Since May 2009, purchasing real estate in the Czech Republic has become possible without registering your own company
Metrinfo.ru magazine reports on what this significant change in legislation has brought to buyers of Czech real estate.
Like all of Europe
The Czech Republic is not the richest country in the European Union, and the average income of Czechs is relatively low. Therefore, they often can spend less on real estate than their Western neighbors or Russians (in Russia, incomes are certainly not higher, but it is wealthy citizens who buy real estate abroad, and their budget for purchase is quite large). By banning the purchase of real estate by foreigners without forming a legal entity, Czech legislation protected its citizens from increased demand for real estate and, consequently, from a significant rise in prices. However, the Czech Republic joined the European Union, and according to Article 56 of the Treaty on the Functioning of the European Union, member states do not have the right to restrict foreigners from acquiring real estate on their territories.
"From May 1, 2009, the International Treaty on the Prohibition of Restrictions on the Movement of Capital came into force in the Czech Republic, giving citizens of other states the right to acquire real estate as individuals. The basis of the treaty is pan-European legislation, which has priority over the law of a specific country," reports Mikhail Butenko, head of the foreign real estate department of the real estate center "Bonus".
"The restriction remains only on the purchase of houses and apartments located on agricultural and forest land; foreigners will be able to buy them only after two years," says Stanislav Zingel, president of the International Agency for Foreign Real Estate Gordon Rock.
Contrary to the fears of Czech legislators, the innovation had virtually no impact on demand for real estate or on prices. Perhaps things would have turned out differently had it not been for the global financial crisis. But in the current economic situation, prices for Czech real estate are not rising, as in all of Europe: "Compared to last year, prices have fallen by an average of 3-5%, with the cost of panel housing even dropping by 10-15%, while the price of luxury apartments has not changed at all. There is no fundamental drop in prices for Czech real estate, but growth has stopped," reports Natalia Zavalishina, general director of "MIEL-DPM".
Furthermore, foreigners have been allowed to buy real estate in the Czech Republic, but the green light has not been given to mortgage loan recipients: Czech banks practically do not consider applications from non-residents of the Czech Republic, and the lack of mortgages naturally restrains demand and the inflow of foreign capital, and therefore prices.
New purchase procedure
In connection with the changes in Czech legislation, the purchase procedure for those wishing to buy an apartment in the Czech Republic with their own funds has been simplified, and transaction costs have been reduced. Today, purchasing real estate in the Czech Republic for a foreign citizen takes place in several stages.
* Selection of the property (preliminarily, and then on site) and payment of a deposit for the chosen property (usually 10% of the property's value). At the same time, a reservation agreement is signed, setting out the terms of the future transaction, as well as the conditions for possible withdrawal from the transaction and penalties in case of violation of this agreement.
* Signing of the main purchase and sale agreement between the seller and the buyer, drawing up the deed of sale. In the Czech Republic, the transaction is not considered completed until the corresponding entry is made in the Land Registry, and therefore the seller cannot receive the money for the sold property at this stage. Until the transaction is completed, the money is placed in escrow with a notary, and the relationship between the parties and the notary is formalized by a separate agreement.
* Registration of the purchase and sale agreement in the Land Registry, for which a corresponding application for a change of ownership information is submitted to the local cadastral office. The process of recording in the Registry can take from one to six months, and once registration is complete, the transaction is considered finalized – at that moment the notary releases the money to the seller. Also, a handover protocol is drawn up, which includes an inventory of furniture and appliances in the purchased apartment, meter readings, etc.
Thus, the current process of buying Czech real estate is quite simple and takes relatively little time, while before May 1, 2009, all foreign buyers had to register a legal entity. This procedure did not last long – on average 2-3 weeks – but required fulfilling additional conditions and preparing a certain package of documents.
To open a legal entity in the Czech Republic, foreign citizens need to provide incorporation documents indicating the company name and its business subject, information about all founders as well as their family members and parents, information about the director, information about the co-owners' share in the registered capital (each must contribute at least 20,000 crowns), a certificate of having 160,000 crowns in any Czech bank, and a certificate confirming that the director and co-founders have no criminal record.
For registering a legal entity, one had to pay about €1,600-2,000. It was possible to entrust all the groundwork to a real estate agency, but then company registration cost €2,500-3,000. In addition, in order not to lose the property, one had to keep the company operational, submit annual reports, preparation of which cost about €300, and pay taxes.
Now buyers of Czech real estate only pay the realtor's commission – 2-5% of the property value, interpreter services – €100-200, notary escrow services – about €1,000. After becoming the owner, you also have to pay an annual property tax – about €50 and monthly utility bills – on average €100. Naturally, before the change in Czech legislation, buyers also bore all these expenses, but they were added to the costs of registering a legal entity.
Big advantages of the innovation
The most important plus is saving money. Now even when making a purchase and sale transaction, you can save from 1,600 to 3,000 euros, plus you don't have to bear the costs of taxes and annual reporting, nor do you need an extra 20 thousand crowns for the charter capital of the created company and 160 thousand crowns in the account of the legal entity in a Czech bank.
“An absolute plus of registering real estate in the name of an individual is saving time,” claims Mikhail Butenko (“Bonus”).
Another relaxation. Previously, only citizens without a criminal record were actually allowed to purchase real estate in the Czech Republic. With a criminal record, it was of course possible to register a legal entity in the name of household members and relatives, but in this case the risk of losing the property increased. And today, almost anyone can buy a house or apartment in the Czech Republic.
Restrictions only concern crossing the border and obtaining a Schengen visa, which is necessary for entry into the Czech Republic. For example, those who have previously seriously violated the visa regime of the European Union or committed crimes in Schengen Agreement countries have practically no chance of getting a Schengen visa, and those under investigation will not be able to legally cross the border of their country. Only under such circumstances will you have to forget about buying real estate in the Czech Republic, and in other cases – no restrictions.
Another important advantage of the new rules is that property purchased in the name of an individual becomes personal property, meaning it can be freely sold and rented out without a collective decision of all founders. Moreover, personal property cannot be lost in the event of bankruptcy or financial difficulties of an open company.
Not so small disadvantages
However, the new rules also have a downside. Firstly, real estate can only be registered in the name of one individual or a married couple. And if it is necessary for other people to be co-owners of the housing along with the buyer, the new Czech legislation does not provide such an opportunity.
Secondly, as we have already noted, it is practically impossible for foreigners to get a mortgage.
Thirdly, owning real estate in the Czech Republic does not guarantee obtaining a six-month or annual Schengen multi-visa, let alone a residence permit; property serves only as one of the advantages when considering applications. “Usually, property owners initially receive only a multi-Schengen for six months, which gives them the right to stay in the country for up to 90 days, and then an annual visa, which increases the duration of stay in Schengen countries to six months (90 days in each half-year). However, it is necessary to confirm the availability of funds during the stay in Schengen,” says Elena Nekrytova, head of the resort real estate department of the company “Novoye Kachestvo”. And when purchasing real estate in the name of a legal entity, all co-founders and their family members can count not only on multi-visas, but also on a residence permit.
And a company is still needed
Thus, if the goal of buying real estate in the Czech Republic is permanent residence in this country, then it is still impossible to do without forming a legal entity. “Therefore, our clients, as a rule, apply for a package of services that includes company registration,” reports Stanislav Zingel (Gordon Rock).
True, nothing prevents homeowners who bought property in their own name from then also opening a company; this protects the property from possible financial troubles of the company and allows the company to be closed at any time without worrying about the fate of your apartment or house.
But such behavior is impossible for those wishing to use a mortgage, because in this case mortgage programs are open only to legal entities. But credit should be given to Czech banks – mortgage loans to legal entities are issued quite quickly and easily: “Even a newly registered company can get a mortgage loan, but naturally on condition of providing all necessary documents. First of all, the bank is interested in information about the income of the company's owners, and they will be quite satisfied with data on salary, as well as information on the flow of financial funds in bank accounts over the last 6 months. As a rule, Czech banks are more willing to give a loan if the down payment is 50% of the property value. Today, a mortgage can be obtained for a maximum of 30 years, and the loan rate is 4.5-5% per annum,” says Natalia Zavalishina (“MIEL-DPM”).
“As a rule, real estate in the Czech Republic is purchased with the aim of investing in one's future – for education, doing business, emigration, etc. Therefore, opening a legal entity is a supplement to property registered in the name of an individual. This opens up great opportunities for activities in the Czech Republic. But if the buyer of real estate does not have such tasks, then the new procedure for registering property will be more convenient and less costly for him,” concludes Mikhail Butenko (“Bonus”).
Until May 1, 2009, real estate in the Czech Republic could only be purchased by a legal entity; now, practically any citizen can become the owner of apartments and houses in this country. The innovation, which aligned Czech legislation with the requirements of the European Union, makes the purchase process faster and more understandable, and very importantly, less costly. However, owning real estate in the Czech Republic does not give its owner significant advantages in obtaining a Schengen visa, let alone the right to reside in the Czech Republic. Moreover, it is virtually impossible for foreign citizens to obtain a mortgage loan.
Therefore, for those who link their future life and work with the Czech Republic, opening their own company is highly desirable, and for obtaining a mortgage loan, it is simply necessary. But in other cases, the changes in legislation only benefit potential buyers of Czech apartments and houses.