Tax 

Possible Changes in the Real Estate Acquisition Act

The Czech Pirate Party has prepared a draft amendment to the ordinance on real estate acquisition tax which, if approved, would decrease the tax rate on the acquisition of real estate for natural persons purchasing real estate for own permanent residence and eliminate the possibility of claiming an exemption for new buildings only by legal entities.

The first substantial change proposed by the deputies in the amendment to Ordinance of the Senate No. 340/2013 Coll., on Real Estate Acquisition Tax, relates to the exemption of the first transfer of a new building in exchange for consideration. At present, both natural persons and legal entities are entitled to the exemption, provided the property meets the statutory parameters of a new building. If the amendment is approved, the exemption could only be newly applied by acquirers that are natural persons, and EU and EEA nationals.

According to the proposers, the amendment’s objective is to prevent the existing practice whereby legal entities purchase new buildings and subsequently only sell equity interests in the given business corporations, which are not subject to real estate acquisition tax. The amendment should ensure that the legal entity pays real estate acquisition tax at least upon the first acquisition of the new building.

Secondly, the draft amendment proposes that the tax rate on real estate acquisition be decreased from 4% to 2% for tax bases under CZK 4 million. In excess of the limit, the standard 4% tax rate would continue to apply. The draft amendment proposes several conditions for applying this treatment: the decreased rate could only be applied by natural persons of age who are acquiring the whole property or an ownership interest equal to at least half of the property and who are not owners of another property in the Czech Republic or in another country as of the date of assuming the ownership right, either directly or indirectly, for example, through a legal entity. The property must be intended for residence and, as of the date on which the deadline for filing the tax return expires, they must have permanent residence in the property.

The latter condition is the weakest point of the draft amendment. In practice, if a natural person wanted to apply the decreased rate, it would have to relocate its permanent residence to the newly acquired property no later than within three months from the registration of the ownership right in the Land Register.

Another controversial restriction for applying the decreased rate is the five-year conditionality of the exemption: if the payer gratuitously transfers his or her ownership right to the property within five years from its acquisition, the entitlement to apply the decreased rate will expire and the payer will be obliged to pay the remaining portion of the real estate acquisition tax at the standard 4% rate. Gratuitous transfers also include allocating the property to a trust fund. The restriction clearly targets the situations where the decreased rate would be abused for speculative purposes. However, neither the draft amendment nor the statement of reasons specify the treatment of, for example, the settlement of marital property or divided co-ownership, which may occur on fully objective grounds.

At the moment, it is difficult to predict whether the amendment will find support in the legislative body. At its meeting of 24 October 2018, the government expressed a negative opinion. The draft is now set to be debated by the Chamber of Deputies. We will, of course, keep you informed about the course of the legislative proceedings.

In addition, please accept our invitation to our ‘tax breakfast’ which will take place on 12 December 2018 and during which we will debate real estate market-specific tax news.

The article is part of dReport – December 2018, Tax news; Grants and investment Incentives.

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