Technical Improvements in Leased Offices
Legal and Tax Risks in Czech Law
When you lease an office, you often want to adapt it. You repaint, change the layout, or create new facilities. It may seem straightforward, but technical improvements have complex legal and tax implications under Czech law. Find out what risks you face, who owns the modifications, and how to avoid costly disputes when returning the premises.
Key takeaways
When renting an office turns into a legal problem
It starts innocently. You receive the keys to the leased premises and see that repairs are needed. Old paint, cracked plaster, outdated wiring. So you decide to invest in it to create a pleasant working environment. The agreed rent is low because the landlord knowingly leases the space in a shell-and-core condition.
The tenant then typically invests tens to hundreds of thousands of Czech crowns. They repaint the walls, replace the flooring, install new lighting, modify the electrical installation, build internal partitions, fit a kitchenette, or do anything else. Legally and for tax purposes, all of these are technical improvements—i.e., an increase in the value of the leased property.
That sounds simple, but in legal terms it entails a range of obligations and risks that many business owners do not even realise until they face litigation or an additional tax assessment by the Czech tax authority. If you are dealing with how to properly address these investments contractually in the lease agreement and related amendments, our support in contracts and negotiations can help.
What “technical improvements” are and why the law addresses them
Lawyers and tax authorities use the term technical improvements (under Section 33 of the Income Taxes Act) to mean alterations a tenant makes to leased property. These must be expenses that, in total for a tax period, exceed CZK 80,000 and that increase the value or functionality of the property.
In general, this includes:
- extensions, additions and building alterations (changes to the layout, new partitions),
- reconstruction (interventions in the property resulting in a change of purpose or technical parameters),
- modernisation (expanding the equipment or usability of the property—e.g., new air conditioning, a security system).
Legal regulations focus on technical improvements because they create tax, accounting and ownership implications. A tenant investing their own money wants to know whether the costs can be claimed as tax-deductible expenses. The landlord, in turn, asks what impact this will have on their property. The state’s interest is that these transactions are taxed correctly—especially where VAT supplies are involved. The practical impacts on tax deductibility and related records are also discussed in more detail in the article Technical improvements versus repairs: Where the tax line lies and how to correctly categorise million-crown investments in real estate.
The key issue is tax depreciation—tenants want to spread their costs over several years to reduce their corporate income tax base. But this is exactly where things get complicated, because the law sets clear conditions for when this is permitted and when it is not.
Key requirement: the landlord’s written consent
This point is absolutely critical, yet many tenants overlook it. Without the landlord’s consent, you can end up in a complex tax situation. In practice, it pays to set the consent and other tax-related aspects in advance with support in tax law.
Under Section 28(3) of the Income Taxes Act, a tenant may depreciate technical improvements to leased property only if they have the landlord’s written consent to such depreciation and if the landlord has not increased the acquisition cost of their own property by these expenses. Without the landlord’s consent, you cannot depreciate the technical improvements for tax purposes—only for accounting purposes.
In practice, this means:
- All costs of technical improvements will remain in your accounts, but you will not be able to claim them for tax purposes (they are non-deductible expenses).
- When the lease ends, the tax residual value (the amount you have not yet depreciated) becomes a non-deductible expense unless the improvements are sold (transferred for consideration) to the landlord.
Let’s say you invested CZK 500,000 in new flooring, partitions and lighting. The landlord never gave you written approval for depreciation. After three years you decide to leave and you restore the premises to their original condition. For tax purposes, the entire investment then becomes a sunk cost that you cannot deduct from your taxes.
Ideally, the consent should be included directly in the lease agreement or in a separate written agreement. If the purpose of use of the premises is also changing (e.g., office vs. retail/operating premises), it may be useful to follow the overview in the article Change of use without construction works: When a notification is sufficient and when a permit is required. ARROWS tax advisory always verifies with clients that this consent is properly in place, so they do not face unpleasant tax surprises when the lease ends.
Tax depreciation of technical improvements
If you have the landlord’s written consent, you may depreciate. The tenant follows the same procedure as when depreciating its own tangible assets.
Technical improvements are classified into the same tax depreciation group as the leased asset itself. This is important—the landlord must therefore tell you which group the leased premises (building) are classified in. Technical improvements are always depreciated in the same group as the improved asset.
Examples:
- You lease an office building (administrative buildings are typically in depreciation group 5). Your alterations to the premises will also be classified in group 5.
- You lease retail premises in a shopping centre (also usually group 5). Your alterations will be classified in group 5.
- You lease a production hall made of lightweight materials (it may be group 4). The alterations will be classified in group 4.
In practice, this means you cannot choose an arbitrary number of years. Minimum depreciation periods are set by law under Czech legislation. For group 5 (most office buildings) the depreciation period is 30 years; for group 6 (hotels, historic buildings) it is 50 years; and for group 4 the depreciation period is 20 years. In practice, this means you cannot choose an arbitrary number of years, because minimum depreciation periods are set by law.
In your accounting, you record your costs (accounting depreciation) based on how long you expect to use the technical improvements (e.g., for the duration of a 5-year lease). This may be a different figure than tax depreciation. The difference between accounting and tax depreciation is then dealt with in the tax return.
So if you invest CZK 100,000 and have written consent for a building in group 5, you can claim for tax purposes (using straight-line depreciation) approximately CZK 3,334 per year (CZK 100,000 / 30 years). The remaining value stays on the tenant’s balance sheet and is depreciated very slowly.
End of the lease and the tax treatment
The last day of the lease arrives. The landlord wants the premises back from you. The question is in what condition you must return them and who pays if you return the premises with your alterations. This is where the legal and tax reality becomes dramatically more complicated.
Basic legal rule on restoring the original condition
Under Section 2225 et seq. of the Czech Civil Code, the tenant is obliged to return the leased item in the condition it was in at the time it was taken over, taking into account normal wear and tear from proper use, unless the parties agree otherwise.
That sounds simple. In practice, it means: if you installed a new floor, new lighting fixtures and partitions in the leased premises, you should remove them and restore everything to its original condition. Normal wear and tear is tolerated—but building alterations are not. In practice, this means that if you installed a new floor and partitions in the leased premises, you should remove them and restore everything to its original condition.
But that is not all. The legal reality is more complex. Tenants often ask whether they really have to remove everything, or whether the landlord will keep it. The answer to each question has its legal and tax consequences.
Option 1: You return the premises with alterations and the landlord pays you compensation
This is the cleanest tax solution for the tenant if the premises are not restored to their original condition. If you agree that the landlord will keep the alterations and pay you for them (e.g., in the amount of the tax residual value), this constitutes a sale of assets. The residual value of the technical improvements is recognised as a tax-deductible expense.
Example: You invested CZK 600,000; during the lease you managed to depreciate CZK 60,000 for tax purposes; CZK 540,000 remains. The landlord pays you these CZK 540,000. You have income of CZK 540,000 and an expense of CZK 540,000. The tax impact is neutral.
Option 2: You return the premises, the landlord keeps the alterations and provides no compensation
This is tax-wise complicated for both parties. If you return the premises with your alterations and the landlord keeps them without paying you, the tax residual value of the technical improvements becomes a non-deductible expense. You lose this amount for tax purposes.
The landlord incurs a so-called non-monetary income in the amount of the value of the technical improvements. The landlord must tax this “gift” with income tax, even though they received no money.
Option 3: Restoring the original condition
If the tenant removes everything at its own expense, the technical improvements are disposed of. The tax residual value of the disposed technical improvements is a tax-deductible expense (provided that the technical improvements were frustrated/disposed of). However, it is necessary to have a disposal report.
VAT issue when transferring improvements
Watch out for VAT. If you are a VAT payer and you claimed input VAT on the acquisition of technical improvements, transferring them to the landlord free of charge may be deemed a supply of goods or provision of services. Under the Czech VAT Act, an obligation to account for output VAT may arise based on the usual price.
Specifically: You paid a construction company CZK 600,000 plus VAT of CZK 126,000. You claimed input VAT of CZK 126,000. Now you are transferring the improvements to the landlord for free. You must pay VAT to the state on this transaction.
Risk table for alterations to leased premises
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Possible issues |
How ARROWS helps (consultation@arws.cz) |
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Missing the landlord’s written consent to depreciation. |
All costs of technical improvements are tax non-deductible. Our attorneys in Prague can help you negotiate an amendment to the lease agreement or a separate agreement including the landlord’s consent so that everything is tax-compliant. |
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At the end of the lease, the landlord keeps the alterations without compensation. |
The residual value of the technical improvements is non-deductible for the tenant (a loss), and the landlord has non-monetary income subject to tax. ARROWS will ensure you agree clear compensation with the landlord that is tax-efficient for both parties. |
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It is unclear what will happen to the technical improvements after the lease ends. |
Disputes over the obligation to restore the premises to their original condition lead to costly demolitions or litigation. ARROWS attorneys clarify the scenarios with clients already when the lease is being concluded and incorporate them into the agreement. |
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The resulting obligation to pay VAT surprises the tenant. |
If you transfer technical improvements free of charge, there is a risk of an additional VAT assessment. Our Prague-based attorneys can help you structure the lease termination so that VAT impacts are minimized or properly settled. |
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A change of landlord or the tax depreciation group of the asset during the lease. |
If the landlord changes the tax depreciation group of their asset, you must also change your depreciation. ARROWS attorneys will adjust the lease agreement so that the landlord is obliged to inform you about such changes. |
Legal ownership of technical improvements
The key point is this: technical improvements made by a tenant to real estate generally become part of that real estate. Under the principle of superficies solo cedit (the surface yields to the land) and the concept of components of a thing (Section 505 of the Czech Civil Code), you cannot separate, for example, new tiling from a building without devaluing it.
This means that the owner of the improvements (as part of the building) is the landlord from the moment they are installed. The tenant may depreciate the technical improvements for tax purposes and treats them as its own asset only for income tax purposes, but in terms of civil law the owner is the landlord. The tenant cannot take “its floor” away.
Typical real-life scenarios
Scenario 1: A startup leases an office in shell & core condition
A startup leases 100 square metres of office space in a building near Prague. The space is empty—just concrete and basic connections. The startup decides to invest CZK 800,000 in interior fit-out: a new floor, partitions, lighting, a meeting room. The landlord agrees, but insists that the tenant must pay for everything itself.
The landlord knowingly leases a bare space. The startup and the landlord agree in writing that the startup may depreciate the technical improvements.
After three years the startup grows and needs a larger space. The lease ends. The landlord wants the premises back “in the original condition”—i.e., stripped back to concrete. The startup then has to remove everything, which costs tens of thousands of Czech crowns for demolition and disposal.
If the landlord does not pay the startup for the improvements, the startup has a tax problem and, in addition, demolition costs. ARROWS attorneys would have addressed this situation already when the lease was being concluded, preventing demolition costs.
Scenario 2: A development company leases storage space
A development company leases 500 square metres of storage space. The developer decides to create an office and staff facilities there, which means building new partitions and installing water supply and waste pipes. The developer invests CZK 3 million.
The developer and the landlord agree on a ten-year lease with the right to depreciate the technical improvements. After 10 years the lease ends. The landlord wants the developer to return the premises to their original condition. The developer refuses to pay a million for demolition, while the landlord argues that it was the tenant’s investment.
In the end, they agree on a compromise where the landlord pays an amount as a buyout of the improvements. The developer will then be able to claim the residual value in its tax return only up to the amount of this compensation. If they had clarified all of this during the lease with ARROWS attorneys, they could have set the compensation for the improvements in the contract from the outset.
Final summary
Alterations to leased premises may look simple, but the legal and tax reality is complex. The main thing is to understand four points: the landlord’s consent to depreciation, the CZK 80,000 threshold, ownership of building alterations, and the tax impacts at the end of the lease.
Many entrepreneurs do not realise these consequences until they face a dispute over compensation or an additional tax assessment.
It is safer to address the matter with experts from the very beginning. The attorneys at ARROWS, a Prague-based law firm, specialise in real estate law and the tax aspects of leases. They can help you obtain written consent, draft clear terms for the end of the lease, and address VAT together with tax advisers.
If you are planning major alterations to the leased premises, contact us at consultation@arws.cz.
Read also:
- Retail Leases in the Czech Republic: Legal Traps That Cost Chains Millions
- Eviction order 2026: How to get rid of a delinquent tenant faster
- Termination clauses that work – and those that don't in the Czech Republic
- Supply chain disputes in Czech law: How to win or settle smart
- Accounting vs Tax Write-Offs of Unpaid Invoices Under Czech Law
About the author
Disclaimer:
The information contained in this article is for general informational purposes only and serves as a basic guide to the issue as of 2026. Although we strive for maximum accuracy, laws and their interpretation evolve over time. We are ARROWS Law Firm, a member of the Czech Bar Association (our supervisory authority), and for the maximum security of our clients, we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of the regulations and their application to your specific situation, it is necessary to contact ARROWS Law Firm directly (consultation@arws.cz). We are not liable for any damages arising from the independent use of the information in this article without prior individual legal consultation.