VAT Amendment for Real Estate - July 2025
A Practical Guide for Companies, Developers, and Investors
The Czech VAT amendment effective from July 2025 changes the taxation of property sales through a new first-supply logic, a shorter 23-month test and revised rules for substantial alterations and building land. Developers and investors therefore need to assess VAT before signing a transaction. This article explains when property sales are taxable, how major renovation can restart the test and why zoning now matters more for land sales.
Key takeaways
The End of the Five-Year Test: Why 23 Months is the New Key Deadline?
Under the new rules, VAT primarily applies only to the first sale of a property after its final approval for use or after a substantial change has been made. Any subsequent sale of the same property is exempt from VAT, provided no further substantial change has occurred in the meantime. This approach is based on the case law of the Court of Justice of the EU, which states that economic value is mainly created when a property is first placed on the market.
In practice, this represents a fundamental shift. A developer who sells a new apartment six months after its final approval will apply VAT. However, if the buyer (e.g., an investment fund) sells this apartment a year later without any further significant modifications, this second sale will be exempt from VAT, even though it takes place within the original 23-month period.
This creates a new obligation for buyers to thoroughly verify whether their transaction is indeed the first supply or a subsequent one. The lawyers at ARROWS can assist clients with a legal analysis of the transaction to determine with certainty whether it is a first or subsequent supply and which tax regime applies. Are you planning to buy or sell a new property? Verify your tax obligations with us. Write to consultation@arws.cz.
Substantial Change to a Building: When Does a Renovation "Reset" the Tax Clock?
The term "substantial change" has often been a subject of interpretative ambiguity in the past. The amendment to the Czech VAT Act brings clear order to this issue and establishes two key conditions that must be met simultaneously for a renovation to be considered a substantial change that restarts the 23-month period.
The first condition is that the modifications lead to a change in the use of the property or substantially alter the conditions of its occupancy. The second, and crucial, condition is that the costs of this change (excluding VAT) exceed 30% of the tax base upon its subsequent sale—that is, 30% of the future selling price.
For investors and developers, this means they must calculate the tax implications even before starting a renovation. Moreover, the costs are assessed exclusively for the person carrying out the sale. Routine maintenance, even if expensive, is not considered a substantial change. This mechanism directly affects the popular practice of "flipping" properties, where a more extensive renovation can unexpectedly increase the sale price by 21% VAT.
Renovation and Substantial Change of Property
Risk to Address and Potential Problems and Penalties | How ARROWS Helps |
Unintentionally exceeding the 30% cost threshold: The subsequent sale will be subject to 21% VAT, which can completely destroy the planned return on investment. There is a risk of a tax assessment and penalties. | Legal and tax analysis of the investment plan: We will help you calculate and plan renovation costs in advance. Want to know your legal options? Write to consultation@arws.cz. |
Insufficient documentation of costs: During a tax office audit, you will be unable to prove the actual amount of costs, which may lead to the VAT exemption being challenged. | Preparation and review of supplier contracts and setting up internal processes for cost recording: We will ensure your documentation is bulletproof. Need to prepare contractual documentation? Contact us at consultation@arws.cz. |
Incorrect interpretation of the term "change of use": You carry out modifications that you believe are not a substantial change, but the tax administrator assesses them differently. | Issuing a legal opinion: We will assess the nature of the planned modifications and provide you with legal certainty. Need an expert opinion? Get in touch with us at consultation@arws.cz. |
Dispute with the buyer regarding VAT: If the contract does not clearly regulate the VAT regime and the tax is subsequently assessed, a dispute may arise as to who is liable to pay it. | Preparation and review of purchase agreements: Our contracts clearly define the tax regime and protect your interests. For a review of your contract, write to us at consultation@arws.cz. |
Building Land Under Scrutiny: Which Sales Will Now Cost 21% More in VAT?
Perhaps the most fundamental change concerns the definition of building land. Previously, the obligation to pay VAT was often tied to the existence of a building permit. However, from 1 July 2025, a plot of land on which construction is possible based on a zoning plan or other similar document will be considered building land for VAT purposes.
This change has far-reaching consequences. It expands the range of land subject to VAT and also affects non-business individuals. If an individual actively prepares land for sale (e.g., installs utilities, subdivides the plot, sells repeatedly), the tax office may classify their activity as an economic activity with an obligation to pay VAT.
The impact on the price can be dramatic. The sale of a plot of land for CZK 14 million, which now falls under the VAT regime, could see its price increase by almost CZK 3 million in tax. The municipal zoning plan thus becomes a key tax document, and knowledge of it is absolutely essential for landowners.
New Definition of Building Land and Related Tax Obligations
Risk to Address and Potential Problems and Penalties | How ARROWS Helps |
Selling land in good faith without VAT: You sell a plot of land that is designated for construction in the zoning plan. The tax office subsequently designates you as a person liable for tax and assesses 21% VAT plus penalties. | Verification of the land's tax regime: Before the sale, we analyze the zoning plan and assess whether the sale is subject to VAT. Want to be sure? Request a legal analysis at consultation@arws.cz. |
Your activity being classified as "economic": Installing utilities on the land or subdividing it into smaller plots may be evaluated by the tax office as a business activity, even if you do not have a trade license. | Structuring the transaction and preparing arguments for the tax office: We will help you structure the transaction to minimize the risk of reclassification. Need legal assistance with structuring the sale? Write to consultation@arws.cz. |
Incorrectly drafted purchase agreement: The contract does not address what happens in the event of a subsequent VAT assessment, leading to costly disputes with the buyer. | Preparation of watertight contractual documentation: Our contracts include clauses that protect you in case of a change in tax assessment. For the preparation of a tailor-made contract, contact us at consultation@arws.cz. |
Loss of competitiveness: If you have to add 21% VAT to the price, your land may be too expensive for a buyer (who is not a VAT payer) compared to similar plots. | Consultation and strategic planning: We will discuss options with you, including the possibility of voluntary taxation if the buyer is a VAT payer. For a strategic consultation, contact us at consultation@arws.cz. |
Strategic Preparation for Your Company: How ARROWS Protects Your Business
The new legislation also introduces other changes that require attention. For buildings intended for social housing, the application of the reduced 12% VAT rate will depend on the entry in the Land Register or the RÚIAN register. When selling property to employees or related parties, the tax base will now be derived from the fair market value, not the agreed price.
These changes are not just isolated tax adjustments but represent a complex challenge that requires a strategic legal approach. At ARROWS, we are ready to provide your company with comprehensive support that will protect you from risks and help you seize new opportunities.
Our experts will provide you with:
Drafting of internal guidelines for the correct assessment of the tax regime for properties and monitoring renovation costs.
Preparation or review of purchase and construction contracts that will be fully compliant with the new legislation.
Representation before courts and administrative authorities in case of disputes with the tax office.
Expert training for your employees from the finance, development, or sales departments, including a certificate of completion.
These comprehensive changes show how closely tax issues are intertwined with the daily practice of property development and management. You can find more about this service on our website in the Real Estate Law section.
International Transactions and the ARROWS International Network
The real estate market is increasingly global. Whether you are a foreign investor entering the Czech market or a Czech company with properties abroad, the new rules will affect you. For example, the amendment makes it easier to apply voluntary taxation on leases for tenants from other EU member states.
Thanks to our ARROWS International network, which has been built over ten years, we handle transactions with an international element on a daily basis. We provide legal services that cross borders and ensure compliance with both local and international regulations. Are you dealing with a real estate transaction involving a foreign partner? Contact us at consultation@arws.cz and get a tailor-made legal solution.
Legal Certainty as the Foundation of a Successful Real Estate Transaction
The amendment to the Czech VAT Act, effective from 1 July 2025, represents one of the biggest changes in the real estate market in recent years. The shortening of the time test, the new definition of a substantial change, and the expansion of the concept of building land bring risks, but also new strategic opportunities. Navigating this complex issue requires a proactive approach and expert legal advice.
Our specialists will help you
At ARROWS, we have long specialized in this area. Our portfolio includes more than 150 joint-stock companies, 250 limited liability companies, and 51 municipalities and regions for whom we provide top-tier legal services. We pride ourselves on speed and high quality. We can also connect clients with each other if they have interesting investment or business opportunities.
Don't get caught off guard and risk losses in the millions. Our lawyers are ready to help you – write to consultation@arws.cz.
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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 350,000,000. 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.