The 8 Most Significant Changes in VAT for 2019 – Part 8. „”General“ ” domestic R-CHreverse charges and reduced VAT rates for selected transactions

22.1.2019

Every week until the end of the year, I will discuss one of the most fundamental topics of the forthcoming VAT changes for 2019. This week we will look at the last topic: VAT rates and EET amendment.

Topic overview:

 

Part 1. Correction of the tax base for irrecoverable claims

The Czech legislator, under pressure from the Court of Justice of the EU (in particular judgments C-330/95 Goldsmiths and C-246/16 Enzo Di Maura) will most likely allow the tax base to be corrected at irrecoverable claims.

At present it is only possible to adjust the tax base for precisely defined receivables in insolvency proceedings for debtors who have been declared bankrupt (Section 44 of the VAT Act). Since the amendment to the VAT Act in 2019, this enumeration has greatly expanded and is already in line with Article 90 of the EU VAT Directive. Put simply, the tax administrator should only select the VAT that the supplier actually paid to the customer. The new Section 46-46g of the VAT Act will describe the cases and conditions in which you will be able to reduce the tax base for receivables that buyers do not pay fully or pay only in part.

This report does not set out to provide a detailed analysis of these paragraphs, but to present all the transactions to which these corrections will apply. There are many pitfalls that need to be avoided when applying this positive instrument.

I will start by mentioning the temporary provisions. The legislature determines that up to the new initiated proceedings after the amendment will allow the correction of the tax base according to the new rules. In practice this means that the tax administrator will not want to allow the tax base to be corrected for receivables enforced in bankruptcy, insolvency or estate proceedings which began before the amendment came into effect.

I will start with untraditional cases where the tax base cannot be corrected:

a) As at the date of the taxable transaction, the creditor and the debtor are/were:

b)The debtor was an unreliable payer/person on the date of the contract related to the claim.

c)The debtor is not sufficiently known to the creditor.

d)The creditor knew / should know and could know, at the latest on the date of delivery of the goods or service, that the taxable transaction would not be duly paid.

e)The debtor ceased to be a payer.

Pitfalls hidden in the range of forbidden receivables:

List of receivables for which the tax base can be corrected:

a) They are enforced in the distraint order according to the execution code and at least two years have passed in this procedure since the first fieri facias.

b) They were enforced in the distraint order according to the execution code, which resulted in a suspension due to the debtor’s lack of funds.

c)The insolvency proceedings are taken into account and:

d) It is clear from the outcome of the inheritance proceedings that they will not be fully or partially satisfied.

e)Where the procedure under (a) to (d) has been commenced and has not yet ended, but so far not all the facts relevant for the correction of the tax base occurred and five years have passed since the end of the taxable period in which the taxable transaction took place.

Pitfalls hidden in the list of receivables:

The deadline for the correction of the tax base is three years after the end of the tax period in which

  1. taxable supply has taken place; or
  2. the total work was taken over, if partial performance was provided.

This period does not run during the period of execution, insolvency proceedings, estate proceedings and administrative, judicial or arbitration proceedings conducted for or in connection with the creation of an enforcement title, and from the beginning of the debtor’s liquidation to the start of the insolvency proceedings.

Pitfalls hidden in the deadline for correcting the tax base:

The amount of the tax base correction appears to be clear. It will usually be the same as the tax base for an irrecoverable claim.

Pitfalls when determining the amount for the correction of the tax base:

Correction of the tax base in the case of an irrecoverable claim is treated as a separate taxable benefit, which is realised in a simplified way:

From the perspective of the Treasury, this is a very convenient setting. The corrective tax document is issued within 30 days of the date on which the decision to make the correction was taken (fulfilment of the conditions for corrections to be made within the respective period) or is required to make the correction (change of the qualified estimate, change in the value of the claim, cancellation of the correction).

Pitfalls when determining the date of the tax base adjustment:

Finally, I would like to point out these are not just arbitrary decisions of the legislator, but fill the gaps in the procedural provisions as requested by the Court of Justice of the EU. Without this amendment, payers could claim the direct effect of the EU VAT Directive on a wider scale than proposed. I see no obstacle to the exercise of these rights even before the amendment comes into force. The analyses of Article 90 of the EU VAT Directive and the principles of neutrality and proportionality in the settled case law of the Court of Justice of the EU speak clearly.

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Part 2. Single purpose vs. multipurpose vouchers vs. discount coupon

Part of the VAT amendment is a more detailed treatment of vouchers. EU Member States have the task of implementing Council Directive (EU) No 2016/1065 amending Council Directive (EU) No 2006/112 / ES as regards the treatment of vouchers by 31 December 2018. If an EU Member State fails to implement the directive, the payer may invoke direct effect until 1 January 2019 or, if domestic legislation is more favourable to the payer, he may proceed according to local regulations.

The Czech legislator began to legislate in a non-standard way in advance. From 1 July 2017, we encounter Section 20a, which is followed by extensive GFR information. Until 30 June 2017, the tax administrator demanded that VAT be deducted from each payment received, in addition to the deposit, regardless of whether it was known how the received advance would be used. Based on the case law of ESD C-419/02 BUPA HOSPITALS, this simplified assessment has finally begun to change.

Why am I describing the VAT regime for deposit? For simpler transactions, the term “deposit” can be compared to voucher payment.

The voucher for the purposes of value added tax means an instrument,

  1. with which it is bound to accept it as consideration or part of the consideration for the supply of goods or services; and
  2. on which or in the relevant documentation, the following particulars shall be given:
    1. the goods to be delivered or the service to be provided; or
    2. the person who has to make the delivery of the goods or the provision of the service.

A single-purpose voucher is defined as follows:

For the purposes of value added tax, a single voucher is a voucher for which at least the following information is known at the time of its issue about the supply of the goods or services to which it relates:

  1. the tax rate in the case of taxable transactions or the fact that the transaction is exempt; and
  2. the place of performance.

For the purposes of value added tax, a multipurpose voucher means a voucher other than a single voucher.

I would like to say that meal vouchers will be considered as being multipurpose vouchers.

 

MEAL VOUCHERS

I would like to state here that meal vouchers apparently are considered multipurpose vouchers if goods or services at different tax rates can be obtained for them. If goods or services can be purchased for meal vouchers at only one tax rate, this is apparently a single-purpose voucher. The GFD is preparing separate information on vouchers where they will explain all the uncertainties in this area.

 

SINGLE-PURPOSE VOUCHERS

If the issuer of the single-purpose voucher is the same person as the service provider or the supplier of the goods, the transfer of that voucher is considered to be the supply of goods or services on the date of the transfer of the voucher. The application of a voucher for the payment of the price of performance is no longer considered to be a supply of goods or services.

If the issuer of a single-purpose voucher is a person other than the service provider or the supplier of the goods, the transfer of a single-purpose voucher is again the delivery of the goods or the provision of the service and there is a legal fiction that when applying this voucher, goods or services are delivered to the issuer. This elementary construction was missing in the current wording of the VAT Act. In the case of receipt of a voucher as a partial payment, this construction will, of course, only be used for this part of the payment.

Before a single-purpose voucher reaches the final consumer, it can be sold differently. Each tax transfer must be subject to tax, but the right to deduct can be claimed if the general conditions are fulfilled (use for economic activity, have a tax document, etc.). However, if the payer who exercises the right to deduct VAT does not draw or discontinue the single-purpose voucher (e.g. due to expiration), he must correct the claim for deduction for the period when he learned of this fact. The deadline for the statutory correction of the right to deduct is at the most three years and begins to run from the end of the taxable period in which the payer could first claim the initial deduction of the tax. After this deadline, this obligation ceases.

For the sake of completeness, in the case of a free transfer of a single-purpose voucher meeting the conditions for gifts of small value (for economic purposes up to CZK 500 according to Section 13 (9) of the VAT Act), VAT is not paid. In the case of a free transfer of a single-purpose voucher not meeting these conditions, the output VAT will be applied.

 

MULTIPURPOSE VOUCHERS

Transfer of a multipurpose voucher is not considered as a supply of goods or services for VAT purposes. It follows that it is awaiting the application (drawing) of this voucher. Only when the voucher is applied are goods or services delivered.

The tax base is the amount paid or payable by the end consumer for the multipurpose voucher, excluding tax. If a voucher or a part of it has been paid by a third party (e.g. an employer), this third-party payment also enters this amount. Only if this amount is not known is for the tax base determining the amount of money specified in the voucher or the related documentation, less the applicable tax.

An example where the amount of money for a multipurpose voucher is known:

An example where the pay-out amount for a multipurpose voucher is not known:

If a multipurpose voucher is used only for the part of the payment, the normal rules for determining the tax base are applied to the rest of the payment.

An example in the case of partial payment with a multipurpose voucher (where we know the amount of payment for a voucher):

An example in the case of partial payment with a multipurpose voucher (where we don’t know the amount of payment for a voucher):

Services relating to the transfer of a multipurpose voucher are considered as separate services subject to general rules. In the case of, for example, promotional or distribution services arising in direct connection with a multipurpose voucher, these services will be invoiced separately.

DISCOUNT COUPONS

The new voucher regulation does not apply to discount coupons.

The biggest problem in practice will be distinguishing between vouchers and discounts. Among other things, General Financial Directorate’s information will deal with this problem.

It will always be up to the contractual agreement. To illustrate this, I present one more complicated case in several variations:

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Part 3. Supply and lease of immovable assets in 2019

This article sets three ambitious goals:

On the contrary, I will not deal with VAT rates in relation to social housing. The planned amendment in this respect does not foresee any changes. This issue and others are addressed in detail by the GFR Information of 21 December 2015.

Substantial change of the building

Section 56 of the VAT Act is quite clear. Put simply, the selected property can be sold 5 years after

Imagine you are about to sell an old building in which a substantial change was made a year ago. The delivery of such a building will not be exempt from tax!

A substantial change according to the GFR Information is:

All of these building modifications are subject to the occupancy permit procedure (or notification). A substantial change restarts the five-year test procedure for applying the exemption.

For the sake of completeness, the term “occupancy permit procedure” is discussed. I quote from an excellent article by my colleague Jan Tecl on the subject of the occupancy permit procedure and building sites, among others, which you can read here:

For the occupancy permit process, the Financial Administration considers the approval permitting the simultaneous use of the immovable asset, therefore it may be the second or third approval (in the case of the Financial Administration, it is the first approval). These include, for example, a situation where the property has been approved as an apartment building and now, after minor modifications (or without any modifications) the apartment building is re-authorised as a hotel. The new five-year deadline begins from the time of the new occupancy permit.

The professional public points out that the time limit according to the Eurocomfortable interpretation should only be reintroduced if the new occupancy permit is granted in connection with the construction of the building. An administrative change in the purpose of building use should not recommence the five-year test period for the possibility of exempting the delivery of the property from tax. However, the financial administration acknowledges that mere formal administrative acts and changes in concepts (changing the obsolete concept of “old home” to the concept of “home for seniors”) are not considered as the first (or other) occupancy permit decisions, and therefore are not taken into account when calculating the time limit for applying the tax exemption.”

Modification of VAT deduction from technical assessment

If in the past (after 1 January 2012) you have made a real estate assessment and you sell this real estate under the exemption scheme, a few tenths of the VAT deduction from this technical assessment will have to be returned!

Example:

In December 2018, a technical improvement to the storage hall will be completed for CZK 1.21 million (CZK 1.0 million, VAT of CZK 210,000 – fully deductible). This technical assessment is not subject to approval, therefore it is not considered as a substantial change of the building. For example, a building has been approved in 2010. In January 2019, this building is sold to the purchaser who is a VAT payer and has not given written consent to the application of the tax regime under Section 56 (5) of the VAT Act. In this case, the building must be sold under the VAT exemption scheme without deduction.

If you have included a technical assessment of a building or unit after 1 January 2012 for which you have applied the VAT deduction, my recommendation is to use the possibility of taxing this sale, of course only if possible.

Delivery of land

Probably the biggest problem is in delivering land. In accordance with European legislation, deliveries of building land cannot be exempted. According to the VAT Act, building land is defined as land:

  1. on which a structure is to be constructed firmly connected to the ground, and
  1. on which a construction firmly connected to the ground can be made according to the building permit or the granting of consent for the construction of the declared building in accordance with the Building Act.

The above GFR information explains this section extensively. My opinion is that the tax administrator is trying to make building plots out of the vast majority of land in the Czech Republic in order to tax as much as possible, which certainly is not the purpose of this exemption. For this reason, I always recommend, when the land is delivered separately, to verify with the tax advisor whether or not the exemption can be applied.

Leasing of immovable property

It is still true that a taxpayer in the long-term lease of real estate to another payer may apply the tax. Why would he do that?

can apply full deduction claims at directly attributable received transactions (e.g. repairs).

PROPOSED CHANGES FOR 2019

Unfortunately, the current VAT amendment does not bring any major system shift. In particular, the legislator responds to case law and clarifies definitions, but also brings one unpleasant obligation for the payer in the form of tracking major repairs.

  1. Specification of the beginning of the five-year period

If according to the amendment to the Building Act (effective 1 January 2018) no occupancy permit or decision (notification) is issued, and generally in all cases of delivery of immovable property not requiring an occupancy permit or decision, the day on which the five-year period begins will be considered the day when the first use of the building commenced.

If a so-called substantial change is made on immovable property not subject to a final occupancy permit or decision, the period recommences from the beginning of the use of this immovable property after a substantial change. It is possible that a substantial change will be subject to the occupancy permit process or a decision. In this case, the term starts from this fact.

In practice, this means that the VAT exemption can be applied to the sale of immovable property, which is not subject to occupancy permit or notification, only five years after the first use of such a building or its substantial change.

Accommodation services are not a long-term lease

The fact that accommodation cannot be exempted from VAT also applies in the current version. The legislator probably decided to emphasise this fact in connection with the expansion of the shared economy.

The right of user

According to the case law of the Court of Justice of the European Union (C-326/99 Goed Wonen), if the charter signs are fulfilled, the lease also means the establishment, duration or extinction of the right of the user established for a consideration for immovable property.

Repairs over CZK 200,000

In the VAT Act, we will likely see a new Section 78da which extends the obligation to track major repairs on immovable property. An important repair is a repair exceeding CZK 200,000 without tax.

If immovable property is transferred to a regime of exemption from taxation without deduction during the adjustment period and a claim for deduction of a major repair is made, several tenths of that deduction must be returned. The deadline for this correction is 10 years, meaning it will take 10 years to register these major repairs for each property.

The limit will always be judged separately for each completed action. For example, window repair for CZK 150,000 and roof repair for CZK 100,000 would not have to be monitored even if they are completed in one tax period. This provision cannot be circumvented, for example, by splitting the bill.

An example:

In December 2019, the windows on a building will be replaced for CZK 363,000 (CZK 300,000, VAT CZK 63,000 – reduced deduction claimed). The Accounting Act does not consider this to be a technical improvement; it is accounted, for example, on the 511 account. In January 2020, the building will be sold to a purchaser who is a VAT payer and does not provide written consent to the tax regime under Section 56 on VAT. In this case, the building must be sold free of VAT without deduction.

This obligation will begin to apply for repairs made after the amendment came into effect.

I hate to look forward to this, but the truth is that this change is also part of the approved tax package.

This is a restriction on the taxation of the rental for the following immovable property. From 2021, the payer will no longer be able to decide that he will apply the rent tax of the listed immovable property to another payer for the purpose of carrying out his economic activity. Lease is:

  1. the construction of a family house according to the regulations governing the Land Register;
  2. living space (e.g. a flat);
  3. units which do not include a non-residential space other than a garage, cellar or chamber;
  4. buildings in which at least 60% of the floor area, if leased, consists of living space;
  5. the land, which includes the construction of the family house, the residential area or the construction according to letter d), with which the land is leased;
  6. the right to construct, including the construction of a family house or the construction referred to in point d) with which the right to build is rented.

Examples

The developments in the field of VAT on real estate are very dynamic. Since these are mostly significant amounts, I recommend that you closely monitor the VAT regimes in relation to immovable property, both for received transactions and transactions carried out. For an optimal setup, it is also appropriate to predict future use of the real estate and future investment in real estate. Finally, I do not forgive my wisdom, which unfortunately was formed by practice – ignorance, however, too much caution by the payer only results in unnecessary financial losses.

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Part 4. FINANCE vs. OPERATING LEASES, mind the lease of movable things

THE CONCEPT OF HANDLING GOODS AS AN OWNER

It is first necessary to recall that VAT has its own point of view when it comes to the transfer of ownership of a thing. This is primarily due to VAT harmonisation within the EU. If each Member State could determine the transfer of the ownership of a thing on its own, there would be widespread confusion.

Section 13 (1) of the Czech VAT Act assumes the following definition: The supply of goods for the purposes of this Act means the transfer of the right to dispose of the goods as the owner. Thus, in the case of an instalment sale, the buyer becomes the legal owner of the item only upon payment of the last instalment, but from the point of view of VAT, the delivery is completed as soon as the item is handed over, when, of course, the obligation to charge and pay VAT also arises.

FINANCE LEASING ACCORDING TO CURRENT ADMINISTRATIVE PRACTICE

The provision of movable property through finance leasing is regulated in the VAT Act.

Until 30 June 2017, the supply of movable property was also considered the surrender of the goods by the owner for use on the basis of the contract, if it is agreed that the owner of the used goods transfers their ownership to the user. From 1 July 2017, the definition changed slightly, and according to the current wording of Section 13 (3) (d) of the VAT Act, the supply of movable property is also considered leaving the goods for use on the basis of a contract, if it is agreed that ownership of the goods used will be transferred to its user.

This definition seeks to bring the definition in line with Article 14 (2) (b) of the EU VAT Directive, i.e. the supply of goods is considered the actual delivery of the goods on the basis of a fixed-term lease or the sale of goods with deferred payment, in which is fixed that under customary circumstances the ownership right will be transferred at the latest when the last instalment is paid.

According to the information available to the amendment to the VAT Act with effect from 1 July 2017, however, the attitude of the Czech tax administrator to finance leasing has not changed, even though the parameters of the “revolutionary” case law of the Court of Justice of the EU C-164/16 Mercedes- Benz Financial Services was already known. I will return to this case law a few sentences later.

Remember that if the Czech VAT Act does not comply with the EU VAT Directive, the VAT payer can choose which law to be regulated by. The tax administrator has no such option, but must follow the Czech VAT Act and, as the case may be, its interpretation of this Act.

Czech administrative practice takes a benevolent approach to finance leasing. It is enough for the possibility of repurchase to be negotiated in the contract, not the duty of repurchase, and the definition according to Section 13 (3) (d) of the VAT Act is not met, meaning the goods are not delivered by the (leasing) company when the movable property is transferred to the user. Therefore, the vast majority of finance leases are seen from the point of view of VAT as the mere leasing of movable property (operating leases).

For a (leasing) company this approach is advantageous. It does not have to pay the full amount of VAT as soon as the goods are transferred to the user and VAT is gradually deducted for the duration of the contractual relationship under the VAT rules for the provision of services of this type.

C-164/16 MERCEDES-BENZ FINANCIAL SERVICES

This case law confirms that VAT always looks at the nature of the transaction, not just the formal arrangements of the parties to such a transaction.

The British company offered three types of contracts (the names of the contracts are modified for the sake of clarity):

  1. Operating lease without any possibility of buying the vehicle.
  2. Finance lease, where the total amount of monthly payments made is usually equal to the total purchase price of the vehicle together with the cost of financing. To acquire ownership it is necessary when terminating the contract to pay only an insignificant amount (“cost of the option”). However, the option may not be used under certain conditions.
  3. Hybrid lease agreement where monthly repayments are generally lower than for a finance lease so that their total amount is approximately 60% of the purchase price of the vehicle, including the cost of financing. If a user wishes to take advantage of the purchase option, he must still pay approximately 40% of the purchase price. This “coupled” amount should represent the estimated average residual value of the vehicle at the end of the contract. The customer is asked to choose the option three months before the end of the contract. According to the findings of the referring court, approximately half of lessees use the purchase option.

The Court of Justice of the EU has no doubt that operating leases are services. It also notes that if it can be inferred from the financial terms that the option is the only economically reasonable choice which the lessee will be able to make at that moment if the contract is fulfilled until the end (e.g. if the sum of all repayments paid will be almost equal to the purchase price of the object of the lease), it is the delivery of goods according to Article 14 (2) (b) of the EU VAT Directive. For this reason, hybrid lease agreements should be considered as operating leases.

FINANCE LEASING UNDER THE NEW VAT ACT IN 2019

After the amendment to the VAT Act, the definition for the provision of goods through finance leases is even closer to the definition of the EU VAT Directive. Its wording will be:

“The surrender of goods for use on the basis of the contract, if agreed and on the date of conclusion of this agreement, it is clear that the ownership of the goods used will normally be transferred to its user.”

The explanatory report may not directly claim that the tax administrator changes its long-term administrative practice; however, it probably does not want to admit that this practice has clearly been at odds with the European legislation for a long time. However, the explanatory report describes in detail the already mentioned case law to which the legislator refers in the draft of the amended provision. It is clear that after the amendment comes into effect, the VAT payer will no longer be able to refer to the inconsistency between Czech and European legislation in this regard.

Let me start with what is most important. The aforementioned new position of the tax administrator will be applied only for contracts concluded after 31 December 2019. At the same time, before this date, the contract should be concluded and the movable asset transferred to the user, so that the new amendment will not really apply.

When concluding new lease agreements with the option to buy leased movable property, I suggest that you conduct a detailed analysis of whether delivery of goods at the time of the transfer of the item to the user is concerned, during which you also incur an obligation to charge and pay VAT on the full value of that transaction. For a company providing such performance, this can mean a significant impact on its cash flow.

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Part 5. The managing director as an independent taxable person

Full of sound and fury, signifying nothing. This is how the legislative process of changing the VAT status of executives could be summarised.

At first it was threatened that the Czech VAT law will follow the Czech case law and the European definition of a taxable person. This would entail the attribution of income from the activities of the managing director to turnover and, after exceeding this turnover, the Czech executives would have to invoice their remuneration with VAT. If the managing directors were already VAT payers, the invoicing of the director’s remuneration with the output VAT would have to be done from April 2019.

As the tax administrator has not synchronised all its processes and is not prepared for such a fundamental change (in particular the alignment with income tax), the amendment has been modified by a simple parliamentary proposal and everything will run as before.

In practice, this means that managing directors can continue to choose whether to be considered a taxable person for VAT purposes or to remain outside the scope of the Czech VAT law.

THE MANAGING DIRECTOR AS A PERSON OBLIGED TO PAY TAX ACCORDING TO THE SUPREME ADMINISTRATIVE COURT

Everything started with the judgments of the Supreme Administrative Court, in particular 2 Afs 100/2016, which emphasise that according to Czech regulations, the performance of a managing director’s function fulfils the characteristics of self-employed economic activity and hence the managing director is a taxable person for VAT purposes.

Nevertheless, under this judgment, until the current version of the Czech VAT Act is amended, the manager can choose whether or not he wants to be considered a taxable person.

PERSON REQUIRED TO PAY TAX ACCORDING TO THE CZECH VAT ACT

The current wording of Section 5 (1) states that a taxable person is a natural or legal person who independently carries out economic activities. In the current wording of the definition of economic activity under paragraph 2 of the Czech VAT Act, economic activities are not considered activities of persons who are taxed as income from dependent activity under the Income Tax Act.

Thanks to this wording, the managing director can choose whether to be considered a taxable person according to the conclusions of the Supreme Administrative Court, which would mean in specific regulations to comply with the Czech VAT Act or to remain outside VAT, i.e. a person not obligated to pay tax based on reference to the Income Tax Act.

This reference disappeared from the draft amendment to the VAT Act. In the explanatory report, the tax administrator did not disclose the development of administrative practice after this change, but the only logical conclusion is that the conclusions of the Supreme Administrative Court will be applied, so the Czech managing director will always be considered as a taxable person.

I should probably add that VAT has no interest in the formal wording of the contract with the executive or under which Czech law the contract is concluded.

WHAT ARE THE THREATS?

At issue here are mainly Czech managing directors residing in the Czech Republic or managing directors with their place of business in the Czech Republic. A VAT payer in the Czech Republic (someone whose turnover exceeds CZK 1 million in a period of 12 consecutive months) can only become a person liable to tax domiciled in the Czech Republic.

The domestic seat of the taxable person is the address of the place of management. If a natural person does not have a place of management, the seat of that person shall be deemed their place of residence according to Article 4 (1) (i) of the VAT Act. The stay itself of a physical person is a little more difficult to set up – it can be either an address kept in the customary registry or the place where the person usually resides. At least it can be concluded that a foreign managing director who usually resides and has his home address abroad does not have to worry about exceeding the turnover for compulsory registration for Czech VAT.

  1. An interesting problem arises here. Since a foreign managing director could also be considered a taxable person in the Czech Republic (without having to monitor the turnover for VAT purposes), the tax administrator may like to require the recipient of this “service” (the Czech company) to charge and pay VAT, i.e. in reverse-charge mode. The place of performance is in the Czech Republic, the provider is a taxable person with its seat abroad. Why not? Of course, a related right to deduct would be granted after the general conditions are met.

So Czech managing directors would definitely have to monitor the turnover. I would point out that not only the above-mentioned executive fees need to be added.

  1. If the managing director rents immovable property in the Czech Republic that is exempt from tax, this income is also included in the turnover. If only these activities are carried out, it may not be necessary to register even after the turnover has been exceeded. However, if in the quarter the managing director invoices CZK 990,000 on the rent and receives CZK 20,000 as remuneration, he will become a payer from the first day of the second month following the month in which the managing director exceeded the turnover. The same applies to financial, pension and insurance activities.

If the managing director would only be remunerated for the work which he does, he would have to monitor whether the turnover exceeds the mandatory VAT registration (CZK 1 million). It is always important to add the correct amounts for these purposes.

  1. The basis of the tax (tax-free payment) is everything that the person obliged to pay tax / taxpayer should receive. Therefore it includes all benefits and refunds – meal vouchers, private car use, travel expense accounts, etc.

My assumption that the tax administrator would prefer to keep the status quo proved accurate. Here are some of my (and other people’s) observations:

  1. The tax administrator does not want to directly contradict the Supreme Administrative Court and the euro-comfortable interpretation of taxable person.
  2. This new regulation should not only affect managers, e.g. members of the board or supervisory bodies are in a similar position.
  3. The tax administrator cannot ignore, for example, the Supreme Audit Office, which will be interested in why the tax authorities did not collect VAT from statutory bodies’ fees from banks (they certainly have no full right to a deduction).
  4. The income tax of natural persons does not even want to hear about the possibility that this income will move from Section 6 (dependent activity) to Section 7 (income from business). What is the gross wage (including VAT or not)? How will social and health insurance determine the basis of assessment?
  5. Since the company cannot claim VAT without an invoice, invoices will start flying from managing directors to the finance department. Sometimes, however, it is not desirable to know their bonuses or travel expense accounts.

CONCLUSION

As already mentioned, the status quo remains in place after 1 April 2019. Managing directors may choose whether to be considered a taxable person for VAT purposes. This is good news. At least for now, Czech executives will not have to worry about the compulsory payment of VAT on remuneration for carrying out their activities for the company.

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Part 6. Services related to the export and import of goods

Judgment of the Court of Justice of the European Union (CJEU) C-288/16 of 29 June 2017, which related to the exemption of services directly linked to exports and imports under Article 146 (1) e) Directive 2006/112 / ES, on VAT (in the Czech VAT Act this concerns Section 69), elicited a somewhat extreme reaction from the Czech tax administrator.

Since 1 July 2017, the Czech VAT Act has a very different view on transport services and other services linked to the export and import of goods. This illogicality attempts to deny the General Financial Directorate’s information, according to which this has been going on for transport and other services since 1 March 2018. But we all know that the law is more important than any information. Following the amendment, the VAT Act will generally include export and import-related services, i.e. transport will be shared with other services (e.g. customs formalities, loading, unloading, security).

As the amendment was drafted in a slapdash manner, the meaning is difficult to explain to the professional public and especially to taxpayers. That is why the Chamber of Tax Advisors put together a Coordination Committee to explain the terminology and, in particular, what the tax administrator wants and does not want to exempt. I think it succeeded, and since 20 June 2018 we know who can apply the exemption for export and import services and when.

In the case of services related to the export of goods, it will continue to apply that there must be a direct link to the export of goods pursuant to Section 66 of the VAT Act and the already mentioned CJEU case law, i.e. such services must contribute to the actual realisation of exports and, at the same time, must be provided directly, typically to the owner of the goods, the seller or exporter mentioned in the customs declaration within the meaning of Article 1 (19) a) of Commission Regulation 2015/2446.

In the case of services related to the import of goods, it will continue to apply  that it is sufficient for the value of these services to be included in the tax base for the import of goods pursuant to Section 38 of the VAT Act. The provider of these services does not have to examine whether the value of its service was included in the taxable amount on the import of the goods; it is sufficient that this obligation arises.

For the sake of completeness, the amendment to the VAT Act extends the exemption of services directly linked to the import of goods, when these goods are temporarily stored or released when they enter EU territory to the external transit procedure, customs warehousing or free zone, temporary admission with total relief from customs duties or inward processing.

I would like to point out a few important consequences:

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Part 7. Quick fixes for trading goods within the EU

I would like to start by mentioning the validity and effectiveness of the changes listed below:

All EU Member States have until the end of 2019 to implement this Directive. If the Czech Republic inadvertently fails to meet this deadline, payers may benefit from the direct effects of the Directive.

The quick fixes are intended to set up and simplify certain rules as regards:

a) consignment store (call-off stock);

b) assignment of transport in chain stores;

c) the customer’s VAT verification condition through the VIES application.

Also directly effective from 1 January 2020 will be the IMPLEMENTATING REGULATION (EU) 2018/1912 from 4 December 2018, amending Implementing Regulation (EU) No 282/2011, as regards certain exemptions for intra-Community transactions (the “Regulation”), namely:

d) proof of the VAT exemption for intra-Community supplies of goods.

Despite the shift in efficiency, it is in certain cases advisable to proceed in accordance with the conclusions of these valid regulations also in 2019 (e.g. assignment of shipment and proof of liberation). These applicable regulations may be referred to in the event of a dispute. In the past, this has been done when determining the place of performance, for example, for services related to immovable property.

Ad a) CALL-OFF STOCK

The directive states in this point: “The term call-off stock refers to the situation where, at the time of transport of the goods to another Member State, the supplier already knows the identity of the acquirer of the goods to whom the goods will be delivered at a later stage after the goods have been shipped in the Member State of destination. In the present state of affairs there is a presumed supply (in the Member State of commencement of the transport of goods) and the alleged intra-Community acquisition (in the Member State of termination of the carriage of goods) followed by a “domestic” delivery in the Member State of termination of the carriage of goods, for VAT purposes. In order to avoid this, such transactions should, in cases where two taxable persons are involved, be considered, under certain conditions, to be the supply of one exempt supply in the Member State of departure and one intra-Community acquisition in the Member State of exit transport.

The understanding of our Section 16 (4) of the VAT Act according to the minutes of the Coordination Committee will not be valid from 2020. In short, a foreign entity that does not have a seat or registered office in the Czech Republic (but can already be a payer) will report in its summary report the relocation of goods to the call-off stock to a specific customer in the Czech Republic (the Czech payer or Czech identified person). However, this payer or identified person must report the purchase of goods in the EU on line 3 or 4 in the VAT return only upon the moment when the right to dispose of the goods as the owner is transferred (this moment will depend mainly on the contract). The right must be transferred within 12 months of the deposit.

If the conditions are not met (relocation for subsequent delivery to a designated payer or designated identified person in the Czech Republic), a foreign person must register for VAT in the Czech Republic and transfer the goods from the EU to the Czech Republic. According to the Directive the specific payer / identified person in the Czech Republic, i.e. the purchaser, may subsequently change after the stock. This change must be followed by a correction of the summary report at the supplier from the EU.

The Directive lists other situations where for a foreign entity there is a risk of VAT registration in the Czech Republic.

If the goods are not taken over by a specific payer or a specific identified person in the Czech Republic (the right to dispose of goods as the owner does not transfer) within 12 months from their delivery to the warehouse in the Czech Republic, the will be deemed relocated. This can be prevented by the foreign entity taking these goods back before the deadline expires and correction of the summary report.

However, if goods are dispatched or transported from the Czech Republic to a country other than the Member State from which they were originally moved, without transferring the right to the buyer, the conditions for using this simplified procedure will be considered no longer met immediately before such dispatch or shipment starts.

In the event of destruction, loss or theft of goods, the conditions for using this simplified procedure will be considered no longer met on the date on which the goods were actually removed or destroyed or, if this date cannot be determined, on the date on which the goods were found to be destroyed or missing.

The supplier and customer using the simplified “call-off stock” scheme will have to keep records under Article 54a of the Regulation.

Ad b) TRANSPORTATION FOR SELLING THROUGH CHAIN STORES

From 2020, in some cases it will be possible to deviate from the INCOTERMS delivery terms. The directive “firmly” assigns transport for selling through chain stores as follows:

  1. If the same goods are the subject of successive supplies, being dispatched or transported from one Member State to another Member State from the first supplier directly to the final purchaser in a chain, the dispatch or transport will be attributed only to delivery to the intermediary.
  2. Differently from paragraph 1, dispatch or transport shall be credited only to the supply of goods by the intermediate body, if that body communicates to the supplier his VAT identification number issued to him by the Member State from which the goods are dispatched or transported.
  3. For the purposes of this Article, “Intermediate Body” means a supplier within a chain that is not the first supplier in that chain and who dispatches or transports the goods himself or to his account through a third party.

Example:

Item 1 – A Czech payer based in the Czech Republic (B) supplies goods which are transported directly from a German supplier (A) to a customer in Poland (C). The Czech payer is not registered for VAT in Poland; entity A is a person registered for VAT and established in Germany; entity C is a person registered for VAT and established in Poland. In this case, the shipment will be assigned to the first shipment, i.e. between A and B. The Czech payer who organises the shipment will be able to use a simplified three-way trade scheme, regardless of the terms of the delivery.

For the sake of completeness, for the application of this simplified scheme, it will continue to apply that the transport cannot be organised by a Polish entity. If the Polish entity organises the transport, the intra-Community delivery will be assigned to a transaction between B and C, which would very likely mean a mandatory registration of a Czech entity in Germany (which is already the case under the case law of the European Court of Justice).

Item 2 – Only if Czech entity B reports its German VAT number to German supplier A, the first delivery will be the German (local) delivery of the goods and the second delivery from Germany to Poland (B and C) will be the intra-Community delivery of goods, which can be exempted from tax.

Ad c) TAX IDENTIFICATION NUMBER

In the Czech Republic, we are already accustomed to needing a foreign TID verifiable in the VIES application for the exemption of supplies to another EU Member State (Section 64 of the VAT Act).

In some EU Member States it may now be sufficient for the customer to be a taxable person (self-employed person or company) and Directive 2006/112/EC on the common system of VAT supported by the case law of the European Court of Justice gives them certainty in some cases.

This discrepancy can be used with some caution as an argument against the rejection of the exemption applied in the Czech Republic pursuant to Section 64 of the VAT Act due to this formal shortcoming.

From 2020 this will no longer be possible. VAT identification, which will have to be verifiable in the VIES application, will become a substantive legal condition for the possibility of applying the VAT exemption for intra-Community supplies. This will bring about unification and increase legal certainty across the EU.

In the framework of the amendment to Section 64 of the VAT Act for 2020, it is discussed at what point it is necessary to have a foreign buyer’s VAT number available in order to apply the exemption. In my opinion, the Czech contractor should have the VAT number of a foreign purchaser no later than the date of the obligation to award performance under Section 22 of the VAT Act, i.e. on the date of issue of the tax document or on the 15th day of the month following the month in which the goods were dispatched or transported from the Czech Republic to the EU, unless a tax document has been issued before that date.

Also, a new condition will be added to Section 64 of the VAT Act, which follows the already mentioned TAQ of the buyer – the Czech payer will be obliged to state the delivery of goods to another EU Member State in its summary report.

Ad d) DOCUMENTATION FOR THE FREE RELEASE OF GOODS TO THE EU

The Regulation, for reasons of greater legal certainty, indicates when the VAT exemption for intra-Community supplies of goods will in any case be maintained.

The supplier will be able to exempt deliveries to another EU Member State if it provides the following evidence:

or

The supplier will be able to exempt deliveries to another EU Member State if it provides the following evidence:

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Part 8. “General” domestic reverse charges and reduced VAT rates for selected transactions

Both areas were and may still be planned for 2019. But in my opinion, if we get these changes at all it will be in 2020 at the earliest.

“GENERAL” DOMESTIC REVERSE CHARGE

I hear a lot of incomplete information and PR talks, so I decided to briefly write all the relevant information about this area so that each of you can form your own picture of the issue.

The EU Council has approved the possibility for a Member State to adopt legislation to apply a general tax credit to purchasers of goods or services. Of course, this is only true between VAT payers. In practice, this would mean that the supplier (a Czech VAT payer) will “always” issue an invoice without VAT to the purchaser (also a Czech VAT payer), and this customer will pay the Czech VAT to the Czech tax office.

But there are several snags:

The Czech Republic must first submit a request to the EU Commission. According to a press release by the Ministry of Finance, this request has already been filed in record time. If the EU Commission believes that it does not have all the necessary information, it will request a supplement within one month of receipt of the Czech Republic’s request. The Czech Republic then has a month to provide the missing information. If the request contains all the requisites and meets all the conditions (see below), the EU Council, at the recommendation of the EU Commission, will authorise an EU Member State to apply the general reverse charge mechanism in its territory within three months. After obtaining permission, there must be an amendment to the domestic VAT Act. If we are to see this provision in the Czech legislation, it will probably not be until 2020.

As most conditions are assessed based on 2014, the Czech Republic will likely have a chance of success. Why 2014? These data are available. If we had to judge the year 2018, the Czech Republic would probably be unlucky.

Interestingly, there will be a justification that the Czech Republic will use to prove that other control measures (in our case control reports and EET) are not enough to combat carousel fraud.

If the Czech Republic introduces this system of general domestic reverse-charge, it will certainly not be “general”. It will only cover transactions that do not fall under other domestic R-CH (waste, construction and assembly works, etc.) and which are worth over EUR 17,500 (about CZK 450,000).

It is also worth mentioning that Member States can only use this regime until June 2022.

Summary:

The Finance Minister mentions that the application took five years of hard work and suggests that introducing a flat reverse charge will improve tax collection and reduce carousel fraud. Questions that everyone can answer on their own are simple:

VAT REDUCTION OF SELECTED FUNCTIONS

Unfortunately, there is no flat reduction in VAT rates. We remain with a basic rate of 21%, a first reduced rate of 15% and a second reduced rate of 10%.

Nevertheless, a draft amendment of June 2018 on EET is being intensively discussed in the Chamber of Deputies. Following the intervention of the Supreme Administrative Court of the Czech Republic, this amendment is crucial to the launch of the third and fourth waves of mandatory electronic sales records. Six months on, however, not even the first reading is completed. The path ahead for this regulation looks long and thorny. Part of this amendment is also to move selected benefits from the current basic or first reduced rate to the second reduced rate.

The proposed effect date of these changes is the first day of the seventh calendar month following the day of publication in the collection of laws.

This is in most cases a kind of compensation for the costs of introducing the mandatory EET for the business entities concerned. Below I put forward the proposals and occasionally add a short note:

Move from the basic rate (21%) to the second reduced rate (10%) – this should be for services with a high proportion of human work

Move from the first reduced rate (15%) to the second reduced rate (10%)

Regular public transport

We will certainly see one change in 2019. From February 2019, the second reduced rate (10%) will begin to apply to the following items:

It is necessary to recall that the subject fulfilment must always correspond to the CZ-CPA Classification Code of Production valid on 1 January 2008, or the Customs Tarif nomenclature code as amended on 1 January 2018 and the explicit description of this code in the text section.




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