Home > Blogs > Finance Watch Czech VAT rise - Czech VAT rates on new builds to rise in 2008 - what does it mean for investors? At the eleventh hour, the European Commission has given permission for Czech to hold its VAT rates on new builds at a reduced rate - but the Czech government is raising the rate anyway… The European Union has made its long-awaited decision on new build VAT rates in the Czech Republic – the VAT rate can stay at 5%. But it will rise to 9% anyway on most properties. Several countries that joined the EU in 2004 were granted special waivers allowing them to apply a lower rate of VAT on certain goods and services in order to smooth the transition to a higher standard rate. One of these countries was the Czech Republic, which was allowed to charge a lower VAT rate of 5% on new build housing. That transition period runs out on midnight, December 31, 2007. At this time, the VAT rate on new builds was due to switch to the upper Czech rate of 19%. Now the European Commission’s Economic and finance committee (at a meeting yesterday, Dec 4) has approved an extension of the 5% rate until the end of 2010 for ‘social housing’ – this is new builds below a certain size. But the Czech government intends to raise the rate to 9% anyway from January 1, 2008, as we have previously reported. So, after much confusion, rumour and changes of plan, the situation is now this: VAT on new builds in Czech will rise to 9% from January 1, 2008. 9% will also apply to renovation works on existing buildings. The 9% rate will only apply to properties in the category of ‘social housing’. Social housing is defined as: 1) Family houses with floor space up to 350 sqm (floor space of all rooms) 2) Flats with a floor space up to 120 sqm It appears too that developers will be able to take advantage of this lower 9% rate only if the block they are building only contains flats below the 120 sqm threshold. The basic VAT rate of 19% will be applied to new houses or flats over the 350/120 sqm threshold. Workaround What this means is that for those investors who are buying into developments due to finish very early in 2008, it may be financially advantageous to complete payments before December 31. It is really simply a calculation weighing up the difference between the new VAT rate and the extra cost of drawing down a mortgage early. For those with property due to complete in early 2008 – such as in the Old Brewery deal in Prague – this possible work around could help investors avoid the extra 4%. Josef Malir of Star Capital finance says the arrangement would be that final settlement would be paid into an escrow account before the January 1 deadline. But for this provision borrowers can expect to pay a 2% additional charge on their mortgage repayments until the time of completion – basically because the lender doesn’t have a hold on the property, which is not completed yet. If you calculate that the extra costs are worthwhile, the key is to set up a mortgage and make the arrangements for the escrow account immediately. Eventually, the VAT rate will have to rise to at least 19% in line with EU norms. It is thought highly unlikely that another extension of the lower rate will be granted after 2010. 2009 boost? This means that the market will almost certainly receive a boost in 2009 as buyers and developers rush to beat the deadline. Effects on the market How will this VAT change affect investments? Property Secrets chief analyst, Simon Tweddle, who is based in Prague, believes that overall the initial small increase in the VAT rate having little negative effect on the property market in the Czech Republic. ‘For those with existing properties it is good news that new build properties will become a little more expensive as this price rise will inevitably filter into the secondary market. ‘For those with existing off-plan properties nearing completion or for those looking to purchase in the future it will simply mean that most properties will become 4% more expensive – and remember much of this price rise (80-90%) can be mortgaged anyway (subject to status, of course). ‘This is an annoying increase but it is likely to have the effect of raising the whole market - so, relative to the market, you are paying no more particularly over the long term. Also, buying costs in the Czech Republic are amongst the lowest in Europe. ‘Given the market in Prague alone is rising at 25% per annum currently and many second tier Czech cities are rising at 25-35% per annum a 4% increase will be easily absorbed by the market.’ POSTED BY ROBIN BOWMAN ON WED 5TH DECEMBER AT 09:13 GMT TAGS: Czech Property, Czech VAT, Czech Tax [ Back To Blog Home ]

CONTRIBUTORS Robin Bowman Deborah Le Goff Anna Grybel-Kloc Noreen Lucey Nigel Hodges Brett Tudor First Name Last Name Email  BLOG POSTS Sep 2008 Aug 2008 Jul 2008 Jun 2008 May 2008 Apr 2008 Mar 2008 Feb 2008 Jan 2008 Dec 2007 Money matters – the CEE mortgage markets in review AND what’s coming in 2008 Czech your finances Czech VAT rise - Czech VAT rates on new builds to rise in 2008 - what does it mean for investors? Nov 2007 Oct 2007 Sep 2007  DISCUSS Comment On Blog Post  BOOKMARK THIS Del.icio.us Stumble It! Digg This Facebook Reddit

Call Property Secrets on: +44 (0)1270 539550

Buy To Let   |   Property Development   |   Property Renovation   |   Property Tax   |   Property Auctions   |   Landlord Advice   |   Financing & Mortgages   |   UK Buy To Let Mortgages   |   Foreign Mortgages & Finance   |   Investment Property