The acquisition of Czech real estate by foreigners

The acquisition of real estate in the Czech Republic by foreigners is closely regulated, mainly in the Foreign Exchange Act and the Act on Land. With a few exceptions, only Czech citizens or people having a permanent residence in the Czech Republic and Czech legal entities are entitled to acquire Czech real estate. Below we discuss some of the ways foreign individuals and legal entities may also do so.

Introduction

Generally, only residents of the Czech Republic -- citizens of the Czech Republic or people with a permanent residence in the Czech Republic, including foreigners -- may acquire Czech real estate. Non-residents may acquire Czech real estate only in cases covered by the Foreign Exchange Act. These rules were put into place because the purchasing power of residents is not equal to the purchasing power of foreigners. These rules do not contradict OECD requirements.

The term "permanent residence" is understood as a place where a person lives with the purpose of residing permanently and where he or she has such life essentials as work, home, etc. This needs to be a real "permanent residence," not just record keeping of a permanent residence.

Real estate is generally defined as plots of land and buildings connected to the land by a solid foundation, according to the Civil Code. Further it should be pointed out that a building is not legally a part of the land. So a building can have a different owner than the land on which the building stands, a situation that is not uncommon in the Czech Republic.

Relationship between the Foreign Exchange Act and Act on Land

The Act on Land stipulates in Section 3 that farm and forest land may not be transferred to non-resident owners. The Foreign Exchange Act, however, includes certain exceptions allowing Czech real estate to be transferred to non-residents. These exceptions apply to farm and forest land as well.

Acquisition of land by non-residents

A foreigner who is not a resident of the Czech Republic may acquire ownership right to real estate in the Czech Republic in the following cases:

Marriage
A foreigner can acquire Czech real estate if he or she is married to a Czech citizen. However, the real estate must then be included in the spousal "community property." In such a case, the foreigner becomes the co-owner of the real estate together with his or her Czech spouse.

Inheritance
A foreigner can acquire Czech real estate by inheritance. This is also relevant for foreigners who inherit from a non-Czech testator who obtained co-ownership to Czech real estate with his or her Czech spouse.

Acquisition from parents, grandparents or spouse
A foreigner may acquire Czech real estate from parents, grandparents or a spouse. In all these cases, he or she may achieve full ownership, as opposed to the co-ownership situation that arises through acquisition by marriage.

"Acquisition" is a general term that includes acquisition on the basis of purchase or by gifting, among other possibilities. It seems therefore legally possible for a foreigner to acquire ownership title to Czech real estate by accepting it as a gift from Czech resident parents. This offers opportunities for international estate planning.

Exchange of Czech real estate for another Czech property
A foreigner who owns real estate in the Czech Republic may acquire another property provided he or she acquires the new real estate through exchange of the original real estate. The current price of the new real estate may not exceed the current price of the original real estate. Considering the fact that it is practically impossible to find two pieces of real estate whose current prices will be the same, this provision should be interpreted in such a way that the current prices of both properties are not in disproportion. However, deciding on a "current price" can cause some difficulties.

Pre-emptive right
If a foreigner jointly owns real estate, he or she may acquire other shares through his or her pre-emptive right. The pre-emptive right related to the co-ownership share is defined by the Civil Code.

Construction
If a foreigner owns a plot of land in the Czech Republic and constructs a building on this plot of land, he or she may own the building.

Foreign companies
A foreign company is a company that does not have its registered office in the Czech Republic. Until the end of 2001, foreign legal entities were not able to directly obtain Czech real estate. It was, however, possible to indirectly acquire Czech real estate through a Czech subsidiary, which could be 100% owned by the foreign entity.

As of 1 January 2002, foreign legal entities are entitled to directly acquire Czech real estate, provided certain conditions are met. The main condition is that the foreign company must have a registered branch in the Czech Republic through which the acquisition is carried out. Agricultural and forest land remain unavailable for acquisition by foreign entities.

The disadvantage of this change is that registering a branch is generally as administratively demanding as incorporating a Czech company. From a tax perspective, it may be beneficial for a foreign entity to structure the acquisition of Czech real estate through a branch, but in certain cases it may still be more advantageous to acquire it through a Czech legal entity. It remains necessary to assess the tax, legal, financial, and other relevant implications on a case-by-case basis.

Contacts:

Ludvík Juřička
Ambruz & Dark, advokáti, v.o.s.
e- mail: ludvik.juricka@cz.pwcglobal.com

Glen Lonie
Tax Services, PricewaterhouseCoopers
e-mail: glen.lonie@cz.pwcglobal.com