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Financial (and legal) Czech up to offer new options?

Property Secrets' Head of Legal & Business Affairs, Debbie Le Goff, was recently in Prague, Czech Republic, meeting with mortgage brokers, lawyers and other related companies. Here, Debbie describes what she found on her latest visit to the country...

The first thing that struck me about Prague this time round - and I am a regular visitor - was the sheer number of tourists from all over the world. The city's attraction continues to grow and it is quite a site to see groups following that single person with an umbrella held in the air. I was almost tempted to buy an umbrella hold it up in the air and see if anyone followed me!

The mortgage market in the Czech Republic remains the most advanced in Central & Eastern Europe with, as Star Capital Finance were keen to remind me, 100% Loan To Value (LTV) mortgages available.

The problem for investors, however, remains that there is still a tendency for banks to give a lower valuation to properties. So even if you obtain 100% LTV, this is likely to become around a 80% to 90% LTV.

Of more interest to investors was a meeting I had with Younique, a new company started by Martin Benik who worked for companies.cz, who enable the formation and registration of Czech companies online.

Younique claim to have a new way in which clients can obtain the EU Card without travelling to Prague. I am waiting for in-depth information concerning this.

The whole EU Card process with Younique is in the region of £1,800, which includes the application costing around £600. If you take into account the cost of travel to Prague, accommodation and food then you meet the £1,200 rate.

Highland Trust, who offer mortgages in Poland, Czech and Romania, were another company I met with, looking to expand the options open to Property Secrets clients - in the Czech Republic and also in Romania.

In addition to expanding the number of finance options available, I also met with a lawyer to discuss possibly increasing the legal options you can choose from. More on this in the future.

The market picture that I was given by all the parties I met was that it is anticipated that property prices will continue rise for about two more years before they start to settle.

POSTED BY DEBORAH LE GOFF ON TUE 20TH MAY AT 09:24 GMT

TAGS: Property Law, Prague Property, Mortgages, Czech Property

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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

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Latest twist in the VAT on Czech new builds saga

The Czech VAT on new build saga continues with a new twist.

There's now a new move t leave the rate at its current 5% for another year.

First, a quick re-cap: the Czech authorities are under EU pressure to move the VAT rate on new builds to the country's higher rate of 19%. But the Czech Republic has asked for an stay of execution as it were - before it implements the rise.

For this to happen, the EU must grant what's known as a derogation. It still hasn't done so - and if it fails to do so before January 1, 2008, it's likely the status quo will remain for another year and Czech VAT on new builds will stay at 5%.

For more details on what this may mean, see our blog
For more details on the current state of play, see this forum post

If the EU does grant the derogation before the end of the year, however, the Czech government will put the VAT rate up to 9% on all new builds from the start of next year.

The new twist is that the Czech opposition, the Social Democrats (CSSD), are pressing for the 5% rate to remain whatever the EU decision.

The party has submitted the proposal to the Chamber of Deputies in the form of an amended VAT law.

The CSSD believes the price of many goods affected by the rise to 9% (and food and medicines are included as well as housing) will hit people on lower incomes groups.

However, the Prague Daily Monitor reports Civic Democrats (ODS) tax expert Michal Doktor as saying that the CSSD proposal runs against the practice of all advanced European countries where both VAT rates are getting closer to each other.

The Social Democrats want the Chamber to consider the proposal fast and get it approved at the first reading. This course of action can be vetoed if at least two deputies clubs or fifty deputies are against it.

The proposal, if approved, would come into force as of Jan 1, 2008.

So, now we have the following possibilities:

1 The EU grants the higher VAT exemption before the January 1, 2008 deadline and the Czech government puts up its VAT rate to 9% (still lower than its maximum 19%), probably until 2010 when it will have to impose the higher rate.
2 The EU fails to make a decision on the exemption in time for the January 1 deadline and the Czech government leaves the current 5% rate as it is for another year.
3 The EU grants the higher VAT exemption before the January 1, 2008 deadline and the Czech government adopts the Social Democrats proposal, drops the rise to 9% and leaves the rate at 5% for all new properties.

What's the likely outcome?

At this stage, it's pretty much impossible to make a call.

We'll keep the situation monitored.

POSTED BY ROBIN BOWMAN ON FRI 26TH OCTOBER AT 10:40 GMT

TAGS: czech vat Property, Czech Property Tax, Czech Property

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LATEST TWIST IN THE VAT ON CZECH NEW BUILDS SAGA

Robin. Is a rise to 19% on apartments over 120sqm by 1 Jan 2008 now NOT a possibility then? Nick

POSTED BY NICK ON SUN 11TH NOVEMBER AT 20:14

VAT

Hi Nick That's our understanding, yes. We'll update this subject as soon as we know more. cheers

POSTED BY ROBIN BOWMAN ON SUN 11TH NOVEMBER AT 21:16

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Robin Bowman
Deborah Le Goff
Anna Grybel-Kloc
Noreen Lucey
Brett Tudor

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