What will be the fate of the so-called general reverse charge mechanism?

Andrea Kleinová

So called reverse charge mechanism is based on the principle that the obligation to declare value added tax shifts from the supplier to the recipient. This means that on one hand, the provider issues an invoice without value added tax and on the other hand, the recipient is obliged to declare and pay output tax and, at the same time, usually has the right to claim the VAT refund. Such construction avoids money transfers between taxpayers and tax administrator and thus, eliminates the possibility of so-called carousel frauds.

Carousel frauds are chain frauds where a supplier of goods or a provider of services, the so-called white horse, does not pay the declared output tax, while the recipient of this supply claims the VAT refund. Thus, the tax administrator does not receive the tax but is obliged to pay the deduction.

The Czech Republic is already applying the reverse charge regime in various sectors of the economy, for example in the supply of gold, the supply of slag from the production of iron, metal waste and scrap, the transfer of greenhouse gas emission allowances, the provision of construction or assembly services, the provision of employees for construction or assembly service, as well as in trades with cereals, mobile phones, tablets, laptops, metals and other similar goods exceeding the amount of CZK 100,000.

Building on the experiences in this area, the Czech Republic has started to seek the possibility of introducing a so-called general reverse charge mechanism, which was approved by the EU Finance and Economy Council (ECOFIN) last November. Pursuant to the allowed exemption, all taxable supplies of goods and services in individual transactions over EUR 17,500 (approx. CZK 450,000) shall be subject to the reverse charge mechanism in the Czech Republic. However, this exception is only temporary, namely up to 30 June 2022.

For the application of the above it is, however, necessary to implement it in the national legislation, i.e. the Czech VAT Act. In a press release from early 2019, the Ministry of Finance initially envisaged the introduction of this mechanism as of 1 July 2020. However, according to a press release dated  6 December 2019, the introduction of a general reverse charge mechanism seems very unlikely in the near future, since the Ministry of Finance considers its introduction only upon prolongation of the exception.  However, given the very complicated and lengthy process at EU level, this cannot be expected during 2020.


Andrea Kleinov√°
Andrea Kleinová
Certified Tax Advisor