On January 1^st, 2014, statutory measure of the Senate No. 340/2013 Sb. On Real Estate Acquisition Tax came into force substituting the previous legal provision on immovable property transfer tax. Although the name of the measure suggests that the subject who acquires the property shall be the one to pay the tax, according to the reading valid up to October 31^st, 2016 in the majority of cases of taxable acquisition of proprietary rights of immovable property the tax was paid by the transferor.  But for cases of purchase and exchange the measure allowed both parties to agree in the contract that the tax shall be paid by the transferee. The amendment which came into force November 11^th, 2016 states that the tax shall always be paid by the transferee.

The measure in force until October 31^st, 2016 and its explanatory memorandum brought other changes, too, such as: a change of the way the tax base, which is derived from the acquisition value, is assessed, definition of the agreed price and payment, the fact that an expert valuation is no longer an obligation unless the measure specifically calls for it.

Already at the time of the previous legal provision (that is Act 357/1992 Sb., On Inheritance Tax, Gift Tax and Tax on Transfer of Real Estate Property) there were disputes between taxpayers and the Financial Administration about whether the base for real estate transfer tax shall or shall not include VAT in cases where the VAT was included in the acquisition price. These disputes last up to this day, that is even after the January 1^st, 2014 measure came into force.

According to § 10 of the provision, the tax base is the amount of the acquisition value minus eligible expenditure.

The acquisition value is defined in § 11 as:

1. The agreed value,
2. Comparative tax value,
3. The observed value or
4. Special price.

As stated in § 13, the agreed value is to be understood as “payment for the acquisition of proprietary right to immovable property” and according to § 4 a payment is “an amount of money or a value of a non-monetary payment which are or shall be accepted in return”. Tax subjects disagreed mainly with the reading of the explanatory memorandum to § 13 in which it stands that: “Provision § 13 defines agreed value for the purposes of real estate acquisition tax. Agreed value is understood as payment for the acquisition of proprietary rights to immovable property and at the same time the payment is understood as according to its definition in § 4. The agreed value includes any valuable consideration which is or shall be paid based on an agreement between the contractual parties for the acquisition of proprietary rights to immovable property by either the transferee or a different person either to the benefit of the transferor or a third party. Therefore, this means among other things that the agreed value is the total value including the value added tax. This corresponds with the fact that the observed value includes this tax as well. On the other hand, the agreed value does not include other payments which the transferee makes in connection to the acquisition of proprietary rights to immovable property outside of the contractual relationship with the transferor such as for example payments to the real estate agency for arranging the acquisition.”

Those who are of the opinion that value added tax should not be included in the base for real estate acquisition tax are working with the fact that the acquired value added tax does not increase the income; that the transferor may be called a “treasurer of the public administration” because the transferor is collecting income for the public budget.

A breakthrough in this dispute was brought by a judgement of the Supreme Administrative Court from June 28^th, 2017, č.j. 4 Afs 88/2017-35 about a case where a village named Střelská Hoštice as a transferor of the sold immovable property and a VAT taxable person submitted an appeal in cassation and this lead to a decision that with immovable property sold from their ownership the base for tax on acquisition of immovable property will be calculated from the agreed value without VAT. The important conclusions of this judgment can be summed up as follows:

1. The purpose of tax on acquisition of immovable property is taxation of the financial profit gained by the sale of the immovable property. This conclusion must be related to the tax on acquisition of immovable property according to the measure No. 340/2013 Sb. because its purpose is to similarly tax paid transfers of immovable property.
2. The value of the VAT which is received by the payer of VAT as a part of the acquisition price is not a part of the financial profit of the payer.
3. In this case there are two possible readings of the mentioned measure and the intention to include VAT into the base of tax on acquisition of immovable property has not been specifically stated in the measure. When there are more possible readings of an act of law it is necessary to give preference to the one which interferes with the fundamental rights and freedoms the least, in other words so that it profits the affected party.

On September 5^th 2017 Financial Administration issued a notice titled “Financial Administration will accept an agreed value without VAT from a taxable transferor when it comes to tax on acquisition of immovable property”[1] where it stated that their practice will correspond with the judgment of the SAC: “We will newly accept an agreed price without VAT when stating the value agreed on for the purposes of tax base assessment for cases from the time period from January 1^st 2014 to October 31^st 2016 where the taxpayer was the transferor”.

In the conclusion the Financial Administration points out the fact that the courts have not dealt with cases where the taxpayer was the transferee, nevertheless, the answer to this question is crucial for practice and that’s why there will be more looking into this issue.

According to the Financial Administration, the mentioned judgment of the SAC means more options for lowering the tax base of tax on acquisition of immovable property both in cases currently under way and for closed cases where the time period for tax assessment has not ended yet.

The SAC judgement brings the question of tax base assessment for tax on acquisition of immovable property also for cases where the taxpayer was (from January 1^st, 2014 until October 31^st, 2016) or is (from November 1^st, 2016) the transferee – a payer of VAT (or maybe a non-payer as well).

It is certainly going to be interesting to see the next steps of the Financial Administration and the development of opinions on different solutions to further questions related to this judgment among the specialists.

If this is something that concerns you, we are ready to assist you with practical solutions for your business.

[1] http://www.financnisprava.cz/cs/financni-sprava/pro-media/tiskove-zpravy/2017/FS-bude-u-dane-z-nabyti-nemovitych-veci-akceptovat-cenu-sjednanou-bez-DPH-8726