VAT on Building Land

Why is VAT on land sales a critical strategic issue?

An expert legal analysis conducted before the purchase agreement is signed is not just an administrative formality but a crucial tool for actively managing financial and legal risks.

A 21% difference: How the correct assessment affects your transaction

The Value Added Tax Act (Section 55a of the VAT Act) strictly defines the conditions for tax exemption. The supply of land is exempt only if the land a) does not form a functional unit with a building permanently attached to the ground and b) is not building land. Therefore, if the sale is exempt, VAT is not applied (0%). 

However, once the land is classified as building land, the supply becomes a taxable transaction, and the standard rate of 21% must be applied. This difference fundamentally changes the economics of the entire transaction, both for the seller (obligation to pay tax) and the buyer (possibility to claim a deduction).

An incorrect assessment of whether a transaction is taxable or exempt leads to the greatest risks of a tax reassessment. Not taxing the sale of building land that should have been taxed represents a direct tax loss, which is easily traceable from the Tax Office's perspective, especially in larger development transactions. Developers and investors who incorrectly classify the VAT regime thus automatically become targets for tax audits with a high probability of a subsequent tax reassessment.

The lawyers at ARROWS have many years of experience and routinely prepare or review real estate supply agreements for our clients, who include over 150 joint-stock companies and 250 limited liability companies in our portfolio. Need legal assistance? Contact us at konzultace@arws.cz.

Two criteria for applying VAT: Intent and economic activity

For the correct tax treatment of a land sale, two fundamental and independent factors must always be precisely assessed: whether the entity is acting within the scope of its economic activity and whether the land qualifies as building land.

Are you a "Taxable Person"?

Value Added Tax applies only if the seller is a taxable person (a VAT payer) and carries out the sale as part of their economic activity. The sale of land by a natural person that is demonstrably unrelated to their business is generally not subject to VAT.

For corporations and investors, however, the assessment of economic activity is much stricter. The key is intent. If the purpose of purchasing land is its subsequent sale for profit, it is considered an economic activity, regardless of whether the entity is formally registered in the Commercial Register as a real estate agency or developer.

Case law from the Supreme Administrative Court (NSS) has confirmed that in development activities, land must be treated as goods for VAT purposes, not as a long-term asset. The decisive factor is the primary intention at the time of acquisition and the expected future use of the land. 

If land is acquired with the aim of converting it into building plots for subsequent sale, it is considered goods for tax purposes. Minor use of the land, such as short-term leasing for agricultural or advertising purposes, does not affect this classification if the land was not acquired for that purpose.

The critical definition: What is "building land" 

The definition of building land for VAT purposes is key to determining the tax treatment of a sale. This definition is complex and must be interpreted in accordance with the EU VAT Directive, which aims to tax all undeveloped land intended for construction.

According to the Value Added Tax Act (hereinafter "the VAT Act"), building land is land on which construction work is being or has been carried out for the purpose of erecting a building, or on which a building can be erected based on a building permit, planning consent, or a notified construction.

The impact of legislative changes and case law on the assessment

Historically, the emphasis on whether land is considered building land has shifted between the active intent of the parties and the objective possibility of construction. However, the Czech Financial Administration has previously applied an extensive approach, considering all land within a developable area as building land unless it was proven that a building could not be located on it.

The 2025 VAT amendment codifies a stricter interpretation, which increases the number of taxable land plots and creates high uncertainty for borderline projects. An investor must therefore be able to actively prove that the land is expressly excluded from development or that the intention to sell for construction is objectively absent. Over-relying on the fact that land is not for building just because there is no active permit is extremely risky after the amendment. 

ARROWS must provide its clients with a precise legal opinion on VAT that analyzes the zoning plan and current case law. Our Prague-based legal team is ready to help you – write to konzultace@arws.cz. 

Burden of proof: Strategies for proving intent and contractual protection

In tax proceedings, the seller bears the obligation to assert and prove all facts that led to their tax claim. The burden of proving that a given case does not involve building land thus lies with the taxpayer.

Legal evidence for and against taxation

During an audit, the Tax Office does not only evaluate the formal designation of the land but the overall objective picture of the buyer's and seller's intent:

1. Zoning Plan: This is the strongest objective criterion. If the land is included in the zoning plan as developable (i.e., construction is possible on it), this is a strong indication for the Tax Office that it is building land, even without any specific building applications being filed.

2. Contractual Arrangements: Any provision in the purchase agreement that refers to development goals or conditions related to obtaining a building permit is evidence for the Tax Office that the sale was intended for construction. An example is the option to withdraw from the contract if the buyer does not obtain a building permit by a certain date.

3. The Price Test: An important indirect indicator. If the sale is carried out at a price corresponding to the normal market value of land designated for construction, the Tax Office interprets this as an intention to build, as the land would not be purchased for other purposes (e.g., agricultural) at that price.

Complex problems for developers: Deduction reductions and mixed use

For developers and investors who treat land and buildings as long-term assets for mixed purposes (sale and lease), the greatest administrative and tax challenge arises in connection with monitoring the entitlement to VAT deduction.

New challenges for construction by own activity (2025 Amendment)

The VAT amendment for 2025 fundamentally changes the rules for long-term assets created by own activity, which primarily affects the development of residential buildings and complexes. Previously, the payer claimed a full VAT deduction on all inputs and only at the end of the project dealt with the fiction of supply, where they "supplied the asset to themselves" and paid output VAT corresponding to the reduced entitlement. This fiction of supply is now being abolished.

Under the new rules, the payer must reduce the deduction claim already during construction if the building will be used for mixed purposes. An example is a development project where some apartments are intended for sale (taxable supply) and some for long-term lease (exempt supply with no right to VAT deduction).

This mechanism requires the taxpayer to implement precise and ongoing monitoring of the intended use from the very beginning of the project and to apply a so-called apportionment coefficient. The lawyers at ARROWS will help you set up a VAT reporting system to minimize the risk of a tax reassessment.

Managing deductions for mixed-use assets

The issue of the apportionment coefficient also applies to existing long-term assets that are used simultaneously for taxable activities (e.g., short-term accommodation) and exempt activities with no right to deduction (e.g., long-term lease of residential properties).

An error in the initial determination of the coefficient or a subsequent adjustment of the deduction during the ten-year adjustment period for real estate can lead to a significant tax reassessment. ARROWS therefore prepares internal guidelines for its clients and provides expert training for employees or management on how to correctly monitor the VAT regime for mixed-use projects, including issuing a certificate. Do not hesitate to contact our office – konzultace@arws.cz. 

International transactions: Obligations for non-residents and the role of ARROWS International

If you are a foreign entity investing in land in the Czech Republic, specific rules for VAT registration and administration apply to you.

VAT and the place of supply

According to VAT rules, the supply of immovable property is governed by the place where the property is located. The sale of building land in the Czech Republic is therefore always subject to VAT in the Czech Republic.

A foreign investor (non-resident) selling building land in the Czech Republic who is acting within the scope of their economic activity automatically becomes a mandatory VAT payer and must register in the Czech Republic.

New obligations for non-residents: Agent for service of process

The administrative burden for foreign persons is increasing. From 1 October 2025, new obligations apply to non-residents who are VAT payers regarding the appointment of an agent for service of process for value added tax purposes.

This obligation is critical. Although there is a transitional period, after 30 September 2025, the tax administrator may take measures and impose fines if this legal obligation is not met.

The ARROWS law firm provides comprehensive legal advice on obtaining permits and licenses, including representation before registers and regulators, which also covers fulfilling obligations for non-residents, such as appointing an agent for service of process. Thanks to the ARROWS International network, built over ten years, we provide legal services outside the Czech Republic and deal with such issues with an international element on a virtually daily basis. Our Prague-based legal team is ready to help you – write to konzultace@arws.cz. 

Your Partner for Tax Certainty: Why choose the ARROWS law firm

The sale of building land as part of development or investment activities poses a significant risk that can only be effectively eliminated with professional legal support and a deep knowledge of current case law and administrative practice.

Depth of Knowledge and Experience: ARROWS is a partner for corporate clients for whom our experience in providing long-term services plays a key role. We manage a portfolio that 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 work.

Comprehensive Service: We do not focus solely on contractual documentation. We provide a full range of services from legal opinions and analyses to representation in courts and before administrative authorities, where we protect our clients from financial penalties. We also prepare internal guidelines and expert training, which are the best prevention against audits.

Networking and Opportunities: In addition to legal advice, we can connect clients with each other if they have interesting investment or business opportunities. And we are also happy to hear about interesting entrepreneurial or business ideas.

Conclusion: Don't be caught off guard by a tax reassessment

VAT on building land is a minefield where tax authorities are increasingly relying on the zoning plan and the seller's economic intent. Given the ongoing amendment to the VAT Act (2025), which tightens the definition of building land, a review of your sales strategies and contractual documentation is urgent.

Gain tax certainty before the Tax Office comes calling. Contact us for a consultation and a review of your situation today – konzultace@arws.cz.