Czech VAT Rise on New-Built Residential Property

Czech VAT Rise VAT is actually still set to raise from 5% to 19% as of 1-Jan-2008 on all new-builds except "social housing." Under current interpretations, "Social Housing" is any apartment project in which ALL individual units are under 90m2. My advice is to be careful here, and not be fooled into thinking that you can simply buy units under 90m2... if even one unit out of the given project is greater than 90m2, then ALL units will be assessed at the 19% VAT rate since the project itself will not be deemed to qualify as "Social Housing".

Frankly, this whole VAT issue illustrates Czech Government decision making at it's worst. They should have left the VAT rates alone as the market had already accepted the hike and had priced it in. The market would NOT have experienced any material "price shocks".

Worse still, we now observe many developers redesigning apartment projects so that multiple smaller units can be modularly fit together to make a bigger unit... just to save on VAT. Tax policies that force negative changes to archicture are absurd.

An interesting parallel case occurred in Amsterdam in the 1600s. Ever wonder why the buildings in that city are so narrow... because the government imposed a tax based only on the width of a given building, with no consideration of overall floor area. Today the architectural consequences of such tax have given the city a unique design. However, I do not expect the same to said for the Czechs.

New Opinion issued regarding Czech VAT on advance payments

Under current VAT practice, VAT payers that receive advance payments for taxable supplies must apply VAT to the advance at the rate valid when the payment is received. Czech law, however, has been unclear concerning the tax treatment if the VAT rate changes during the period between the receipt of advance payments and the tax point. PWC has just advised that the Czech Ministry of Finance has recently issued an opinion regarding this situation, which could arise. In particular relating to the expected VAT rate change for construction and assembly works from 5% to 19% on 1-January, 2008. The opinion states that When the balance of the contract for purchase is paid, the taxpayer applies VAT on the difference between the contract price and the value of the advance payments received at the then current rate. Hence, the 19% rate would apply toward an apartment under construction only on payments made after 31-December, 2007. Hence, according to this ruling one can take advantage of the 5% tax rate by maximizing payments towards one’s the apartment prior to 1-January, 2008. One does not need to pay off all of the apartment by the 1-January, 2008 date, but any balances due and paid after the VAT rise deadline will be assessed 19% vs. the previous 5%. This also has implications for bank financing. If a down payment is made (say 15% in February 2007) and a mortgage is arranged immediately afterward to make staged drawdown payments to the developer according to phases of completion up to 31-December, 2007, these mortgage payments too qualify towards payments under the 5% rate. Theoretically, one could arrange for the bank to pay up 100% of the price of their apartment prior to 1-January, 2008 and qualify 100% of the apartment’s cost under the 5% rate even if the project is not due to complete for many months (years?) afterward. In practice, however, negotiating with a bank to actually allow/do this is unlikely since banks in general are extremely cautious about fronting any additional funds to a builder/developer prior beyond specified level of completion; hence, asset value.

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