VAT Deduction: When You're Entitled and How to Claim It

As a VAT-registered business, you have the right to deduct the tax included in the price of goods and services you purchase. This input VAT deduction is one of the main benefits of VAT registration — but only if you meet all the legally required conditions. In practice, it turns out that the deduction area is where the most mistakes occur and where tax authority assessments most frequently follow. Let's take a detailed look at when you're entitled to a deduction, how to claim it correctly, and what pitfalls to avoid.

What Is VAT Deduction and Why Does It Matter

VAT deduction is a mechanism that prevents tax from accumulating along the supply chain. When you, as a VAT payer, purchase goods or a service from another VAT payer, the price includes VAT. You can deduct this input tax from the tax you collect on your outputs (i.e., the VAT you charge your customers). You then remit only the difference to the tax authorities.

How the Deduction Works in Practice

Let's take a craftsman — a carpenter who is a VAT payer:

• Buys timber for CZK 10,000 + CZK 2,100 VAT = CZK 12,100
• Makes furniture and sells it for CZK 30,000 + CZK 6,300 VAT = CZK 36,300
• Output VAT: CZK 6,300
• Input VAT (deduction): CZK 2,100
• Amount remitted to the tax office: 6,300 − 2,100 = CZK 4,200

Without the deduction, he would remit the full CZK 6,300, and the timber would effectively cost him CZK 2,100 more.

Basic Conditions for Claiming a VAT Deduction

To claim a VAT deduction, you must meet several conditions simultaneously. Failing to meet even one of them can result in the deduction being disallowed.

Required Elements of a Tax Document

Under § 29 of the VAT Act, a tax document must include:

Full VAT Deduction

You are entitled to a full deduction when you use the received taxable supply exclusively for purposes that carry the right to deduct. In practice, this means you use the purchased goods or service solely for your economic activity, specifically for:

• Taxable supplies (sales at the standard or reduced VAT rate)
• VAT-exempt supplies with the right to deduct (e.g., intra-EU supply of goods, exports)
• Financial activities that are no longer exempt from 2026 onwards (certain financial activities are being reclassified as taxable supplies from that date)

Examples of Full Deduction

Pro-Rata VAT Deduction (§ 75)

The pro-rata deduction applies when you use a received taxable supply not only for your economic activity but also partly for purposes unrelated to it — typically personal use.

When the Pro-Rata Deduction Applies

The most common situations:

• Car — used for both business and private purposes
• Mobile phone — business and personal calls
• Computer — work and personal use
• Property — part used as an office, part as a residence

How the Pro-Rata Coefficient Is Calculated

The pro-rata coefficient expresses the share of use for economic activity. You determine it by estimating the actual or expected proportion.

Adjusting the Pro-Rata Deduction

It's important to note that the pro-rata coefficient is not final. Under § 75(4) of the VAT Act:

• If the actual use ratio differs by more than 10 percentage points from the estimate, you must adjust the deduction
• The adjustment is made in the last tax period of the calendar year
• For long-term assets, the adjustment period is 5 years (10 years for real estate)

Partial VAT Deduction (§ 76)

The partial (pro-rata) deduction applies when a VAT payer makes both supplies that carry the right to deduct (taxable supplies, exempt supplies with the right to deduct) and supplies that do not carry the right to deduct (exempt supplies without the right to deduct).

Typical Cases for Partial Deduction

• A landlord who lets property VAT-exempt while also conducting a taxable business activity
• A doctor who provides exempt healthcare services while also selling taxable supplements
• An educational institution offering exempt education alongside taxable consulting services

Calculating the Coefficient for Partial Deduction

The coefficient is calculated as follows:

Numerator: Total value of supplies carrying the right to deduct Denominator: Total value of supplies carrying the right to deduct + total value of supplies not carrying the right to deduct

Provisional and Settlement Coefficients

During the year, you use a provisional coefficient based on the previous year's figures. At the end of the year, you carry out an annual settlement in which the provisional coefficient is replaced by the actual (settlement) coefficient.

Supplies Excluded from VAT Deduction

The VAT Act exhaustively lists certain supplies that are excluded from the right to deduct. Even if you meet all other conditions, you cannot deduct VAT on the following items.

Entertainment (§ 72(4))

You are not entitled to deduct VAT on supplies used for entertainment purposes. This includes in particular:

• Hospitality for business partners (lunches, dinners)
• Refreshments at company events
• Gifts beyond what is customary (note: promotional items up to CZK 500 excluding VAT bearing a logo are exempt from this restriction)

Other Exclusions

• Supplies acquired for purposes unrelated to economic activity
• Supplies used exclusively for exempt supplies without the right to deduct

Changes to VAT Deduction Rules Effective from 2025 and 2026

Changes Effective 1 January 2025

Several amendments to deduction rules took effect in 2025:

• New turnover calculation — turnover is now monitored on a calendar-year basis (rather than over 12 consecutive months)
• Dual registration threshold — CZK 2,000,000 (VAT registration from 1 January of the following year) and CZK 2,536,500 (VAT registration from the following day)
• Registration application deadline — now 10 working days from the date the threshold is exceeded

Changes Effective 1 January 2026

• Refund of VAT paid without justification — the recipient of a supply may now apply to the tax authority for a refund of tax paid without justification via the VAT return (for example, where the supplier incorrectly applied a higher VAT rate)
• Reclassification of exempt financial activities — the above-mentioned reclassification of certain financial activities

Time Limits for Claiming a VAT Deduction

Basic Time Limit

A VAT deduction can be claimed at the earliest in the VAT return for the tax period in which the conditions for claiming it were met (you hold the document and the supply has been received). The latest it can be claimed is 3 years from the first day of the month following the tax period in which the right arose.

Practical Example of the Time Limit

Deduction for Assets Acquired Before VAT Registration

When you become a VAT payer, you may claim a deduction in your first VAT return for assets acquired before registration:

• Regular assets — acquired no more than 12 months before registration
• Long-term assets — acquired no more than 60 months (5 years) before registration
• Condition: you still own the asset and are using it for your economic activity

Adjustment of Deduction for Long-Term Assets (§§ 78 et seq.)

For long-term assets (acquisition cost above CZK 80,000 for tangible assets), the deduction must be adjusted if the extent to which the asset is used for purposes carrying the right to deduct changes during the adjustment period.

Adjustment Periods

A Practical Example of Adjustment

You buy a machine for CZK 200,000 + CZK 42,000 VAT and claim the full deduction of CZK 42,000. In year three, you begin using the machine 50% for an exempt activity without the right to deduct.

Annual adjustment: 42,000 / 5 × (0% − 100%) × 50% = −CZK 4,200 (you must repay this for years 3, 4, and 5)

Most Common Mistakes When Claiming VAT Deductions

1. Claiming a Deduction Without a Valid Tax Document

This is by far the most frequent problem. Many VAT payers claim a deduction on the basis of an incomplete document, a document with an incorrect VAT number, or one that does not meet the legal requirements.

Solution: Always check the document as soon as you receive it. Verify the supplier's VAT number in the payer register on the Financial Administration portal. If the document is missing any required element, ask the supplier to issue a corrected version.

2. Claiming a Deduction on Entertainment

As mentioned above, VAT on hospitality and entertainment cannot be deducted, even if the expense is tax-deductible for income tax purposes.

3. Applying a Pro-Rata Coefficient Without Supporting Records

If you claim a pro-rata deduction (e.g., for a car), you must be able to demonstrate the business-use ratio. Without a mileage log or other supporting records, you risk having the deduction disallowed by the tax authority.

4. Forgetting to Adjust the Deduction for Long-Term Assets

A change in how an asset is used (e.g., you start using it more for personal purposes or for an exempt activity) triggers an obligation to adjust the deduction. This requirement is frequently overlooked.

5. Claiming a Deduction from an Unreliable VAT Payer

Since 2013, the concept of an "unreliable VAT payer" has existed in Czech law. If you purchase from an unreliable payer and make payment to a bank account other than the one published in the register, you become jointly and severally liable for the unpaid VAT. Always verify your supplier's status.

6. Claiming the Deduction in the Wrong Tax Period

A deduction can be claimed at the earliest in the period in which you hold the tax document and the supply has been made. Claiming it prematurely can result in an additional tax assessment and interest on arrears.

VAT Deduction for Specific Items

Passenger Car

Standard pro-rata deduction rules apply to passenger cars. The key points are:

• Keep a mileage log (business vs. personal kilometres)
• The pro-rata deduction applies to both the purchase price and running costs (fuel, servicing, insurance — note that insurance is VAT-exempt)
• The adjustment period is 5 years

Real Estate

For real estate, the adjustment period is 10 years. If you acquire a property and use part of it for business and part as a residence, you claim a pro-rata deduction based on the ratio of floor area (or another appropriate criterion).

Fuel

You can deduct VAT on fuel if the vehicle is used for your economic activity. Where the vehicle is used for both business and personal purposes, you apply a pro-rata deduction.

Services from Abroad

If you purchase services from a supplier in another EU member state (e.g., cloud services, advertising, licences), you account for VAT under the reverse charge mechanism. You declare VAT on the output side and simultaneously deduct it on the input side — the net effect is nil if you have a full right to deduct.

Step-by-Step Guide: How to Claim a VAT Deduction Correctly

Frequently Asked Questions

Can I deduct VAT on purchases made through an online shop?

Yes, provided the seller is a registered VAT payer and issues you with a proper tax document showing your VAT number. A standard receipt from an online shop (a simplified tax document) is sufficient only for amounts up to CZK 10,000 including VAT.

What if the supplier is not a VAT payer?

If you buy from a non-registered supplier, there is no VAT included in the price and there is nothing to deduct. The price excluding VAT is typically lower, however, so this is not necessarily a disadvantage.

Can I deduct VAT on office rent?

It depends on whether the landlord charges VAT on the rent. Residential and commercial property rental is ordinarily VAT-exempt, but the landlord may opt to charge VAT (provided the tenant is a VAT payer). If they do, then yes, you can deduct it.

What about deducting VAT on advance invoices?

An advance invoice is not in itself a tax document. The right to deduct arises only on the basis of a tax document issued in respect of the advance payment received, or the final tax document.

Do I have to claim the deduction immediately, or can I wait?

You do not have to claim the deduction straight away. You can claim it in any subsequent tax period, up to the 3-year limit. In practice, however, there is no reason to delay — the sooner you claim it, the sooner you get the money back.

What happens if the tax authority disallows the deduction?

If the tax authority rejects a deduction (typically during an audit), it will issue an additional assessment together with interest on arrears. You can appeal against the assessment notice within 30 days. The key is thorough documentation — tax documents, records of asset use, mileage logs, and so on.

Summary Table: Types of VAT Deduction

Conclusion: VAT Deduction Is Your Right — But It Requires Diligence

VAT deduction is one of the most significant financial tools available to registered VAT payers. When claimed correctly, it can save you tens or even hundreds of thousands of crowns a year. The key is meticulous record-keeping, correct tax documents, and careful identification of the deduction type based on the intended use of the received supplies.

Key principles for a smooth VAT deduction process:

1. Always check your tax document as soon as you receive it
2. Keep clear records distinguishing the type of deduction
3. For assets with mixed use, maintain verifiable records (mileage log, usage records)
4. Verify your suppliers in the VAT payer register
5. Observe filing deadlines and deduction time limits
6. When in doubt, consult a tax adviser

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Useful Links to Official Sources

• Right to VAT Deduction — Financial Administration
• Information on Changes to the Right to Deduct from 1 January 2025 — Financial Administration
• Tax Changes for 2026 — Financial Administration
• News 2026 — Financial Administration

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Disclaimer: This article is intended for informational purposes only and does not constitute tax advice. Legislation is subject to change. For advice on your specific situation, we recommend consulting a tax adviser or your local tax office. Information is current as of February 2026.