A Prague court's ruling could devastate short-term accommodation providers

Prague’s Municipal Court has ruled that short-term tenancies made through platforms such as Airbnb and Booking.com count as accommodation services and that they should therefore be taxed as business activity.

Concluding a drawn-out consideration of the case, the court’s decision could have a major impact on the financial prospects of Prague’s already ailing short-term accommodation sector.

The decision came in response to the case of a woman who contested the tax which the authorities asked her to pay for 2017, which took into account revenues from short-term rents made through Airbnb. The woman argued her Airbnb rentals should have been classified as discontinuous business activity, but the court has now ruled that they should be classified as business activity in accommodation services.

“This decision could completely dismantle Airbnb’s business model,” Lukáš Eisenwort, tax advisor and partner at EK Partners, told Hospodářské noviny.

“In the case of leases, landlords are exempt from VAT. For providing accommodation services, though, it is different. If the rental income exceeds one million crowns per year, the landlords become VAT payers and therefore pay 15 percent of their income to the state,” he added.

With Airbnb rentals needing to break the CZK 1 million mark for owners to pay VAT, the court’s ruling will have the biggest impact on those who rent multiple flats simultaneously and therefore fall into the higher income bracket.

The court reached its decision with reference to a previous ruling by the Constitutional Court defining the difference between rental and accommodation services. The latter include additional services as the provision of bed linen, toilet paper, soap and towels. Regular rentals are exempt from VAT, but the new classification of Airbnb as an accommodation service means short-term providers will be affected.

The new tax burden will come as a nasty shock for Airbnb owners already struggling with a lack of tourists, especially in Prague. Prices for short-term stays in the Czech capital remain far below pre-pandemic levels, while increased competition for longer-term leases is also putting the squeeze on landlords.

The number of Airbnb rentals available in Prague has almost halved since the pandemic began, according to data from the AirDNA portal. This year’s summer tourist season has been another subdued affair with overseas travelers from the USA, UK and Asia still missing.

Under normal circumstances, Airbnb rentals are a huge business in Prague. Data from the Czech Statistical Office shows that over 1.16 million foreign tourists and 115,000 domestic visitors stayed in Airbnb flats in the Czech Republic in 2018. Yet Airbnb remains unpopular among many local residents, who argue the service contributes to a scarcity of affordable housing and declining quality of life in city centers.