Acquisition of Real Estate in the Czech Republic

General

In the case of a transfer of immovable property on the basis of a contract, the ownership title is acquired on its entry in the Cadastre of Real Estates.

This means that the buyer does not become the owner of the real estate at the time of execution (signing) of the purchase contract but on the official registration of his ownership right based on the purchase contract in the Cadastre of Real Estates. A similar principle applies to other property rights to real estate (right of lien, right of easement, pre-emptive right with material effect).

In administrative proceedings, the Cadastral Office assesses deeds and other documents, decides on whether to permit an entry and, based on these decisions, records the rights in the Cadastre of Real Estates. Property rights to real estates are created by registering in the Cadastre of Real Estates.

There is an administrative fee of CZK 500 (app. EUR 22) for the petition for entry of the ownership right in the Cadastre of Real Estates.

Recognition of ownership

Although the ownership right to property recorded in the Cadastre of Real Estates cannot be effectively transferred without this transfer having been recorded in the Cadastre of Real Estates, the existence of the ownership right does not depend on its being recorded in the Cadastre. The fact that another party is recorded in the Cadastre of Real Estates as the owner of a property does not have any impact on the right of the actual owner to assert his rights through the courts. In the event of an inconsistency between the entry in the Cadastre of Real Estates and the actual state of affairs, the courts must act according to the actual state of affairs.

Legal Review of Ownership Title

In order to determine the legal status of the real estate that is to be acquired, the investor should perform a legal review of the ownership title to the assets prior to the acquisition of the property. This step is of fundamental importance. Such a legal review includes an evaluation of all necessary documents filed with the Real Estate Cadastre (although other sources should also be consulted), determination of the history of the title in question, ascertaining whether or not the seller is the sole and unrestricted owner of the real estate being sold and a check on whether there exist any contracts or encumbrances or potential disputes that could limit the proper use of the real estate in the future.

Even if the ownership title seems to be all right the use of the purchased real estate can be limited by a lease or other similar agreements that are concluded for a long period of time or can be terminated only with huge costs being incurred. On a change of ownership title to real estate all the agreements concluded that relate to that real estate are still valid.

Although it is not possible to achieve absolute legal certainty with regard to an ownership title to real estate in the Czech Republic, the determination of the facts below will provide a sufficient degree of legal certainty.

The archives of the Real Estate Cadastre constitute a source of information on real estate.

Because the current Real Estate Cadastre began functioning on 1 January 1993, information on properties prior to this date must be sought in older registers and records.

It should be pointed out that both the archives of the Real Estate Cadastre and the older registers frequently contain incomplete or inaccurate information. Consequently it is essential to obtain additional information on a particular property from other state authorities (e.g. information on building permits can be obtained from the archives of the relevant Construction Office) as well as from the records of companies that were connected in some way to the property.

The aim of the above investigative process is to find out whether there was ever an ownership dispute or conflict in the past that could in the future threaten the investor’s rights.

Purchase Contract

A purchase contract is the most frequent title for the transfer of the ownership right to real estate. Apart from specification of the real estate according to the records of Cadastre of Real Estate, only written form and authenticated signatures on the same deed are generally required in order for the purchase contract to be valid.

Since registration with the Cadastre of Real Estate usually takes from two to five months depending on the real estate’s location (with the same period of uncertainty about whether the entry in the Cadastre will be permitted or not), special attention must be paid to the way in which the purchase price is paid. Practically all investors transfer funds to an attorney, notarial or bank custody (under an escrow account agreement) and after they are registered as the sole owners of the real estate or other conditions are fulfilled the money is released to the seller.

Necessary Permission/Ac­quisition of Real Estate by Foreigners

According to Czech legislation, only residents (i.e. natural persons who have a permanent residence in the Czech Republic or legal entities which have their seat in the Czech Republic) and non-residents, who are Czech nationals, may buy real estate, agricultural land or forest in the Czech Republic without any further conditions.

Non-resident legal entities with branches in the Czech Republic which are registered in the Commercial Register of the Czech Republic may acquire real estate. Furthermore real estate can be acquired by Czech legal entities which are owned partly or fully by non-residents. In particular, there is no limitation on the purchase of real estate by subsidiaries established by non-residents as subsidiaries are considered to be residents.

The acquisition of real estate by non-residents is possible only for non-residents who are citizens of an EU country and who have acquired a residence permit in the Czech Republic (however it is just a formality for an EU citizen to acquire a residence permit in the Czech Republic).

Special rules relate to the acquisition of agricultural land and forest by foreigners.

Taxes on the Transfer of Real Estate

• Real Estate Transfer Tax

For tax purposes, the transfer of real estate means the transfer or assignment of the ownership rights to real estate for a fee from one person/entity to another, including the settlement of shared joint ownership. Tax is also paid upon the exchange of real estate. Tax also applies to a free-of-charge constitution of a real burden when acquiring a real property by donation. Real estate transfer tax is generally paid by the transferor (seller).

The buyer (transferee) pays the tax in the case of an acquisition of real estate as an execution of judgement, condemnation, bankruptcy or settlement proceedings, or in a public auction. However, the tax may be paid by other persons too.

The real estate transfer tax base is the real estate’s sale price or the value of the real estate as determined by an expert’s valuation, whichever is higher (the expert’s valuation is an obligatory attachment to any real estate transfer tax return).

The tax rate is the same for all persons/entities and amounts to 3 % of the tax base.

The taxpayer must submit a tax return by the end of the third month after the date of the receipt of the contract with a provision permitting the entry in the Cadastre of Real Estates (or another decision or deed confirming the ownership of the real estate) at the latest, and the tax must be paid within the same period.

• Gift Tax

Gift Tax is imposed on the transfer of real estate for no fee. The tax base is the expert’s valuation of the real estate; the tax rate depends on the value of the real estate and the degree of kinship and varies from 1 to 40%.

• Value Added Tax

Transfer of land is VAT exempt with the exception of building plots. The transfer of buildings within three years of their acquisition or the issuance of use of permit are subject to 19 % VAT (other than residential) or 5% (residential, by the end of 2007; starting in 2008 the transfer of residential real estate will be subject to either 5 or 19 per cent VAT, depending on the size of the real estate). Transfers of real estate three years after their acquisition are exempt from VAT.

The lease of real estate is generally VAT exempt, however the lessor may opt for VAT (19%) when leasing real estate to another taxpayer.

Financing

Loan/Credit/Leasing Agreements: These agreements are often used for real estate purchase financing, with no specific formalities and no legal fees related to such agreements.

Mortgage Agreement: The right of lien to the collateral (real estate) comes into existence on its entry in the Cadastre of Real Estate.

Taxes and Fees: There are no specific taxes/fees relating to the financing of the purchase of real estate; there is a standard administrative fee of CZK 500 for the petition for entry of the lien in the Cadastre of Real Estate.

Lease Agreements

Lease: Lease contracts for both residential and non-residential premises need to be in writing and must contain essentials set by law. While the Act on the Lease and Sub-Lease of Non-Residential Premises is (in its current latest wording) based on wide contractual freedom, the lease of residential premises is still strictly regulated.

Rent: The rent for non-residential and newly concluded residential premises may be freely negotiated. The rent set by “old” residential contracts may be increased within the frames set by law only and is still much lower than “new” market rents.

There are no specific tax/stamp duties connected with lease agreements. The lease of real estate is generally VAT exempt, however the lessor may opt for VAT (19%) when leasing real estate to another taxpayer.

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We very much hope that you find the above of interest and that you will grant us your trust and ask for our law offices’ services. Should you have any further questions or comments please do not hesitate to contact our real-estate partners JURAJ DULIK or VOJTECH TRISKA at + 420 221 105 206 or office@aktz.cz