Refund of claimed VAT deductions on substantial real estate repairs
In real estate, an important change awaits VAT payers which can be a rather unfavourable one. A proposal for the VAT amendment (with expected effectiveness from 2019) should introduce an obligation to retroactively adjust VAT deductions claimed on substantial repairs made to real estate if the real estate is transferred within 10 years of the repairs.
Current treatment of VAT deductions on real estate
The current wording of the law imposes on payers the obligation to retroactively reduce the VAT deduction claimed when acquiring real estate or realising its technical appreciation if, within a period of 10 years, the manner of using the real estate changes and the new manner of using the real estate does not allow or restricts VAT claims. A typical example could be using real estate or a part thereof for tax-exempt rent. In such a case, the payer is obliged to calculate and return part of the formerly claimed VAT.
On the other hand, the deduction can be adjusted in a positive way if the payers were not entitled to claim the deduction when the real estate was acquired or when the technical appreciation was performed or if they were only entitled to a limited deduction; the payers become subsequently entitled to the claim or its increase because of the change in use of the real estate.
An important aspect is that such a subsequent adjustment to the VAT claim has so far not been related to received supplies other than the VAT claimed when acquiring real estate or performing its technical appreciation.
New treatment of VAT deductions on real estate repairs if subsequently delivered
The newly proposed subsequent adjustment of VAT deductions on substantial repairs means that the obligation will be extended. But, contrary to the adjustment of VAT deductions claimed at acquisition and technical appreciation of real estate, the new obligation to adjust the VAT deduction on repairs does not arise for any change in using real estate which generally means a change in the claim but only if the real estate is delivered.
The reason for adjustment of the deduction claim regarding repairs will be only a transfer of real estate which (with respect to its VAT exemption or VAT non-exemption) is a change in use of the real estate compared to the moment the deduction claim on repairs was applied. An adjustment should not be applied if - for example - real estate was rented as tax non-exempted and then as tax exempted.
What repairs will be related to the possible adjustment of VAT deductions?
According to the amendment, substantial repairs will mean repairs that are considered repairs for accounting purposes (e.g. there will be a similar difference between repairs and technical appreciation as in accounting) if the amount of all relevant received supplies excluding VAT is above CZK 200,000.
Adjustment of deductions will be mandatorily applied to all repairs which start after the amendment is effective (most likely 1 January 2019). Repairs that started before but are finished after the amendment is effective can be adjusted but no obligation to subsequent adjustments of the terminated deductions should arise for the payers (e.g. if originally there had been no deduction claim but the subsequent delivery of real estate had given rise to a deduction claim).
In practical terms, it will be necessary to specify which of the received supplies are to be assigned to one "repair" for the purpose of stipulating the above-mentioned limit of CZK 200,000 or specifying the start and finish of a repair. Often there are a number of supplies received from various suppliers for a relatively long period.
