Please note that because of the change to the law regarding foreign citizens purchasing property in May of 2009, much of this information is no longer applicable.

Czech Residency VS SRO (EU or ‘favored nation’ citizens) 

 

The vast majority of property investors in the Czech Republic are members of the EU. Currently Czech Republic restricts how even EU citizens can purchase property here. No fixed date has been given regarding when these restrictions will be lifted. 

 

The two options for an EU citizen for purchasing property are through an SRO (Czech limited liability company) or as an individual with a Czech residency permit. 

 

 

Taxation 

 

The main consideration of whether to go the route of one or the other remains taxation. 

 

If you buy as an individual and hold the property for more than 5 years, this property not being your primary residence, you will not pay capital gains on the property in Czech Republic. 

 

This being said, some clients from EU countries have informed me that even if the capital gains is not paid here because of this exemption, their home countries would require payment of taxes on this gain. This would be a good question to pose to your home country accountant. In some cases there can be a tax advantage in your home country to receive the capital gains as dividend payment through a foreign company rather than capital gains. 

 

If you buy as an individual and sell before the 5 years, you will be required to pay capital gains tax as an individual. 

 

Here is the current chart of taxation for an individual in the Czech Republic: 

 

Tax Base (CZK) Tax

0 to 121,200 12%

121,201 to 218,400 19% of base exceeding 121,200

218,401 to 331,200 25% of base exceeding 218,400

331,201 and over 32% of base exceeding 331,200

 

 

As can be seen, taxation quickly jumps to the highest tax bracket of 32%. 

 

Let’s work through a scenario then where an individual sells a property before the 5 years with a capital gains of a hypothetical 1 000 000 CZK with no other income. Based on the chart above you would pay a total of close to 275 000 CZK in taxes. 

 

For an SRO, on the other hand, capital gains are always taxed at the corporate tax rate for net profit. As of 2006 this is 24%. This would make the tax on 1 000 000 CZK of capital gains at 240 000 CZK. This leaves you with less tax on the amount than you would have as an individual. 

 

This is an easy calculation should you choose to leave your gains in the SRO and reinvest it. However, many at this time might be interested in retrieving it for other purposes. In this case a possible scenario is to withdraw it as dividends, in which case there would be a 15% withholding tax (in the scenario above, another 114 000 CZK) from the payments. 

 

In the SRO scenario, your take-away would be 646 000 CZK while as an individual, 760 000 CZK.

 

Another consideration of taxation is that it is generally easier to expense property related costs through an SRO compared to an individual, because it is a stand-alone enterprise. 

 

 

Costs 

 

Regarding the costs of each, an SRO is definitely more expensive to maintain and requires some added costs because of the higher standard of accounting required. Currently the cost of accounting and tax filing for a one property SRO through our accounting partner is around 10 000 CZK/year. 

 

Also, there can be slightly higher rates for electrical and gas if the owner of a property is a company rather than an individual (don’t understand this one…). 

 

 

Liability 

 

Another consideration is liability. 

 

Czech law stipulates that a company is only liable for the amount of assets it possesses. The individual shareholders are not personally responsible unless there is unpaid initial capital outstanding (200 000 CZK total). If this is paid in full (in 100% of the SROs that Czech Point 101 has setup, this is done at the outset) then there is no additional liabilities. This being said, there is personal liability on the part of the director of the company, should there be found gross negligence. 

 

Although the Czech Republic has not typically been a litigation oriented society, it is increasing moving in this direction, following the trends in Western countries. 

 

 

Mortgages 

 

Currently at the outset of investment in Czech Republic, it is easier for a person purchasing as an individual to get a better loan to value ratio and slightly better interest rates than purchasing through an SRO. 

 

Banks are looking for a track record on the SRO. 

 

This being said, after two years of good investment history and payment through an SRO, the banks often offer better interest rates and mortgage terms to an SRO as opposed to an individual. 

 

 

Attainability 

 

The final factor in the discussion, is how difficult it is to obtain either. 

 

A Czech SRO can be owned by any individual and individuals of any citizenship are now able to fulfill all roles within a company, provided they have a clean criminal record, are over 18, have not been subject to bankruptcy, etc. 

 

For an EU citizen obtaining a residence permit, it requires two things that can be difficult to obtain. 

 

The first is a valid ‘purpose of stay’. This can be any number of things including being registered in a university program, having a work permit or being a licensed professional or business person. 

 

The second requirement is that you need an accommodation address for which you have permission to stay while in Czech Republic. 

 

Meeting these requirements can be the difficult part of obtaining a Czech residency permit for those who are not actually living here at the time of purchasing a property. 

You can also ask any questions about this article or SROs in general, by contacting us here.

Updated/Aktualizováno: December 4, 2014, Czech Point 101