When Is an Entrepreneur Required to Refund VAT on an Unpaid Invoice?

A recent amendment to the VAT Act introduced a new obligation: the so-called refund of the declared VAT deduction in cases where a payment has not been made. But when exactly does this obligation take effect, and for which tax period must an entrepreneur or company adjust the deduction?

The VAT Act in the Czech Republic has undergone significant changes. Since the beginning of 2025, the list of situations requiring a debtor to reduce a previously declared VAT deduction has expanded. According to the amendment, a VAT-registered debtor must return the deducted VAT if the corresponding invoice remains unpaid six months after the due date.

New Legal Framework and Deduction Adjustment

This change means that in certain cases, a debtor must return VAT that was previously claimed as a deduction. Specifically, if a VAT payer has not paid the supplier for a taxable supply — and six full calendar months have passed since the month the payment was due — the debtor is obliged to reduce the original VAT deduction.

However, the law also considers situations of late payment. In such cases, it allows the VAT deduction to be reclaimed again. This is achieved by reducing and subsequently increasing the deduction — a mechanism introduced to more accurately reflect payment timing.

Due to uncertainty caused by the amendment, the Financial Administration has released guidance detailing how the new deduction adjustment works. It also provides clear answers to the most frequently asked questions that have arisen in practice.

When Must I Refund the Declared VAT?

The obligation to adjust the VAT deduction took effect on January 1, 2025. This obligation is defined in Section 74b of the VAT Act. The provision outlines the responsibility of a debtor who has claimed a VAT deduction for received taxable supplies of goods or services but has not paid for them within six calendar months after the month in which payment was due.

Section 74b(3) of the VAT Act states:
“If a claim for a taxable supply is not settled in full by the last day of the sixth calendar month following the month in which it became due for payment, the debtor — if they are a VAT payer — must reduce the previously declared tax deduction by an amount corresponding to the unpaid portion, in the tax period in which that final day falls.”

For quarterly VAT payers, there’s an exception:
If the full payment is made no later than the end of the tax period in which the six-month period expires, the taxpayer is not required to reduce the declared deduction.

Since this provision comes into effect as of January 1, 2025, it is expected that many businesses will first apply the reduction of the VAT deduction in their July 2025 VAT return.

Reduction of Tax Deduction for Overdue Receivables

The VAT Act requires that a debtor who is a VAT payer must reduce the tax deduction claimed on received taxable supplies if the related liability has not been fully or partially settled. According to information provided by the financial administration, the repayment period for Section 74b is determined based on the payment terms set out in the contract, commercial terms, other documentation, or legal arrangements.

The law further specifies that the obligation to reduce the VAT deduction applies to receivables that remain unpaid by the last day of the sixth calendar month following the month in which the payment was originally due. The correction (i.e., reduction) of the deduction must be made in the tax period in which this final day falls.

Businesses are likely to encounter this adjustment for the first time in their VAT return for July 2025.

Repeated Increase of the Deduction Upon Settlement of a Receivable

If a taxpayer reduces a tax deduction due to non-payment of a receivable within the statutory period, but the receivable is later paid, the debtor is entitled to adjust the deduction again, this time by increasing it.

This provision is outlined in Section 74b, paragraph 4 of the VAT Act:
“If the debtor has adjusted the tax deduction following paragraph 3, the debtor who is a VAT payer has the right to adjust the deduction again, increasing the adjusted tax deduction, if the claim for taxable supplies has been fully or partially satisfied. This adjustment may not be made earlier than the tax period in which the payment was received. The deduction increase is calculated based on the actual amount paid by the debtor.”

It’s important to note that this increase can only be applied starting from the tax period in which the receivable was paid, whether partially or in full.

However, there is a time limit: the deduction correction must be made within two years. According to Section 74b, paragraph 9 of the VAT Act:
“The correction of the tax deduction under paragraph 4 may be made no later than the end of the second calendar year immediately following the end of the tax period in which the debtor first became entitled to make such a correction.”

Exception for Quarterly VAT Payers

So-called quarterly VAT payers face slightly different rules when it comes to adjusting tax deductions. According to information published by the tax administration: “For a taxpayer whose tax period is a calendar quarter, the obligation to reduce the declared tax deduction under § 74b (3) of the VAT Act does not arise if the claim is fully settled no later than the last day of the tax period in which the six-month period immediately following the month the claim became due has expired.”

The logic behind this is straightforward. For taxpayers who file VAT returns quarterly, it’s possible that within the same tax period the obligation to reduce the deduction (due to non-payment) and the right to increase it again (due to late payment) could occur almost simultaneously.

This exception was introduced specifically to prevent such situations, where a taxpayer would otherwise be required to make a double adjustment (first reducing and then immediately increasing the tax deduction) within a single tax period.

Reduction of Tax Deduction for Supplies with “Reverse Charge”

The obligation to reduce the tax deduction applies only to supplies received under § 108 (1) of the VAT Act. These are supplies where “the taxpayer providing a taxable supply of goods or services with a place of supply in the Czech Republic is required to pay VAT on the supply.”

Therefore, this adjustment does not apply, for example, to the acquisition of goods from another EU Member State or to supplies subject to the reverse charge mechanism (where the recipient, not the supplier, accounts for the VAT).

Where Do Tax Deduction Corrections Appear in the VAT Return?

If the adjustment concerns a reduction in the tax deduction, it is shown in line 40 (or line 41) of the VAT return — but with a negative value. At the same time, this adjustment must be recorded in line 34. The value in line 34 is entered as a positive amount and does not affect the final VAT liability.

Where to Report the Correction in the VAT Control Report

Adjustments to the tax deduction — whether an increase or a decrease — are always reported in Section B.2 of the control report. The amount of the adjustment doesn’t matter here; what matters is that the “P” code is used.

Reporting other details in the control report follows a specific format. According to the Financial Administration, these are unilateral transactions for which no standard tax document exists. However, certain information must still be entered, such as a registration number (this can be an internal reference), the original tax document number, or the supplier’s identification number.

The taxable supply date is key — this field should always show the date of the original taxable supply to which the adjustment relates (i.e., the supply that remains unpaid).

💡 Need help navigating VAT deductions and reporting obligations?

Our experts at 360WEDO are here to guide you through the complexities of Czech tax law. Whether you’re dealing with overdue invoices, reverse charge rules, or preparing VAT control reports, we’ll make sure everything is handled accurately and on time.

Contact us for personalized accounting and tax consulting in the Czech Republic.
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