VAT on construction within the Czech Republic is likely to remain low following the rejection of new tax proposals.

It is expected that the country's finance ministry will propose that the tax on housing construction remain at five per cent and should not be increased to 19 per cent, reports the Prague Daily Monitor.

There had been fears that the possible increase of VAT on the construction of apartments larger than 90 square metres and houses with more than 150 square metre areas would be subject to a significantly higher rate from 2008 onwards – impacting heavily on the country's development as a key real estate and offplan development market.

However, the ministry believes that the proposals would prove to be unworkable and could undermine the country's economic development.

Robert Lukasek, spokesman from the finance ministry, added: "The setting of limits would only lead to their bypassing. Moreover, only a few newly built flats and houses exceed the areas previously proposed as limits."

Since joining the European Union in 2004, the Czech Republic has seen a strong increase in demand for high quality but affordable property and many offplan projects are already being proposed to capitalise on such high levels of demand, especially within the major city of Prague.

Real estate firms and development companies have welcomed the finance ministry's proposals to keep VAT at a lower rate and if approved, the reduced tax could help ensure continued overseas investment in the country's maturing property market.