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Major Changes to Czech Real Estate Legislation

Major Changes to Czech Real Estate Legislation

Czech Republic

The Czech real estate market is currently being affected by two substantial changes – one already in effect and one that will soon come into being.

Changes to the Legislation on Environmental Impact Assessment (EIA) in Legislative Process

An amendment to the Czech Republic’s Construction Act is currently being discussed by the Chamber of Deputies and will likely become effective in mid-2017. This amendment addresses the chief shortcoming of the current legal framework of the EIA process – its unjustified length. The main change to be introduced is the “co-ordinated” proceeding, which will unite construction, planning permit, and EIA proceedings into one comprehensive process and which is expected to speed the whole process up. 

Still, there is a significantly, and probably also unnecessarily, high degree of public participation in the decision-making. For example, an entity created to protect environmental or public health which has existed for more than three years or which submits the supporting signatures of more than 200 individuals may exercise rights resulting in blocking a development project for several months or even years. The relevant EU directive stipulates that the concerned public should be allowed to effectively participate in the EIA process, but how should the “concerned public” be defined? The EIA Act defines it too broadly, which is unsuitable regarding an excessively strong role of the concerned public in the EIA proceedings, which includes, e.g., the ability to appeal certain administrative authority decisions. 

The EIA process has three stages. The first stage consists of notifying the competent authority of the planned project. In projects covered by the Annex to the EIA Act, fact-finding proceedings – or even the main proceedings, where the project´s environmental impact and permissibility as a whole are being assessed – follow this notification. However, the administrative authority has the power to decide that a project will be subjected to assessment in fact-finding proceedings even when this is not mandatory. 

The EIA process has always been lengthy, especially in transport infrastructure projects where the period from the commencement of the EIA to the potential project’s implementation can reach 15 years or more, and the current legislation makes this problem even worse. The lengthy process also represents an administrative burden for large-scale development and other projects and unnecessarily prolongs the period of implementation for construction projects, thus inhibiting growth in the Czech Republic’s real estate sector.

Real Estate Transfer Tax to be Paid by the Buyer

The obligation to pay the real estate transfer tax, which applies to transfers for consideration of real estate ownership, passed from the seller to the buyer as of November 1, 2016. It is no longer possible to deviate from this rule, since the contractual transfer of this obligation onto the buyer allegedly caused a burden for the Tax Administration, which faced an increase of administrative work in connection with identifying the taxpayer in most of the cases.

In past years, the buyer played the role of the statutory guarantor. This long-awaited change removes the risk that the buyer will pay the real estate transfer tax twice – once as a part of the real estate price and again as the guarantor in the event that the seller does not pay it.

While it may appear that purchase prices of immovable property will decrease due to the change of taxpayers, in fact, a significant impact on the real estate prices is not expected, as the demand for real estate in the Czech Republic has exceeded supply over several years, and sellers do not have any reason to lower them. 

Going forward, it is to be expected that the costs of purchasing real estate will increase, which could cause difficulties with mortgages. A mortgage is intended to cover the purchase itself, so buyers will now have to pay the transfer tax from their own savings. The good news for buyers is that banks may offer to finance the transfer tax from the mortgage, too. 

Considering real estate development projects where future purchase agreements concerning acquisition of land had been concluded before the change to the transfer tax was adopted, the total costs of developers in such cases will undoubtedly increase by the 4% transfer tax rate, since the tax will now not be paid by the transferor.

By David Padysak, Partner, Rovenska Partners

This Article was originally published in Issue 3.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.