VAT place of supply

Where to Pay Tax: Basic Rules for Determining the Place of Supply for B2B and B2C Services

The key consideration in determining the place of supply lies in the fundamental distinction of who the service is provided to. It is essential to determine whether the recipient is a taxable person (B2B), i.e., another entrepreneur, company, or corporation, or a non-taxable person (B2C), i.e., an end consumer. Correctly assessing the recipient's status is a fundamental pillar of the international VAT system, as a different recipient automatically triggers different tax rules and obligations.

The Basic B2B Rule: Why is Invoicing to the EU Usually Without Czech VAT?

When providing most services to another taxable person (B2B) within the EU, the so-called "recipient's location rule" applies. In this case, the place of supply is the place where the recipient of the services has their registered office or a fixed establishment from which the service is received.

The impact of this rule is crucial for Czech companies: A Czech company does not charge Czech VAT because the place of supply is in the customer's country (however, the right to deduct input tax is preserved). Instead, the recipient of the service has the tax liability in their own Member State under the reverse charge mechanism.

A typical example is a situation where a Prague-based consulting company, which is a VAT payer, provides financial advice to a Slovak company registered for VAT in Slovakia. In this case, the place of supply is Slovakia, and the service is subject to Slovak tax.

However, it must be emphasized that the basic B2B rule does not automatically apply if the client, although in business, is not registered for VAT in their country. In such a case, the provider must examine whether B2C rules apply or whether the partner becomes an Identified Person for the given transaction. This ambiguity, which is not apparent from the outside, is a frequent source of tax errors.

For this reason, it is essential that companies do not take the understanding of the basic rules for determining the place of supply when providing a service under the VAT Act as a definitive guide. The greatest risk lies in the detailed determination of the client's status and in assessing whether one of the special exceptions (Sections 10-10i of the VAT Act) exists. Our lawyers at ARROWS regularly deal with this issue and can help you with a detailed legal analysis of your invoicing. Need legal assistance? Contact us at konzultace@arws.cz.

Beware of B2C Supplies: When Do You Pay VAT Even When Invoicing Abroad?

If a service is provided to an end consumer, i.e., a non-taxable person, the place of supply is usually where the service provider has its registered office, i.e., the Czech Republic.

For example, if a Czech company provided a service to a private individual abroad, the place of supply is in the Czech Republic, and the service is subject to Czech VAT. This means the provider must declare and pay the VAT in the Czech Republic.

However, for specific services such as telecommunications, broadcasting, and electronically supplied services (B2C), the special One Stop Shop (OSS) scheme applies if the total turnover exceeds EUR 10,000. Although the goal of OSS is administrative simplification, it does not apply to most B2B transactions, where the reverse charge mechanism is still mandatory.

Reverse Charge in Practice: Invoice Setup and the Need to Verify Your Partner

The reverse charge is a key tax mechanism that is at the core of secure international invoicing in the EU. Its essence is that the obligation to declare and pay output tax is shifted from the provider (supplier) to the buyer (recipient of the supply). This regime ensures that VAT is paid in the country where the service is consumed, which is the basis for VAT harmonization within the EU.

For the correct application of the reverse charge, the invoice must meet specific requirements. The invoice must be issued with a zero VAT rate and must contain a clear notice that the reverse charge mechanism applies, for example, with the wording "Tax to be paid by the customer (reverse charge)".

The Czech supplier (a VAT payer) is obliged to report this supply on line 25 of the tax return, and most importantly, report it in the EC Sales List (specifically as Code 3 – Provision of a service with the place of supply in another Member State).

Why You Must Always Verify Your Partner's VAT ID in the VIES System

The legal and safe application of the reverse charge mechanism is conditional on verifying that your EU business partner is indeed a taxable person and is registered for VAT in their Member State.

This verification must be carried out in the European Commission's electronic VIES (VAT Information Exchange System). The process is simple: you enter the partner's VAT ID number (without the two-letter country code), and the system confirms its validity and registration.

Verification through VIES is a critical piece of evidence for a tax audit. If the Czech tax authority discovers that VIES verification is missing or that the partner's VAT ID was invalid, it can challenge your right to exemption from Czech VAT and assess you for domestic tax, including penalties. Missing verification is an easily detectable formal error that becomes the first indicator for the tax administrator to launch a deeper audit of your entire international agenda. Without valid evidence, a procedural error becomes a trigger for significant financial sanctions.

The lawyers at ARROWS handle the preparation or review of contracts and the negotiation of contractual terms to ensure you always have certainty about the correct application of the reverse charge. For an immediate solution to your situation, write to us at konzultace@arws.cz.

You can read more about this service HERE.

When Do You Become an Identified Person and What Does It Mean for Your Finances?

Many small and medium-sized companies that are not VAT payers in the Czech Republic start providing services to the European Union and immediately become an Identified Person (IP). This status brings specific administrative obligations, but above all, a significant economic handicap that is crucial for the company's cash flow.

Identified Person (IP) vs. VAT Payer: Fundamental Differences

An Identified Person (IP) is a domestic taxable person who has become a tax subject by law, typically because they have provided a service with the place of supply in another EU Member State. That is, a service where the recipient declares the tax (Reverse Charge).

This status imposes administrative obligations: an IP must file a VAT return (usually when receiving a service from abroad where they are obliged to declare the tax) and must file an EC Sales List if they have provided a B2B service to the EU. Both filings are done electronically by the 25th day of the following calendar month if the obligation arose in that month. In contrast, an IP does not file a VAT Control Statement.

The key economic handicap of an IP is that, unlike a VAT payer, an Identified Person is not entitled to a VAT deduction. All VAT paid on the purchase of goods and services domestically and on the receipt of services from abroad becomes a net cost to the company. The IP status thus effectively increases the costs of international transactions, thereby disrupting cash flow and reducing overall profitability.

How to Minimize Losses Associated with IP Status

For companies that frequently trade with foreign countries and have high inputs subject to VAT, the status of an Identified Person is financially disadvantageous. Input VAT taxation without the possibility of a deduction can be a significant obstacle to profitability.

For such entities, it is often more economically advantageous to become a voluntary VAT payer to regain the right to a deduction. For B2B companies, the choice between being an IP and a VAT Payer is a strategic financial decision, not just an administrative necessity.

Our lawyers are ready to help you with a detailed analysis of the costs and benefits of each regime. We are specialists in corporate and tax law and can handle all the documentation for VAT registration. Connect with us at konzultace@arws.cz and get a tailor-made legal solution.

The Biggest Tax Nightmare: How to Avoid Creating a Fixed Establishment for VAT Purposes Abroad

For companies that provide complex, long-term services abroad, the biggest nightmare is the risk of unintentionally creating a Fixed Establishment for VAT purposes in another Member State. This situation has dramatic tax consequences and almost certainly leads to mandatory and often retroactive registration in that country.

Why the Risk of a Fixed Establishment for Services is More Complicated Than for Income Tax

A Fixed Establishment (FE) for VAT purposes represents a critical risk because its creation abroad means mandatory full VAT registration in that country. This immediately changes the rules for invoicing and VAT payments, and instead of reverse charge, local VAT and the need to comply with local compliance obligations apply.

The fundamental problem is that a fixed establishment for VAT is a legally completely different concept from a permanent establishment for income tax purposes. While for income tax (IT), the creation of an establishment is often assessed based on a time test (e.g., providing services for a period exceeding a total of six months), the definition of an FE for VAT focuses on a permanent human and technical structure that is necessary and autonomous for active participation in the supply of a taxable service.

What Activities (e.g., Long-Term IT Services or Consulting) Trigger the Risk of Mandatory Registration

The risk of creating an FE is particularly high for companies providing complex and long-term services, such as long-term IT support, engineering, financial consulting, or project management in another Member State. If a Czech company permanently provides these services and has sufficient technical and personnel resources there (e.g., permanently assigned employees in key positions, constant access to the client's IT infrastructure), you risk creating an FE.

This concept is dynamic, as the definition of an FE is constantly evolving based on decisions of the Court of Justice of the EU (CJEU). For example, in Poland, the tax administration recently had to soften its strict approach to the definition of an FE for VAT in response to CJEU case law.

Utilizing the ARROWS International Network to Assess Risks

Given that CJEU case law and local interpretations are constantly changing, the issue of Fixed Establishment requires detailed and up-to-date knowledge of local tax laws.

Thanks to the ARROWS International network, built over ten years, we handle cases with an international element on a practically daily basis and can assess the risk of creating an FE for VAT in a specific Member State, taking into account the specifics of your business model. Neglecting this distinction is one of the most common and costly mistakes made by international corporations.

The lawyers at ARROWS can provide you with expert legal opinions and advice that will thoroughly assess whether your specific cross-border business model creates a risk of a Fixed Establishment. Our lawyers are ready to help you – write to konzultace@arws.cz.

Exceptions That Change the Rules: When the Basic Rule Isn't Enough

The basic B2B rule for the place of supply is often overridden by specific exceptions defined in Sections 10 to 10i of the VAT Act. These exceptions always take precedence and often trigger a VAT registration obligation abroad, regardless of the recipient's status.

Services Related to Immovable Property: The Place of Supply That Forces You to Register

For services related to immovable property, the absolute rule is that the place of supply is always where the immovable property is located. This exception applies to both B2B and B2C supplies.

Services related to immovable property are defined very broadly and include not only construction work, short-term leases, or accommodation, but also valuation, management, and even legal, engineering, or architectural consulting, if they specifically relate to the property in question. Due to the unclear definition of what exactly is considered a related service, it is recommended to refer to the European Commission's Explanatory Notes.

Providing such a service abroad (e.g., legal advice on the purchase of a development plot in Austria) will almost always trigger a VAT registration obligation in that country. Even with a seemingly simple lease, it is necessary to assess whether it is the main supply or whether other taxable services are related to it (e.g., cleaning, management), which is another area full of legal exceptions.

Cultural, Sporting, and Educational Services

Another important exception concerns cultural, artistic, sporting, educational, and entertainment services. For these services, the place of supply is determined by where these services are physically carried out.

For example, if a Czech VAT payer organizes a conference or professional training in Germany, VAT is paid in Germany, where the service actually takes place. However, if these services are provided to another person (e.g., an intermediary), the standard basic rule according to the recipient's location applies. ARROWS uses these interpretative tools daily to securely set up your invoicing.

Compliance Under Scrutiny: The EC Sales List and Its Sanction Risks

Flawless and timely VAT reporting is just as important as correctly determining the place of supply.

Deadlines and Form of Submission: VAT Reporting Under Time Pressure

For B2B supplies to the EU (Reverse Charge), the key report is the EC Sales List (ESL). The ESL serves to inform the tax administrations of other Member States that their entities are required to declare tax on supplies from your company.

The EC Sales List must be submitted exclusively electronically. The deadline is very short: the ESL must be filed within 25 days after the end of the calendar month in which the supply was made. This obligation applies to both VAT payers and Identified Persons.

What Are the Risks if You Forget to File the EC Sales List or File It Incorrectly?

Errors in the EC Sales List, such as an incorrect value or a wrong VAT ID, disrupt the VIES control mechanism and can lead to problems for your business partner abroad and a subsequent audit for you.

Although a penalty may not be automatically imposed for late filing of the ESL, if you fail to file it even after a request from the tax administrator, you face a procedural penalty of up to CZK 500,000. This is an example of how a small administrative error can have a huge financial impact, especially if the client does not respond to the tax authority's request.

The ARROWS law firm provides expert training in this area, including certification for your team, to prevent these errors from occurring. Do not hesitate to contact our office – konzultace@arws.cz.

Invoicing Outside the EU: How to Correctly Set Up VAT for Third Countries?

The rules for trading with entities outside the European Union (so-called Third Countries) are less complex than within the EU, as there is no need to harmonize VAT legislation.

Difference in Rules for Providing Services to Third Countries

B2B to a Third Country: If a service is provided to a taxable person (B2B) in a Third Country, the place of supply is usually the Third Country, i.e., the recipient's registered office. The supply is exempt in the Czech Republic. There is no need to file an EC Sales List.

B2C to a Third Country (Exception in Section 10h): For certain specific services (such as consulting, engineering, legal, financial, and similar services) provided to non-business customers in a Third Country, the place of supply is also the Third Country. This exception is key because it ensures that in these cases, a Czech company does not charge Czech VAT to an end consumer outside the EU.

Our lawyers at ARROWS handle this agenda daily and can provide you with legal advice on obtaining permits and licenses that may be required for trade with Third Countries. Contact us at konzultace@arws.cz.

Audits, Disputes, and Penalties: Why It Pays to Have Insured Experts

Securing your international tax agenda is crucial for protecting your company's finances.

How International VAT Audits are Conducted

An incorrectly determined place of supply or erroneous reporting of a reverse charge becomes the subject of cross-border tax audits. If an error is found, a tax assessment is made.

Risk of Assessment and Interest: In the Czech Republic, the taxpayer is assessed a penalty of 20% of the additionally assessed tax. In addition, high late payment interest is charged, calculated as the CNB repo rate increased by eight percentage points. This risk is exponential over time, meaning the longer the error persists, the greater the financial impact.

Security with ARROWS: Your Peace of Mind Insurance

The VAT agenda is so complex and lengthy that even small procedural errors, especially in the interpretation of Fixed Establishment, can lead to financial disaster. Given that individual steps that seem simple have hidden exceptions, procedural details, and connections to other regulations that a layperson often does not see, it is better to entrust the entire matter to experts.

The ARROWS law firm handles this agenda daily, which allows us to significantly shorten the time for the client and minimize the risk of errors. For maximum client security, ARROWS is insured for damages up to CZK 500,000,000. For your business, this is the safest way to have your tax agenda perfectly secured. We also regularly partner with in-house corporate lawyers to resolve special tax matters.

Leave the Complex Tax Agenda to Us

The place of supply for VAT and the related compliance agenda is a complex mechanism full of procedural details and hidden risks. When providing long-term services abroad, the risk that a VAT registration obligation will unexpectedly arise in a foreign country (Fixed Establishment) due to changing CJEU case law is real and financially paralyzing.

Entrust your tax strategy to the experienced experts at the ARROWS law firm. Our experience from providing long-term services to a portfolio that includes more than 150 joint-stock companies, 250 limited liability companies, and 50 municipalities and regions guarantees a fast and high-quality solution that we pride ourselves on.

We will help you with the preparation of documentation, contracts, and guidelines, provide legal consultations that protect against fines and audits, and represent you in licensing, sanction, and administrative proceedings. Moreover, within our community, we are happy to connect clients who have interesting investment or business opportunities, and we are always keen to hear about interesting business ideas.

If you do not want to risk mistakes, damages, or penalties, you can safely leave the entire matter to us. Ensure your tax certainty in international trade. Contact ARROWS at konzultace@arws.cz.