GFD’s Information on VAT on immovable assets – Part II

You can read Part I of our article on this topic here.

Immovable asset sale test

One of the biggest changes is the "restart" of the test for sale of immovable assets in the event of a substantial change to a completed immovable asset: the test will restart when modifications change the use of the building or the conditions of occupancy (e.g., insulation of the house, installation of a lift) and their actual costs exceed 30 per cent of the VAT base on subsequent sale. For example, if a house is renovated for CZK 1.5 million and then sold for CZK 4 million, the share of renovation costs is 37.5 per cent; this then constitutes a substantial change to the property, and its first sale after such renovation will again be subject to VAT.

Please note that the actual costs of renovation also include DIY work and VAT-exempt supplies. Conversely, interest on loans is not included in these costs.  It is essential that these are costs incurred by the seller. For example, if a house is purchased that has already been extended and is subsequently insulated at a cost of CZK 2 million and sold for CZK 8 million, the parameters for a significant change to the property are not met, as the share is 25 per cent. The sale will therefore not be subject to output VAT.

Tax rate and social housing

The reduced rate applies only to the supply or construction of buildings for social housing. It is not sufficient that the building is for housing. A building for social housing is defined as:

1. an apartment building where more than half of the floor area consists of living space for social housing,
2. a family house with a floor area not exceeding 350 m2, and
3. habitable space for social housing.
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For buildings under construction, it must be proven that the social housing parameters will be met upon their completion.

For construction and assembly work, the reduced rate applies to all work on a completed building for housing or social housing purposes. However, if modifications to a completed building change the building’s purpose so that it is no longer a building for housing or social housing, the basic rate shall apply. If the work is carried out on mixed-use buildings, the tax base shall be divided according to the proportion of floor space.

A key role in social housing plays a new decree on the calculation of floor area, as this may alter the classification of existing buildings, as well as the registration of a building in the RÚIAN register (Registr územní identifikace, adres a nemovitostí – Register of Territorial Identification, Addresses, and Real Estate). The actual use of the property is no longer relevant for VAT purposes. An apartment building qualifies as an apartment building only if it is registered as such. Where the factual use differs from the registration, the registration is decisive for VAT purposes until the owner corrects it. In practice, it then makes sense to thoroughly check both the floor area and the RÚIAN registration before signing a contract.

Decision to apply VAT for completed selected immovable assets

Under the new rules, VAT payers—and certain persons not established in the Czech Republic—may choose to subject the supply of completed selected immovable assets to VAT. However, for specific categories of buyers, the choice is conditional upon the buyer’s consent. Such consent may also be inferred where the buyer declares VAT. As a best practice, consent should be expressly incorporated into the purchase agreement to avoid interpretation uncertainty. Where the property is supplied between VAT payers, and if they opt for applying VAT, the buyer pays VAT under the reverse charge mechanism.