The municipal council of the capital city of Prague approved a methodology determining the rules for payment of the developers’ contributions to public infrastructure.
Arguments for the introduction of this new Methodology include the effort to harmonize the rules, to make the investor – municipal parts of the capital city of Prague relationships transparent and to provide for foreseeability which is crucial for investors during the development planning stage.
The purpose of the Methodology is to determine, based on transparent conditions, a recommended co-participation of investors in the municipality’s increased costs of public infrastructure and the resolution of their deficits in the municipality’s cooperation with the investor.
Methodology in terms of taxes
In terms of taxes, in particular in terms of income tax, the Methodology might be beneficial since there will no longer be any doubt as to what and how much the developer must contribute to the municipal part. There will no longer be a place for various “gentlemen’s agreements” between developers and municipal parts as to what should be provided or built, in exchange for the developer obtaining a change of the zoning plant or building approval.
Contributions paid based on the Methodology will be conditional investment costs of the developer, entering into the asset acquisition price, thus without any negative tax impacts, unlike in the cases where the developer agreed with the municipality on building, at the developer’s costs, a part of the infrastructure, donating it by a contract of donation to the municipality afterwards, thus exposing itself to the risk of all costs of the building of such infrastructure being non-tax-deductible due to the provision of donation.
Value added tax
Another unpleasantness in the case of donating a built infrastructure to the municipality, free of charge, is value added tax (“VAT”). If the developer has claimed VAT deduction, after the infrastructure is donated to the municipality, the developer must return the claimed VAT to the state, although the developer has not received any consideration from the municipality.
Tax issues relating to developers’ contributions to municipalities or municipal parts are complicated and consultation in this respect with a tax advisor sufficiently in advance is strongly recommended.