Tax

Great Interest in Romanian Agricultural and Forest Land

Further openings for individuals and legal persons from EU and EEA member states to own agricultural and forest land in Romania as of January 2014 stirs even more interest in Romanian land.

It is no secret that land prices for agricultural and forest lands are among the lowest in Romania.

At the same time the biggest gains with food production in the Eurozone were reported to have been made in Romania in the first half of 20131. The same phenomenon is noticeable with forests. With prices between EUR 2,000 and 3,800 per hectare,  Romania has a considerable competitive advantage over western European countries. The price is attractive and the produce can be sold without difficulties. Companies from Europe, the Middle East, and even China are looking to Romania for wood.

Add to this the increasing legal security of the ownership title and it is no wonder Romania has become highly coveted by investors in agricultural and forest land.

Foreigners have been able to hold title to land via Romanian registered companies, while EU/EEA citizens resident in Romania have had direct access to land.

Further opening

Starting with 1 January 2014, legal and natural persons of the EU/EEA will be able to own agricultural and forest land in Romania whether or not they are resident in Romania and without the need to interpose a company.

Adjacent costs at purchasing

Title to land is transferred upon notarisation of the sale-purchase agreement. The minimum fee the notary has to charge is set out by law and is calculated applying a formula to the purchase price. It ranges between 0.65% and 1% of the purchase price.

Following a legally binding title transfer, the new owner is registered in the land books. The land registry fees are 0.5% of the purchase price if the purchaser is a company and 0.15% if the purchaser is an individual.

These costs, the notary’s, and the land registry fees are usually borne by the buyer.

If the transaction is subject to VAT and the buyer is not allowed to claim input VAT credit (eg, being a natural person), the price may increase by the VAT rate of 24%.

Normally the sale of agricultural and forest land is exempt from VAT unless the seller opts to apply VAT. If the seller has claimed input VAT credit upon acquisition, the subsequent resale without VAT will trigger a VAT cost, the seller being obliged to repay to the state budget the input VAT initially claimed. Therefore, the seller is likely to opt to charge VAT on the transaction.

The land price would not translate into fiscal depreciation deductions in Romania, but companies may deduct transaction-related expenses. However, a tax deduction for the land price may be allowed in buyer’s country of tax residence.

Exploitation of land

A company’s taxable income from agricultural and forestry activities is revenue less deductible expenses.

  • For individuals, taxation is specifically regulated, similar to freelancers:
  • for certain activities, fixed income quotas are established and the individual pays 16% tax on the quota irrespective of the income actually derived. For reference, the highest income quota applicable for 2013 is for ornamental plants (RON 11,773/ha);
  • for other activities, income is computed based on actual revenue and expenses;
  • health social contribution may also be due.

For non-residents, the following general taxation rules should be considered:

  • income should qualify as taxable in Romania, being related to an immovable property located there, an approach confirmed also by the OECD Model Convention allowing the state where the immovable property is situated to tax income from such property (including income from agriculture and forestry);
  • the country of tax residency should allow for elimination of double taxation;
  • the non-resident may need to apply for a Romanian VAT number.

Transfer of land

If an individual sells land from private patrimony, the entire income from the sale is subject to taxation at a rate between 1% and 3% depending on the value and on the holding period. For companies, the capital gain from sale of land is taxed at 16%.  Thus, if a significant increase of the land prices is expected, 1%-3% on the sale price could prove more beneficial compared to a 16% tax on the capital gain.

Certain transfers are tax exempt: donations between relatives up to the 3rd grade and between spouses, as well as inheritance, if succession is finalised within 2 years.

VAT is also an issue when selling land. Land acquired for private use may be sold without VAT, while with land acquired for business use (assuming non-building), the seller may opt to charge VAT.

This is the current legal and tax framework. But laws in Romania are undergoing continuous changes and it is to be seen how the market and practice develops in 2014, the first year when non-resident EU citizens and legal entities are allowed to own agricultural and forest land in Romania.

Irrespective of the structure chosen, buying directly or through a Romanian subsidiary, a thorough title check is highly advisable. A successful exit also depends on how transparent and well-documented the title history is.

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Financial Times: http://www.ft.com/intl/cms/s/0/1e1126e8-34bc-11e3-8148-00144feab7de.html