FAQs with CERES Group

In this section, CERES Group will look at commonly asked questions from the company's property investors in order to help you make more informed decisions.

Question: I am a UK resident looking to purchase an apartment in Prague (Czech Republic). By my calculations, the property should make just enough money to cover the mortgage repayments. What taxes will I need to pay?

Before answering, we need to break it down...

Ownership Structure

There are different taxes applicable to different ownership structures. The two most common structures utilised by foreign investors are either via a company or alternatively via an EU card. As you (the buyer) are a UK resident, we will assume that you have purchased this through the EU card, which is the preferred structure for most European Union residents.

Purchasing through an EU card essentially means that you are purchasing the property in your own name, after you have confirmed that you are an EU resident with the Czech authorities (for which you need to go through an application process and be issued with a Czech EU card).

Types of Taxes

The next aspect is to define what taxes are applicable to purchasers who are intending to hold property in their own name. The four most common types of taxes which you will encounter are:

1. VAT (known as DPH in the Czech Republic)

If you are purchasing a new-build apartment, you will need to pay VAT on the apartment which is currently 5% and set to rise to 9% in 2008 (see related article in the Expert Corner). If you are purchasing a resale apartment, VAT is typically not applicable unless it is less than 3 yrs. old (i.e. still considered a new build) or being purchased from a company (rather than an individual).

2. Transfer tax

Transfer tax is a set percentage amount of 3.0% which is paid by the seller so this will not apply to you (as the purchaser) until you look to resell the unit. In this case, it should be noted that an official evaluation is required and, should the evaluation be higher than the selling price, then you will be required to pay the transfer tax from the evaluated amount. If it is lower, you pay from the sales price.

Also, be warned, when on the purchasing side, be sure that your lawyer includes a clause to hold a certain amount of the purchase price back until the seller can show that they have paid the transfer tax, otherwise the authorities will come after the new owner (you) if they do not receive payment from the previous owner (the seller).

3. Real estate tax

Real estate tax, for which you need to complete a Property Tax Return, is a nominal amount (typically around 1,000 – 2,000 CZK) and is paid annually.

4. Capital gains (or 'profit') tax, or in the case of an individual, 'personal income' tax

This is typically the most complex tax to calculate. The amount of capital gains (or personal income) tax is dependent on the length of time that the property is held:

• If you are living in the property (i.e. have your primary registered address at the property) for a period of more than 2 years, then there is no capital gains tax.
• If this property is purchased for investment purposes (i.e. you are renting it out to someone), then the period is more than 5 years before no capital gains tax becomes applicable.

Assuming that you fall below these thresholds, it becomes a little more complex as first you need to work out the amount of 'profit' that the property has made, more accurately referred to as the tax base. In very basic terms, it is calculated as the 'sales profit' made between the sale and the purchase price, as well as the total 'income profit' that the property generated between the purchase and the sale of the property.

The formula looks something like the following:

Basically, the tax base (i.e. the amount on which you calculate the tax) is your final sales price, minus your initial purchase price, plus any profit/loss which you've made over the time in which you've held the property (e.g. over 3 years, assuming it's rented out).

It should be noted here that while losses can be carried forward and deducted from the following year, profits cannot, therefore the subsequent tax needs to be paid in the year in which the profit is generated. In a bid to lower your tax base (and subsequently the amount of profit tax which you need to pay), you should look to include as many costs as possible against your property purchase.

Certain costs are not allowed (you will need to check with your tax advisor), however, the most common ones included in general are the interest payable on the mortgage (although not the principle), fixtures and fittings (including kitchens and furniture), repairs made to the property, the cost for preparing annual tax returns, annual insurance, bank fees and so forth.

If these are all properly recorded, they can be deducted, otherwise a 30% flat rate can be applied (i.e. expenses equal to 30% of the rental income), according to Section 9 of the Czech Income Taxes Act.

If the rental income on your property is thus 'just' covering the mortgage repayments, then this would most likely mean that 9should all expenses be properly accounted for and recorded), then you could show an annual 'loss', which can be carried forward and deducted from the 'profit' you make on the final sale, resulting in a final tax base.

Assuming that this tax base is above zero, then currently there is a progressive personal income tax rate which can vary between 12-32% (with the latter being applicable to a tax base of 331,200 CZK and above). This is supposed to change on the 1st January 2008 to a flat rate of 15%, and subsequently to reduce to 12.5% in 2009.

Essentially this means that an investor could save up to 19.5% on their taxes if sold in 2009 rather than in 2007. In comparison, the corporate tax rate is currently 24% and is expected to drop to 21% in 2008 and to 20% in 2009.

Summary

In summary, aim to reduce your tax base by as much as possible both in the transactions and running of the property by including as many costs as possible. In addition to this, if you can hold off for another year or two in the sale, you should be able to reduce the amount of profit tax payable.

This text was reviewed by Martin Pecka of Tax Dimensions.

Source: CERES Group Property Report, November 2007.

CERES Group advises foreign investors looking to purchase individual or business property in Central Europe.

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© PropertyIndex.com 2007 | Last Updated: 05 December 2007