Under the provisions of the Statutory Measure of the Senate No. 340/2013 Coll. on Real Estate Transfer Tax (the "RE Transfer Tax Act"), the transferor is obliged to pay the real estate transfer tax (the "RE Transfer Tax") when ownership title to real estate is acquired by purchase or exchange, unless the transferor and the transferee stipulate otherwise in the purchase or exchange agreement. If the transferor does not fulfil its obligation to pay the RE Transfer Tax, the RE Transfer Tax Act establishes the statutory guarantee consisting in the duty of the transferee to do so.
However, the Czech Parliament recently passed an amendment to the RE Transfer Tax Act, under which the obligation to pay the RE Transfer Tax passes from the transferor to the transferee.
According to the Czech government, which is the petitioner of the amendment to the RE Transfer Tax Act, the amendment seeks to reduce the administrative burden connected with collection of the RE Transfer Tax. Tax collection and its administration might sometimes be difficult for the financial authorities, as the RE Transfer Tax Act allows the transferor and the transferee to stipulate in the transfer or exchange agreement who will pay the RE Transfer Tax. To tackle these issues, the government sought explicit determination of the taxpayer and sought to repeal the statutory guarantee consisting in the transferee's obligation to pay the RE Transfer Tax, instead of the transferor in case the RE Transfer Tax was not paid. The current 4 % RE Transfer Tax rate was, however, not influenced by the amendment.
According to the government, the above-mentioned change should in particular (i) make the RE Transfer Tax Act more straightforward; (ii) ease the administrative burden connected with RE Transfer Tax collection; and (iii) mitigate the transaction risks of the transferees in case the transferors do not pay the tax (if the amount corresponding to the tax is not wired to the financial authority directly from the escrow, which is often established due to these reasons).
Motivation of the contracting parties was also a factor when proposing this amendment. The motivation of the owner of the real estate (the transferee) to pay the tax is much higher than that of the transferor, who no longer has anything to do with the property, and who might be difficult to reach and force to meet his obligation.
The amendment will take effect on the first day of the third month after its publication in the Collection of Laws, presumably on 1 November 2016.
It can be expected that the market will react to these changes and that real estate prices will be affected. Despite the stimulus of very low interest rates, it is believed that prices will almost certainly decrease due to the substantial increase in buyers' expenses. As the RE Transfer Tax calculation is based on the value of the transferred property, it is expected that the amount of tax collected will decrease accordingly as a result of the price decrease.
The change of taxpayer is not the only change introduced by the amendment of the RE Transfer Tax Act. For example, the acquisition of ownership by the municipalities was freed from the tax obligation, the new buildings and flat unit taxation concept was changed, the tax obligation on extension of building rights was broadened, changes and other transformations of legal entities were exempted from tax, and the taxation concept for the acquisition of utility networks was changed.
It will take some time to evaluate to what extent the lawmaker was successful and the new consequences that the amendment to the RE Transfer Tax Act will bring about.
By Miroslav Dudek, Attorney at Law, Schoenherr