In an effort to reduce increasing deficits in the state budget, the Czech government has prepared a financial reform, consisting in amendments of a number of tax and social security laws. The financial reform is subject to many political controversies and the government has difficulties to obtain the necessary support in the Czech Parliament to approve the envisaged legislative changes. The situation is even more complicated by the fact that the President may veto bills approved by Parliament and such presidential veto may be overcome only by an absolute majority of all MPs of the Chamber of Deputies.

So far, the only piece of legislation within the framework of the financial reform having been finally approved by the Parliament is the Amendment of the Act on Value Added Tax, which has been reconfirmed by an absolute majority of MPs after a presidential veto.

The amendment introduces a number of changes into the system of VAT some of which aim at harmonizing the Czech legislation with the EU directives. However, the amended version of the VAT Act is still not fully in line with the EU law. Full compliance of the Czech VAT legislation with the EU law should be achieved by enacting a new VAT Act which is under preparation now.

Probably the most important change in the system of VAT introduced by the amendment is lowering the minimum amount of imposing upon the business the obligation to register as VAT payer. From now on, any person subject to the tax whose 12 months turnover exceeds 2 million CZK (approx.65 000 EUR)shall be obligated to register as VAT payer (before, the limit was 3 million CZK turnover during 12 months and at the same time 750 000 CZK turnover during 3 subsequent months).

The amendment has modified the definition of financial activities enjoying a VAT exemption. In this connection, the amendment also modifies the conditions for claims for subtraction of the tax to arise. From now on, these claims shall be shortened apart from others also in case a performance subject to VAT is used by the VAT payer to invest in securities, as transfer of securities is one of financial activities exempted from VAT. It is questionable how this amendment shall affect the conduct of institutional investors in securities among Czech VAT payers.

The amendment also changes the conditions of VAT refund to foreign natural persons, exporting goods bought in the Czech Republic. Such persons shall be entitled to a VAT refund only if the total price of goods paid to one seller during one day exceeds 2500 CZK and the goods are exported within 30 days as of the day of purchase.

Finally, the amendment modifies the classification of goods and services subject to 5%and 22%VAT rate, widening the scope of applicability of the 22%rate,and comprises a number of technical precisions.

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