On January 1, 2024, the Czech consolidation package and with it the change to the Czech VAT Act came into force. In the area of VAT, the package brought two major innovations - the merger of the two reduced tax rates of 15% and 10% into one tax rate of 12% (reclassification of some items between the rates) and the restriction of input tax deductions on the purchase of luxury vehicles. The supply of books and related services is now exempt from VAT with input tax deduction in the Czech republic.
Change in the reduced sales tax rate
The most discussed items when it comes to VAT rates are beverages and medical devices. Soft drinks now fall under the basic rate of 21%, with the exception of so-called selected drinks and tap water, which are subject to a reduced rate of 12%. Selected drinks include milk, liquid dairy products and plant-based alternatives to these products (or flavored versions of these drinks, provided they retain the essential character of milk/plant-based milk alternatives).
The category of medical devices to which the reduced tax rate of 12% applies has been newly expanded to include medical devices (according to the relevant European regulations) intended for single use and also falling under the defined codes of the customs nomenclature.
On the other hand, the items that are reclassified from one of the original reduced tax rates to the basic tax rate include bicycle repair services, household cleaning services, draft beer, hairdressing services, textile and shoe repairs, firewood, cut flowers, the collection and transport of municipal waste and related services, author's services and artists as well as the transport of mass aircraft.
In case of doubt, an application can be made to the tax authority for a binding decision both on the determination of the tax rate and on the correct application of the tax exemption for the supply of books and the provision of related services.
Restriction of input tax deduction for luxury cars
The VAT Act now limits the input tax deduction when purchasing vehicles of class M1 (passenger cars) to the amount of CZK 420,000 for the selected vehicle that is part of the taxpayer's fixed assets (corresponding to an acquisition value of CZK 2 million. This maximum amount must also be applied when purchasing a selected vehicle for purposes that give rise to a proportionate right to deduct input tax. The restriction should not apply to leasing companies that purchase vehicles for the purpose of subsequent delivery as part of a finance lease.
The aforementioned limit also applies to each technical assessment of the respective vehicle, so that the amount of the maximum input tax deduction is checked together for both the purchase and each technical assessment.
According to the transitional provisions, the restriction on the right to deduct input tax does not apply to vehicles for which an advance payment in accordance with usual practice has been made and taxed by the end of 2023. This also applies to technical improvements made to these vehicles.