Legislators spared no changes when it came to taxes this year. This applies both in general and to the taxation of the real estate sector.
Changes that directly or indirectly affect real estate and development permeate the entire tax system, and many of them are relatively significant.
Abolition of acquisition tax and related changes
The tax on the acquisition of real estate was definitively abolished last autumn after several months of twists and turns. This tax (or its predecessor, the real estate transfer tax) has been an integral part of the Czech tax system since 1993, and during its existence has been a frequent cause of tax optimizations in real estate trading and considered by many to be a drag on the real estate market; it was not until the coronavirus crisis that there was political agreement to abolish it. The tax was abolished retroactively for transfers made since December 2019.
However, as some compensation for this relief, the partial tightening of the personal income tax has been introduced starting this year as regards the tax implications of financing and selling real estate. In the case of immovable property for one’s own housing acquired since 2021 and financed by a mortgage or a loan from a building society, it will now be possible to use a maximum of only CZK 150,000 per year as a deductible item in the form of interest (instead of the current CZK 300,000). At the same time, for a newly-acquired property in which the seller will not have resided for at least two years immediately before the sale, the “time test” (minimum holding period) for the exemption of income from its sale is extended from five to ten years. However, it will now be possible to exempt the income realized from the sale of such real estate before the expiration of the time test, to the extent that the taxpayer will use the obtained funds to procure his/her housing needs. The existing rules remain in force for properties acquired before 2021.
Second tax rate for individuals
In the area of personal income tax, a second tax rate of 23% was also introduced with effect from this year. In contrast to the previously applied solidarity tax increase, which applied only to employment and business income, the second tax rate applies to all partial tax bases, including rental income. For natural persons renting real estate whose total annual income is higher than CZK 1.7 million, this will effectively mean an increase in the rental tax by more than half (depending on the structure of total income) - this is the opposite trend compared to income from employment, where the tax burden has declined quite interestingly this year as a result of other tax changes (abolition of the super-gross wage, meal flat vouchers).
Application of VAT to residential buildings and flats
Another relatively fundamental change concerns the application of VAT to residential buildings and flats. The new legislation bringing this change was incorporated into the VAT Act as early as April 2019, but did not enter into force until January this year. The essence of this change is the impossibility for the landlord upon its choice to apply VAT to the lease of a house, flat or building, in which more than 60% of the area of this building (or part of the building, if only part is rented) is represented by flats, or premises intended for permanent residence, if these buildings or premises are rented to another payer for the performance of his/her economic activity. The aim of these new rules was to prevent structures based on artificial rent chaining, where the owner of a residential building charged with VAT has formally met the conditions for the immediate exercise of the right to deduct VAT upon the acquisition of this building. In the case of residential buildings which were leased with VAT before 2021, the new VAT regime of their lease may give rise to a proportionate reduction in the VAT deduction previously applied upon the purchase, construction or technical upgrading of such buildings or premises. This adjustment is generally made for each year until ten years after the acquisition. At the same time, in the case of a lease without VAT, there is no right to deduct input VAT on continuously purchased inputs related to this non-taxed lease (repairs, reconstruction, a proportion of overheads, etc.).
Other changes in income taxation
Other tax changes current for this year apply to all areas of business and will therefore also be reflected in entities in the real estate business. These changes are mostly positive for taxpayers. Firstly, there are changes in corporate income taxation, which were mainly a response to the effects of the coronavirus crisis. The most significant novelty is the possibility of claiming a tax loss retrospectively in up to two previous periods - for the first time, this can be used for tax losses incurred in the tax period of 2020 and for this period it can exceptionally be applied in the estimated amount in the tax return for 2019. This measure has the potential to improve the cash flow of previously profitable companies which ended in a loss in 2020, either as a result of anti-epidemic measures or for other reasons.
Entrepreneurs will also be pleased with the changes in the area involving the tax depreciation of tangible assets, specifically the increase in the value limit for tangible assets and technical improvements from CZK 40,000 to CZK 80,000. With a suitable adjustment of the company’s accounting guidelines, it will be possible to write off significantly more items to costs once. At the same time, for selected groups of assets (1st and 2nd depreciation group - typically hardware, furniture, machinery and equipment, transport vehicles), the tax depreciation period was exceptionally shortened to 12, respectively 24 months. This applies to assets acquired in 2021 and with the fact that taxpayers can also voluntarily apply the new rules to assets acquired in 2020. The depreciation of intangible assets is also simplified.
Reporting of income paid abroad
In addition, simplifying arrangements have been introduced for reporting income paid abroad. Revenues paid by Czech entities to foreign recipients, which are generally subject to withholding tax but are exempt from it (according to the law or the double taxation treaty), will now have to be reported not for each month in which they were paid, but only in aggregate for the calendar year. This typically applies to regularly paid interest or license fees. The monthly amount is also increased, up to which it is not necessary to include paid payments in the reporting.
Amendment to the Tax Code
Last but not least, it is necessary to mention the extensive amendment to the tax procedural regulation - the Tax Code. It came with a longer-term modernization for 2021 in communication between the tax authorities and taxpayers in the form of the MOJE DANĚ portal. It builds on the already existing system of tax information boxes and expands its functions, for example, with the possibility to file a report. The extension of the basic three-month deadline for filing an income tax return by one month provides positive motivation for the greater use of electronic means of communication with the tax office. There has also been a relatively significant reduction in interest on arrears and, in general, the unification of interest rates paid by taxpayers and tax administrations.
The most important innovation in the world of international taxation which has been talked about for several years, but which really came into play (also due to the coronavirus delay) only at the beginning of this year, is the notification of cross-border arrangements under the EU DAC 6 directive. This EU measure, with which not only taxpayers but also the tax administration is struggling in our country, is only gradually being established in the Czech Republic and in other Member States. If your company is part of a multinational group or carries out financial transactions with foreign entities, do not forget to monitor this area continuously - reporting obligations may also apply to you.