Appreciation of Rental Property by Way of Technical Improvements, under Amended Tax Regulations

Czech Republic: In the future, economic beneficiaries will be allowed to depreciate the value created by technical improvements in their own accounting.

An upcoming amendment to the Income Tax Act, scheduled to come into force as of 1 April 2017, will allow so-called economic beneficiaries to write off value-enhancing technical improvements (such as installations performed by a sublessee in a rental property which they use based on a sublease agreement: the sublessee will be able to affect its tax base by depreciating such new installations). For this to be possible, the sublessee must fulfill the same conditions as the tenant would have to satisfy with respect to value-enhancing improvements which they performed on their own.

Before this amendment bill was passed, only tenants (including lessees under finance lease arrangements) were allowed to perform tax depreciations on rental property, on the terms set out in Sec. 28 (3) of the Czech Income Tax Act.

The depreciation of technical improvements to rental property principally requires that the tenant has obtained the consent of the owner (i.e., the landlord / lessor) with such depreciation, which must be recorded in a written agreement (i.e., either in the lease agreement itself or in a separate deed). Also, the acquisition price of the given assets (rental property) as accounted for in the books of the owner must not be increased by the expenses made towards the said technical improvement, the tenant must write off the technical improvement in the manner prescribed for the depreciation of tangible assets, and the technical improvement must be put into the same depreciation category as the rental property itself.

If these requirements are fulfilled, sublessees will newly be allowed to write off the value-enhancing technical improvements which they performed in and on the rental premises used by them under a sublease agreement. The termination of such use, and the revocation of consent with such write-offs, is governed by the same rules which also apply to the termination of the lease itself and to the revocation of similar consent by the person who depreciates the underlying tangible property (i.e., in their case, consent with the fact that the tenant will perform the said write-offs). In other words, in terms of the tax consequences, the sublessee here takes on the role of the tenant, and the tenant who allowed them to use the given property (fixed assets) takes on the role of the person who writes off such property (i.e., the role of the owner of the fixed assets).

In closing, we ought to mention that this rule which has newly been incorporated in the Income Tax Act will apply only to value-enhancing technical improvements which are completed and put into use after the amendment has come into force.


Source: Act No. 586/1992 Coll. (Income Tax Act) Amendment bill amending the Income Tax Act as of 2017, parliamentary press 873



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