VAT amendment for real estate - july 2025

On July 1, 2025, a major amendment to the VAT Act will come into force in the Czech republic, changing the rules of the game on the real estate market. Whether you are a developer, investor, or corporation managing a real estate portfolio, these changes will directly affect you. In this article, you will find clear answers and practical examples of how to prepare for the shortening of the time test, the new definition of land designated for construction, and what exactly "substantial change" to a building means.

Need advice on this topic? Contact ARROWS Law Firm at office@arws.cz or +420 245 007 740. Your question will be answered by "JUDr. Jakub Dohnal, Ph.D., LL.M.", an expert on the topic.

End of the five-year test: Why is 23 months the new key date?

The most visible change brought about by the amendment to the VAT Act (Act No. 461/2024 Coll.) is a radical reduction of the time test for tax exemption from 5 years to just 23 months. This change not only speeds up the tax cycle for real estate, but above all introduces a completely new logic based on the principle of "initial supply."

Under the new rules, only the first sale of a property after its approval for use or after a substantial change is subject to VAT. Any subsequent sale of the same property is exempt from VAT, provided that no further substantial change has taken place in the meantime. This approach is based on the case law of the Court of Justice of the European Union, according to which economic value is created mainly when a property is first placed on the market.

In practice, this represents a fundamental change. A developer who sells a new apartment six months after its approval will apply VAT. However, if the buyer (e.g., an investment fund) sells this apartment a year later without any significant alterations, this second sale will be exempt from VAT, even though it takes place within the original 23-month period.

This creates a new obligation for buyers to thoroughly check whether their transaction is actually the first or subsequent delivery. ARROWS lawyers can assist clients with the legal analysis of the transaction to determine with certainty whether it is the first or subsequent delivery and which tax regime applies. Are you planning to buy or sell a new property? Check your tax obligations with us. Write to office@arws.cz.

Substantial change to a building: When does renovation "reset" the tax clock?

The term "substantial change" has often been subject to interpretative uncertainty in the past. An amendment to the VAT Act introduces clear rules on this issue and sets out two key conditions that must be met simultaneously for a renovation to be considered a substantial change that restarts the 23-month period.

The first condition is that the alterations lead to a change in the use of the property or substantially alter the conditions of its habitation. The second, and absolutely essential, condition is that the costs of this change (excluding VAT) exceed 30% of the tax base upon its subsequent sale – i.e., 30% of the future sale price.

For investors and developers, this means that they must calculate the tax implications before starting the reconstruction. Furthermore, the costs are assessed exclusively by the person making the sale. Routine maintenance, even if costly, is not considered a substantial change. This mechanism directly affects the popular practice of "flipping" real estate, where extensive renovations can unexpectedly increase the sale price by 21% VAT.

Our real estate law experts:

FAQ – Legal tips on renovations and VAT

How do I calculate the 30% threshold if I don't know the exact sale price yet?

It is necessary to obtain a qualified market valuation. Our lawyers and collaborating appraisers at ARROWS will help you determine the real value and minimize the risk of miscalculation. For a consultation, please contact us at office@arws.cz.

Are the costs of work I do myself included in the costs?

The costs include actual and demonstrable expenses for materials and services. Proper record keeping is key. We can help you prepare the necessary documentation for any inspections. Please write to us at office@arws.cz.

Renovation and substantial alteration of real estate

Risks to be addressed and potential problems and penalties	How ARROWS can help
Unintentional exceeding of the 30% cost limit: The subsequent sale will be subject to 21% VAT, which may completely destroy the planned return on investment. There is a risk of additional tax assessments and penalties.	Legal and tax analysis of the investment plan: We will help you calculate and plan the renovation costs in advance. Would you like to know your legal options? Write to office@arws.cz.
Insufficient documentation of costs: During a tax audit, you will not be able to prove the actual amount of the costs, which may lead to the VAT exemption being questioned.	Preparation and review of contracts with suppliers and setting up internal processes for cost recording: We will ensure that your documentation is airtight. Do you need to prepare contractual documentation? Contact us at office@arws.cz.
Incorrect interpretation of the term "change of use": You make adjustments that you believe are not a significant change, but the tax administrator assesses them differently.	Preparation of a legal opinion: We will assess the nature of the planned adjustments and provide you with legal certainty. Do you need an expert opinion? Contact us at office@arws.cz.
Dispute with the buyer over VAT: If the VAT regime is not clearly specified in the contract and additional tax is assessed, a dispute may arise over who is liable to pay it.	Preparation and review of purchase agreements: Our contracts clearly define the tax regime and protect your interests. To have your contract reviewed, please write to us at office@arws.cz.

Building plots under scrutiny: Which sales will now be subject to an additional 21% VAT?

Perhaps the most significant change concerns the definition of the term building land. Until now, the obligation to pay VAT has often been linked to the existence of a building permit. However, from July 1, 2025, land on which construction is possible based on a zoning plan or other similar document will be considered building land for VAT purposes.

This change has far-reaching consequences. It expands the range of land subject to VAT and also affects individuals who are not engaged in business. If an individual is actively preparing land for sale (e.g., providing utilities, dividing a plot, selling repeatedly), the tax office may consider their activity as an economic activity subject to VAT.

The impact on the price can be dramatic. The sale of land for CZK 14 million, which will now fall under the VAT regime, may become almost CZK 3 million more expensive in tax. The municipal zoning plan thus becomes a key tax document, knowledge of which is absolutely essential for landowners.

New definition of building land and related tax obligations

Risks to be addressed and potential problems and penalties	How ARROWS can help
Sale of land in good faith without VAT: You sell land that is designated for development in the zoning plan. The tax office subsequently designates you as a taxable person and assesses 21% VAT plus penalties.	Verification of the tax regime for land: Before the sale, we analyze the zoning plan and assess whether the sale is subject to VAT. Want to be sure? Request a legal analysis at office@arws.cz.
Assessment of your activity as "economic": The land registry or division of the land into smaller plots may be assessed by the tax office as a business activity, even if you do not have a trade license.	Structuring the transaction and preparing arguments for the tax office: We will help you set up the transaction to minimize the risk of reclassification. Do you need legal assistance with structuring a sale? Write to office@arws.cz.
Incorrectly drafted purchase agreement: The agreement does not address what happens in the event of additional VAT assessment, which leads to costly disputes with the buyer.	Preparation of robust contractual documentation: Our contracts contain clauses that protect you in the event of a change in tax assessment. For a tailor-made contract, please contact us at office@arws.cz.
Loss of competitiveness: If you have to add 21% VAT to the price, your land may be too expensive for the buyer (non-VAT payer) compared to comparable land.	Consulting and strategic planning: We will discuss the options with you, including voluntary taxation if the buyer is a taxpayer. For strategic consulting, please contact us at office@arws.cz.

Strategic preparation for your company: How does ARROWS protect your business?

The new legislation also brings other changes that require attention. For social housing, registration in the land register or the RÚIAN register will be decisive for the application of the reduced 12% VAT rate. When selling real estate to employees or related parties, the tax base will now be based on the usual price, not the agreed price.

These changes are not just isolated tax adjustments, but represent a complex challenge that requires a strategic legal approach. At ARROWS, we are ready to provide your company with comprehensive support that will protect you from risks and help you take advantage of new opportunities.

Our experts will provide you with:

• Preparation of internal guidelines for the correct assessment of the tax regime for real estate and monitoring of reconstruction costs.
• Preparation or revision of purchase and construction contracts to ensure full compliance with the new legislation.
• Representation before courts and administrative authorities in disputes with the tax authorities.
• Specialized training for your employees in the finance, development, or sales departments, including a certificate of completion.

These comprehensive changes show how closely tax issues are linked to everyday practice in real estate development and management. You can find more about this service on our website in the Real Estate Law section of our website.

Have a problem? Contact our experts:

International transactions and the ARROWS International network

The real estate market is becoming increasingly global. Whether you are a foreign investor entering the Czech market or a Czech company with real estate abroad, the new rules will affect you. For example, the amendment facilitates the application of voluntary taxation on leases for tenants from other EU member states.

Thanks to our ARROWS International network, built over ten years, we handle transactions with an international element on a daily basis. We provide legal services outside of the Czech republic and ensure compliance with local and international regulations. Are you dealing with a real estate transaction with a foreign partner? Contact us at office@arws.cz and get a tailor-made legal solution.

Legal certainty as the basis for a successful real estate transaction

The amendment to the VAT Act, effective July 1, 2025, represents one of the biggest changes in the real estate market in recent years. The shortening of the time test, the new definition of a substantial change, and the expansion of the concept of building land bring risks, but also new strategic opportunities. Navigating this complex issue requires a proactive approach and expert legal advice.

At ARROWS, we have long specialized in this area. Our portfolio includes more than 150 joint-stock companies, 250 limited liability companies, and 51 municipalities and regions for which we provide top-quality legal services. We pride ourselves on speed and high quality. We can also connect clients with each other if they have interesting investment or business opportunities.

Don't be caught off guard and risk losing millions. Our lawyers are ready to help you – write to office@arws.cz.

FAQ – Frequently asked legal questions about the VAT amendment for real estate

When exactly does the 23-month period start?

The period begins at the end of the month in which the construction was completed or substantially altered. The moment of completion is considered to be the date on which the first occupancy permit becomes final, or the date on which the conditions for permanent use of the building are met, if no occupancy permit is issued. If you are dealing with a specific situation, please contact us at office@arws.cz.

I bought a new building from a developer with VAT. If I sell it in a year, do I also have to pay VAT?

No, unless you have made a substantial change to the property. Your sale will be considered a subsequent supply, which is exempt from VAT, even if it takes place within the 23-month period from the original occupancy permit. To be on the safe side, we recommend consulting your situation. Write to us at office@arws.cz.

I own a field that the municipality has designated as "land for housing" in its new zoning plan. Do I have to pay VAT when I sell it?

Most likely, yes. According to the new definition, such land is considered building land and its sale is subject to 21% VAT. In addition, if you have prepared the land for sale in any way, there is a risk that your actions will be considered economic activity. For an assessment of your specific case, please do not hesitate to contact us at office@arws.cz.

What if the renovation costs are just over 30%? Can I not declare part of the costs?

We strongly advise against this. It would be an attempt to evade tax, which is a tax offense with serious legal and financial consequences. It is absolutely essential to keep accurate and complete records of all costs. For an immediate solution to your situation, please write to us at office@arws.cz.

Do the changes also apply to unfinished buildings?

Yes. The law stipulates that the supply (sale) of unfinished real estate, i.e., buildings before final approval, will always be subject to VAT regardless of any time tests. Do you need legal assistance with the sale of unfinished real estate? Contact us at office@arws.cz.

What is the difference between routine maintenance and a substantial change?

Routine maintenance (e.g., replacement of windows, repair of the facade, modernization of the bathroom) does not change the use of the property and is not considered a substantial change, even if it is costly. A substantial change always involves a change of purpose (e.g., from offices to apartments) or a fundamental change in living conditions (e.g., a large extension) and must exceed the 30% cost threshold. If you are unsure how to assess your construction modifications, please contact us at office@arws.cz.

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