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:
- 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.
- The purchaser will be liable for the payment of RETT and there shall be no guarantor for the tax payment.
- 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.