Restrictions on the application of VAT on real estate rental from 1 January 2021
From 1 January 2021, property owners in the Czech Republic will be affected by a fundamental change in the application of VAT on rental of residential properties. Currently, voluntary taxation gives landlords the advantage of claiming a VAT deduction on all purchased inputs associated with rent related to residential properties. However, beginning 1 January 2021 VAT payers will not be able to tax the rental of space designed for permanent housing. The lease of this kind of real estate will be VAT exempt without the right to deduct input VAT.
Implications for property owners
The following are the key implications of this change:
- Landlords will not be allowed to deduct VAT on purchased services and goods directly related to earning rent on residential properties.
This situation will most likely lead to landlords having to calculate the coefficient for mixed use properties and to reduce the tax deduction on inputs that the landlord uses both for the implementation of taxable transactions and for the implementation of exempt transactions (for example, overhead). If the resulting coefficient is 95% or more, the landlord will not have to reduce anything.
- The change will have a significant effect on VAT deductions applied for purchases or technical improvements of residential properties where the VAT was incurred since 2012. Property owners will be required to correct past VAT deductions related to these properties. Therefore, this change will have a significant effect on VAT deductions applied for purchases or technical improvements that have occurred since 2012. The time limit for adjusting the deduction for real estate and its technical improvement is 10 years and starts with its acquisition or technical improvement. During this period, the property owner is obliged to monitor the use of the property (to determine whether it is used for taxable transactions for VAT purposes). If the use changes, the property owner must assess whether the new use of the property still gives rise to a right to deduct VAT, or to what extent. From 1 January 2021, however, the lease of the real estate in question will no longer be a taxable supply (it will be an exempt transaction without the right to deduct VAT). Therefore, the property owner will have to make an annual correction of the VAT deduction for each property separately until the 10-year period is lapsed. This means the property owner will have to return one-tenth of the originally applied deduction practically every year for the remaining years when the rent will be exempt.