While international organisations recommend that Slovakia should tap real estate taxes more, as the level in Slovakia is low and its increase would not hinder economic growth as in the case of other taxes, the Slovak government has abandoned its original idea to burden so-called ‘luxury’ real estate with higher tax rates. Yet, it still wants to see property taxes to be reflective of the value of the real estate, not only based on size.
“We changed the approach,” Finance Minister Peter Kažimír told the Slovak Television in late December, adding that this tax should continue to be only revenue for towns and villages and the government only wants to agree upon a gradual change in taxation of real estate so that it also reflects the value of the property.
In Slovakia, municipalities decide on individual property tax rates based on the size of the real estate. Apart from being a source of revenue for municipalities, localities can also utilise property taxes to affect their future development either in terms of population growth or investments into businesses.
“It is their estimate of how much citizens and entrepreneurs pay,” said Peter Kremský from the Business Alliance of Slovakia (PAS). “It can also be a tool for supporting business activity,” he added.
The government already wanted to increase taxes on luxury real estate in 2012 when it planned to introduce a special flat rate for luxury villas. However, after it realised that it would be too difficult to filter luxury real estate, it abandoned the idea and left deciding about property tax rates to municipalities.
Highest increase since 2013
This year brings higher real estate taxes to Slovakia, compared with previous years. They increased by 2.33 percent on average, which is the largest increase since 2013, based on an analysis by PAS.
So far, the most dramatic increase of real estate taxes took place between the years 2004 and 2005, when municipalities could independently decide on the taxes for the first time. The rate of increase declined significantly over the following years.
Kremský sees especially the tax hike in Bratislava and regions with high investment and development behind the increase, as most Slovak towns have not increased their real estate taxes.
“New industry and services bring greater demands on transport, infrastructure or other related activities that are often provided by municipalities,” explained Kremský.
The Slovak capital increased the real estate tax on apartments and houses by 30 percent and on agricultural and other constructions by 50 percent, while taxes rose especially for commercial space in blocks of apartments – in the Old Town they almost tripled and in other boroughs they rose by as much as 160 percent.
However, it is the town of Nové Mesto nad Váhom which can boast the highest increase in real estate taxes, when businesses will pay as much as 322 percent more than for ordinary, non-residential premises such as garages.
On average, tax rates on commercial space for doing business in blocks of apartments increased the most – by as much as 9 percent.
Only three towns increased real estate taxes on premises for doing business – Nové Mesto nad Váhom, Martin and Medzev. Nevertheless, the tax remains the lowest in the latter – €666 for per 1,000 square metres of commercial space on a plot of 1,500 square metres.
Businesses will pay the highest taxes for premises for doing business in Púchov – as much as €6,449 for the same real estate. In Bratislava’s Old Town it will be roughly €5,000. Among the remaining boroughs of Bratislava and in Košice it will be roughly €4,100.
Kremský was surprised by the increase in towns that suffer from high unemployment. He believes that low real estate taxes can attract potential investors and improve employment in some areas.
“It seems that the towns are not using the tax rate as stimuli for the arrival of new investors,” he said. As an example he listed Zvolen, Rožňava, Veľký Krtíš, Spišská Nová Ves and Rimavská Sobota, which rather discourage investors.
“The same is the situation in Púchov or Žiar nad Hronom, where the town wants to rely on the big industries but at the same time it slows down economic development,” he added.
The system of taxation based solely on square metres of property was criticised by the International Monetary Fund in 2012, as it did not take into consideration price differences among cities and regions.
In May 2016, the Finance Ministry introduced its plan to create, in cooperation with the Association of the Towns and Villages in Slovakia (ZMOS), technical preconditions for a change in the system of taxation that would also take into consideration the market value of the property.
However, no significant changes in the mechanism of taxation are planned for 2017.
“Proposals and changes in taxation are exclusively in the competence of the Ministry of Finance,” said ZMOS executive chairman Jozef Turčány.
Experts see advantages as well as disadvantages in both approaches.
“Allocating the tax according to the square area of the estate is not fair as it does not reflect the value of the property as such, taking into consideration its utilisation,” Alica Orda Oravcová from the Slovak Chamber of Tax Advisors told The Slovak Spectator.
On the other hand, many people, mainly from older generations, are rich in property ownership but poor in terms of current income.
“A high tax on real estate in which they live can bring them into misery in their own residence,” Radovan Ďurana, an analyst at the INESS think-tank, told The Slovak Spectator.
Experts claim that the new system based on the market value of the property will put certain groups of residents at a disadvantage.
Orda Oravcová explained that the tax must be fair and explicitly stated, so that taxpayers know their obligation.
“It is a big challenge for legislators, because they must set the price maps and establish the market value of the estate,” said Orda Oravcová.
“The biggest problem can be property not captured by the market such as historic landmarks or factories that were not subjects of trade and therefore their market value is not available or it is difficult to calculate,” she added.
The National Agency of Estate Agents developed price maps that take into consideration the square area, balconies and loggias, number of floors, condition and even material used for the construction. However, they are not always reliable.
Maps include the prices per square metre of agricultural land that serve as a foundation for allocating the tax.
“These, however, do not correspond with the current market prices because they were set 15 years ago,” said Turčány.
Ďurana also points to a possible lack of data and the problems this may cause.
“Another aspect is the creation of the price maps that due to insufficient data can result in inappropriate taxation of different properties on the same street,” said Ďurana. “Taxation of real estate according to its market value requires a developed market with transaction volume that makes it possible to estimate the market value.”
Pavel Škriniar from the Finančná Hitparáda website also points out that the maps contain only general information about the prices in the locality but not about the particular value of an estate.
“Many people obtained their flats during socialism and their lifestyle has not changed since,” Škriniar said, pointing out that according to the development on the estate market their flats will now fall into the luxury category. “They will have to pay additional tax on this luxury.”
Turčány from ZMOS confirmed that the difference between the value of the estate and the income of the owner can be a problem.