Late December 2014, Czech Republic’s Parliament enacted a new law (Act No. 360/2014 Coll.) extending VAT reverse-charge mechanism to some domestic sales.

The new legislation was taken in line with the Council Directive n° 2013/43/EU adopted in 2013 to tackle massive VAT fraud in specific sectors within the EU.

In the present instance, the application of Czech’s reverse-charge mechanism on specific commodities was to be effective as from 1 January 2015. This initial date was finally postponed to 1 April 2015. (Government Decree No. 361/2014 Coll.)

What is ‘Reverse Charge Mechanism’ under the Council Directive n° 2013/43/EU ?

It is a tax procedure introduced in EU during the summer 2013 and allowing any Member State which suspects that a VAT fraud is taking place in a specific sector to apply, on an optional and temporary basis, a reversal liability of Value Added Tax (VAT).

In the normal course of a domestic trading, it is the seller who is usually liable of VAT. The tax is collected from the customer through a sale invoice and is repaid to the tax authorities. When Reverse Charge Mechanism is applied, the liability for payment of VAT is shifted from the supplier to the customer who must self-account VAT on the transaction. It means that the client (necessarily registered for VAT) will instead receive a VAT exempt invoice from its supplier. He will have the responsibility to collect VAT on the invoice (output tax), and at the same time be able to claim back VAT when the purchase is made for business purposes (input tax).

It is also important to mention here that ‘domestic trading’ does not necessarily mean that all the parties (seller and buyer) are companies incorporated in the same country. It can happen for example that a foreign company imports and store products in a warehouse located in Czech Republic. The goods will be subsequently sold to local Czech companies. This is a typical case of domestic sale where a non-Czech entity is engaged as a supplier.

Goods subject to VAT reverse-charge mechanism in Czech Republic

The reverse-charge is extended to specific commodities listed in Annex 6 of the Czech VAT Act. This includes but is not limited to:

–        Integrated circuit devices such as microprocessors and central processing units;

–        Mobile phones, games consoles, tablets and laptops;

–        Cereals and industrial crops, including oilseeds;

–        Sugar beets (effective as from 1 September 2015);

Transaction threshold for the application of the new VAT scheme

The Czech domestic reverse-charge will be applicable only to sale invoices showing a total amount exceeding CZK 100,000.00 (VAT excluded), that means approximately 3,650.00 EUR. Other invoices with a lower amount will continue to be issued by suppliers VAT inclusive.

Some implications on czech invoicing rules

As a result of the new VAT law in Czech Republic, suppliers of the above commodities for a value exceeding CZK 100,000.00 will have to issue their sale invoices under the domestic VAT reverse-charge mechanism. It means that no Czech VAT should be mentioned on the invoices.

However, two key information should be mentioned on the invoice (tax document) in order to justify the VAT exemption:

• The VAT registration number of the Czech customer. The format of a VAT identification number in Czech Republic is 10, 11 or 12 alphanumeric digits starting with the letters CZ.

• This sentence or a similar one should be displayed on the invoice: “Transaction subject to VAT reverse-charge mechanism in Czech Republic pursuant to § 92a of the Czech VAT Act n° 235/2004 Coll.”

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It is advisable to companies supplying to the same customer both goods subject to new VAT exemption scheme (reverse-charge) and goods subject to Czech VAT to split their invoices in order to make easier the preparation and filing of their local VAT returns and the new VAT control statement.

Introduction of a new reporting obligation effective from 1 January 2016

In addition to the regulation on domestic VAT reverse-charge mechanism, Czech Republic has also introduced a new VAT control statement to be filed as from 1 January 2016.

This new return is not limited to transactions subject to the local VAT reverse-charge scheme. All domestic sales and purchases in Czech Republic will need to be reported on the return by every taxpayer. The statement will be submitted electronically on a monthly basis at the same time with the VAT return.

The specific monthly return for transactions falling under Czech domestic VAT-reverse charge mechanism (§ 92a zákona o DPH – Czech VAT Act) is known as Výpis Z Evidence Pro Daňové Účely.

Read more on the website of the Czech tax administration : VAT Control Statement