The EU has extended the VAT exemption for apartments in the Czech Republic, but the government will not utilize it

Brussels - The European Union today extended the exemption for the application of the reduced VAT rate on housing for the Czech Republic until 2010. However, the Czech government will not use it, a reliable source informed ČTK. The same rules apply as if the exemption had expired at the end of this year, which will increase the prices of large apartments starting next year. The so-called social housing will continue to fall under the reduced VAT rate, which, however, will increase from five percent to nine in connection with the approved government reform starting in January 2008. Most apartments and houses in the Czech Republic will fit into this definition.
    "The Czech Republic adopted a definitive solution this year in the form of an exceptionally advantageous definition of social housing, which allows single-family houses with an area of up to 350 m² and apartments with an area of up to 120 m² to remain under the reduced VAT rate. It is much more advantageous to maintain this definitive solution in the legal system, which is beneficial for more than 90 percent of the population, than to utilize the extension of the exemption, hastily change the legislation, and again seek a definitive solution in two years," said Finance Minister Miroslav Kalousek to ČTK.
    With a substantial increase in prices, people who want to buy an apartment larger than 120 square meters or a house larger than 350 square meters after January 1, 2008, must prepare. Such defined housing will not fit into the "social" category and will be subject to the standard 19 percent VAT rate. For a house valued at ten million crowns with an area larger than 350 square meters, the price will increase by 1.4 million crowns in terms of conversion.
    Developers have long been unclear about which VAT rate a new apartment building will fall under if just one apartment is larger than 120 square meters. According to today's statement from the Ministry of Finance spokesman Ondřej Jakob, however, such a house falls under the basic 19 percent VAT rate. When such a house is sold as a whole, the basic VAT rate must be applied, according to him. However, if a developer sells individual apartments, as is the case in most cases, they can apply the reduced VAT rate to those meeting the definition of social housing.
    If the government wanted to utilize the exemption for the reduced VAT rate, it would mean that Parliament must quickly vote on a change in the government reform package. This package also includes the validity of the definition of social housing from January 1, 2008. Therefore, the deputies would have to move the validity date by three years, which will not happen.
    The European Commission has no problem with the Czech definition of social housing, a source told ČTK. In the past, media reports suggested that social housing "in the Czech way" was not very well received in Brussels.
    According to Radim Koliba from the real estate agency Hot Reality, apartments up to 120 square meters constitute up to 95 percent of developers' offerings. A similar ratio is also estimated for family houses. "According to our estimates, 70 percent of properties will fit into this category," added Petr Illetško from the real estate agency AAAByty. Vladimír Toman from Orco estimates the share of social housing to be up to 90 percent of all properties on the market. Approximately the same share of this category is offered in new apartments by Skanska, said their spokesman Ondřej Šuch.
    "We sell apartments and houses at a price excluding VAT and add the VAT at the current rate, so from January 1, 2008, we will offer apartments at the new VAT rate. In other words, the price at which we offer the apartment remains the same; the tax rate is changed by the state," Šuch said today. According to Toman, the price including VAT will logically be higher, as "the increase in tax cannot be compensated by lowering the price excluding VAT."
    "Developers will have to either spread these costs across the total costs of the project or build a larger number of smaller units and prepare them for the final investor for possible combination. The adjustment of the tax will then be on the final customer," responded René Hradecký from Bonafide Communications.
    "A loggia or balcony does not fall into the usable area of the apartments, but a cellar does. But that's more a question for lawyers," clarified Jakub Sedmihradský from the real estate company Lexxus.