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Property Investor: Real estate tax laws can sour deals

A transparent, understandable and reliable real estate regime is one of the more important pillars on which foreign investment rests. As the name suggests, 'greenfield' investments typically involve new construction on undeveloped property. Mergers, acquisitions or share purchases involving enterprises such as large manufacturing concerns also involve real property that lies under existing buildings, not to mention questions of expansion onto new land. The connection between solid real estate laws and foreign investment is therefore an important one. It is also important to ensure that other laws that can affect ownership rights in real estate follow a consistent and coordinated policy, including tax laws. While there have been laws dealing with real estate in Slovakia for many years, including major revisions to the Cadastral Act in 1992 and 1995, there remain some important aspects that could be streamlined and improved.


photo: Julian Juhasz

A transparent, understandable and reliable real estate regime is one of the more important pillars on which foreign investment rests. As the name suggests, 'greenfield' investments typically involve new construction on undeveloped property. Mergers, acquisitions or share purchases involving enterprises such as large manufacturing concerns also involve real property that lies under existing buildings, not to mention questions of expansion onto new land. The connection between solid real estate laws and foreign investment is therefore an important one. It is also important to ensure that other laws that can affect ownership rights in real estate follow a consistent and coordinated policy, including tax laws. While there have been laws dealing with real estate in Slovakia for many years, including major revisions to the Cadastral Act in 1992 and 1995, there remain some important aspects that could be streamlined and improved.

An issue that often arises is the present system for dealing with tax arrears of a registered owner or registered lessee. Under the present laws, a decision on imposing a tax lien by a tax office becomes effective on the date of the ruling, no matter when the tax lien is filed. Accordingly, potential buyers of land must always be careful to account for the possibility that a letter of ownership of real property may not indicate a tax lien that has been ruled upon but not yet filed. A danger arises because a lien for provision of tax arrears will prevail over other liens on a secured 'thing', and the Civil Code defines 'things' to include real property.


photo: Kevin Connor

Moreover, local tax offices are permitted to file tax liens on property located in other Slovak tax jurisdictions that are owned by the person whose tax payments are in arrears. What this leads to is either a contractual mechanism that withholds full payment to a seller of real property for a period of time (which is not favored by the sellers), or researching potential tax liabilities of the seller in every jurisdiction where real property is held. A possible solution is to request a letter from each tax office wherein the property of the seller is located, which would indicate the existence of any unfiled tax liens. In addition, it is important to check for any significant tax arrears that could lead to rulings on tax liens prior to not only the closing on a real estate sales contract, but also before title is fully registered in the name of the purchaser.

Checking with tax offices in all jurisdictions where a seller holds property takes time and can also add to the ultimate cost of the purchase. Hold-back of a portion of the purchase price to cover potential tax arrearages is also highly unpopular and can sour a pending deal for the sellers. In all cases, the lack of a more streamlined and secure system of charging and filing tax liens by tax offices can complicate matters. There is a significant risk that one or both parties to a real estate purchase contract or a transaction involving real estate ownership become less interested. This neither helps owners of real property nor provides appropriate comfort to foreign investors. For these reasons, improved laws and procedures concerning tax liens on real property are in order. Improvements may also have the beneficial effect of enforcing more timely tax collection.

Julian Juhasz and Kevin Connor are attorneys with Squire, Sanders & Dempsey. Their column appears monthly. Send comments or questions to propertyinvestor@ssd.com.

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