Reverse Charge 2025

The Reverse Charge Mechanism in Construction: A Stable Foundation with Hidden Pitfalls

The domestic reverse charge mechanism (RCH) applies exclusively between two domestic VAT payers, and the place of supply for the recipient must be in the Czech Republic. The mechanism applies to services that fall under Section F of the CZ-CPA classification, which includes construction and installation work.

The biggest practical application problems often arise in precisely defining what still falls under construction work and what is already a supply of goods or other services. The RCH also applies to the supply of goods with installation, provided this activity is classified under the aforementioned Section F. For example, repairing an office air conditioning installation is considered construction and installation work subject to RCH, while repairing industrial air conditioning is not.

This dependence on the technical CZ-CPA classification has enormous legal and financial consequences. If a construction company incorrectly classifies even a small part of its subcontracts (for example, service work not subject to RCH), it risks a massive incorrect application of VAT. This problem requires either strict control of all contracts or the implementation of binding internal guidelines and process audits. Our Prague-based lawyers are ready to assist you with preparing a legal opinion for the correct classification of works – write to us at consultation@arws.cz.

What are the formal obligations of the customer and the supplier?

The Reverse Charge mechanism imposes clear and strict administrative obligations on both parties. The supplier is obliged to issue an invoice without VAT within 15 days of the date of the taxable supply. The invoice must explicitly contain the sentence "VAT shall be accounted for by the customer" and a zero VAT rate. In the VAT return, the supply is reported on line 25 and in the VAT Control Statement in section A.1, but only for supplies exceeding CZK 10,000.

The customer (recipient of the supply) must declare the tax as of the date of the supply and record it in their VAT records. The customer declares the tax on line 10 or 11 of the return and can simultaneously claim the right to deduct on line 43 or 44. Although the financial impact of VAT self-assessment is neutral, the risk of penalties for reporting errors is very high.

The correct handling of advance payments is also important. The RCH mechanism also applies to advance payments, which are included in the total value of the supply. In such a case, the supplier is obliged not to issue a tax document for the received advance payment.

Administrative Burden and Control: Reporting Supplies and Penalties

The VAT Control Statement (KH) links issued and received tax documents between VAT payers, allowing the Financial Administration to immediately identify discrepancies. For corporations with extensive construction projects and a high volume of subcontracts, flawless reporting in the VAT Control Statement is absolutely essential.

The customer must report supplies received under the reverse charge mechanism in section B.1 of the VAT Control Statement. Ensuring the correct link between the supplier and the customer requires the correct use of domestic supply codes, especially code 4 (construction work) and code 4a (provision of workers).

Any reporting discrepancy leads to automatic calls to resolve inconsistencies, resulting in fines and a significant administrative burden for legal and financial departments. Given that many small suppliers may quickly become VAT payers (see the new 2025 thresholds), the main contractor becomes vulnerable to these partners' errors. This situation requires the implementation of a comprehensive compliance matrix and internal process audits to protect against penalties arising from third-party mistakes.

We regularly provide expert training for employees and management. Gain confidence in the VAT Control Statement through certified training. Contact us at consultation@arws.cz.

Application and Reporting Errors in Reverse Charge

VAT Amendment 2025: Key Changes for Developers and Investors

The amendment to the VAT Act, effective from 1 January 2025, introduces two main sets of changes: adjusted thresholds for mandatory VAT registration and a significant tightening of the rules for the sale of real estate.

New Registration Thresholds: The Risk of a Sudden Jump to VAT Payer Status

From 1 January 2025, the monitoring of turnover for the 12 immediately preceding months is abolished and replaced by monitoring turnover exclusively within a calendar year (January to December). New dual thresholds will apply. The first threshold, CZK 2 million, leads to registration on 1 January of the following year.

A fundamental change concerns the second threshold: if turnover during a calendar year exceeds CZK 2,536,500, the entrepreneur must register for VAT from the second day after exceeding this threshold. For corporations, this means an increased risk of lack of diligence. If a subcontractor suddenly exceeds the threshold, they must adapt instantly. If they invoice incorrectly during the transition phase, the main contractor may unlawfully claim a deduction, exposing themselves to the risk of a penalty.

This situation requires the implementation of comprehensive internal mechanisms that quickly identify a change in the VAT status of partners. Our clients rely on our experience in providing long-term services. We help them adapt quickly to regulatory changes and continuously optimize their tax processes. Contact us at consultation@arws.cz.

A Revolution in Real Estate Sales: The 23-Month Rule and Substantial Alteration of a Building

For developers and investors, the shortening of the period for taxing the first transfer of a completed immovable property is critical. This period is being reduced from five years to just 23 months from its completion (effective 1 January 2025).

Furthermore, the rules regarding repairs and reconstructions are being tightened. The first transfer after a so-called substantial alteration of the building is now also considered a taxable transfer. For the first time, the law explicitly defines a substantial alteration using a value test, namely an increase in the building's value by more than 30% of its original price excluding VAT. This 30% test is tied exclusively to the costs incurred by the seller.

Precise tracking of costs and their legal assessment is critical for developers because if a repair exceeds 30% of the original price, it triggers a new 23-month period for taxing the sale, which has a major impact on the sales strategy.

To determine whether a building is for housing (which affects the VAT rate), the decisive factor will now be the current entry of the method of use in the Register of Territorial Identification, Addresses and Real Estate (RÚIAN). This abolishes the old references to the Building Act.

Risky Transactions with Related Parties: The Threat of VAT on the Usual Price

Effective from 1 January 2025, the definition of a related party for VAT purposes when supplying immovable property is expanded: an employee is now considered a related party.

This change has a direct impact on corporate transactions. If a VAT payer sells a property to a related party (including an employee) at an agreed price that is lower than the market value, VAT must be calculated on the usual market price. A sale below cost no longer leads to an exemption but to taxation based on the market value. This adjustment requires a detailed legal assessment of all property transfers within a group or to key management.

ARROWS will help you prepare or revise contracts and assess the transaction price in the context of VAT. Need legal assistance? Contact us at consultation@arws.cz.

The International Dimension: When the Domestic RCH Is Not Enough

For companies that operate internationally or use foreign subcontractors, it is critical to understand that the domestic RCH (under Section 92e of the VAT Act) applies only between domestic VAT payers.

Domestic RCH Ends at the Border: When Do You Need a Foreign VAT Registration?

For services related to immovable property, which includes construction and installation work, the place of supply is always where the property is physically located. If a Czech company performs construction services in another EU member state, the place of supply is in that state.

Even if the service is provided to a B2B partner, the obligation for foreign VAT registration is governed by local legislation, which is often stricter. For example, in Germany, VAT registration is generally required if a Czech supplier uses other subcontractors on the construction site. Failure to manage this step in the country of performance leads to high fines and legal disputes.

The greatest financial risk lies precisely in the international taxation of construction services, where different implementations of EU directives apply. For corporations that frequently operate across borders, a partner with international experience is therefore indispensable. Thanks to the ARROWS International network, built over ten years, we deal with VAT issues with an international element on a daily basis and will ensure you comply with all regulations abroad, including representation before registers and regulators.

International Contracts and Taxation of Real Estate

Capital Protection and Proactive Compliance

The case law of the Supreme Administrative Court (SAC) repeatedly emphasizes the taxpayer's obligation to demonstrate sufficient diligence (due diligence) when selecting suppliers. This obligation protects the company from the disallowance of a VAT deduction claim if the Financial Administration proves that the entity unwittingly participated in tax fraud within the supply chain.

For a large customer, the risk is high, especially if they enter into a transaction with a new, unvetted supplier, without a proper written contract and with non-standard payment terms. The SAC has confirmed that such circumstances can lead to the disallowance of a VAT deduction claim, even under the RCH mechanism.

A key defense mechanism for corporations is the implementation of defined, written procedures for vetting partners within internal guidelines. These procedures demonstrate good faith to the tax administrator and minimize the risk of penalties and legal disputes. We provide the drafting of internal guidelines and expert training. We will provide you with a tailor-made legal solution in the area of Due Diligence. Contact us at consultation@arws.cz.

Conclusion: Comprehensive Support for Your Legal Certainty

The proposed comprehensive changes in VAT and their impact on the Reverse Charge mechanism and property transfers from 2025 require a rapid and precise response in the form of a revision of internal guidelines, setting up correct invoicing and reporting processes, and updating contractual documentation.

Our Prague-based lawyers have extensive experience in providing long-term services – our portfolio includes more than 150 joint-stock companies, 250 limited liability companies, and 51 municipalities and regions. We pride ourselves on the speed and high quality of our solutions, which minimize the risks of fines and disputes.

ARROWS is ready to prepare internal guidelines for RCH, documentation to protect against penalties, legal consultations, contract preparation, representation before administrative authorities, and expert training for your employees. Thanks to the ARROWS International network, we can also provide you with comprehensive support for the VAT regulation of your construction projects abroad. 

We also provide above-standard service for our clients – in the case of interesting investment or business opportunities, we can connect clients with each other. We would also be happy to hear your business idea. Do you need a tailor-made legal solution that effectively covers domestic and international VAT obligations for construction in 2025? Do not hesitate to contact our office – consultation@arws.cz.