The forthcoming amendment to the Value Added Tax Act, about which my colleague Petr Vondraš also wrote in his previous article, will bring significant changes in the conditions of taxpayers, both for established and non-established persons. The changes will therefore affect not only Czech entrepreneurs and companies, but also taxable persons established abroad who trade in the Czech Republic. Thanks to the unification of VAT rules across the European Union, a new Small Business Scheme will come into force, which will be valid in most Member States from 1 January 2025. The scheme aims to reduce the administrative burden and create a level playing field between domestic and foreign small businesses.
For the first time since the Czech Republic joined the EU, there is a change in the way turnover is calculated. Until now, businesses had to track turnover for each of the 12 immediately preceding consecutive calendar months. Now, turnover will be calculated for the whole calendar year. At the same time, it will be necessary to track not just one amount of turnover but two turnovers.
The amended VAT Act also includes new terminology and the terms "domestic turnover" and "turnover in the European Union". As before, domestic turnover means the aggregate of payments, net of tax, for supplies made with a place of supply in the Czech Republic. This turnover will now also include transactions which would be taxable if they were not exempted in the domestic small business scheme (see Small Business Scheme below for more details). The turnover in the European Union is the sum of the turnover in the home country and the turnover in all other Member States (determined according to local rules).
A domestic entrepreneur or a foreign entrepreneur registered in the Small Business Scheme whose domestic turnover exceeds CZK 2,000,000 during a calendar year will become a VAT payer. He becomes a taxpayer as of 1 January of the following year. However, he/she may voluntarily decide to become a taxpayer earlier than 1 January. The condition is the timely submission of the application, i.e. within 10 working days of exceeding the turnover, and notification to the tax office of the interest in becoming a taxpayer on the day following the date of exceeding the turnover.
However, as mentioned above, a higher turnover threshold will have to be monitored, namely CZK 2,536,500. This amount is based on the limit of EUR 100 000 set by EU law. In such a case, the taxable person becomes taxable on the day after this threshold is exceeded. Again, the application must be submitted within 10 working days of the date of the overrun. The law continues to provide for voluntary VAT registration regardless of the amount of turnover achieved, if the entrepreneur carries out supplies eligible for tax deduction.
Example
The newly established Czech limited liability company XY s.r.o., a non-taxpayer, makes the first supply of goods with a place of performance in the Czech Republic with a value of CZK 4,000,000 on 6 March 2025. The next domestic supply of goods made on 7 March 2025 will already be subject to VAT. The registration application must be submitted within 10 working days, i.e. by 20 March 2025.
Small Business Scheme
This is a new cross-border scheme under EU law that will allow domestic and foreign taxable persons (mainly entrepreneurs and trading companies) to avoid VAT registration and the associated administrative burden in the Member States where they trade in small volumes. A condition for using the Scheme is that the turnover of the entrepreneur in the European Union (i.e. the sum of the turnover in the home country and in other Member States) did not exceed EUR 100 000 in the relevant or preceding calendar year. Transactions carried out by entrepreneurs registered under the Small Business Scheme will be considered exempt from VAT.
In addition to reducing the administrative burden, the legislator's intention was also to establish a level playing field between small businesses across the EU. Currently, a Czech non-taxpayer can offer his goods and services cheaper (i.e. without VAT) in the Czech Republic as long as he does not exceed his turnover. In contrast, an entrepreneur based, for example, in Poland is (with certain exceptions) obliged to register in the Czech Republic from the first taxable supply with a place of supply in the Czech Republic and to charge Czech VAT on his goods and services. This applies vice-versa to a Czech entrepreneur in Poland or other Member States.
The use of the Small Business Scheme is voluntary and it is up to the taxable person to decide whether to use it or to proceed according to the existing legislation. If the entrepreneur decides to use the Scheme, he or she does not become a taxable person when making a taxable supply and therefore does not incur the related obligations to register and file tax returns. On the contrary, the supply will be treated as exempt.
A condition for using the Scheme is the obligation to register for it through the tax authority in the country where the entrepreneur has his/her registered office. The entrepreneur will then be assigned a special identification number with the suffix "EX". Once registered, quarterly reports must be submitted indicating the value of the transactions carried out in all Member States. This will be used by the tax authorities to monitor whether the turnover exceeds EUR 100 000. It is therefore questionable whether joining the Scheme will achieve the objective of reducing the administrative burden.
However, if a Czech entrepreneur exceeds the turnover in the European Union (i.e. the amount of EUR 100,000 from transactions carried out in Poland and Slovakia, for example) and thus cannot continue to benefit from the Small Business Scheme, it does not automatically mean that he or she becomes a taxpayer in the Czech Republic. For the purposes of taxability in the Czech Republic, he must continue to monitor the turnover in the Czech Republic, i.e. CZK 2,000,000 during the calendar year for transactions with a place of performance in the Czech Republic. Finally, it is necessary to mention that in order for a Czech entrepreneur to be able to use the Scheme in another EU Member State, that State must have implemented the relevant EU Directive into its local VAT law.
denisa.krocova@bdo.cz
For the first time since the Czech Republic joined the EU, there is a change in the way turnover is calculated. Until now, businesses had to track turnover for each of the 12 immediately preceding consecutive calendar months. Now, turnover will be calculated for the whole calendar year. At the same time, it will be necessary to track not just one amount of turnover but two turnovers.
The amended VAT Act also includes new terminology and the terms "domestic turnover" and "turnover in the European Union". As before, domestic turnover means the aggregate of payments, net of tax, for supplies made with a place of supply in the Czech Republic. This turnover will now also include transactions which would be taxable if they were not exempted in the domestic small business scheme (see Small Business Scheme below for more details). The turnover in the European Union is the sum of the turnover in the home country and the turnover in all other Member States (determined according to local rules).
A domestic entrepreneur or a foreign entrepreneur registered in the Small Business Scheme whose domestic turnover exceeds CZK 2,000,000 during a calendar year will become a VAT payer. He becomes a taxpayer as of 1 January of the following year. However, he/she may voluntarily decide to become a taxpayer earlier than 1 January. The condition is the timely submission of the application, i.e. within 10 working days of exceeding the turnover, and notification to the tax office of the interest in becoming a taxpayer on the day following the date of exceeding the turnover.
However, as mentioned above, a higher turnover threshold will have to be monitored, namely CZK 2,536,500. This amount is based on the limit of EUR 100 000 set by EU law. In such a case, the taxable person becomes taxable on the day after this threshold is exceeded. Again, the application must be submitted within 10 working days of the date of the overrun. The law continues to provide for voluntary VAT registration regardless of the amount of turnover achieved, if the entrepreneur carries out supplies eligible for tax deduction.
Example
The newly established Czech limited liability company XY s.r.o., a non-taxpayer, makes the first supply of goods with a place of performance in the Czech Republic with a value of CZK 4,000,000 on 6 March 2025. The next domestic supply of goods made on 7 March 2025 will already be subject to VAT. The registration application must be submitted within 10 working days, i.e. by 20 March 2025.
Small Business Scheme
This is a new cross-border scheme under EU law that will allow domestic and foreign taxable persons (mainly entrepreneurs and trading companies) to avoid VAT registration and the associated administrative burden in the Member States where they trade in small volumes. A condition for using the Scheme is that the turnover of the entrepreneur in the European Union (i.e. the sum of the turnover in the home country and in other Member States) did not exceed EUR 100 000 in the relevant or preceding calendar year. Transactions carried out by entrepreneurs registered under the Small Business Scheme will be considered exempt from VAT.
In addition to reducing the administrative burden, the legislator's intention was also to establish a level playing field between small businesses across the EU. Currently, a Czech non-taxpayer can offer his goods and services cheaper (i.e. without VAT) in the Czech Republic as long as he does not exceed his turnover. In contrast, an entrepreneur based, for example, in Poland is (with certain exceptions) obliged to register in the Czech Republic from the first taxable supply with a place of supply in the Czech Republic and to charge Czech VAT on his goods and services. This applies vice-versa to a Czech entrepreneur in Poland or other Member States.
The use of the Small Business Scheme is voluntary and it is up to the taxable person to decide whether to use it or to proceed according to the existing legislation. If the entrepreneur decides to use the Scheme, he or she does not become a taxable person when making a taxable supply and therefore does not incur the related obligations to register and file tax returns. On the contrary, the supply will be treated as exempt.
A condition for using the Scheme is the obligation to register for it through the tax authority in the country where the entrepreneur has his/her registered office. The entrepreneur will then be assigned a special identification number with the suffix "EX". Once registered, quarterly reports must be submitted indicating the value of the transactions carried out in all Member States. This will be used by the tax authorities to monitor whether the turnover exceeds EUR 100 000. It is therefore questionable whether joining the Scheme will achieve the objective of reducing the administrative burden.
However, if a Czech entrepreneur exceeds the turnover in the European Union (i.e. the amount of EUR 100,000 from transactions carried out in Poland and Slovakia, for example) and thus cannot continue to benefit from the Small Business Scheme, it does not automatically mean that he or she becomes a taxpayer in the Czech Republic. For the purposes of taxability in the Czech Republic, he must continue to monitor the turnover in the Czech Republic, i.e. CZK 2,000,000 during the calendar year for transactions with a place of performance in the Czech Republic. Finally, it is necessary to mention that in order for a Czech entrepreneur to be able to use the Scheme in another EU Member State, that State must have implemented the relevant EU Directive into its local VAT law.
denisa.krocova@bdo.cz