BDO Indirect Tax News

Czech Republic - VAT rate changes and limits on VAT deductions

The Czech Republic austerity package that became effective on 1 January 2024 includes some important changes to the VAT rules.
VAT rate adjustments
The VAT rates have been simplified by consolidating the previous reduced rates of 10% and 15% into a single 12% reduced rate (for prior coverage, see the article in the July 2023 Indirect Tax News). The standard VAT rate remains at 21%.

Certain goods and services (e.g., hairdressing and barber services; services of authors and artists; cleaning; repair of shoes, clothing, leather goods and bicycles; transport and storage of municipal waste; cut flowers; and firewood), which previously were subject to the reduced rates, are now subject to the standard VAT rate. On the other hand, occasional public passenger bus transport is moved from the standard rate to the reduced rate. Draft beer is now more expensive as it has moved from being subject to the 10% reduced VAT rate to the 21% standard rate, as are all other beverages, except tap water and milk, regardless of whether the drink is supplied separately or as part of a catering service.

Significant changes have been made to the VAT treatment of books and their rental services. Books, whether provided in hard copy or electronically, are now VAT exempt. The exemption represents a fundamental shift in the treatment of literature-related services and promotes accessibility to knowledge and culture.
Limitation of VAT deduction for passenger vehicles
One of the main elements of the new legislation is the limitation of the right to deduct VAT for passenger vehicles used for business purposes. The deductible VAT is set at CZK 420,000. To put this into context, the limit is equal to the maximum VAT payable when purchasing a personal car with a tax base of CZK 2 million. The following example demonstrates the impact of these changes: Assume a business acquires a personal automobile with a tax base of CZK 5 million. Under the new rules, the business can only deduct up to CZK 420,000 in VAT, regardless of the actual purchase price of the vehicle. However, if after a year, the VAT payer decides to sell the automobile for CZK 4 million, the tax paid from this transaction will be calculated on the full amount, which is CZK 840,000 (21% VAT rate).

The new rules do not apply to ambulances, funeral vehicles, vehicles purchased for the purpose of operating under a concession (passenger transportation) and automobiles purchased as goods for resale.

Petr Linx
BDO in Czech Republic