Investment property

What it means

Investment property is land or a building that a company holds to earn rent or to benefit from capital appreciation, rather than for its own production, sale of goods or administration. A typical example is an office building let to third-party tenants or a plot bought to be sold later.

A separate category exists mainly under IFRS, in IAS 40. The company may choose the cost model with depreciation or the fair value model, under which the property is not depreciated and changes in value go straight to profit or loss every year.

Slovak accounting rules have no separate category for investment property. A let building is ordinary tangible fixed assets, measured at acquisition cost and depreciated, while land is not depreciated. The exception is property held for sale, which may be remeasured.

How it works in practice

When letting to a business, rent is generally VAT exempt, but the landlord may opt to tax it if the tenant is a VAT payer, which allows it to deduct input VAT on the building's costs. The rules are explained under property rental and VAT.

For a company, rent is income taxed as part of the ordinary tax base. An individual letting property outside a business has rental income under Section 6(3) of the Income Tax Act with its own exemption up to an annual limit, which does not apply to companies.

If a Slovak subsidiary belongs to a group reporting under IFRS with the fair value model, an expert or internal valuation has to be supplied for consolidation every year. The difference from the net book value under Slovak rules is dealt with only in consolidation adjustments.

What to watch out for

Tax depreciation of buildings in the higher depreciation groups is spread over many years, while IFRS fair value measurement can show a large gain or loss in a single year. Revaluation does not generate cash, so dividend decisions should not be based on it.

A change of use, for example when the company starts using the building itself or lets it out, can have tax consequences and affect VAT deduction through the adjustment for capital goods. Before such a change, recalculate the VAT effect for the rest of the 20-year adjustment period.