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REAL ESTATE

Foreigners still can't buy real estate

One of the obstacles to investment in real property in the Slovak Republic is the inability of non-Slovaks, with a few exceptions, to own interests in real property. Generally, the only way for a foreigner to maintain an interest in real property is to establish a Slovak company, which may hold title or other interests in real property.
This prohibition does not apply to a mortgage or a lien, which is simply a way to ensure payment of some obligation out of the proceeds of a sale of the real property if the obligation is not paid. For example, foreign banks may secure the repayment of loans made to Slovak individuals or companies by mortgage or lien and filing such interest at the appropriate Cadastral Office.

One of the obstacles to investment in real property in the Slovak Republic is the inability of non-Slovaks, with a few exceptions, to own interests in real property. Generally, the only way for a foreigner to maintain an interest in real property is to establish a Slovak company, which may hold title or other interests in real property.

This prohibition does not apply to a mortgage or a lien, which is simply a way to ensure payment of some obligation out of the proceeds of a sale of the real property if the obligation is not paid. For example, foreign banks may secure the repayment of loans made to Slovak individuals or companies by mortgage or lien and filing such interest at the appropriate Cadastral Office. With certain exceptions, such as tax liens, those security interests will be protected from other interests that are filed at a later time.

Other entities now have greater rights to own real property in the Slovak Republic, but only if such property is used for office space. These include branches of foreign insurance companies, banks and securities dealers. Other exceptions from the ban on foreign ownership include inheritance and restitution.

For the rest, the only way to validly hold real property is to incorporate in the Slovak Republic. Common problems with incorporation are high corporate tax rates (though these have fallen rather dramatically since January 1, 2000), high transfer tax rates, and all of the legal and bureaucratic steps necessary to establish and to maintain a Slovak company.

The prohibition against foreign ownership, in addition to adding extra costs to doing business in the Slovak Republic, could be limiting development in key sectors. As an example, anyone who lives in or around the capital city of Bratislava knows that housing is expensive. Subsidized mortgage loans are not easy to get, banks that have given them out in the past now have fairly large uncollectible loans in their portfolios, and the building industry generally has been in an economic slump.

For all of these reasons, housing starts are depressed, and Slovak businesses and the government do not seem to have the money to begin a turn-around. One option would be to create a limited exception to ownership of property by foreigners in the housing sector. This could provide an important source of capital for a necessary service, and serve as an indicator of the value of permitting foreigners to own real property directly.

One area where the rules have been relaxed for foreigners concerns property valuation. Until late last year, companies that had any amount of foreign ownership were subject to different procedures of evaluating the worth of property for purposes of real estate transfer taxes. To ensure an appropriate price, the former system of valuation in the case of such companies was to use property values applicable to similar property either in Germany or Austria. Thus, transfer taxes, which are payable by the seller but are guaranteed by the buyer, were likely to be higher than with a sale to Slovak individuals, or Slovak companies with no foreign ownership. This special valuation requirement has now been abolished, which is a positive development.

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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