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Abolition of real property transfer tax and the impact on the structure of real estate transactions on the Czech market

20. 10. 2020Petr Karpeles

In September, Act No. 386/2020 coll. was declared, by which, among others, real property transfer tax (a form of the previous real estate transfer tax) was excised from the Czech tax system.

Whilst among individuals this benefit has partially been “redeemed” by other disadvantages (e.g. tightening the test for exemption of real property sales from income tax or a certain limitation connected with amortization of mortgage interest from the tax base) the news is certainly positive for corporations.

It is thus a question as to the extent to which abolition of acquisition tax will appear in a larger proportion of direct real property sales (so-called “asset deals”) on the Czech real estate market. From our experience until now, transfers of companies owning desirable property (i.e. a “share deal”) clearly dominated, whereas asset deals occurred only very rarely and in very specific situations; to illustrate – in the case of transactions in which we provided our advisory services, less than 5 % of transactions were at issue.

The 4 % transfer tax burden imposed on the entire turnover (i.e. not only the profit) was certainly a fundamental obstacle for asset deals. Nevertheless, it was not – and is not – the only obstacle; time will indeed tell whether this in itself will lead to a change of habits on the real estate market. Not even the previously implemented possibility to apply VAT to a transaction in certain cases (instead of exemption, which could lead to a substantial adjustment of the previously claimed VAT) led to a larger proportion of asset deals. Let us therefore summarize below the advantages and disadvantages connected with both types of transactions.

It should be noted in advance that certain advantages and disadvantages could be relative in view of the side from which we view the transaction in a given situation – as is always the case in life. Nevertheless, clearly both the tax or legal disadvantage of the seller, although it does not directly impact the buyer, appears in the purchase price or other commercial arrangements between parties.

The main features of asset deals are therefore as follows:

– no transfer tax;

– “revaluation” of a real estate occurs for tax purposes – the buyer will already amortize the agreed price from the new tax base;

– in transfers of rented buildings it is necessary to note the VAT mode (i.e. whether a business expiry is not at issue, for this has a specific mode);

– neither legal nor tax risks from the past are transferred to the buyer;

– the seller taxes the income from the sale on the level of the selling company in a standard tax base – i.e. 19 % from the profit, simplified from the sale income reduced by the residual tax value of the property.

The main features of a share deal, on the other hand, are as follows:

– no transfer tax;

– the base for tax amortization does not change (this fact is then often compensated by reduction of the selling price by latent tax reflecting a tax shield, which the seller loses in the future by this form of sale);

– it is not subject to VAT;

– the company legal and tax risks are transferred to the buyer, so due diligence is almost a necessity in order to detect possible risks and the solution thereof;

– the seller can exempt from income tax the income from selling a stake in the company if it fulfils the conditions of Czech law or, as the case may be, if a foreign investor is at issue, an agreement on averting dual taxation can “prevent” taxation in the CR.

If we are to summarize the stated asset and share deal aspects, we believe that no fundamental change in structuring transaction will occur even now. Besides business reasons, the advantage of a share deal from the corporate income tax perspective will lead to this (especially in situations when the market value of real estate significantly exceeds its residual tax value). Although the uncertainty of VAT interpretation in an asset deal (an uncertain limit when business expiry is at issue) was partially cleared up at a coordination committee prepared by TPA, practice will show how its conclusions will be used in practice.

On the other hand, the asset deal will probably become a more frequent variant than has been the case until now, for the advantage stemming from property transfer tax savings may prevail in certain (especially simpler) transactions, in the same way as certain transactions, where a share deal could not be carried out for other (e.g. legal) reasons and an asset deal could not be carried out commercially due to property transfer tax, could newly make economic sense. In any event, we welcome the abolition of property transfer tax as a good step towards supporting the real estate market in the Czech Republic.

In the event of any questions, please do not hesitate to contact Petr Karpeles, email:

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