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Amendment to VAT Act to narrow scope of exempt financial activities

The Ministry of Finance is proposing to significantly narrow the scope of financial activities exempt from VAT in a forthcoming amendment to the VAT Act. The aim is to align the Czech VAT Act with the EU Directive and the interpretations of the Court of Justice of the European Union.

Under the amendment, the following activities would no longer be included in the list of exempt financial activities for which financial institutions are also not entitled to deduct VAT:

  • organisation of a regulated market in investment instruments
  • management of a customer's assets based on a contract with the customer where the assets include an investment instrument, except for the administration and custody of investment instruments
  • keeping records of investment instruments
  • settlement of trades in investment instruments 
  • procurement of collections
  • collection of radio and television licence fees
  • payment of pension benefits or recovery of recurrent payments from the public.

For the first four of the above services, according to the explanatory memorandum, the proposed amendment reflects the fact that these do not involve transactions in securities but administrative and custodial activities. Under the VAT Directive and the CJEU’s case law (e.g., judgment in Case C-44/11 Deutsche Bank), these types of services cannot be exempt from VAT.

For the last three types of services, the reason for the abolition of the exemption is that these involve debt recovery and not payment services from a VAT perspective. Debt recovery cannot be exempt from VAT under the VAT Directive and the CJEU’s case law (e.g. C-175/09 AXA UK). ‘Debt recovery’ is not defined in the directive and, according to case law, can also refer to debts that are not yet due.

Financial service providers should analyse the impact of the proposed changes, review the VAT treatment of outputs, and assess the impact on the right to deduct input VAT. They should also pay attention to reconfiguring their IT systems. If the service is to be subject to VAT, tax invoices will need to be issued.

Also the customers of these services need to consider the impact of the proposed changes. For example, if a domestic customer (a VAT payer or person identified for VAT) receives one of the above listed services from abroad, they will now be obliged to declare VAT on that service in the Czech Republic and should also assess whether or to what extent they will be entitled to deduct relevant VAT. It can be expected that a recipient financial institution’s right to deduct will be rather limited.

This new regulation raises several questions, and the possible implications are currently being discussed among the professional community. The current draft amendment sets the effective date at 1 January 2025. Considering its significant interference with the existing functioning, it is to be expected that proposals to postpone its entry into force will be made, to allow the financial institutions more time to prepare for the changes.