In accordance with the EU directive on the common system of value added tax, the Czech VAT Act ranks the lease of residential properties among tax-exempt performances with no claim for input tax deduction, given that tenants who use the property do not themselves have the option to claim VAT (since their use does not qualify as commercial operation by a VAT payer). In this sense, the tax exemption seeks to eliminate the increase in rent (in the form of VAT) which such tenants would have to pay.

However, this tax exemption has the consequence that a VAT payer who e.g. builds a tenement block cannot make deductions on the expenses which they make towards the construction (and, later, operation and investments). Because of this, commercial intermediaries are often "inserted" in real life between the original developer and the final tenants, making it possible to apply VAT to the lease (which is now to another VAT payer) and to deduct input tax. Not surprisingly, the explanatory memorandum for the amendment bill mentions that frequent abuse of the current rules for tax optimization purposes motivated the lawmaker to close the loophole.

Going forward, taxpayers are still at liberty to apply VAT when renting out a piece of real property to another VAT payer for commercial use. However, beginning as of 1 January 2021, it will be principally impossible to apply VAT to residential properties (irrespective of whether or not the property is used for the VAT payer’s commercial purposes).

In introducing this ban, the lawmaker went beyond a simple definition, taking great care to eliminate any wiggle room for circumventing the law as much as possible. Aside from family homes and apartment units, the types of real property whose lease will always be VAT-exempt includes premises that have been categorized as residential space, buildings in which at least 60% of the floor area (or, in the case of a partially let building, that part of the building which is being rent out) qualifies as residential premises, and land plots of which any of the aforementioned types of residential building forms a part.

Taxpayers who will in the future be prevented by the amendment to apply VAT on their leasing operations will have to look into the matter of adjustments to their input tax deductions. The time period for adjusting the deductions for real property and technical improvements is 10 years, beginning with the acquisition (or the implementation of the given technical improvement). In 2021, the current claims for deduction may thus be curtailed by a part of the deductions claimed in 2011.

Source:
Parliamentary press 206: government bill amending several tax laws
Act No. 89/2019 Coll., on the amendment of certain tax laws and certain other laws
Act No. 235/2004 Coll., on value-added tax

AUTHOR

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  Karel Kotrba

  Junior Associate

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  Czech Republic