Guide to Taxes on Real Estate in Central and Eastern Europe

Edition 2016

KPMG in Central and Eastern Europe kpmg.com/cee © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Contents

Introduction 4

Albania 6

Bosnia & Herzegovina 10

Bulgaria 14

Croatia 20

Czech Republic 28

Estonia 36

Hungary 42

Latvia 52

Lithuania 58

Macedonia 64

Montenegro 70

Poland 74

Romania 84

Serbia 90

Slovakia 94

Slovenia 100 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent of network KPMG the of firm member a and company liability limited a Limited, Europe Eastern & Central KPMG 2016 © reserved. rights All entity. Swiss a International”), (“KPMG Cooperative International KPMG with affiliated firms member Introduction

According to data provided by one of the concentrating on opportunities in leading global property advisors for 2015, the total locations, but they are also trying to target investment volume in Central and Eastern good assets in secondary locations in other Europe (CEE), excluding Russia, amounted CEE countries such as Romania, Slovakia to EUR 9 billion. Analysts contend that and Hungary. the real estate market in the region is expected to grow steadily over the next 10 The most preferred real estate sectors years. Moreover, companies also appear in 2015 were retail and office, followed to be deciding to undertake investments in by the fast growing industrial and logistic second- and third-ranked cities, not just in sectors, where huge investments in the region's capital cities. the warehouse market are being made year-on-year. Market forecasts also show Poland continues to be regarded as the key that the industrial and logistic sectors investment destination in the CEE region, should also prosper beyond 2015. This will followed by the Czech Republic. According mainly be due to the healthy growth of to real estate advisors, investors are still e-commerce and retail logistics.

4 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Moreover, it is believed that investors are going to develop shopping infrastructure beyond niche areas by investing more in convenience shopping centers in line with the American "strip mall" model and in high streets with exclusive shops.

The Guide to Taxes on Real Estate in CEE provides an overview of the key tax aspects related to the real estate sector in the following countries:

• Albania • Lithuania • Bosnia and Herzegovina • Macedonia • Bulgaria • Montenegro • Croatia • Poland • Czech Republic • Romania • Estonia • Serbia • Hungary • Slovakia • Latvia • Slovenia

This, our 5th edition, presents the most important tax benefits and burdens connected with operations in the real estate sector. Each summary was prepared based on the situation as at 1 January 2016 and focuses on the following areas: • Value added tax • Corporate income tax and capital gains • Tax depreciation • Tax implications of financing investments (thin capitalization, dividends, withholding tax, interest and losses carried forward) • Real estate tax • Real estate transfer tax

We trust that this comprehensive survey of real estate taxation within our region will prove valuable to your business objectives and encourage you to contact us should you have any further questions on the issues covered herein.

Sincerely, Honorata Green Partner KPMG's Tax practice in Central and Eastern Europe

Guide to Taxes on Real Estate in CEE | 5 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Albania

GENERAL which the earlier progressive taxation There have been no major changes to tax scheme still applies. legislation introduced in 2016. In order to stimulate the exchange of The most relevant amendments remain ownership of agricultural real estate, the the ones introduced in 2015 which transfer of ownership of agricultural land include i) the new value added tax (VAT) from a registered farmer to another farmer law which is effective as of 1 January or natural person, or official taxpayer who 2015, ii) an exhaustive “instruction” performs agricultural activities, is exempt document supporting the respective VAT from personal income tax. law, and iii) changes to the law on tax procedures, income tax, social and health CORPORATE INCOME TAX AND contributions. CAPITAL GAINS The corporate income tax (CIT) rate in Personal income tax on all types of Albania is 15%. A reduced rate of 7.5% income is subject to a 15% tax rate, with applies for taxpayers who have an annual the exception of personal income tax on turnover between ALL 2 million and

6 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 8 million. Small businesses having an provisions of the Law on Income Tax, annual turnover of less than ALL 2 million the maximum annual rates allowed for are subject to a fixed tax obligation tax purposes are specified according to amounting to ALL 25,000 per year. a separate tax depreciation schedule. Land is not depreciated for tax purposes. Corporate income tax is applied to the Solid buildings, including investment accounting profit after adjustments for properties, facilities, transmitting devices tax purposes. (e.g. antenna stations), machinery and production equipment which are fixed Capital gains from the sale of real estate at a building’s location are depreciated are included in the taxable income of the according to the declining balance entity and are taxed at the applicable CIT method at a depreciation rate of 5%. rate. The sale of real estate by individuals is subject to personal income tax at Certain assets associated with a building 15% on the capital gain generated. The can be treated as separate movable ownership transfer of agricultural land assets for tax purposes and therefore can from a registered farmer to another be depreciated over a shorter period. farmer or legally active person who performs agricultural activities is exempt As set out in the recent amendments to the from personal income tax. Law on Income Tax, starting from 1 January 2015, if the net book value of a Since 1992, Albania has entered into fixed asset, at the beginning of the year, agreements with several countries for the is lower than 3% of the historic cost (for avoidance of double taxation. As of assets depreciated at 5% on net book 1 January 2015, 37 double tax treaties (DTT) value) or 10% of the historic cost (for assets with different countries are in force. In depreciated at 20% or 25% of the net book addition, a DTT with Iceland is expected to value), the net book value shall be entirely enter into force on 1 January 2017. A general recognized as a deductible expense for rule imposed by the tax treaties is that the corporate income tax purposes. right to tax capital gains is conferred to the state of residence of the seller. Tax losses Tax losses can be carried forward over However, a number of double tax treaties three tax periods. They can be offset provide a special regime for capital gains against positive financial results after if the shares’ object of transaction derive tax adjustment for the respective tax more than 50% of their value directly or period according to the “first loss before indirectly from real estate. In addition, the last” principle. A tax loss cannot be capital gains are taxed in Albania in carried forward if the ownership of stock cases where a foreign entity or a foreign capital or voting rights of a person or individual transfers the direct ownership taxable entity changes more than 50% in of real estate situated in Albania. number or value.

Tax depreciation Thin capitalization Entities may set depreciation rates Thin capitalization rules apply in Albania for assets in accordance with their if a company’s liabilities exceed four accounting policies, while under the times the amount of its equity (excluding

Albania | 7 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. short-term loans). In such a case, the The Instruction on Income Tax provides that interest paid on the exceeded amount is the deadline for destination of the profit and not tax deductible. The thin capitalization eventual payment of WHT on dividends will restrictions do not apply to banks, to be 20 August of each year, notwithstanding insurance or to leasing companies. the time when the actual payment to the beneficiary is/was performed. In addition, any interest paid exceeding the average annual interest rate on loans Interest and royalties published by the Bank of Albania is not Withholding tax of 15% is also applied tax deductible. to interest and royalties paid by Albanian companies unless a respective DTT WITHHOLDING TAX states otherwise. As of 1 January 2015, the standard Albanian withholding tax (WHT) is REAL ESTATE TAX 15% (from the previous 10%). The Individuals and legal entities that own real WHT rate can be reduced or the WHT estate property in Albania are subject to obligation may be eliminated based on real estate tax. Local taxes on real estate the provisions of each specific DTT in consist of the real estate tax on buildings force between Albania and the country and on agricultural land. Regarding real of residence of the beneficiary of the estate tax on buildings, the tax base income. Withholding tax should be is calculated as the floor area of the declared and paid within deadlines set out buildings measured in square meters in the Law on Income Tax and declared for each floor of the building owned via a specific tax return published by the (for real estate tax on agricultural land, Ministry of Finance. the tax base is the area of agricultural land measured in hectares). The tax Based on new tax legislation depends on the district where the real amendments, starting from 1 January estate is located and is calculated on an 2015 WHT returns should only be annual basis. The local tax on buildings submitted electronically. varies from ALL 5 to ALL 400 per square meter. The tax on residential buildings Dividends used for business purposes varies from Withholding tax of 15% on dividends ALL 40 to ALL 400 per square meter, applies on all dividends paid by Albanian while the tax on buildings owned by companies unless a DTT in force states individuals varies from ALL 5 to ALL 30 otherwise. per square meter. In addition, the tax on buildings is at double the rate for No WHT applies if dividends are paid to a any second or subsequent real estate tax resident company or partnership which property (apartment or house) owned by is subject to CIT in Albania. In addition, the individuals. The tax on agricultural land income generated from dividends is not varies from ALL 700 to ALL 5,600 per included in the taxable income of the tax hectare. Buildings owned by the state resident company or partnership. and local governmental authorities as well as by religious institutions are exempt from this tax.

8 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. REAL ESTATE TRANSFER TAX Place of supply of services This tax is applicable in the case of the Based on Albanian VAT legislation, the transfer of ownership rights of buildings and place of supply of services relating to real other real estate properties. It is payable by estate is the place where the real estate the entity that transfers the ownership of is situated. Therefore, services related to the real estate. The tax on the ownership Albanian real estate such as architectural transfer of buildings is levied on each square or engineering services are considered meter and varies from ALL 100 to 2,000, subject to Albanian VAT regardless of depending on the district where the real whether the recipient of the services is estate is located. The tax on ownership subject or not to VAT in Albania (i.e. the transfers of real estate other than for general business to business and business buildings is 2% of the sale price. The tax to customer rules does not apply). is not applicable to individuals subject to personal income tax in Albania. VAT refund A legal entity carrying out taxable activities Donors of real estate property to has the right to claim for reimbursement governmental authorities, religious of VAT if the excess tax credit is carried institutions or not-for-profit organizations forward for 3 successive months and the are exempt from this tax. The tax should claimed reimbursement amount exceeds be paid by the seller of such property ALL 400,000. A VAT refund cannot be before the transfer of the real estate is requested by entities or individuals not registered in the Real Estate Register. registered for VAT purposes in Albania.

VALUE ADDED TAX Further notes Supply of land and the lease of land are According to oanda.com, the exchange considered VAT exempt supplies. The rate as at 20 September 2016 was EUR 1/ supply of buildings (with the exception of ALL 135.199. construction works) is an exempt supply. The lease of a building is an exempt supply except in the following cases: For more information on real estate services in Albania, • when renting for not longer than please contact: 2 months; Alba Paparisto • for those staying in hotels or vacation Senior Manager resorts. KPMG in Albania In addition, based on the by-laws issued Blvd. “Deshmoret e Kombit” by the Minister of Finance, entities or Twin Towers Buildings, individuals may opt (upon the fulfillment Tower 1, Floor 13, Ap A1-A4 of certain conditions) to categorize their Tirana, Albania lease supply of buildings as a taxable T: +355 4 2274 524 supply subject to 20% VAT. +355 4 2274 534 E: [email protected] kpmg.com/al

Albania | 9 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Bosnia & Herzegovina

GENERAL All BiH taxpayers, both physical and legal Bosnia and Herzegovina (BiH) consists persons, have a personal identification of two main territorial and administrative number (PIN) issued by the tax entities: the Federation of Bosnia and administration of the relevant entity, Herzegovina (FBiH) and the Republic of and all business documentation and Srpska (RS), jointly referred to as “the correspondence (including tax returns) entities”, including the very small district must include the PIN. of Brcko. Legislation related to physical and legal persons and taxes (exclusive of Foreign physical or legal persons indirect taxes) is predominantly enacted (including EU citizens) can buy land at the level of the entities. (except for agricultural land) and real estate in BiH on the condition of The observations which follow are based international reciprocity for BiH physical on the relevant laws of these entities, or legal persons. effective as at 1 January 2016.

10 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. CORPORATE PROFIT TAX Generally, domestic dividend income is Direct taxes are levied in line with the not subject to CPT provided profit was entity's legislation. subject to CPT at source, in both entities.

Resident legal persons (legal persons In both entities, tax losses may be carried incorporated in the relevant entity, or forward for a period of 5 years, if certain legal persons whose place of effective conditions are met. No tax loss carry back management and control is in the FBiH provisions exist in either entity. (applies in the FBiH only) are subject to corporate profit tax (CPT) on their Tax grouping is available in the FBiH only, worldwide income. Non-resident legal provided that all members of the group persons are subject to CPT on their are incorporated in the FBiH and agree to income sourced in the relevant entity. the tax grouping.

Taxable profit is subject to CPT at 10% in Anti-avoidance both entities. In the FBiH, taxable profit Anti-avoidance provisions, including is the accounting profit adjusted for tax transfer pricing provisions, exist. non-deductible and non-taxable items in accordance with provisions of the Transfer pricing provisions require that all FBiH CPT legislation. In the RS, taxable transactions with related parties be listed profit is the difference between taxable separately and compared with the prices revenues and tax-deductible expenditures that would be charged in regular market in accordance with provisions of the RS conditions (according to the arm’s length CPT legislation. principle).

The tax period is the calendar year in both Thin-capitalization rules exist in the entities. Corporate profit taxpayers pay FBiH only. Thin-cap ratio of 4:1 applies monthly advance payments (by the end of to interest expenses per financial the current month for the previous month agreements and instruments from related in the FBiH; by the 10th of the current parties. Interest expense in relation to month for the previous month in the RS), liabilities per financial agreements which based on the previous year’s CPT return. exceed the registered share capital in the Any CPT shortfalls at the year-end must 4:1 ratio are not tax deductible and cannot be self-assessed in the CPT return and be carried forward to another tax period. paid by 30 March of the current year for However, this does not apply to banks the previous year in the FBiH and by 31 and insurance companies. March of the current year for the previous year in the RS, by which date the annual Tax Depreciation Rates CPT returns must be submitted. Accelerated depreciation is possible in the FBiH only under specific Capital gains are generally included in circumstances. Tax depreciation taxable profit in both entities and subject expenses can only be calculated on a to tax at the same rate, i.e. 10%. straight-line basis in both entities.

Bosnia & Herzegovina | 11 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The annual depreciation rates in the REAL ESTATE TRANSFER TAX / FBiH include 5% for buildings, 15% for REAL ESTATE TAX equipment and machinery and motor vehicles, 20% for intangible assets and FBiH 33.33% for computers and equipment for Real estate transfer tax (RETT) is environmental protection. regulated at the cantonal level in the FBiH (i.e. there are currently 10 different laws Tax depreciation rates in the RS are applicable in the FBiH). prescribed by the newly enacted “Rulebook” on application of annual Real estate transfer tax applies to depreciation rates. Due to the volume of transfers of land and all transfers of data, i.e. specific tax depreciation rates real estate which are value added tax prescribed by the Rulebook, these will (VAT) exempt, i.e. all transfers of real not be detailed here. estate except the first transfer of newly constructed objects. Real estate transfer WITHHOLDING TAX tax is irrecoverable. Withholding tax (WHT) at a rate of 10% generally applies to payments made to The RETT rate applicable in all 10 cantons non-resident legal persons for provision in the FBiH is 5%. of services (e.g. management consulting, tax and regulatory advisory, market RS research, audit services), royalties, In the RS, the Law on Real Estate Tax qualifying interest, renting of movable (RET) became applicable as of 1 January property. Renting of immovable property 2016. The RET rate is prescribed up to is subject to WHT in the FBiH only. 0.20% and applies on an annual basis to all real estate situated in the RS, In both entities, WHT at a rate of 5% except for real estate which is used applies to dividends paid to non-resident for production where the RET rate is legal persons. prescribed up to 0.10%. The RET base is the market value of real estate, whose In the FBiH only, non-resident’s income market value is determined in accordance subject to 10% WHT includes income with municipal decisions. which a non-resident realized from a resident or other non-resident, on the If the RET payer, i.e. the real estate territory of FBiH, from sale of or transfer owner, transfers the real estate during the for a fee of an immovable asset, shares or year, they are obliged to settle the RET stakes in the equity of a company, unless liability that became due in relation to the provided otherwise in an applicable period from the beginning of the year until double tax treaty. the transfer of the real estate in question.

The WHT rate may be reduced or eliminated pursuant to an effective double tax treaty.

12 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. VALUE ADDED TAX Options available to foreign legal entities in respect of VAT registration BiH and compliance are to either register Value added tax is levied at the national for VAT purposes in BiH through a VAT level. The standard VAT rate is 17% and representative, or to establish a limited applies to the supply of products and liability company in BiH which would then services. register for BiH VAT.

A VAT rate of 0% (input VAT recovery In accordance with the VAT Law, a foreign possible) applies to exports. legal entity and its VAT representative are jointly and severally liable for VAT Services are taxable in BiH if they are calculated in accordance with the BiH VAT deemed to have been supplied in BiH. Law.

The reverse-charge mechanism applies to Foreign legal persons are permitted certain services supplied from abroad. to register a branch office in the FBiH and the RS. Such a branch office is The rules regarding the place of supply not considered a legal entity and it is are similar to the EU 6th VAT Directive therefore deemed as an extension of the prior to the implementation of the “VAT foreign company. package” applicable in the EU as of 1 January 2011.

The registration threshold is set for 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 For more information on real are met. estate services in BiH, please contact: The transfer of newly constructed buildings is subject to VAT at a rate of Paul Suchar 17%. Physical persons generally cannot Partner recover VAT; however, VAT is generally recoverable for legal persons registered KPMG in Bosnia & Herzegovina for VAT in BiH, provided general Importanne centar, conditions for VAT recovery are met. Zmaja od Bosne 7-7A/III 71000 Sarajevo Foreign legal persons are eligible to Bosnia and Herzegovina recover VAT, provided certain conditions T: +387 33 941 500 are met. E: [email protected] kpmg.com/ba

Bosnia and Herzegovina | 13 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Bulgaria

GENERAL derived from Bulgarian permanent No major changes have been made to establishments (including branches) the Bulgarian Corporate Income Tax Act and/or profits related to the disposal of (CITA) or the Local Taxes and Fees Act property owned by such a permanent (LTFA) as of January 2016. Furthermore, establishment. there have been no significant amendments to the Value Added Tax Corporate income tax is calculated on (VAT) Act which would concern the real the basis of the annual financial result (as estate sector. per the Income Statement of the entity) adjusted with certain permanent or CORPORATE INCOME TAX AND temporary tax differences. CAPITAL GAINS The Bulgarian CITA specifies that The income from real estate derived Bulgarian entities are subject to 10% by Bulgarian entities is included in corporate income tax (CIT) on their their annual financial result. The annual worldwide income. Foreign entities financial/accounting result is subject to are subject to tax only on the profits further adjustments for tax purposes.

14 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Under the general CITA rules, any Tax losses expenses incurred in relation to company- A tax loss can be carried forward for 5 owned or rented assets (incl. real estate), years. It can be offset against a positive which are used for the personal purposes tax result for a subsequent tax year. of employees, management, clients, etc., should be treated as non-business related Thin capitalization expenses which are tax non-deductible. Thin capitalization rules apply in Bulgaria Certain amendments to the law are if a company’s liabilities exceed three expected to be introduced from 2017, times the amount of its equity. including direct one-off taxation of such expenses. Interest expenses are deductible up to an amount equal to the entity’s interest Annual CIT liability is determined by income plus 75% of the profits before the taxpayer through the preparation of interest and tax. The disallowed interest an annual CIT return. Any outstanding expenses under the thin capitalization liability (off-set with any advance rules are reclaimable in the following installments made) should be remitted 5 tax years up to the above-mentioned to the state budget by 31 March 2017. threshold calculated in those subsequent The same timeframe applies for the years. submission of the annual CIT return. Interest expenses on bank loans are not There is no provision for tax grouping in subject to thin capitalization, except in Bulgaria. some specific cases.

Tax depreciation TRANSFER PRICING Bulgarian tax-liable persons should Transfer pricing rules allow the revenue maintain a tax depreciation schedule authorities to adjust tax bases where (TDS) where they report all tax transactions are not carried out at an depreciable assets. Tax depreciation arm’s length basis. as per the TDS is to be reported as a downward adjustment to the financial Under the transfer pricing provisions the result for tax purposes, while the tax base may be adjusted by the revenue accounting depreciation expenses authorities in order to determine the CIT, accrued during the year are disallowed withholding tax (WHT) and VAT liabilities for tax purposes and are reported as an of the taxpayer. upward adjustment to the financial result. WITHHOLDING TAX The Bulgarian CITA provides for Specific types of income originating in maximum tax depreciation rates Bulgaria accrued by local tax resident depending on the type of the depreciable entities in favor of non-resident asset. The maximum tax depreciation taxpayers is subject to WHT provided rate for buildings including those held as that the income is not derived through investment properties is 4%. Land is not a permanent establishment of a non- depreciated for tax purposes. resident entity in Bulgaria.

Bulgaria | 15 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Such income includes capital gains, (i) the beneficiary of the income is rental payments, the accrual of interest, a foreign legal entity from an EU royalties, technical services (including member state or a permanent consultancy services), management fees, establishment in the EU; etc. (ii) the local legal entity (payer of the The standard WHT rate is 10%. income) is a related party to the Withholding tax rates can be reduced foreign beneficial owner of the under an effective double taxation treaty income; and signed between Bulgaria and the country of residence of the foreign income (iii) at the time of the income accrual, the recipient, following a specific pre-approval ownership of the required minimum procedure. capital is uninterrupted.

Withholding tax is generally calculated on The aim of this provision is to harmonize a gross basis. CITA includes provisions the Bulgarian tax legislation with Directive stating that foreign recipients of income 2003/49/EC (i.e. the EU Interest and subject to WHT and who are tax residents Royalties Directive). of an EU/EEA member state are entitled to an annual recalculation of the WHT Further, interest derived from bonds which has been levied and paid on a gross and other securities issued by local tax basis following a specific procedure. The residents and traded on a regulated EU recalculation is aimed at equaling out the or EEA stock exchange is exempt from tax treatment between local entities and WHT. Neither is WHT due on interest foreign entities which are tax residents of accrued in relation to loans extended by an EU/EEA member state. EU/EEA residents, which have issued bonds and other securities traded on Dividends a regulated EU/EEA stock exchange, Dividends and liquidation quotas are in order to lend the proceeds to the subject to WHT at a general rate of 5%. Bulgarian entity.

Please note that dividends and liquidation In addition, the interest on bonds or quotas distributed by local tax residents other debt instruments issued by the to shareholders’ local entities, as well as state and the municipalities and traded foreign entities that are tax resident in an on a regulated market in the EU or in the EU/EEA member state, are exempt from EEA, as well as interest arising under WHT taxation. loan facilities granted to the state or the municipalities and not backed-up with Interest and royalty payments bonds, are not subject to WHT. WHT on interest income and royalties accrued by local companies to foreign tax Payments for rent/the right of use residents of EU countries is exempt in the of immovable properties following cases: Rental income realized by foreign entities from rent or the right of use of immovable properties located in the country is

16 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. subject to 10% WHT, which should be Garbage collection fee deducted and paid by the local payer of Generally, a garbage collection fee is the income, provided that the latter is levied on the book value/cost of the a tax liable person under the terms of immovable property at a rate determined CITA. As mentioned above, the WHT rate annually by the respective municipality may be reduced under a double taxation where the property is located. The rates treaty. for the garbage collection fee may vary significantly between municipalities. LOCAL TAXES AND FEES The main local taxes and fees in relation The garbage collection fee comprises to the ownership or acquisition of real several service fees: (i) waste collection/ estate in Bulgaria include real estate tax, transportation fee, (ii) fee for safe disposal garbage collection fees and transfer tax. of household waste at sanitary landfills or other facilities, and (iii) fee for sanitation Real estate tax of spatial-development areas for public Owners of buildings and plots of land use. An exemption from waste collection/ situated in Bulgaria as well as acquirers transportation fee is introduced upon of limited ownership rights of real estate submission of a declaration by the property are subject to annual real estate owners of the properties by the end taxation. The rate of real estate tax of the calendar year declaring that the varies in a range of 0.01% – 0.45%. It is property shall not be used the whole year determined at a municipal level and may that follows. vary from year to year. Transfer tax The taxable base for real estate tax Transfer tax is levied when transferring of non-residential property owned by real estate property or limited property companies is the higher amount of the rights over real estate. The tax rate is tax valuation and the book value of the in a range of 0.1% – 3% levied on the property. The taxable base for real estate tax base of the property in cases of tax of property owned by individuals or acquisition against consideration. When residential property owned by companies immovable property is transferred as is the tax valuation of the property. a gift, the tax rate ranges from 3.3% to 6.6%. The applicable transfer tax An exemption from tax on real estate rate is determined by the respective properties still counts for buildings municipality. constructed before 1 January 2005 depending on the type of certificate for No transfer tax is due upon non-cash energy consumption that the building capital contributions in companies, has received and whether any measures cooperatives or non-profit organizations. are applied for utilization of the building’s renewable energy sources. The real The tax base upon transfer of real estate estate tax exemption for the respective property or limited property rights over it building may be used for a maximum is the higher of the following values: of 10 years depending on the specific (i) the purchase price/a price defined by conditions satisfied. state or municipal authorities, and (ii) the tax valuation of the property.

Bulgaria | 17 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The transfer tax is generally paid by the Taxable amount recipient of the property, unless the The taxable amount of real estate is parties have agreed differently. determined under the general rules of the VAT Act and is not regulated separately. If the recipient has no clear presence in the country, the tax is payable by the The following special rules may also be transferor. applicable for real estate transactions:

All tax returns specified in the Local Taxes • Transactions between related parties and Fees Act may be filed electronically, including by using the personal The taxable amount for supplies made identification code issued by the National between related parties should be Revenue Agency. equal to the open market value only in specific cases where neither the VALUE ADDED TAX supplier nor the recipient enjoy the As of 1 January 2016, there are no right to full input VAT deduction. The significant amendments of the Bulgarian aim of this rule is to prevent related VAT Act which would affect VAT in the parties from optimizing their pro-rata real estate sector. VAT deduction by applying non-arm’s length prices. VAT exempt and VAT taxable supplies According to the provisions of the • Barter transactions (e.g. construction Bulgarian VAT Act, the lease of buildings rights for construction services) for residential purposes, the sale and lease of unregulated plots of land, the The taxable amount for a barter sale of old buildings (i.e. buildings for transaction for which the parties have which more than 60 months from the not agreed a monetary value should be issuance of the exploitation permit equal to the acquisition cost/direct cost has expired) as well as the transfer of of the goods/services provided. When construction rights, are considered a VAT the tax base cannot be determined exempt supply. However, the seller/lessor in this way, it should be equal to the has the option to choose to treat these open market value. The open market supplies as VAT taxable transactions and value would also be used as a taxable charge VAT at the rate of 20%. base when the barter transaction is performed between related parties The supply of construction rights could be with restricted input VAT deduction exempt from VAT only up until the start rights, as explained above. of the construction process, i.e. up to the date of issuing the building permit. • Improvement of rented assets

The sale of new buildings, plant, The taxable amount of the deemed machinery, equipment and structures supply of service by the tenant to the immovably fixed to the land is a VAT- landlord in cases of free-of-charge taxable supply, subject to 20% VAT. improvements of hired assets should

18 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. be equal to the direct expenses For more information on real incurred, taking into account normal estate services in Bulgaria, wear and tear. If the direct cost cannot please contact: be estimated, the taxable amount should be the open market value. Kalin Hadjidimov Partner There is no VAT grouping in Bulgaria. KPMG in Bulgaria In 2016 certain clarifications were made 45/A Bulgaria Boulevard with regards to the VAT implications 1404 Sofia arising for the taxpayer if a corporate Bulgaria asset (including real estate) is used T: +359 2 9697 700 for personal needs. In most general E: [email protected] terms, the direct costs incurred for the kpmg.com/bg acquisition/rent and the exploitation of the asset is to be allocated between personal use and business use, and VAT is to be self-charged on the personal element of the costs, if input VAT was deducted for them.

Bulgaria | 19 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Croatia

GENERAL The standard value added tax (VAT) rate Croatia joined the EU on 1 July 2013, a is 25% and it applies to most products step which resulted in significant taxation and services. There are also reduced and legal changes. VAT rates of 5% and 13% for some other products and services. The comments below are based on Croatian laws effective as at 15 July 2016. Generally, as of 1 January 2015, land and buildings are considered to be one supply, In general, legal entities and legitimate i.e. the same tax treatment applies to persons from EU member states are free both land and buildings. to buy real estate in Croatia. Exceptions do exist and depend on the type of real Whether VAT or real estate transfer tax estate. Other foreign (non-EU) legal (RETT) applies depends on the status entities and legitimate persons need of the seller, the status of the buyer and to apply for a permit from the Croatian the status of the real estate. For details, Ministry of Justice before they can be please refer to the section “Real Estate registered as owners in the land registry. Transfer Tax and Value Added Tax” below.

20 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. CORPORATE INCOME TAX AND Any CIT shortfalls at year end must be CAPITAL GAINS self assessed in the annual CIT return Resident legal entities (legal entities and paid by the taxpayer by 30 April of incorporated in Croatia or legal entities the current year for the previous year, by whose place of effective management which date the annual CIT return must be and control is in Croatia) are subject submitted. to corporate income tax (CIT) on their worldwide income. Non-resident legal There is no separate capital gains tax – entities are subject to CIT on their any capital gains realized by a company Croatian-sourced income. on the disposal of fixed assets and intangibles are added to the company’s Accounting profits, adjusted in tax base and are subject to the standard accordance with the provisions of the CIT CIT rate of 20%. On disposal, the seller Law, are subject to CIT at a rate of 20%. can deduct the net tax value of the fixed assets and associated disposal Amongst other items, accounting profit expenditures. Taxable income can be needs to be increased for: reduced by tax losses where they are available for utilization. • interest on loans provided or guaranteed by a foreign direct Domestic and foreign dividend income is, shareholder (holding 25% or more of generally, not subject to CIT. the shares), or by any foreign related party on the amount of the loan There is no tax grouping provision. that exceeds four times the capital of that foreign shareholder (“thin There are anti-avoidance provisions, capitalization” rule, see below); including detailed transfer pricing provisions (which require a transfer • interest over 5.14% per annum on pricing study including benchmarking loans provided by a foreign related analyses, for all cross border transactions party (“excessive interest rate” rule); with related parties and for certain domestic transactions between related • interest over 5.14% per annum on parties). loans provided by a domestic related party, if one of the parties is in a tax Tax depreciation favorable position or has tax losses Depreciation of tangible and intangible carried forward from previous periods assets is usually calculated on a straight- which can be utilized in the current tax line basis using the rates laid down in the period; and Croatian CIT Law. Depreciation of tangible and intangible assets is a tax deductible • penalty interest between related expense starting from the month following parties (both domestic and foreign). the month in which a particular asset was brought into use. After being completely The tax period is the calendar year. depreciated, the tangible and intangible Corporate income taxpayers pay assets are kept on record until they are monthly advance payments based on sold, disposed of or found missing. The the previous year’s annual CIT return. annual depreciation rates include: 5%

Croatia | 21 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. for buildings; 25% for equipment and For loans provided or guaranteed by machinery, motor vehicles (other than entities without a direct shareholding personal cars) and intangible assets; 20% in the loan recipient but which are for personal cars; 50% for IT equipment considered to be related to the loan and mobile phones; and 10% for other long- recipient, the equity capital of the foreign term assets. These rates can be doubled in direct shareholder is taken into account some cases. for thin capitalization purposes.

Land is not depreciated for tax purposes. The thin capitalization rule does not apply to loans provided by foreign shareholders Tax losses and foreign related parties that are Tax losses may be carried forward for a financial institutions. maximum of 5 years starting with the year in which they occurred, if certain Tax incentives conditions are met. No tax loss carry-back The CIT rate can be reduced by 50% if the provisions exist. company operates in a Class II Support Area or the company can be exempt In the case of mergers and de-mergers, from CIT if it operates in a Class I Support tax losses can be transferred to the legal Area or in the City of Vukovar. Specific successor, but only if the legal predecessor conditions must be met in all cases. In is fully in operation and if the legal addition, other incentives may exist under successor does not have a significantly the Investment Promotion Law. different business activity compared to the predecessor, the timeframe being for 2 Incentive for reinvested profits under years both prior to and after the statutory the CPT Law change. The same applies if there is a As of 1 January 2015, profits from change in ownership of the company of the current year used to increase the more than 50% compared to the ownership registered share capital of a company are structure at the beginning of the tax period. exempt from corporate profit tax (CPT):

Thin capitalization • if the reinvested profits are used to Interest on a loan provided or guaranteed invest in fixed assets in the tax period by a foreign direct shareholder holding at for which the incentive will be used; least 25% of the shares or voting rights in a company or a loan provided, or guaranteed • if the increase of share capital in the by a foreign related party, is not deductible amount of the reinvested profits is for CIT purposes on the amount of the loan registered in the Court Register; which exceeds four times the capital of that foreign shareholder. • whereby the existing number of employees needs to be preserved The amount of the shareholder’s holding for at least 2 years following the year in the loan recipient’s equity capital is when the reinvestment of the profit determined for the tax period as an was performed; and average on the basis of paid-in capital, retained earnings and reserves as at the • this incentive does not apply to banks last day of each month in the tax period. or financial institutions.

22 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Companies applying for the incentive period of 5 years for micro entrepreneurs are required to submit to the Croatian and 10 years for small, medium-sized and Tax Authority (CTA), together with the large entrepreneurs (or until the investment tax return, but not later than 6 months level is reached) commencing from the year from the deadline for filing the tax return, in which the investment started (provided evidence of the increase of the share certain conditions are met). The following capital which consists of: incentives are available:

• a list of acquired fixed assets and • a 10% reduced rate, if the minimum credible documentation on performed investment is EUR 50,000 and the investments in fixed assets; taxpayer employs at least three new employees related to the investment • evidence that the increase of the share within the initial period of 1 year capital in the amount of reinvested (this incentive applies only for micro profits was registered in the Court entrepreneurs); Register; and • a 10% reduced rate if the investment • a statement that pursuant to the same does not exceed EUR 1 million and completed investment in fixed assets the taxpayer employs at least five new the company does not use incentives employees related to the investment; based on the special regulation governing the encouragement of • a 5% reduced rate if the investment investments (see below). amount is between EUR 1 million and 3 million and the taxpayer employs at The incentive for reinvested profits will be least 10 new employees related to the denied if: investment; and

• the company’s share capital which • a total exemption if a taxpayer invests was increased by reinvested profits is at least EUR 3 million and employs at subsequently decreased; least 15 new employees related to the investment. • the share capital of the company is decreased due to statutory changes WITHHOLDING TAX (e.g. mergers or demergers); or Dividends Withholding tax (WHT) at a rate of 12% • the number of employees with valid applies to payments of dividends and temporary and permanent contracts is profit shares paid to foreign legal entities decreased before the 2-year period has made on or after 1 March 2012, but not lapsed. for payments of dividends and profit shares earned before that date. Investment incentives A taxpayer making a qualifying investment The WHT rate may be decreased/ may be exempt from CPT or taxable at a eliminated where an effective double reduced rate of CPT, depending on the taxation treaty exists to which Croatia is level of investment and the number of new a party. In order for the dividend payment employees employed, for a maximum not to be subject to Croatian withholding

Croatia | 23 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. tax in line with provisions of a double The WHT rate may be decreased or taxation treaty, the Croatian company – eliminated in line with an effective double i.e. the payer of such a dividend – would taxation treaty to which Croatia is a need to obtain the following documents party. In order for the interest payment prior to the payment of the dividends: or royalty payment not to be subject to Croatian withholding tax in line with • a Statement of Residence issued by provisions of a double tax treaty, the the tax office in the country in which Croatian company, i.e. the payer of such the recipient of the dividend is tax interest or royalty, would need to obtain resident – a procedure which applies if the following prior to the payment of withholding tax is eliminated (reduced interest or royalties: to 0%); or • a Statement of Residence issued by • a completed form for dividend the tax office in the country in which payments prescribed by the Croatian the recipient of the interest or royalty CIT legislation, stamped/approved by is tax resident – a procedure which the tax office in the country in which applies if withholding tax is eliminated the recipient of the dividend is tax (reduced to 0%); or resident – a procedure which applies if withholding tax is reduced from the • a completed form covering interest statutory rate of 12% to a lower rate or royalty payments prescribed by provided for under a double taxation the Croatian CIT legislation, stamped/ treaty (e.g. 5% or 10%). approved by the tax office in the country in which the recipient of the Also, dividends paid to shareholder interest or royalty is tax resident – a companies that are residents in EU procedure which applies if WHT is member states or paid to qualifying Swiss reduced from the statutory rate of 15% companies are exempt from Croatian to a lower rate provided for under a withholding tax if the shareholder owns double tax treaty (e.g. 5% or 10%). at least 10% (for Swiss shareholders at least 25%) of the payer’s shares and the In addition, interest paid to EU resident shares have been uninterruptedly held companies or to qualifying Swiss for at least 2 years, and if certain other companies is exempt from Croatian conditions are met. WHT where a minimum of 25% direct shareholding exists between Interest, royalties and intangible both companies or where a third services company directly owns at least 25% Withholding tax at a rate of 15% applies of both companies, provided that the to certain payments made to non-resident participation is held for an uninterrupted legal persons (for specified interest period of at least 2 years and if certain payments, payments for intellectual other conditions are met. property rights, market research, tax advisory, business advisory and audit Other services services). Withholding tax at a rate of 20% applies to payments for services, other than the above-mentioned services, made to

24 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. legal persons outside the EU if the legal between the period of first occupation person has their registered seat or place of and the date of transfer; and effective management and supervision in a country with a CPT rate lower than 12.5%, • transfers of reconstructed buildings if Croatia does not have a double tax treaty (or parts of buildings) if the costs of with that country, and if the country is reconstruction in the previous 2 years included in the appropriate list published by exceed 50% of the sale price. the Croatian Ministry of Finance. In all other instances, real estate transfer REAL ESTATE TRANSFER TAX AND tax (RETT) applies. VALUE ADDED TAX General provisions regarding However, in certain circumstances, real estate the transferring party (of both land and The following transfers of real estate are buildings) is able to opt for the transfer subject to VAT (if transferred by a Croatian to be subject to VAT, provided that the VAT registered entrepreneur): transferee is entitled to full input VAT deduction. In this case, the reverse- • transfers of construction land; charge mechanism applies.

• transfers of buildings (or parts of RETT at a rate of 5% applies to the buildings) before first occupation transfer of real estate unless the transfer or if less than 2 years have elapsed

Croatia | 25 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. of real estate is subject to VAT. RETT is VAT refunds payable by the purchaser. VAT Refunds for non-resident entrepreneurs from non-EU countries Place of supply of services (13th Directive) Croatian VAT rules regarding the place of In order for non-resident entrepreneurs supply of services are fully aligned with from non-EU countries to obtain a refund the EU VAT Directive. of Croatian VAT, the reciprocity condition needs to be fulfilled. Specifically, Croatia has the general business to business rule for taxation If the reciprocity condition with the of services according to which services country has not been officially confirmed, provided by a taxpayer from one EU then resident entrepreneurs of that member state to a taxpayer in another EU country will generally not be able to member state are taxable in the country recover Croatian VAT. of the service recipient. In order to obtain a refund of Croatian However, in the case of services related VAT the non-resident entrepreneur to real estate (including renting or must submit a request to the Croatian leasing), the place of supply is the place Tax Authorities no later than 6 months where the real estate is located. following the end of the calendar year to which it relates, e.g. it has VAT refunds and domestic law to be submitted by 30 June 2017 for Input VAT can generally be recovered if transactions in 2016. A request for a taxpayer is VAT registered and if the a VAT refund must be submitted on following conditions are met: the prescribed form together with a certificate issued by the tax authorities • the taxpayer receives a proper VAT of the country of the non-resident invoice from a supplier; entrepreneur stating the VAT status of the claimant and include original invoices. • the delivery of goods (services) took place; and VAT Refunds for non-resident entrepreneurs from other EU member • the goods (services) are used by the states taxpayer for business purposes and for According to the VAT legislation the performance of VAT-able supplies/ applicable as of Croatia’s EU accession, provisions. non-resident entrepreneurs from EU member states are entitled to a A taxpayer whose input VAT exceeds its refund of the VAT charged by Croatian VAT liability is entitled to claim a refund of entrepreneurs. that difference. The refund period is 30 days from the date of submission of the In order to obtain a refund of Croatian VAT return. If a tax inspection is initiated VAT, non-resident entrepreneurs from prior to the receipt of the VAT refund, a other EU member states must submit refund must be made within 90 days of an electronic request for a VAT refund the day of the start of the tax inspection. by using the electronic portal of the tax

26 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. office of the EU member state where they are established. For more information on real estate services in Croatia, Electronic requests for VAT refunds please contact: should be submitted at the latest by 30 Paul Suchar September in relation to charges from Partner the previous year, e.g. for the year ending 31 December 2016 the request needs to KPMG in Croatia be submitted at latest by 30 September Eurotower, Ivana Lucica 2a 2 0 1 7. Zagreb, 10000 Croatia Non-resident entrepreneurs from other T: +385 1 5390 032 EU member states which submit requests M: +385 91 4668 032 for a refund of Croatian VAT are also E: [email protected] required to provide an explanation of the kpmg.com/hr business activities and a description of the transactions for which the VAT refund is sought, bank account number, etc.

European sales/purchases list/ Intrastat Apart from regular VAT returns, all transactions with taxpayers from EU member states need to be reported on an European Sales List and an European Purchase List. Additionally, all transactions involving goods with taxpayers from EU member states must be reported on Intrastat returns, provided the relevant threshold is reached.

Croatia | 27 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Czech Republic

GENERAL the administrative burden laid upon the The Czech legal environment has taxpayers has increased. changed significantly following a reform of the civil and commercial law on 1 In addition, instruments against carousel January 2014. Taxpayers should pay close fraud in the VAT area and certain attention to particular tax rules (since they instruments against base erosion and are still subject to subsequent revisions), profit were implemented in 2016. to ensure that they are in line with the new civil and commercial laws. The most significant changes enacted in 2016 are summarized below. Overall, the year 2016 brought greater emphasis on the effectiveness of tax Income tax administration, including broader use of Tax implications of new rules for the digital technologies. This will primarily treatment of interest free loans which help the tax authorities in monitoring were introduced in 2015 were further and identifying tax fraud. In this respect, clarified in the first half of 2016.

28 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. According to the current interpretations, • The Income Tax Act includes new rules the tax base of the borrower will not be for adjusting profit/loss by reserves for affected as a result of an interest-free handling electrical waste from solar loan provided by a direct shareholder. panels.

Another change implemented in the Recently, structures aiming at the Income Tax Act in 2016 is the limitation deductibility of interest on acquisition of the dividend exemption for hybrid loans (debt push-down structures) instruments (i.e. financial instruments attracted the attention of the tax which are treated as a loan in one authorities, and in 2015 in a landmark, country and as equity in another country) but very specific case, the Czech according to an EU directive. As of Supreme Administrative Court rejected 1 May 2016, dividends received by a tax deductions for acquisition-related Czech parent company (or a permanent borrowing. establishment of an EU company) from a subsidiary located outside the EU may Value added tax be exempt from Czech taxation under As of 1 January 2015, all Czech VAT the participation exemption only if the payers are required to file the new dividends were not an item decreasing control VAT statement report. The control the tax base at the level of the subsidiary. VAT statement must be submitted It appears that the intention of the electronically by the 25th day of the legislators was that this rule should also following month at the latest. apply to dividends received from other EU member states. However, due to A control VAT statement reports on improper EU directive implementation, individual local sales and purchases as well this does not seem to be the case in as intra-community acquisitions of goods 2016. As of 1 January 2017, this should or services including information such be changed and the limitation rule should as tax bases, VAT applicability, dates of also apply to dividends received from taxable supply, VAT numbers of suppliers/ subsidiaries located within the EU. customers, and evidence numbers of the relevant tax documents, etc. Additionally, a new double tax treaty with Liechtenstein was duly ratified by both Effective from 1 February 2016, the contracting states and became effective reverse-charge mechanism obligation as of 1 January 2016. Its ratification is extended to the supply of gas and enables the application of several income electricity through networks to a dealer exemptions which were conditional on and certain supplies of real estate to the existence of this treaty. Czech VAT payers.

Other minor changes to the Income Tax Further changes in the VAT area related Act as of 2016 are as follows: to the real estate market implemented in 2016 include: • For tax purposes, company incorporation costs are no longer • The definition of building plots (the capitalized as intangible assets and are sale of which is subject to VAT) has directly expensed; been expanded. It includes plots of

Czech Republic | 29 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. land (or plots of land relating to the TAX SUMMARY land) on which construction work CORPORATE INCOME TAX AND has been carried out, or in respect of CAPITAL GAINS which an administrative act has been Corporate income tax (CIT) is levied on made to build a building. This also profit from all activities (including rental applies to plots of land relating to the income) and from the management of plot of land on which a building is to all types of property, although there are be constructed if they relate to the some exceptions to this rule defined building. in the tax law. The corporate income tax rate is 19% (with the exception of • A substantial change to a building pension funds where it is 0% and certain prolongs the term in which the sale of investment funds where it is 5%). such real estate may not be exempt from VAT. Capital gains are generally included in income and taxed at the same rate, • A possibility exists to opt for application including income from the transfer of VAT on generally VAT-exempt of shares in Czech companies or supplies of land. cooperatives. However, if at least 10% of the shares of a company have been Tax on the acquisition of immovable held by a parent company for 12 months, property income from the sale of the shares is An amendment of taxation on the acquisition of immovable property was expected to be effective as at 1 April 2016. However, it was approved by the Czech senate only in July 2016 and is expected to be effective from November 2016.

The amendment will bring three key changes:

• The payer of the tax, who is always the buyer, may not be determined by an agreement;

• Abolishment of the concept of a guarantor for the payment of the tax as a result of the buyer being liable for the tax payment;

• Limitation of the exemption of the first acquisition of new buildings and units. It should now apply only to the buildings and units already completed or used, not under construction.

30 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. tax exempt if the parent company is an taxation right belongs to the state where EU resident company or a resident of the real estate is located. In other cases Norway, Iceland or Liechtenstein (since the taxation right belongs to the state of 1 January 2016) and the subsidiary is a tax residence of the company whose shares resident of an EU Member State or a non- are being sold (e.g. under agreements EU Member State with which the Czech with Germany, Israel and Saudi Arabia). Republic has concluded a double taxation treaty (subject to certain conditions). There are no corporate tax grouping provisions in the Czech Republic. As of 1 January 2016, the Czech Republic has 89 double taxation treaties. As a rule, Tax depreciation the right to tax capital gains is conferred For tax purposes, either straight-line on the state where the seller is resident. or reducing balance depreciation can However, a number of double taxation be used. The tax depreciation period treaties provide a special regime for for buildings is generally 30 years capital gains if the shares being sold except for administrative buildings, derive more than 50% of their value shopping centers and hotels where the directly or indirectly from real estate (e.g. depreciation period is 50 years. Special as in agreements with Australia, Cyprus, rates apply in the year of acquisition. Egypt, Finland, France, Ireland, Canada, Land is not depreciated for tax purposes. Sweden, and the USA). In such cases, the Certain assets attached to a building can

Czech Republic | 31 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. be treated as separate movable assets The following financial costs are non- for tax purposes and therefore can be deductible: depreciated over a shorter period. • financial expenses on loans and credit Special provisions apply for the assets of received from related parties which solar power plants. These fixed assets are more than four times the equity must be depreciated over 240 months (six times in the case of banks and and the depreciation must be claimed insurance companies); (unlike depreciation on most other assets). Special adjustments are made • financial expenses incurred on loans for similar assets acquired under finance and credit with interest rates or other lease agreements. returns dependent on the debtor’s profit levels. Tax losses Tax losses can be carried forward for 5 Interest on loans and credits received years. from unrelated parties including those secured by a related party is fully Losses may not be carried forward where deductible on general principles, except there has been a substantial change in for interest on “back-to-back” loans (i.e. the ownership of a company unless it where a related party provides a loan, can be shown that at least 80% of the credit or deposit to an unrelated party company’s revenues is derived from the which then provides the funds to the same activities as those performed in the borrower) which is treated as interest on period when the loss arose. A change related party debt. of at least 25% in the ownership of the registered capital or the voting rights or Any interest or other expenses relating a change resulting in a person obtaining to a non-EU or non-EEA resident lender a controlling influence in the company is which is disallowed under the thin always seen as a substantial change. capitalization rules may be treated as a dividend, i.e. it is subject to dividend Tax losses are available after a merger withholding tax (WHT). or de-merger, although they can only be offset against profit if the entity performs WITHHOLDING TAX the same activity as was carried out in the Under Czech tax legislation, a 15% WHT year when the tax loss arose. applies to dividends, as well as to interest and royalties paid to foreign entities. It is also possible to utilize tax losses However, a 5% WHT applies on finance taken over during chain mergers or de- lease payments. The rate may be reduced mergers. or eliminated under double tax treaties or under EU directives. On the other hand, Thin capitalization an increased 35% WHT rate applies to The thin capitalization provisions act to income paid to residents of countries restrict the deductibility of interest where which have not signed a double tax treaty the borrower has insufficient equity. with the Czech Republic and where no arrangement is in place for the exchange of information on tax matters.

32 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Dividends This also applies to recipients in Withholding tax applies on all dividends Switzerland, Norway, Iceland and paid by Czech companies. Liechtenstein (since 1 January 2016).

Under the EU Parent-Subsidiary Directive, Residents of other EU and EEA countries a dividend paid by a Czech subsidiary to have the option to file a tax return for a parent company that is tax resident income subject to WHT (e.g. interest in an EU member state may be exempt payments, royalties, income from from WHT. These provisions also apply freelance work), and to claim a deduction to dividends paid between Czech of related expenses. This may result in companies and those paid to Switzerland, a reduction in the tax burden as WHT is Norway, Iceland or Liechtenstein (since calculated on a gross basis. 1 January 2016). A parent and subsidiary qualify for this exemption if a minimum TAX ON IMMOVABLE PROPERTY shareholding of 10% is maintained for an The tax on immovable property (formerly uninterrupted period of 12 months unless real estate tax) comprises land tax and one of the shareholders in question: building tax. The property in question must be located in the Czech Republic • is exempt from corporate income (or a and recorded in the Land Register. This similar) tax; or tax is calculated by multiplying the area in square meters by the tax rate factor. • may claim a corporate income tax exemption or corporate income tax The rate varies according to the type relief; or and location of the property. The basic rates of tax applicable to buildings • is subject to corporate income tax at a may be increased depending on the rate of 0%. number of floors, the prevailing activity for which the building is used and the The EU Parent-Subsidiary Directive location. Municipalities can also issue a has recently been updated to include a decree increasing the basic tax rate or general anti-avoidance rule. It is assumed coefficient. that the effect of this rule will be to bring into question application of the EU Improved land surfaces are regarded as Parent-Subsidiary Directive on dividends a separate class of real estate on which a in cases where the parent company special rate of tax applies. lacks sufficient substance and business rationale for its position in a structure TAX ON THE ACQUISITION OF (other than for the purposes of tax). IMMOVABLE PROPERTY With effect from 1 January 2014, a new Interest and royalties tax replaced the former real estate Under the EU Interest and Royalties transfer tax (although the tax rate of 4% Directive, qualifying interest and remains the same). The tax is payable on royalty payments between associated transfers of the ownership of real estate enterprises which are tax resident in EU for consideration. In cases of purchases member states may be exempt from and exchanges, the tax is paid by the WHT. transferring party (seller) unless the

Czech Republic | 33 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. parties agree that the acquirer will pay. In principle, the sale of land with As mentioned above, in the next few a building on it is considered as a months this may be subject to a change transaction subject to the standard VAT (the tax will be paid by the real estate rate of 21% unless 5 years have passed acquirer from the law). from the date when the first consent to use the building was granted, or from the The tax base is the higher of the agreed date when the building was brought into price and the reference value, which is use. As already mentioned, starting 1 calculated by the tax authorities based on January 2016, the 5-year period will also prices for similar transactions. If the tax count from the date of any substantial authorities cannot calculate a reference change made to the building in question. value, the tax base is the higher of the A 3-year period applies for buildings agreed price and 75% of the value for which consent was granted or for assessed by an expert. If real estate is buildings which were first used before transferred as part of an enterprise, the 1 January 2013. However, the taxpayer tax base is set according to an expert can opt to tax the sale of the land and/or valuation. the building after expiry of the period. If the sale is to a Czech VAT payer, the VAT The contribution of real estate to share may be applied after the buyer’s consent capital is no longer tax exempt. and the supply is subject to the “reverse charge” regime (as from 1 January 2016). VALUE ADDED TAX The standard rate is 21%, the first A change in the level of exempt sales reduced VAT rate is 15% and the second within 10 years of acquisition of the reduced rate is 10%. building (or improvement of a building) may lead to a claw back of previously The sale of residential property that recovered input VAT. A claw back period qualifies as social housing is subject to of 5 years is applicable to buildings the reduced VAT rate. To qualify as social acquired before 1 March 2011. housing, an apartment should have a floor area of 120 square meters or less The lease of buildings and land is and the floor area of houses should not generally VAT exempt, but the lessor can exceed 350 square meters. Such areas opt to charge 21% VAT on a lease with a also include the area physically beneath tenant who is registered for VAT. the walls. Groups of related companies may form a According to the new Civil Code, a VAT group. building is an integral part of the land on which it stands. Therefore, it is no Construction work and building assembly longer possible to treat the sale of land services between two Czech entities that with a building on it as two separate pay VAT are subject to the reverse charge transactions for VAT purposes and the regime. As a result, the duty to report and whole transaction is considered as a sale pay VAT rests with the recipient of the of land even if the price is split into two service. parts.

34 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Sale of land (other than building plot) without a structure on it is generally For more information on real exempt from VAT. Again, as of 1 January estate services in the Czech 2016, a taxpayer can opt to tax the sale Republic, please contact: of the land. If the sale is to a Czech VAT payer, the VAT may be applied after the Petr Toman buyer’s consent and the supply is subject Partner to the reverse charge regime. KPMG in the Czech Republic The sale of a building plot (as newly Pobrezni 1a defined) is subject to a standard 21% VAT 186 00 Praha 8 rate. Czech Republic T: +420 222 123 602 ADMINISTRATION OF TAXES F: +420 222 123 446 Tax administration is governed mainly by E: [email protected] the Tax Code with specific procedures kpmg.com/cz covered by other legislation.

Czech Republic | 35 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Estonia

GENERAL of residential housing, as long as the The sale of immovable property and the tax authorities have been notified in leasing or letting of immovable property writing beforehand. The notice regarding or parts of them are generally tax exempt optional taxation of the leasing or letting when arranged as supply without credit of immovable property or parts thereof is according to the Estonian Value Added binding for 2 years. Tax (VAT) Act. Tax exemption applies neither for the supply of buildings before CORPORATE INCOME TAX AND their first occupation, nor for their parts, CAPITAL GAINS nor for significantly renovated buildings The corporate tax system in Estonia (nor their parts), nor for plots within the differs from that used by many countries, meaning of the Planning Act, as long as in that corporate income is taxable only there is no construction work in operation upon distribution. The profits earned and on such plots. retained by a company are not subject to taxation. The income tax rate for 2016 However, the taxpayer is entitled to use on gross dividends is 20%, although optional taxation, except for the case the tax is calculated on the net amount

36 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. of dividends by applying a proportional Interest, royalties and intangible tax rate of 20/80. Thus a company not services distributing profit is not obliged to pay Interest income tax. Taxable expenses and From 2014, income tax is charged on payments are taxed at the rate of 20/80 interest received from the holding as well. (in a contractual investment fund or other pool) of assets, where no less There is no separate tax on capital gains, than 50% of the property part of those but proceeds from the disposal of fixed assets, at the time of the transfer or assets and intangibles are added to the for up to 2 years prior to the transfer, taxpayer’s regular business income, was or is directly or indirectly made up so that corporate income is taxable of immovable real estate or movable only upon distribution in the form of a structures located in Estonia and in which dividend. the non-resident had a holding of at least 10% at the time of transfer. A non-resident is obliged to pay income tax on income derived from the transfer Previously income tax of 21% had to be of property if the immovable property is withheld on interest paid to a resident located in Estonia. In addition, income individual, interest that corresponded from the transfer of a shareholding in to the market interest paid to a non- a real estate company or of the right of resident, or a resident company was claim or real right related to real estate generally exempt from taxation. located in Estonia is subject to taxation. Furthermore, tax was levied at 21% for Generally, the tax treaties concluded above-market-value income tax interest between Estonia and other countries paid to a non-resident, but from 2014, grant the right of taxation of real estate or such liabilities will be taxed according to rights related to real estate to the country transfer pricing rules. where the real estate is located. Royalties Tax depreciation Patent royalties, including payments As Estonian companies pay income tax for the use of commercial, scientific or upon distribution of profit, corporate industrial equipment, paid by resident income tax depreciation is not relevant in companies to non-resident ones, are Estonia. subject to income tax withholding. The rate is 10%, unless a treaty provides for Tax losses a lower rate. However, in order to apply Tax losses are not recognized nor do they the treaty rates, the payer should hold a have any effect on corporate taxation. certificate of tax residence in the name of the recipient party. Thin capitalization There are currently no thin capitalization Under the domestic law implementing regulations in Estonia. the provisions of the EU Interest and Royalties Directive and the EU- WITHHOLDING TAX Switzerland Savings Agreement, Dividends outbound royalty payments are exempt There is no withholding tax (WHT) on from WHT, provided that the recipient dividends. Estonia | 37 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. company is an associated company of the REAL ESTATE TAX paying company and is resident in The only property tax imposed in Estonia another EU Member State or in is land tax. Taxable persons are the Switzerland, or if such a company’s owners or, in specific circumstances, permanent establishment is situated in the users of land. Tax is levied on the another member state, or in Switzerland. market value of all land unless specific Two companies are “associated exemptions apply. The tax rate is companies” if one of the following established by the municipal council and conditions is met: may vary between 0.1% and 2.5% of the taxable value of the land. Land beneath or • one of them directly holds at least 25% directly around a domestic residence is of the capital of the other; or tax exempt.

• a third EU or Swiss company directly TAX ON CIVIL LAW TRANSACTIONS holds at least 25% of the capital of the (PCC, TRANSFER TAX) two companies. Transactions involving immovable property are subject to a state fee the In both cases, a minimum holding period amount of which depends on the value of of 2 years is required. The exemption is the transaction. For transactions of more not granted if the payment in question than EUR 639,116.48, the fee is fixed at exceeds a similar payment between non- 0.16% of the value, up to a maximum associated entities. value of EUR 2,556.46.

Intangible services VALUE ADDED TAX A 10% WHT rate applies to fees paid to General provisions regarding a non-resident for services rendered in real estate Estonia. The tax rate is reduced to 0% The sale of immovable property and the under any double taxation treaty to which leasing or letting of immovable property Estonia is a party. However, in order to or parts thereof are generally tax exempt apply the treaty rates, the payer should if they are supplies without credit. Tax hold a certificate of tax residence in the exemption does not apply for the supply name of the recipient. before the first occupation of buildings or their parts, or for significantly renovated Fees paid to companies resident in low- buildings or their parts, or for plots if there tax territories for services rendered to an are no construction works on such plots. Estonian resident are subject to a 20% WHT, irrespective of where the services However, the taxpayer can opt to charge/ were provided or used. pay VAT, except in the case of residential housing, as long as the tax authorities A 20% WHT rate applies to rental have been notified in writing beforehand. payments made to non-residents and The notice regarding optional taxation resident individuals. of the leasing or letting of immovable property or parts thereof is binding for 2 years.

38 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The standard VAT rate in Estonia is 20% The foreign person is required to submit (for land and building sales) and 9% (for an application for registration for VAT accommodation services). purposes to the tax authority within 3 working days as of the date on which Place of supply the registration obligation arises. Generally, the place of supply of services to a taxpayer registered for VAT purposes Value added tax returns and in another EU country is the place where EC Sales Lists the purchaser is registered. Services Estonian VAT payers submit VAT returns provided to a third country taxable person and EC Sales Lists monthly. The EC Sales are subject to taxation in the country List includes data on supplies of goods where the purchaser has established its and services to VAT registered persons business. In cases where the services in other EU countries, i.e. supplies which are provided to a non-business entity, are subject to taxation in the buyer’s the place of supply of services is usually country under the so-called reverse where the service provider was originally charge mechanism. Services related registered. to real estate in Estonia are subject to Estonian VAT and therefore are not to be However, in the case of services that reported in the EC Sales List. are regarded as services related to real estate, the place of supply of such VAT returns and the EC Sales List should services is where the real estate is be filed by the 20th day of the following situated. Also, the supply of immovable month. property is taxable in the country where the real estate is situated. VAT refunding under domestic law If VAT calculated by the Estonian taxpayer Registration of a foreign person for during a taxable period is less than the VAT purposes in Estonia amount of deductible input VAT in the If a foreign person who is not registered same period, the overpaid amount of for VAT purposes in Estonia performs a VAT is refundable to the taxpayer. The VAT taxable supply in Estonia, that person standard refund period is 30 days. is required to register in Estonia for VAT purposes if: The tax authority may, in connection with checking a claim for refund, extend • the foreign person has no fixed the term for fulfillment of the claim by a establishment in Estonia and no tax is reasoned decision for up to 90 calendar payable upon the acquisition of goods days, if there is reason to believe that it by an Estonian customer; or may be impossible to reclaim the sum paid upon satisfaction of the claim for • the foreign person has a fixed refund. The term for fulfilling a claim establishment which intervenes/ for refund may be extended for up to participates in the supply in Estonia and 30 calendar days at a time. where supplies during a calendar year exceed the threshold of EUR 16,000, There is no right of deduction if the excluding the transfer of fixed assets. taxable person paid the input VAT when paying for goods or services relating

Estonia | 39 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. to the reception of guests, or the For more information on real provision of meals or accommodation for estate services in Estonia, employees of the taxable person. please contact: This provision does not apply to the Joel Zernask deduction of input VAT which is paid for Partner, Tax accommodation services received during a business trip. In addition, there is no KPMG in Estonia right to deduct input VAT on purchases Narva mnt 5 directly related to exempt supplying or Tallinn, 10117 purchasing of items for non-business use. Estonia T: +372 6 268 700 Foreign VAT refund under M: +372 5 112 475 Directive 2008/9/EC E: [email protected] Since 1 January 2010, foreign persons kpmg.com/ee may claim input VAT incurred in Estonia by filling in reclaim forms obtainable electronically from the local VAT authority (where a company is registered). Value added tax refund applications have to be filed electronically. The Estonian Tax Authority notifies relevant parties of the acceptance or rejection of the application within 4 months or, upon the request of additional information – e.g. an invoice or import documentation – within 6 months of the receipt of the application. Upon request of further additional information, the Tax Authority notifies applicants of the decision concerning the refund of VAT within 8 months of the receipt of the application.

40 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Estonia | 41 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Hungary

GENERAL the purchase of shares (in companies In Hungary, as of 2012, the value added owning real estate) may be subject to tax (VAT) rate was increased to 27% (up transfer tax and the capital gain achieved from the previous 25%). As a main rule, by foreign entities via selling the shares in real estate rental and the sale of real real estate companies may be subject to estate older than 2 years are exempt from Hungarian corporate income tax (CIT). VAT, but VAT-able treatment may be opted for upon the taxpayer’s request. In the Since 2011, a new Real Estate Investment case of opting for VAT-able treatment, the Trust (REIT) regime has been introduced, real estate rental is VAT-able according to under which CIT and local business tax the general rules, while the sale of real exemption is available for entities fulfilling estate (older than 2 years) can be VAT- the relevant conditions. able under the rules of the established domestic reverse charge mechanism. CORPORATE INCOME TAX Rental income The share purchase is VAT exempt; Effective since summer 2010, rental however, under certain circumstances, income is subject to 10% corporate

42 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. income tax up to a tax base of HUF 500 amount transferred as a loan and shown million, and at 19% above this threshold. in the balance sheet as a money claim among long-term financial investments, With respect to tax deductible items, only receivables or securities. Since 2013 costs and expenditures which are not it has also been clarified that accounts related to the core business activity of a payable and receivable related to goods company are not deductible in Hungary and services (even if subject to transfer for corporate income tax purposes. With pricing correction) should not be included respect to “normal” business costs, in the thin capitalization calculation. there is no specific limitation. Availability of robust and complete documentation is Minimum income important to support the tax deductibility (or minimum tax base) of business costs. Resident taxpayers and foreign entrepreneurs (PEs) can be subject Certain consulting and financing to corporate income tax even if their expenses (e.g. interest) which relate taxable base for corporate income tax directly to units of property prior to purposes is negative. The minimum tax capitalizing the asset should be taken base is 2% of total revenues modified by into account and capitalized as part of certain items, e.g. relating to preferential the investment value. Amounts spent on transactions; but these cannot be future reconstruction/enlargement costs decreased by the cost of goods sold or may also be capitalized as part of the real services intermediated from 1 January estate. 2015. If the higher of the tax base or the accounting pre-tax profit does not Tax depreciation reach the minimum tax base, then the In the case of buildings, generally 2% minimum tax base should be considered per annum depreciation is acceptable as the tax base. according to the corporate income tax regulations. In the case of real However, taxpayers may choose not to estate subject to rental, the accepted pay the tax on the minimum tax base depreciation rate is 5% per annum. even if they were obliged to be based on The value of land cannot be depreciated. the above calculation, but they can elect to file a specific declaration to the tax Thin capitalization authorities stating that their tax base did Interest payments are tax deductible in not reach the required minimum income Hungary. However, thin capitalization level. The tax authorities specifically rules should be taken into account. The focus on those companies which file Hungarian thin capitalization regulations such a declaration when they decide provide for a debt-to-equity ratio of 3:1. whom to audit. Loans from financial institutions, even if related, are excluded from the calculation. The minimum tax base rule does not Effective from 2012, interest-free related apply in the year of foundation, nor in party loans should also be calculated as cases where certain natural disasters part of the average daily loan amount. have caused a loss. However, since 2012, it has been possible to reduce the amount of liabilities by the

Hungary | 43 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Loss carry forwards As of 1 January 2014, in the case of a As from 1 January 2015, a general 5-year merger, the successor will be entitled time limitation has been introduced in the to utilize the losses arising at the case of tax losses arising in 2015 or later. predecessor in the tax year of the merger Tax losses arising up until 2014 may be first in its tax year including the day of the utilized (by applying the rules in force on merger. This rule can already be applied 31 December 2014) until the end of the with regard to 2013. tax year but no later than in 2025. Furthermore, losses carried forward From 2010, no permission needs to be cannot be utilized if majority interest is obtained from the tax authority in order acquired in a company where the parties to carry forward losses.1 Since 1 January were not affiliated in the 2 tax years prior 2010 (and in some cases for 2009), to the acquisition. This prohibition should financial institutions have also been able not be applied if a portion of the shares to carry forward losses. of the acquirer or acquired company was introduced to a recognized stock As of 2012, losses carried forward from exchange prior to the acquisition, or if the previous periods may only offset half the business activity of the acquired company positive tax base (calculated without the will be continued after the acquisition utilized loss). Accordingly, the effective over the next 2 tax years commencing utilization of losses is expected to cover from the date of acquisition (except if double the timeframe previously seen as the company is liquidated without legal necessary. succession), and if the acquiring company will realize income from this activity and Effective from 1 January 2012, in the where the activity will not be significantly case of a transformation, available changed. losses may be utilized if, as a result of the transformation, no new majority As of 1 January 2015, there is a further shareholder is introduced in relation to restriction that only those losses acquired the company and where income would may be utilized by the successor which be realized at least from one of the are attributable to the original activity. activities (not including holding activities) A proportional adjustment should be performed by the predecessor over the made if new activities are pursued. following 2 tax years commencing from This provision may be ignored if the the date of transformation. From 2013, predecessor’s sole business was asset if the successor is terminated without management. legal succession or if the predecessor’s activities include significant holding WITHHOLDING TAX activities, this requirement for realizing Withholding tax (WHT) rules were revenue is not applicable. discontinued on 1 January 2011.2

1 Before that, if the taxpayer had a negative profit before establishment of its tax position and had tax losses for2 consecutive years (after the initial start-up period), or the total revenue of the company in the tax year did not exceed 50% of the total costs and expenses, then the carrying forward of losses was subject to the granting of permission from the tax authority 2 Between 1 January 2010 and 31 December 2010, withholding tax at a rate of 30% was payable on royalties, interest and certain service fee payments granted to foreign entities. Exemption from WHT was only possible for foreign companies that were tax residents in countries having a double taxation treaty with Hungary. Having only their seat in such countries was not sufficient for exemption.

44 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. VALUE ADDED TAX The domestic reverse charge system Since 2008, the VAT treatment on the is applicable in cases of construction sale of buildings has depended on the and other real estate related services, wish of the taxpayer. The sale is subject thereby reducing VAT financing costs. to VAT if the transaction occurs: Since 1 May 2008, services that are provided in relation to real estate and 1) before the first occupation; or which are eligible for official permits also fall under this rule. From 1 January 2015, 2) after the first occupation, but if less the domestic reverse charge scheme is than 2 years has elapsed between the broadened to staff leasing and employee date of the occupancy permit and the leasing. date of sale. In the case of sales after 2 years of the issuance of the occupancy As of 1 January 2016, the regulations in permit, the VAT treatment is optional connection with periodic settlements for the taxpayer. After choosing either (“continuous performance”) will change. VAT-charging or VAT exempt status, The date of the performance of business the taxpayer has to retain that choice transactions subject to the rules of for 5 years. periodic settlement will be the closing day of the settlement period as opposed If choosing VAT charging status, the to the currently applicable due date of taxpayer has to notify the tax authority by payment. the end of the preceding tax year. Since 1 January 2010, the taxpayer has been The new regulation will be applicable for able to choose to apply VAT charging settlement periods commencing after 31 status only for the sale of non-residential December 2015 as long as the due date real estate. of payments also falls after 31 December 2015. This will mean an additional Rental activity is exempt from Hungarian administrative burden for the taxpayers, VAT, but there is a taxpayer option to as they will need to pay attention to charge the standard 27% VAT on rental their periodic settlements after that fees. Since 2008, the VAT status of date. In contrast to the general rule, residential and non-residential real estate two additional special regulations were rental can be treated separately. introduced as of 30 June 2015 regarding auditing, bookkeeping and tax advisory The VAT exempt method allows entities services, while in cases of other services not to charge VAT on property rental – it is applied as of 1 January 2016: however, in that case, input VAT cannot be deducted or reclaimed. Companies • if the date of issuing an invoice and the have to submit a request to the Tax due date of payment occur before the Authority by a statutory deadline if they last day of the period, then the date wish to apply standard rated VAT. If such of issuing the invoice is the date of a choice is made, the VAT treatment of supply; the rental activity cannot be changed for 5 years.

Hungary | 45 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. • if the due date of payment occurs for local business tax base calculation after the last day of the period, then purposes for entities with annual net the date of supply is the due date of sales revenue of over HUF 500 million. payment, but not later than the 30th Net sales revenue ranges have been day following the last day of the period. determined where certain proportions of the cost of goods sold and mediated In addition, as the term “periodic services are allowed to be deducted, settlement” will also be re-defined, limited to decreasing percentages of the it might also be important to review revenue (the following thresholds have whether the business transactions been introduced in the revenue ranges: treated previously in compliance with the up to HUF 500 million: 100%; HUF 500 rules of “settlement for a fixed period” or million to HUF 20 billion: 85%, HUF 20 “installment payment” still fall under the billion to HUF 80 billion: 75%, over HUF rules of “periodic settlement” in light of 80 billion: 70% will be applicable). the new system of concepts. The cost of goods sold and mediated According to the changes which came services relating to export sales revenue into effect on 1 October 2014, all will continue to be 100% deductible. taxpayers with Hungarian VAT numbers are obliged to report to the Hungarian Tax A consolidated local business tax base Authority details about which invoicing establishing method has been introduced software they use, by submitting a for taxpayers qualified as related parties special form. for corporate income tax purposes. When determining the local business tax base, LOCAL BUSINESS TAX the figures for the related parties need If real estate is recognized as stock in to be taken into account proportionally, the books of a company at the time of an based on the period of the existence of asset deal, local business tax should be the related party status. paid; the maximum tax rate is 2%. Rental income is also subject to local business Please note that local business tax tax. In order to calculate the amount of amounts are deductible from the the local business tax base, the cost of corporate tax base only once as of goods sold, the amount of mediated 1 January 2010. As part of pre-tax profit, services, the value of services provided it is accounted as a cost under Hungarian by subcontractors, material costs and GAAP.3 direct R&D costs can be deducted from the net sales revenue. CAPITAL GAINS ON SHARE DEALS If the shares of a Hungarian entity are Effective from 1 January 2013, the sold by a non-Hungarian entity, the gain deductible value of the cost of goods sold is not taxable in Hungary. However, such and mediated services will be limited capital gains are taxable in Hungary from

3 Until 2009, this could be deducted from the corporate tax base as well, if a company did not have unpaid tax liabilities at the end of the tax year. This additional deduction was capped by the amount of the positive pre-tax profit under Hungarian GAAP.

46 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1 January 2010 if shares of a real estate company could give rise to considerable company are transferred. A company administrative work. A further complicating will be considered to be a “real estate factor is that the real estate of affiliated company” if the following requirements undertakings has to be considered too. are met: ASSET DEALS 1) more than 75% of its total assets on If real estate is sold as an asset, the gain a consolidated and/or stand-alone is subject to corporate income tax as part basis are real estate units located in of the normal tax base at a rate of 10% up Hungary; and to a tax base of HUF 500 million, and at 19% above this threshold. 2) at least one of its shareholders is resident in a state with which Hungary PROPERTY TAX has not concluded a double taxation Hungarian companies may be subject to treaty, or in a state where the double local land tax or local building tax. taxation treaty allows such gains to be taxed in Hungary. The maximum rate of local building tax may be 3.6% of the fair market value As of 1 January 2014, to determine of the building owned or HUF 1,100 whether a company qualifies as a real per square meter (approx. EUR 3.5 per estate holding company, the book square meter). The maximum rate of value of the real estate units should be local land tax may be 3% of the market considered instead of their market value value of the plot or HUF 200 per square effective on the balance sheet data. meter of land (i.e. approx. EUR 0.7 per square meter). The applied method of According to the Act on CIT, tax liability tax base calculation depends on the local for shareholders of a real estate company municipality.5 will arise when the shareholder sells, provides free of charge or as an in- The tax liability arising is paid in two kind contribution the shares of such installments (whose deadlines are 15 a company to another party. The tax March and 15 September). This tax may base will be the difference between be levied by the local municipalities at the income from the sale of the shares their own discretion. and the acquisition costs including expenses related to the shares during the REAL ESTATE TRANSFER TAX shareholding period. Until 2010, by purchasing the shares of a Hungarian entity, no VAT or real estate The tax rate will be 19% (in accordance transfer tax (RETT) liability would arise with the law, the reduced rate may in connection with the transaction. Only not be applied).4 Deciding whether or minor procedural costs would be payable not a taxpayer qualifies as a real estate

4 According to the interpretation of the legislators, the reduced rate is also applicable to the owner of the real estate company, although the legislation has not yet been amended accordingly. 5 Please note that the above maximum rates may be modified by changes in the consumer price index. For 2015 the maximum rate of building tax is HUF 1,852,1 per m2 and the maximum rate of land tax is HUF 336,7 per m2.

Hungary | 47 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. to the Hungarian court of registration to the basis of the stamp duty liability should register new shareholders. be the market value exclusive of VAT.

However, since 1 January 2010, transfer The standard rate of stamp duty is 4%, for tax liability has been payable in cases of the acquisition of real estate property or the acquisition of shares of companies shares of a real estate owning company that own real estate. The liability arises 4% up to HUF 1 billion of the value of the at the time when the direct or indirect real estate, and 2% for the value above ownership (through the owner’s related that, but with the maximum stamp duty parties) of such company reaches 75%. liability of HUF 200 million per unit of real Different conditions applied from July estate. 2011 until 31 December 2013. Furthermore, the transfer of real estate However, from January 2014, the and the transfer of shares in a real estate definition of real estate holding company holding company between related parties was amended similarly to the Act on CIT. is exempted from transfer duty under According to this, a company qualifies as certain conditions. a real estate holding company, In special cases, lower stamp duty may • if the book value of the real estate be applicable: presented in the balance sheet reaches 75% of the total assets, or • The stamp duty rate is 2% if the purpose of the acquisition of the • if the entity owns 75% shares (directly property is resale/finance leasing and or indirectly) in another company which in the year prior to the purchase, more has a real estate to total assets ratio of than 50% of the buyer’s sales revenue 75%. arose from the resale of property/ finance leasing, or if the buyer is From January 2015, beside cash and licensed by the Hungarian Financial financial claims, accrued assets and Supervisory Authority to perform loans should not be considered when financial leasing. Moreover, the buyer calculating the amount of total assets must declare that the property will be either. In addition, an important change either sold within 2 years, or leased, is that the acquisition of shares in real with the condition that the lessee estate holding companies is subject to would eventually buy the property. transfer tax payment liability irrespective of the company’s main activity indicated • Until 2013, the stamp duty rate in the in the company register. case of residential properties was only 2% up to a maximum of HUF 4 million, In the case of acquisitions of real estate in but from January 2013, the favorable Hungary, the buyer is liable to pay stamp rate was abolished and the standard duty on the property, based on the market rate is now applicable. price of the property. It is important to note that based on a recent court case,

48 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. • With regard to plots of land, if the buyer • The SPV can have its seat outside of of the plot makes a declaration that he Hungary; will build residential property on the purchased plot within 4 years, stamp • The current SPV entities may be duty exemption may be obtained (as converted into a REIT in a tax neutral long as the 4-year deadline is met). way (including transfer tax exemption);

REAL ESTATE INVESTMENT TRUST • The REIT entity is able to hold shares in A new Real Estate Investment Trust a project company. (REIT) regime was introduced in 2011. Public limited companies with a minimum Limitations and obligations regarding the starting capital of HUF 5 billion, registered operation of a REIT: (at the request of the company) with the Tax Authority are eligible for REIT status • REIT entities have an obligation to if the conditions set out by the legislation dividend out 90%, or for SPVs 100% are met. of their profits each year. There are mitigating rules in case free cash would The activities of a REIT entity or its 100% not match the dividend obligation subsidiary project companies (SPV) amount; are limited to the following, within and outside the territory of Hungary: • A starting capital of HUF 5 billion is required; • sale of one’s own real estate; • At least 25% of the shares must be • rental and operation of one’s own real traded in controlled financial markets estate; (i.e. certain defined stock exchanges), and would have to be split among at • property management; or least 20 minority shareholders (below 5% each); • asset management. • Share acquisition by banks and The main advantages of a Hungarian REIT insurance companies would be limited are the following: to 10% in a REIT;

• A corporate income tax exemption is • The trading and the bank/insurance available for the REIT and at SPV level company thresholds could be met in an (including gains on asset deals); easier way from 2016;

• Exemption from local business tax at • The entity should follow strict REIT and SPV levels (including gains on registration obligations administered by asset deals) is introduced; the Tax Authority;

• The transfer tax rate is 2% (although with no upper cap);

Hungary | 49 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. • The total debt to properties ratio would For more information on real be a maximum of 65% for REITs, and estate services in Hungary, 70% for SPVs; please contact: • None of the real estate’s or REIT Gabor Beer ownerships’ value can exceed 20% of Partner the balance sheet total; KPMG in Hungary • A compulsory quarterly market Vaci ut 31 valuation of the property portfolio is Budapest, 1134 required. Hungary T: +36 1 887 7329 Further notes E: [email protected] Since 9 July 2009, loan debt assumptions kpmg.com/hu have been considered as exempt from gift duty if the assumption is carried out between two legal entities. Before that time they were subject to gift duty of 40%.

According to oanda.com, the exchange rate as at 20 September 2016 was EUR 1/ HUF 308.725.

50 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Hungary | 51 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Latvia

CORPORATE INCOME TAX AND Tax depreciation CAPITAL GAINS TAX Fixed asset depreciation for financial The corporate income tax (CIT) rate in Latvia purposes is disallowed for CIT purposes, is 15% charged on taxable income, which and depreciation for tax is calculated is calculated as financial profit before tax instead in accordance with the increased by disallowable expenses and requirements set out in the CIT Law. decreased by additional deductions. Buildings are depreciated at a rate of 10% There is no separate capital gains tax in per year applying the reducing balance Latvia. All capital gains including gains on method for each building separately. disposal of real estate (sales price less tax Revaluation of property is not taken value) are taxed as taxable income at the into account in the calculation of tax general CIT rate of 15%. depreciation.

Profit from the rental of real estate Land is not depreciated for tax purposes. for a Latvian taxpayer is subject to the standard CIT rate of 15%.

52 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. If a company has chosen to apply the fair INVESTMENT INCENTIVES value model instead of cost model for its The main incentives are: property, depreciation for tax purposes can no longer be calculated, and instead the • Corporate income tax relief for long- property has to be revalued on a regular term investments which exceed EUR basis. Profit or loss from revaluation 10 million. Tax relief of 25% of invested is a non-taxable or non-deductible, amount for investments of up to EUR respectively, for CIT purposes. 50 million, and 15% on amounts from EUR 50 to EUR 100 million; Tax losses Tax losses can be carried forward for an • Corporate income tax and property unlimited period of time. tax relief for companies registered in a special economic zone or free port; Thin capitalization Interest payments may be deducted from • Tax relief for enterprises engaged in a company’s taxable income; however, agricultural activity. the deductible amount is restricted. There are no deduction restrictions if WITHHOLDING TAXES the interest is paid to a Latvian, or an EU Real estate registered credit institution, or on funds Withholding tax (WHT) of 2% from borrowed from a credit institution in a proceeds is applied if a Latvian resident country with which Latvia has concluded company purchases real estate in Latvia a double taxation treaty. According to the or shares in a real estate company from thin capitalization rules, two calculations a non-resident. A real estate company is for determining the deductible amount of a company whose real estate holdings interest must be made: comprise more than 50% of its assets in Latvia. The proportion is calculated • interest on interest bearing loans based on book value as at the beginning subject to thin capitalization in excess of the financial year during which the of a 4:1 debt to equity ratio, or transaction takes place.

• any interest in excess of the financial Following payment of the WHT, the year average weighted interest rate non-resident may submit to the Latvian applied by commercial banks published tax authority a tax return disclosing by the Bank of Latvia multiplied by a acquisition cost and profit and reduce the coefficient of 1.57. tax charge to 15% from any capital gain (if lower than 2% WHT on proceeds). The If the interest payment for the tax year overpayment would be repaid to the non- exceeds any of the amounts, the excess resident by the Latvian tax authority. is not deductible for taxation purposes. The higher disallowance is applied. Dividends There is no WHT on dividend payments Non-deducted interest payments cannot made by a Latvian resident to a non- be carried forward for deduction in future resident unless established in a taxation years. jurisdiction with low or no taxes.

Latvia | 53 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Regardless of the level of ownership, entities which own or have legal control dividends received are tax exempt over real estate. except for dividends paid by a Latvian company which utilizes some form of Municipalities have the right to set the corporate income tax relief, or if the payer rate of property tax between 0.2% and of dividend is from a low tax or zero tax 3% of a property’s cadastral value. A tax country or territory. rate of more than 1.5% of the property’s cadastral value may be set only in Other cases where the property is not being Latvia imposes withholding taxes on the managed properly. If a municipality has following payments, besides proceeds not published binding regulations on from sale of real estate as described property tax rates, the following tax rates earlier, made to non-resident entities: are applicable:

• management and consulting services: • for property and land used for business 10%; activities, and also for engineering or technical buildings: 1.5% of the • payments for the use of fixed or cadastral value of the property; movable property in Latvia: 5%. • for agricultural land not currently used Following payment of the WHT, the non- for agricultural purposes: 3% of the resident may submit to the Latvian tax cadastral value; authority a tax return disclosing relevant costs and the profit and reduce the tax • for houses, apartments for inhabitants charge to 15% from the profit (if lower and additional premises (garages, than WHT). storage rooms, etc.) not used for business purposes, the rates are as Withholding tax rates may be reduced in follows: line with Latvia’s bilateral double taxation treaties. - 0.2% of the cadastral value if it does not exceed EUR 56,915; WHT of 15% must be withheld at source on any payments made to a non-resident - 0.4% of the amount of the cadastral company established in a jurisdiction with value from EUR 56,915 to EUR low or no taxes. The tax authorities may 106,715; waive this payment requirement if certain conditions are met. A 30% WHT rate is - 0.6% of the amount of the cadastral applicable to interim dividends that the value which exceeds EUR 106,715. Latvian resident pays to a non-resident company established in a jurisdiction with The minimum tax payment from each low or no taxes. taxpayer for residential property to a particular municipality is EUR 7. REAL ESTATE TAX Tax on immovable property (land and • for houses and apartments that belong buildings) is paid by individuals and legal to legal entities and which are not leased out to an individual: 1.5%;

54 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. • for engineering constructions that is 2% of the real estate’s value up to a are taxable but are not registered in maximum of EUR 42,686 per title. In case the information system of the State of sale of residential properties, no cap is Cadastre of Immovable Property: 1.5%; applied. If an agreement is concluded with an individual’s children, spouse, parents, • for completed buildings which are siblings, stepbrothers, stepsisters, in use but have not been formally grandchildren, great grandchildren or commissioned: 3%. grandparents, the duty is 0.5% of the real estate’s value with no cap. Families with three or more children are eligible for a 50% property tax reduction Real estate transfer tax on real estate for a property where they have registered transferred as an investment in kind into their place of living, but the reduction the equity of a company is chargeable amount must not exceed EUR 427. at a rate of 1% from the amount of investment with no cap. When a gift In special economic zones the municipality agreement is concluded, the duty is 3% can apply tax relief of up to 80%. of the real estate’s value. If the agreement is concluded with an individual’s children, TAX ON CIVIL LAW TRANSACTIONS spouse, parents, siblings, stepbrothers, (TRANSFER TAX) stepsisters, grandchildren, great There is a state duty on real estate grandchildren or grandparents, the duty is transactions. 0.5% of the value of the real estate, and a cap is not applied. When sale or exchange agreements are concluded for commercial property If a company purchases an apartment consisting of only non-residential that is designated as living space, the properties (with or without land), the duty duty is 6%, with no cap.

Latvia | 55 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Real estate transfer tax is payable by the The lease of residential property for buyer of the property. housing purposes is VAT exempt.

Real estate transfer tax is calculated per The place of provision of services which title not per transaction. are related to real estate is the place where the real estate is located. The value of the property for real estate transfer tax purposes is determined as VAT refund under domestic law sales price or cadastral value, whichever Input VAT is refunded each month, is higher. based on a submitted VAT return. Input tax is refunded within 30 days after the VALUE ADDED TAX deadline of submission of the VAT return. General provisions regarding real estate According to the VAT law, the sale of unused real estate and the sale of building land are taxable at the standard VAT rate of 21%. The term “real estate” includes parts of real estate (flats, workshops, etc.), land, buildings, constructions, and immovable parts of real estate (bridges, roads, etc.) on the land.

Used real estate and land which is not building land are VAT exempt.

If it is planned that the real estate will For more information on real be used only for taxable activities, then estate services in Latvia, input tax is fully deductible. If the real please contact: estate will be used for both taxable and non-taxable activities, then input tax is Steve Austwick deducted proportionally. In both cases the Partner, Head of Tax Services new real estate must be registered with the tax authority. An input tax correction KPMG in Latvia has to be completed every year if the Vesetas iela 7 proportion between taxable and non- Riga, LV1013 taxable use of the real estate changes. Latvia The proportion must be calculated for a T: +371 6703 8000 10-year period. F: +371 6703 8002 E: [email protected] There is an option to apply VAT to the kpmg.com/lv sale of used real estate if the details are registered with the tax authority.

56 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Latvia | 57 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Lithuania

GENERAL CORPORATE INCOME TAX Real estate located in Lithuania is Taxable profit is subject to a standard flat generally subject to taxation. Real estate rate of 15%. Taxable profits are arrived at tax is applicable for commercial property. by deducting exempt income as well as As of 2012, residential premises held by allowable and partly allowable expenses individuals are also subject to real estate from taxable income. tax (certain exemptions apply). Land is subject to a separate land tax. For VAT Tax-exempt income purposes, only new buildings and land for Exempt income includes received construction is taxed at the standard VAT penalties and fines, revaluation of fixed rate of 21%. assets and liabilities (except for derivative financial instruments), insurance There is no specific transfer tax applicable compensation, etc. to real estate transactions in Lithuania. However, certain notarization and real Dividends received from European estate registration fees apply. Economic Area (EEA) companies (subject to corporate income tax – CIT – or

58 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. equivalent tax) are tax exempt. Dividends Capital gains derived by non-residents received from other foreign companies from the sale of shares in Lithuanian (subject to CIT or equivalent tax) are tax companies are not taxable in Lithuania. exempt if they qualify for participation exemption (not less than 10% of the Non-residents are taxed on capital voting shares are held continuously for gains arising from the disposal of real at least 12 months), except for dividends estate located in Lithuania. For resident received from tax havens. companies, capital gains are included in the taxable income for CIT purposes. Allowable and partly allowable deductions Tax depreciation Deductions allowed are all expenses Depreciation of fixed assets is usually actually incurred in the ordinary course calculated from acquisition cost on a of business that are necessary for the straight-line basis, or using a double earning of income or in order to receive declining balance method over periods as economic benefit. outlined in the Lithuanian Law on CIT. The tax depreciation period for new buildings Partly allowable expenses include: (except residential buildings) used in depreciation and amortization of fixed a company’s economic activity for tax assets, business trips, advertising purposes may not be less than 8 years. and entertainment, ordinary loss of inventories, taxes, bad debts, payments Tax losses for the benefit of employees, granted Ordinary tax losses can be carried support, membership fees, etc. forward indefinitely if a taxpayer continues to perform business activities The main types of non-deductible from which such losses occurred. expenses are: penalties and default Ordinary tax losses carried forward interest, compensation for damages, can only be set off against up to 70% payments to tax haven entities (if not of the calculated taxable profits of the verified this relates to the ordinary taxable period. Capital losses from activities of tax haven entities), other the disposal of securities or financial payments not related to the ordinary derivatives can be carried forward for business of a taxpayer, etc. 5 years and exclusively to set off gains from the disposal of securities or financial CAPITAL GAINS derivatives (applicable for non-financial Capital gains are non-taxable if they are institutions). derived from the transfer of shares of an entity that is registered in Lithuania or Grouping another EEA country, or in a country with Tax losses of a company incurred for the which Lithuania has a double tax treaty taxable period may be set off against the and is subject to CIT or equivalent tax respective profits of another company (participation requirement: more than 25% forming a group provided the following of shares held continuously for at least 2 criteria are met: the parent company directly years). If the transfer of shares takes place in or indirectly owns at least two-thirds of the the course of a corporate reorganization, the shares in subsidiaries; and the transfer of minimum holding period is 3 years. losses is performed between companies

Lithuania | 59 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. that have continuously been members It is possible to pay interim dividends in of the group for at least 2 years, or if the Lithuania. participants of the transfer have been a part of the group since their incorporation and Interest and royalties will be part of the group for at least 2 years. Interest is subject to a 10% WHT rate. However, interest paid to an EEA Grouping with foreign losses is possible company, or to a company registered in a where the foreign entity transferring country with which Lithuania has a double losses is a tax resident in the EU and taxation treaty, is tax exempt. where there is no possibility to carry forward respective losses in that foreign Royalties are generally subject to a 10% country; additionally, such losses have to WHT rate. Royalties paid to associated be calculated according to the rules of the EU or Swiss companies are exempt Lithuanian Law on CIT. from WHT. Two companies are deemed to be associated companies if one of Thin capitalization them directly holds at least 25% of the A certain part of interest paid to a capital of the other, or a third EU or Swiss controlling lender may not be deductible company holds directly at least 25% of for CIT purposes. Under the thin the capital of these two companies. capitalization rules, the non-deductible part of interest expenses is calculated A minimum holding period of 2 years is based on a debt/equity ratio of 4:1. required.

WITHHOLDING TAX Real estate Dividends Non-resident companies are subject to a In general, dividends are subject to a 15% 15% WHT rate on income from the sale, withholding tax (WHT) rate. However, transfer or rental of real estate situated dividends paid to a company holding not in Lithuania. Non-resident companies less than 10% of the shares granting the may also apply to the tax authorities to same percentage of votes for at least recalculate the tax withheld in order to be 12 months are tax exempt, except for taxed on the net capital gains instead of dividends paid to tax haven countries. the whole proceeds of the transfer of the real estate. As of March 2016, general anti-avoidance provisions were implemented in the WHT may be reduced under the Lithuanian legislation for inbound and applicable tax treaties. outbound dividends based on amendments to the EU Parent-Subsidiary Directive REAL ESTATE TAX (amending directives 2014/86/EU and Real estate located in Lithuania is subject 2015/121). Tax exemptions for dividends to real estate tax. Land is subject to may not apply where the main purpose specific land tax. (or one of the main purposes of the arrangement) is obtaining a tax advantage, The annual tax rate for legal entities which is contrary to the subject and purpose ranges from 0.3% to 3% of the taxable of the EU Parent-Subsidiary Directive and, value of real estate. Municipalities are therefore, such an arrangement is artificial. entitled to establish a precise rate by

60 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1 June of each year to govern families raising three or more children and transactions in the following year. The families raising disabled children. taxable value is the average market value of the real estate established by Land tax applying the mass valuation method or Land tax is paid by the owners of private the recoverable value (costs) method land. The land tax rates range from 0.01% depending on the purpose of the real to 4% of the taxable value. The rates are estate. Owners of real estate may established by local municipalities by 1 request an individual valuation. June to cover the following year (or they are set by 1 December in specific years). Commercial property owned by individuals (for purposes other than those Land tax does not apply to roads subject to the below taxation) is taxed in of common usage, land owned by the same way as real estate owned by embassies, land in protected areas and legal entities. also other specific areas of land. Land tax is paid annually for the whole calendar The annual tax return for commercial year according to the taxable value of the property has to be filed with the tax land owned on 30 June of the current authorities and real estate tax must be year. The taxable value is established paid by 15 February of the following based on the mass valuation method, year. In addition, advance real estate tax which is intended to reflect the market (applicable only for legal entities) for the price of the land. first 9 months of the current tax period also has to be declared by 15 February of Legal entities and individuals leasing the current calendar year. Advance real state or municipality owned land must estate amounts have to be paid by 15 pay land lease tax, which is not less than March, 15 June and 15 September if the 0.1% and not higher than 4% of the land annual amount of tax payable exceeds value. A precise tariff and payment dates EUR 500. Individuals paying 0.5% real for land lease tax are established by the estate tax (see below) must file their local municipality in each individual case. annual tax return and pay the tax owed by The land value on which the land lease tax 15 December of the current year. is estimated according to special rules is stated in the land lease agreement. Lithuanian and foreign individuals owning real estate in Lithuania have to pay 0.5% VALUE ADDED TAX real estate tax on the total taxable value General provisions – real estate exceeding EUR 220,000 (an individual In general, the Lithuanian Law on VAT non-taxable value of EUR 220,000 should provides that the sale of buildings, be applied for each family member who land and other real estate is VAT non- owns immovable property as well as for taxable, except for new buildings and spouses who own property under joint building land, which are both subject ownership rights). Qualifying property to the standard 21% VAT rate. A new includes residential premises, gardens, building or structure, or a finished garages, homesteads, science facilities, building or structure (within the first places of worship. The non-taxable real 24 months following its completion or estate value is increased by 30% for following its material improvement) are

Lithuania | 61 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. considered as unfinished buildings or include construction, projecting, relevant structures. “Building land” means a research, engineering, architectural plot of land assigned for construction works, valuation, supervision and works regardless of whether or not maintenance of real estate, and other any development of the plot has been real estate-related services. Since 1 July undertaken. Besides this, the land 2015, construction works are subject to transferred together with new buildings the local VAT reverse charge mechanism, (e.g. land beneath a new block of under which VAT for construction works flats which is allocated to each flat) or is calculated and paid to the state budget structures or their parts are subject to the by the customer, i. e. not the contractor standard 21% VAT rate. (the construction company).

If real estate is sold without VAT, but VAT refund under domestic law the taxpayer has deducted input VAT, Application for VAT refunds may be filed they shall be obliged to adjust the VAT with the Lithuanian tax authorities as deduction (for real estate a 10-year term soon as VAT has been reported (subject is applicable). to certain conditions).

Rent of real estate is VAT non-taxable The VAT is typically refunded within unless the real estate is categorized among 30 days after submission of the certain exceptions. Exceptions are made for application. In the case of a tax review hotels, motels, camping sites, and similar or investigation, VAT shall be refunded accommodation services as well as short- within 20 days as of completion of the tax term rentals within residential areas. The review/investigation. renting of garages, parking lots and similar real estate properties, as well as equipment Foreign VAT refund treated as real estate, are subject to a Claims by EU businesses for cross-border standard VAT rate of 21%. refunding of VAT in the EU must be filed with their local tax authorities (i.e. in the A taxpayer can choose to sell or rent real country where the company is established) estate to another VAT payer applying the and not where VAT has been paid. VAT standard VAT rate of 21%. Such choices claims have to be filed electronically. have to be declared to the tax authorities and must remain unchanged for at least Non-EU businesses may refund input 24 months from commencement. VAT incurred in Lithuania under the 13th VAT Directive if Lithuania has a Services related to a real estate unit reciprocity agreement with their country which is, or will be located, in Lithuania of establishment subject to particular are considered to be provided in conditions. Lithuania. Therefore, such services have to be subject to the standard Lithuanian EC services list VAT rate of 21%. In such cases, foreign A monthly EU sales listing should be taxable persons rendering services submitted to the tax authorities by the related to real estate in Lithuania have 25th day of the following month (in line an obligation to register for VAT in with VAT return submission deadlines) Lithuania. Services related to real estate in the case of supplies to other EU

62 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. member countries, which are subject to may be reduced by up to 75% by the a VAT reverse charge procedure by the amount provided in order to support purchaser. film production. If the amount of funds exceeds 75% of that entity’s corporate INVESTMENT INCENTIVES income tax payable, then the exceeding Investment incentive for certain amount may be carried forward to reduce groups of fixed assets (applicable profits in two subsequent tax periods. 2009-2018) Companies may reduce their taxable Free economic zones profits up to 50% by the amount of A company with investments of EUR expenses incurred for investment in 1 million or more and operating in a free certain fixed assets, machinery and economic zone (FEZ) is exempt from equipment, computer hardware and Lithuanian corporate income tax for 6 software, communication equipment taxable years and is subject to a 50% and acquired rights. As of 2014, the reduced corporate income tax rate in 10 incentive also applies to acquired trucks, subsequent years. Such relief is applicable trailers and semi-trailers. Part of the for FEZ companies if at least 75% of the acquisition costs of fixed assets which income in the tax year is derived from has not been utilized during the taxable production, manufacturing, processing or year may be carried forward, but for not warehousing activities performed within more than 4 years. The tax authorities an FEZ, or from wholesale trade in goods should be notified that such a company is stored within an FEZ, as well as services performing an investment project. related to the above-mentioned activities. IT services (e.g. programming, computer Incentive for research and consultancy, data processing, services of development web servers etc.), aircraft and spacecraft Expenses incurred via scientific research maintenance services are also included in and experimental development purposes the list. Real estate tax is not applicable in an may be deducted three times in the tax FEZ territory. period when they are incurred, provided that the research and development works are related to usual business activities. For more information on real estate services in Lithuania, Reduced rate for small companies please contact: Small companies are subject to a reduced 5% CIT rate if their average number of Birute Petrauskaite employees does not exceed 10 and their Head of Tax and Legal taxable income during the taxable year is less than EUR 300,000. KPMG in Lithuania Konstitucijos pr. 29, Vilnius Double tax incentive for movie making LT-08105, Lithuania supporters (applicable 2014-2018) T: +370 655 21357 An entity may deduct (from its taxable E: [email protected] profits) an amount up to 75% of the funds they provide for production of a film or kpmg.com/lt its parts in Lithuania. Furthermore, an entity’s payable corporate income tax Lithuania | 63 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Macedonia

GENERAL The supply of any other real estate by The preferential value added tax (VAT) Macedonian VAT registered taxpayers rate of 5% for the supply of residential is VAT taxable at the general VAT rate of buildings and apartments will apply until 18%. 31 December 2018. After that date, such supplies should be taxable at the general CORPORATE INCOME TAX AND VAT rate of 18%. CAPITAL GAINS Corporate income tax (CIT) of 10% is The above only refers to the first supply of due on the profit or loss for the year residential buildings or apartments made after adjustments for tax purposes with within five years from their completion. regards to unrecognized expenses or Subsequent supplies, as well as first non-taxable income. supplies following the five year period from completion, are deemed VAT Under the current CIT legislation, exempt without the right to input VAT capital gains do not have a specific tax credit. treatment, i.e. capital gains or losses are included in the taxpayers’ profit or loss,

64 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. and, as such, form part of the tax base for on the part of a loan which exceeds the year. three times the amount of the equity attributable to the qualifying shareholder. Tax depreciation There is no specific tax treatment for The thin capitalization rules do not the depreciation/amortization of assets. apply to loan facilities granted by direct Annual depreciation/amortization shareholders, these being banks or other expenses are recognized for tax purposes financial institutions, nor to loan facilities in accordance with the applicable granted by direct shareholders to newly accounting standards. established entities during the first three years of their establishment. Tax loss Accounting losses reduced for the WITHHOLDING TAX amount of the non-deductible expenses Withholding tax (WHT) at 10% is to be can be carried forward and offset against withheld by the payer when certain types future tax bases in the following three of income are paid by a Macedonian years. entity to foreign legal entities, provided that the income is not derived through a However, the right to utilize such losses permanent establishment of the foreign is subject to prior approval from the legal entity in Macedonia. Amongst other tax authorities (the request is due for types, the types of income subject to submission by the end of March of the WHT in Macedonia include dividends, following year, and is usually subject to a royalties and interest as well as rental tax inspection), this also being dependent income for immovable property located in on the taxpayer having covered the losses Macedonia. in question in accordance with the Law on Trading Companies. The WHT rate can be reduced or the income can be exempt from WHT in Thin capitalization Macedonia, as per the provisions of an Interest on loans granted by direct effective double taxation treaty (DTT) to non-resident shareholders who hold at which Macedonia is party. least 25% of a company’s share capital (“qualifying shareholder”), is considered The application of the DTT provisions is non-deductible for tax purposes should subject to approval from the Macedonian the loan amount exceed three times the tax authorities, following a separate amount of the equity attributable to that formal procedure. shareholder. PERSONAL INCOME TAX The same rule applies to loans granted Income realized by individuals from the by a third party and which are guaranteed lease of immovable property is subject by a qualifying shareholder or granted to personal income tax (PIT) at a rate in relation to a deposit provided by the of 10%. Allowances, ranging between qualifying shareholder to a third party. 25% and 30%, are granted in order to determine PIT. The amount which is not recognized for tax purposes is the sum of the interest

Macedonia | 65 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. PIT is also due from individuals who have residential apartment provided that the realized capital gains from the sale of real supply was subject to VAT. property. The capital gain is determined as the difference between the sale price VALUE ADDED TAX and the purchase price. The tax rate is Generally, the sale of immovable property 10%, levied on 100% of the capital gain. (land and buildings) is considered a VAT However, no tax will be due in certain taxable supply at the general rate of cases explicitly noted in the law, including 18%. However, an exception is provided cases where the taxpayer sells the with regards to supplies of residential property after 5 years from the day of buildings and apartments. acquisition or after 3 years from the day of acquisition, provided that the taxpayer, Immovable property qualifying as inter alia, resided in the property for at residential premises is generally exempt least one year. from Macedonian VAT with no right to input VAT credit for related purchases, REAL ESTATE TAX except for the first supply of residential Owners of immovable property situated premises made within five years of their in Macedonia are liable to property tax. completion. The first sale of residential The tax is levied on the market value premises is taxable at the preferential of the property on an annual basis, at a rate of 5% (the preferential rate is rate ranging between 0.1% and 0.2%, applicable until 31 December 2018, upon depending on the municipality where the which these supplies will be taxable at property is situated. The person liable the general rate of 18%). for the property tax is the owner (legal entity or an individual) of the immovable Apart from the above, provision of hotel property, or the user of the property if accommodation services is taxable at the a limited right to use the property was preferential rate of 5%. granted. Property tax on immovable property in state ownership is owed by Place of supply of services the person given the right to use that The general rule is that the place of property. supply of services is the place where the supplier of services has its headquarters REAL ESTATE TRANSFER TAX or a branch office, from where such Tax on the transfer of immovable property services are physically supplied. When ranges from 2% to 4% and is levied on there is no such place, the place where the market value of the property. The tax the supplier of services has a permanent rate is determined by the municipality place of residence is considered the place where the immovable property is located. of supply of the services. Transfer tax is due from the seller of the property, unless otherwise agreed A number of exceptions from the above between the parties. general rules are listed in the Macedonian VAT law. These exceptions include: Certain transfers of immovable properties are exempt from taxation, including • The place of supply of services “contribution in kind” of an immovable connected to real estate (e.g. renting property, as well as the first sale of a out real estate, agency services related

66 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. to real estate, valuation, construction, act or a right, or to bear an action or a supervision of construction works) factual situation; is the place where the real estate is situated. - legal, economic and technical advice and consulting, in particular • The place of supply is the place where activities of a notary public, the services are physically carried out solicitors, auditors, tax consultants, for the following types of services: accountants, specified engineers, as well as other similar activities; - artistic, sporting, educational, scientific and entertainment - services for electronic data services; processing and the provision of information, including know-how - transport and ancillary services; and expertise;

- valuation and work on movable - the provision of personnel; property. - the hiring of movable tangible • The place where transport services are property with the exception of all supplied shall be the place where the forms of transport; transport takes place, i.e. with regard to distances covered. - telecommunications services;

• The place of supply of agency services - the transfer and assignment of in relation to other services is the place copyrights, patents, licenses, of supply of the underlying service trademarks and other similar rights; in connection to which the agency services were supplied. - also the services of agents when they procure the services listed • The place of supply of certain services above for their client. is considered the place where the recipient of the services is established VAT refund to resident taxpayers or if it has a fixed base for which the Macedonian VAT registered persons are services were carried out. These entitled to recover input VAT in respect services include the following: of taxable supplies from another VAT registered person or in respect of imported - advertising services; goods (with certain exceptions) if such goods are used for the purposes of their - banking and financial services, business activities. The input VAT credit insurance and re-insurance services, claimed by a VAT registered person should with the exception of the hire of be supported with an invoice or customs safes; declaration where the VAT charged on import is separately shown, and after such - obligations to refrain from pursuing documents are recorded in the accounting or exercising, in whole or in part, an books of the taxable person. If in a given month the input VAT deduction declared

Macedonia | 67 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. by the registered person exceeds the For more information on real amount of output VAT charged, the excess estate services in Macedonia, amount is subject to reimbursement. The please contact: VAT for reimbursement is generally offset against VAT payable in the subsequent Kalin Hadjidimov periods, unless the VAT registered person Partner, Tax has explicitly declared that a refund is requested. The term for a VAT refund is 30 KPMG in Macedonia days from the filing of the respective VAT Soravia Center 7th floor return. 3 Filip Vtori Makedonski Skopje 1000, Macedonia VAT refund to non-residents: T: +389 2 3135 220 According to the VAT law, foreign persons E: [email protected] registered for VAT purposes in their kpmg.com/mk countries, and who are not headquartered in Macedonia and who do not have a fixed establishment in Macedonia, are, upon request, entitled to receive a refund of the VAT paid for particular purchases of goods and services in Macedonia. In order to apply for a VAT refund, the foreign taxable person should both meet certain conditions and fulfill a statutory procedure. The deadline for VAT application submissions is 30 June in the year following the year in which the purchases were made (with the exception of foreign diplomatic or consular offices, for which the deadline is 5 years after the year in which the goods/ services are purchased). The Macedonian tax authorities have six months to review the application for a VAT refund submitted together with the necessary attached documents and then to make the refund.

A VAT refund from the Macedonian tax administration is made only in Macedonian Denar (MKD) which implies that non-residents should open a non- resident bank account in order to obtain that refund.

The principle of reciprocity applies for foreign persons entitled to claim a refund of Macedonian VAT.

68 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Macedonia | 69 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Montenegro

GENERAL CORPORATE INCOME TAX AND The general value added tax (VAT) rate is CAPITAL GAINS now 19% and it is applicable on the first In Montenegro CIT is levied at 9% for transfer of ownership rights for buildings resident entities and branches of non- built after 1 April 2003, while 3% real resident entities. A resident is a legal estate transfer tax (RETT) is applicable on entity which is incorporated or which all other real estate transfers. has a place of effective management and control within the territory of Gains arising from real estate deals are Montenegro. Resident legal entities pay subject to a 9% corporate income tax tax on their worldwide income. (CIT) rate, which is one of the lowest in Europe. Non-resident entities pay tax on the income generated through a permanent establishment within the territory of Montenegro.

70 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The tax period is the financial year which depreciation rates prescribed for each is also the calendar year except in the group: event of liquidation or for businesses starting their business activity during Group Depreciation Rate the year. A corporate tax return must be submitted within 3 months of the end of I 5% the period for which the tax is assessed. II 15% Corporate income tax liability is paid in one installment within 3 months of the III 20% end of the tax year. IV 25%

Taxable income is determined on the V 30% basis of accounting profit disclosed in the annual income statement, in accordance with International Financial Reporting Buildings and other immovables Standards and is subject to further (excluding land) are classified into tax adjustments in the tax balance. depreciation Group I, while plant and equipment are classified into groups II-V. Capital gains are disclosed separately in Non-current assets classified in Group the tax return and are taxed at 9%. The I are depreciated using the straight- capital gain is the difference between the line method at 5%. A declining model sale and purchase price of assets (land, is prescribed for non-current assets buildings, property rights, capital share classified in groups II-V. and securities). If such a difference is negative, a capital loss is reported. In addition, non tangible assets such as franchises, patents, authorship rights and Tax losses others are tax depreciated based on their Tax losses generated from business estimated useful life. transactions, financial and non-business transactions, excluding capital gains Thin capitalization and losses, may be carried forward for There are no thin capitalization rules in up to five subsequent tax periods and Montenegro. can be offset against future taxable income. Losses can be carried forward WITHHOLDING TAXES irrespective of mergers, acquisitions, Withholding tax (WHT) at a rate of 9% spin-offs or other organizational changes. is levied on dividends, profit sharing, royalties, interest, capital gains, lease Capital losses may be carried forward payments for immovable and movable for 5 years and offset only against capital property, consulting services, market gains. research services and audit services earned by non-residents. Withholding Tax depreciation tax may be reduced via double taxation For CIT purposes, non-current tangible treaties. assets are divided into five groups, with

Montenegro | 71 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Distribution of inter-company dividends A taxpayer is any entity that between Montenegrin companies is independently supplies goods and subject to withholding tax. services in the course of doing business.

DOUBLE TAXATION CONVENTIONS The threshold for VAT registration is Montenegro has declared that it will prescribed at the equivalent of EUR honor all tax conventions that have 18,000. Namely, if turnover in the been concluded by the state union of previous 12 months exceeds or is likely to Serbia and Montenegro (and previously exceed EUR 18,000, then registration for by the Federal Republic of Yugoslavia VAT is obligatory. and the Socialist Federative Republic of Yugoslavia). However, the application of Only the first transfer of newly built such agreements with Montenegro has buildings (i.e. buildings built since 1 April to be confirmed on a case-by-case basis 2003) is subject to VAT at the general by those entering such agreements. rate of 19% (there is no reduced rate for residential buildings). Reduced VAT As at 1 January 2016, Montenegro has amounts to 7%. The supply of land 41 effective double taxation conventions (except the first transfer of the ownership on income and capital with the following right or the right to make use of or states: Albania, Austria, Belarus, Belgium, transfer a newly constructed building), Bosnia & Herzegovina, Bulgaria, China, the lease of land, as well as services Croatia, Cyprus, Czech Republic, linked to the leasing of residential Denmark, Finland, Germany, Hungary, buildings for longer than 60 days are Italy, Kuwait, Latvia, Macedonia, Moldova, exempt from VAT without credit. Netherlands, North Korea, Norway, Poland, Romania, Russia, Slovakia, PROPERTY TAX Slovenia, Sri Lanka, Sweden, Switzerland, Tax on property is paid by the titleholder Turkey, Ukraine; additionally, agreements of the property rights (ownership, right of with Azerbaijan, Egypt, France, Ireland, use, etc.). Property tax is paid on land and Malaysia, Malta, Serbia, UAE and United buildings. The property tax base is the Kingdom cover the avoidance of double market value of the property. In general, taxation of income only. property tax rates range from 0.1% to 1.0%. For certain types of real estate (e.g. VALUE ADDED TAX hotels in coastal areas), the rate can be VAT is levied on the following: even higher (up to 5.5%). Property tax is paid in two installments, on 30 June and • supplies of goods and services for 30 November, upon receipt of the tax business purposes by a taxpayer for assessment which is issued by 31 May consideration within the territory of for the current year. Montenegro; and

• import of goods into Montenegro.

72 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. REAL ESTATE TRANSFER TAX For more information on real Acquisition of property rights over real estate services in Montenegro, estate (land and buildings) is subject to please contact: RETT unless the transaction is subject to VAT. Igor Loncarevic The RETT tax base is the market value Partner, Head of Tax and Legal of the real estate at the time of its acquisition. The tax rate is 3%. The KPMG in Montenegro taxpayer will be the acquirer of the real Svetlane Kane Radović 3 estate. Real estate transfer tax is not paid Podgorica, 81000 when a unit of real estate is included as Montenegro part of an initial stake as a contribution in T: +381 11 20 50 570 kind, in connection with a share capital E: [email protected] increase, or in the event of the acquisition kpmg.com/me of real estate in the course of a merger or de-merger.

Montenegro | 73 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Poland

RECENT DEVELOPMENTS reasons) and where the main driving Generally, there have been a couple force for concluding the transaction of developments in the Polish tax law is to obtain a tax advantage (i.e. tax recently which have affected the tax exemption). environment and may have impact on real estate. A general anti-abuse clause (GAAR) has come fully into force in Polish tax As of 31 December 2015, the anti-abuse legislation on 15 July 2016. On the clause is applicable to dividend payments basis of the GAAR regulations, the and other profit distributions made by activity undertaken in particular with a subsidiary to a parent company. As a the aim of achieving a tax benefit that is result of the new regulation, the scope contradictory in the given circumstances of application of the Parent-Subsidiary to the subject and aim of the regulation Directive 2011/96/UE is limited in the case of the tax act, should not result in of artificial arrangements (i.e. carried out achieving such tax benefit, provided without justifiable business or economic that the manner of action was artificial

74 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. (tax avoidance). Therefore, a justified CORPORATE INCOME TAX AND business case should be in place when CAPITAL GAINS performing any restructuring involving Generally, CIT in Poland is levied on all Polish entities. In order to confirm that taxable income, with some exceptions, GAAR does not apply to the given action/ e.g. income derived from forestry and operation/transaction, the taxpayer is agricultural activities. A CIT rate of 19% entitled to obtain a protective opinion. is payable on income which is calculated Generally, a protective opinion, or refusal as taxable revenues reduced by eligible of its issuance, should be issued within costs incurred to generate these 6 months. The cost of such opinion is revenues, or in order to retain or secure PLN 20,000 (approx. EUR 4,500). the source of taxable revenue.

As of 1 February 2016, a new asset The costs incurred in respect of tax for financial institutions was abandoned investments may be treated introduced (banking tax). It applies to as tax-deductible costs. local institutions as well as branches of foreign institutions engaged in banking, There is no separate capital gains tax, but insurance, reassurance, credit or loaning gains on the disposal of fixed assets and activity. intangibles are added to the taxpayer’s mainstream income (gains from the sale With retail it should be noted that a of real estate property are taxed at the new retail trade tax has come into force regular CIT rate of 19%). For the seller, on 1 September 2016. Pursuant to profit on the sale of assets is added key provisions, the new tax applies to to the mainstream income subject to retailers. The act does not include any corporate income tax at normal rates. On specific provisions concerning vendors disposal, the taxpayer can deduct the net operating in the trade network. The tax value of the assets and associated monthly tax will be calculated based disposal expenditure. Taxable income can on turnover and the tax-free amount be reduced by tax losses where they are per year will be approx. EUR 47 million. available for utilization.

As of 30 April 2016, new rules for In the case of a sale of shares in a Polish agricultural land transactions are company held by a non-Polish shareholder, applicable. In principle, only individual many of the double taxation treaties landholders (with some exceptions) Poland has concluded with other countries can purchase agricultural land without provide for a taxation right of respective obtaining special approval from the capital gains in the jurisdiction of the president of the governmental Polish shareholder. However, some double Agricultural Property Agency. The new taxation treaties provide for the sale of restrictions are not applicable to the sale shares of a Polish company whose assets of private agricultural parcels whose area principally (directly or indirectly) consist of does not exceed 0.3 ha. This is likely to real estate to be taxed in Poland at 19% add complexity to transactions for plots of CIT (for example: double taxation treaties land exceeding that size. with the UK, Spain, France, Ireland, Germany, Austria, Belgium, Denmark, Malta, Sweden and Luxembourg).

Poland | 75 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. A fiscal group may be created for affiliate companies). Under the new corporate tax purposes. There is a thin capitalization provisions, indirect number of conditions that need to be participation is established based on met (in practice, the most difficult is the transfer pricing regulations (25% the requirement for the profit of the effective ownership is the required group for tax purposes to be equal to at minimum, based on the number of voting least 3% of gross taxable revenue). In rights proportionally entitled to the given principle, limited partnerships are able to entity). consolidate their CIT results. Equity is now defined differently. Based Tax depreciation on the amended regulations, the entire Depreciation of fixed assets is usually equity amount (with some exemptions) calculated on a straight-line basis using is included in the calculation of debt-to- the rates laid out in the Polish CIT Act. equity ratios (previously only share capital Depreciation write-offs are then claimed was considered). The ratio has now been on the initial value of the individual fixed changed to 1:1 (instead of 3:1). or intangible assets, in equal amounts each month, starting from the month Also, an alternative method of applying following the month in which a particular the thin capitalization restrictions is asset was brought into use, until the available. By this method deductible end of the month in which the total interest expenses are limited to 1) the depreciation write-offs equal the asset’s value corresponding to the product of initial value – or in the month in which the reference rate of the National Bank it is liquidated, disposed of or found of Poland binding on the last day of the missing. The key annual depreciation year preceding the tax year, increased rates are: 2.5% for buildings, 4.5% for by 1.25 percentage points, and 2) the tax constructions and 10% for technical value of assets in line with the provisions devices. Land is not depreciated for tax of the Polish Accounting Act excluding purposes. intangible assets, but not more than 50% of the operating profit, regardless of Tax losses the amount of liabilities towards related Tax losses may be carried forward for 5 entities and regardless of the equity years and up to 50% of a specific tax loss level. Any interest not deducted under can be utilized in any one year (expiring this method may be deducted in the after 5 years). The ability to utilize tax subsequent 5 years. losses is unaffected by a change of ownership in a company. The new regulations do not apply to loans already granted provided that actual cash- Thin capitalization flow took place before the end of 2014 Based on an amendment to the Polish (the “grandfather clause”). CIT Act, from 1 January 2015 thin capitalization limitations also apply The old Polish thin capitalization rules limit to loans provided by entities that the tax deductibility of interest paid or are indirectly related to taxpayers capitalized on loans granted by qualified (previously this only concerned loans lenders, i.e.: made by direct shareholders or direct

76 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. • from a direct shareholder solely holding of shares, interest income, IP income, at least 25% of voting rights or from etc.; (c) the above income/gains are tax shareholders jointly holding at least exempt in the subsidiary country or are 25% of voting rights of the borrowing taxed at a rate lower than 14.25%; or (2) company; because no genuine economic activity is carried out by the subsidiary. • from a sister company which has the same direct shareholder as the Transfer pricing borrower, if the shareholder owns at As of 1 January 2017 new transfer pricing least 25% of voting rights of both the regulations will enter into force. In lending and the borrowing company reference to the provisions adopted, the (i.e. they are clearly linked). capital relation threshold will increase from 5% to 25%. The obligation to Generally, the thin capitalization prepare transfer pricing documentation restrictions apply to interest paid in will be dependent on the fulfillment of relation to the above loans by a Polish two criteria, i.e. 1) revenue, and 2) the company if as per the date of its payment significance of the transaction on the the total debt (payable to the above taxpayer’s tax result. The changes will qualifying lenders and shareholders of a exert the greatest effect upon taxpayers parent entity with at least 25% of voting whose revenues/expenses in the year rights in the parent entity) exceeds three preceding the tax year exceeded EUR 10 times the equity of the Polish company. million – apart from a “local file” they will have to prepare benchmarking studies; In principle, the interest paid from the for those that exceed EUR 20 million, part of the loan exceeding this debt to they will be required to prepare a “master equity ratio is tax deductible. There was file” which includes information about some uncertainty about how the old thin group structure and capital relations capitalization regime should be applied in between the group entities. practice. WITHHOLDING TAX Controlled foreign corporations rules Dividends From 1 January 2015, certain income Dividends are subject to 19% withholding or gain derived by foreign subsidiaries tax (WHT). This is generally reduced owned by Polish taxpayers are now under double taxation treaties to taxed in Poland. The controlled foreign which Poland is a party. To apply the corporations rules (CFC) apply if the reduced rate, the payer should be in following criteria are satisfied: (1) the possession of a tax residence certificate subsidiary is considered a CFC because of its shareholder. Dividends paid to (a) its seat or place of management a qualifying Polish resident company, is in a black-listed country (practicing EU/EEA resident companies (or their harmful tax competition), or in a country foreign permanent establishments), with which Poland has not concluded or to qualifying Swiss companies are an agreement containing an exchange exempt from Polish withholding tax if the of information clause; (b) the income/ shareholder owns at least 10% gain derived by the subsidiary is passive (for Swiss shareholders at least 25%) of in nature, e.g. gain from the disposal the payer’s shares and the shares have

Poland | 77 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. been uninterruptedly held for at least 2 This is generally reduced or eliminated years. The withholding tax exemption is under the double taxation treaties to also applicable if the dividend payments which Poland is a party. However, in order were made before the end of this to apply the treaty rates, the payer should period; but, if the shares were disposed hold a certificate of tax residence of the of earlier, any withholding tax due is recipient and the relevant treaty should payable together with penalty interest. provide for the exchange of information In order to apply reduced rates, the between tax authorities. relevant treaty should provide for the exchange of information between the Interest and royalties are subject to Polish tax authorities and the relevant withholding tax exemptions, if they are country, and the payer should also be in paid to qualifying EU entities. To apply possession of a tax residence certificate the EU Interest and Royalties Directive of its shareholder. Moreover, in order to provisions, a 2-year holding period is apply the WHT exemption based on the required. These provisions can also be EU directive, the payer should possess applied before the 2-year holding period written confirmation from the dividend has been fulfilled, but if the shares are recipient that he is not CIT exempt in his disposed of earlier, any withholding tax country of residence. due is payable together with penalty

The WHT exemption described above also applies to dividends paid by Polish joint-stock partnerships, but only with respect to the profits generated on or since 1 January 2014 (with respect to profits generated until 31 December 2013, the exemption does not apply). Moreover, based on the amended tax regulations, the general partner is not entitled to benefit from withholding tax exemption with respect to income generated from participation in a joint- stock partnership.

It should be also noted that since 31 December 2015, an anti-abuse clause, as referred to at the beginning of the chapter, is applicable to dividend payments.

Interest, royalties and intangible services Under Polish domestic legislation, withholding tax of 20% is applied on payments of interest, and on royalties and fees for intangible services made abroad.

78 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. interest. In order to apply the reduced The taxable base for all buildings is the rate (or exemption), the payer should floorspace area of the building. For land hold a certificate of tax residence of the (and perpetual use of land), it is the land recipient and the relevant treaty should area. For constructions (installations), the provide for the exchange of information depreciation value is taken into account. between tax authorities. Moreover, The current (for 2015) maximum rates for the payer should also hold written real estate tax cannot exceed: confirmation from the recipient that he is not CIT exempt in his country of • PLN 0.89 per square meter for land residence. used for business activities;

Similar provisions apply to qualifying • PLN 0.47 per square meter for other Swiss resident companies. land;

REAL ESTATE TAX • PLN 0.75 per square meter for Real estate tax is a local tax which dwellings; applies to land (and perpetual use of land), buildings and constructions (or • PLN 22.86 per square meter for installations). buildings used for business activities;

Poland | 79 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. • PLN 7.68 per square meter for other transfer tax payable by the buyer, but buildings; some tax management methods may be used. • 2% of the value of constructions/ installations (in principle the value VALUE ADDED TAX being the base for tax depreciation General provisions regarding purposes at 1 January each year, real estate before any depreciation deductions). Generally, the sale of buildings, constructions and their parts is value Year after year the government has added tax (VAT) exempt (except if the intended to implement a new real estate sale is performed before or within the tax where the basis for the taxation would scope of first occupation, or if the sale be the value of the real estate (cadastral is performed during the first 2 years of tax). However, the implementation the first occupation). However, in most of this tax has been postponed each cases taxpayers are able to waive the year and no information has yet been exemption if special conditions are met. forthcoming about when (if at all) it will be Supplies of buildings, constructions or implemented. their parts are also exempt from VAT if the supplier had no right to deduct input TAX ON CIVIL LAW TRANSACTIONS VAT upon acquisition of such buildings or (TRANSFER TAX) constructions and if additional conditions A 0.5% tax on civil law transactions on the level of improvements are met. (PCC) is imposed on capital injections to a newly registered company, as well In the case of a VAT exempt sale of as on any increases of the share capital buildings, constructions and their parts, or additional payments made to the the transaction is subject to 2% transfer reserve capital of the company (or on the tax. In the case of a sale of land along value of contributed assets in respect of with a building upon it, which qualifies partnerships). Shareholder loans are PCC for a VAT exemption, both assets are VAT exempt, while non-shareholder loans exempt and are subject to 2% transfer are generally subject to 2% PCC (the tax. borrower is obliged to pay the transfer tax; if certain conditions are met, there is The standard VAT rate in Poland on the sale no obligation to pay PCC on loans). of land and buildings which are not VAT exempt is 23%. The reduced 8% VAT rate Moreover, the sale and exchange of for sales of residential property applies goods and property rights are subject to only if the property meets the criteria of PCC if they fall outside the scope of VAT. being part of a social housing program If the sale is VAT exempt, it is usually (houses no larger than 300 square also exempt from PCC, except for land meters and apartments no larger than and buildings (purchase of real estate is 150 square meters). If the area of a house subject to 2% transfer tax on its market or apartment exceeds these respective value even if VAT exempt). values, both VAT rates apply (8% for areas up to 300 square meters/150 square Acquisition of shares in Polish companies meters, and 23% for the portion of the is, in principle, subject in Poland to 1% area exceeding those statutory limits).

80 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Where a property is acquired as a VAT payer is also entitled to deduct VAT in going concern (as a whole business the period in which he received an invoice, or organized part of a business) such whereas in respect of the intra-community transactions are not subject to VAT. For acquisition of goods, the VAT payer is these, transfer tax applies at 2% on the entitled to deduct VAT provided that he value of property and is payable by the receives the VAT invoice within 3 months buyer (if an enterprise consists of various from the end of the month in which the tax components, transfer tax of 2% applies point arose. to sales of real estate, movables and perpetual land use rights; 1% applies to Place of supply of services the sale of other property rights). Generally, the place of supply of services performed for a taxpayer is a place The lease of office and rental space where the purchaser has its seat, fixed is subject to 23% VAT. The lease of place of business or permanent place of residential property for housing purposes residence. However, in cases where the is VAT exempt. supply of services is provided to entities other than taxpayers, the place of supply Tax point of services is where the service provider Based on the Polish VAT provisions, the has its seat, fixed place of business or tax point arises when goods are supplied permanent place of residence. or services are provided, whereas for the supply of construction services, the special For services related to real estate, the VAT point is determined with the issuance place of supply of services is where this of a VAT invoice (but not later than 30 days real estate is situated. after the completion of services). Services (including, amongst others, The current Polish VAT provisions include advisory and engineering services) a definition of the taxable amount which provided to a non-taxpayer having its seat complements the definition from the or permanent place of residence outside VAT Directive. As a result, all payments of the EU, are subject to taxation where constitute taxable amounts for VAT the purchaser has its seat or permanent purposes. Moreover, the supplier or place of residence. service provider should, in general, issue an invoice by the 15th day of the Entities obliged to settle VAT month following the month when goods Generally, for services provided to were supplied or services provided. For taxpayers by a foreign taxpayer (without the provision of construction services, a seat or fixed place of business in according to special regulations, the Poland), VAT is settled by the purchaser. invoice should be issued within 30 days from the day the services were provided. However, in cases where the services relate to real estate, VAT is also, as a Also, based on the VAT provisions, the VAT rule, settled by the purchaser but only payer is entitled to deduct VAT from the if the supplier is not registered for VAT given invoice if a tax point already arose purposes in Poland. Otherwise, the for the seller in respect of the given sale supplier is obliged to settle this VAT. and in respect of domestic purchases, the

Poland | 81 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. VAT refund and domestic law tax) where the debt will not be settled The standard VAT refund period is 60 days. within 150 days from the date of payment. In order to apply for a direct refund of input The debtor, in turn, is obliged to adjust the VAT excess within the standard 60 days, amount of input tax, regardless of whether the taxpayer has to perform a taxable or not the debtor has amended their output transaction. The standard period of refund VAT. The adjustment should be made in the (60 days) can be shortened to 25 days if all settlement for a period of 150 days from the purchase invoices in which VAT is declared date of payment. In the absence of such an in the specific VAT return were paid by the adjustment, the debtor may be subject to a time the VAT return has been submitted to fine of 30% of this unadjusted VAT. the tax office. If there is no VAT-able activity, then a VAT refund may still be obtainable. Based on the amendments of the VAT Act, However, in such a case, the deadline is 180 starting from 1 July 2015, bad debt relief will, days (but an application for the refund must provisionally, also apply for related parties be submitted). This period can be shortened (i.e. if there is a capital, pecuniary, family to 60 days if the taxpayer files a security or employment relation between creditor deposit. and debtor). The other important change is that the debtor will not be obliged to adjust Foreign VAT refund under VIII the amount of input tax if he is involved in Directive liquidation or bankruptcy proceedings on Eighth Directive reclaims must be filed and up to the last day of the 150 days from with the local VAT authority (where a the date of payment. company is registered), not where VAT has been paid. VAT reclaims have to be Further notes filed electronically. According to oanda.com, the exchange rate as at 20 September 2016 was EUR 1/ EC services list PLN 4.2964. EC services lists must be filed monthly by taxpayers if they supply services to taxpayers from other EU countries where the reverse-charge mechanism applies. For more information on real Advisory services where VAT is charged estate services in Poland, in the recipient’s country have to be please contact: included. Services relating to local real estate where the VAT is charged locally Honorata Green need not be reported. Partner

The EC services lists must be filed by KPMG in Poland the 15th of the following month – or by ul. Inflancka 4 the 25th of the following month if filed Warszawa, 00-189 electronically. Poland T: +48 22 528 11 53 Uncollectable debts M: +48 604 496 370 According to the VAT regulations, taxpayers E: [email protected] are able to benefit from bad debt relief kpmg.com/pl (i.e. to adjust the tax base and the output

82 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Poland | 83 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Romania

GENERAL tax law. The standard corporate tax rate Significant changes to the Romanian tax is 16%. legislation have been introduced as of 1 January 2016, most notably a reduction Capital gains realized by corporate entities of the dividend tax rate from 16% to 5%, from the sale of assets are deemed to be a reduction of the standard VAT rate from corporate profits and are taxed at 16%. 24% to 20% and new rules regarding building tax. Income realized by individuals from the transfer of real estate is subject to lower CORPORATE TAX, INCOME TAX AND tax rates on income (not on profits). CAPITAL GAINS TAX Capital gains derived by individuals from Taxable profits are determined based the sale of shares is subject to a 16% on accounting profits, as recognized in personal income tax rate, irrespective of accordance with Romanian accounting the period for which the shares are held. standards, subject to certain specific adjustments as provided by corporate A special taxation regime (1-3% on revenue, depending on the number of

84 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. employees) is applicable instead of 16% • accelerated depreciation method (may on profit for so-called micro-enterprises be used for technological equipment (companies fulfilling certain conditions, such as machinery and installations, e.g. an annual turnover below EUR computers and related equipment). 100,000). The accelerated method allows for a deduction of 50% of the cost of the Income from immovable property located asset during the first year of operation. in Romania is subject to 16% capital gains tax. Income from immovable property Land and goodwill cannot be depreciated located in Romania mainly includes for tax purposes. Buildings can be income from the rental or the grant depreciated only using the straight-line of use of immovable property located method. The tax depreciation period for in Romania and gains from the sale- buildings is between 40 and 60 years. assignment of the rights of ownership Certain assets attached to a building can or other rights related to immovable be treated as separate movable assets property located in Romania. for tax purposes and therefore can be depreciated over a shorter period. Non-Romanian vendors may be entitled to claim Romanian tax exemption under Tax losses double taxation treaties where applicable. Tax losses can be carried forward and deducted from taxable profits recorded However, certain double taxation treaties during the following seven years on a (e.g. those with Germany, France and “first in, first out” basis. Austria) provide special regimes for capital gains if the shares being sold Fiscal losses recorded by taxpayers derive their value mainly from real estate performing transfers of activities located in Romania, such gains being following a spin-off/merger can be taken taxable in Romania. over by the new parent company under specific rules provided in the law. There are no corporate tax consolidation rules in Romania. There is no withdrawal of the tax loss carry-forward right if there is a change of Taxpayers can opt for a fiscal year ownership or activity. Tax losses can only corresponding to the accounting year, be carried forward, not carried back. which can be different than the calendar year. Thin capitalization There are two basic Romanian thin Tax depreciation capitalization rules to be considered, as The following depreciation methods are follows: available for tax purposes: Deductibility of interest is restricted to • straight-line method; 4% for non-RON denominated loans and up to the level of the interest rate • reducing balance method (may be of the National Bank of Romania (NBR) applied only to certain assets); corresponding to the last month of the quarter for loans denominated in

Romania | 85 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. RON, 1.75% as of August 2016 (please Under Romanian law, unrealized foreign note that the National Bank of Romania exchange differences on monetary items (NBR) rate is updated throughout the have been recognized on a monthly year, depending on the NBR’s policy). basis and are taxable or deductible upon This limitation is applicable for each corporate tax calculation (subject to loan. The restriction of deductibility is potential thin capitalization deductibility determined before the calculation of restrictions). the debt-to-equity ratio. Interest which is non deductible after the application The right to carry forward interest of this rule is deemed permanently non expenses and net foreign exchange deductible. losses for taxpayers who cease their operations as a result of a merger or Interest expenses in respect of non-bank de-merger operation may be transferred loans which exceed one year, are wholly to newly-established taxpayers, or to deductible if the debt-to-equity ratio of those which take over the assets and the borrowing company is less than 3:1. liabilities of the absorbed or divided company, as appropriate, but this must If the debt-to-equity ratio is three to one be in proportion to the assets, equity and or more (or negative), interest expenses liabilities transferred to the beneficiary are non deductible (but not permanently legal entities, as provided in the merger/ non deductible – see below). de-merger plan.

Interest and foreign exchange losses WITHHOLDING TAX relating to loans received from Romanian The standard Romanian withholding tax or foreign banks, non-banking financial (WHT) rate is 16%. However, this rate can institutions (including leasing companies), be reduced in accordance with double mortgage credit companies, and other taxation treaties (Romania has concluded regulated lending institutions are exempt double taxation treaties with around 90 from the scope of thin capitalization rules. countries).

Any interest which is not deductible due If the income is paid in a state with which to the lender having negative equity, or a Romania has not concluded a treaty for debt-to-equity ratio higher than 3:1, can the exchange of information and the be carried forward to be deducted against payment is deemed to be related to an income earned in future periods, but only artificial transaction, a special WHT rate if and when the company’s debt-to-equity of 50% is applicable. ratio falls below the relevant thresholds. Dividends If foreign exchange losses recorded by Generally, a 5% dividend tax rate applies a company in relation to non-bank loans to dividends paid to non-residents subject to debt-to-equity limitation, as (whether individuals or companies). described above, exceed the foreign exchange gains, then the deductibility of However, dividend payments made by net foreign exchange losses is subject to a resident legal entity to an EU legal the same restrictions as for interest. entity which holds at least 10% of the

86 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Romanian entity’s shareholding for a that the non-resident fulfills the period of at least 1 year at the moment of mandatory holding conditions mentioned distribution, are tax exempt. If the holding above. period conditions are not fulfilled at the moment of distribution, the dividend PARTICIPATION EXEMPTION RULES tax paid may be reclaimed when this Certain sources of income are non- condition is fulfilled. taxable for Romanian corporate tax purposes under participation exemption Interest and royalties rules. These include dividends, gains Income derived from interest and from the sale/transfer/(re)valuation of royalties is exempt if the beneficial shares and proceeds from liquidation, if owner of the income is a legal entity the legal entities in which the company which is located in an EU member holds shares are Romanian or foreign state, or a permanent establishment of entities from states with which Romania a company from an EU member state, has concluded double tax treaties or if it is located in another EU member (both EU and non-EU). These revenues state. Exemption applies subject to the are non-taxable, provided that certain condition of direct ownership of at least conditions are met (the seller/transferor is 25% of the shares for an uninterrupted a Romanian legal entity or a foreign entity period of at least 2 years. located in a state with which Romania has concluded a double tax treaty and at the REQUIREMENTS FOR APPLYING EU time of the sale/transfer transaction or DIRECTIVES at the time when the liquidation process To apply the provisions of EU Directives, starts, the seller/transferor must have a non-resident should provide Romanian owned at least 10% of the share capital companies with their certificate of tax of the legal entity for an uninterrupted residence and with an affidavit stipulating period of at least 1 year).

Romania | 87 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. REAL ESTATE TAX REAL ESTATE TRANSFER TAX Real estate tax comprises land tax and There is no real estate transfer tax as building tax. such.

Tax on land is determined by taking into Transfers of real estate may result in land/ account the area of the land in square building registry taxes and notary fees meters, the status of the locality where of approximately 1% of the value of the the land is located, and the area and/or transaction. category of use of the land, in accordance with relevant guidelines issued by the VALUE ADDED TAX local council where the land is located. The standard value added tax (VAT) rate applicable in Romania is 20% in 2016 and For companies, tax on buildings varies it is expected to decrease to 19% starting between 0.2% and 1.95% of the taxable from 1 January 2017. value (usually 1.5%) for non-residential buildings and between 0.08% and 0.3% A reduced rate of 9% is applicable for for residential buildings (for mixed use, certain supplies of goods and services tax is calculated proportionally). For (e.g. accommodation, foodstuffs, buildings used in agriculture, the tax rate restaurant and catering services, is 0.4% of the taxable value. medicines).

The taxable value is generally determined A reduced VAT rate of 5% is applicable, by valuation for tax purposes (carried out among others, for sales of dwellings to by an authorized valuator, at the owner’s specific segments of the population as expense). part of the government’s social policy, under certain conditions (e.g. a threshold If the taxable value of buildings has not of RON 450,000 / approx. EUR 100,000 been updated in the 3 previous years, the per house sold). building tax rate is 5%. As a general rule, supplies of buildings, For individuals, the same principles apply parts of buildings and land are VAT (e.g. the distinction between residential exempt without credit (i.e. any input VAT and non-residential buildings), however tax incurred on the relevant expenditures is rates and taxable values may be different not allowed to be offset against output from those applicable for companies. VAT, but should be borne by the company as an extra cost). TAX ON CONSTRUCTIONS A tax of 1% applies to the book value of However, there is an exception for constructions held at 31 December of supplies of “new” buildings, parts of the previous year, except for the value of “new” buildings and building land (i.e. buildings that are subject to building tax. any land on which buildings can be Tax on constructions is to be eliminated erected), which are subject to VAT and for starting from 1 January 2017. which the taxpayer is entitled to deduct the VAT incurred on the related costs, if certain conditions are met.

88 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Rental of real estate is also VAT exempt without credit. For more information on real estate services in Romania, For both rental and sales of real estate please contact: property, companies may opt to charge Ramona Jurubita VAT and, when they do so, a formal Partner notification must be submitted to the tax office. KPMG in Romania Victoria Business Park Starting from 1 January 2016, the reverse DN1 Bucuresti Ploiesti nr. 69-71 charge mechanism applies to supplies of Sector 1 buildings, parts thereof and any type of Bucuresti, 013685 land, if taxable either by law or by option. Romania T: +40 741 800 700 The VAT grouping system applicable M: +40 747 333 133 in Romania allows only the mere E: [email protected] consolidation of the VAT returns of the kpmg.com/ro members of the VAT group, possibly leading to a reduction in the amount of VAT payable.

A VAT cash accounting system may be applied by eligible taxpayers, i.e. resident companies with a turnover below RON 2,250,000 (the approximate equivalent of EUR 500,000).

Romania | 89 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Serbia

GENERAL of buildings and construction services The general value added tax (VAT) rate can apply the reverse charge mechanism. currently stands at 20%. The reduced Such measures are intended to reduce VAT rate is now 10%. the costs of VAT financing in real estate and construction deals. Value added tax is applicable on the first transfer of ownership rights for newly The corporate income tax (CIT) rate is 15%. built residential buildings constructed after 1 January 2005. Residential CORPORATE INCOME TAX AND buildings are subject to a reduced VAT CAPITAL GAINS rate, while all other buildings are subject Corporate income tax is levied at 15% on to the general VAT rate. resident entities and branches of non- resident entities. A resident entity is a legal In addition, a VAT reverse charge scheme entity which is incorporated or has a place is in place to govern the sale of real of effective management and control within estate and the provision of construction the territory of Serbia. Resident legal entities services. Under certain conditions buyers pay tax on their worldwide income in the

90 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. country. Non-resident entities pay tax on There are no change of ownership rules the income generated through a permanent (i.e. losses carried forward are not lost in establishment within the territory of Serbia. the case of a change of ownership, or of mergers, acquisitions, spin-offs or other The tax period is usually the calendar year. organizational changes).

A CIT return for each year has to be filed Capital losses may be carried forward within 180 days from the end of the tax year. for 5 years and offset only against capital Corporate income tax liability is payable in gains. monthly advanced payments (by the 15th day of the following month). Corporate Tax depreciation income tax payable is settled by the CIT For CIT purposes, non-current assets return filing date. Upon request, a taxpayer are divided into five groups, with may change its tax year to a period of any 12 depreciation rates prescribed for each consecutive months, but only if the foreign group: parent entity has a financial year which differs from the calendar year. Group Depreciation Rate

Taxable income is determined on the I 2.5% basis of accounting profit disclosed in the annual income statement, in accordance II 10% with International Financial Reporting III 15% Standards, and is subject to further adjustments in the tax balance. IV 20%

Capital gains are disclosed separately in V 30% the tax balance and are subject to 15% tax. The capital gain is the difference Non-current assets classified under between the sale and purchase price of Group I are depreciated using the assets (real estate, shares/securities, straight-line method at 2.5%, while a intellectual property rights, investment declining balance method is prescribed units). If this difference is negative, a for non-current assets categorized capital loss is reported. into groups II-V. Buildings and other immovables (excluding land) are placed Capital gains realized by non-resident into tax depreciation Group I, while plant entities which do not have a permanent and equipment are in groups II-V. establishment in Serbia, are subject to 20% tax unless otherwise prescribed by a If a non-current asset is acquired from a respective double tax treaty. related party, the tax depreciation base will be the lower of: Losses Tax losses generated from business • the transfer price of the non-current transactions, financial and non-business asset; transactions, excluding capital gains and losses, may be carried forward for up • the amount/value determined in line to five subsequent tax periods and can with the arm’s length principle. be offset against future taxable income. Serbia | 91 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Thin capitalization WITHHOLDING TAXES Interest and related expenses arising Withholding tax (WHT) at 20% is from business with related entities are withheld from dividends, the share in deductible to a value of up to four times profits, liquidation surplus, royalties, the taxpayer’s equity (the limit for banks interest, service fees (used or rendered in and finance lease entities is 10 times the Serbia) and lease payments for movable entity’s equity). and immovable assets located in Serbia and which is derived by non-residents. Related-party interest Withholding tax may be reduced in line Interest expenses arising from business with double taxation treaties. with related entities, which are allowable according to thin capitalization rules, are If a non-resident taxpayer receives capital subject to transfer pricing rules. Taxpayers gains from a Serbian resident, from a have an option either to apply a safe harbor non-Serbian resident based in Serbia, interest rate prescribed by the Ministry of from a non-resident individual, or from an Finance or to assess a market interest rate open investment fund within the territory by applying general transfer pricing rules. of Serbia, then 20% tax has to be paid unless otherwise prescribed in line with Transfer pricing a double taxation treaty. A non-resident Transactions with related parties taxpayer has to submit a special tax return need to be separately disclosed in the within 30 days of generating the capital tax return. Penalties are prescribed gains via proxy, based on which the tax for non-compliance. Transfer pricing authorities assess the tax liability. documentation must be submitted along with the CIT return. Withholding tax at 25% is applied on royalties, interest, lease payments for Acceptable methods for assessing the movable and immovable assets and “arm’s length” principle of transactions service fees (irrespective of the place with related parties have been where they are provided or used) paid by a harmonized with OECD methods and resident entity to a non-resident registered include: in a jurisdiction with a preferential tax system (i.e. tax havens). There is a list of • comparable uncontrolled prices method; 51 preferential tax jurisdictions to which this special regime applies. • cost plus method; DOUBLE TAXATION CONVENTIONS • resale price method; As at 1 January 2016, Serbia has 54 effective double taxation conventions • transaction net margin method; on income and capital with the following countries: Albania, Austria, Azerbaijan, • profit split method; Belarus, Belgium, Bosnia & Herzegovina, Bulgaria, Canada, China, Croatia, Cyprus, • any other method, provided the Czech Republic, Denmark, Finland, above-mentioned methods are not Georgia, Germany, Greece, Hungary, applicable or if the other method is Iran, India, Italy, Kuwait, Latvia, Lithuania, more appropriate. Macedonia, Moldova, Netherlands,

92 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. North Korea, Norway, Poland, Romania, as subject to reverse charge mechanism Russia, Slovakia, Slovenia, Spain, in the government decree. Sri Lanka, Sweden, Switzerland, Tunisia, Turkey and Ukraine. Agreements with PROPERTY TAX Egypt, Estonia, France, Ireland, Libya, In Serbia, tax on property is paid by Malaysia, Malta, Montenegro, Pakistan, the titleholder of the property rights Qatar, UAE, United Kingdom and Vietnam (ownership, right of use, tenure, etc.). cover the avoidance of double taxation of The property tax base is the market value income only. for most entities instead of its book value. Each municipality issues detailed rules VALUE ADDED TAX on how to calculate property tax liability. Value added tax is levied on the following: Entities applying fair value accounting use the book value as the tax base. • supplies of goods and services for business purposes by a taxpayer within Property tax rate may not exceed 0.4%. the territory of Serbia; and Property tax returns are submitted by • the import of goods into Serbia. 31 March of the current year.

A taxpayer is any entity that REAL ESTATE TRANSFER TAX independently supplies goods and The transfer of ownership for real estate services in the course of doing business. which is not subject to VAT is subject to transfer tax at a rate of 2.5%. The Each entity whose turnover in the taxpayer is the seller (i.e. transferor of previous 12 months (sales of goods and the ownership right, intellectual property services excluding sales of real estate and right, or the person who leases or gets equipment used in performing business use of the construction land). activities) exceeds RSD 8 million (approx. EUR 65,000) is obliged to register for VAT.

The first transfer of newly built buildings For more information on real (currently for buildings constructed since estate services in Serbia, 1 January 2005) is subject to VAT at 10% please contact: (for residential buildings) or 20% (other buildings). Supplies of land, as well as Igor Loncarevic the renting of land and real estate for Partner, Head of Tax and Legal residential purposes, are exempt from VAT without input VAT recovery. There is a KPMG in Serbia possibility to apply VAT on any transfer of Kraljice Natalije 11 buildings (option to tax) through a reverse Belgrade, 11000 charge mechanism if both the purchaser Serbia and the seller are VAT registered. In T: +381 11 20 50 570 addition, there is an obligation to accrue E: [email protected] VAT through a reverse charge mechanism kpmg.com/rs on construction services if such construction services are specifically listed

Serbia | 93 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Slovakia

GENERAL effective as of 1 January 2015 introduced The Slovak tax system was fundamentally new depreciation rules, certain limitations changed following major tax reforms on tax deductibility of selected costs and in 2004 making the tax system fully EU new transfer pricing and anti-avoidance compliant. In 2009, an amendment to rules. the Slovak tax legislation introduced new tax treatment for business combinations, The amendment to the value added tax effective from 1 January 2010. The (VAT) legislation passed in 2009 introduced amendment to the Income Tax Act effective the possibility of VAT grouping and from 1 January 2012, among other changes, accelerated VAT refunds for qualifying modified certain aspects of tax depreciation. taxpayers. The amendment to the VAT Act With effect from 1 January 2013, inter effective from 1 January 2011 extended the alia, the corporate income tax rate was period for the application of a capital goods increased from 19% to 23%, while from scheme to real estate from 10 to 20 years 1 January 2014 this tax rate was reduced and temporarily increased the basic VAT rate to 22% besides other major changes. The from 19% to 20%. From 1 October 2012, amendment to the Slovak tax legislation a further amendment was introduced with the aim of countering tax fraud in the VAT 94 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. area. This was followed by an amendment under the domestic rules the capital gain to the VAT legislation effective from 1 is taxable in Slovakia but exemptions may January 2013, also implementing, inter alia, be available to EU resident taxpayers. Also, the EU invoicing directive. Slovakia has an extensive array of double tax treaties which normally (but not always) As of 1 January 2014, all VAT payers and provide the right to tax the capital gain in the certain other entities became obliged to jurisdiction of the seller. Potential gains here file all their filings with the tax authorities may also be taxable if the Slovak company electronically. By 2017, it is hoped that all holds substantial real estate. companies and individuals communicating with all public authorities will be doing so Fiscal grouping electronically. There is no concept of fiscal grouping for corporate income tax purposes in Slovakia. CORPORATE INCOME TAX AND CAPITAL GAINS Minimum tax/tax licenses Corporate income tax (CIT) in Slovakia is With effect from 1 January 2014, a taxpayer levied on all taxable income at the standard declaring any tax loss or tax liability which corporate tax rate of 22%. Income is is lower than a defined minimum amount computed as taxable revenues reduced by is obliged to pay a “tax license”, which is eligible costs incurred to generate, assure in fact a minimum tax. The amount of the or maintain taxable income, subject to tax license ranges from EUR 480 to EUR additional tax adjustments. 2,880 depending on the entity's turnover and on whether the entity is a VAT payer. There is no separate capital gains tax in Payment of the tax license is due within the Slovakia and gains on the disposal of fixed filing period of the corporate income tax assets and intangibles are included in a return (i.e. by 31 March the following year taxpayer’s total income. On disposal, the if the deadline is not extended). A positive taxpayer can deduct the net tax value of difference between the minimum tax and the assets (after accumulated depreciation) the actual tax liability may be offset against and associated disposal expenditures up future tax liabilities in excess of the amount to the amount of the income from related of the minimum tax in the following three sales. Taxable income can be reduced by the tax periods. amount of tax losses available for utilization. Losses on the sale of certain buildings are Tax depreciation not tax deductible, nor are losses on the Depreciation of fixed assets is calculated sale of land. The capital gains on sales of real on a straight-line or accelerated basis, using estate, rental income or other income from rates laid out in legislation. Depreciation real estate situated in Slovakia is also subject is based on categorization of assets into to local rules; hence there is also a liability groups with depreciation periods. Effective to pay income tax if both parties involved in from 1 January 2015, the number of the transaction are Slovak tax non-residents depreciation groups has been increased not having a permanent establishment in from four to six groups with a maximum Slovakia, unless a double tax treaty provides tax depreciation period amounting to 40 exemption from paying tax. years. Accelerated tax depreciation may only apply to depreciation groups two and In the case of a sale of shares in a Slovak three (mostly on technological equipment). company held by a foreign shareholder, Slovakia | 95 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Buildings are depreciated over 20 or 40 party exceeding 25% of an amount roughly years depending on the type of the building. corresponding to EBITDA will be tax non- It is possible to decide to interrupt (not deductible. The rules apply to related parties claim) depreciation of tangible assets in any – in line with the definition of related parties particular year, but with effect from 1 January for transfer pricing purposes, i.e. to foreign 2015 the interruption of tax depreciation of and domestic related parties. These rules do tangible assets is not possible during a tax not apply to certain financial institutions, e.g. audit and only via a supplementary income banks, insurance companies, re-insurance tax return for a tax period that was already companies and others. subject to a tax audit. Generally, interruption of depreciation of tangible assets prolongs WITHHOLDING TAX the depreciation period. Land cannot be Dividends depreciated for tax purposes. Dividends are currently not subject to any withholding tax if paid out of profits In the case of certain components generated from 1 January 2004 onwards. of (multiple unit) real estate it is also Dividends paid out from older profit may still possible to divide a fixed asset into be taxable, whilst exemptions are provided separate components if the acquisition to EU/ EEA resident companies under the value of each respective component terms of the EU Parent-Subsidiary Directive. is higher than EUR 1,700 – and also to Dividend income received by individuals depreciate them separately in a different may be subject to compulsory health tax depreciation group. insurance contributions.

Tax losses Interest, royalties and intangible Tax losses incurred from 2014 onwards services may be carried forward over 4 years in equal Under Slovak domestic legislation, installments. Tax losses incurred for the withholding tax of 19% applies to payments 2010 to 2013 taxable periods can be carried of interest, royalties and fees for intangible forward equally over 4 years starting with services paid to treaty countries. This is the taxable period beginning 1 January 2014. generally reduced or eliminated under the A company wound up without liquidation double taxation treaties to which Slovakia is (e.g. for a merger), is allowed to transfer a party. However, in order to apply the treaty the right to carry forward its tax losses rates, the payer should hold a certificate of to its legal successor to set off against tax residence of the recipient. Furthermore, subsequent taxable profits. Subject to the Interest and Royalties Directive fully certain anti-avoidance limitations, the legal applies in Slovakia. successor may deduct the tax losses of a dissolved legal entity. Different rules may In the case of non-treaty countries, the apply to tax losses of companies benefiting withholding tax rate is increased to 35% as from various tax incentive schemes. of 1 March 2014. The Ministry of Finance issues a list of the treaty countries annually. Thin capitalization/earnings stripping rules Currently, withholding tax is regarded as the In tax periods commencing on or after 1 final tax with certain exceptions, such as January 2015, interest and other expenses certain income of tax non-residents listed in related to loans received from a related line with the tax legislation.

96 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. SECURITY TAX VALUE ADDED TAX Payments to an entity which has or may General provisions for real estate have a permanent establishment in Slovakia Generally, the sale of property or parts are subject to 35% security tax with the thereof is subject to VAT in Slovakia if sold exception of treaty counties, in the case of after 5 years of the first occupancy permit which the security tax rate remains at 19%. or first use. The sale of building land is This is not applied if the receiving entity also subject to VAT. Since January 2011, holds a certificate proving it makes advance the standard 20% VAT rate is applicable payments of tax or if the receiving entity has in Slovakia with respect to the supply of its registered seat or address within the EU. building land and buildings.

BUSINESS COMBINATIONS If real estate sales meet these conditions Taxpayers in Slovakia may decide that in they are VAT exempt, but the supplier has the case of certain business combinations/ the option to choose to charge VAT. activities the fair value will be used not only for accounting, but also for tax purposes. Rental of real estate or parts thereof is exempt from VAT, but the supplier may opt In such a case, the revaluation difference to charge VAT if the supply is made to a arising from the restructuring must be taxable person. included in the taxable base in line with the tax law. On the other hand, the company The VAT payer who acquires immovable may depreciate assets from their fair property with the intention to use the value and must not continue with the tax property for both business and non- depreciation of assets from their tax residual business purposes is only entitled to deduct value. In addition, the amortization of the proportional part of the input VAT in the goodwill may, under certain conditions, be amount that corresponds with the scope of tax deductible. the business use of the respective property.

REAL ESTATE TAX The Slovak VAT Act contains provisions In general, real estate tax is applied to for capital goods scheme purposes, companies and individuals owning land and according to which the VAT payer is obliged buildings. The tax is based on the area of to pursue for VAT purposes the change of the land and building, the number of floors use (for business/non-business purposes of a building, usage and location. There is as well as for exempt/non-exempt use) of considerable flexibility for local authorities in immovable property (buildings, building the setting of these rates of tax. lands, flats, commercial premises, building superstructures, extensions and REAL ESTATE TRANSFER TAX AND reconstructions of buildings, flats and OTHER TRANSFER TAXES AND DUTIES commercial premises requiring a building Real estate transfer tax was abolished permit) for a period of 20 years and to adjust in 2005. There are no significant stamp the input VAT deducted accordingly. or other duties on the transfer of land or buildings. Acquisition of shares in Slovak VAT grouping companies is not subject to any transfer tax VAT grouping was introduced in Slovakia or significant stamp duties. with effect from 1 January 2010. A VAT group is defined as a group of

Slovakia | 97 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. taxable persons with their seat(s), to non-EU businesses and within 9 months places of business or establishment in in the case of payments to EU entities. the territory of Slovakia and which are Alternatively, for EU entities, a shorter connected financially, economically and period is allowed if at least 3 calendar organizationally. Members of a VAT group months are involved and VAT incurred act as one taxable entity under one assigned during this period amounts to at least VAT ID number. EUR 400.

The tax authorities should register the VAT The tax authorities determine whether the group with effect from 1 January of the claim is to be paid for EU business within calendar year following the year in which the 4 months of receipt of the application, or application for registration was submitted, if if additional information is requested, with the respective application has been filed by a period of up to 8 months, or for non-EU 31 October of the current calendar year. entities within 6 months.

Should the application for VAT group VAT payers with seats in Slovakia and registration be filed after 31 October of the foreign entities who do not fulfill the current year, the tax authorities will register conditions for refunding of VAT under the the group with effect from 1 January of the EU Directive 2008/9/EC or the 13th EU VAT second year following the calendar year in Directive, and which are VAT registered which the application for the registration of in Slovakia, may apply for a refund of VAT the VAT group was filed. incurred via the filing of VAT returns.

From 1 January 2014, a new member may Generally, the refunding by way of VAT join the existing VAT group anytime during returns takes approximately 90 days if the the calendar year. supplier is a monthly VAT payer.

VAT grouping can positively affect the cash However, an accelerated VAT remittance flow of companies in a VAT group since VAT procedure is available for persons registered is not charged on transactions between VAT for VAT in Slovakia, under which a VAT refund group members. is possible within 30 days of the deadline for filing the VAT return for the respective period. VAT refund This is subject to certain conditions, e.g. If a company is established in another EU the taxable period being a calendar month, Member State, it can submit an electronic registration for VAT purposes for at least claim for VAT refunds under EU Directive 12 months before claiming the excess VAT 2008/9/EC. A non-EU business can also deduction, and underpayments up to EUR recover VAT under the principles of the 13th 1,000 towards the state budget or towards EU VAT Directive. social/health insurance institutions during 6 calendar months before the end of the Under both of these provisions, there calendar month in which the excess VAT are strict time limits for making claims. deduction arose. VAT payers who comply Applications must be submitted within 6 with these conditions must note this in the months following the end of the calendar respective VAT return. year in which the VAT was charged or paid

98 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Slovak Act on Value Added Tax Up until the end of 2014, the transfer-pricing – general rule for determining the place rules have only applied to cross-border of supply of services transactions. As of 2015, the transfer General rules on “place of taxation” pricing rules have been extended to apply stipulate that the place of supply of services to transactions between related domestic to a taxable person (so-called business to entities. business services) is the place where the customer is established; and the place of Based on transfer pricing principles, the supply of service to a person other than transfer price should reflect the risks borne a taxable person (so-called business to and functions performed by parties involved consumer services) is in the member state in the transaction. In principle, any method of the service supplier. recognized by the OECD could be used for price determination (e.g. cost plus, resale Exceptions to the general rule apply for minus, comparable uncontrolled price). If specific services, e.g. the place of supply the price charged for goods or for a service of services connected with immovable significantly differs from prices charged in property, including the services of similar transactions between independent estate agents and of related experts, companies, the tax authorities may accommodation services, the granting challenge the transaction. of rights to use immovable property and services for the preparation and Formal transfer pricing documentation coordination of construction work, such as requirements have been effective since the services of architects and of persons 1 January 2009. The Ministry of Finance providing on-site supervision, should be issues guidelines on transfer pricing the place where the immovable property is documentation rules. Transfer pricing located. documentation must be provided to the tax authorities within 15 days of their request. TRANSFER PRICING Prices used in transactions between related parties must comply with arm’s For more information on real length principles. Under Slovak tax law, if estate services in Slovakia, the agreed price for a transaction is notably please contact: different from a fair market price and the difference would lead to a decrease of the Branislav Durajka taxable base of the Slovak related party, a Partner fair market price will be substituted for tax purposes. Related parties are generally KPMG in Slovakia defined as economically or personally Dvorakovo nabrezie 10 connected individuals or legal entities. Bratislava, 811 02 Economic connection is understood to be Slovakia participation of more than 25% in share T: +421 2 599 84 111 capital or voting rights. Personal connection M: +421 917 843 534 is understood to include participation in the E: [email protected] management or control of the other person. kpmg.com/sk

Slovakia | 99 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Slovenia

GENERAL the buyer and the seller agree in a joint A standard value added tax (VAT) rate of declaration regarding VAT taxation and 22% is applicable in Slovenia, whereas a submit it to the tax authority prior to the reduced rate of 9.5% may be applied in time of supply. some cases. The reduced 9.5% VAT rate on the sale The sale of building land is subject to of residential property applies only if the 22% VAT. However, the sale of buildings property meets the criteria of a social or parts thereof, and of the land on which housing program. If the area of a house they stand (occupied for longer than 2 or apartment exceeds a certain area in years), is VAT exempt; consequently, 2% square meters then the standard VAT rate real estate transfer tax (RETT) is payable. applies. Details are provided under the Notwithstanding the above, the seller “Value added tax” section below. (taxable person) and the buyer (taxable person having the right to full deductions CORPORATE INCOME TAX of VAT) can make an arrangement to Resident companies are taxed on their charge VAT on the sale. In such a case worldwide income. According to the

100 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Corporate Income Tax Act (henceforth Examples of maximum depreciation the Slovene CIT Act), revenues and rates are: expenditure disclosed in companies’ profit and loss accounts are adjusted for • 3% for buildings and investment tax purposes. property;

The corporate income tax (CIT) rate is • 6% for parts of building projects, currently 17%. including parts of investment property;

Investment funds subject to tax • 20% for equipment, vehicles and under the Slovene CIT Act, which are machinery; established in accordance with an act regulating investment funds and fund • 50% for computers, hardware and management companies, shall pay CIT software; for the tax period at a rate of 0% of the tax base, provided that at least 90% of • 10% for other investments. the operating profit generated in the preceding tax period has been distributed Tax losses by 30 November of the tax period in Tax losses may be carried forward for question. an indefinite period and may be used for the reduction of the taxpayer’s positive Capital gains CIT base, but only up to 50% of that Capital gains are included in the tax base taxpayer’s CIT base for the current tax and are subject to CIT. However, under period. Tax losses from the current certain conditions (i.e. if the taxpayer and previous years may not be carried holds at least 8% of the share capital forward if the direct or indirect ownership for a minimum period of 6 months and of capital or voting rights of the taxpayer employs one employee on a full time changes by at least 50%, and where: basis), 47.5% of the capital gain may be exempt from taxation. Fifty percent • the taxpayer, before the changes (50%) of capital losses are treated as of ownership, did not carry out the non-deductible expenses, if realized from business activity for 2 years; or the alienation of shares and if the above- mentioned conditions are met. • the taxpayer essentially changed its business activities in the last 2 Tax depreciation years before or after the change of Based on the Slovene CIT Act, depreciation ownership, unless the change of and amortization may not exceed the business activities is necessary for the level arrived at using the straight-line continuation of employment or due to depreciation method and the maximum business restructuring. annual depreciation rates prescribed by the CIT Act. Any excessive amount should be Thin capitalization treated as a tax non-deductible expense Except in the case of loan recipients that until the asset has been completely are banks or insurance providers, the depreciated or disposed of. interest paid on loans (loans received from a shareholder who at any time

Slovenia | 101 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. during the tax period directly or indirectly Under the Slovene CIT Act, which lays owns at least 25% of the shares in the down the provisions of the EC Parent- equity capital, or the voting rights of the Subsidiary Directive, dividends are taxpayer) will not be recognized as an exempt from withholding tax if the expense, if at any time during the tax recipient is an EU company listed in the period the loans exceed the prescribed Directive and subject to corporate income debt/equity ratio of 4:1. However, if tax, and which directly holds at least 10% the taxpayer can prove that the excess of the capital or voting rights of the paying loan could also be granted by a non- company. related entity under the same or similar circumstances, then thin capitalization A continuous minimum holding period of rules do not apply. 2 years is required. If the 2-year holding period has not yet elapsed, the exemption WITHHOLDING TAX can be directly applied if the recipient The general withholding tax (WHT) rate lodges a bank guarantee. is 15% and is applicable for payments of dividends, interest, royalties, lease Notwithstanding the conditions above, payments for immovable property dividends are exempt from withholding located in Slovenia, on payments for the tax if the recipient is an EU or EEA performances of artists and sportsmen, company that is unable to offset the in all those cases provided that the Slovenian withholding tax because it payment is made to another person, and benefits from a participation exemption for payments for any services to an entity regime in its country of residence. In such resident in a country listed on the “black cases, any withholding tax already paid list” which is published by the Slovene may also be refunded. Ministry of Finance. Interest and royalties Slovenia applies the EC Parent- According to the Slovene CIT Act, which Subsidiary Directive and Interest and lays down the provisions of the EC Royalties Directive which reduce WHT Interest and Royalties Directive, interest to 0% when this income is paid to EU and royalty payments made by resident resident companies. If none of the companies are generally exempt from aforementioned Directives apply, there withholding tax, provided that at the time is also a possibility to apply the relevant of the payment: double tax treaty between Slovenia and the respective country. • the payments are made to the beneficial owner, which is a company Dividends registered in an EU member state; No withholding tax is levied on any payments made by a Slovenian company • the payer and the beneficial owner are to another Slovenian company which related such that a) the payer directly communicates its tax identification participates in the beneficial owner’s number to the payer (the procedure capital by not less than 25%, or b) the normally followed). beneficial owner directly participates

102 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. in the payer’s capital by not less REAL ESTATE TRANSFER TAX than 25%, or c) the same company The transfer of real estate property or directly participates in the payer’s and establishing and transferring the right the beneficial owner’s capital by not of superficies is subject to real estate less than 25%, where participation transfer tax (RETT). If VAT is charged on between the companies of the EU the transaction, RETT is not imposed (i.e. member states is concerned; for supplies of construction land, new immovable property – buildings and land • the duration of the minimum at the time of first use or within 2 years of participation is not less than 24 months. first use, etc.).

However, an exemption from withholding The taxable person is the seller of the tax shall only apply to the amount of the real estate property, unless otherwise payments that are at arm’s length. agreed. In establishing the right of superficies, the taxable person is the For the above-mentioned withholding tax owner who first acquired the right to exemption, a special application must be the superficies, while in transferring the submitted to the Slovene Tax Authorities. right of superficies; the taxable person is If the conditions are fulfilled, the tax the owner who transfers the right to the authorities have to pre-approve the superficies. application of that WHT exemption.

Slovenia | 103 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. This tax is payable at a rate of 2% of reverse charge mechanism, as long as the tax base. The tax base is the selling the buyer is registered for VAT in Slovenia price of the real property. In establishing (using the domestic reverse charge or transferring the right of superficies, mechanism according to Article 76a of the tax base is the realized payment VAT Act). In this case, the seller is obliged equaling the market value of the right of to report every taxable transaction with superficies. regard to such immovable property to the tax authorities on a monthly basis in TAX ON CIVIL LAW TRANSACTIONS accordance with Article 76a of the VAT (TRANSFER TAX) Act (reverse charge mechanism). Slovenia does not impose a special tax on civil law transactions. In the case of a VAT-exempt sale of buildings, constructions and their parts, VALUE ADDED TAX the transaction is subject to 2% RETT. General provisions regarding real estate The standard VAT rate in Slovenia is 22% Generally, according to Article 44 of the and the reduced rate is 9.5%. Slovene VAT Act, the sale of buildings, constructions and their parts are VAT The reduced VAT rate applies only to flats, exempt (except if the sale is made housing and other facilities intended for before the first occupation or if the permanent residence and parts of these sale is performed within 2 years of the buildings that are part of a social policy, first occupation and except for the sale including the construction, renovation and of building land). However, in most repair thereof, the maximum floor space cases taxpayers are able to give up the for these being 120 m2 for apartments exemption if special conditions according and 250 m2 for houses. to Article 45 of the Slovene VAT Act are fulfilled, i.e.: The leasing of an office and certain rental space is, in general, also VAT exempt • the seller and the buyer of immovable (except for accommodation in hotels, the property have made a joint declaration lease of garages and parking areas, the (regarding the VAT-able transaction) to lease of permanently installed machinery the competent tax authority prior to the and equipment and the lease of safes). supply thereof (filed electronically); and However, the lease of an office and certain rental space might be subject to • the buyer of the immovable property VAT if certain conditions are met (e.g. has the right to full deduction of input where a joint declaration is signed and VAT. provided to the tax authorities).

If the supply of immovable property is Place of supply of services subject to VAT (according to Article 45 Generally, since 2010, the place of supply of the Slovene VAT Act), then the VAT is of services to a taxpayer registered for payable by the buyer based on the local VAT purposes in another EU country

104 | Guide to Taxes on Real Estate in CEE © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. or third country is the place where the VAT refund under domestic law taxpayer has established his business, The standard refund period relating permanent place of residence or to VAT returns (i.e. the refund of VAT permanent place of conducting business. surplus) is 21 days after the date of filing However, in cases where the supply of of the VAT return. services is made to a person other than a taxpayer, the place of supply of services Foreign VAT refund under VIII is where the service provider has its Directive seat, permanent place of residence or Since 1 January 2010, VAT reclaims under permanent place of conducting business. the VIII Directive must be filed with the local VAT authority (in the country where In cases of services related to real estate, the requestor is registered) and not the place of supply of services is where where VAT has been paid. VAT reclaims the real estate is situated. must be filed electronically.

EC services list Since 1 January 2010, relevant monthly EC sales lists have had to be filed by taxpayers if they supply goods or services to taxpayers from other EU countries where the reverse-charge mechanism is applied. Advisory services where VAT is charged on a reverse charge mechanism basis in the recipient’s country have to be included in the EC sales list. Services relating to local real estate where the VAT is charged locally do not need to be For more information on real reported in the EC sales list. estate services in Slovenia, please contact: EC sales lists should be filed electronically by the 20th of the month following the transaction. If EC sales Nada Drobnic lists are filed, then VAT returns should Partner, Tax also be filed by the 20th of the following month, otherwise the deadline for filing KPMG in Slovenia VAT returns is on the last working day Zelezna cesta 8a in the month following the tax period 1000 Ljubljana in question. Blank EC sales lists do not Slovenia need to be filed. However, the VAT liability T: + 386 1 2364 300 should always be paid by the last working M: +386 31 641 150 day of the month following the taxable E: [email protected] period in question. kpmg.com/si

Slovenia | 105 © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Contact:

Honorata Green Tax Partner

KPMG in Poland ul. Inflancka 4 Warszawa, 00-189 Poland T: +48 22 528 11 53 M: +48 604 496 370 E: [email protected] kpmg.com/cee

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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The KPMG name and logo are registered trademarks or trademarks of KPMG International. © 2016 KPMG Central & Eastern Europe Limited, a limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.