Investing
in Slovak real estate has become increasingly popular as EU
accession nears and interest rates and returns on other forms
of investment decline or opportunities shrink.
Corporate Income Tax relating to Real Estate
If a Slovak resident company
sells real estate, any profits from the sale are subject to
corporate income tax at the normal rate tax (currently 25%)
as part of the total income of the company. In calculating
the profit on sale, the tax residual value of the real estate
(after allowing for tax depreciation) is normally allowed
as a tax deductible cost.
There is no concept in Slovak
law of an "indexation allowance" to exempt from
tax any profit which arises purely from an increase in value
from inflation over period of time. Losses on disposal of
real estate should now also normally be tax deductible (effective
1 January 2002).
When real estate is sold between
related parties it will be subject to transfer-pricing rules.
These are rules which require an "arms-length price"
(i.e., a similar price to that which would be charged between
unrelated parties under normal market conditions) to be charged
for corporate income tax purposes.
Technically, for transactions
between related Slovak entities, the arms-length price should
be normally be based on a "cost plus" basis.
At present, normally only Slovak
legal entities can own real estate. The question of the taxation
of sales of real estate in Slovakia by non-residents does
not therefore arise in practice. However after Slovakia becomes
a member of the European Union, there are plans to liberalise
the law allowing non-residents to acquire real estate.
Real estate owned and used
for business purposes can be depreciated for tax purposes.
Land cannot be depreciated but buildings and fixtures can
be depreciated at rates set out by law. These rates depend
on the precise nature of the asset. Changes to tax depreciation
rates came into force on 1 January and the maximum depreciation
period for buildings is now 30 years.
1. Local taxes on the holding of Real Estate
Owners of real estate are
obligated to pay real estate tax on buildings, land and flats.
There are different rates for each category and region in
which the real estate is located. It is no surprise that the
owners of real estate in Bratislava will pay the highest taxes.
The Slovak Real Estate Tax Act defines several kinds of land
that are subject to this tax.
The taxable base is the area
of the land. The general tax rate for abuilding plot presently
SKK1 per 1m2. However, this tax rate could be increased by
up to 100% on a decision of the local municipality.
The final tax rate is then
multiplied by a coefficient, whose value depends on the real
estate's location (currently Bratislava has a coefficient
of 4.5 and a village with fewer than 1,000 inhabitants, a
coefficient of 1.0.
Land that is covered by a building
subject to real estate tax is no longer subject to real estate
tax. Instead the building itself is subject to the same tax.
The taxable base is the overall built-up area in m2. The highest
general tax rate is SKK 10 per 1 m2. However, this tax rate
could be increased up to 150% on a decision of the local municipality.
The tax rate is further increased
by SKK 0.75 per 1 m2 for each additional storey. The tax rate
is increased by a coefficient that reflects the location of
the building.
2. Value Added Tax
Slovakia operates a system
of VAT which is broadly based on EU principles but has some
significant variants. A company or branch must register for
VAT if it meets certain limits for VATable supplies and may
voluntary register in other circumstances. However, the tax
authorities can refuse voluntary registration without giving
any reason.
As a general principle, the
transfer of real estate (except for land) is subject to Slovak
VAT. However, the obligation to charge VAT on the transfer
of real estate only applies in the first two years after the
real estate is put in use. If the transfer occurs after this
date it is exempt from VAT. Specific VAT exemptions for real
estate also apply on transfer of business or a part of business
on condition that both parties are registered for VAT purposes.
The leasing of real estate
is normally VAT exempt with some exceptions. However, where
real estate is leased between two payers, the lessor can elect
to charge VAT on the lease at the reduced rate. This can be
useful in avoiding unrecoverable input VAT for lessor in some
circumstances.
3. Withholding taxes on rent of property.
There are no general withholding
taxes on property rent paid between two Slovak entities.
However, rent paid to foreign
resident entity with respect to real estate situated in Slovakia
is subject to a withholding tax of 25% provided this income
is not attributable to a Slovak taxable presence of the foreign
entity.
If attributable, then payments
to the Slovak taxable presence of the foreign entity will
be subject to a 15% security tax, which is creditable against
the corporate income tax liability of the taxable presence.
Currently, foreign ownership of Slovak real estate is limited.
4. Real Estate Transfer Tax
In general, any transfer of
real estate in Slovakia is subject to Real Estate Transfer
Tax at a top rate of 6% with effect from 1 January 2003. In
Slovakia the seller is normally liable for the payment of
Real Estate Transfer Tax although in practical terms it's
likely the acquisition cost will be increased to reflect the
Real Estate Transfer Tax to be borne by the seller.
The purchaser is always liable
for property transfer tax when he acquires real estate from
a company that is bankrupt. In most circumstances property
transfer tax is levied on the higher of actual price paid
or the value assessed by an independent valuer.
Property transfer tax is payable
on the transfer of real estate between two entities. Slovak
transfer tax rates have historically been high in comparison
with Western European countries. The rate of transfer tax
was until 1 January 2003 4% and 20% depending on the value
of the real estate. From 1 January 2003 however the top rate
is 6%.
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