Real estate acquisitions more expensive for developers after 1 November 2016?

About half a year ago, we informed you about changes made by the Senate’s legislative measure regarding real estate acquisition tax. These also include a major change as to the payer of the tax. After many discussions and negotiations, an amendment was published in the Czech Republic’s Collection of Laws last week, stipulating that in all cases, the tax will be paid solely by the acquirer with effect from 1 November 2016. The reasons for the proposal given by the Ministry of Finance are as follows:

• It is an unsystematic provision because no tax law has ever permitted the option to select the taxpayer and, in addition, in most EU countries (except Poland and Slovenia) the tax is also paid by the acquirer
• The object of the tax (i.e. tax on the acquisition of real estate) will now reflect reality
• The ambiguous terms “purchase”, “exchange”, “purchase agreement”, and “exchange agreement” cause interpretation difficulties in assessing what type of acquisition of the title can be classified under these terms
• The current rules applicable to the taxpayer are also complicated in an exchange, which is considered two transfers, while the acquirer may be selected as the taxpayer in one transfer and the transferor in the other transfer
• The complicated issue of liability for unpaid tax will not apply
• With the transferor appointed as the taxpayer, complications also arise in transfers of immovable property owned by the Czech Republic
• The fact that the tax is paid by the transferor may cause difficulties in collecting it because the transferor no longer has the property in possession and, according to the Ministry of Finance, is not sufficiently motivated to pay the tax
• It makes the tax administrator’s investigation for tax administration purposes difficult because tax administrators must look up the information about the taxpayer in the contract.

Our practice shows that tax returns where the taxpayer is the acquirer are indeed somewhat simpler, as there is no need to provide an enclosure informing about the other party, which is otherwise a guarantor. Lawyers need not worry about a correct formulation about the taxpayer in the agreement. In addition, concepts such as security on tax in escrow will not apply. Nevertheless, in financial terms, this change will adversely mostly affect those who have purchase prices fixed in their reservation agreements or agreements to agree (smlouva o smlouvě budoucí) under the existing rules. These assume that real estate acquisition tax will be paid by the seller. This will often result in increased costs for purchasers because the amendment contains no transitional provision that would allow for such possibilities. The solution is either to expedite the entry in the Land Register (where possible, of course) so that it is filed with the competent Land Registry before 31 October 2016. Or the purchaser can start negotiating for an additional adjustment of the purchase price. Given that numerous agreements are currently being concluded which will take effect after 31 October 2016, we recommend taking this change into account.