The right to deduct VAT: when does it arise and how do you claim it?

When the tax deduction is due

The right to deduct VAT arises when you , as a taxpayer, acquire goods or services for your economic activity and the resulting transactions are taxed or exempt with a right to deduct (e.g. export, delivery to the EU). The same applies to acquisitions of goods from the EU, imports of goods and reverse charge (where you, as the customer, declare the tax).

When you are not entitled to deduct VAT (even if you are a taxable person)

For example, you cannot claim a deduction for entertainment expenses – typically treats and entertainment for business partners. Conversely, small promotional gifts up to CZK 500 excluding VAT (if given in the course of an economic activity) are not even considered to be a supply of goods and a deduction for their purchase is possible. At the same time, no output VAT is incurred on the provision of such gifts. However, be careful that it is not just a representation.

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

The tax document with the statutory requirements (identification of the supplier and customer, VAT number, description of the transaction, date of performance, basis, rate, amount of tax, etc.) is essential. If the document does not contain certain elements, the law allows you to prove the claim in other ways – i.e. by other evidence that reliably proves the actual receipt and use of the supply (contracts, delivery notes, bank statements, handover reports, etc.).

However, the courts have repeatedly emphasised that the burden of proof lies with the payer. Therefore, if you use the purchase only partly for economic activity, you must be able to prove in what proportion.

Time limit: by when you must claim the VAT deduction

As of 1 January 2025, a shortened deadline applies: you cannot claim the VAT deduction after the second calendar year following the year in which the deduction is due. In practical terms: if your entitlement is due in March 2025, the latest you can claim it is in your December 2027 return (monthly taxpayers) or Q4 2027 return (quarterly taxpayers). The older three-year time limit no longer applies.

Reverse charge: deduction and “output” at the customer

Under the domestic reverse charge regime, the customer declares the tax and, if he uses the supply for a taxable activity, he also claims a deduction. This usually results in zero cash flow impact if you claim the deduction at the same rate.

Proportionate vs. reduced deduction: two mechanisms that get confused

Proportionate deduction: when you use the supply outside the economic activity

If the purchase is used partly for business and partly for non-economic purposes (e.g. private driving in a company car), you apply a proportional deduction. You determine the amount according to the extent of use for economic activity – by qualified estimate, records or measurement – and adjust it continuously according to reality.

Reduced deduction: when part of your activity is exempt without claiming

When there is a combination of qualifying and non-qualifying exempt supplies (e.g. financial, medical or selected educational services), you apply a reduced deduction using a coefficient calculated on the income. A settlement then follows at the end of the year.

How to avoid confusion?

• Pro rata deduction addresses economic vs. non-economic use of the same benefit.
• A reduced deduction addresses different types of output within an economic activity (taxed vs. exempt without claim).

In practice, the two regimes are sometimes combined – first the apportionment, then the curtailment.

Deduction adjustment for fixed assets (5/10 years)

For fixed assets, the law requires you to keep track of whether the extent of use for the activity qualifying for the deduction has changed in subsequent years. The period for adjusting the deduction is 5 years, and 10 years for buildings, units and land. The annual adjustment is calculated as one-fifth (or one-tenth) of the original VAT times the change in the entitlement indicator.

For example, if after two years you sell an office that was originally used only 50% for taxable purposes and a tenant newly buys it for a non-qualifying activity, an adjustment will make up the difference.

News 2025: unpaid invoices and the obligation to repay the deduction

As of 1 January 2025, the obligation of customer-payers to correct (reduce) a previously claimed deduction has been extended if the unpaid liability lasts 6 calendar months after the due date. Will you pay later? You can increase your deduction again after payment.

Example: invoice CZK 121,000 (base CZK 100,000, VAT CZK 21,000), due on 15 January 2025. On 20.9.2025 you will pay another CZK 30,000 → in the September 2025 return you will increase the deduction by CZK 6,300.

Record keeping and archiving of documents

You must keep tax documents for 10 years from the end of the tax year in which the transaction took place. When storing electronically, ensure that the origin is reliable, the content is intact and the tax authorities have access to it.

Common mistakes that cost money

“If it’s on a VAT invoice, I’m always entitled.” You don’t – it depends what you use the supply for and whether it is a qualifying activity (representations never, mixed and non-economic use only proportionately/shortly).

“I have to charge output VAT on small gifts.” For promotional gifts up to £500 excluding VAT, the provision is not considered a supply – no output VAT is incurred (not to be confused with representation).

“I can supplement my claim at any time by a supplementary return.” From 2025 there is a two year time limit – after that you can no longer claim.

“I didn’t pay the supplier, I’ll keep the deduction.” After 6 months after the due date, you must correct the previously claimed deduction; after payment, the deduction can be increased.

How to set up your VAT deduction practice

1. Set up rules for approving purchases: check whether the supply serves an activity with a claim; for mixed schemes, record usage ratios now.
2. Due date monitoring: automatically report invoices 6 months overdue for mandatory deduction correction.
3. Reverse charge: match self-measurement with deduction in the same period.
4. Control reporting: correct ordering of documents (B.2/B.3) and procedures for pro rata/reduced deduction according to the methodology.
5. Archiving: keep documents for 10 years and ensure their authenticity and legibility.

Summary

VAT deduction (tax credit) is a key privilege of taxpayers – it only works where the purchases actually serve your economic activity. In 2025, watch out for three things:

1. the two-year claim period (always ends at the end of the second year after the year of claim),
2. a new obligation to reduce the deduction for outstanding liabilities after 6 months past due; and
3. the correct reporting of the deduction in the control declaration (B.2/B.3, pro rata/reduced scheme).

Add to this the continuous monitoring of the pro rata and reduced deduction, the multi-year adjustment for fixed assets (5/10 years), the distinction between promotional gifts up to CZK 500 and representations, careful documentation and archiving for 10 years. When you set up the processes (purchase approvals, due date monitoring, audit reporting and archiving), you will find VAT deduction a safe and predictable process – not a source of risk.