Value Added Tax (VAT) Law: How to Properly Differentiate Taxpayers

 Most entrepreneurs and companies are familiar with the terms “taxpayer” and “identified person.” What other entities are defined by the VAT law?

 The VAT law not only defines the concepts of VAT taxpayers and identified persons. It also mentions, for example, entities registered for tax purposes, foreign persons, or entities exempt from taxation.

Tax-Registered Person

The VAT Act defines the concept of a “taxable person,” which is a person to whom a Tax Identification Number (DIČ) is assigned for VAT purposes in trade between European Union member states. VAT payers and identifiable individuals are examples of these entities in the Czech Republic. There are people in a similar situation throughout EU member states.

If these persons are entrepreneurs from another EU country, the assignment of a tax identification number is quite important. They are equated with persons liable to VAT in the domestic market or recognized persons in this case. This distinction has an influence on the tax regime when dealing with such individuals.

The law also defines who is exempt from paying tax: taxable persons having a registered office or establishment in another EU member state, who in that state has the same status as a taxable person in the country and is not regarded as a taxable person. In this situation, a classic example would be an entrepreneur from another EU member state, such as Poland.

Taxable Persons and Non-Taxable Persons

It’s crucial to differentiate between taxable and non-taxable individuals. Article 5 of the VAT Law provides a definition of a taxable person as an individual who conducts economic activities independently or as part of a group. Taxable persons also encompass legal entities formed for purposes other than profit, provided that they engage in economic activities. These entities typically include both VAT-liable and non-VAT-liable entrepreneurs.

The activities of producers, traders, and service providers are considered economic activities aimed at generating regular income. Economic activity is defined as any undertaking that utilizes fixed assets to generate recurring revenue. Rental income is likewise classified as an economic activity and is subject to taxation under Section 9 of the Income Tax Act.

A non-taxable person, on the other hand, does not partake in economic activities. A common example is a non-entrepreneur, such as an ordinary citizen.

Foreign Entrepreneurs

The VAT Law also defines a foreign entity as a taxable person that does not have a registered office or representation within the European Union.

However, it’s important to distinguish between a foreign entity and a taxable person without a permanent residence in the Czech Republic, engaging in taxable supplies by delivering goods or services with the place of supply in the Czech Republic and not having an establishment here, or having an establishment in the Czech Republic but not participating in the supply.

VAT Payer

The VAT Law specifies the circumstances under which a taxable person becomes a VAT payer. The most typical route for a taxable person to become a VAT payer is if he has a registered office in the country and his turnover for 12 consecutive calendar months exceeds CZK 2,000,000. There is an exception to this, however, if the individual only produces exempt supply and does not have the right to deduct tax.

If a person becomes taxable due to excess turnover, he must pay VAT beginning on the first day of the second month after the month in which the extra turnover occurred. This does not apply if a person becomes taxable sooner by operation of law.

A taxable person may become liable to VAT in various circumstances, such as when purchasing property from another taxable person as a business venture. Another case in point is when a taxable person becomes a taxpayer due to the transfer of tax liabilities from the estate of a deceased taxpayer and others.

Identified Persons

Identified persons constitute the last important group of individuals defined by the VAT Law.

These identified persons are subject to additional requirements under the Act. The key point to note is that identified individuals are not eligible for an input tax deduction, but they are obliged to pay tax on the supply in certain situations.

When a taxable person procures a service from an entity based in another EU Member State, they are classified as an identified person. According to the law, a taxable person attains the status of an identified person upon receiving a taxable supply with a domestic place of delivery from an entity not based domestically, provided that the supply falls under the categories of services, goods with installation or installation, or goods supplied through systems or networks.

However, there are numerous other circumstances in which a taxable person becomes an identified person. These include scenarios in which a taxable person obtains items subject to taxation from another EU Member State on national territory, exceeding the CZK 326,000 level.

A taxable person may also become an identified person if he offers services with a place of supply in another EU Member State in accordance with the basic norm for the supply of services, i.e. Art. 9(1) of the VAT Act, unless the services are tax-free in that state.

Source:

https://www.podnikatel.cz/clanky/osoby-v-zakone-o-dph/#google_vignette