Czech VAT Under Reconstruction

The business environment is full of continuous and unstable changes that put pressure on companies´ management to keep pace with these changes and trends. Recently, the most discussed and current topic is VAT law, which in this country has followed suit with sweeping changes made EU-wide. Here we will discuss the most significant legislative changes in this area.

The new VAT law changes the general rule for the supply of cross-border services. The first question that needs to be answered is whether the recipient is a business or private entity. If the consumer is a taxable person, the place of taxable supply will be shifted to the member state in which the establishment of the recipient or place of its business resides, i.e. into the state of actual consumption. On the contrary, for services provided to consumers who are not taxable persons, the general principle does not change and the place of taxable supply remains in the state of the service provider. This rule will be subject to a number of exceptions, some of which are stated below:

· Services related to real estate will remain taxed in the state where that real estate is.

· Place of taxable supply for services in the field of culture, arts, sports, science, education, entertainment and similar services, including services of the organizer will not change and will be in the state where the event takes place.

· A significant change occurs in the taxation of transport services. If goods transportation including ancillary services is provided to a company, the place of taxable supply will be in the state of the consumer, regardless of whether it is transportation between member states or within the territory of the Czech Republic. On the other hand, if the transport services are provided to private entities, the place of taxable supply will be in the state where the transportation began or the place where the relevant section of the transport takes place.

· In the case of electronic services provided by a foreign entity liable to tax (i.e. entity that does not have residency within the European Community, nor the place of business or place of stay) to an ordinary consumer who resides in the Czech Republic, the place of taxable supply will always be in the Czech Republic.

· Another important novelty is the increasing use of the so-called ”effective use and enjoyment rule”. If according to a general rule, the place of taxable supply of services to a taxable person is established in a third country, but the real use or consumption of the service is in the domestic country, the place of taxable supply will be shifted to this country.

To comment on the previous situation, when certain types of services are taxed by some Member States according to special rules, while others have applied the general rule, one must say that it is somewhat confusing. The new general principle will not only resolve disputes about the right to charge VAT between the Member States, but also minimizes the risk of double taxation that companies face when providing cross-border services.

Another important change in the VAT, which has been adopted, is the increase of the VAT rates from 1st January 2010, i.e. the standard rate of VAT increases from 19% to 20% and reduced VAT rate changes from 9% to 10%. The increased rates of VAT can result in price increases and therefore the final burden will be on the customers´ shoulders. However, if businesses want to keep the 2009 price levels, the increased VAT may result in a slight decrease in their profit margins of products and services sold.

###