52ND UIA CONGRESS

Bucharest - Romania
October 29-November 2, 2008

 

 

TAX LAW

Friday, October 31, 2008

 

REAL ESTATE TAXATION

 

QUESTIONNAIRE

 

Bogdan Bibicu
Bulboaca & Asociatii SCA, Millennium Business Center,
2nd floor, 2-4 Armand Calinescu Street,
District 2, Bucharest, Romania
Tel +40 21 408 8900 / Fax +40 21 408 8911
bogdan.bibicu@bulboaca.com

 

© UIA 2008

 

1UIA Congress, October 2008, Bucharest (Romania)

Questionnaire

The upcoming UIA congress in Bucharest (Romania) in October 2008 will focus on the taxation of real estate. The purpose of the present questionnaire is to analyze, for each jurisdiction represented at the Congress, the regimes of taxation of cross-border real estate ownership and transactions.

Name of Author(s)

Bogdan Bibicu / Catalin Georgescu / Stelian Mic

Corresponding state

Romania

 

Introductory remarks:

The following situations have to be analyzed: The taxation of acquiring, holding and transferring real estate, whereas the person – whether an individual, a legal entity or a real estate fund, is domiciled in another state than the real estate property is located (cross-boarder situation).

Two possible scenarios have to be examined, i.e. scenario (i) where the real estate is located in your own jurisdiction and (ii) where the residence of the owner of the real estate is in your jurisdiction.

In addition, in case the real estate owner is an individual, the answer has to distinguish between a private asset and a business asset. Furthermore, the real estate may be a residential property or a business property. Finally, a distinction may be made between a structure where the property is owned directly or indirectly (through the ownership of the shares of a real estate company).

The questionnaire invites the participants to present in some brief answers the tax consequences in the different scenarios mentioned above.

The questionnaire is split into a section (i) dealing with the taxation of a transfer of real estate, into a section (ii) dealing with the taxation of ongoing ownership of real estate and into a section (iii) dealing with other objects of taxation. For all those situations, each type of tax shall be covered.

As an introduction, some basics of civil law topics are raised in order to summarize the underlying civil law system relevant for the taxation of real estate in the different jurisdictions. Additionally, general questions on some basics of tax law topics are addressed and a chapter regarding a general overview over some taxes is available.

 

Overview:

 

CIVIL LAW


TAX LAW

General Questions

Specific Questions

Civil Law

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Hereafter, some civil law questions are raised in respect of the state where the real estate is situated.

How is real estate property defined according to the law of the corresponding state?

According to the Romanian Civil Code („RCD“), there are three types of immovable property: (i) by nature (Romanian language: imobile prin natura lor), (ii) by destination (Romanian language: imobile prin destinatie) and (iii) by the object to which it applies (Romanian language: imobile prin obiectul la care se aplica). Therefore, pursuant to article 463 of RCD, land plots and buildings are defined as immovable property by nature.

Is there a public register stating the ownership of a real estate property
(land register)?

Yes. Following the entry into force of Law no. 7/1996 regarding real estate cadastre and publicity (“Law 7/1996”), a general land register has been established for all the geographical regions of Romania. By way of historical background, before 1996, in Romania there were two systems for the registration of the real estate property: (i) the land register system (Romanian language: sistemul cărţilor funciare) and (ii) the inscriptions and transcriptions register system (Romanian language: registrul de inscriptiuni si transcriptiuni).

If there is a land register, what is the nature of the register and what are the legal effects of a registration with the register?

The land register is kept for each village, town or district (in the case of Bucharest which has 6 districts). All such land registers form the general territorial cadastral register.
The registration with the land register is done only for opposability towards third parties (Romanian language: opozabilitate fata de terti), since ownership over the real estate property is transferred upon conclusion of the sale purchase agreement. Therefore, please note that the registration with the land register does not operate the transfer of ownership over the property.

Is the land register a national or a regional register? – Which authority is in charge of the land register, how is the register kept?

Pursuant to article 17 of Law 7/1996, the registration with the land register of the juridical acts and facts relative to the real estate is done through each cadastral office from each administrative region (county or district) where the real estate is located.
According to article 4 of Law 7/1996, the authority in charge with the coordination and keeping of the land register is the National Agency of Cadastre and Land Registration (the “NACLR”).
The NACLR coordinates the offices of cadastre and land registration established in each county and in each of the 6 districts from Bucharest. The county offices are in charge of keeping the land register for the respective counties.
The land register has three parts: (i) the asset description record (Romanian language: foaia de avere) in which the description of the real estate property is registered; (ii) the ownership record (Romanian language: foaia de proprietate) containing registrations regarding the ownership right (e.g. name of the owner, type of the ownership title, rights of way in favour of the land property, personal rights, etc.); and (iii) the encumbrances record (Romanian language: foaia de sarcini) containing the registration of any encumbrances over the land property or any dismemberments of the ownership right (e.g. superficies, beneficial right, right of way in favour of the adjacent properties, hypothec rights, lease agreements concluded for a period greater than 3 years, etc.).

Which form has to be observed when the ownership on land is transferred (e.g. public deed, notarization)?

According to article 2 of Title X of Law no. 247/2005 regarding the reform in the fields of property ownership and justice, as well as certain adjacent measures ("Law 247/2005"), the ownership right over lands with or without buildings shall be transferred only through a sale purchase agreement concluded in an authenticated form (Romanian language: formă autentică), which may be obtained only before a notary public. If the authentic form is not observed, the agreement is deemed null and void as a deed operating the transfer of ownership.
Please note that, with respect to the transfer of ownership right over buildings, as a rule the agreement operating the transfer is not required to be concluded in an authentic form. However, when one intends to transfer, through the same agreement, the ownership right over both buildings and land under such buildings, that person obtains only a right of use over the corresponding quota of the land on which the building is erected. In order for the transfer of ownership over both the building and the part of the land on which that building is erected to occur, the transfer deed must be concluded in authentic form.

Who is entitled to acquire real estate property in the corresponding state? Are there any limitations applicable to persons without residence in the state of the real estate property?

According to article 44 of the Romanian Constitution, foreign citizens and stateless persons may acquire the property right or any of its dismemberments subject to special conditions.
Law no. 312/2005 on the acquiring of the ownership right over real estate by foreign individuals and/or legal entities establishes a different treatment for (i) the citizens of the European Union (“EU”) and (ii) the citizens of non-EU Member States.
Therefore, following Romania’s accession to the EU on 1 January 2007, the following rules are applicable:

  1. citizens of EU Member States having their place of residence in Romania may acquire land properties in Romania following Romania’s accession to the EU;
  2. citizens of EU Member States having their place of residence outside Romania, stateless persons residents of a EU Member State and legal persons having their place of residence in any EU Member State may acquire land properties in Romania as secondary residence or secondary headquarters only after 5 years from the date of Romania’s accession to the EU;
  3. citizens of EU Member States, stateless persons residents of a EU Member State regardless of the place of residence may acquire property rights over agricultural or forestry lands only after 7 years from the date of Romania’s accession to UE; and
  4. citizens of non-EU Member States may acquire land properties based on bilateral agreements between Romania and their state of residence, but in any case not under more favourable conditions than EU residents.

In the corresponding state, how is real estate preferably acquired / held / transferred? Directly (asset deal / asset property) or indirectly (share deal / asset property)? According to civil law, what are the reasons for such structuring? (cf. also hereafter, page XX question according to tax law)

As a general background, both types of transactions are frequently encountered. Please note that, strictly from a cost perspective, the share deal would be advisable due to the relatively low costs generated in relation to the transfer of shares in the company owning the target land property.
However, from a financing point of view, it must be mentioned that if the land property is owned by a joint stock company (Romanian language: societate pe acţiuni), then financial assistance matters will arise if the loan granted for the acquisition of shares in that joint stock company is intended to be secured with a hypothec/mortgage over the target land property.

 

Is there a statutory mortgage (legal lien) securing the tax liability, due on the transfer of the ownership of real estate?

According to Law 571/2003aprroving the Romanian Fiscal Code (the “Fiscal Code”), in the case of natural persons the tax on the property transfer shall be computed and retained by the notary public authenticating the property transfer at the moment when the agreement operating that property transfer is signed. Therefore, if the transfer tax is not paid, the notary public shall not authenticate the property transfer agreement.

 

Tax Law

 

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General Questions

Acquisition of real estate

In the corresponding state, is real estate property preferably acquired directly (asset deal) or indirectly (share deal)?
From a tax point of view, what are the advantages / disadvantages of an acquisition of real estate by way of an asset deal or a share deal? Especially, are there any advantages of a share deal regarding inheritance and gift taxes, or with respect to real estate capital gains taxes etc.?

 

As mentioned in the sections above, both types of transactions are frequently encountered. However, from a fiscal point of view, please note the following:
1. Regarding asset deals:

  1. When a natural person transfers a land property, an income tax is levied on the declared value of the respective property;
  2. In the case of an asset deal, apart from the income tax, since the property transfer has to be made through an authentic deed, the notary public shall also apply an authentication fee for the transfer deed;
  3. Since, in the case of an asset deal, the ownership over the property is changed, additional taxes regarding the registration of the change of ownership with the land register shall have to be paid.

 

2. Regarding share deals:

  1. No authentication and registration fees must be paid, due to the fact that the ownership over the real estate property does not change as a direct consequence of the share transfer and, hence, no authentic transfer deed is required;
  2. The only taxes which must be paid are those regarding the registration of the new shareholders with the Trade Registry, which amount to approximately EUR 400 and are borne by the company whose shareholders have changed;
  3. Capital gains tax is paid only if the ownership transfer over the shares is made against a price which is higher than their nominal value. If that is not the case, no income tax is paid following the ownership transfer over the shares.

Please note that, with respect to depreciation (Romanian language: amortizare) of real estate property, depreciation rules only apply to buildings, as land may not be subject to depreciation under Romanian accounting regulations.

 

Separation of operational business and real estate property

Provided that the real estate is held by a company domiciled in the state of location of the real estate, and provided that the company is performing operating activities/ conducting a business, how is the ownership of the assets of the company usually structured?
I.e., are real estate assets separated from the operating business (two separate companies under the same control)?
And, what are the drivers behind such structuring? Civil law (ring fencing) and/ or tax reasons, other reasons?

According to Romanian law accounting principles, the land is an asset of the company and it is registered as such together with all the other immovable assets of the company.
As a general rule in Romania, real estate properties are registered with the company which is at the same time undertaking the day-to-day operating activities.
However, in project finance, a group structure is frequently established:
(i) a Special Purpose Vehicle Company (“SPV”) which owns the land property and the future building to be developed; and (ii) a Holding Company (“HoldCo”), having control over the SPV. The SPV undertakes the development of the project. Following completion of the intended project, the HoldCo sells the shares it holds in the SPV. At this particular point, HoldCos usually choose to increase the share capital of the SPV by increasing the nominal value of the shares issued by the SPV, in order to minimise the income tax to be paid on the difference between the sale price of the shares and their nominal value.

 

What is the definition of a transfer of real estate?

Is there a taxation upon change of ownership in accordance with civil law (asset deal)?

The taxes incurred in connection with an asset deal are strictly related to the income tax, the notarial fees and the land register fees.

Is there a taxation upon indirect transfer of real estate, in particular in the event of a change of ownership in a real estate company (change of control, share deal)?

Since the ownership of the real estate property does not change, apart from capital gains taxes that may arise no taxation upon indirect transfer of real estate is levied according to the Romanian regulations in force. However, taxes in relation to the share transfer registration with the Trade Register shall be incurred. Please note that such registration taxes shall be paid by the company over which the change of control operates.

 

Does the law of the corresponding state provide for a deferral of, or exemption from, taxation in certain cases? In what situation (e.g. upon succession; upon donation to the spouse / descendant; upon disposal of the shares of a real estate company)?

Real estate capital gains tax

It is our understanding that, for the purpose of this section, by real estate capital gains tax one refers to the tax levied on the amounts resulting from the sale or exchange of real estate which exceed the initial purchase price, without making distinction between legal and natural persons.
Please note that, under Romanian law, the income tax differs depending on the subject it applies to. Therefore, we shall analyse below only the exemptions applicable to natural persons, since the exemptions applicable to legal persons shall be analysed in the following section.
In addition, please note that, with respect to natural persons, the exemptions from real estate capital gains tax are only a part of the exemptions from the income tax.
In light of the above, please note the following exemptions from real estate capital gains tax:

  1. amounts received as a result of the expropriation for public utility (Romanian language: exproprierea pentru cauza de utilitate publica), according to the regulations in force;
  2. amounts or assets received in the form of sponsorship; and
  3. amounts or assets received by way of inheritance or donation. For an extensive analysis regarding donations and inheritance of real estate property, please refer to the section below analysing the inheritance and gift tax.

Corporate income tax

As mentioned above, the real estate capital gains tax varies depending on the type of person to which it applies. With respect to the exemptions from income tax applicable to legal persons, please find below a brief analysis.

According to article 27 of the Fiscal Code, income tax is not triggered in the case of: (i) mergers; (ii) demergers; (iii) a transfer by a Romanian company of all its assets and liabilities in exchange for a participation in the Romanian company acquiring the respective assets and liabilities, only when the transferring company receives a participation in the acquiring company and the aggregate value of the acquired participation is equal to the aggregate value of the transferred assets and liabilities; and (iv) the acquiring by a Romanian company of at least 50% of the participations in another Romanian company in exchange for participations in the acquiring company and, if the case, an amount not exceeding 10% of the nominal value of the exchanged participations, only when the value of the acquired participations and the transferred participations are equal.
Please note that, as a general corporate rule, if a land property is brought as a contribution in kind to the share capital of a company, the constitutional documents of that company will have to be prepared in an authentic form, thus entailing notarisation fees and land register taxes.

Moreover, following Romania’s accession to EU, according to article 27 of the Fiscal Code, the above exemptions may be applicable also to cross border mergers, demergers, transfer of assets and transfer of participations, if the two companies are from EU and if several particular conditions are observed.

Please note that, with respect to legal persons, when analysing the fiscal treatment under Romanian Law, the corporate income tax and real estate capital gains tax are not treated separately when computing the aggregate income tax to be paid. However, the amount of the real estate capital gains can be easily assessed on the basis of the financial statements.
 

Real estate transfer taxes

Please note that, under Romanian law, apart from the exemption mentioned above, no other real estate transfer exemptions are established. Moreover, please note that, for the scenario in which the real estate property is brought as contribution in kind to the share capital of a company, the constitutional documents of that company must be amended and prepared in authentic form, thus triggering the payment of the authentication tax computed at the declared value of the property brought as contribution in kind.

Inheritance and gift tax

According to article 77 of the Fiscal Code, no income tax from real estate transactions is due:

  1. for ownership over lands and buildings acquired under special laws;
  2. for donation deeds between relatives three times removed and between spouses; and
  3. in the case the inheritance notarial procedure is completed within two years from the date of the decease of the ancestor.

Other taxes

N/A

 

 

Relevant time


What time or what civil act is relevant for the taxation of the acquisition of real estate (time of conclusion (signing), time of completion (closing) or time of registration?

Article 77 of the Fiscal Code provides that the notary public shall compute and withhold upon signing of the transfer deed the income tax due by natural persons before its authentication, even if the parties agree for the ownership transfer to take place after registration with the land register.
Please note that, under Romanian law, the ownership transfer may also operate as an effect of a court decision or another procedure, in which case the tax is computed and collected by the competent fiscal authority. The competent fiscal authority is the fiscal administration from the area where the seller has its fiscal residence. The above shall be applicable to sellers either legal or natural persons.

 

Depreciation and amortization


Depreciation and amortization of real estate.

According to the provisions of article 24 of the Fiscal Code, depreciation is not registered for land properties. For owned buildings, article 24(7) of the Fiscal Code sets out that depreciation may be computed and registered based on the asset’s fiscal value and using the “straight line depreciation” method (Romanian language: metoda amortizarii liniare), computed by applying the straight line depreciation quota to the purchase price of the asset (Romanian language: valoarea de intrare a mijlocului fix). The straight line depreciation quota is determined as a fraction between 100 and the normal estimated life of the respective asset (Romanian language: durata normala de utilizare a mijlocului fix).

 

Tax Overview


Taxes relevant to real estate taxation in the corresponding state

Real estate capital gains tax

Except for taxes already mentioned above, under Romanian law, resident companies and natural persons are not required to pay a separate real estate capital gains tax.

As for individuals, there is a debate in the legal doctrine whether, under specific conditions, certain real estate transactions operated by individuals may be considered commercial activities and, therefore, taxed at 16%. Consequently, there is a risk that a real estate transaction may be characterised as a commercial operation and, therefore, taxed at 16%, as in the case of any incomes resulting from independent activities (commercial incomes), in accordance with article 46 of Title III, Chapter II of the Fiscal Code. Unfortunately, neither the legal doctrine nor the practice of fiscal authorities have addressed the exact procedure for collecting the above income tax in the event such a characterisation would be made.

Income tax (corporate and individual income taxes)

According to article 771 of the Fiscal Code, natural persons are required to pay a tax levied on real estate transfer transactions, as follows:

i. if the real estate is owned for less than 3 years:

  1. 3% for values up to RON 200,000 (the equivalent of EUR 55,600);
  2. RON 6,000 (the equivalent of EUR 1,700)+ 2% of the asset value exceeding RON 200,000, for values exceeding the RON 200,000 threshold;

 

ii. if the real estate is owned for more than 3 years:

  1. 2% for values up to RON 200,000
  2. RON 4,000 + 1% of the declared value exceeding RON 200,000, for values exceeding the RON 200,000 threshold.

 

The capital gains obtained from the sale of immovable property by Romanian resident companies are included in the ordinary profit of such companies and taxed at the general level of 16% income tax.

Real estate transfer taxes

When concluding real estate transfer operations, due to the fact that the transfer deed must be prepared in an authentic form before a notary public, the parties must pay certain notarial fees. Moreover, since following the transfer of the ownership over the property the registration thereof in the land register must be operated, land register fees will also be incurred by the new owner.

Please note that, under Romanian law, notarial fees are applied gradually on a percentage basis, having in mind the value of the immovable property, in accordance with the annexes to the Norm related to public notary fees, approved through Order no. 943/2005 issued by the Minister of Justice, as subsequently amended (the “Notary Public Fees Act”).
For a list of the requested notary public fees for the property transfer, contribution in kind and registration of superficies right, please refer to Schedule no. 1 below.
In accordance with the fees list approved by Order no. 371/2007 related to the approval of the services fees levied for the services of the National Agency of Cadastre and Land Registration (the “NACLR Fees Act”), the following registration taxes are established:
- issuing the land book excerpts for authentication (RON 40, the equivalent of EUR 12);
- registration with the land register of the ownership right (Romanian language: intabularea dreptului de proprietate) (0.5% of the asset’s value, if the registration refers to the ownership right of a legal person and 0.15% of the asset’s value, if the registration refers to the ownership right of an individual). Please note that if the resulting registration tax is less than RON 100 (the equivalent of EUR 30), then a fixed fee of RON 100 shall be paid.

Inheritance and gift tax

According to article 771 (2) of the Fiscal Code, no tax is due for donation deeds concluded (i) between relatives three times removed or (ii) between spouses.

With regard to inheritance, in accordance with article 771 of the Fiscal Code, no tax is levied, provided the notarial procedure is completed within two years from the date of decease of the ancestor; otherwise, an income tax of 1% of the succession value is collected. For more details in this respect, please refer to the exemptions section above.

Net wealth tax

Romanian law does not establish any such wealth tax.

Special tax on immovable property

Romanian fiscal regulations provide for the following local taxes payable to the local budgets:

  1. tax on buildings;
  2. tax on land;
  3. tax on public transport;
  4. fees for issuing certificates, licenses and permits;
  5. fee for the use of advertising and publicity;
  6. tax on performance;
  7. hotel tax;
  8. special taxes;
  9. other local taxes.

At furtherance, we shall focus only on the local taxes relevant for immovable property.

Tax on buildings
In light of the above, please note that any person who owns a building located in Romania has to pay an annual tax for that building, save for a series of exemptions mentioned in Schedule 2 below.
The tax on buildings is collected to the local budget of the territorial administrative unit in which the building is located. In the case of Bucharest Municipality, the tax on buildings is due to the local budget of the district in which the building is located.
Please note that, if the building is in the joint ownership of two or more persons, each of the joint owners of the building has to pay the tax pertaining to the part of the building owned by that person. In the event the part of the building owned by each of the joint owners cannot be determined, each of the owners shall have to pay an equal share from the tax on the building.
The tax on buildings is to be paid annually in two tranches. Therefore, in the case the building is owned by a natural person, the tax rate is 0.1% computed on the taxable value of the building.
In case the building is owned by a legal person, the applied tax varies between 0.25% and 1.5% and it is computed over the entry value of the building.
Please be advised that, if the building tax is paid in advance for the entire year, the relevant local council may grant a reduction of up to 10%.

Tax on land
With respect to owned land property, please note that any person who owns a plot of land located in Romania has to pay a tax on land property to the local budget.
If the land property is jointly owned by two or more persons, each owner must pay the taxes pertaining to the part of the land owned by that person. In the case the part of the land owned by each of the joint owners cannot be determined, each owner shall have to pay an equal share from the land tax.
The land tax represents a fixed amount per square metre, which the owners of land properties have to pay on an annual basis.
Please note that as mentioned before, when acquiring a building through a transfer deed concluded in authentic form, the buyer also acquires an ownership right over the land on which the building was erected. However, even if the new owner should have to pay taxes both on the land and on the building acquired, according to article 257 of the Fiscal Code, it shall be obliged to pay only the tax on the building, the land surface beneath the building being exempted from taxation in this case.
The computation of the amount of the due land tax is made by reference to various criteria, such as: (i) the surface of the land (number of square meters); (ii) the rank of the locality in which the land is located, as determined by the law; and (iii) the area and/or the category of land use, according to a classification made by local council.
Government Decision 44/2004 approving the implementing of the norms to the Fiscal Code (the Implementing Norms”) sets forth in detail the procedure for computing and collecting the above taxes.

Value added tax (VAT)

The relevant legal framework is the following:

  1. the Fiscal Code – article 141 (2) f), as amended by Government Emergency Ordinance no. 106/2007 (“GEO 106/2007”);
  2. GEO 106/2007 amending the Fiscal Code;
  3. the Fiscal Code, as amended by before GEO 106/2007; and
  4. The Implementing Norms.

As a general rule under Romanian law, the transfer of real estate property such as (i) a building, (ii) a part of the building and the land on which it is built and (iii) any other land is exempted from VAT taxation. However, this exemption from payment of VAT shall not apply for the delivery of (i) new buildings, (ii) parts of new buildings and (iii) sale of buildable land.
In order to avoid any confusion in practice, article 141(2)(f) of the Fiscal Code sets out the following definitions: (i) “delivery of new buildings” means the delivery made no later than on 31 December of the year following the year (a) during which the first inhabitation or use of a building or a part thereof, as appropriate, has occurred or (b) when the building was put at use or upgraded, if the structure, nature or destination thereof has been modified; (ii) “buildable land” is defined as any land on which a construction may be developed, according to the Romanian law; (iii) “construction” means any building or fixed structure on or in the land.
Please note that article 141(3) of the Fiscal Code allows any taxable person to choose for VAT to be applied to the above transactions if the person involved in such transfers of real estate property is registered for VAT purposes.
According to article 127 (1) from the Fiscal Code, a taxable person is any person carrying out economic activities in an independent manner and irrespective of the place, with the purpose to obtain an income on a regular basis.
In accordance with point 3(1) from the Implementing Norms, the incomes obtained by natural persons from the sale of their residential private buildings or other buildings used for personal purposes are not considered as resulting from economic activities, unless the sale of real estate property is conducted on a daily basis and in order to obtain income on a regular basis. As an effect of the above re-characterisation, a natural person shall be considered as having at the same time the obligation to pay the VAT collected from the asset sale and the obligation to pay the 16% income tax.

According to an answer addressed by the National Agency for Fiscal Administration to the National Union of Notaries Public from Romania, starting with 1 January 2008, individuals who independently sell new buildings, parts of such new buildings or buildable land for the purpose of obtaining permanent incomes exceeding EUR 35,000 per year are obliged to register themselves as taxable persons and to pay VAT for such sales. Please note, however, that the above answer does not represent an order or regulation issued by the National Agency for Fiscal Administration, having a normative force (it simply represents an official answer formulated to the benefit of its addressee only, with no binding effect in relation to third parties).

Other taxes

N/A

 

Double Taxation Treaties (DTT)


Under the double taxation treaties concluded by the relevant jurisdiction, which State is entitled to levy a tax on income derived from real estate?

As a general rule under the Double Taxation Treaties concluded by Romania, the state where the immovable property is located has the right to levy a tax on the income derived from real estate transactions.
The above provision applies both to individuals and legal entities.

Which State is entitled to levy a net wealth / net equity tax on immovable property?

As mentioned above, Romanian law does not regulate the concept of net wealth / net equity tax.
 

Which State is entitled to levy a tax on capital gains derived by the alienation of immovable property?

Out of all the 74 reviewed Double Taxation Treaties, 39 of them establish that capital gains derived from alienation of immovable property may be taxed in the state where the real estate property is located, while the other 35 treaties expressly set out that such capital gains are taxed in the state where the real estate property is located.

Methods for the elimination of international double taxation under the treaties concluded by the relevant country (tax credit/ imputation or exemption method):

Under most Double Taxation Treaties concluded by Romania, the method used for the elimination of the international double taxation is that of the fiscal credit (Romanian language: credit fiscal).
By fiscal credit it is understood the deduction from the tax levied on all incomes in the state of residence of the tax collected abroad. Such deducted tax should not exceed the amount of the tax levied on such income in the state of residence.
 

Specific Questions

 

Introduction/ Instructions:

Below you find 12 different cases. The criteria to distinguish the cases are the following:

  1. Owner of the properties: Individual ("I"), real estate company ("REC") or (other) legal entity ("LE")
  2. Type of property: Residential ("Res") or Business ("Bus")
  3. Type of deal: Asset deal ("AD") or Share deal ("SD")
  4. Type of wealth to which property or shares belong: Private ("Pr"), Business ("Bus") or Business of a legal entity ("BLE")

 

The following table gives an overview of the 12 cases:

Case No.

Owner

Type of property

Type of deal

Type of wealth to which properties/ shares belong

1

I

Res

AD

Pr

2

REC

Res

SD

Pr

3

I

Bus

AD

Pr

4

REC

Bus

SD

Pr

5

I

Res

AD

Bus

6

REC

Res

SD

Bus

7

I

Bus

AD

Bus

8

REC

Bus

SD

Bus

9

LE

Res

AD

BLE

10

REC

Res

SD

BLE

11

LE

Bus

AD

BLE

12

REC

Bus

SD

BLE

 

It must be noted that the above criteria have been elected from a Swiss legal and tax perspective. It may be possible that in your jurisdiction other criteria are more relevant. For this purpose, under all cases listed below, the specific situation of your jurisdiction can be described in the section "Comments".

The 12 cases have been put into the following three sub-sections:

  1. Real estate is part of private wealth of an individual: Cases 1 –4.
  2. Real estate is a business asset of an individual: Cases 5 – 8.
  3. Real estate is an asset of a legal entity: Cases 9 – 10.

 

Each case contains a Part A asking for the tax treatment if your jurisdiction is the country where the real estate is located. Part B deals with the situation where your jurisdiction is the country of residence of the owner, or shareholder of the real estate company, as the case may be.

Within the questionnaire, the taxation upon transfer of the ownership of real estate (e.g. by way of a sale) will be covered as well as the ongoing taxation of real estate (i.e. recurring taxation such as income and wealth taxes).

I. Real estate is part of private wealth of an individual

 

 

Case 1

 

Part A (Your jurisdiction is the country where real estate is located)

 

Description

Country of taxation

Taxation in the state where the real estate is located

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Taxation upon transfer of the ownership of real estate

 

Real estate capital gains tax

N/A

Income tax

The generally applicable tax for transfer is of 2% - 3% applied to the declared value of the Land or Building.
In some special cases the levied tax may be of 16%, if the real estate sale is considered to be an economic activity for the seller, natural person. For more details in this respect, please refer to Section “Real estate capital gains tax” under “Tax Overview” chapter above.
According to article 771 of the Fiscal Code, individuals are due to pay a tax levied on real estate transactions, as follows:

i. if the real estate is owned for less than 3 years:

- 3% for values up to RON 200,000;
- RON 6,000 + 2% of the asset value or consideration value exceeding RON 200,000, for values exceeding RON 200,000;

ii. the real estate is owned for more than 3 years:

- 2% for values up to RON 200,000;
- RON 4,000 + 1% of the asset value or consideration value exceeding RON 200,000, for values exceeding RON 200,000.

Real estate transfer tax.

The notarial fees for transfer of real estate properties are applied gradually, on a percentage basis, applied to the declared value of the immovable property. For a summary of such taxes, please kindly refer to Schedule 1, attached below.
In accordance with the fees list approved by Order 371/2007 related to the approval of the services fees levied for the services of the National Agency of Cadastre and Land Registration, one should pay as follows:

- issuing the land book extracts for authentication (Romanian language: extrase de carte funciara pentru autentificare) (40 RON);
- registration of the ownership right (Romanian language: intabularea dreptului de proprietate) (0.15% of the asset’s value).

Inheritance and gift tax

According to the provisions of article 771 (2) of the Fiscal Code, no tax is due for donation deeds concluded (i) between relatives three times removed or (ii) between spouses.

With respect to inheritance, in accordance with article 771 of the Fiscal Code, no tax is levied, provided the notarial procedure (Romanian language: procedura notariala) is completed within two years from the date of decease of the ancestor (Romanian language: autorul); otherwise, an income tax of 1% of the succession value is collected to the State’s budget.

Other taxes (VAT, etc.)

According to an answer addressed by the National Agency for Fiscal Administration to the National Union of Notaries Public from Romania, starting with 1 January 2008, individuals who independently sell new buildings, parts of such new buildings or buildable land for the purpose of obtaining permanent incomes exceeding EUR 35,000 per year are obliged to register themselves as taxable persons and to pay VAT for such sales. Please note, however, that the above answer does not represent an order or regulation issued by the National Agency for Fiscal Administration, having a normative force (it simply represents an official answer formulated to the benefit of its addressee only, with no binding effect in relation to third parties).

 

Ongoing taxation of real estate

Net wealth tax

Please note that Romanian fiscal regulations do not expressly provide for any net wealth tax.

Income taxes: Taxation of rental income, imputed rental value, deductibility of interest

In accordance with the provisions of article 62 of the Fiscal Code, please note that for lease agreements registered with Romanian tax authorities, the gross annual income to which the 16% quota is applied must be diminished with a 25% quota (i.e. which is considered a general accepted quota relative to the costs related to the damages incurred as a result of the use of the leased assets). Such a decrease of the gross annual income shall also diminish the actual income tax amount payable to Romanian tax authorities.

Other taxes

Apart from the general income tax, the owners are also obliged to pay certain local taxes, such as the building tax and the land tax.

The building tax is payable twice a year. The levied tax rate is of 0.1%, applicable to the fiscal value of the building.
If paid in advance for the entire year, the local authorities shall grant a discount of up to 10%.

The land tax represents a fixed amount per square metre, which land owners have to pay twice a year. For more information in this respect, kindly refer to section “Special tax on immovable property” on page 16 from the UIA1 questionnaire.

 

Comments

N/A

 

Part B

 

Description

Country of taxation

Taxation in the state of residence of the owner of the real estate

Type of asset

Residential property

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Taxation upon transfer of the ownership of real estate

 

Real estate capital gains tax (RECGT)

N/A

Gift taxes

We have not identified any specific provision in this respect under Romanian law.

Income tax

According to most of the Double Taxation Treaties Romania is a party to, the state where the immovable property is located has the right to levy a tax on the income derived from real estate. As a consequence, the income tax shall be levied in Romania, and not in the state of residence of the owner, if the owner is not a Romanian resident. Moreover, please note that according to Romanian law, there is no difference between the tax levied on real estate capital gains and the income tax from the point of view of the income obtained from real estate transfers. Therefore, the income tax is calculated according to the specifications provided under Case 1 Part A above.
With respect to income obtained from activities other than real estate transfers, the general income tax of 16% is applicable.

Other taxes (VAT, etc.)

A note issued by the National Agency of Fiscal Administration stats that starting with 1 January 2008, individuals who, in an independent manner, sell new buildings, parts of the buildings or buildable land, in order to obtain continuous income exceeding EUR 35,000 per year have to register as taxable persons and pay VAT for such sales.

Real estate transfer taxes (RETT)

The applicable transfer taxes for the real estate properties transferred from and towards non Romanian residents shall not differ from the ones applied to Romanian residents. Therefore, no RETT is levied in Romania on the transfer of real estate properties located outside Romania.

Inheritance taxes

According to the provisions of article 771 (2) of the Fiscal Code, no tax is due for donation deeds concluded (i) between relatives three times removed or (ii) between spouses.

With regard to inheritance, in accordance with article 771 of the Fiscal Code, no tax is levied, provided the notarial procedure is completed within two years from the date of decease of the ancestor (Romanian language: autorul); otherwise, an income tax of 1% of the succession value is collected to the State’s budget.

Gift taxes

We have not identified any specific provision in this respect under Romanian law.

 

Other taxation (other than upon holding or upon disposal)


N/A

Comments

N/A

 

Case 2

 

Part A

 

Description

Country of taxation

Taxation in the state where the real estate property is located

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The company is domiciled in the state where the real estate is located. Its shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company
Share deal

Taxation upon transfer of the ownership of real estate

Real estate capital gains tax: Is there a real estate capital gains tax on the sale of shares of a real estate company?

If so, is the buyer of the shares entitled to claim a step-up in tax basis for a later asset and/ or share deal?

Since the present study case refers to share deals, no real estate capital gains tax shall be applicable. However, if any income is registered as a result of the share transfer, such an income shall be considered under Romanian Fiscal Code as an investment income.

Corporate income tax

According to article 65 from the Fiscal Code, the sale of shares is taxed as investment income at a flat rate of 16%. This income tax shall be payable only if the share transfer is made against a price exceeding the nominal value of the transferred shares and only with respect to the difference between the transfer price and the nominal value of the shares. The income tax shall be payable following the conclusion of the transfer documents, but prior to the registration of the share transfer with the Trade Registry.
The indirect transfer of the ownership of real estate through the sale of share triggers no corporate income tax.

Real estate transfer taxes.

In the case of share deals, there are no ownership transfer operations registered with respect to real estate property, thus no real estate transfer taxes shall be incurred.

Inheritance and gift tax

N/A

Other taxes (VAT, etc.)

N/A

Ongoing taxation of real estate

Net wealth tax, net equity taxes

N/A

Corporate income taxes.

N/A

Other taxes

N/A

Other taxation (except upon holding or upon disposal)


N/A

Comments

N/A

 

Part B

 

Description

Country of taxation

Taxation in the state where the real estate is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal.

Comments

No difference can be mentioned between Part A and Part B of Case no. 2.

 

Case 3

 

Part A

 

Description

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of private wealth of an individual.

Property / Deal

Single property
Asset deal

Comments

Case no. 3 does not represent a different approach with regard to the fiscal treatment under Romanian laws, as long as no difference between residential or business assets is made.
The income from real estate operations is taxed in accordance with article 771 of the Fiscal Code (please kindly refer to Case no. 1 above), irrespective of the nature of the buildings or the land.

In addition, one should have in mind that there are specific regulations concerning the acquisition of real estate by foreigners and stateless persons, as explained below.

According to article 44 of the Romanian Constitution, foreign citizens and stateless persons may acquire the property right or any of its dismemberments subject to special conditions.
Law no. 312/2005 regarding the acquisition of ownership right by foreigners and stateless persons establishes a different treatment between EU citizens and citizens of non-EU countries.
Therefore, following Romania’s accession to the EU on 1 January 2007, the following rules are applicable:

  1. citizens of EU Member States having their place of residence in Romania may acquire land properties in Romania following Romania’s accession to the EU;
  2. citizens of EU Member States having their place of residence outside Romania, stateless persons residents of a EU Member State and legal persons having their place of residence in any EU Member State may acquire land properties in Romania as secondary residence or secondary headquarters only after 5 years from the date of Romania’s accession to the EU;
  3. citizens of EU Member States, stateless persons residents of a EU Member State regardless of the place of residence may acquire the property right over agricultural or forestry lands only after 7 years from the date of Romania’s accession to the EU; and
  4. citizens of non-EU Member States may acquire land properties based on bilateral agreements between Romania and their state of residence, but in any case not under more favourable conditions than EU residents.

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

N/A

 

Case 4

 

Description

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of private wealth of an individual.

Property / Deal

Shares of a real estate company.
Share deal

Comments

From a tax treatment perspective, the distinction between business property and residential property has no relevance under Romanian Law.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

N/A

 

II. Real estate is a business asset of an individual

 

Case 5

 

Description

Country of Taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Comments

Under Romanian law, there is no significant difference between a business asset held by an individual and by a company.
The fiscal regime focuses on the commercial character of the activity conducted by the individual and the gains resulted from an asset deal are taxed as commercial incomes, i.e. at a level of 16%.
In addition, it should be mentioned that a real estate transaction which apparently falls under article 771 of the Fiscal Code may be re-characterised as a commercial activity and taxed accordingly.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

N/A

 

Case 6

 

Description

Country of taxation

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares of the real estate company are part of the business assets of an individual. The company is domiciled in the state where the real estate is located.

Property / Deal

Shares in a real estate company
Share deal

Comments

Under Romanian law, shares are not considered to be part of the business assets of an individual.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

N/A

 

Case 7

 

Description

Country of taxation

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The property is part of the business asset of an individual.

Property / Deal

Single property
Asset deal

Comments

From a tax treatment perspective, the distinction between business property and residential property has no relevance under Romanian law.
If the activity performed by the owner (natural person) of the business property shall be considered as a commercial activity, then the income obtained thereunder shall be taxed accordingly with the flat tax of 16%.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

N/A

 

Case 8

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Business property (e.g. store, warehouse, office building)

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares are part of the business assets of an individual.

Property / Deal

Share property
Share deal

 

Comments

Neither the distinction between business/residential property nor the distinction regarding the ownership of the real estate is relevant for the Romanian fiscal treatment, save for the case when the difference is realised between natural and legal person. In the case of legal persons, the income obtained from a share deal shall be taxed with the flat tax of 16%.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

N/A

 

III. Real estate is an asset of a legal entity

 

Case 9

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Residential property

Owner of the real estate

The belongs to a legal entity.

Property / Deal

Asset property
Asset deal

 

Comments

The transfer of the real estate property is subject to a flat tax of 16% of the income obtained from such a transfer.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

N/A

 

Case 10

 

Description

Classification

Taxation in the state where the real estate property is located.

Type of asset

Residential property

Owner of the real estate

The real estate is indirectly held by real estate company. The company is domiciled in the state where the real estate is located. Its shares belong to a legal entity.

Property / Deal

Share property
Share deal

 

Comments

At the moment the ownership over the shares is transferred, if the transfer is made against a price exceeding the nominal value of the shares, a flat tax of 16% shall be levied on the difference between the transfer price and the nominal value of the shares.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

N/A

 

Case 11

 

Description

Classification

Taxation in the state of the real estate property

Type of asset

Business property

Owner of the real estate

The property belongs to a legal entity.

Property / Deal

Asset property
Asset deal

 

Comments

The transfer of the real estate property is subject to a flat tax of 16% of the income obtained from such a transfer.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

N/A

 

Case 12

 

Description

Classification

Taxation in the state where the real estate property is located

Type of asset

Business property

Owner of the real estate

The real estate is indirectly held by a real estate company. The shares belong to a legal entity.

Property / Deal

Share property
Share deal

Comments

At the moment the ownership over the shares is transferred, if the transfer is made against a price exceeding the nominal value of the shares, a flat tax of 16% shall be levied on the difference between the transfer price and the nominal value of the shares.

 

Part B

 

Are there any comments regarding the taxation in the state of residence of the owner of the real estate?

N/A

 

* * * * * * * * * * * * *


 

Schedule 1

Transfer procedure

Surface/value

Costs

Contribution in-kind to the share capital of an SPV of the ownership right, of a joint ownership quota, or of a superficies right

Share capital below or equal RON 20,000

1% from the share capital but not less than RON 100 (notary cost)

 

Share capital above RON 20,000

RON 200 + 0.5% applied to the amount exceeding the RON 20,000 threshold (notary cost)

Sale purchase of a determined plot of land or of a certain property quota

Price below or equal to RON 13,696

2.5% applied to the value of the transferred property (notary cost)

 

Between RON 13,697 and RON 27,499

RON 342 + 2% applied to the value of the transferred property (notary cost)

 

Between RON 27,500 and RON 54,891

RON 618 + 1.5% applied to the value of the transferred property (notary cost)

 

Between RON 54,892 and RON 274,562

RON 1,029 + 1% applied to the value of the transferred property (notary cost)

 

Between RON 274,563 and RON 549,231

RON 3,226 + 0.75% applied to the value of the transferred property (notary cost)

 

Over RON 549,231

RON 5,286 + 0,5% applied to the value of the transferred property (notary cost)

Registration of the property right or of the superficies right in the name of an SPV with the Land Book

 

0.5% applied to the declared value of the property or of the superficies right


 

Schedule 2

The tax on land is not due:

  1. for the land beneath the buildings;
  2. any land owned by a religious cult recognized by law or a local establishment, with legal personality;
  3. any land used as a cemetery, or cremation hall;
  4. any land of owned by education institutions and universities provisory authorized or accredited;
  5. any land owned by sanitary units of national interest which did not entered in the administration of the local authorities;
  6. any land owned, managed or used by a public institution, except for the areas used for economic activities;
  7. any land owned by the state, local and territorial administrative- units or other public institutions, except the areas used for economic activities;
  8. any land degraded or polluted, included in the perimeter of improvement for the period as lasting improvement;
  9. land which by their nature, and not by their destination is unsuitable for agriculture or forestry, any land occupied by ponds, accumulation lakes or waterways, those used for the activities of defence against floods, water management, hydrometeorology, those contributing to the exploitation of water resources, the areas used for protection as defined by law, and land used for mining and resource exploitation, defined as such by a decision of the local council, insofar as it does not affect the use of surface soil;
  10. land linked within hydro-systems, land used for navigation, land related for harbour infrastructure, navigable channels, including chain of locks (Romanian language: ecluze), and related fields used for land upgrading works, based on the license regarding the use category of the land issued by the county cadastral office and real estate publicity;
  11. land occupied by highways, roads European national roads, main roads managed by the Romanian National Company for Roads and Highways, and the land around the tracks representing the security areas;
  12. land used for industrial parks, science and technology, according to the Romanian law;
  13. land transfer under the ownership of the state or administrative-territorial units when no successors were found;
  14. land obtained under special regulations such as Law 10/2001 regarding the legal status of properties abusively taken in the State’s Property between 6 March 1945 to 22 December 1989 or Emergency Ordinance no. 94/2000 concerning the returning of the immovable property which belonged to religious cults from Romania and no. 83/1999 concerning the return of immovable property which belonged to the communities of national minorities from Romania.