Information of the GFD on the Application of VAT to Real Estate

Building plot

It remains valid that a building plot, the supply of which is subject to VAT, is an undeveloped plot intended for construction.

The intention to construct on the plot is to be determined primarily based on spatial planning documentation as of the date of supply (e.g., a proposed amendment to the zoning plan newly has no impact on the classification of the plot, as only the status on the date of supply is assessed).

It has now been clarified that the purchaser’s intention to build on the acquired plot is not decisive. The GFD stated in this respect that recent related case law of the Supreme Administrative Court is not applicable to the current wording of the Czech VAT Act, as the current wording differs from the versions assessed in prior court proceedings. However, if under the zoning plan the area is designated for construction but a structure connected to the ground cannot be placed on the plot (e.g., the plot lies within a protection zone), or such placement is highly unlikely, the plot is not considered a building plot.

The intention to build may also be demonstrated by the fact that construction or similar works have been carried out or are being carried out in the vicinity of the plot for the purpose of enabling future construction, e.g., building an access road, deforestation, etc. The Information states that the type of works or the distance from the assessed plot is not decisive, but solely whether their purpose is to enable the future construction. Newly, it is not relevant whether the form of the future building is known at the time such works are performed.

If, at the time of supply, the plot already contains the foundations of a future building, it is necessary to assess the degree of construction progress and the related contractual terms. The supply of a plot on which, for example, a foundation slab has been laid at the time of supply, and there is no agreement that these foundations will be demolished, is considered a supply of a building plot. 

Functional unit

A functional unit generally means a plot and a building firmly connected to the ground that are inseparable from one another.

In practice, the concept of a functional unit was applied very broadly, but this approach has gradually been narrowed and fundamentally modified in relation to the Information. A supply of a plot forming a functional unit with a building may newly be considered primarily where the supply of the plot constitutes an independent transaction. This typically includes situations where the owner of the plot differs from the owner of the building, for example, when the plot owner sells the plot to the owner of the building situated on it. Thus, the concept of a functional unit now has significantly limited application. When supplying a plot with a building, the rules on principal and ancillary supplies must be tested first.

The functional unit concept is further maintained, for example, when defining residential buildings, which subsequently affects the applicable VAT rates. 

Supply of a completed real estate

As of 1 July 2025, only the first supply of real estate after its completion or after a substantial alteration is taxable, provided it takes place within 23 months following the month in which the property or its substantial alteration was completed. The decisive moment is usually the issuance of the occupancy approval.

Due to the absence of transitional provisions, the Information provides several specific examples of how to proceed under the new rules. For instance, the sale of a house that was approved and sold at least once before 1 July 2025 will automatically be VAT exempt after this date. At the same time, any reconstruction carried out in the preceding 23 months must be taken into account to assess whether it meets the new definition of substantial alteration.

Any supply of real estate prior to completion remains a taxable supply. For exempt supplies, the option to tax remains available. 

Substantial alteration

A substantial alteration newly refers only to cases where the reconstruction aims to change the use or the conditions of use of the building, provided that the costs of such changes exceed 30% of the tax base of the property at the time of its sale. Unlike previous rules, carrying out construction works is now a mandatory condition. The concept of change of use without construction works has been abolished.

A change in the use of a building refers, for example, to construction changes converting accommodation facilities into residential buildings. A change in the conditions of use refers essentially to any construction works that go beyond regular maintenance. The Information further states that the costs of a substantial alteration are assessed for the construction project as a whole, and where a substantial alteration is carried out in stages, the decisive moment for the time test is the completion of the last stage. It remains unclear how to proceed when various construction works and regular repairs are carried out on the same property within a certain period.

All costs incurred by the owner, including construction works carried out by a tenant, are included in the value of a substantial alteration. The only item excluded is interest on loans. Costs incurred by previous owners are not taken into account. 

VAT rate on supplies of real estate

The reduced VAT rate applies to supplies of buildings for social housing, including both completed buildings and those still under construction. A building for social housing is defined in two ways: by type and by intended use.

A building for social housing defined by type includes any residential building meeting the statutory floor‑area limits — 120 m² for an apartment, 350 m² for a family house, and a majority residential area intended for social housing in an apartment building. A new methodology for calculating floor area has been published in the annex to the Information. As of 1 July 2025, the definition of residential buildings for family and apartment houses is strictly tied to the entry in the Register of Territorial Identification, Addresses and Real Estate (hereinafter as ‘the Register’). The Information explicitly states that if the actual or factual use of the building differs from its entry in the Register, such fact is irrelevant for legal certainty of taxpayers. For buildings under construction not yet registered in the Register, the building is considered residential only if it can reasonably be assumed that it will be registered as such. This assessment must be based primarily on project documentation, planning permission, or the zoning plan.

A building defined as social housing by intended use refers to specific structures listed by law, such as social service facilities, dormitories, etc. These do not need to be registered in the Register as residential buildings. The condition is that the sum of floor areas designated as social housing and social living spaces exceeds half of the total floor area. The new definition aims to prevent disputes concerning VAT rates on mixed‑use buildings, for example when constructing a senior home that includes facilities such as a hairdresser or pedicure. 

VAT rate for installation and construction works

For installation and construction works related to buildings for social housing, the reduced VAT rate applies. To apply the reduced VAT rate to construction works on an unfinished building, the outcome of the construction must always be a building for social housing, not merely a residential building.

The reduced VAT rate also applies to construction and installation works on completed residential or social housing buildings. The Information confirms that the reduced rate applies even to works carried out on parts of a completed residential or social housing building that do not serve residential purposes (e.g., a grocery shop), provided the building as a whole is a completed residential or social housing building.

For construction works carried out on completed buildings that are not residential or social housing buildings, the reduced VAT rate applies only if the works are performed on those parts that serve exclusively for residential or social housing purposes. A problematic situation arises where works are carried out on parts serving mixed purposes, for example, electrical repairs in both residential and non‑residential areas of a mixed use building. In such cases, part of the works will be subject to the standard VAT rate and part to the reduced rate. 

The above mentioned changes to VAT rules for real estate are highly complex, and we are already observing their significant impacts in practice. We would be pleased to review with you any specific situations concerning your properties, planned disposals, or ongoing reconstructions and assist you in correctly determining their VAT treatment.

Authors:

Petr Drahoš, Senior Manager, Tax Department

Štěpánka Šťastná, Tax Department Manager