VAT on Real Estate Leases

Basic VAT Rules for Real Estate Rentals in 2025

What is not included in the exemption (these services are always taxable):

• Short-term rental (up to 48 continuous hours) – must always be taxed

• Accommodation services (hotels, guesthouses) – are subject to standard VAT

• Rental of parking spaces and garages – always a taxable supply

• Rental of safe deposit boxes

• Rental of machinery and fixed equipment

If the rent is exempt, the landlord loses the right to deduct VAT from the property acquisition, renovations, repairs, and operating costs. This loss can amount to hundreds of thousands or even millions of crowns, especially for newly acquired properties. 

In practice, VAT on real estate rentals is significantly more complex than it first appears, as the individual steps contain hidden procedural details, connections to tax regulations, and risks that a layperson often does not see. In 2025, the Financial Administration has tightened its controls in this area, and penalties for incorrect VAT application are substantially higher.

A rental is the provision of space for long-term use, whereas accommodation services include ancillary services (cleaning, meals, reception). If you only provide space without services, it is a rental. If you provide a complex of services, it is accommodation, which is always taxable. Not sure how to classify your supply? Write to us at konzultace@arws.cz. 

When You Can Voluntarily Tax Real Estate Rentals

The VAT Act permits the voluntary taxation of rent only under strict conditions. It is not a free choice but a legally defined option that depends on meeting all of the following criteria:

Conditions for voluntary taxation of rent:

1. The landlord is a VAT payer – you must have a valid VAT registration and exceed the specified turnover threshold

2. The tenant is a VAT payer – they must be registered for tax in the Czech Republic or, from July 1, 2025, in another EU member state

3. The property is not intended for housing – it is not an apartment, a house with more than 60% residential area, or a unit intended for permanent residence

4. The tenant uses the space for their economic activity – it must be for business purposes

From July 1, 2025, the options have been expanded. You can voluntarily tax rent to tenants registered for tax in another EU member state, even without their consent. Previously, it was necessary for the tenant to agree to the taxation. This change has significantly facilitated the rental of properties to international companies and firms from other EU countries.

If the tenant ceases to be a VAT payer or changes the purpose of use (for example, terminates their business), you must immediately switch to exempt rent. If you have already claimed a VAT deduction, you will face an adjustment of the deduction for the remainder of the 10-year period. This is a process that requires attention and legal handling.

In such a case, you must apply the VAT exemption. If you were to tax it anyway, you would be violating the law and exposing yourself to penalties of up to CZK 500,000. The Financial Administration has the right to assess additional tax, penalties, and late payment interest, leading to a financial burden exceeding the original error. Want to avoid the risk of fines? Contact our specialists at konzultace@arws.cz. 

When Voluntary Taxation Truly Pays Off

Voluntary taxation pays off if your input costs exceed the profit from the rent or if you are planning significant investments in the property. The key is the math and a long-term strategy. The decision to tax has a long-term character – the choice is not easily reversed but is tied to a 10-year adjustment period.

Practical Example: Office Building with Renovation

Imagine a landlord who acquired a property in 2023:

• Purchase price (2023): 20,000,000 Kč + VAT 4,200,000 Kč

• Renovation (2024): 5,000,000 Kč + VAT 1,050,000 Kč

• Annual rent: 1,500,000 Kč

• Annual operating costs: 300,000 Kč + VAT 63,000 Kč

Option A: Exempt Rent (Without Voluntary Taxation)

This option is the standard choice. The landlord cannot claim a VAT deduction, which means:

• You cannot claim a deduction of 4,200,000 Kč from the acquisition

• You cannot claim a deduction of 1,050,000 Kč from the renovation

• You cannot claim a deduction of 63,000 Kč annually from operations

• Total loss of deduction entitlement: 5,313,000 Kč (in year 1)

• Income tax: 1,500,000 × 19% (for 2023) = 285,000 Kč annually

Option B: Voluntary Taxation

The landlord decides to tax the rent and apply VAT:

• You invoice rent + VAT: 1,500,000 + 315,000 Kč VAT

• You claim a deduction of 4,200,000 Kč from the acquisition

• You claim a deduction of 1,050,000 Kč from the renovation

• You claim a deduction of 63,000 Kč from operations

• Total deduction entitlement: 5,313,000 Kč

• Output VAT: 315,000 Kč

• Net position: 4,998,000 Kč in your favor (refund of input VAT)

• Income tax: 1,500,000 × 19% (for 2023)  = 285,000 Kč annually (on rent excluding VAT)

The difference between the options amounts to an additional 4,998,000 Kč in the case of voluntary taxation. This is how much you gain from the VAT deduction on the acquisition and investments. This example clearly shows that voluntary taxation is always worthwhile when you have significant input costs with VAT.

When Voluntary Taxation Does Not Pay Off:

There are situations where exemption is more advantageous:

• You have minimal input costs with VAT (an old property without renovation, acquired years ago)

• The tenant is not a VAT payer (in which case you cannot tax, even if you wanted to)

• You are renting out residential spaces, which are exempt by law

• You plan to sell the property within 10 years and want to use the exemption on the sale

• The tenant provides services with an additional right to a VAT deduction

You must perform a deduction adjustment for the remaining part of the 10-year period. This means returning a portion of the deduction back to the state. The calculation is complex and depends on the year you claimed the deduction. The adjustment is always made on the last day of the year. This obligation is associated with risk if not performed correctly – you face an additional tax assessment with penalties. Want to avoid errors in the deduction adjustment? Contact us at konzultace@arws.cz. 

The 10-Year Deduction Adjustment – What It Means in Practice

One of the most complex aspects of VAT on real estate rentals is the so-called 10-year deduction adjustment. This is not a simple rule, but a complex mechanism that requires expert understanding and careful monitoring.

A deduction adjustment (or tax deduction adjustment) is the obligation to return part or all of the claimed VAT deduction if the use of the property changes. If you claimed a full VAT deduction when acquiring the property (because you planned to tax the rent), but later decide to apply an exemption (or vice versa), you must "correct" this change by returning part of the VAT to the state.

The law stipulates that the adjustment is made over a period of 10 years from the acquisition of the property or from the completion of a renovation (so-called technical improvement). This period is calculated in individual calendar years. This means:

• In the 1st year, you may have to return 1/10 of the deduction

• In the 2nd year, you may have to return 1/10 of the deduction

• In the 3rd year, you may have to return 1/10 of the deduction

• ... and so on, up to the 10th year

Important rules for the adjustment:

1. The adjustment is only made if the difference in entitlements exceeds 10 percentage points. If the differences are smaller, no adjustment is made.

2. Changes are assessed for each calendar year separately – if the situation changes in July, the adjustment applies only to the second half of the year.

3. The adjustment must be made in the tax return for the relevant year – it cannot be overlooked.

4. Discrepancy with the Land Registry – if the property is registered in the Land Registry as "non-residential space" and you are renting it as an apartment, you risk penalties.

If you fail to make an adjustment that you should have, the Financial Administration will assess it during a tax audit. You risk not only having to return the VAT but also penalties and late payment interest, which can add up to tens of thousands of crowns. 

Risks and Penalties for Incorrect Procedures

Incorrect application of VAT on real estate rentals can lead to serious financial penalties and administrative proceedings. In 2025, the Financial Administration tightened its controls in this area, and the penalties are significantly higher than a few years ago.

The most common mistakes that cost you money:

1. Taxing the rent of apartments – apartments are always exempt; taxing them is illegal.

2. Missing consent for taxation – before July 1, 2025, the tenant's consent was required (for tenants from the EU); today, consent is optional.

3. Incorrect assessment of the tenant – if the tenant is not a VAT payer, the taxation is invalid, and they have the right to a refund of the rent without VAT.

4. Failure to comply with the 10-year period – when changing the taxation of a property, a deduction adjustment must be made.

5. Formal errors in documentation – a missing contract with a taxation clause, missing signatures, or ambiguity between the invoice and the contract.

Specific Situations – What ARROWS Lawyers Handle in Practice

VAT on real estate rentals is far more complex in practice than it first appears. Individual situations contain hidden details and connections that a layperson does not see. The lawyers at ARROWS deal with this agenda daily and can help you avoid financial losses.

International Tenants and New Rules from July 2025

As of July 1, 2025, the rules for tenants registered in another EU member state have changed. Previously, you needed their consent for taxation; now, consent is not required. This means you can tax the rent even if the EU tenant does not agree. This change has a practical impact – it simplifies the decision for landlords but also increases the risk of errors. 

ARROWS has a network, ARROWS International, built over 10 years and handles cases with an international element daily. If you are renting to foreign entities, we are well-versed in EU rules and will ensure your legal compliance. Do you have a tenant from another EU state? Contact us at konzultace@arws.cz and ensure legal compliance.

Change of Property Use During the 10-Year Period

Imagine you were renting out premises with VAT, the tenant was a VAT payer, and you were claiming deductions. After four years, the tenant ceases to be a VAT payer (or terminates their business). You must switch to exempt rent. In this case, a deduction adjustment for the remaining 6 years is automatically triggered. The calculation is complex – part of the deduction remains valid (for the years the tenant was a payer), and part must be returned (for the years the tenant is not taxed).

The lawyers at ARROWS will help you calculate the exact amount of the adjustment and ensure correct reporting in your tax return. Without this solution, you risk a penalty for failing to make the adjustment. Has your tenant's situation changed? Contact us at konzultace@arws.cz. 

Renovation and Technical Improvement – Special Rules

If you renovate a property (that is rented with VAT), special rules apply. The renovation is considered a separate asset with its own 10-year period for adjustment. This means that in our example, you do not have one period for the acquisition, but two: one for the original property acquisition (2023–2033) and another for the renovation (2024–2034).

This rule complicates the situation – if you sell the property in 2030, you must make an adjustment for both assets: for the original acquisition (remaining 3 years) and for the renovation (remaining 4 years). Without a lawyer, it is easy to get lost. Are you planning a renovation of a rented property? Write to konzultace@arws.cz and secure a legal analysis.

How ARROWS Helps Clients in Practice

The lawyers at ARROWS handle this agenda daily and have experience that can save you thousands of hours of work and hundreds of thousands of crowns in penalties. In the area of VAT on real estate rentals, ARROWS provides comprehensive legal services:

Legal consultations and expert opinions: We analyze your situation and prepare a written legal opinion that protects you from fines and audits. Advice that protects.

Contract preparation and review: We prepare legally sound lease agreements with a clause on voluntary taxation (if appropriate). By reviewing existing contracts, we ensure their compliance with the law.

Calculation of taxation profitability: We perform a detailed financial analysis of both options (exempt vs. taxed rent) and recommend which is more advantageous for you.

Management of deduction adjustments: We ensure the correct reporting of the 10-year deduction adjustment in tax returns and prepare all documents for the Financial Administration.

Representation before registries and regulators: If you need to update the property's entry in the Land Registry, we will handle communication with the relevant authorities.

Training and certificates: We offer expert training focused on VAT on real estate rentals for your legal team or accountants.

If you have an interesting investment or business opportunity, we will be happy to connect you with other clients from our network. If you are looking for financing or a business partner in a given area, contact us – we know how to make connections. Need legal advice? Write to konzultace@arws.cz and arrange a consultation.

Conclusion: Why Entrust VAT on Real Estate Rentals to Professionals

The issue of VAT on real estate rentals is much more complex than property owners usually think. The individual steps, which seem simple (tax the rent, claim a deduction), are in the real world hidden with exceptions, procedural details, connections to other regulations, and risks that a layperson does not see. An error in one year means you have to return hundreds of thousands of crowns in VAT, including penalties.

The lawyers at ARROWS have twenty years of experience with this issue and deal with it daily. They know all the details, all the processes, and all the risks. An investment in professional legal advice usually pays for itself in the first year through savings on penalties and VAT optimization.

At the same time, remember: ARROWS is insured for damages up to CZK 500,000,000. For you as a client, this means that if we give you legal advice and we make a mistake, the insurance will cover you financially. This is important if your case involves high amounts.

If you are not sure whether you have your VAT on rentals set up correctly or have any doubts, contact us without hesitation. A consultation will help you avoid mistakes and save you time and money. Just write to konzultace@arws.cz and arrange a meeting – we will be happy to help you find the best solution for your situation.