Buying property in the Czech Republic
By Tomas Chrobak
Tomas Chrobak is a director of Spolecnosti Online s.r.o. (Companies
Online), a provider of corporate services and the largest firm offering
ready-made companies in the Czech Republic and Slovakia.
Any foreigner interested in the acquisition of real estate in the Czech
Republic finds out very quickly that local legislation prevents him
from buying property directly on his behalf. The limitation on buying
real estate for foreign citizens and entities is a result of the
exception from the EU common rules granted for the Czech Republic for
the period of five years since it entered the European Union. In other
words, from May, 2004 until May, 2009. This limitation is intended to
ensure that real estate is acquired only by foreign individuals wishing
to do business or work here while residing here. In spite of such
precautions, it is possible for all foreigners (including those living
abroad and/or buying property for investment reasons) to circumvent the
legal obstacles.
An exhaustive summary of options for purchasing real estate as a
foreigner was published in the first issue of Lifestyles, in an article
called ‘Practical advice for real estate purchases by foreign
citizens’. The following article omits the alternatives that are not
typically available to foreigners (such as direct succession or joint
ownership with a Czech spouse) and focuses on the two most popular
options used by EU citizens:
1. Obtaining a residence permit
2. Purchasing property through a special purpose vehicle
(such as a newly formed or acquired Czech company)
Residence permits
Obtaining a residence permit is an option granted by law. Further to the Czech Foreign Exchange Act, property in the Czech Republic (except for agricultural land and forests) can be directly acquired by foreign individuals if and only if they fall under one of the following categories:
• Czech residents
• foreigners with Czech citizenship
• citizens from EU countries, Switzerland, Norway, Iceland or
Liechtenstein, and other nations with the status of favored treatment
(such as the United States), holding a temporary or permanent residence
permit.
Any EU citizen wishing to stay in the Czech Republic is entitled to a
residence permit. However, applying for the permit is a typical
bureaucratic procedure that involves filing an form at the Foreign
Police Department (FPD), waiting in queues and dealing with various
civil servants who speak only Czech.
Moreover, there are two potential difficulties for an applicant: he
must provide a permanent accommodation address in the Czech Republic
and a purpose of stay. While the first requirement affects those
residing mainly or partially outside the Czech Republic, the second
could also cause problems for those residing in the Czech Republic
without a purpose that is generally accepted by the FPD; valid purposes
include doing business or staying with a work permit.
On average, the process takes one to two months and will exhaust a
considerable amount of time and patience. However, once the permit is
issued, the EU citizen may buy real estate in the Czech Republic
without any limitations.
Special purpose vehicles
Because a foreigner can obtain the right to own and manage a Czech company without any limitations, and since a Czech company can legally acquire Czech real
estate, one popular and less complicated option for any foreigner is to establish a company or to buy an ‘off-theshelf’ company, which then becomes the owner of the desired property.
Despite legislative changes passed in July, 2005 relating to the registration of companies in the Business Register, the formation of a Czech company is still a complicated and time-consuming procedure, even a Czech citizen typically seeks assistance from a lawyer or a specialized firm. The company registration form that is filed with the Business Registry must be accompanied by a list of documents proving that all legal requirements relating to the incorporation have been met.
In practice, the registration usually takes four to eight weeks, largely because the registration form must be accompanied by many additional documents, some
of which are quite difficult to obtain. Among these, for example, are police records on behalf of the directors of the company, which must be obtained from both the Czech Republic and the country of origin, and which must be verified by a notary public and bear an apostille (a special verification stamp) and translated into Czech by a certified translator. If any of the necessary documents are incorrect or missing, the registration application is rejected.
Given the above, it is not surprising that every year, many
foreigners avoid the time-consuming paperwork involved in establishing
a company by buying an off-theshelf (or ready-made) company, that is, a
company already in the Business Registry with no claims or obligations,
registered only for the purpose of being sold to the final client. By
acquiring a ready-made company, the purchaser becomes the de facto
director and can act on behalf of the company without any delays or
restrictions.
Pros and cons
Each of these two routes has limitations and advantages, and there
are many factors to consider when deciding to buy Czech property as an
individual with a residence permit or through the establishment of a
company. A few of the most important issues each foreigner should bear
in mind are tax implications, costs, and bookkeeping requirements.
Taxation
If an individual buys property as his/her secondary residence and sells it within five years from the purchase date, he is liable to capital gains tax on the property in the Czech Republic. In the case of a primary residence, the time constraint is two years. The tax rate quickly jumps from 12% to 32%, depending on the amount of tax base.
In the case of a company, there is no time constraint, income from the property sale is taxed at the standard corporate tax rate (currently 24%). Another important difference is that a company (as opposed to an individual) may include property-related costs such as bank interest, repairs, improvements, etc. into its tax-deductible expenses against the attained income (for example, rental earnings).
A real estate transfer tax at a rate of 3% applies to any transfer of property. It is payable by the seller; however, the buyer is legally held to be the guarantor of the real estate tax, regardless of whether the buyer is an individual or a company.
Bookkeeping
Holding property through a limited liability company is more expensive, mainly because of the accounting requirements. An s.r.o. must keep accounting books and file tax returns regardless of whether it carries out an active business or not.
Asset protection
As in any country, holding property through a limited liability
company is a reasonable step for an individual wishing to protect his
assets from potential litigation or fraud.
Simply put, holding property through a company serves as a good
protection tool and brings more advantages to those who wish to
maintain property for business purposes or as an investment. Foreigners
wanting to stay in the Czech Republic long-term and who want to
purchase real estate as their primary residence might benefit from
buying property directly, after obtaining a residence permit.
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Disclaimer: this article is not intended to serve as legal advice and
should not therefore be understood as such. While we have done our best
to ensure the accuracy of the contents, we do not accept any legal
responsibility for statements made herein.
