The Ministry of Finance confirmed in the Decree D-130 that VAT payers whose revenues from financial services exceed 10% of either total revenue or 10M Ke are considered to be financial institutions, as stipulated in section 28 of the VAT Act. Their input VAT reclaim will be reduced proportionally as a result of rendering tax exempt financial services.
Section 28 of the Czech VAT Act differentiates between financial services which are always tax exempt (e.g. financial brokerage, foreign currency exchange operations) and financial services which are tax exempt on the condition that they are provided by a financial institution (e.g. provision of credits, investment in securities as a principal, trading on own account in securities).
The consequences of this section are that companies falling within the definition of financial institution will be required to treat financial activities as VAT exempt supplies. Hence they will subsequently have to reduce the input VAT reclaim with the use of a coefficient. As there is no mechanism for pooling of inputs in relation to separate outputs, this situation could potentially cause a significant absolute cost for such VAT payers.
The coefficient for VAT recoverable in the year is calculated as the total value, excluding VAT, of all taxable supplies which were rendered in respective tax period, and in respect of which a VAT payer can claim VAT recovery, divided by the total value of both tax exempt and taxable supplies, excluding VAT.
If the coefficient is in the region from 0.95 to 1, the payer of VAT may fully recover input VAT paid. If the coefficient is under the level of 0.95, the payer of VAT has to proportionally reduce his claim to recover input VAT paid.
The content of this article is intended to provide general information on the subject matter. It is therefore not a substitute for specialist advice.
For additional information contact Paul Antrobus or Richard Fletcher on 42/2/2440 1300. Or enter text search 'Arthur Andersen' and 'Business Monitor'.
Section 28 of the Czech VAT Act differentiates between financial services which are always tax exempt (e.g. financial brokerage, foreign currency exchange operations) and financial services which are tax exempt on the condition that they are provided by a financial institution (e.g. provision of credits, investment in securities as a principal, trading on own account in securities).
The consequences of this section are that companies falling within the definition of financial institution will be required to treat financial activities as VAT exempt supplies. Hence they will subsequently have to reduce the input VAT reclaim with the use of a coefficient. As there is no mechanism for pooling of inputs in relation to separate outputs, this situation could potentially cause a significant absolute cost for such VAT payers.
The coefficient for VAT recoverable in the year is calculated as the total value, excluding VAT, of all taxable supplies which were rendered in respective tax period, and in respect of which a VAT payer can claim VAT recovery, divided by the total value of both tax exempt and taxable supplies, excluding VAT.
If the coefficient is in the region from 0.95 to 1, the payer of VAT may fully recover input VAT paid. If the coefficient is under the level of 0.95, the payer of VAT has to proportionally reduce his claim to recover input VAT paid.
The content of this article is intended to provide general information on the subject matter. It is therefore not a substitute for specialist advice.
For additional information contact Paul Antrobus or Richard Fletcher on 42/2/2440 1300. Or enter text search 'Arthur Andersen' and 'Business Monitor'.
