Adjustment of VAT deduction on rented property intended for residential use

From 1 January 2021, the tax regime cannot be applied to the rental of selected real estate. This situation will often lead to a mandatory refund of part of the VAT deductions claimed. For the first time, this obligation will arise already for the last tax period of 2021!

An amendment to the VAT Act of 1 April 2019 introduced a provision limiting the possibilities of applying the tax to the rental of listed real estate. This provision was postponed to 1 January 2021.

From the beginning of this year, the lessor can no longer choose to apply the tax to the following properties when renting to another taxpayer for the purpose of carrying out their economic activity:

a) the construction of a residential house according to the legislation regulated by the Land Register,

b) living space,

c) a unit which does not include non-residential space other than a garage, cellar or storage room,

d) a building in which at least 60% of the floor area of that building, or part of the building if that part is rented out, consists of living space,

e) a plot of land of which a residential house, living space or building referred to in point (d) with which that plot is leased,

f) the building right of which the house or the building referred to in point (d) with which the building is leased

For the purposes of VAT, the term residential premises means a flat or another set of rooms, or a single occupied room, which corresponds to the requirements for permanent housing and is intended for this purpose.

It is clear from the above that the lease of a property registered as a flat in the Land Register can no longer be taxed, even if the lessee is, for example, a law firm (payer) that has adapted the premises for its business. The same applies to various villas where there are rooms for business, but the villa is registered as a residential house in the Land Register. From 2021 onwards, the landlord‘s activity is an exempt activity without any tax deduction.

There are some doubts about properties or parts of properties that have not been formally relicensed but whose layout can no longer be demonstrably used for housing. An example of this is the cellar space in a rented apartment building used as a wine storage room.

This is a major inconvenience especially for the above properties where:

  • VAT was deducted on acquisitions after 1 January 2012; and/or
  • a VAT deduction was claimed for technical improvements carried out after 1 January 2012.

In VAT, in the event of a change of regime, i.e. from taxation to exemption, it is necessary to make an adjustment to the VAT deduction on the property each year until the end of the deduction adjustment period. In the case of immovable property and its technical improvements, this period is 10 years. So, if the property is acquired or the technical improvement is carried out in 2012, the period ends in 2021. The adjustment is always made at the rate of 1/10 in the last tax period of the year.

Example:
In 2012, you carried out a technical evaluation of the apartment in the amount of CZK 1 million. The apartment has been and continues to be used for the purpose of renting office space for a design agency (VAT payer). You claimed a deduction of CZK 140,000 under the domestic reverse charge regime and received a tax credit of CZK 140,000. Tax was claimed for this lease until the end of 2020. As this rental must be exempt from 2021 onwards and 2021 is still within the period for adjusting the deduction for this technical improvement, you are obliged to repay one tenth of the CZK 140,000. Thus, you will have to pay CZK 14,000 in the last tax period of 2021.

Probably the worst situation is a property acquisition or technical improvement that took place in 2020. If the VAT deduction has been claimed and the property is used for rental purposes, which must be exempt from 1 January 2021, the obligation to repay one tenth of the deduction claimed may last until 2029.

There is some hope for mixed-use properties. If the deduction factor from all the taxpayer‘s activities (not just renting) comes out to at least 95%, no adjustment to the deduction is required. Property used for mixed purposes is defined as property that is used, for example, for both taxable activities and exempt activities without entitlement to a deduction. An example is an apartment building that is not divided into units, used partly for long-term rentals and partly for short-term accommodation.

We will be happy to discuss this issue with you and to help you set up your VAT reporting system in such a way as to minimise the risk of VAT being charged by the tax authorities.