By Beata Balogová
LAND is becoming an attractive commodity in Slovakia but the market in this country is still rather chaotic. The Slovak Spectator talked to Miriam Galandová, tax manager; and Martin Kluch, associate, at the law firm White & Case to get orientated in the expanse of changes and regulations.
The Slovak Spectator (TSS): Current legal conditions for the acquisition of Slovak real estate by foreigners are very strict. As of May 1, 2004, Slovakia should become an EU member state. Will these strict conditions change?
Miriam Galandová and Martin Kluch (MG & MK): Yes. In order to ensure the harmonisation of Slovak law with EU regulations, an amendment to the Foreign Exchange Act has been adopted and should come into force on May 1, 2004. According to this amendment, a foreigner (either an individual or a legal entity) will be able to freely acquire real estate in Slovakia. This liberalisation, however, does not apply to agricultural and forest land, where the Slovak Republic was granted a seven-year transition period. By 2011 at the latest, Slovakia should remove restrictions on the acquisition of agricultural and forest land by EU nationals and companies.
TSS: This means that foreigners will not be able to buy agricultural or forest land in Slovakia sooner than seven years after the country's entry to the EU. Is there any option for foreigners to obtain land sooner?
(MG & MK): Under the amendment, foreign individuals (not companies) are allowed to acquire forest and agricultural land located outside the boundaries of the developed area of a town or village. However, this is only if the purchaser is a Slovak citizen (residency permit is not required) or meets the following requirements for acquisition of the agricultural land: The foreigner is a national of an EU Member State, is the holder of a temporary residence permit in Slovakia, and has farmed the land to be acquired for at least three years following the accession of Slovakia to the EU. Needless to say, foreigners are free to lease real estate, including agricultural and forest land.
TSS: Slovaks fear there will be a massive real estate buy-up by foreigners soon after EU accession, especially of agricultural land. Do you assume this will occur?
(MG & MK): As regards agricultural land, foreign individuals must farm the land for at least three years following the accession of Slovakia to the EU if they want to buy it. Moreover, the restrictions on the acquisition of real estate by foreigners may easily be avoided by the establishment of a company in Slovakia. As such a company is, according to the Foreign Exchange Act, a Slovak resident, it may acquire real estate, including agricultural and forest land, without any restrictions. As such an acquisition is permitted under current law, I think that foreigners who are interested in massive buy-ups of real estate are already present in the Slovak market through their own Slovak companies.
TSS: Would there be any Slovak tax consequences for foreigners that could arise regarding the acquisition of real estate?
(MG & MK): The sale of land is subject to a real estate transfer tax at the rate of 3 percent. This tax is generally payable by the seller with some exemptions (e.g. expropriation or if the real estate is acquired in a bankruptcy proceeding). Nevertheless, even if it is payable by the seller, it actually increases the selling price of the real estate. As a part of the tax reform currently being implemented in Slovakia, the government intends to cancel this tax beginning in 2005.
Once an owner of real estate, the foreigner would be liable to pay real estate tax, which is levied on buildings, land, and apartments. For example, for building sites, gardens, and courtyards, the land tax is calculated according to the area in square meters. The tax rate ranges from 10 haliers (€0.002) to Sk1 (€0.025) per square metre multiplied by a coefficient of up to 4.5, dependent on the land's location and use.
A new concept of real estate tax should become effective on January 1, 2005. Tax assessment would be based on the actual value of real estate as stated in the price maps, which are being prepared. Currently, the real estate tax does not represent a significant expense, but it is expected that the tax liability will increase, especially for real estate situated in more attractive locations.
TSS: Will there be any Slovak tax payable if the foreigner decides to sell real estate?
(MG & MK): Such income is considered taxable in Slovakia only if real estate is sold to a Slovak person or a permanent Slovak establishment of a foreign entity. Then the profit realised on the sale is subject to the 19 percent Slovak income tax unless the relevant double tax treaty states otherwise. The majority of double tax treaties, however, leave the right to tax such income to the country in which the real estate is situated. Therefore, if the foreigner sells it to a Slovak person, the income would be taxable in Slovakia.
TSS: Under what conditions may foreigners currently acquire real estate in Slovakia?
(MG & MK): Under the current wording of the Foreign Exchange Act, a foreigner (i.e., a foreign company or individual that has no corporate presence/permanent residency in Slovakia) may only acquire real estate:
1- by inheritance;
2- through diplomatic channels for the representation of a foreign country under the condition of reciprocity;
3- by exchanging Slovak real estate for other Slovak real estate;
4- by exercising a preemptive right resulting from co-ownership;
5- by constructing a building on already-owned land;
6- if real estate is acquired by a married couple in which one is a foreigner or is acquired from a spouse, brother, sister, parents, or grandparents;
7- if it is stipulated by a specific law (e.g., restitution laws); or
8- if the real estate is acquired for the purpose of operating a branch office
TSS: A new act on restitution took effect as of January 1, 2004. Briefly, what are land restitution's most significant factors and limitations?
(MG & MK): According to this act, Slovak citizens with permanent residency in Slovakia (if such person is deceased, the act applies to that person's relatives with Slovak citizenship) may file restitution claims for agricultural or forest land until December 31, 2004.
This applies to citizens who were deprived of their property between February 25, 1948, and January 31, 1990.
The claimant may be granted restitution, however, on a maximum of 250 hectares of land, of which agricultural land may not exceed 150 hectares. If the claimed land cannot be returned due to any of the reasons stipulated by law (e.g., there is a building or garden located on the land, the land is owned by a physical entity, etc.), another piece of land of adequate quality and area will be provided by the state, or financial compensation will be paid.
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