The Czech Republic has been part of the European Union (EU) since 2004, so it complies with the EU’s value-added tax (VAT) framework for member states. The EU has certain requirements in place for the collection of tax, as well as mechanisms that can make collecting VAT easier, such as the One-Stop Shop.
However, each EU country can set its own VAT rates and has the leeway to establish certain rules within the EU’s VAT framework. If you are doing business in the Czech Republic, you must know the country’s rules and the EU rules that apply to your transaction.
This guide will explain what you need to know about the Czech Republic’s VAT rules and regulations, so you can comply with your obligations and avoid costly fines and other penalties.
How VAT works in the Czech Republic
VAT is known as Daň z přidané hodnoty (DPH) in the Czech Republic. Both domestic and foreign businesses that sell to Czech customers may be required to register for and collect VAT.
Czech VAT rates
Czech VAT rates were recently simplified, with two reduced rates consolidated into one. Here are the current Czech VAT rates that apply to different kinds of goods and services:
21% standard VAT rate: This rate applies to non-exempt goods and services that are not zero-rated or taxed at a reduced rate.
12% reduced VAT rate: This rate applies to items including:
- Some food products, including gluten-free food and baby food.
- Water supplies.
- Non-alcoholic beverages (in some circumstances).
- Agricultural products.
- Admission to cultural events.
- Restaurants (in some circumstances).
- Catering services.
- Pharmaceutical products.
- Domestic passenger transport.
0% VAT rate: Zero-rated items include some international passenger transport and some intra-community transport. Under recent changes, some media products, including books, ebooks, newspapers, and periodicals, have also been reclassified as zero-rated.
Exemptions: Exempt items include:
- Basic postal services and stamps.
- Some media.
- Radio and TV broadcasts.
- Financial transactions.
- Pensions.
- Insurance transactions.
- Immovable items and immovable item leases.
- Training and educational items.
- Healthcare services.
- Healthcare products.
- Social assistance services.
- Lotteries.
Registering for VAT
Czech registration requirements may apply to domestic and foreign companies.
Once you’re required to register for VAT, you must submit the registration and begin following the rules for collecting VAT, submitting required returns, and remitting payments.
Resident vs. non-resident businesses
Businesses established in the Czech Republic must register for VAT if their turnover exceeds CZK 2 million in a calendar year, or immediately if turnover surpasses the higher Czech threshold of CZK 2,536,500.
Non-resident companies generally have no minimum threshold and must register for VAT before they carry out their first taxable transaction in the Czech Republic.
EU regulations set a €10,000 threshold for cross-border distance sales and certain services within the EU, so once your EU-wide turnover for those supplies exceeds that amount, you must register (or use the One-Stop Shop scheme).
Companies participating in Fulfilled by Amazon programs that involve storing goods in the Czech Republic must also register for Czech VAT.
How to register
Resident businesses can apply for a Czech VAT number through their local tax office. Non-resident companies will need to apply to the Financial Office in Prague. You’ll need to complete the application in Czech and can expect the process to take between three and four weeks.
Working with a tax representative in EU countries
Some EU countries require non-resident companies to have a fiscal representative, which is a local representative who is required to agree to share responsibility for ensuring VAT requirements are fulfilled. This is not mandated in the Czech Republic.
When to charge tax
If you are selling goods or services as a Czech business or within the Czech Republic, you must charge tax if:
- You meet registration thresholds.
- VAT isn’t taken care of by a marketplace seller or through the reverse charge mechanism.
- Your transaction is taxable.
It’s important that you understand when you must register and that you are aware that Czech rules for which items are taxable may differ from the rules in other EU countries.
Reverse charges
The reverse charge mechanism is a system within the EU that facilitates the sale of taxable goods and services across borders in some situations (including B2B sales and some domestic sales). In some cases, it can allow sellers to register in fewer countries.
The reverse charge mechanism works by shifting the responsibility for VAT collection to the buyer instead of the supplier. The distant supplier doesn’t report the VAT on the invoice, and the buyer can calculate it and report VAT on their own returns, claiming allowable deductions at the same time on the same return.
Since the seller is not responsible for the VAT and the local buyer is, the reverse charge mechanism can greatly simplify the process of complying with the Czech Republic’s VAT rules.
B2B vs. B2C
When you’re charging VAT, there are different rules and processes for selling to consumers (B2C) versus businesses (B2B), especially if you are a non-resident seller. For example:
- The reverse charge mechanism may apply to B2B sales.
- You may be able to use the One-Stop Shop scheme to comply with your VAT requirements for B2C sales
It’s important to understand how these programs work to impact your responsibility for tax collection.
Marketplace facilitators
Many companies choose to sell products to Czech consumers through third-party marketplaces. In some cases, such as when those marketplaces feature their own brand prominently or take on responsibility for certain key tasks instrumental to the sales process, they become deemed sellers.
In the Czech Republic and other EU countries, a deemed seller is responsible for the collection and reporting of VAT on transactions that take place on its marketplace. Not all third parties that facilitate transactions take on this responsibility. For example, a simple payment processor like Stripe wouldn’t. But those that play a key role in the transaction, like Amazon and eBay, do in some circumstances.
If you are selling to Czech customers through a marketplace that is a deemed seller, you may not have to collect VAT on those transactions.
VAT deductions
VAT deductions can reduce VAT owed. Deductions are allowed from VAT returns for input VAT that was paid as a direct result of the company’s taxable transactions.
You will need to have an invoice that is in full compliance with the Czech Republic’s VAT invoice requirements in order for a deduction to be permitted.
Statute of limitations
There is a three-year statute of limitations for VAT in the Czech Republic, which begins running from the day of the tax filing deadline (there are situations in which this period can be extended).
Staying compliant with Czech VAT regulations
Registering for VAT when required is just one of your obligations under Czech VAT regulations. You also need to follow the rules for invoicing, filing VAT returns, completing all required forms, and meeting filing deadlines.
Invoicing requirements
The Czech Republic has strict rules for invoicing, including requiring that invoices be issued within 15 days following the tax point. Invoices must contain certain information, including:
- Issue date and date of supply if different from the invoice issue date.
- A sequential unique number.
- Contact information for the supplier and buyer.
- A complete description of goods, including quantities and unit numbers.
- VAT rates as well as the total VAT charged by rate.
- Information to show why the transaction is a zero-VAT transaction, if applicable.
- Details about any scheme that applies.
- Gross value of the transaction.
When invoices are below CZK 10,000, you can send a simplified invoice with just a number, the supplier’s VAT number, the amount charged, and a description of goods and services.
Filing VAT returns
Businesses that have revenue of less than CZK 10 million in the past two years can file quarterly returns, while businesses with more revenue must file monthly. Filings must be submitted electronically via the Financial Administration of the Czech Republic.
Currently, when annual turnover exceeds CZK 12 million for arrivals and CZK 12 million for dispatches, Intrastat declarations are required.
Filing deadlines
The deadline for filing a VAT return is the 25th day of the month after the reporting period.
Record-keeping requirements
You should hold on to Czech VAT records for 10 years.
Risks of noncompliance
Not complying with Czech VAT rules exposes your business to serious risks. For one, it increases the likelihood that you will be audited, an expensive, invasive, and time-consuming process.
If you are found to have unfiled returns or unremitted VAT payments, you may be responsible for fines and other fees.
The penalty for late filing can be as high as CZK 300,000. Late payment of VAT is subject to interest calculated at the statutory rate, while incorrect or understated VAT declarations may result in a fine of up to 20% of the assessed tax.
Future business opportunities could also be impacted by the damage to your reputation and by the threat of legal action for unresolved tax issues.
Tips on how to stay compliant
The key to compliance is to understand the rules, including when you’re required to register, what items are taxable, and how often you must file VAT forms.
There are also some programs in the EU aimed at making compliance simpler that you should take advantage of, as well as some software tools that can automate much of the tedious work and take care of the technicalities of fulfilling your tax obligations.
One-Stop Shop and Import One-Stop Shop
Beginning in July 2021, the One-Stop Shop (OSS) and Import One-Stop Shop (IOSS) programs were put into effect in the Czech Republic and other EU countries with the goal of simplifying VAT collection on B2C transactions.
Under OSS, EU businesses that sell to different EU countries have the option to register with just one member state and submit just one VAT return. These companies will charge VAT at the point of purchase following the rules of the buyer’s home country, and the collected funds will be distributed appropriately.
IOSS works similarly and allows for one-country registration and one-stop filing for imports valued at €150 or less. Non-EU countries are also allowed to participate in IOSS, and this can significantly simplify VAT compliance, as you may not need to file individual returns in every country.
Software solutions
Following the rules in the Czech Republic is likely just one of many things you need to do in order to fulfill all of your business’s tax obligations.
Managing sales tax compliance in even one country can be challenging on your own, but the good news is, there are solutions out there like Numeral that make the process easy. Numeral can help you to manage sales tax and VAT obligations in more than 75 countries.
With Numeral, everything is taken care of for you, from tracking when you hit registration obligations to collecting tax at the right rate to filing and paying VAT on time to keeping essential records safe. You’ll spend less than five minutes a month on sales tax, and Numeral will make sure you’re audit-ready and fully following the Czech Republic’s rules at all times.
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Final thoughts
Although the EU has aimed to simplify tax compliance in the Czech Republic and other member countries, following the rules in multiple countries can still quickly become overwhelming.
Let Numeral take that task off your plate so you won’t have to worry about whether your VAT obligations are going unfulfilled. Contact us today to learn how we can help.
