Amendments to the VAT law from 1 January 2024

The most significant change that will affect the VAT rate will be the definition of a residential and family home. Until now, these definitions of real estate have been based on cadastral norms. The new VAT law will include the definitions set out in the construction law.

An amendment to the value-added tax law will go into effect on January 1, 2024. Law No. 284/2021 Coll. (“Amendment”) essentially tied a large body of regulations to the new Building Law (Law No. 283/2021 Coll.). This also applies to the VAT law. Until now, real estate definitions have been based on cadastral rules. After January 1, in the VAT Law, we use the definitions given in the Building Law.

Which areas will be impacted by the amendments?

They will affect the most: 

• the tax rates specified in Article 48 of the VAT Law for a completed residential building or a completed social housing building. This includes, for example, repair, renovation of an existing building, etc.
• the tax rates specified in § 49 of the VAT Act for the construction or letting of a building for social housing. In this case, we are talking about the construction and commissioning of a new building.
• VAT exemption conditions for the supply of real estate in accordance with Article 56 of the VAT Law.
• conditions for exemption from VAT when renting real estate in accordance with article 56a of the VAT Law.

Let’s talk in depth about the two important points.

The biggest change is in how private and family homes are defined, which has a big effect on the tax rate.

For the purposes of value-added tax, the most recent version of Article 48(2) of the VAT Law defines a residential building as follows:

a) the construction of a residential building in line with land registry standards,

b) construction of a family residence in compliance with land registry standards,

This definition has been changed in the version of Article 48(2) of the VAT Law that will go into effect on January 1, 2024. Now consider this:

a) the construction of a residential structure in accordance with building codes,

b) establishing a family house in line with building codes.

What is the practical significance of the above seemingly insignificant change? The present definition is based on Cadastral Decree No. 501/2006 Coll. on general land use criteria. Section 2(a) specifies a residential building as follows:

1. a residential structure that meets the requirements for permanent living in more than half of its area and is intended for this purpose,

2. a family home in which more than half of the area meets the requirements for the family’s permanent residence and is intended for this purpose; a family house may have no more than three separate living quarters, no more than two floors above ground, one underground floor, and an attic.

The new residential building definition is based on Section 13 of the Land Registration Act:

• a residential building in which more than half of the space is devoted to housing,
• a family house is a residential building in which more than half of the floor area is used for living and which has no more than three separate living quarters, no more than two floors above ground and one underground floor and an attic, or a third floor not less than two meters spaced from the outer side of the building’s outer wall, oriented to the line of the street.

As a result of the foregoing, the new definition of a family dwelling under the Building Act differs from the previous one.

What has changed in terms of VAT rates after July 1, 2023?

The transitional clauses of the amendment provide the answer:

Construction and installation work performed on a finished family house (Section 48(2)(b) of the VAT Law) or a family residence for social housing (Section 48(5)(b) of the VAT Law) beginning before January 1, 2024 will be liable to VAT for the next two years.

As a result, the lawmaker has authorized a reduced tax rate to be applied for two years even for family residences that will no longer fulfill the definition under the Building Act after January 1, 2024. If construction work cannot be finished within this time frame, work undertaken beyond June 30, 2025, should be taxed at the standard rate.

If it is a social housing family home, the same procedure as in the preceding paragraph applies to the provision of construction or installation work linked to the construction of a social housing building (48(5)(b) of the VAT Law).

The same treatment applies to construction or installation work that converts a building or space into a social housing building if it is a family dwelling (Section 48(5)(b) of the VAT Law) and was begun prior to the effective date of this Law. The initial decreased tax rate shall be implemented within two years of the date of this law’s enactment.

This change and the inclusion of a two-year transitional period are justified in the explanatory note of the amendment’s author (the Czech Republic’s Government) as follows:

“A significant change associated with the implementation of the new Building Law is a change in the definition of a family home.” This will have an impact on the tax rate for the provision of construction or installation work related to ongoing construction and the supply of family houses classified as a building for social housing for VAT purposes, as well as the provision of construction or installation work for repairs and other construction work already underway on completed family houses (classified as a housing or social housing building for VAT purposes). The VAT Law includes a two-year transition period.”

Source:

https://portal.pohoda.cz/dane-ucetnictvi-mzdy/dph/novela-zakona-o-dph-od-1-7-2023/