VAT Deduction Eligibility: When Does It Apply and How Do You Claim It?

Quick Overview

You are entitled to a VAT deduction if you are a VAT payer, have received a taxable supply, and use it for your business activities that qualify for a deduction. However, an invoice showing the tax amount is not sufficient on its own. You must be able to document what you purchased, from whom, when, for what purpose, and how the supply relates to your business. It is also important to keep track of the shortened deadline for claiming the deduction and the obligation to correct the deduction for invoices that remain unpaid more than 6 months past due.

In practice, be sure to check the following:

• whether you are a VAT payer and have a tax document,
• whether the purchase serves your business activities,
• whether it is not for entertainment or other non-tax-deductible purposes,
• whether, in the case of mixed use, you are applying a proportional or reduced deduction,
• whether you are monitoring the deadline for claiming the deduction and any unpaid invoices.

If you’re dealing with a higher VAT deduction, mixed-use assets, or a request from the tax authority, we’d be happy to advise and assist you.

When Does the Right to a Tax Deduction Arise?

You are entitled to a VAT deduction when, as a taxpayer, you purchase goods or services for your business activities and the resulting transactions are either taxable or exempt with a right to deduction (e.g., exports, supplies to the EU). The same applies to the acquisition of goods from the EU, the importation of goods, and reverse charge situations (where you, as the customer, report the tax).

When You Are Not Entitled to a VAT Deduction (Even If You Are a Taxpayer)

You cannot claim a tax deduction, for example, on entertainment expenses —typically hospitality and entertainment for business partners. Conversely, small promotional gifts worth up to 500 CZK excluding VAT (if given as part of business activities) are not even considered a supply of goods, and a VAT deduction is possible upon their purchase. At the same time, no output VAT is incurred from providing such gifts. Be careful, however, to ensure that this does not constitute entertainment.

What a tax document must contain and how to prove your claim

The basis is a tax document containing the legally required details (identification of the supplier and customer, tax ID number, description of the transaction, date of the transaction, tax base, tax rate, tax amount, etc.). If the document lacks certain required details, the law allows you to prove your claim in other ways —that is, through other evidence that reliably demonstrates the actual receipt and use of the service (contracts, delivery notes, bank statements, handover reports, etc.).

However, the courts have repeatedly emphasized that the burden of proof lies with the taxpayer. Therefore, if you use a purchase only partially for business purposes, you must be able to document the exact proportion.

Not sure if your documents will hold up during an audit? Have your contracts, invoices, and related records reviewed before the tax office requests an explanation.

What We Most Often Deal With in Practice

In practice, we often encounter situations where a business owner has a formally correct invoice but lacks evidence of the actual delivery of the service. This typically involves marketing services, consulting, IT work, or brokerage services, where a general description on the invoice is not sufficient. During an audit, the tax authority then requests contracts, emails, deliverables, handover reports, or other evidence clearly showing what was actually delivered.

Deadline: By When You Must Claim the VAT Deduction

Effective January 1, 2025, a shortened deadline applies: the right to claim a VAT deduction cannot be exercised after the end of the second calendar year following the year in which the right to the deduction arose. In practice: if your right to a deduction arose in March 2025, you must claim it no later than in the return for December 2027 (for monthly filers) or for the fourth quarter of 2027 (for quarterly filers). The previous three-year deadline no longer applies.

Reverse Charge: Input Tax Credit and “Output” Tax for the Customer

Under the domestic reverse charge mechanism, the customer reports the tax, and if the supply is used for a taxable activity, the customer claims a deduction at the same time. This typically results in a zero impact on cash flow if you claim a deduction in the same amount.

Proportional vs. Reduced Deduction: Two Mechanisms That Are Often Confused

Proportional Deduction: When the Supply Is Used for Non-Business Purposes

If a purchase is used partly for business and partly for non-business purposes (e.g., personal use of a company car), you claim a proportional deduction. You determine the amount based on the extent of use for business purposes—through a reasonable estimate, records, or measurement—and adjust it ongoing based on actual usage.

Reduced Deduction: When Part of Your Activity Is Exempt Without a Right to Deduction

When there is a mix of taxable and tax-exempt transactions (e.g., financial, healthcare, or certain educational services), you apply a reduced deduction using a coefficient calculated from your revenue. A settlement is then performed at the end of the year.

How can you avoid getting this mixed up?

• The proportional deduction addresses the economic vs. non-economic use of the same supply.
• The reduced deduction addresses different types of outputs within an economic activity (taxable vs. exempt without a right to deduction).

In practice, both methods are sometimes combined —first the proportional deduction, then the reduced deduction.

The most common mistake occurs with cars, real estate, and services that a business owner uses for both business and personal purposes. If the business owner claims the full deduction but lacks records of the actual extent of business use, the tax authority may reduce the deduction and assess additional tax, including penalties.

Adjustment of Depreciation for Fixed Assets (5/10 Years)

For fixed assets, the law requires you to monitor whether the scope of use for activities eligible for a deduction has changed in subsequent years. The deadline for adjusting the deduction is 5 years; for buildings, units, and land, it is 10 years. The annual adjustment is calculated as one-fifth (or one-tenth) of the original VAT amount multiplied by the change in the eligibility ratio.

For example, if after two years you sell an office that you originally used only 50% of the time for taxable transactions and the new buyer—a tenant—will use it for non-taxable activities, the adjustment will account for this difference.

Rules Effective in 2025: Unpaid Invoices and the Obligation to Revoke a Tax Credit

Effective January 1, 2025, the obligation for customer-payers to correct (reduce) a previously claimed tax credit has been expanded if an unpaid liability remains outstanding for 6 calendar months past due. Will you pay later? Once you’ve paid, you can increase your tax credit again.

Example: Invoice for 121,000 CZK (base amount 100,000, VAT 21,000), due January 15, 2025. As of July 31, 2025, 60,000 Kč (base amount) remains unpaid —you must reduce the original deduction by 12,600 Kč (21% of the unpaid portion). On September 20, 2025, you pay an additional 30,000 CZK → in the September 2025 tax return, you increase the deduction by 6,300 CZK.

From our experience: A company claimed a deduction from a large supplier invoice but, due to a dispute with the supplier, did not pay it for several months. The accountant continued to account for the original deduction, but the liability had been past due for more than 6 months. In such a situation, it is no longer just a commercial dispute with the supplier, but also an obligation to correct the previously claimed deduction in the VAT return.

Record-Keeping and Archiving of Documents

You must retain tax documents for 10 years from the end of the tax period in which the transaction took place. When storing documents electronically, ensure the authenticity of their origin, the integrity of their content, and their availability to the tax authority.

Common Mistakes That Cost Money

“If it’s on a VAT invoice, I’m always entitled to a deduction.” You are not—it depends on what you use the supply for and whether it qualifies for a deduction (entertainment expenses never qualify; mixed and non-business use qualifies only on a pro-rata or reduced basis).

“I have to charge output VAT on small gifts.” For promotional gifts up to 500 CZK excluding VAT, the provision is not considered a supply—no output VAT is due (do not confuse this with entertainment expenses).

“I can claim the credit at any time by filing an amended return.” Starting in 2025, a two-year deadline applies—once it expires, you can no longer claim the credit.

“I haven’t paid the supplier, so I’ll keep the input tax credit.” Six months after the due date, you must correct any previously claimed input tax credit; once payment is made, you can increase the credit.

How to Set Up Your VAT Deduction Procedures

1. Set up purchase approval rules: verify that the goods or services are used for eligible activities; for mixed-use situations, record the usage ratios immediately.
2. Monitor due dates: automatically flag invoices that are 6 months past due due to the mandatory correction of the deduction.
3. Reverse charge: Match self-assessment with the deduction in the same period.
4. Control reports: Correctly sort documents (B.2/B.3) and follow procedures for proportional/reduced deductions according to the methodology.
5. Archiving: Keep documents for 10 years and ensure their authenticity and legibility.

When it comes to VAT deductions, the details often make all the difference: the purpose of the purchase, supporting evidence, record-keeping, and proper timing. If you want to be sure your procedures will hold up during an audit, contact us before a dispute arises with the tax authority.

Summary

A taxpayer is entitled to a VAT deduction when the goods or services received are used for economic activities eligible for deduction and the taxpayer can substantiate this with the correct documents and other records. Therefore, an invoice showing the VAT amount alone is not sufficient. No right to a deduction arises for entertainment expenses; for mixed use, the deduction is applied on a pro rata basis; and for exempt activities without a right to deduction, the deduction is reduced by a coefficient. In 2026, it is also necessary to monitor the shortened deadline for claiming the deduction, the obligation to correct the deduction for liabilities unpaid for more than 6 months past due, proper reporting in the control report, the multi-year adjustment for fixed assets, and the archiving of documents for a period of 10 years. The safest approach is to establish internal rules in a timely manner for approving purchases, recording mixed-use transactions, monitoring due dates, and retaining supporting documentation.