This past autumn brought extensive changes to the Czech Republic’s real estate acquisition tax, which, according to lawmakers, should align the country’s regulation to the European standard. Is it really the case? With the assistance of members of the Real Estate team within Taylor Wessing CEE, we compare the new regulation to those in neighboring countries.
Before the amendment, the seller of real estate was generally obliged to pay the transfer tax, although the parties could agree that the buyer would take over that role. In practice, the ability to choose the actual taxpayer created a number of problems. The Amendment removes the option to choose the taxpayer, and now in all cases the taxpayer will be the buyer.
With regard to other Central European countries, it cannot be said unequivocally whether the change made by the Czech Republic is in line with a regional trend. Regulations in neighboring countries vary, and we find representations of virtually all possible solutions. In Poland, the taxpayer is the seller. In Hungary, it is the buyer, and it is also possible to assume the tax obligation under civil law, although the exchange requires the approval of the tax authority and is not binding. In Austria, both parties are jointly and severally liable, and their arrangements for paying the tax (as is in practice the rule) is not binding for the tax administrator. Slovakia went so far as to abolish the tax altogether in 2004.
The amendment also removes the statutory liability of the buyer in the Czech Republic for payment of the tax by the seller. For the buyer, his position as guarantor was, of course, unfortunate, and therefore in practice as a rule he generally tried to “secure” the payment of the tax by the seller, mostly by retaining a part of the purchase price corresponding to the amount of the tax until proof of payment of the tax was made.
In other Central European jurisdictions, no such statutory liability exists. In Austria, however, as noted earlier, by law both parties are taxpayers, thus the situation is similar to the earlier Czech statutory liability: if the party obliged to pay the tax under the contract does not do so, the tax administrator usually turns to the other party to do so.
The 4% tax rate – above the regional average – was left untouched by the amendment. The only neighboring country with a higher tax is Hungary, where, in addition to the basic rate of 4%, an additional rate of 2% is applied if the tax base exceeds a certain threshold. Indeed, in most nearby countries, the tax is lower.
From time to time, the issue of taxation of so-called share deals (in companies owning real estate) comes up for discussion. Through share deals, it is possible in the Czech Republic to legally avoid the transfer tax. The amendment has gone so far as to eliminate the exemption of real estate’s contribution to the capital of companies, although subsequent dispositions in the form of a share deal remained exempt from the tax.
In neighboring states it is common to tax share deals. For example, in Hungary over the past ten years there has been a trend towards reducing the tax burden in relation to immovables, but share deals involving a minimum 75% share remain subject to the transfer tax. A similar rule applies in Austria (only it must be a 100% share). So if the Czech Ministry of Finance wanted to extend the tax on share deals in the future, practice in the neighboring states could serve as argument.
This recent amendment to the Czech real estate acquisition tax, in our opinion, has increased legal certainty. Whether it follows regional trends cannot however be unequivocally confirmed. Especially with regard to the rate of taxation, the country is definitely “behind.” The question is whether the best way forward would be to help shift the regional trend towards the simplest possible solution and follow Slovakia’s lead: To simply cancel the transfer tax.
By Marketa Cvrckova, Partner, Taylor Wessing
This Article was originally published in Issue 4.5 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.