Investments into real estate belongs to one of the investments with a stable and secure income. Investment can be made by a legal entity or an individual, each investment has its own specifics. From an investor’s point of view, it is good to evaluate the investment´s impacts from the real estate in the Czech Republic from a tax point of view in following areas – corporate income tax, income tax of natural persons, value added tax and the tax on the acquisition of immovable property.
- Taxation of income
Generally, in accordance with concluded contracts on avoiding double taxation, the profits from the immovable property are taxed in the state the real estate is located in. Generally, these profits should be taxed in the state of the source as well as in the state of the residence. However, in accordance with the concluded contract on avoiding double taxation with Germany, income from immovable property (tenure as well as sale) are taxed in the Czech Republic only, because the profits are exempt from taxation in accordance with the contract on avoiding double taxation in Germany.
- Legal entities
In the Czech Republic, the corporate income tax rate is 19 % and the tax base are based on the profits after the deduction of the related costs. The value of the immovable property cannot be applied in the costs on a one time basis, but it enters into the costs via amortisations (30 or 50 years according to the type of the immovable property and it is possible to choose an amortisation, which is a uniform or an accelerated one).
By correctly structuring the ownership of the immovable property and transactions, it is possible to significantly reduce the burden of taxation of the relevant transactions from the corporate income tax point of view as well as the value added tax or the tax on the acquisition of immovable property in the Czech Republic.
The sales of shares in companies are not subject to VAT and if this sale is made after 12 months of holding a share in a subsidiary, the related income is exempted from corporate income tax. Generally, mergers or spin-off are a tax neutral transaction and if the conditions are met, it is possible to take over the tax losses that occurred previously.
Within the transfer of immovable property, the tax on the acquisition of immovable property is a significant cost, because it amounts to 4 % of the purchase price of the immovable property (it is compared with the market price), the acquirer is the taxpayer. In some cases, it is possible to eliminate this tax (i.e., transfer, merger or spin-off the company, which owns the immovable property).
- Individuals
In many cases, direct ownership of the real estate or real estate holding company owning the immovable property can be preferred by an individual. When the income from the property rental and the related property is not intended for business, the income tax rate of natural person in the Czech Republic is taxed at 15 % from the amount of income after the deduction of the related expenses (including the possibilities of amortisation of the relevant immovable property). From that income, social as well as health insurance is not paid.
By correctly structuring an investment, it is possible to eliminate the income tax from natural persons as well as value added tax in the Czech Republic – by selling an immovable property, the income does not have to be taxed in the Czech Republic as well as in Germany (for example, after 5 years of ownership). In case of a transfer of the share to a company, this income can be exempted after 5 years of ownership in the Czech Republic. At this moment, the immovable property can be moved into the holding structure without tax impacts within the income tax scheme of the Czech Republic.
The sale or deposit of immovable property into a company is always subject to the tax on the acquisition of the immovable property and the acquirer has to pay a tax of 4 % of the purchase price (after comparison with the market price).
- Value added tax
The provision on income tax is the same for individuals as well as for legal entities. The sale of immovable property is tax exempt after 5 years from the completion of or from a significant change on this immovable property (whichever comes later). Even after this term, the sale may be subject to VAT, if the seller comes to an agreement with the purchaser. Rental income is exempt from VAT. However, the lessor can decide, in some cases, to apply VAT in the rental agreement. If the output (rent or sale) is subject to VAT, it is possible to apply the related VAT on the input as a deduction. The Czech law applies the term of 10 years for the immovable property, in which the Czech law observes the way the immovable property has been used and, in this term, the previously applied deduction is adjusted.
- Summary
In the case of a suitable structure, the related sale of the share is, for legal entities, exempt from corporate income tax after one year of ownership in the Czech Republic and this sale of the share is not subject to VAT or tax on the acquisition of the immovable property (as opposed to German adjustments). It makes it possible to suitably transfer the related investments.
For individuals, the sale of the immovable property is exempt from a Czech tax point of view in some cases or the sale of the share in a company after the term of 5 years of ownership.
In all cases, it is necessary to assess the impacts from the international taxation point of view and to assess the adjustment from the state of the investor as well as from the Czech Republic’s point of view. The question of a technical evaluation is complicated and this requires a complete assessment of the relevant situation. The next disadvantage is that it is not possible to transfer an immovable property between an individual and a legal person without paying tax on the acquisition of the immovable property.
Autor: Jan Tecl, Manažer daňového oddělení
