayer is at liberty as to whether they wish to proceed in accordance with the new or the old rules.

Also, a special rule will apply to services rendered by the landlord in conjunction with the lease of a property as such (e.g. building security or cleaning services by a third-party provider), concerning the determination of the moment in which the taxable services and supplies have been rendered: in such cases, the taxable services and supplies are deemed rendered only as at the day on which the actual price has been determined (as opposed to the date on which they were rendered).

The rules governing the application of VAT on property leases comes into force as of the beginning of 2021; the other two rules will apply already as of 1 April 2019.

 

Source:
Parliamentary press 206 government bill for a law amending certain tax laws
VAT Act (Act No. 235/2004 Coll.)

 

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