BDO Indirect Tax News

Several important changes to the VAT treatment of real estate in the Czech Republic became effective on 1 July 2025  that affect exempt/taxable status and definitions of terms of art (for prior coverage, see the article in the January 2025 issue of Indirect Tax News):  

• VAT exemption for real estate transfers: The most notable change is the introduction of revised VAT treatment of newly constructed buildings, with the previous five-year exemption eliminated. VAT now is levied only on the first supply of a new building within two years from the date of final approval (i.e., the date a building permit is issued). Subsequent sales (even if within the two-year period) are exempt from VAT, although a VAT payer can opt for voluntary taxation, which may allow the supplier to deduct input VAT. If the purchaser is VAT-registered in the Czech Republic or another EU member state, they must consent to voluntary taxation. (The lease of premises used for a tenant’s economic activity may be voluntarily subject to VAT if the tenant is VAT-registered in another EU member state even without their consent.)
• Definition of “substantial modification:” The definition of the substantial modification of a completed building is revised, which may trigger an obligation to charge VAT on the transfer of an older property. A substantial modification will be deemed to take place if the purpose of the construction is to change how the building is used or the conditions under which it is occupied (typically reconstruction, extension or major repair) provided the costs incurred by the seller exceed 30% of the tax base of the consideration for the supply. In such a case, the first subsequent transfer of the property will be subject to VAT. It should be noted that the substantial modification does not have to be completed at the time of the supply. However, the obligation to charge VAT on the transfer of the property following a substantial modification expires after two years from the completion of the work, typically the date the certificate of occupancy is issued. The determination of the sale price of the property following a substantial modification may affect whether the supply is subject to VAT or remains VAT‑exempt.
• Definition of a building site: The definition of a building site is updated and includes specific administrative actions that classify land as a building site for VAT purposes. A building site is a parcel of land on which a permanently affixed structure may be constructed based on the land use planning policy of a municipality, the designation of a development site or a decision made by the building authority. Preparatory construction activities, such as deforestation, site preparation, utility connections or construction of an access road, may also result in the classification of land as a building site, as long as these activities are carried out for the intended future construction of a permanent structure. The only exception will be where objective circumstances clearly indicate that it is not possible to construct a permanent structure on the land or that such construction is unlikely.
• Classification of building for housing purposes: The decisive factor in determining the classification of a structure for residential purposes is how the structure is to be used as indicated in the official government registry rather than having to refer to the Construction Act.
• Supply of real estate to an employee: Based on the rules governing the VAT liability on the supply of real estate to a VAT payer’s own employee, which have applied since January 2025, the employee is considered a related party for VAT purposes with respect to the supply of the property. Therefore, VAT is based on the market value (the usual price) if the consideration paid for the property is lower than its market value.

BDO Insights

The main impact of the new VAT rules will be fewer taxable and more VAT-exempt supplies of real estate due to the shorter taxation period and the overall concept of taxation of only the first delivery after the issuance of a building permit. Further, the revised definition of a building site is expected to provide more legal certainty for VAT payers when assessing whether a supply of land should be subject to VAT. The tax authorities will be scrutinizing the delivery of real estate to employees to examine whether the VAT was remitted based on the usual price.

Denisa Krocová
BDO in Czech Republic