Guide to Taxes on Real Estate in CEE and CIS kpmg.com

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1 Guide to Taxes on Real Estate in CEE and CIS kpmg.com KPMG in Central and Eastern Europe

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3 Contents Introduction 3 ALBANIA 4 BELARUS 7 BOSNIA AND HERZEGOVINA 11 BULGARIA 15 CROATIA 19 CZECH REPUBLIC 23 ESTONIA 28 HUNGARY 33 LATVIA 38 LITHUANIA 44 MONTENEGRO 50 POLAND 53 ROMANIA 60 RUSSIA 65 SERBIA 73 SLOVAKIA 76 SLOVENIA 82 UKRAINE 87

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5 Guide to Taxes on Real Estate in CEE and CIS 3 Introduction Many more investors have started to show renewed interest in real estate transactions in the CEE / CIS region outside the core markets of the Czech Republic and Poland since the amalgamation of an overheated market and the 2008 credit crunch made it one of the earlier victims of the global financial crisis. A combination of rising yields, high vacancies and a lack of financing led to an almost complete stop in speculative development. In some CEE countries major new development projects are now being initiated or restarted. In others, however, including Hungary, Bulgaria, Romania and Ukraine, overall investor activity remains very limited. Some of have these countries have now introduced special incentives to try and encourage real estate investment. This Guide to taxes on real estate in CEE and CIS provides an overview of the tax aspects related to the real estate sector in the following countries: Albania Belarus Bosnia and Herzegovina Bulgaria Croatia Czech Republic Estonia Hungary Latvia Lithuania Montenegro Poland Romania Russia Serbia Slovakia Slovenia Ukraine The short summaries presented highlight the most important tax benefits and burdens connected with operations in the real estate sector. The summaries were prepared based on the situation at 1 January 2011 and focus on the following areas: Value added tax Corporate income tax and capital gains Tax depreciation Tax implications of financing the investment (thin capitalisation, dividends, WHT, interest, losses carried forward) Real estate tax Real estate transfer tax Eva Doyle Tax Partner Honorata Green Tax Partner

6 4 Guide to Taxes on Real Estate in CEE and CIS ALBANIA Tax Summary CORPORATE INCOME TAX AND CAPITAL GAINS From 1 January 2008, corporations conducting business in Albania are subject to corporate income tax at a flat rate at 10%. Corporate income tax is applied to the accounting profit after adjustments for tax purposes. Capital gains from the sale of real estate are included in the taxable income of the entity and taxed at the 10% rate. The sale of real estate by individuals is subject to personal income tax at a 10% rate on the capital gain generated (0.5% over the sale price in case of sale of agricultural land). Since 1992, Albania has entered into agreements with several countries for avoidance of double taxation. As at 1 January 2011, 29 double tax treaties with different countries are in force. A general rule imposed by the tax treaties is that the right to tax the capital gains is conferred to the state of residence of the seller. However, a number of double tax treaties provide a special regime for capital gains if the shares being sold derive more than 50% of their value directly or indirectly from real estate. In addition, capital gains are taxed in Albania in case a foreign entity or a foreign individual transfers the direct ownership over real estate situated in Albania. Tax Depreciation Entities may set depreciation rates for assets in accordance with their accounting policies, while under the provisions of the Law on Income Tax, maximum annual rates allowed for tax purposes are specified according to a separate tax depreciation schedule. Land is not depreciated for tax purposes. The solid buildings, including investment properties, facilities, transmitting devices, machinery and production equipment which are fixed at the building site are depreciated according to the declining balance method at a depreciation rate of 5%.

7 Guide to Taxes on Real Estate in CEE and CIS 5 Certain assets incorporated to a building can be treated as separate movable assets for tax purposes and therefore can be depreciated over a shorter period. Tax Losses Tax losses can be carried forward over three tax periods. They can be offset against the positive financial result after tax adjustment for the respective tax period according to the first loss before the last one principle. A tax loss cannot be carried forward if the ownership of stock capital or voting rights of a person changes more than 25% in number or value. Thin Capitalisation The thin capitalisation rules apply in Albania if a company s liabilities exceed four times the amount of its equity (excluding short-term loans). In such a case, the interest paid on the exceeded amount is not tax deductible. The thin capitalisation restrictions do not apply to banks, insurance and leasing companies. In addition, the interest paid exceeding the average annual interest rate of loans published by the Bank of Albania is not tax deductible. WITHHOLDING TAX The standard Albanian withholding tax rate is 10%. The withholding tax rate can be reduced by double tax treaties to which Albania is party. Dividends Withholding tax on dividends at 10% rate applies on all dividends paid by Albanian companies unless a respective double tax treaty states otherwise. No withholding tax applies if dividends are paid to a tax resident company or partnership subject to corporate income tax in Albania. Interest and Royalties Withholding tax at 10% rate applies to interest and royalties paid by Albanian

8 6 Guide to Taxes on Real Estate in CEE and CIS companies unless a respective double tax treaty states otherwise. REAL ESTATE TAX Individuals and legal entities that own real estate property in Albania are subject to tax on real estate. Local taxes on real estate consist of the real estate tax on buildings and real estate tax on agricultural land. For real estate tax on buildings, the tax base is the area of the buildings measured in a square metres for each floor of the building owned (for real estate tax on agricultural land, the tax base is the area of agricultural land measured in hectares) and it varies depending on the district where the building is located. Buildings owned by the state and local governmental authorities as well as by religious institutions are exempt from this tax. REAL ESTATE TRANSFER TAX The tax is applicable in case of transfer of ownership right on buildings and other real estate properties. The tax is payable by the entity that transfers the ownership of the real estate. The tax on ownership transfer of buildings is levied on each square metre and varies from ALL 100 to ALL 2, 000, depending on the district where the real estate is located. The tax on ownership transfer of real estate other than buildings is 2% of the sale price. The tax is not applicable to individuals subject to personal income tax in Albania. Donors of real estate property to governmental authorities, religious institutions or not-for-profit organisations are exempt from this tax. The tax should be paid by the seller of immovable property before the transfer of the real estate is registered with the Real Estate Register. VALUE ADDED TAX (VAT) A supply of land and a lease of land are considered VAT exempt supply in Albania. The supply of buildings (except the supply of construction works) is an exempt supply. The lease of a building is an exempt supply except for these cases: renting for not longer than two months staying in hotels or vacation resorts. In addition, based on the by-laws issued by the Minister of Finance, entities or individuals may opt (upon the fulfilment of certain conditions) to categorise their lease supply of buildings as a taxable supply. For more information on real estate services in Albania, please contact: Arkadiusz Mierzejewski Senior Partner KPMG in Albania Blvd. Deshmoret e Kombit, Twin towers Buildings, Tower 1, Floor 13, Ap A1-A4 Tirana, Albania T: E: arekmierzejewski@kpmg.com kpmg.al

9 Guide to Taxes on Real Estate in CEE and CIS 7 BELARUS Tax Summary VALUE ADDED TAX (VAT) According to the Tax Code of the Republic of Belarus (special section) objects of taxation on added value are turnover from the sale of goods (works, services), and property rights on the territory of the Republic of Belarus. The Republic of Belarus is recognised as the place of sale of goods, if the goods are on the territory of the Republic of Belarus, and are not shipped, nor transported and (or) the goods are on the territory of the Republic of Belarus at the time of shipment or transportation. The goods shall be deemed the property (except for the property rights) sold or intended to be sold, unless otherwise stipulated by customs legislation. The Republic of Belarus is recognised as the place of sale of works, services, and property rights, if the works or services are directly related to real property located on the territory of the Republic of Belarus. This provision is also applicable to the rent, lease and tenancy of the real property. On the sale of goods (works, services), property rights on the territory of the Republic of Belarus by foreign organisations not operating in the Republic of Belarus through permanent establishment, and not having in this connection a tax registration in the Republic of Belarus, the duty to calculate and remit to the budget value added tax is imposed on organisations and sole traders which acquire these goods (works, services), property rights, and have tax registration in the Republic of Belarus. The value added tax rate is 20%. Exempt from VAT are turnovers on the sale of housing facilities in the Republic of Belarus, construction in progress as well as works on construction and repair of housing facilities according to the list of such works, approved by the President of the Republic of Belarus. This provision is also applicable to foreign entities not bearing tax registration in the Republic of Belarus.

10 8 Guide to Taxes on Real Estate in CEE and CIS CORPORATE PROFIT TAX (CPT) The object of taxation for income tax is gross profit, as well as dividends and similar gains, charged by Belarusian organisations. Profit (loss) from the sale of goods (works, services), and property rights (except for fixed assets, intangible assets) are defined as a positive (negative) difference between the revenue from their sale, less tax and fees paid out from revenue, and the cost of production and sale of goods (works, services), property rights, calculated on taxation. Profit (loss) from the sale of fixed assets is defined as a positive (negative) difference between the revenue from the sale of fixed assets, less taxes and fees paid (VAT), and the residual value of fixed assets, as well as the costs of the sale of fixed assets. Residual value is the initial (replacement) value of the property, less accumulated depreciation at the disposal date. Tax Rate The basic corporate profit tax (CPT) rate is 24% of the tax base. Reduced rates are 12% (applied for dividends, sales of shares, sales of self-produced high-tech goods, works and services); 10% (for producers of laser and optical equipment, for residents of science and technology parks); 5% (for registered members of Science and Technology Association established by the State University selling informational technologies and services). For special economical zones the CPT rate may be reduced to 12% (50% of the standard tax rate) if certain special requirements are met. WITHHOLDING TAX Withholding tax is due on the income of foreign legal entities not engaged in commercial activities in Belarus through a permanent establishment (WHT). Tax Payers Foreign entities not engaged in commercial activities in Belarus through a permanent establishment but profiting from sources in the Republic of Belarus are considered to be tax payers. The tax on the income of foreign legal entities generated on the territory of Belarus is withheld by legal entities or individual entrepreneurs (tax agents) who accrue or pay out the income of the foreign legal entity, out of the full amount of such income. In the case of non-cash income, tax is calculated on the basis of its cash equivalent. Subject to Taxation Incomes specified in the list derived from sources in Belarus (including advance payments) accrued or paid in favour of foreign legal entities, not engaged in commercial activity through a permanent establishment, are the subject to taxation. Subject to taxation are income from transportation, forwarding and chartering; interest; royalty; dividends; agent s fees; penalties; R&D fees; disposal of real estate, entities and securities; disposal of shares and stakes in companies; consulting, accounting, auditing, marketing, legal, engineering fees; mediation services; management services; recruitment services, training, storage of property, insurance, advertising; installation, commissioning, testing and maintenance of equipment; cargo protection; providing access to the

11 Guide to Taxes on Real Estate in CEE and CIS 9 informational complex and some others including specified incomes paid/accrued by a foreign organisation to another one. 12% rate is applied to dividends and disposal of shares and stakes in companies; Tax Rates The income of foreign legal entities not engaged in commercial activities in Belarus through a permanent establishment is subject to taxation at the following rates: 5% rate is applied to dividends, interest, royalties and licenses from HTP residents; 6% rate is applied to cross-border transportation, forwarding and chartering fees (including demurrage and other payments arising in transit); 10% rate is applied to interest income retained from debt obligations of any type including: credit facilities, loans and income on interest (discount) securities; 15% rate is applied to other income under the list stipulated by the Tax Code. Belarus has ratified international doubletax treaties and international treaties on mutual investment protection with a number of countries. Double-tax treaties can stipulate rules and rates that may conflict with those of the Tax Code. In the event that the rules and rates stipulated by the double tax treaties differ from those described in the Tax Code, the rules and rates under double tax treaties are applied. Tax Period Tax returns are submitted on a monthly basis to the tax authorities by the 20th and the tax is paid by the 22nd day of the month following the reporting month.

12 10 Guide to Taxes on Real Estate in CEE and CIS REAL ESTATE TAX The objects of taxation for the real estate tax are buildings and constructions, including the above norm construction in progress, owned or in possession, in economic control or operational management by organisations taxpayers. The tax base of the real estate tax is determined based on presence as at 1 January of the calendar year of buildings and constructions at the residual value and the value of buildings and facilities of the above norm construction in progress. The annual rate of the real estate tax is set for organisations in the amount of 1%. Tax calculation on such objects of taxation is performed by applying the coefficient established in the administrative-territorial unit in the location of these objects of taxation. Local Councils of deputies have the right to increase (decrease), but not more than twice, the real estate tax rates for certain categories of taxpayers. LAND TAX The objects of taxation for the land tax are land properties located on the territory of the Republic of Belarus and owned, permanently or temporarily, by organisations. The tax base of the land tax is determined in the amount of the cadastral value of the land. Land tax rates for land properties within residential areas (cities, urban, resort and workers settlements, rural settlements) are set according to the Appendix to the Tax Code of the Republic of Belarus. Local Councils of deputies have the right to increase (decrease), but not more than twice, the land tax rates for certain categories of taxpayers. For more information on real estate services in Belarus, please contact: Steve Austwick Partner, Head of Tax and Legal Services KPMG in the Baltics KPMG in the Baltics and Belarus Vesetas iela 7 Riga, LV1013 Latvia T: F: E: saustwick@kpmg.com kpmg.by

13 Guide to Taxes on Real Estate in CEE and CIS 11 BOSNIA AND HERZEGOVINA Tax Summary GENERAL Bosnia and Herzegovina (BiH) consists of two main territorial and administrative entities: the Federation of Bosnia and Herzegovina (the FBiH) and the Republic of Srpska (the RS), jointly referred to as the entities, as well as the very small District of Brcko. Legislation related to physical and legal persons and taxes (exclusive of indirect taxes) is predominantly enacted at the level of the entities. Our comments relate to both entities, unless it is specifically stated otherwise. The below comments are based on the relevant laws of the entities effective as at 1 February All BiH physical and legal persons have a personal identification number (PIN) issued by the Tax Administration of the relevant entity, and all business documentation and correspondence (including tax returns) must include the taxpayer s PIN. Foreign physical or legal persons (including EU citizens) can buy land (except agricultural land) and real estate in BiH on condition of reciprocity for BiH physical or legal persons. CORPORATE PROFIT TAX Direct taxes are levied at the level of the entities. Taxpayers are resident legal persons (legal persons incorporated in the relevant entity, or legal persons whose place of effective management and control is in the FBiH applies in the FBiH only) on their worldwide income. Non-resident legal persons are subject to CPT on their income generated in the relevant entity. Taxable profit is subject to CPT at the rate of 10%. In the FBiH taxable profit is the accounting profit adjusted for non-deductible and non-taxable items in accordance with the provisions of the FBiH CPT legislation. In the RS the taxable base is determined as the

14 12 Guide to Taxes on Real Estate in CEE and CIS Tax Depreciation Rates Accelerated depreciation is possible in both entities in specific circumstances. Depreciation expenses can only be calculated on a straight-line basis. The FBiH Assets Buildings, except: Office buildings Annual depreciation rate (%) , standard rate KPMG Central and Eastern Europe Ltd., a limited liability company and a member firm of the KPMG network of independent member difference between taxable revenues and tax-deductible expenditures as determined in accordance with the RS CPT legislation. The tax period is a calendar year. CPT taxpayers pay monthly advance payments (by the end of the month for the previous month), based on the previous year s CPT return. Any CPT shortfalls at the year-end must be self-assessed in the CPT return and paid by the taxpayer by 30 March in the FBiH/31 March in the RS of the current year for the previous year, by which date the annual CPT returns must be submitted. Capital gains are generally included in income and taxed at the same rate. Domestic and foreign dividend income is not subject to CPT. Tax losses may be carried forward for a maximum of five years, if certain conditions are met, and no tax loss carry back provisions exist. Tax grouping is available. Residence buildings, hotels, restaurants Roads, utilities premises, upper layer of railways Equipment, vehicles Equipment for utility services Computers and equipment for environmental protection Perennial plants 14.3 Livestock unit 40 Intangible longterm assets 20 The RS The RS CPT legislation provides for a detailed overview of tax depreciation rates, which depend on the type of materials used in the construction of real estate, purpose of assets and similar.

15 Guide to Taxes on Real Estate in CEE and CIS 13 WITHHOLDING TAX Withholding tax at the rate of 10% applies generally to all payments made to non-resident legal persons for provision of services. In the FBiH withholding tax is levied on all services provided in the FBiH, while the RS levies withholding tax on all services delivered to RS legal persons, irrespective of the place where the services were actually provided. The withholding tax rate may be decreased/eliminated pursuant to an effective double tax treaty. A reduced 5% withholding tax rate is applied on dividends paid abroad by FBiH taxpayers. The RS does not levy withholding tax on dividend payments (subject to a 10% participation rule). REAL ESTATE TRANSFER TAX Real Estate Transfer Tax (RETT) is regulated at the cantonal level in the FBiH (i.e. there are currently 10 different laws applicable in the FBiH) and in the RS at the entity level. A new RETT Law at the RS level came into effect in December 2008, but will be applicable as of 1 January Currently in the RS the Law on Property Tax applies. RETT applies to transfer of land and all transfers of real estate which are VAT exempt, i.e. all transfers of real estate except the first transfer of newly constructed objects. RETT is irrecoverable. The RETT rate applicable in all 10 Cantons in the FBiH is 5% and in the RS is 3% (until 1 January 2012). VALUE ADDED TAX (VAT) VAT is levied at the level of BiH. The standard VAT rate is 17% and applies to most products and services. A VAT rate of 0% (where input VAT recovery is possible) applies to exports. Services are taxable in BiH if they are deemed to be supplied in BiH. The reverse-charge mechanism applies to certain services supplied from abroad.

16 14 Guide to Taxes on Real Estate in CEE and CIS The rules regarding place of supply are similar to the EU 6th VAT Directive prior to the implementation of the VAT package applicable in the EU as of 1 January The registration threshold is taxable supplies of BAM 50,000 (approximately EUR 25,000). Foreign legal persons providing taxable supplies in BiH are required to register for VAT purposes, provided relevant conditions are met. The transfer of newly constructed buildings is subject to VAT at the rate of 17%. Physical persons generally cannot recover VAT; however, VAT is generally recoverable for legal persons registered for VAT in BiH, provided general conditions for VAT recovery are met. Foreign legal persons are not eligible to recover VAT, except in some limited cases. PERSONAL INCOME TAX (PIT) PIT is levied at the level of the entities with the standard rate of 10% applicable in both the FBiH and the RS. SOCIAL SECURITY (S/S) CONTRIBUTIONS S/S contributions are levied at the level of the entities. Total S/S contribution rates applicable in the FBiH amount to 41.50%, applicable to gross salary. Out of that, 31% is withheld from salary and 10.5% is paid in addition to salary. Total S/S contribution rates applicable in the RS as of 1 February 2011 amount to 33%, all of which is withheld from salary. For more information on real estate services in BiH, please contact: Paul Suchar Partner KPMG in Croatia Eurotower, Ivana Lucica 2a, 10000, Zagreb Croatia T: M: E: psuchar@kpmg.com kpmg.ba

17 Guide to Taxes on Real Estate in CEE and CIS 15 BULGARIA Tax Summary GENERAL Several changes to the Bulgarian tax legislation have come into effect from 1 January The most significant ones concern withholding tax (WHT) and local taxes and fees. CORPORATE INCOME TAX AND CAPITAL GAINS The Bulgarian Corporate Income Tax Act (CITA) specifies that Bulgarian entities are subject to 10% corporate income tax (CIT) on their worldwide income. Foreign entities are subject to tax only on the profits derived from Bulgarian permanent establishments (including branches) and/ or profits related to disposal of property of such a permanent establishment. The CIT is calculated on the basis of the annual financial result (as per the Income Statement of the entity) adjusted with certain permanent and temporary tax differences. The income from real estate derived by Bulgarian entities is included in their annual financial result. The annual accounting financial result is subject to further adjustments for tax purposes. The annual CIT liability is determined with the annual CIT return. Any outstanding liability (off-set with any advance instalments made) should be remitted to the state budget by 31 March The same term applies for the submission of the annual CIT return. There are no tax grouping provisions in Bulgaria. Tax Depreciation Bulgarian tax liable persons should maintain a Tax Depreciation Schedule (TDS) where they report all tax depreciable assets. Tax depreciation as per the TDS is to be reported as a downward adjustment to the financial

18 16 Guide to Taxes on Real Estate in CEE and CIS result for tax purposes while the accounting depreciation expenses accrued during the year are disallowed for tax purposes and are reported as an upward adjustment to the financial result. The Bulgarian CITA provides for maximum tax depreciation rates depending on the type of the depreciable asset. The maximum tax depreciation rate for buildings including those held as investment properties is 4%. Land is not depreciated for tax purposes. Tax Losses A tax loss can be carried forward for five years. It can be offset against a positive tax result for a subsequent tax year. Thin Capitalisation Thin capitalisation rules apply in Bulgaria if a company s liabilities exceed three times the amount of its equity. Interest expenses are deductible up to an amount equal to the entity s interest income plus 75% of the profits before interest and tax. Interest expenses on bank loans are not subject to thin capitalisation, except in some specific cases. TRANSFER PRICING Transfer pricing rules allow the revenue authorities to adjust tax bases where transactions are not carried out on an arm s length basis. Under the transfer pricing provisions the tax base for CIT purposes may be adjusted as well as tax bases for calculating other taxes such as WHT. WITHHOLDING TAX Specific types of income with Bulgarian source accrued by local tax resident entities in favour of non-resident taxpayers is subject to withholding tax (WHT) provided that the income is not derived through a permanent establishment of non-resident entities in Bulgaria. Such income includes capital gains, rental payments, interests, dividends and liquidation quotas, royalties, technical services (including consultancy services), management fees, etc. The standard WHT rate is 10% WHT, with 5% WHT applied to dividends and liquidation quotas. Please note that dividends and liquidation quotas distributed by local tax residents to shareholders local entities, as well as foreign entities that are tax resident in an EU/EEA member state are exempt from WHT taxation. WHT rates can be reduced under an effective Double Tax Treaty signed between Bulgaria and the country of residence of the foreign income recipient following a specific pre-approval procedure. The WHT is generally calculated on a gross basis. CITA includes provisions under which foreign recipients of income subject to WHT, tax residents of an EU/EEA member state, are entitled to annual recalculation of the WHT which has been levied and paid on a gross basis following a specific procedure. The recalculation is aimed at equalling out the tax treatment between local entities and foreign entities, tax residents of an EU/EEA members states. As of 1 January 2011 the WHT due on income realised by foreign entities from rent/right of use of immovable properties located in the country, should be deducted and paid by the local payer of the income, provided that the latter is a tax liable person under the CITA. So far the foreign income recipient had the obligation for deduction and remittance of the WHT.

19 Guide to Taxes on Real Estate in CEE and CIS 17 Interest and Royalty Payments Under the EU Interest and Royalties Directive, qualifying interest payments and royalty payments between associated enterprises, tax residents in EU member states may be exempt from any taxes imposed on those payments in that state, provided that the beneficial owner of the interest or royalties is a company of another EU member state or a permanent establishment of an EU member state situated in another EU member state. However, a transitional period for the application of the Interest and Royalties Directive was agreed whereby Bulgaria has reserved its right to tax interest and royalty income arising in the country by applying the maximum withholding tax rates as follows: 10% for the period until 31 December 2010, and 5% for the period 1 January December As of 1 January 2011 the CITA is amended accordingly and the WHT rate on such income may be reduced from 10% to 5% provided that certain conditions specified in the law are simultaneously fulfilled. LOCAL TAXES AND FEES The main local taxes and fees in relation to the ownership or acquisition of real estate in Bulgaria include real estate tax, garbage collection fee and transfer tax. Real Estate Tax Owners of buildings and land plots situated in Bulgaria as well as acquirers of limited ownership right over real estate property are subject to annual charges for real estate tax. The tax rate of real estate tax varies in the range of 0.01% %. It is determined at a municipal level and may vary from year to year. As of 1 January 2011 the taxable base for real estate tax of non-residential property owned by companies is the higher amount of the tax valuation and the book value of the property. The taxable base for real estate tax of property owned by individuals or residential property owned by companies is the tax valuation of the property. Garbage Collection Fee Generally, garbage collection fee is levied on the book value/cost of the immovable property at a rate determined annually by the respective municipality where the property is located. The rates for

20 18 Guide to Taxes on Real Estate in CEE and CIS the garbage fee may vary significantly between the municipalities. Transfer Tax Transfer tax is levied when transferring real estate property or limited property right over real estate. The tax rate is in the range of 0.1% - 3% levied on the tax base of the property in cases of acquisition against consideration. When immovable property is gratuitously transferred the tax rate is in the range of 3.3% - 6.6%. The applicable transfer tax rate is determined by the respective municipality. The tax base upon transfer of real estate property or limited property rights over it is the higher of the following values: (i) the purchase price/a price defined by state or municipal authorities and (ii) the tax valuation of the property. The transfer tax is generally paid by the transferee of the property, unless the parties have agreed differently. In case the transferee is not in the country, the tax is payable by the transferor. VALUE ADDED TAX (VAT) The changes of the Bulgarian VAT Act as of 1 January 2011 do not significantly affect real estate. According to the provisions of the Bulgarian VAT Act the lease of buildings for residential purposes and the sale of unregulated land plots and old buildings (i.e. buildings for which more than 60 months from the issuance of the exploitation permit have expired) are considered a VAT exempt supply. However, the seller/lessor has the option to choose the sale of the land plot or the old building/the lease of building for residential purposes to be treated as a VAT-taxable transaction and charge VAT at the rate of 20%. Sale of new buildings, plant, machinery, equipment and structures immovably fixed to the land is a VAT-taxable supply, subject to 20% VAT. There is no VAT grouping in Bulgaria. For more information on real estate services in Bulgaria, please contact: Kalin Hadjidimov Partner KPMG in Bulgaria 45/A Bulgaria Boulevard 1404 Sofia Bulgaria T: E: khadjidimov@kpmg.com kpmg.bg

21 Guide to Taxes on Real Estate in CEE and CIS 19 CROATIA Tax Summary GENERAL The below comments are based on Croatian laws effective as at 1 January All Croatian citizens and legal entities have a personal identification number (PIN) and all business documentation and correspondence (including tax returns) must include the taxpayer s PIN. EU citizens can freely buy real estate in Croatia. Other citizens need to apply for a permit from the Croatian Ministry of Justice before they are registered as owners in the land registry. As of 1 January 2011 Croatian foreign exchange laws were further relaxed (allowing cross border cash pooling). Croatia has opened all negotiating chapters for EU Accession. Further taxation and legal changes are expected leading up to EU accession. CORPORATE PROFIT TAX Accounting profit, adjusted in accordance with the provisions of the Corporate Profit Tax (CPT) Law, is subject to CPT at the rate of 20%. Amongst others, the CPT base needs to be increased for: Interest on loans provided or guaranteed by foreign direct shareholders (holding 25% or more) where the loan exceeds four times the share capital invested by the shareholder ( thin capitalisation rule); Interest over 9% per annum on loans provided by a foreign related party ( excessive interest rate rule), subject to the application of international agreements; and Interest over 9% per annum on loans provided by a domestic related party, if one of the parties is in a tax favourable position or has tax losses carried forward from previous periods which can be utilised in the current tax period.

22 20 Guide to Taxes on Real Estate in CEE and CIS Depreciation expenses can only be calculated on a straight-line basis and the tax depreciation rate is limited to the accounting depreciation rate. Tax Depreciation Rates Assets Maximum accelerated annual depreciation rate (%) 1 Annual depreciation rate (%) Buildings 5 10 Capital gains are generally included in income and taxed at the same rate, including income from the transfer of shares in Croatian and foreign companies. However, domestic and foreign dividend income is not subject to CPT. Tax losses may be carried forward for a maximum of five years, if certain conditions are met, and no tax loss carry back provisions exist. There are no tax grouping provisions. Anti-avoidance provisions, including detailed transfer pricing provisions (which require a transfer pricing study including a benchmarking analysis, for all cross border transactions with related parties and for certain domestic transactions with related parties) exist. Equipment, motor vehicles (other than personal cars), intangible assets Personal cars IT equipment and mobile phones Other longterm assets A depreciation expense relating to vessels, aircrafts, apartments and holiday homes is recognised as an expense for CPT purposes only if specific conditions are fulfilled. 1 If the same rates are also used for accounting purposes, these rates may be claimed for CPT purposes. 2 If the value of a personal car exceeds the amount of HRK 400,000, depreciation on the amount in excess of HRK 400,000 is non-deductible for CPT purposes.

23 Guide to Taxes on Real Estate in CEE and CIS 21 WITHHOLDING TAX Withholding tax at the rate of 15% applies to certain payments made to non-resident legal entities (specified interest payments, payments for intellectual property rights, market research, tax advisory, business advisory and audit services). Withholding tax at the rate of 20% applies to payments for services made to companies outside the EU if the company has its registered seat or place of effective management and supervision in a country with a CPT rate lower than 12.5% and if the country is included in the list published by the Ministry of Finance. The withholding tax rate may be decreased/eliminated pursuant to an effective double tax treaty. No withholding tax is levied on dividend payments, except for dividend payments made to individuals out of profits earned during the period from 1 January 2001 until 31 December REAL ESTATE TRANSFER TAX Irrecoverable transfer tax at the rate of 5% applies to the transfer of land. For buildings constructed before the VAT law became effective (i.e. before 1 January 1998) transfers are subject to an irrecoverable transfer tax at the rate of 5%. For newly constructed buildings (i.e. on or after 1 January 1998) transfers are subject to VAT at the rate of 23%. The subsequent transfer of newly constructed buildings is subject to transfer tax at the rate of 5% if the seller was not able to deduct VAT as a tax prepayment when the building was initially purchased by the seller. Croatian citizens acquiring their first property as their main residence are exempt from paying property transfer tax (but not VAT, if VAT applies), if certain conditions are met.

24 22 Guide to Taxes on Real Estate in CEE and CIS Further transfer tax exemptions are available for the transfer of land or qualifying buildings located in special state care areas to both companies and physical persons, if certain conditions are met. VALUE ADDED TAX (VAT) The standard VAT rate is 23% and applies to most products and services. A reduced VAT rate of 10% applies to: Tourist accommodation services and related agency fees; and Newspapers and magazines issued on a daily and periodical basis, with the exception of newspapers and magazines that consist mainly or entirely of advertisements or whose main purpose is advertising. A VAT rate of 0% (input VAT recovery possible) applies to bread, milk, educational literature (specified), certain (specified) medical supplies, scientific magazines and film projection services, as well as to exports. Services are taxable in Croatia if they are deemed to be supplied in Croatia. The reverse-charge mechanism applies to certain services supplied from abroad. The rules regarding place of supply are similar to the EU 6th VAT Directive prior to the implementation of the VAT package applicable in the EU as of 1 January The registration threshold is taxable supplies of HRK 85,000 (approximately EUR 11,600). Entities in Croatia using financial support from certain preaccession EU funds are entitled to obtain goods/services without being subject to VAT, if certain conditions are met. The transfer of newly constructed buildings is subject to VAT at the rate of 23%. Individuals generally cannot recover VAT; however, VAT is generally recoverable for corporate entities registered for VAT in Croatia. Foreign legal entities may be able to recover VAT, provided relevant conditions are met. Foreign legal entities are required to register for VAT purposes, provided relevant conditions are met. PERSONAL INCOME TAX (PIT) PIT rates were lowered with effect from 1 July 2010 and are as follows: HRK 0 HRK 3,600, 12%; HRK 3,600 HRK 10,800, 25%; above HRK 10,800, 40%. SOCIAL SECURITY (S/S) Employees pay pension s/s contributions in the amount of 20% of their salaries whilst employers pay health insurance, unemployment fund and injury at work contributions of 17.2% based on employees salaries. For more information on real estate services in Croatia, please contact: Paul Suchar Partner KPMG in Croatia Eurotower, Ivana Lucica 2a 10000, Zagreb Croatia T: M: E: psuchar@kpmg.com kpmg.hr

25 Guide to Taxes on Real Estate in CEE and CIS 23 CZECH REPUBLIC Tax Summary GENERAL As of 1 January 2011, a number of significant changes to the tax administration system following the introduction of the new Tax Code were made. Further changes are anticipated in respect of VAT as of 1 April CORPORATE INCOME TAX AND CAPITAL GAINS Corporate income tax is levied on profit from all activities (including rental incomes) and from the management of all types of property, although there are some exceptions to this rule defined in the tax law. The corporate income tax rate is 19% in 2011 (with the exception of pension and investment funds where it is 5%). Capital gains are generally included in income and taxed at the same rate, including income from the transfer of shares in Czech companies or cooperatives. However, if at least 10% of the shares of a company is held by a parent company for 12 months, income from sale of the shares is tax exempt if the parent company is a Czech tax resident, an EU resident company or a resident of Norway or Iceland and the subsidiary is tax resident in an EU Member State or a non EU Member State with which the Czech Republic has concluded a Double Tax Treaty (subject to certain conditions). As of 1 January 2011, the Czech Republic has 77 bilateral double tax treaties. As a rule, the right to tax capital gains is conferred on the state of residence of the seller. However, a number of double tax treaties provide a special regime for the capital gains if the shares being sold derive more than 50% of their value directly or indirectly from real estate (e.g. those with Australia, China, Cyprus, Egypt, Finland, France, Ireland, Canada, Sweden, USA). In such cases, the taxing right belongs to the state where the real estate is located. In other cases the taxing right belongs to the state of residence of the company whose shares

26 24 Guide to Taxes on Real Estate in CEE and CIS are being sold (e.g. those with Germany and Israel). There are no corporate tax grouping provisions in the Czech Republic. Tax Depreciation For tax purposes, either straight-line or reducing balance depreciation can be used. The tax depreciation period for buildings is generally 30 years except for administrative buildings, shopping centres and hotels where the depreciation period is 50 years. Special rates apply in the year of acquisition. Land is not depreciated for tax purposes. Certain assets attached to a building can be treated as separate movable assets for tax purposes and therefore can be depreciated over a shorter period. Special provisions apply for the assets of solar power plants. These fixed assets must be depreciated over 240 months and the depreciation must be claimed (unlike depreciation on most other assets). Special adjustments are made for similar assets acquired under finance leases. Tax Losses Tax losses can be carried forward for five years. Losses may not be carried forward on a substantial change in the ownership of a company unless it can be shown that at least 80% of the company s revenues are derived from the same activities as those carried on in the period when the loss arose. A change of at least 25% in the ownership of the registered capital or the voting rights, or a change resulting in a person obtaining a controlling influence in the company, is always a substantial change. Tax losses are available after a merger or de-merger, although they only can be offset against profit on the same activity as was carried on in the year when the tax loss arose. Thin Capitalisation The thin capitalisation provisions act to restrict the deductibility of interest where the borrower has insufficient equity. The following financial costs are nondeductible: Financial expenses on loans and credits received from related parties which are more than four times the equity (or more than six times the equity in the case of banks and insurance companies); Financial expenses incurred on credits and loans with interest rates or other returns dependent on the debtor s profit.

27 Guide to Taxes on Real Estate in CEE and CIS 25 Interest on loans and credits received from unrelated parties, or those secured by a related party, are fully deductible on general principles, except for interest on back-to-back loans (i.e. where a related party provides a loan, credit or deposit to an unrelated party, which then provides the funds to the borrower); this is treated as interest on related party debt. Any interest or other expenses relating to a non EU or EEA resident lender disallowed under the capitalisation rules may be treated as a dividend, i.e. is subject to dividend withholding tax, as reduced by the provisions of any applicable double taxation agreement. WITHHOLDING TAX The standard Czech withholding tax rate is 15%. However, the rate can be reduced by double tax treaties. Dividends Withholding tax applies on all dividends paid by Czech companies. Under the EU Parent/Subsidiary Directive, a dividend paid by a Czech subsidiary to a parent company that is tax resident in an EU member state may be exempt from withholding tax. These provisions also apply to dividends paid between Czech companies and paid to Switzerland, Norway and Iceland. A parent and subsidiary qualify for this exemption if a minimum shareholding of 10% is maintained for an uninterrupted period of 12 months. Interest and Royalties Withholding tax applies on interest, royalties and lease payments paid abroad, although the rate is reduced to 5% for finance lease payments. Under the EU Interest and Royalties Directive, qualifying interest and royalty payments between associated enterprises which are tax resident in the EU member states may be exempt from withholding tax. This also applies to recipients in Switzerland, Norway and Iceland.

28 26 Guide to Taxes on Real Estate in CEE and CIS Residents of other EU and EEA countries have the option to file a tax return in respect of income subject to withholding tax (e.g. interest payments, royalties, income from freelance work), and to claim a deduction of the related expenses. This may result in a reduction in the tax burden as withholding tax is calculated on a gross basis. REAL ESTATE TAX Real estate tax comprises land tax and building tax. The property must be located in the Czech Republic and recorded in the Land Register. The real estate tax is calculated on the area multiplied by the tax rate. The rate varies according to the type and location of the property. The basic rates may be increased depending on the number of floors and the location. Starting from 2009, the basic rates of real estate tax doubled for buildings and land, except for arable land, hop fields, vineyards, gardens, grassland and fishponds for intensive fish farming. Municipalities can also issue a decree increasing the basic tax rate or coefficient. REAL ESTATE TRANSFER TAX A 3% real estate transfer tax is payable on the transfer of ownership to real estate for consideration. Generally the tax is paid by the transferor (seller), with the buyer guaranteeing the tax. The tax base is the higher of the market value (according to the Valuation Act) or the sales price. The contribution of real estate to share capital is exempt from the tax unless the contributor sells all shares received within five years. VALUE ADDED TAX (VAT) The reduced VAT rate is 10% and the standard rate is 20%.

29 Guide to Taxes on Real Estate in CEE and CIS 27 The sale of residential property that qualifies as social housing is subject to the reduced VAT rate. To qualify as social housing, an apartment should have a floor area of 120 square metres or less and houses should not exceed 350 square metres. The VAT rate on the sale of buildings is generally 20%. The transfer of buildings is exempt from VAT three years after the first approval for use of the premises or after the first use of the building. If the acquisition of a building is subject to VAT, this can be recovered if the building will be used to generate VAT-able sales. The recovery will be limited if it is used to wholly or partly make VAT exempt sales. A change in the level of exempt sales within five years of acquisition may lead to a claw back of previously recovered input VAT. It is expected that the claw back period will be extended to 10 years. The transfer of land is VAT exempt except for the transfer of building land, which is subject to 20%, VAT. The lease of buildings and land is generally VAT exempt but the lessor can opt to charge 20% VAT on a lease with a tenant which is registered for VAT. Groups of related companies can form a VAT group. ADMINISTRATION OF TAXES Tax administration is governed mainly by the Tax Code with specific procedures provided by other acts. The Tax Code replaced the Administration of Taxes Act from 2011 and introduces a wide range of changes, such as: different rules for deadlines for tax assessments; penalties for late filing of a tax return; filing additional tax returns with a lower tax liability or a higher tax loss is only allowed under limited circumstances; new rules for tax audits. For more information on real estate services in the Czech Republic, please contact: Eva Doyle Partner KPMG in the Czech Republic Pobrezni 1a, Praha 8 Czech Republic T: M: E: evadoyle@kpmg.cz kpmg.cz

30 28 Guide to Taxes on Real Estate in CEE and CIS ESTONIA Tax Summary GENERAL Sale of immovable property and the leasing or letting of immovable property or parts are generally tax exempt supply without credit according to the Estonian VAT Act. Tax exemption does not apply for the supply before the first occupation of buildings or their parts as well as renovated building or their parts and plots within the meaning of the Planning Act if there are no construction works on such plots. However, the taxpayer is entitled to use the optional taxation, except residential housing, if it has notified the tax authorities in writing beforehand. The notice regarding the optional taxation of the leasing or letting of immovable or parts thereof is binding for two years. The corporate tax system in Estonia differs from those used by many countries, so that corporate income is taxable only upon distribution in the form of a dividend. CORPORATE INCOME TAX AND CAPITAL GAINS The corporate tax system in Estonia differs from those used by many countries, so that corporate income is taxable only upon distribution. The profits earned and retained in a company are not subject to taxation. The income tax rate on gross dividends is 21% (in 2010), although the tax is calculated on the net amount of dividends by applying a tax rate of 21/79. Thus a company not distributing profit is not obliged to pay income tax. Taxable expenses and payments are taxed at the rate of 21/79 as well. There is no separate capital gains tax, but gains on the disposal of fixed assets and intangibles are added to the taxpayer s regular business income, so that corporate income is taxable only upon distribution in the form of a dividend. A non-resident is obliged to pay income tax on income derived from the alienation of property, if immovable property is