Some two years ago, we informed you about changes the Senate adopted to amend the proposed bill (later a statutory measure of the Senate) on real estate acquisition tax. Part of the amendment fundamentally changes who is responsible for paying the tax. At the last minute, the Senate permitted application of the current regulation in exchange and purchase agreements under which the parties may choose the tax to be paid by the acquirer (purchaser). However, last week the Czech government adopted a proposed amendment that goes back to the original bill, under which the tax is to be paid only by the acquirer in all cases. This is despite the fact that according to information from the General Financial Directorate, the option to choose the acquirer as the taxpayer has been selected by only 16 out of 100 entities.
The reasons for the Ministry of Finance’s proposal 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, 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.
And the last, yet none the less important reason the Ministry gives is that “complications also arise when transferors – a couple – are undergoing divorce proceedings and there is in fact no communication between them, while they are obliged to pay tax on property transfer for consideration jointly and severally (solidarity tax obligation)”. As is clear from unofficial statements of the Ministry, if spouses are to purchase property, they must be on speaking terms. Consequently, there is no problem for spouses – taxpayers – to be acquirers.
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 agreements to agree (smlouva o smlouvě budoucí) under the existing rules. These assume that real estate acquisition tax will be paid by the seller and the transfer will take place after 1 April 2016, at which time the tax will only be paid by the acquirer, contrary to general expectations. The new arrangement will often result in increased costs for purchasers because the amendment contains no transitional provision that would allow for such possibilities (because there is no legislative mechanism facilitating collection of the tax in place before the effective date of the amendment that involves collection of the tax). If the amendment completes its path through the legislative process and is published in this version in the Collection of Laws, the solution is either to make the entry in the Land Register so that it is filed with the Land Registry before 1 April 2016. Or you can start negotiating for an additional adjustment of the purchase price. Even in this situation, sellers as taxpayers must keep in mind that their actual cash flow will not be equal to the purchase price but the purchase price less tax. Therefore, they already calculate the purchase price taking account of the tax they will have to pay on the sale.
Given that numerous agreements are currently being concluded and which will take effect after 1 April 2016, we recommend taking this change into account.