DIRECT TAX SYSTEM:
PROPERTY TAXES
(EVIDENCE FROM THE CZECH REPUBLIC)
Taxation – Lecture 5
Content
• Property taxes – general background
• Property taxes – evidence from the Czech Republic
• Road taxes – evidence from the Czech Republic
• Literature
Property taxes – current state (world)
• Taxes on land and property are among the oldest forms of all
taxes. Old taxes need not necessarily be ‘good taxes,’ as the saying
has it, but they almost invariably have over the years become
encrusted with various peculiar features that are generally
difficult to alter and that often obscure their impact. Modern
features of property taxes in the world (based on OECD evidence):
 Diversity - diversity in the application of land and property
taxes among the developed and developing OECD countries
is striking. There are differences in the determination of the
tax base, the setting of tax rates, and the ability to levy and
collect the tax. In some countries, one property tax covers
all types of property. In others, there are different taxes for
different components of real property. Countries may, for
example, have separate taxes on land and buildings;
separate taxes on residential and non-residential property;
or separate taxes in urban and rural areas.
Property taxes – current state (world)
Moreover, not only are there significant differences in how
land and property are taxed across countries; there are often
significant differences within countries.
 Revenue - taxes on land and property are minor revenue
sources in all countries: (1) % of GDP – for developing and
developed OECD countries are 0.4 and 1 respectively; (2) %
of total tax revenues – for developing and developed OECD
countries are 2 and 4 respectively.
 Importance/role – PT are much more important in rich
OECD countries than in developing OECD countries (based
on % to GDP). Level of GDP per capita and degree of
urbanization are significant determinants of PT % to GDP:
countries tend to rely more heavily on property taxes as
income levels rise and they become more urbanized.
Property taxes – fundamentals
• PT vs IT & CT - as usually applied, PT is a very visible tax. Unlike
the income tax, for example, the property tax is not withheld at
source. Unlike the sales tax, it is not paid in small amounts with
each daily purchase. Instead, PT generally has to be paid directly
by taxpayers in periodic lump-sum payments. This means that
taxpayers tend often to be more aware of the property taxes they pay
than they are of other taxes. Moreover, to a considerable extent, the
PT finances services which are also very visible, such as roads,
garbage collection and neighborhood parks. Visibility is clearly
desirable from a decision-making perspective because it makes
taxpayers aware of the costs of local public services. This
awareness enhances accountability, which is obviously a good thing
from both an economic (hard budget constraint) and political
(democratic) perspective. It does not, however, make the property
tax popular. On the contrary, it often appears to be harder to
raise (or reform) property taxes than other taxes.
Property taxes – fundamentals
• Tax base - the base of the PT is invariably relatively inelastic,
meaning that it does not increase automatically over time.
Property values generally respond more slowly to annual
changes in economic activity than do incomes. Taxable area, of
course, responds even more slowly. As a result, in order to
maintain property tax revenues in real terms, it is necessary to
increase the rate of the tax. As with visibility, inelasticity leads to
greater accountability (taxing authorities have to increase the tax
rate to increase tax revenues) but it also leads to greater
taxpayer resistance.
Most taxes are based on flows – income or sales. The tax base
may sometimes be the source of argument between taxpayer and tax
authority, but there is, in principle, a measurable economic activity
on the basis of which the tax is levied. In contrast, taxes on land
and property are (generally) based on stocks – asset values.
Unless the asset subject to tax is sold (by willing buyers to willing
Property taxes – fundamentals
sellers) in the tax period, someone has to determine the value that
serves as the basis on which to assess the tax.
• Valuation - valuation is inherently and inevitably an arguable
matter. If there is a ‘self-assessment’ system, owners are likely to
undervalue their property; if there is an ‘official’ (cadastral)
assessment system, owners are likely to feel that their property
is (at least in relative terms) overvalued. In the end, someone has to
determine the tax base for the property tax in a way that is not true for
any other significant tax. It is not surprising that the results are often
perceived to be unfair and arbitrary. It is also not surprising that the
process of obtaining ‘good’ (close to market, fair) valuations is not
likely to be cheap. In short, to administer a property tax at the
same level of fairness (non-arbitrariness) as most other major
taxes is both a costly operation and one whose results are
unlikely to be accepted as fair by most taxpayers.
Property taxes – fundamentals
• Functions of PT –
 Finance local governments – PT generates a significant
proportion of local government revenues in developed
OECD countries. In most developing countries, however, PT
provides only a small, though not insignificant, share of the
revenue available for local governments. Property tax
revenues are low in many developing economies in part
because of the way in which the tax is administered: as a
rule the coverage of the tax is not comprehensive,
assessments are low, as are nominal tax rates, and
collection rates are also often low. Low tax rates are
sometimes imposed by higher-level governments and
sometimes by local governments themselves, which find rate
increases in this most visible of taxes very difficult to sell
politically.
Property taxes – fundamentals
In general, revenues would be higher if the property tax
were based on the value of land and buildings (instead of
just on land), if there were few exemptions, if there were no
favorable treatment of particular property classes, if the
nominal tax rate were set higher, and if the scope for local
tax competition were limited.
 Affect land use - local governments can affect urban form not
only with planning tools but also with municipal financial
tools. In some cases, municipal financial tools work together
with planning tools, but in other cases they may have the
opposite effect . PT is one fiscal instrument that can clearly
influence land use patterns, especially in urban areas. In
terms of the impact on the density of development, for
example, increases in property tax should be expected to
result in a reduction in density (other things being equal).
Where the tax is levied on the assessed value of property
Property taxes – fundamentals
(land and improvements), any investment that increases the
value of the property (such as any improvement to the
property including an increase in the density) will increase the
assessed value and make the property subject to a higher
tax. Higher property taxes thus provide an incentive for
less densely developed projects – for example, scattered
single-family houses rather than apartment buildings. On
the other hand, a tax on land only will provide an incentive
for greater density relative to a tax on both land and
improvements.
Although the property tax cannot be regarded as a direct
‘user fee’ through which individuals pay directly for the
services they receive, where both tax rates and service levels
are determined locally, it can often be thought of loosely as a
benefits tax to the extent that public services provided to
the property-owner enhance the value of the property and
result in higher property taxes. In reality, taxes on land and
Property taxes – fundamentals
property are seldom matched by service benefits. For
example, non-residential properties are often overtaxed
relative to benefits received compared to residential
properties; tax competition among municipalities often does
not reflect differential service benefits; and favorable tax
treatment of farm properties can create distortions.
In summary, a number of policy choices can be made with
respect to the structure of the property tax that will have
an impact on land use. Such choices include what is
included and excluded from the tax base, how property
value is defined for different classes of property (for
example, residential, farm, commercial and industrial
properties), what percentage of the value is taxable, and
how effective tax rates vary within and between classes of
property.
Property taxes – object of PT & its asses-t
• Object - PT are generally levied on all types of properties –
residential, commercial and industrial, as well as on farm
properties. Sometimes different categories of property are treated
differently. Sometimes certain classes of property, or property owner,
or uses of property, are exempt. Sometimes only land is taxed.
 Exemptions - In every country, some properties are excluded
from the property tax base. Exemptions may be based on
various factors such as ownership (for example
government-owned property), the use of the property (such
as properties used for charitable purposes), or on
characteristics of the owner or occupier (such as age or
disability). In some countries, exemptions are granted by the
central or state government; in other countries, exemptions
are granted locally; in some, both levels can grant
exemptions.
Although there is great diversity in the use of exemptions,
some properties are exempt in most jurisdictions. For
Property taxes – object of PT & its asses-t
example, property owned and occupied by government is
generally exempt from property taxes. Other property types
that are often exempt include colleges and universities,
churches and cemeteries, public hospitals, charitable
institutions, public roads, parks, schools, libraries, foreign
embassies and property owned by international
organizations. In some countries, agricultural land and
principal residences are also tax exempt.
In any case, it is clear that when property tax exemptions
are granted for any reason, in the interest of transparency
and accountability all exempt property should still be
assessed in the same way as other properties so that the
value of the exemption is known.
Property taxes – object of PT & its asses-t
• Assessment approaches 
Area-based assessment - under an area-based assessment
system, a charge is levied per square meter of land area,
per square meter of building (or sometimes ‘usable’
space), or some combination of the two. Where measures of
area are used for both land and buildings, the assessment
of the property is the sum of an assessment rate per
square meter multiplied by the size of the land parcel and
an assessment rate per square meter multiplied by the size
of the building. The assessment rates may be the same for
land and buildings, or they may be different. For example, a
lower unit value per square meter might be applied to buildings
to encourage development.
A strict per unit assessment results in a tax liability that is
directly related to the size of the land and buildings. With
unit value assessment, the assessment rate per square
Property taxes – object of PT & its asses-t
meter is adjusted to reflect location, quality of the
structure, or other factors. Market value has an indirect
influence on the assessment base through the application
of adjustment factors. For example, the assessment rate
per square meter might be adjusted to reflect the location
of the property within a particular zone in the city. Although
the specific location of the property within the zone is not taken
into account, properties in different zones will have different
values.
The adjustment factors are derived from average values
for groups of properties within each zone and do not
reflect the characteristics of each individual property.
When the groups are defined narrowly enough, the unit value
begins to approximate market value. For example, a zone
could be defined anywhere from an entire city to specific
neighborhoods to properties on one side of a street.
Property taxes – object of PT & its asses-t
Area-based assessments are commonly used in CEE
where the absence of developed property markets makes
it difficult to determine market value. They are also used in
parts of Germany (in the former GDR), China, Chile, Kenya and
Tunisia.
Another common example of unit value assessment is in
the assessment of agricultural land. In many countries, farm
property is assessed at so much per square meter, with
the unit value varying with the location (region, accessibility
to markets), fertility (irrigation, climatic conditions, soil
conditions, hilliness), and sometimes with the crops grown.
Such values are sometimes established on the basis of
detailed cadastral studies, and sometimes on the basis of
sales data on comparable property.
Property taxes – object of PT & its asses-t
 Market value assessment - market value (or capital value)
assessment estimates the value that the market places on
individual properties. Market value is defined as the price
that would be struck between a willing buyer and a willing
seller in an arm’s length transaction.
Three methods are commonly used to estimate market value:
 The comparable sales approach looks at valid sales of
properties that are similar to the property being
assessed. It is used when the market is active and
similar properties are being sold.
 The depreciated cost approach values property by
estimating the land value as if it were vacant and
adding the cost of replacing the buildings and other
improvements to that value. This approach is generally
used when the property is relatively new, there are no
comparable sales, and the improvements are specific.
Property taxes – object of PT & its asses-t
The cost approach is also normally used to assess
industrial properties.
 Under the income approach, the assessor estimates the
potential gross rental income the property could
produce and deducts operating expenditures. The
resulting annual net operating income is converted to a
capital value using a capitalization rate. This approach is
used mainly for properties with actual rental income.
Market value assessment is used in all the OECD
countries, as well as a number of others, including Indonesia,
the Philippines, South Africa, Latvia, Argentina and Mexico.
Property taxes – object of PT & its asses-t
 Self-assessment - requires property-owners to place an
assessed value on their own property. In Hungary, for
example, the current local tax system is based on the principle
of self-identification. Taxpayers are obliged to register and
report their tax obligations to the local tax administration.
The determination of the tax on buildings and tax on idle land in
Hungary requires verification only of the property size and
not its market value. In practice, self-registration is not
particularly effective because not all owners comply.
Consequently, the number of potential taxpayers or
taxable assets is generally unknown. The determination of
tax liabilities also requires verification of the selfassessment
submitted by the taxpayer. The lack of
personnel to make field inspections of each property in
Hungary means that verification is inadequate. The rental
value tax on housing in Tunisia is based on the number
Property taxes – object of PT & its asses-t
of square meters. Taxpayers are required to submit a selfdeclaration
form. Some municipalities verify the declared
square meters against existing information, for example from
the roll for the rental value tax that existed before 1997, but
most municipalities do not.
Nonetheless, self-assessment is an appealing procedure
for poor countries with little administrative capacity. It
does not appear to require expert assessment staff, and it
seems to be easy to implement.
In general self-assessment seems likely to lead, over time,
to inaccurate estimates of property values, with a tendency
toward underestimation. It violates the principle of fairness
on the basis of ability to pay because people with
comparable properties will not necessarily pay
comparable
Property taxes – object of PT & its asses-t
taxes. Generally lower-valued properties have a lower rate of
underestimation than do higher-valued properties, making this
assessment approach regressive (that is, taxes are relatively
higher on low-valued properties). Underestimation also
obviously erodes the size of the tax base, with the usual
detrimental effects on tax rates and/or on service levels. In
the end, there is no easy way to get people to tax
themselves in the absence of a credible verification
process. To minimize the obvious problems of understatement
associated with any self-assessment system, the government
must be prepared to obtain (costly) expert assessments of
individual properties in cases where it believes selfassessment
is inaccurate.
Property taxes – Czech Republic
• Real Estate Tax - the real estate tax also belongs to direct taxes in
the Czech Republic. It is divided into two parts:
 Land Tax
 Tax of Buildings and Units
• Land Tax - the object of land tax is land on the territory of the
Czech Republic registered in the Real Estate Cadastre.
• The land tax is not imposed on some lands:
 lands within the area of the ground plan of building which
is built on,
 woodlands, if they involve protective forests and forests of
special determination,
 water areas except ponds used for commercial fish-
farming,
 lands used for defense of the state.
• In most cases the taxpayer is the owner of the land, sometimes it is
Property taxes – Czech Republic
the leaseholder or user of the land.
• The Land Tax = Tax Base x Tax Rate
• Agricultural lands
 The tax base of agricultural land such as arable land, hopfields,
vineyards, gardens, orchards and permanent grass
growth is the price of land determined as a multiple of the
actual area of the land in square meters and the average
price per square meter of the land laid down in a decree.
 The tax rate is 0,25% for permanent grass growth and
0,75% for the other agricultural lands.
• Commercial Forests and Ponds used for Fish-Farming
 Assessing the tax base, the taxpayer can choose, preferable
tax base for him: whether to use the price of the land as
determined pursuant to the price regulations valid on 1st
January of the taxable period or the actual area in square
meters multiplied by 3,80 CZK. The tax rate is 0,25%.
Property taxes – Czech Republic
• Built-On Areas and Courtyards, Development Lands and Other
Areas
 The tax base of other land is the actual area of the land in
square meters, as ascertained on 1st January of the
taxable period.
 The tax rate per square meter is different for these lands:
 Paved areas of land used for business or in connection
with:
 Primary agricultural production, forestry and water
industry – 1 CZK
 Other business – 5 CZK
 Built-on areas and courtyards – 0,20 CZK
 Building land – 2 CZK multiplied by coefficient
according to the number of inhabitants
 Other areas – 0,20 CZK
Property taxes – Czech Republic
• Tax of Buildings and Units
 The objects of this tax are finished or used buildings and
units (flats).
 In most cases the taxpayer is the owner of the building or
unit, sometimes it could be the leaseholder or user.
 The tax base is defined as built-up area in square meters as
on 1st January of the taxable period. For taxable units, the
tax base is multiplied by a coefficient of 1,22.
 The tax rate varies for different types of buildings:
 Residential buildings and other structures that
provides facilities for residential buildings (excess of 16
m2) – 2 CZK/m2 of built-up area; the rate is increased
by 0,75 CZK per each additional above-ground floor;
this rate shall be multiplied by a coefficient according
to the number of inhabitants.
Property taxes – Czech Republic
 Houses and family houses used for individual
recreation – 6 CZK/m2 of built-up area; other structures
that provides facilities for these houses except garages – 2
CZK/m2 of built-up area.
 Garages constructed separately from residential
buildings – 8 CZK/m2 of built-up area.
 Other taxable buildings – 6 CZK/m2 of built-up area.
 Other taxable units - 2 CZK/m2 of built-up area.
 Tax rate of structures used for business activities:
 Primary agricultural production, forestry and water
industry – 2 CZK/m2 built-up area.
 Industrial production, construction industry,
transport, power and other agricultural production
– 10 CZK/m2 built-up area.
 Other business activities - 10 CZK/m2 built-up area.
Property taxes – Czech Republic
• The tax return must be filed by the taxpayer by 31st January of
the taxable period. The tax return is not necessary to be filed every
year. If there are no changes, the taxpayer does not have this duty.
Every year the Financial Office sends the assessment with the tax
duty to the taxpayer. If the duty does not exceed 5 000 CZK, it shall
be payable no later than 31st May. If it exceeds 5 000 CZK, it is
payable in four equal pays no later than 31st May, 30th June, 30th
September and 30th November.
• The revenue from real estate tax is the income of the
municipality, in whose district is the real estate situated.
Property taxes – Czech Republic
• Real Estate Transfer Tax - the aim of this tax is to draw a part of
purchase price obtained from the sale of real-estate. The object
of this tax is acquirement of ownership rights to real estate
against remuneration.
• The taxpayer is transferer of ownership rights of the real estate if
transferer and acquirer do not say otherwise in the contract.
• The tax base is:
 acquired value determined to the date of change in the
Real Estate Cadastre, or
 guideline value (value which compares real estates in the
same territory, time, age, condition, etc.).
Property taxes – Czech Republic
• The tax rate is 4%.
• The tax = tax base (rounded up to hundreds CZK) x tax rate
• The tax return must be filled by the end of the third month
following the month when registration of such transfer was
made in the Real Estate Cadastre. The tax must be also paid up to
this date.
• The revenue from real estate transfer tax is the income of the
state budget.
Road tax – Czech Republic
• The road tax belongs to direct taxes collected in the Czech
Republic.
• The objects of the road tax are:
 All motor vehicles registered and operating in the Czech
Republic, used or determined for running business.
 Vehicles of the total maximum allowed weight of 3,5 tons,
registered in the Czech Republic and exclusively intended
for goods transport.
• The objects of the road tax are not:
 some vehicles such as special tracked vehicles, tractors and
their trailers, vehicles with special number plate, vehicles with
special registration number.
• The taxpayer is the operator of the vehicle whose name is
entered in vehicle registration papers. The taxpayer is also an
employer which sends his employee to a business trip and the
employee uses his own vehicle.
Road tax – Czech Republic
• The tax base differs from type of the vehicle:
 For motor cars the tax base is the engine capacity in cm3,
 For trucks and semitrailers the tax base is the sum of the
highest permissible weights on axles in tons and the
number of axles.
• The annual tax rate is fixed for every vehicle. In the case when
employer sends employee to a business trip and he uses his own
vehicle, the employer is obliged to pay special tax rate 25 CZK per
day.
• The taxpayer which buys a new car is tax-preferred for the first 9
years after the first registration of the vehicle. The first 36
months after the first registration he pays only 48% of the annual
tax rate, the next 36 months 40% of the annual tax rate and the
last 36 months 25% of the annual tax rate.
• On the other hand the taxpayer which has a vehicle registered
before 31st December 1989 has to pay tax rate increased by 25%.
Road tax – Czech Republic
• The tax return on the road tax must be filed by 31st January of
the next year. The taxpayer has to calculate his tax obligation for
all vehicles he owns in his tax return.
• The tax must be paid also by 31st January of the next year. But
taxpayer is obligated to pay tax advances during the year. There are
four terms to pay the tax advance: 15th April, 15th July, 15th October
and 15th December.
• The whole revenue from the road tax is the income of State Fund
of Transport Infrastructure.
Literature
• MCGEE, Robert W. The philosophy of taxation and public finance.
Boston: Kluwer Academic Publishers, 2004. viii, 313.
ISBN 1402077165.
• RADVAN, Michal. Czech Tax Law - 3rd ed. 3. vyd. Brno: Masarykova
univerzita, 2010. 65 s. Fac. of Law Publ. no. 4 (Edition of textbooks).
ISBN 978-80-210-5269-7.
• MILLER, Richard, SLACK, Enit, and SLACK, N.E. International
Handbook Of Land And Property Taxation, Edward Elgar Pub, 2004,
320. ISBN 978-1843766476.