Property Purchase for EU Citizens: SRO or Czech Residency Permit?
Property purchasing vehicle or green card? Which route should citizens of European Union and other "favored nation" countries take when buying property in the Czech Republic?
Many European Union and other "favored nation" citizens ask about the pros and cons of buying as an individual (with a Czech residency permit) against buying via an SRO (Czech limited liability company). What are the implications of each method? We'll take an in-depth look at each possibility.
Also, when an EU citizen gets residency in Czech Republic does it make them liable to pay taxes here? We answer this question in our Tax section.
(For the sake of convenience, any reference to EU citizens is also applicable to citizens of "favored nation" countries.
Czech Residency vs. SRO (EU or 'Favored Nation' Citizens)
The vast majority of property investors in the Czech Republic are members of the European Union (EU). Currently, the 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.
The main consideration in deciding whether to go down one route or the other remains taxation.
If you buy as an individual and hold the property for more than five years -- and this property isn't your primary residence -- you won't pay capital gains tax on the property in the Czech Republic.
That said, some clients from EU countries have informed me that even if the capital gains tax 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 receiving the capital gains as dividend payment through a foreign company.
If you buy as an individual and sell within five years, you'll be required to pay capital gains tax as an individual.
Here's a chart showing the current taxation on an individual in the Czech Republic:
Tax Base (CZK)
0 to 121,200
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, 32%.
Let's work through a scenario, then, where an individual sells a property within five years with a hypothetical capital gain of 1,000,000 CZK, with no other income. Based on the chart above you would pay 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 a 1,000,000 CZK capital gain 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) on the payments.
In the SRO scenario, your take-away would be 646,000 CZK, or, as an individual, 760,000 CZK.
Another consideration is that it's generally easier to expense property-related costs through an SRO than an as individual, because it's a stand-alone enterprise.
Regarding the costs of each, an SRO is definitely more expensive to maintain and inolves some added costs because of the higher standard of accounting required. Currently the cost of accounting and filing tax for a one-property SRO, through our partner, is around 10,000 CZK per year.
Also, there can be slightly higher rates for electricity and gas if the owner of a property is a company rather than an individual. (I don't understand this one...)
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, then there are no additional liabilities. (In all the SROs that Czech Point 101 has set up, this is done at the outset.) That said, the director of the company can be personally liable if they're found guilty of gross negligence.
Although the Czech Republic hasn't typically been a litigation-oriented society, it is increasingly moving in that direction, following trends in Western countries.
Currently, at the outset of an investment in the Czech Republic, it's easier for a person purchasing as an individual to get a better loan-to-value ratio and slightly better interest rates than they would purchasing through an SRO.
Banks are looking for a track record with an SRO.
Having said that, after two years of good investment history and payment, the banks often offer better interest rates and mortgage terms to an SRO than to an individual.
The final factor in the discussion is how difficult it is to acquire either an SRO or a residency permit.
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, haven't declared bankruptcy, etc.
For an EU citizen obtaining a residence permit poses two potential difficulties.
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 an accommodation address, at which you have permission to stay at while in the Czech Republic.
For anyone who isn't actually living here at the time that they purchase a property, meeting these requirements can be the difficult part of obtaining a Czech residency permit.
Hopefully, this article will help you make the right decision when it comes to choosing a route for investing in the Czech Republic.
At Czech Point 101 we are prepared to guide you along either route, and, ultimately, help you to invest successfully.
Question: If, as an EU citizen, I were to obtain a Czech residency permit, would I be required to pay taxes in the Czech Republic, even if I don't live there?
You are required to pay taxes in the Czech Republic only if you are deemed to be a tax resident. A tax resident is someone who resides in the Czech Republic for more than 183 days in a year.
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