Most real estate transactions in the Czech Republic are made by
acquiring the shares or ownership interests in property-owning
companies. Such transactions have significant tax benefits as
currently no real estate transfer tax
("RETT") is payable on such
transactions. The Czech government, motivated by an unstable
economic environment, diminishing tax revenues and the adoption of
the new Civil Code, is trying to improve the country's tax
system by closing some of the country's most obvious tax
loopholes. The Czech Ministry of Finance (the
MoF") are in the process of drafting new laws
relating to the payment of RETT that will, if passed, have a
significant impact on the way in which real estate transactions are
structured.
Currently in the Czech Republic RETT is payable by the seller at
the rate of 3 % on the transfer of freehold title to real estate.
The purchaser of the real estate acts as guarantor for the RETT
payment, the tax base being the higher of either the amount agreed
in the contract or the amount stated in the mandatory expert's
valuation. In contrast no RETT is payable if the real estate is
acquired through a share deal.
According to the Government's proposal, from 1 January 2013
the RETT rate will be increased from 3 % to 4 %.
From 2014 the new RETT law should introduce other major changes,
some of which are listed below:
1) Transfer of shares in "property companies" will no
longer be tax exempt and shall trigger the same RETT obligations as
an asset deal. The MoF has released no further details as to the
qualification of the property companies.
2) The purchaser will be liable for the payment of RETT and there
shall be no guarantor for the tax payment.
3) Expert's valuations will no longer be needed to set the
basis for the calculation of RETT. Instead the amount of RETT
payable will be based on the contractual value of the real estate,
unless it is more than one third lower than the usual market value
of the real estate in question. No further information has been
released regarding how the usual market value will be determined;
it is possible that the data may be obtained from "price
maps" (i.e. maps created and used by the state authorities
showing real estate price levels in particular areas).
Nevertheless, the MoF expects expert's valuations to remain
mandatory for disposals of large or "non-standard" real
estate projects (such as multifunctional premises).
The new RETT rules will bring a higher tax burden and will make
share deals less attractive for real estate investors. Due to this
we expect more transactions to be structured as asset deals rather
than share deals. The new rules will to some extent lower the
administrative burden: the absence of the guarantor will simplify
purchase price payments and in less complex real estate
transactions no tax valuation will be required.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 28/08/2012.
