Dear Readers,
We want to inform you about the Czech Supreme Administrative Court’s (the “SAC”) Decision No. Afs 323/2021 – 56 dated 13 November 2023 that dealt with the question of the VAT mode applicable to technical improvements in terminating a lease.
What Was the Litigation About?
A tenant performed revitalisation (technical improvement) of a main train station’s premises and recognised the revitalisation’s costs as technical improvement, which was amortised with the landlord’s consent. The property was sublet by the tenant. Upon the lease’s termination, the tenant charged a portion of those costs to the landlord (in the amount of the technical improvement’s tax net book value), and applied the reverse charge mechanism on the supply in compliance with Section 92e of the VAT Act (the “VATA”).
The tenant asked the General Financial Directorate (the “GFD”) for a binding consideration of the applied VAT mode. The GFD assessed the application of the reverse charge mechanism (the “RCM”) as incorrect. However, the tenant issued an invoice with the applied reverse charge before the GFD’s decision was received. To follow upon the GFD’s decision, the tenant subsequently issued a corrective tax document showing VAT.
As a consequence, the litigation sought to arrive at a decision whether the tax administrator and later on the Municipal Court correctly considered the concerned supply a service’s provision with a VAT charge (i.e. without a link to the RCM’s application pursuant to Section 92e of the VATA), where the tax should have been reported and paid by the payer who made the supply.
Key Reason for the SAC’s Decision
The Supreme Administrative Court agreed with the tax administrator’s opinion and subsequently with the Municipal Court’s decision, i.e. it also considered the supply a supply where the reverse charge mechanism should not be applied.
In the SAC’s view, VAT is reported by the payer performing the concerned supply under the basic VAT rule. The reverse charge mechanism is an exception from that rule and, as a result, it should only be interpreted in situations regulated by law. In addition to this, leaving a property’s technical improvement to a landlord cannot be classified as the provision of construction and assembly work under Section 92e of the VATA in the SAC’s opinion because such supply (a service of transferring another property value) does not fall under Sections 41 through 43 of the CZ-CPA Classification (41: Buildings and Construction of Buildings, 42: Engineering Structures and Construction Thereof, 43: Specialised Construction Work).
Hence, this decision clearly indicates that technical improvement’s settlement upon lease’s termination (linked to leaving goods to another person for the use pursuant to Section 14 (1) (b) of the VATA) is a taxable provision of a service where the payer who made the supply (the tenant in this case) will apply VAT in the basic rate.
On the one hand, the SAC’s decision finally provided clear conclusions as to what steps to take in settling technical improvement upon a lease’s termination. On the other hand, a question of applicability of Section 92a (7) of the VATA arises, as this provision establishes the fiction of applying the reverse charge mechanism if contracting parties (VAT payers) have a reason to believe that the taxable supply is subject to the reverse charge mechanism.
Please feel free to contact us, if you need additional information with regard to this article. We are ready to help you.
Michal komárek
komarek@clarksonhyde.cz