The real estate market in Slovakia has become very dynamic, especially due to an increased economic growth, jump-started by both our country‘s accession to the European Union and a system of economic reforms initiated in the recent years. An integral part of our real estate market is an increased interest in purchase and subsequent lease of apartments and non-residential premises by foreign entities. Purchase of an apartment by a foreign entity creates an entire bundle of obligations. The failure to meet these obligations can be strictly sanctioned by the state authorities. The purpose of this article is to clarify the basic steps, which must be taken to avoid unnecessary fines and sanctions following the purchase, as well as – even more importantly – after a piece of real estate has been rented out.
Real estate tax
Foreign entities are obliged to report the registration of their ownership rights to a given piece of real estate to the local authority, which administers the area where the real estate is located, and to do so within 30 days after such registration. Also, an obligation arises for foreign entities to pay the residential and non-residential premises tax for the year following the year of registration of their ownership rights in the cadastre.
Example: if a citizen of the Czech Republic acquires ownership rights to a piece of real estate on January 31, 2007, he/she will only be required to pay the real estate tax for 2008. Such person will be obliged to file a tax return by January 31, 2008, and settle the tax in accordance with a tax assessment submitted by the local authority. A report must be filed by this person within 30 days from the date of registration of his/her ownership rights pertaining to the piece of real estate in the cadastre.
The obligation to pay the tax expires in the year following the year, when the ownership rights to the piece of real estate were transferred.
Example: if, in 2008, a citizen of the Czech Republic sells an apartment, which he/she acquired in 2007 and the purchase was registered in the cadastre in the same year, there will be no need to pay real estate tax for 2009 anymore.
At the same time such entity will have no right to claim any partial refund of the real estate tax aliquot to the period of 2008, in which the buyer of the apartment will be registered as its owner in the cadastre. Such person must also fulfill his/her reporting duty. Example:if a citizen of Germany buys an apartment in 2007, sells it in the same year, and is not registered as its owner in the ownership records as of January 1, 2008, he/she has no obligation to pay the tax. His/her only obligation is to file a report about the purchase/sale to the local authority within 30 days from the date of the effective ownership acquisition.
Registration for the income tax
In accordance with an amendment to the Tax and Fees Administration Act, beginning on September 1, 2007, all persons including foreigners are required to register for the income tax with the locally competent tax authority, if they rent out an apartment or non-residential premises, and to do so within 30 days from the commencement of such activity. In the case of foreign entities, the Bratislava I Tax Authority is locally competent. If such entities have already been registered for the income tax for other reasons, it is sufficient to report this fact to the tax administrator within the same time period. If, however, such foreign nationals engaged in the rental of an apartment before the effective date of the above amendment, i.e. before September 1, 2007, the statutory time period shall be prolonged until December 31, 2007. Example: if a citizen of the Czech Republic begins to rent out an apartment on September 2, 2007, he or she will be required to register as a payer of the natural person income tax by October 30, 2007. The failure to meet this obligation will be sanctioned by the tax administrator. Example: if a citizen of the Czech Republic has been renting an apartment since March 3, 2007, the registration needs only be made until December 31, 2007.
Natural person income tax
Income from the rental of apartments located in the Slovak Republic is fully taxable in the Slovak Republic pursuant to the Income Tax Act and Art. 6 of international treaties on the prevention of double taxation. Therefore a foreign entity is required to file a tax return by March 31 in the year following the year when the taxable income was attained. Foreign entities have
the possibility to request the tax administrator to prolong such period until June 30, 2007, at the latest. The tax administrator, however, has the right to reject such request. Within the tax return, the foreign entity has the right to decrease his/her taxable income (rent income) by documentable costs in a manner regulated by the Income Tax Act or by a flat rate of 40% from such attained income (if not a VAT payer). At the same time, after the fulfillment of relevant tax provisions, a tax non-resident has a possibility to decrease his/her tax base by a taxpayer deductible. Its amount depends on the attained income, with the maximum amount for 2007 being SKK 95,616. Should the lessor be an entity residing outside of EU countries, the lessee shall be required to provide for a 19% tax payment from the monthly rent disbursed at the moment of its payment. Taxes secured in such way can be subsequently deducted by the lessor from his/her tax obligations in his/her tax return, as if they were advanced payments for a withholding tax. In this case the requirement to secure taxes in the above manner does not apply to entities residing in the EU states. After a tax return has been filed in the Slovak Republic, it is necessary to request the Slovak tax authority to issue a tax payment confirmation, which will serve as a document for the settlement of tax obligations from world-wide income in the foreign lessor‘s country of residence. There the foreign resident can exclude the income from the rental of real estate in Slovakia from his/her worldwide incomes, or be given credit for the taxes paid in the Slovak Republic in a manner regulated by tax legislation in such country.
Value Added Tax
The current VAT Act does not cover the issue of VAT payer registration for apartment/non-residential premises rental in cases, when the lessor is a natural person – non-entrepreneur – residing abroad. In our opinion such persons are not subject to the registration obligation for this tax. However, based on our experience gained by consultations concerning similar cases with the Tax Authority Headquarters, we have found that its employees hold a different opinion. For the purposes of VAT registration the Tax Authority Headquarters considers foreign persons – nonentrepreneurs – to be regular domestic taxable persons. Therefore, the obligation for such persons to register arises if their rental income for 12 subsequent calendar months exceeds the amount of SKK 1,500,000. After this level of turnover has been attained, foreign nationals are required to register with the Bratislava I Tax Authority within 20 days after the conclusion of the month, in which the above amount of turnover was attained. Should the apartment/non-residential premises lessor be a foreign national, who simultaneously performs entrepreneurial activities abroad, such person shall be required to register as a VAT payer before the commencement of his/her rental activities. In this case such person is not required to monitor the amount of his/her turnover. In general, rental of real estate is tax exempt, meaning that no VAT is added to the amount of rent, but at the same time the lessor is not entitled to VAT deductions from any purchased inputs. If apartments or non-residential premises are rented to other VAT payers, the lessor has the option to decide to add VAT to the amount of rent. In such case, this person is entitled to VAT deductions in the scope of inputs subject to VAT, but has no such title for performances within the scope of exempt items.
Source: Financnik
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