Acquisition of Real Estate in the Czech Republic
12.04.2010 / 09:33
Acquisition of Real Estate
The rules for the acquisition of real estate in the Czech Republic are not applicable universally. There are still exceptions which limit foreign persons (including citizens of the European Union) in acquiring certain types of real estates, despite the fact that the Czech Republic has been a member of the European Union since 2004.
RESTRICTIONS APPLYING TO ACQUISITION OF REAL ESTATE
The internal market of the European Union is based on the application of four basic freedoms, which are the free movement of goods, persons, services, and capital. Free movement of capital includes unrestricted acquisition of real estate in particular European Union member states. In accordance with such principle, Article 56 of the Treaty establishing the European Community prohibits any restrictions of the free movement of the capital, both between European Union member states and in relation to third countries. On the basis of these freedoms, citizens of the European Union are free to acquire real estates in other states of the European Union without any restrictions. Upon its accession to the European Union, the Czech Republic was granted two exemptions related to the above mentioned Article 56 of the Treaty establishing the European Community, which were implemented by the introduction of the so-called transition periods for the acquisition of real estate in the territory of the Czech Republic. During these transition periods, certain restrictions were maintained in the area of the acquisition of domestic real estate by foreign persons, and that in the duration of 7 years for the acquisition of farmland and woodland, and in the duration of 5 years for the acquisition of other real estate. Both transition periods became effective as of the Czech Republic’s accession to the European Union, i.e. as of 1 May 2004, and were incorporated into documents signed by the Czech Republic upon its entry into the European Union. These transition periods are implemented in the Czech law by the Foreign Exchange Act (Act No. 219/1995 Coll.). With respect to the above mentioned, in the case of land which is part of the agricultural land resources, and land designated for the fulfi lment of forest functions, the transition period still lasts and will end in May 2011 (i.e. on the expiry of 7 years from the Czech Republic’s accession to the European Union). As regards other types of real estates – especially residential and commercial – the exemption restricting their acquisition by the foreign persons, granted for 5 years from the Czech Republic’s accession to the European Union, expired in May 2009. The acquisition of this type of real estates is thus no longer restricted, despite the fact that the respective amendment to the Foreign Exchange Act has not yet been approved by the Parliament of the Czech Republic. To summarize, as regards the acquisition of real estates in the Czech Republic by the foreign entities, the Foreign Exchange Act still distinguishes two categories of real estates, namely the agricultural and forest land, and other real estates. Both types of real estates may be acquired without restrictions by individuals with permanent residence on the territory of the Czech Republic or legal entities with the registered offices in the country (resident status). Foreign individuals and legal persons (non-residents) are restricted at present only from the acquisition of the agricultural and forest land because, due to the expiry of the fi ve-year transition period, they are entitled to acquire other real estates under the same conditions as the resident individuals and legal entities.
Restrictions on the acquisition of real estates in the territory of the Czech Republic thus currently apply only to the acquisition of the agricultural and forest land, which is available to the non-residents under the conditions stipulated in Section 17 of the Foreign Exchange Act. Besides the resident individuals and legal entities, agricultural and forest land may be acquired also by:
- non-residents who are Czech citizens;
- non-residents who hold the residence permits for nationals of the European Union member states, provided that they are (i) registered as agricultural entrepreneurs in the territory of the Czech Republic, and (ii) have been permanent residents in the Czech Republic for a minimum of 3 years.
If an acquirer of the agricultural and forest land does not meet the above mentioned conditions, a non-resident may acquire the agricultural land only:
- by inheritance;
- for the diplomatic representation of a state;
- into a co-ownership of a married couple if one of the spouses is a Czech citizen;
- from parents or grandparents, brother or sister, or spouse;
- through exchange for other agricultural land if its price does not exceed the price of the exchanged land;
- on the basis of a legal or contractual preemption right or by virtue of a co-ownership of the land;
- in cases the agricultural land forms a functional unit with a building owned by a non-resident; or
- where stipulated by special laws (e.g. Property Restitution and Privatisation Acts).
PROPERTY ACQUISITION BY NON-RESIDENTS
The existing legal regulation of the real estate acquisitions in the Czech Republic does not restrict the Czech residents and legal entities, who may acquire the real estates (with the exception of the so-called reserved property that, pursuant to the Charter of the Fundamental Rights and Freedoms and the implementing regulations, may be acquired only by the state, municipalities, or listed legal persons) without any limitations. Thus, if a foreign individual or legal person wishes to invest in the real estates in the Czech Republic, although they are formally prevented from such intention by a legal restriction or the continuation of the transition period, they may acquire the real estates through a resident legal entity (e.g. a limited liability company) established for such specific purpose. This practice was common during the existence of more extensive restrictions on the acquisition of the real estates for the non-residents, even with the aim to acquire the real estates for residential purposes.
In addition, certain basic principles of the applicable laws must be respected by the acquisition of the real estates in the Czech Republic. These principles are as follows:
- Real estates situated in the territory of the Czech Republic are registered in the publicly accessible Land Register. The Land Register contains facts about the particular real estates as well as information about legal relationships to them, especially the identification of their owners and limitations of the ownership rights. Before any acquisition, it is thus advisable to check the Land Register for the legal status of the real estates being acquired, preferably with the help of an appointed consultant who is specializing in the relevant legal field.
- The principle “superficies solo cedit“ (the surface yields to the ground) does not apply in the Czech Republic. Thus, if someone is acquiring a building, he/she is not automatically acquiring the land on which the building is situated. Therefore, it is necessary in every acquisition to ensure that besides the ownership title to the building being acquired, the acquirer also acquires the ownership (or at least the enjoyment) right to the land on which it stands.
- Real estates in the Czech Republic are being acquired upon entry of the ownership right in the Land Register (referred to as a two-phase acquisition of ownership right). Thus, for the transfer of an ownership right to an acquirer it is not sufficient to sign the respective contract (e.g. on purchase or on a donation), but the ownership right must also be entered in favor of the acquirer in the Land Register. Only then is the property acquisition accomplished.
- From the formal point of view, a written form is obligatory for legal acts (especially contracts) concerning the transfer and acquisition of the real estates, and the signatures of the parties (i.e. the transferor and acquirer) must be on the same document. In order to prove the identity of the parties vis-á-vis the respective cadastral offi ce, it is regularly required that the signatures on this document be officially certified.
- Transfers of the real estates are subject to real estate transfer tax, which amounts to 3% of the price of the real estates being transferred. The tax is payable by the transferor, but the real estates acquirer becomes by operation of law the guarantor of the tax liability. Consultation with specialists is advisable on other tax liabilities related to the acquisition of the real estates.
Published in Czech Business and Trade 1/2010
Petr J. Syrovátko
WOLF THEISS, advokáti (Attorneys-at-Law)