Whenever you buy a roll in a shop, pay your electricity bill or book a holiday, the price already includes value added tax, or VAT. Many of us pay it every day without realising it, and businesses in turn charge and remit it to the state. In this article, we’ll give you a clear explanation of what VAT means, how it works in practice, how it’s calculated, what the current rates are and when it’s payable.
VAT is an indirect tax, which means that it is paid to the state by a different entity (the payer) than the one who is actually affected by its economic impact – the consumer, who pays it in the price of the product or service. The essence is the taxation of value added, i.e. the difference between what a business buys (input) and what it sells (output).
The most important regulation is the Value Added Tax Act (VAT Act), which sets out the tax payer, the calculation of the tax, the rates and the deadlines for filing returns. In everyday practice, however, you will also encounter implementing regulations and methodological information from the Tax Administration that specify new procedures or European changes.
We can help you navigate the law, whether it’s dealing with a specific tax situation, preparing for an audit by the tax authority or defending yourself in court.
The correct classification to individual tax subjects determines when the obligation to declare the tax arises, when the deduction can be claimed and what administrative tasks must be performed. There are four basic categories: taxable person, group, VAT payer and identified person.
A taxable person is anyone who carries out an economic activity independently. This includes manufacturers, traders, service providers, farmers and freelancers. Non-profit organisations also fall into this category if, in addition to their main activity, they carry out an economic activity for the purpose of regular income (e.g. renting out real estate). An employment relationship is not considered an economic activity and wages or salaries therefore do not meet the definition of subject to VAT.
A group consists of persons connected by capital or otherwise with a registered office or place of business in the Czech Republic who register together and act as a single VAT payer. The group has a single tax identification number (TIN) and is represented to the tax authorities by a selected member. Transactions within the group are not subject to VAT – tax liability arises only in relation to third parties.
A taxable person becomes a taxable person after exceeding a turnover of CZK 2,000,000 for the last twelve consecutive months or on the basis of voluntary registration if he wishes to claim a tax deduction. Other specific situations in which an entity becomes a taxpayer are set out by law (typically when providing selected services abroad).
When is it worth paying VAT? The answer can be found in our article.
An identified person is an entity that is not a taxpayer but carries out a specific cross-border transaction, in particular an intra-community acquisition of a service or good. An identified person does not pay tax on domestic transactions, but files a tax return and pays VAT on transactions that are taxable in the Czech Republic.
The subject matter of the tax defines the transactions to which VAT applies. In the Czech legal system, it includes four main headings:
Any supply of goods or services that takes place in the Czech Republic in the course of a business activity is considered to be subject to tax.
The subject matter of the tax is when a VAT payer, another taxable person or a non-taxable legal person acquires goods from a VAT-registered supplier in another Member State. The destination is important: if the goods are destined for the Czech Republic, the tax is payable here.
For non-payers, the annual limit of CZK 326,000 applies – below this limit, the performance is excluded from the subject matter.
A special regime applies to the purchase of new means of transport – cars, boats, planes, etc. Regardless of the status of the buyer, the obligation to pay VAT arises in the country of registration, i.e. in the Czech Republic.
When importing goods from non-European countries, VAT is collected during customs clearance. The place of transaction is domestic and therefore the tax is paid in the Czech Republic at the same time as the customs duty. If the importer is a VAT payer, he can claim the VAT directly as a deduction in his tax return.
How do customs duty and VAT work when buying from China? You can read that in our article.
The tax base is the consideration to be received by the taxpayer for the taxable supply, excluding the tax itself. For normal domestic transactions, it is therefore the selling price excluding VAT. For imports from non-EU countries, the tax base determines the taxable amount for the assessment of customs duties, plus other charges such as excise duty.
For transactions between related parties, the tax authority may determine the basis according to the normal price if the agreed amount does not correspond to market conditions, in order to avoid understatement of tax.
The principle of VAT is best illustrated by a simple chain: producer → wholesaler → retailer → final customer. Each link in the chain adds its margin to the price, and at the same time adds VAT to it. While the customer pays the full tax, the individual businesses only pay the difference between the output VAT (which they invoice) and the input VAT (which they pay to the suppliers) to the state.
If the output tax exceeds the input tax, a tax liability arises – you send the difference to the tax office. Conversely, if the input tax is higher, an excess deduction arises and the state will refund the difference. This ensures that only the newly added value is taxed in each article, not the entire cost of the product each time it changes hands.
Imagine that a wholesaler buys goods for CZK 2,200 + CZK 300 VAT (21%). When selling to a retailer, he sets the price at CZK 3,000 + CZK 360 VAT. The wholesaler compares the output VAT (CZK 360) with the input VAT (CZK 300) and pays the difference of CZK 60 to the state. The retailer then sells the goods to the consumer, calculates again the difference between its inputs and outputs and the whole process is completed when the consumer pays the tax out of his own pocket.
As of 1 January 2024, the consolidation package has seen the biggest change in a decade: the second reduced rate of 10% and the first reduced rate of 15% have been merged into one reduced rate of 12%, while the basic rate of 21% remains. This has simplified the system, but also shifted some items between rates.
Thus, there are currently two VAT rates:
To find the final price with tax, multiply the tax base by the appropriate rate and add the two amounts. Example: a laptop with a price of CZK 25,000 excluding VAT at the standard rate of 21%:
VAT = 25 000 × 0.21 = CZK 5 250
Price with VAT = 25 000 + 5 250 = 30 250 CZK
On the other hand, if you want to get the tax and the base from the final price:
Base (21%) = price / 1.21
VAT = price – base
For example, price 30 250 CZK / 1,21 = 25 000 CZK; VAT = 5 250 CZK.
VAT is usually declared and paid monthly or quarterly, depending on the size of the turnover and the taxpayer’s status. The tax return and control report must then be submitted electronically no later than the 25th day after the end of the tax period and the tax must be credited to the tax office’s account on the same date. If the 25th day falls on a weekend or public holiday, the deadline is moved to the next working day.
Identified persons have a monthly tax period and file a return for each month in which they are liable for tax.
From 1 January 2025 we are looking at two limits:
Of course, you can also register voluntarily before you exceed the limits, for example to deduct input VAT on significant investments or when trading abroad.
How to register and cancel VAT registration? What are the conditions and procedures and what news has this year brought? Find out in the next article.
All returns are now only filed electronically via a data box, EPO application or accounting software. The administration also includes an audit report that details domestic B2B transactions. This is filed by the legal entity for a calendar month within 25 days after the end of the month. An individual can then submit the control report on a monthly or quarterly basis.
If you sell goods or selected services to customers in the EU via the internet, you will appreciate the One Stop Shop (OSS) scheme, which allows you to file one quarterly return in the Czech Republic and not file separate returns in other Member States. OSS returns are filed by the end of the month following the end of the quarter.
In addition to the general method of taxation, the VAT Act also introduces several special regimes that govern how tax is calculated and reported on specific activities or commodities. The aim is to take account of the nature of the transactions concerned and to simplify administration where the normal procedures would not reflect economic reality.
The first is the travel service scheme. Payers who set up a tour as a combination of accommodation, transport and other tourist services are taxed only on their mark-up, not on the full amount collected.
The second scheme applies to dealers in second-hand goods, works of art, collectibles and antiques. Here, too, the difference between the purchase and sale price is taxed to avoid the same item being taxed again.
The third specific procedure is the regime for investment gold, which lays down the conditions under which gold is exempted from tax and the rules for deducting tax from producers and intermediaries.
We can help you navigate the law, whether it’s dealing with a specific tax situation, preparing for an audit by the tax authority or defending yourself in court.
Special schemes include the one-stop shop system, internationally known as the One Stop Shop. It allows businesses that sell goods or services to customers in other EU Member States to handle all cross-border VAT obligations through a single electronic interface. This removes the need to register for tax in each individual customer’s country.
A separate chapter is the reverse charge, where the role of the taxpayer changes: the tax is declared and paid by the customer, not the supplier. This mechanism is designed to prevent tax evasion on risky commodities and services.
In the national system, it is permanently applied to the supply of gold, to selected goods listed in the law (such as certain scrap metals), to specific transfers of immovable property, to construction and installation work and to the supply of goods provided as a guarantee or after the exercise of retention of title.
In addition to these permanent situations, the Government may, by decree, introduce the reverse charge temporarily for other supplies if the economic situation or the development of fraudulent practices so requires.
How to e-file via My Tax Portal? The next article will tell you.
Breaches of the obligations set out in the VAT Act and the General Tax Code are reflected in financial penalties and other negative consequences for taxpayers.
Each control declaration must be submitted by the 25th day after the end of the relevant tax period and in the prescribed electronic form. If the taxpayer submits the report late, the law automatically imposes a penalty of CZK 1 000. If the taxpayer submits the report after being requested to do so within the alternative deadline, he or she will be fined CZK 10 000.
More serious consequences arise when the tax administrator calls for completion or correction of the report and the taxpayer fails to respond within the specified time limit: a fine of up to CZK 50,000 may be imposed for non-compliance with the call, or CZK 30,000 if the taxpayer completes the report but after the extended deadline.
In the event of repeated problems or an apparently lazy approach, the amount of the penalty increases and the tax administrator may impose a fine of up to CZK 500,000 if the taxpayer fails to submit the report even after repeated requests.
Serious or persistent breaches of obligations (in particular ignoring calls for control reports or high VAT arrears) lead to inclusion in the register of unreliable taxpayers.
This status is publicly available and has direct implications for business partners. They are liable for VAT on supplies from an unreliable taxpayer and often stop working with them for this reason. Removal from the register requires that all deficiencies are corrected and that at least one year passes without further infringements.
What are the obligations of VAT payers and non-payers? The next article will answer you.
The tax authority normally provides a ‘ grace period‘ within which the error can be corrected without maximum penalties (normally 5 days), but interest on late payment runs from the fourth dayafter the tax is due. In addition to financial penalties, excessive deductions may be blocked, tax audits may be extended or criminal charges may be filed in serious cases of tax evasion.
A responsible approach to record keeping, timely electronic filing and ongoing communication with the tax authority are the most effective prevention against penalties and reputational risk associated with unreliable taxpayer status.
All the rules we have described are based on the VAT Act. This defines the basic concepts, sets out the procedure for calculating the tax, exemptions, rates and penalties for late payment. For general orientation, we also recommend following the methodological information of the Tax Administration, which responds to European legislation and the case law of the Court of Justice of the EU.
VAT is an indirect tax, which is actually paid by the final consumer but remitted to the state by taxpayers (businesses). Value added – the difference between purchases and sales – is always taxed, so each link in the chain pays only the difference between output VAT and input VAT. The main tax subjects are the taxable person, the VAT payer (automatically after exceeding a turnover of CZK 2 million or upon voluntary registration), the identified person and the group. The subject of the tax is the domestic supply of goods or services, the acquisition of goods from the EU, imports from third countries and selected cross-border transactions. From 1 January 2024, two rates apply: a basic 21% and a reduced 12% rate (food, medicines, accommodation, etc.). VAT is generally declared and paid monthly or quarterly – returns and control statements must be submitted electronically by the 25th day after the end of the period.
The VAT Act allows for special regimes (travel services, second-hand goods, investment gold) and reverse charge for risky transactions. Violations lead to fines (from CZK 1,000 to CZK 500,000) or unreliable taxpayer status, which means reputational and financial risk. The key to trouble-free compliance is timely electronic registration, following the methodological instructions of the Tax Administration and compliance with the limits of CZK 2,000,000 / CZK 2,536,500 for becoming a taxpayer.
Companies collect VAT from their customers but only pay it when they file their returns. They may thus work with other people’s money in the short term. Optimisation is helped, for example, by a monthly return regime for start-ups (faster refunds) or, conversely, a quarterly regime for stable businesses (less administration).
Once the limit has been exceeded, it becomes a payer regardless of the fact that it is exceptional income. You may only apply to cancel your registration after 12 months of registration and only if turnover has not exceeded the limit again in the previous 12 months.
Typically when buying expensive machinery or software with 21% VAT, when exporting (refunds) and in B2B sales where buyers require a taxpayer for their own tax deduction.
It compares it with independent comparable transactions (CUP method). In practice, if the difference is more than 10%, it can charge VAT on the normal price and apply penalties.
The basis is the normal price of each transaction. Both parties shall issue an invoice with the corresponding value and VAT, even if no cash flow takes place.
For example, bottled flavoured water (21%), fitness centre services (21%) or the processing of dog food (21%). You can resolve the error by filing an additional return and paying the tax.
Get proof (screenshot, log) and send the return as soon as the portal is functional again. The FA will usually accept additional filings without penalty if you prove the failure.
You will submit a follow-up control report within 5 working days. If you do it without a notice, there is no penalty of CZK 10,000, but there is still a penalty of CZK 1,000 for late submission.
If you pay to a company marked as an unreliable taxpayer by the Tax Office, you are liable for its unpaid VAT. Check the VAT number in the register and pay to the accounts published by the Tax Office.
Not sure how to do your taxes correctly so you don’t get it wrong? We can help you navigate the law, whether it’s dealing with a specific tax situation, preparing for an audit by the tax authority or defending yourself in court.
Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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