At the end of the year 2014, a more fundamental conceptual change occurred in the reverse charge system, which is applied between Czech VAT payers. The changes were required due to two new regulations of the EU Council and their aim was to extend application of the reverse charge system (“RCS”) and to provide the EU member states with a tool for fighting tax evasions in areas, where tax evasions most frequently occur, according to statistics.

The new enactment has divided the RCS into permanent and temporary, with the temporary one representing a very flexible tool against tax evasions. Amendment 6 has been added to act no. 235/2004 Sb., on the value added tax, specifying the different commodities, for which RCS can be applied. The government has kept the authority over determining the commodities, for which RCS is applied, through an enabling clause, and based on it the government determines (and can subsequently adjust) the extent of commodities that are subject to RCS regulations.

In November 2015, the Financial Administration published a warning on its website about fraud involving commodities on the energy markets, and called upon tax subjects enterprising in this segment to pay particular attention to examining their business partners. Caution is in place not only in cases the Financial Administrations specifically cautions, but by examining their business partners, payers should prevent being unwittingly drawn into a construction affected by tax fraud. In these cases, it is up to the payer to prove he did not know about the tax fraud and could not have known, and to prove he spent adequate efforts on examining the transaction (see Supreme Court verdict 2 Afs 15/2014 - E.ON Energie).

In reaction to the alleged spreading of tax fraud in the segment of energy commodities, the government issued and amendment of the decree on January 13, 2016, extending RCS also to:

• Transfers of permits for greenhouse gas issue,
• Supplying of electricity certificates and
• Supplying of electricity or gas through grids or networks to a dealer.

The decree was set to come in operation as of February 1, 2016. Shortly thereafter, information from the General Financial Directorate for application of RCS to these commodities was also published.

We will focus mainly on the last item, that is the supply of electricity or gas, which we can probably encounter the most frequently.

According to general rules, RCS is only applied between two VAT payers, in the case of fulfilment with a place of performance in the Czech Republic. The decree adds another condition to this, stating that the recipient of gas or electricity must be a dealer.

The place of fulfilment for supplying electricity and gas to a dealer is set in the place, where the dealer has his seat of permanent business premises. In case of electricity or gas supplies to a Czech dealer, we thus most frequently reach the conclusion that the place of performance will be in the Czech Republic. An exception will only be a situation, when a supply is directed to his supply units located abroad (and which are also his permanent business premises).

A dealer is defined in the VAT act and is understood to be a person liable for taxes, which buys gas and electricity mainly for the purposes of their further sale and his own use is negligible. It is a relatively wide definition and the General Financial Directorate thus states a list in its information (not enumerative), when RCS is applied. The definition mentions “a person liable for taxes”, that is a person, which continually carried out economic activities. This definition thus includes already registered VAT payers, as well as persons not yet registered for VAT. As the RCS is only applied between two local VAT payers, RCS is only applied, if the trader is also a payer.

An electricity or gas dealer is also defined by other laws. Their definition is not decisive for RCS application, though, but can be used for assistance (as the General Financial Directorate also states in its information). A subject, to whom a licence for dealing in electricity or gas has been given, can be considered an electricity dealer or gas dealer can (for example for the purposes of act no. 458/2000 Sb., energy act). When supplying electricity or gas to a customer, who is also a VAT payer and licence holder, RCS is applied. At its website, the Financial Administration has published an overview of holders of these licences.

The purpose of the granted licence is not decisive for the application of RCS. The regime can thus also be applied in cases, when a licence was only issued for dealing in one commodity (gas or electricity). RCS is also applied towards subjects, who do not have a licence directly for trading with electricity and gas, but also for enterprising in energy fields (such as for example transmission of electricity and distribution of electricity, market operator activities, transport, distribution and storage of gas). These subjects, too, can be considered dealers, according to the definition in the amended decree.

Along with the extension of RCS to other commodities, the option of choosing the application of RCS has also been introduced in the decree. Choice applies to commodities, for which the application of RCS is conditioned by exceeding a value limit on the tax invoice. This currently includes mainly mobile telephones, tablets, integrated circuits, video game consoles, etc. The payers can agree among themselves in writing that they will apply RCS when supplying these goods with a sum lower than CZK 100,000.