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Czech Real Estate Investment - Potential Abolition of Real Estate Acquisition Tax as a Result of COVID 

by KSB Covid-19 Task Force

Published: April, 2020

Submission: April, 2020

 



The Ministry of Finance proposes the abolition of a 4 percent real estate acquisition tax. The proposal will be discussed on Friday 17 April by the Coalition Council of the Government and the National Economic Council of the Government (NECG).


Abolition of real estate acquisition tax


The Friday meeting of the Coalition Council of the Government and NECG will discuss the proposal of the Ministry of Finance to abolish the real estate acquisition tax currently paid by the buyer, amounting to 4% of the value of the property.


Cancellation of mortgage interest deduction and extension of time test


An important part of this proposal is that, together with the abolition of the real estate acquisition tax, the Ministry proposes to abolish the possibility of natural persons to deduct interest on newly concluded mortgage loans. Thus, there will be no possibility today to reduce the income tax base by these interest payments. The abolition of interest deductions should, of course, not affect already concluded contracts or those newly concluded, which will only refinance the existing mortgage loan.


The Ministry of Finance also proposes to extend the time test for the exemption of income from the sale of immovable property not intended for own housing, from the current 5 years to 15 years. This proposal is already included in the so-called tax package with the proposed effect as of 1 January 2021, which has recently undergone comments.


The retroactive effects of the law


The Ministry of Finance also proposes that the abolition of the real estate acquisition tax be applied retroactively to cases where taxpayers are required to file a tax return by 31 March 2020 or later. This applies to cases where the Land Register processed an entry into the register during December 2019 or later. Of course, this will also imply the impossibility of deducting interest on the mortgage loan from the tax base. Therefore, if someone is interested in applying the new rules and not having to pay the acquisition tax, there is no need to wait for the acquisition of the property.


The information published by the Ministry of Finance is not very clear in this regard, but from the logic of the matter, we believe that this 're-application' should not be mandatory and this group of taxpayers will be able to choose whether to opt for the existing rules interest deducted) or new rules (they do not pay the acquisition tax and do not deduct interest), as in the case specifically described below.


Acquisition of tax-exempt new build structures


The Ministry of Finance information also contains specific rules for taxpayers who have acquired a property that is exempt from acquisition tax (typically a new building) in a situation where the Land Register processed an entry to the register during December 2019 and later, but no later than when the taxpayer filed an application for land registration on 31 December 2020.


These taxpayers will be able to choose to apply the existing rules to the acquisition of the property. Thus, if they have acquired a property whose acquisition is exempt from tax, such a procedure would be advantageous as they would still be exempted (i.e. they would not pay tax) but would also be able to deduct interest on the mortgage loan for its acquisition. The condition will be that within the deadline for filing the tax return or within 30 days of the effective date of the Act, they will notify the tax office of their choice.


Of course, the exact rules will not be known until the bill has been published. We will keep you posted on our blog.


 



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