Czech Republic: Jet to Let Guide to the Czech Republic

The story so far…

The Czech Republic is one of the most stable countries in Eastern Europe. Communist rule came to an end in 1989 and in 1993, the country of Czechoslovakia was split into the independent nation states of the Czech Republic and Slovakia. A recession in the late 1990s slowed the country’s economic growth, but foreign direct investment (FDI) and EU exports have since helped to make it one of the most successful post-Communist states in Eastern Europe.

Where is it?

The Czech Republic has borders with Poland to the north and Germany to the north-west. The country also shares borders with Slovakia to the east and Austria to the south. The Czech Republic is divided into two geographic and cultural regions, Bohemia and Moravia, which have a combined territory of 78,866km squared.

What is the weather like?

Summers are moderately warm with temperatures rising during July and August. The weather in the spring is usually changeable and can swap from sun to snow very quickly and spring and summer are the wettest seasons. Winters are generally cold and wet, sometimes with snowfall and temperatures below freezing point.

Language

The Czech Republic has an estimated population of 10,241,138, mainly consisting of Czechs (90.4 per cent), Moravians, Poles and Slovaks. The official language is Czech, spoken by the majority of the population, but other spoken languages include Polish, Hungarian, German and English.

Currency

The currency in the Czech Republic is the Ceska Koruna or Czech Crown (CZK), divided into 100 Halers. The Czech Republic is presently forecast to adopt the euro on 1 January 2010.

Politics

The Czech Republic is a parliamentary democracy, with a President as Head of State. In 2003, Václav Klaus was elected President of the Czech Republic and continues to serve in this post. Klaus leads the right-wing Civic Democratic Party and previously served as a Prime Minister until 1997. He launched ambitious economic reforms, notably through privatisation and a pro-western foreign policy.

Following the 2002 parliamentary elections, the centre-left parties gained a small majority, forming a coalition government. The main parties are the Czech Socialist Party (CSSD) and the Civic Democratic Party (ODS). The Czech Republic’s Prime Minister is Jirí Paroubek, elected in 2005.

Economy

After a period of political and economic crisis that ended in the separation of the Czech and Slovak Republics, the Czech government went ahead with a series of economic reforms. The country soon gained a standing as one of the most steady and prosperous of the post-Communist states.

Manufacturing is the main source of economic activity, most notably in the production of cars. Other industries that contribute significantly to the Czech economy include iron and steel, electronics and chemicals.

The Czech Republic continues to attract companies looking for less expensive labour than in the other more mature Western economies such as Germany. Companies such as Toyota, Peugeot, Skoda and Bosch have all capitalised on using an Eastern European labour force to get work done to the same standard at lower costs. More recently, Hyundai has announced plans for a €1 billion car plant to be built in the Moravia-Silesia region which will produce 300,000 cars each year and employ 2,000 people. This will be the biggest foreign investment in the history of the Czech Republic and it’s estimated that it will boost its gross domestic product (GDP) by an impressive 1.3 per cent. At this point, the final agreement has yet to be signed, but even plans on this scale illustrate that large and successful companies are attracted to the opportunities present in the country.

Economic growth

The European Commission reports that real GDP in Czech Republic is expected to grow by 4.4 per cent in 2006, after growing at 6.0 per cent in 2005. Real growth statistics for the past six years are presented in the table below.

Year Real growth of GDP (%)
2000 3.9
2001 2.6
2002 1.5
2003 3.7
2004 4.0
2005 6.0

Source: Eurostat, the Statistical Office of the European Communities

The Czech Republic’s GDP per capita is €17,100 according to 2005 estimates.

Inflation

The annual inflation rate was 1.6 per cent in 2005 and this was caused mainly by an increase in fuel and gas prices.

Interest rates

Central Bank interest rates are two per cent (March 2006) and Czech rates are expected to remain below the European Central Bank (ECB) rate for the next 12 months.

Unemployment

Unemployment has not changed much over the last five years and still remains at nearly eight per cent. Serious structural problems remain in the labour market, such as continuing long-term unemployment and marked regional differences in employment opportunities.

Unemployment rate (percentage unemployed)
2000 8.7
2001 8.0
2002 7.3
2003 7.8
2004 8.3
2005 7.9

Source: Eurostat, the Statistical Office of the European Communities

Foreign direct investment (FDI)

The introduction of financial incentives in the late 1990s has encouraged a substantial inflow of FDI and throughout the pre-EU period, the country received more FDI per capita than any of the other Eastern European 8 countries. The government has moved quickly to modernise the economy and adopt EU standard practices, which continues to be rewarded by foreign companies having the confidence to invest considerable sums of money.
The highest percentage of FDI goes into financial and manufacturing sectors, in industries such as car manufacturing, software development, engineering products and electronic goods.

Foreign direct investment in the Czech Republic (€ million)
1999 5,932.8
2000 5,403.5
2001 6,296.0
2002 9,012.4
2003 1,862.7
2004 3,595.5
2005 5,233.2

Source: Czech National Bank

The property market

Czech property prices have risen constantly since 1991, but they are still lower than in Western Europe. This gap in prices will shrink dramatically as the Czech Republic becomes wealthier.

Despite the property boom, foreigners currently represent only about one to two per cent of buying activity in the property sector. Demand from investors at this stage is not affecting the whole market, particularly outside of the capital Prague.

The property market is also fuelled by increasing tourism. The number of arrivals to the Czech Republic is expected to double by 2010 to reach 14 million visitors per annum. Growth is expected to be stimulated by EU membership, the development of the regions, the rise of low-cost air travel and growing demand for short breaks. Currently, 90 per cent of tourists visit only Prague, but this percentage is expected to fall due to growing interest in other parts of the country.

Property hotspots

As it’s the capital city, it’s unsurprising that Prague is the Czech Republic’s prime jet-to-let investment destination. Economic activity in Prague is high and the city has almost no unemployment. It’s also the top Czech tourist destination and property prices reflected these factors when they rose by 15 per cent last year. Prices and rents are higher in the centre of Prague and fall the further out you go. Prices in the city centre are in the region of €18,00 to €4,000 per square metre falling to €1,000 to €2,400 per square metre in outlying districts.

Brno is the country’s second largest city and an ever-growing European business hub, making new-build apartments the investor’s first choice. As an example, a two-bedroom apartment currently costs in the region of €60,000–75,000. Brno and several other Czech towns have beautiful rural houses and ski-chalets which offer opportunities as live-and-let investments. Property prices are cheaper than Prague and rental yields can be in double digits.

Transaction costs

Buying a property in the Czech Republic is fairly straightforward. There are certain restrictions on foreign ownership and, unless the buyers have permanent residency in the country, foreign nationals can only buy a property if they establish a limited liability company (known as an SRO in the Czech Republic). Foreigners are still not permitted to buy forest or agricultural land and these restrictions will remain in force until 2009.

When choosing a property, the buyer should check whether it’s being sold with private or collective ownership, which usually applies to apartments in old-style blocks that date from Communist times. Ideally, the property would be sold with private ownership, free of any loans, but your lawyer should confirm this before you make an offer.

When signing the preliminary contract the buyer pays a deposit which is usually around 10–20 per cent of the total price. The rest of the payment is made when signing the final contract and the buyer then becomes the legal owner after the contract and relevant documentation have been lodged with the Land Registry. This process can take up to several months, so it’s normal for a buyer to leave the completion monies in either a notarial or escrow account until the purchase is legalised and completed.

The overall expenses are as follows:

• Transfer Tax is charged at a rate of three per cent of the sale price of the property or the usual market price, depending on which figure is higher. It’s paid by the seller, but the buyer becomes liable for this tax in the event that the seller doesn’t pay.

• Legal expenses vary – typical costs are up to €2,000 including the incorporation of an SRO.

• Notary fees are in the region of €300–400.

• Estate agents’ fees come to three to six per cent.

You should allow up to eight per cent of the purchase price for taxes and fees.

Annual costs

At the moment, annual tax rates are low, but they may rise in the future.

• Property Tax is charged on an annual basis depending on the value of the property. It’s calculated by special evaluation rules which depend on the use of the property, where it’s located and several other factors. For a large two-bedroom apartment the annual amount should not exceed €50.

• Land Tax is imposed on plots of land entered in the Land Register and is payable by the owner.

Taxes

Income Tax
Individual Income Tax rates in 2006:

Tax Annual tax base (CZK)
15% 0–109,200
20% 109,201–218,400
25% 218,401–331,200
32% 331,201 and over

Corporation Tax
Corporation Tax is charged at a rate of 24 per cent.

Capital Gains Tax
Capital gains are taxed as income for companies and individuals. Individuals are exempt from the sale of a main residence which has been held for at least two years.

Facts at a glance

Geography
Population (2005 estimate): 10,241,138
Language: Czech
Ethnic groups: Czech (90.4%). Minority groups include Moravians, Poles and Slovaks, which form the largest ethnic minorities
Local currency: Ceska Koruna or Czech Crown divided into 100 Halers

Political system
Political structure: Parliamentary democracy
President: Václav Klaus
Prime Minister: Jirí Paroubek
Main parties: Civic Democratic Party (ODS), Socialist Party (CSSD)

Economy
Unemployment rate in 2005: 7.9%
Unemployment rate, February 2006: 7.7%
Inflation rate in 2005: 1.6%
Inflation rate, February 2006: 2.4%
Interest rate, March 2006: 2.0%
GDP growth in 2005: 6.0%
GDP growth forecast for 2006: 4.4%
GDP per capita: (income €17,100 per person) in 2005

Taxation
Income Tax: 15–32%
Corporation Tax: 24%
Capital Gains Tax: Taxed as income

Corruption statistics
Corruption rate: 4.3
Corruption rank: 47th

Industry and technology
Major industries: Machinery and equipment, Motor vehicles, Glass.

The Czech property market
Hotspots: Prague, Brno

Property taxes (transactions)
Transfer Tax: 3%
Notary fees: €300–400
Estate agents’ fees: 3–6%
Legal fees: €2,000
Total fees: 8%

Property taxes (annual)
Property Tax: Negligible
Land Tax: Negligible

Mortgage
LTV: 50–85%
Term: 5–25 years
Currency: Czech Koruna only
Current interest rate: 3.5–5.0%

Investor resources

Embassies

British Embassy in the Czech Republic
Thunovska 14
118 00 Prague 1
Czech Republic
Tel: +420 257 402 111
Fax: +402 257 402 296
Website: www.britain.cz

Embassy of the Czech Republic in the UK
26–30 Kensington Palace Gardens
London W8 4QY
Tel: 020 7243 1115
Fax: 020 7727 9654
Website: www.mzv.cz/wwwo/?zu=london

Useful websites

Czech National Bank
www.cnb.cz

Czech Statistical Office
www.czso.cz

Invest in Czech Republic
www.czechinvest.org

Tourism in Czech Republic
www.czechtourism.com

© Lawpack Publishing 2006

“The Jet–to–Let Bible”, Dominic Farrell
Reproduced with the permission of Lawpack Publishing.

Further information on this topic can be found in “The Jet-to-Let Bible”, by Dominic Farrell, ISBN 1 905261 11 X

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