Everybody will come across the real estate transfer tax one day, either as a tax payer or as a guarantor. We can say that save for some minor exceptions; this tax has been one of the very few in our tax system to be interpreted clearly and consistently. According to information on the new law on real estate transfer tax, which has been distributed by the Ministry of Finance as part of the consultation procedure, it is also going to be changed in a significant way. MF justifies the intended changes as a result of non-payment transformations becoming a part of the income taxation system, which are necessary to comply with the newly amended Civil Code, an act on business corporations and finally current practices in the field of tax system.
The changes are rather significant; therefore the following text provides more detailed analysis and evaluation of the most crucial changes.
The good news is definitely the “effort” to decrease the administrative and financial burden, which means that certified copies of the contracts and originals of expert opinions will not be obligatory any longer (generally, the need to submit expert opinions will be reduced). In order to verify the subject matter, it will be enough to supply a plain copy. Another good thing is that the law will be amended by missing necessary regulation of the tax which is determined while purchasing real estate in a foreign currency, defining spouses as joint payers (the redundant duty of both spouses to file an individual tax assessment will therefore be cancelled). The proposed changes will at the same time result in a guarantor being terminated. The newly amended law will also enable taxpayers to decrease their tax base by the deductible item in the form of the fee and refund of cash expenses related to the provision of obligatory expert opinions.
However, the revolutionary idea that the acquirer will pay the tax instead of the transferor, which is allegedly customary in some European countries but contradicts our long-term practice, arouses controversy. This concept is based on the fact that transfer of the ownership rights to the real estate for a consideration should be subject to tax instead of acquiring the consideration by the transferor. Based on comments provided by the Chamber of Tax Advisers of the Czech Republic, this new concept is not entirely in compliance with the current practice of the courts and we believe it may initiate a distortion of the real estate market.
The MF also highlights the benefit of a new way of determination of the tax base. Except for non-standard and complicated transfers from a construction perspective, e.g. multi-functional buildings, the tax base will always be determined upon the price agreed by the parties. In order to avoid tax evasion, this rule applies only if the agreed price does not exceed the usual price which is possible to be obtained at a certain time and place. However the proposal does not determine who and how the deviation should be determined. If the burden of proof falls on the tax payer, the administration is definitely not going to be simplified unless the purchase price is compared to the usual price by the Tax Administrator. As to the property exchanges, the regulation remains the same.
In response to the newly amended Civil Code, the definition of real estate for the purposes of the law will be changed, the reason being that according to the new Civil Code, some rights are also defined as part of real estate although they are not supposed to be subject to the tax.
Nevertheless, the Chamber of Tax Advisers of the Czech Republic have adopted a negative and rejecting position on the changes introduced in order to avoid tax evasion which are the following: business share transfers will be taxed as real estate transfers, contributions to the registered capital of business companies will no longer be exempt from the tax, the same applies to the first transfer of ownership to a newly built real estate, and it is not sure whether the tax exemption will remain in transfers of real estate within the merger and de-merger of a corporation.
If the taxation of transfers within mergers and de-mergers is introduced universally, we can expect a number of problems arising from a problematic definition of real estate companies (see the attempts to introduce this in the past as a part of the law on the income tax return). In addition, this taxation contradicts the principles based on income tax exemption applicable while selling a share owned by a parent company in a subsidiary.
Cancelling the tax exemption on contribution of the real estate into registered capital could also have a significant impact on company combinations. In addition this would contradict the tax neutrality of such transactions which are now exempt only on the condition that the property is held for at least for five years. The transactions would be based on the price determined by an expert evaluating the non-monetary contribution.
Cancelling the exemption on the first transfers of real estate for contribution for business purposes will go hand in hand with the selling of this property, which is already difficult, becoming more expansive and complicated. However, the transfer from the ownership of a housing co-operative remains exempt from the tax. Does it mean that building housing owned by a cooperative will be supported at the expense of privately owned housings? In order to simplify the tax administration, it would work much better to extend the exemption to land transferred together with the first transfers for considerations, which logically are not exempt nowadays making the situation even more difficult for taxpayers as well as the Tax Administrator.
To sum up, we would like to add that in the material there is not a single comment on keeping or cancelling tax exemptions in transfers within mergers and de-mergers, which are valid under current laws. As optimists we believe that it has simply been passed unnoticed and that the law will never be adopted in the currently proposed form. If anything is supposed to pass it should be a legal-technical amendment considering the new definition of real estate in the Civic Code entering into force on 1 January 2014.