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Providing employee benefits brings along specific tax issues in the areas of both income taxes and VAT. In early December, minutes of the Coordination Committee between the Chamber of Tax Advisors and the General Financial Directorate were published. Those minutes confirm application of VAT in selected employee benefits. Changes in employee benefits concerning income taxes, which have been effective since 1 January 2024, did not result in any changes in VAT rules. Please find below a summary of agreed conclusions.

Benefits Provided to Employees Free of Charge

Provision of employee benefits free of charge has usually the following tax implications:

• Entitlement to VAT deduction in general is absent, if the benefits are intended to satisfy private needs of employees. Should the entitlement to VAT deduction arise (e.g. it would not be clear in acquiring inputs that they will not be used for economic operation), provision of a benefit to an employee is considered fiction for a taxable supply (the employer is obliged to pay VAT, if such service is not exempt from VAT).
• Entitlement to VAT deduction under general principles exists where an employee is provided with a free supply under special regulations (e.g. provision of drinks in hot workplaces), or where those supplies were provided strictly for business purposes during business meetings.

Benefits Provided to Employees for Consideration

In cases where the benefit involves provision of a service or goods for consideration, such consideration must be a direct equivalent to the performed supply rather than a mere “charge”. A conclusion of the Coordination Committee highlights that a lump-sum threshold cannot be applied in general (e.g. 10% of costs) as a direct equivalent. The General Financial Directorate also arrived at a conclusion that particular circumstances of each case have to always be referred to in considering whether the determined consideration is a direct equivalent to the provided supply.

If an employer provides employees with a benefit for consideration (and the consideration is an equivalent to the performed supply rather than a mere “charge”), a standard provision of a service / supply of goods for consideration, i.e. a taxable supply, is involved from the VAT perspective (unless the supply is tax-exempt). The employer is then usually entitled to tax deduction under general principles of the VAT Act.

Employer’s Supplies for Establishment of and Compliance with Work Conditions for Performance of Work

A specific category includes an employer’s supplies for the establishment of and compliance with work conditions for performance of work; those supplies do not constitute a benefit on the employee’s side, but conditions for the performance of the employer’s operation. As a result, the supply does not involve a supply provided to an employee (it is not subject to VAT), and the employer will generally be entitled to a tax deduction under general principles of the VAT Act in connection with the nature of the employer’s operation.

If you provide your employees with benefits and are unsure as to VAT’s application, please feel free to contact us. We will be happy to help you.  

Michaela Kozminská
kozminska@clarksonhyde.cz