An entrepreneur registers for VAT in the Czech Republic on a mandatory or voluntary basis under the conditions set out in the VAT Act (Act No. 235/2004 Coll. on VAT, hereinafter only "VAT Act").
In recent years, the rules for the registration of taxable persons have been amended several times. The article summarises the rules on the registration of taxable persons currently in force in 2022 and points out the expected changes that should be implemented in the Czech Republic with effect from 1 January 2023.
First, the definition of taxable persons is explained, followed by the legal regulations on their registration, especially when the turnover limit is exceeded. Consequently, other cases in which the obligation to register arises from the law are also mentioned, as well as the conditions for voluntary VAT registration.
Every VAT registered entrepreneur gets its Czech VAT ID Numer. For more information about the VAT ID Number in the Czech Republic or Slovakia please see our blog. You can find there also more information about the Czech VAT.
VAT registration - taxable person
According to Section 5 of the VAT Act, a taxable person in the Czech Republic is understood to be both a legal entity and a natural person who carries out an independent economic activity. According to this definition, taxable persons are primarily domestic entrepreneurs, regardless of whether they are legal entities or natural persons, but also entrepreneurs from another EU Member State or from a third country, as well as other Czech persons who are not entrepreneurs but who carry out an independent economic activity.
A group according to Section 5a VAT Act is also considered to be the taxable person. The VAT group is a group of associated persons with their registered office or permanent establishment in the Czech Republic, which is registered for VAT purposes in accordance with Section 95a of the VAT Act (i.e. like the group in terms of the VAT Act). The VAT-registered group is considered an independent taxable person, i.e. the services between the group members are not subject to VAT. Only services and supplies from taxable persons outside the group are taxed and the right to deduct input tax arises for the VAT group only for inputs from taxable persons outside the group. Each person can be a member of only one VAT group.
In practice, it means that the group member is not registered for VAT individually, but is registered for VAT as a group member.
Legal entities that are not founded or established for entrepreneurial purposes are also liable for tax if they carry out an economic activity. These may be so-called public corporations such as regions, municipalities and their organisational units, foundations, associations, political parties or other private-law corporations. Neither an employee nor any other person is liable to tax if he or she carries out an activity arising from an employment relationship, a service relationship or a similar relationship.
According to Section 5(3) of the VAT Act, a self-employed economic activity (an activity subject to VAT) is defined as the activity of manufacturers, traders and service providers, as well as other activities that serve to generate regular income. The Czech definition corresponds to the definition in the European VAT Directive, as well as the case law of the EU Court of Justice. The use of tangible and intangible assets to generate regular income is also considered an economic activity, e.g. the rental of movable or immovable property. On the other hand, self-employed economic activity does not include the activity of employees or other persons who have a contract with the employer on the basis of which an employment relationship is established, or other persons whose income is taxed as income from employment within the meaning of the Income Tax Act (for example, the activity of managing directors or board members of commercial companies).
VAT registration - when is it obligatory?
The Czech VAT Act defines in Section 6 various circumstances that lead to a VAT registration obligation in the Czech Republic. Some provisions apply only to domestic persons, while some provisions apply only to persons not established in the country. Therefore, it is always important to pay attention to which provision is relevant to a particular situation.
VAT Registration grounds for domestic traders
1. Turnover limit for VAT registration
A taxable personestablished in the Czech Republic must register for VAT under Section 6 (1) of the VAT Act if his or her turnover exceeds CZK 1 million in no more than 12 immediately preceding consecutive calendar months, with the exception of a person who only performs exempt transactions without the right to deduct input tax.
The obligation to register under this provision does not apply to taxable persons who do not have a registered office in the country, but only to Czech traders.
According to Section 4 (1) of the VAT Act, turnover is defined as the sum of the consideration, excluding turnover tax, to which a taxable person is entitled for services rendered that are taxable or exempt under the VAT Act, but with a right to deduct input tax. The services included in the turnover must have their place of performance in the Czech Republic.
Payments for services with a place of performance outside the Czech Republic do not have to be included in the turnover. Similarly, payments for tax-exempt services without the right to deduct input tax are generally not included in turnover, unless the service is an occasional secondary activity. An exception also applies to payments from the sale of fixed assets. These payments also do not count as turnover if this activity is not part of the taxable person's ordinary economic activity.
Pursuant to Section 94 (1) of the VAT Act, this taxable person is obliged to submit an application for registration within 15 days of the end of the calendar month in which it exceeded the specified turnover. The taxable person is registered for VAT with effect from the first day of the second month following the month in which he exceeded the specified turnover.
In its 2021 Programme Statement, the Czech government has already declared its intention to increase the current turnover limit for the mandatory registration of a taxable person from CZK 1 million to CZK 2 million. This change needs to be approved by the European Commission and should enter into force on 1 January 2023.
2. Registration in other cases
Other cases in which a taxable person established in the territory of the country is obliged to register arise from Sections 6b to 6e of the VAT Act, although these are more specific situations. According to these provisions, the taxable person incurs the obligation to register e.g. when acquiring a business from a taxable person registered for VAT, in the case of a transformation (in the case of a merger or a spin-off), if one of the entrepreneurs involved in the transformation is registered for VAT, furthermore in the case of a change of legal form or when inheriting assets from a deceased person registered for VAT, if the activity continues to be carried out.
Registration for VAT without a place of business or residence in the Czech Republic
The cases in which a taxable person who does not have a place of business or residence in the Czech Republic must register for VAT arise from Section 6c(2) and (3) of the VAT Act.
1. Supply of goods or services in the Czech Republic
According to Section 6c (2) of the VAT Act, a taxable person who does not have a registered office/residence in the Czech Republic is obliged to register if he makes a taxable supply of goods or services with a place of performance in the Czech Republic. An exception from the registration obligation applies to situations in which the VAT is to be declared by the recipient of the service (i.e. reverse-charge). In this case, the service provider does not have to register for VAT in the Czech Republic.
Another exception from the registration obligation also applies to the taxable person who carries out a taxable supply of goods or services in the Czech Republic but is registered for OSS (one-stop shop) in his state of residence. In this case, the tax for the Czech Republic is levied via OSS and the service provider must therefore comply with his registration obligation in the Czech Republic. A similar obligation also applies to a branch of a taxable person not established in the Czech Republic. The branch must register for VAT at the moment it makes a supply of goods or services with a place of supply in the Czech Republic.
If VAT registration is established for the taxable service provider or for the establishment, the service provider or the establishment must submit an application for VAT registration within 15 days of the day on which the obligation to register arose. The tax office registers the taxable person or the taxable establishment retroactively to the day on which the taxable supply was made.
2. EC supply from the Czech Republic
The taxable person without a registered office/residence in the Czech Republic must also register for VAT if he or she supplies the goods to a taxable person in another EU Member State. The taxable supplier is registered for VAT on the date of delivery of these goods. A similar regulation applies to the taxable person making an intra-Community supply from the Czech Republic (so-called EC supply). In this case, too, the taxable person must register for VAT in the Czech Republic.
The obligation to register for VAT may relate also to companies that import to the Czech Republic and export their goods to other EU countries, i. e. they make EC supplies. For more information about the VAT in the Czech Republic or Slovakia please see our blog. You can also read more about the import VAT.
3. Voluntary VAT registration in the Czech Republic
The taxable person (whether resident in the Czech Republic or in another EU country) can also register for VAT in the Czech Republic on a voluntary basis and thus also acquire its Czech VAT identification number. In this case, the taxable person is registered for VAT from the day following the date of notification of the registration decision.
It follows that a taxable person who wishes to register voluntarily cannot decide or influence for himself from which day he becomes a registered taxable person. Voluntary registration cannot be applied for by a taxable person who only carries out exempt transactions without the right to deduct input tax.