The abolition of the real estate acquisition tax from 2020 has freed up and changed the market for real estate transactions. Until then, purchases of lucrative real estate between entrepreneurs were structured mainly as the purchase of shares in property companies (i.e. companies that own real estate), the so-called share deal. The abolition of the real estate acquisition tax opened up the space for direct real estate purchases, the so-called asset deal. Let's summarise the advantages and disadvantages of both options. The starting point for further consideration will be a situation where an SRO has held a lucrative property (let's call it a Real Estate SRO - hereafter referred to as SRO) in its fixed assets for 20 years, leases the property, and does not develop any other activity.
SHARE DEAL Tax aspects
If the owner of the SRO was another legal person, i.e. the SRO was part of a holding structure, then the selling parent legal person very often (after meeting the conditions of parent x subsidiary, i.e. holding at least 10% of the share capital of the company being sold for at least 12 months and in an enumerated legal form) exempts the income from the sale of shares completely.
If the owner of the SRO is a natural person, then we will assess the fulfilment of the conditions of the time test of holding 3 years of shares / 5 years of business shares for exemption and, as of 1 January 2025, also the financial limit of income from this type of transactions of 40 million CZK. CZK per year. If the conditions are met, the income from the sale of the SRO will be exempt for the individual. Please note here the condition of mandatory notification of the exempt income to the tax authorities within the deadline for filing the tax return for the given calendar year.
And beware, the above exemption for legal and natural persons applies to Czech tax residents, for non-residents it is necessary to check the obligations in their country of residence, the terms of the double taxation treaty!
The exemption of income from SRO sales is, of course, the reason why this type of transaction is so popular with sellers. But it has pitfalls for the buyer.
From the buyer's perspective (whether it is a corporation or an individual), the historical (often low) acquisition value of the property (because the buyer purchased the SRO and not the property as such) does not change from which tax depreciation is calculated. Therefore, this buyer will be taxed on a potentially higher tax basis because they will take lower tax depreciation in relation to the proceeds received, or a lower tax depreciated amortized cost when they resell the property.
Therefore, in this type of share deal, it is common for the seller to give the buyer a discount on the purchase price to compensate for the low tax depreciation (and therefore low tax depreciation in the acquired company). This difference is referred to as the "LCGT discount", Latent Capital Gains Tax, a deferred tax on capital gains, currently amounting to 21% of the difference between the market value of the property on outright sale and its tax depreciated cost. A gentleman's apportionment of the difference in the purchase price of an SRO versus the property itself tends to be around 50% LCGT.
The buyer also assumes all the risks of the SRO from the seller, often not even detailed legal, financial and tax due diligence can protect against them.
ASSET DEAL tax aspects
In this method of selling the property as such, the seller taxes the gain (most often the difference between the historical cost, possibly less tax depreciation already applied, and the sale price of the property) on income tax.
The selling corporation cannot claim any exemption, it taxes the profit at 21% as part of its general tax base.
The seller, an individual who did not have the real estate in his/her business property, can claim tax exemption if the time test of possession or other conditions of the law are met (this issue would be a separate article, so we will not go into details here). In other cases, the gain on the sale is taxed on the tax return (at the rate of or 23%).
The buyer can depreciate the property from the full purchase price. On resale, the full tax depreciated cost is applied to the tax expense.
Asset deal may therefore be a suitable option, e.g. when selling loss-making or otherwise troubled SROs. The rules of the new Civil Code will be applied to the buyer, where the buyer in good faith will acquire a better title than the original owner.
Autor: Ivan Kovář