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Czech Republic: Lessor denied reduced VAT deduction for air conditioning repairs

Czech Republic: Lessor denied reduced VAT deduction

The Supreme Administrative Court issued a decision in a case involving air-conditioning repair in a building with leased premises that were, depending on their location in the building, subject to value added tax (VAT). At issue was a claim for a reduced VAT deduction. According to the court’s decision, the connection between the taxable supply received and the taxable supply provided was not demonstrated; thus, the claim for a reduced VAT deduction was denied.

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The case identifying information is: No. 1 Afs 253/2018


Summary

The taxpayer/lessor leased non-residential premises on the ground and first floors of a building; these leases were VAT exempt. However, the premises leased out on the second floor of the same building were subject to VAT.

In premises leased out without VAT (on the ground and first floors), air conditioning units had to be replaced, and the taxpayer claimed a VAT deduction on the supply. The tax administrator challenged this claim, asserting that although the building was not formally divided into units, it was factually separated into clearly identifiable parts (as defined by lease agreements) that were subject to different tax treatment.

The tax administrator did not assert that the air conditioning units had become a part of the building. Rather, the issue was whether this repair was used to provide taxable supplies—a crucial element in the context of the VAT neutrality principle.

The Supreme Administrative Court held that repair of the air conditioning unit for the leased premises not subject to VAT had no effect on the second floor where premises were leased subject to VAT. Therefore, there was no connection or link between the taxable supply received (the air conditioning repair) and the taxable supply provided (the lease of premises on the second floor subject to VAT). The taxpayer, thus, failed to satisfy the conditions for claiming a reduced VAT deduction.

Read a November 2019 report prepared by the KPMG member firm in the Czech Republic

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