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Profitably exiting from an s.r.o. owned property

When it comes to the minds of many foreign property owners the words ‘profitable’ and ‘s.r.o.’ don’t belong in the same sentence.

For the unfamiliar, there was a period when the only way a foreign citizen could purchase property in Czech Republic was through a Czech limited liability company called an s.r.o. (abbreviation for ‘společnost s ručením omezeným’ – yes, all non-native Czech speakers prefer the abbreviation).

But the laws relating to non-Czech citizens owning property changed in May of 2009.

The data box is one headache of those with property owned via an s.r.o.

Owning property as a physical person is more advantageous for most investors because:

1. Selling a property from an s.r.o. always results in paying tax on the capital gains whereas if you hold a property for more than 5 years as a physical person you will not pay any tax on the capital gains.

2. Administering an s.r.o. is a real pain in the butt with the necessity to maintain a working company seat (in Czech ‘sídlo’) and electronic data box where authorities can communicate with you. You will also pay higher accounting costs as for an s.r.o. you are required to keep double-entry accounting as opposed to single entry.

3. When you sell the property an s.r.o. holds you then have to dispose of the s.r.o. which is usually a costly affair.

There are basically two ways to move a property into personal ownership:

1. Direct sale of property to shareholder(s)

This is an option but can be quite costly because you need to pay the 4% real estate transfer tax and legal costs.

As well, since the transaction is non “arm’s length” you need to sell the property for a fair market value (sometimes you are required to get it valued by a Court appointed valuer). A fair market value may mean that you will have to pay corporate tax on profits.

In the end you will have an empty company that you will need to dissolve or give away.

2. Merging of assets from s.r.o. to physical person

With this scenario the property of an s.r.o. is merged into ownership by a physical person who is a 90% or higher shareholder in the company.

This process is quite legally intensive (read expensive) and the whole process takes 3 to 6 months.

The advantages of this method of moving the assets to personal ownership is that it does not trigger the real estate transfer tax of 4%, the s.r.o. does not have to pay capital gains on the increased value of a property and the s.r.o. itself is dissolved during the process.

Because of the cost and length this process does not make sense for everyone but I would really encourage anyone who bought prior to 2007 to seriously look at this option because the savings on s.r.o. tax can be considerable.

Unfortunately both of the above procedures require some additional up front expenditure which is very distasteful right now to property owners when rents are low and properties are not appreciating quickly.

However, as the old adage goes “Short term pain for long term gain”.

If you have a question on the above or are interested in what would be the best course for your particular situation please don’t hesitate to contact me at the details below for a free assessment.   

by Nathan Brown (Google+) - - owner and managing director of Czech Point 101  - "You’re in good hands whether buying, selling or managing property in the Czech Republic."   

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