Stricter conditions for VAT exemption of services directly related to the export or import of goods

The General Financial Directorate has published Information on the application of VAT to services directly related to the import and export of goods exempt from VAT within the meaning of Sec. 69 of the VAT Act. The Information was issued in the context of the judgment of the Court of Justice of the European Union of 29 June 2017 in case C-288/16 ‘L. Č.’ The Court of Justice ruled on a situation where an exporter of goods commissioned a carrier to make the delivery of goods to a third country. As, however, the carrier did not have sufficient capacity, it assigned the effective performance of that freight transport to the third country to a subcontractor (another carrier).

The Czech VAT Act has long provided for the VAT exemption of the transport of goods and services directly related to the export or import of goods, with the exception of VAT-exempt services with no right to deduct the tax.

Services directly related to the import or export of goods include those objectively caused by the import or export of goods and those contributing to their actual performance. The Information mentions the condition of the existence of a direct link, such as unloading or customs agent’s services.

However, the direct link between the services and the effectuation of the export or import alone is not sufficient to apply VAT exemption. Another significant condition is the direct provision of the relevant service, either to the importer, exporter, consigner or consignee. This is referred to as the condition of the form of a link.

NEWS 3/2017 Directly related services shall mean services objectively caused by the effectuation of the import or export of goods and contributing to their actual performance (the condition of the existence of a link) and, at the same time, these services being provided directly to the exporter, importer, consigner or consignee (the condition of the form of a link). In the judgment in question, the subcontractor was not given the right to exemption in the context of transport related to the export of goods since the condition of the form of a link was breached. The subcontractor that carried out the transport ought to have charged VAT.

For the sake of completeness, please note that services related to the import of goods under Sec. 69 (2) of the VAT Act continue to be exempt from tax if the value of this service is included in the basis of the assessment of the tax on the import of goods, without the necessity for a direct link, i.e. contractual relationship between the provider and importer or consignee.

The Czech tax administration shall apply this stricter interpretation of services directly related to the import or export of goods from 1 March 2018. Thus we recommend reviewing customer-supplier relationships related to the import or export of goods.