But, with the end of the transition period looming, the Czech government is clawing for a way to avoid increasing VAT and trying to figure out what it can get away with. Prime Minister Mirek Topolánek's Cabinet failed to agree Dec. 6 on how the country will set future VAT rates on construction.

"We need to carry out further analyses in order to make sure we don't go beyond EU principles," Topolánek said.

"The rise in the tax would affect housing conditions of all people, and it would lead to an increase in housing prices in this country," he said.

The previous Cabinet, under Jiří Paroubek, introduced a plan that would create a VAT loophole: Apartments smaller than 90 square meters (108 square feet) and houses smaller than 150 square meters would be considered "social housing," and would still qualify for 5 percent VAT. The rest would face 19 percent VAT.

Tlustý's newest proposal rejected those limits out of hand.

"It would be virtually impossible to effectively control whether the limits are bypassed," Tlustý said. For example, he said, firms could build two smaller flats that could later be easily transformed into one big apartment.

While the European Commission (EC) has no power to prevent Czechs from including all types of accommodation under the banner of "social housing," it could later dole out hefty fines if the rules run contrary to EU laws.

Regional Development Minister Petr Gandalovič said last week that the proposed social housing loophole could be difficult to defend, and former Finance Minister Bohuslav Sobotka doubted the EC would tolerate such a move.

"If we can push this through, then we can push anything through," Sobotka said jokingly.

The move will test the EU's patience, which Topolánek said forced him to postpone the decision.

"[Tlustý's] proposal is advantageous for most people, but we need to respect EU conventions," he said. "We shouldn't force what is possible with the EU, but rather what is usual."

Still, other EU countries — including France, Belgium and Italy — have pushed for lower VAT and won. The United Kingdom has no VAT on the construction of new homes.

Decision time

The expected 19 percent VAT after 2007 has led to a rush of new construction to take advantage of the lower rate.

"The fact is that demand for flats across the whole country is higher than supply," said Arnošt Hejduk of Rooney & Benett, which monitors developments on the real estate market. "That is why prices are growing."

Housing prices have increased 10 percent outside Prague and as much as 30 percent in Prague this year, the daily Hospodářské noviny reported. Real estate experts say the trend will continue next year. Some 20,000 flats are sold in the country annually, and half of them are built in Prague.

Jakub Sedmihradský, general manager of the real estate company Lexxus, said there will be no slowdown in housing construction in 2008, even if the proposal to keep housing construction under the lower VAT bracket is pushed through.

Skanska CZ spokesman Ondřej Šuch said it's essential the government rule on taxation of housing construction. He said any solution will be better than the current uncertainty.