Beware of the purposeful establishment of new companies to circumvent VAT

While some voluntarily register for VAT, others want to avoid the VAT regime - therefore, when they exceed the turnover threshold for compulsory VAT registration, they prefer to set up a new company and charge from scratch. Find out why this is an inappropriate practice.

When does a company become a VAT payer?

If you don't choose to register for VAT voluntarily, you may well become VAT-registered anyway over time due to an excess turnover. For VAT registration purposes, the amount of turnover is tracked for the last 12 consecutive months (so be careful that it is not a calendar or financial year). As soon as the turnover for this period exceeds CZK 2,000,000, you must register as a VAT payer with the tax authorities in accordance with Section 94 of the VAT Act.

The 15-day period for registration starts immediately after the end of the month in which you exceeded the turnover limit (you do not wait for the next quarter or the end of the year).

The turnover includes all amounts you have received from normal business transactions such as supplying goods, services, etc. Extraordinary transactions, such as a one-off sale of a property, are not included in turnover - nor is income you earn from occasional ancillary business activities (for example, making a client a coffee for a fee at a hairdresser's).

What are the advantages and disadvantages of being a VAT payer?

To give you an overview, here are the main areas that are affected by the VAT scheme.

Advantages of being a VAT payer

When two VAT payers trade together, their transactions are as if at a discount. You take the input VAT rate (the rate at which you purchase the goods, raw materials or services yourself) and the output VAT rate (the rate at which you finally sell the goods or your services).

If you buy at a higher VAT rate, you only pay the difference between the two amounts to the government. Similarly, if your income is less than the cost of your purchases, you can claim back the difference in input and output VAT from the state.

VAT status is also interesting from the point of view of foreign transactions within the EU. When you sell goods across borders, they can either be exempt from VAT and thus cheaper for the buyer, or you invoice the price of the goods including VAT and claim a credit for input VAT.

Disadvantages of being a VAT payer

VAT status is disadvantageous when you sell your product, goods or service to ordinary consumers - for example, as a local bistro, boutique or family-run guesthouse whose clients are end customers (individuals, the public). As non-VAT payers, they must always pay the full price of the product, including VAT, and there is no possibility of charging rate differentials.

You do not save tax even if you buy with less VAT on the input than you charge on the output.

There is also a significant disadvantage in terms of administration. Usually you can no longer do without an accountant. You do not file VAT returns and control statements once a year like income tax returns, but monthly (or quarterly if you have been a VAT payer for at least 2 years and request a change in frequency).

It is illegal to set up a new company for the purpose of avoiding VAT

When a company's turnover starts to approach the threshold for compulsory VAT registration, which would make the VAT on outputs more expensive, some entrepreneurs resort to setting up another company where they continue with the same activities but charge from scratch. The aim is to artificially divide the sales so as not to reach the decisive amount.

Legally, however, this is an abuse of tax law principle. The VAT non-payers scheme is primarily intended to support small businesses and reduce their administrative burden. If it is proven that a new company has been set up for the sole purpose of obtaining a tax advantage, it will not be able to benefit from the exemption scheme.

This was ruled by the Court of Justice of the European Union in October 2024, and the judgment therefore applies to all EU member states - even if their own legislation does not address such behaviour. If an inspection by the tax administration (or upon denunciation) proves that the purposeful establishment of a new company was an abusive practice, the Czech courts and the tax administration must also refuse to grant the VAT exemption and supervise the proper collection of the tax.

We will take care of your business taxes

It pays to work with experts on tax issues, including VAT, in the long term. We offer a complete tax service for businesses, from filing to tax returns. We will also handle your accounting agenda under one roof. Get in touch with us using the contact form below.