Real Estate Legal Consultation: Company Transactions and Their Consequences

Taxes on the sale of real estate

• for an individual, income from selling housing owned for less than 36 months is subject to personal income tax (PIT); non-residential premises are not exempt (Art. 378 of the Tax Code);
• income from real estate is the difference between the sale price and the cadastral value (Art. 375);
• the rate is 12% (Art. 381); the return is due by 1 April and payment by 1 June (Art. 397, 398);
• for legal entities, property tax is 1.5% of the average annual net book value, but not less than the minimum value per square metre (Art. 412, 415).

What companies ask about

The most frequent area is buying or selling a commercial property: checking title, structuring the deal, the payment arrangements and the tax consequences for each party.

The second area is leasing: contract terms, allocation of maintenance costs, the treatment of improvements and what happens to them on termination. The third is contributing real estate to charter capital and transactions between related companies.

• buying and selling properties
• lease and sublease of premises
• inseparable improvements to leased property
• contribution of real estate to charter capital
• transactions between related parties
• registration of rights and permits

What is checked before a transaction

Legal due diligence starts with title to the property: who the owner is, on what basis, and whether there are any encumbrances or restrictions. Next, the documents for the property itself and its designated use are analysed.

A separate issue is whether actual use matches the designated use of the property. A mismatch creates risks both for the transaction and for subsequent business activity in the premises.

• the basis on which the seller acquired the rights
• encumbrances and restrictions
• documents for the property and its designated use
• whether actual use matches the designated use
• authority of the seller's signatories
• checking the counterparty as a party to the deal

Tax consequences of real estate transactions

Property deals are almost always large, so inspectors examine their tax consequences particularly closely. The key questions are how the transaction is taxed and whether the declared value is justified.

Transactions between related parties require special attention: the price must be justified, otherwise there is a risk that the tax consequences will be revised. The specific rules are set by tax legislation in its current version.

Accounting for the property after acquisition

A properly executed deal is only half the job. The property then has to be recognised in the books: its initial cost, useful life and depreciation method determined.

Mistakes at this stage drag on for years. An incorrectly determined initial cost distorts both expenses and the tax base over the entire period the property is used.

• determining initial cost
• including related costs
• determining useful life
• depreciation method
• accounting for subsequent improvements and repairs
• revaluation and impairment testing

Leases: what to look for in the contract

From the expense point of view three things matter: evidence that the premises are actually used, allocation of maintenance costs and the procedure for documenting improvements. Vague wording leads to disputes over whether costs can be recognised.

Inseparable improvements are a separate issue. What happens to them when the contract ends must be agreed in advance — otherwise there will be both a legal dispute with the landlord and a tax question about how the investment is accounted for.

The handover procedure also deserves thought. The handover certificate records not only the fact of transfer but also the condition of the premises, meter readings and the list of equipment handed over. A formal attitude to this document leads to disputes over who is responsible for defects discovered and for utility arrears. For leases this is particularly important: the move-in and move-out certificates become the main evidence in any dispute about the condition of the premises and the cost of restoration work.

Why law and taxes are examined together

A legally flawless contract may create unfavourable tax consequences, while a tax-efficient structure may prove vulnerable legally. When dealing with real estate, these two dimensions cannot be separated.

We review transactions as a whole: we assess the legal risks and, at the same time, how the transaction will look in terms of justification of expenses and the tax base.

It is also useful to consider how the property may be used in future. A company's plans change: premises bought for its own needs may be leased out or sold a few years later. Each of these scenarios has its own tax consequences, some of which depend on how the property was originally acquired and accounted for. Thinking through possible scenarios at the deal stage is cheaper than restructuring ownership later, once the decision has been made and formalised.

How Leader Audit works

We are an audit firm with 13 years in practice and more than 220 audits completed. We build our support for real estate transactions around the consequences, not just the text of the contract.

Consultations are available in person at our office in Chilanzar (4th quarter, 1) or remotely, if the documents provided are sufficient for the review.

• legal due diligence of the property and the parties
• assessment of tax consequences
• drafting and reviewing contracts
• recognising the property in the books
• support in disputes and inspections
• in-person and online consultations