News 1/2020

Generalized reverse charge mechanism in the Czech Republic

The European Commission has permitted the Czech Republic to temporarily apply a generalized reverse charge mechanism from 1 July 2020 to 30 June 2022, i.e. until the final system of VAT rules is implemented. All taxable supplies of goods and services will be subject to the new mechanism if the value of a transaction exceeds CZK 450,000 (EUR 17,500).

Under the reverse charge mechanism, the seller makes the purchaser liable to pay output VAT on taxable supplies with the place of performance in the Czech Republic.

The main reason the Czech Republic applied for a generalized reverse charge mechanism was to curb carousel fraud. A sector-related reverse charge mechanism has already been applied in the Czech Republic in all areas permitted by existing EU law—the construction sector, precious metal trade, selected IT products and gas and electricity supply.

The Czech Republic applied for this exemption, under which Member States may implement a generalized reverse charge mechanism, in June 2014.

The Economic and Financial Affairs Council gave its final approval to this application in November 2019.

The approved measure must first be translated into Czech legislation. However, this procedure has not yet begun since the Czech Republic postponed implementing the mechanism in order to negotiate an extension before implementation. The aim was to avoid criticism that an amendment to the tax scheme for only 18 months was not an appropriate systemic action and added an excessive administrative burden on companies.

It is currently not clear when and whether the extension will be approved. However, this is not likely to happen before the end of 2020, and anticipating further developments in 2021 is difficult. To conclude, a generalized reverse charge mechanism has not yet been implemented in the Czech Republic.