(P) Real estate in Romania…tax challenges and still opportunities

We met a lot of investors attracted by stories about Romania and potential of growth of our country. We met even investors buying plots of land without knowing exactly where is located, without knowing what they will do with it and which will be planned return of investments. This was in that period where prudence was not in category of trendy words. Many of them started to build residential complex with big hope of huge profits. Crisis shows a different reality, blocking projects, and working in progress in needs of financing, finished houses or apartments not yet sold. As the obligations of declaration of those buildings in progress or not finalized within due time, as per construction permit to the local tax authorities gave room for some interpretations, in practice many companies did not declare these building to the tax authority and consequently did not pay related taxes. In order to avoid the above mentioned situations, the recent changes in tax Code bring some provisions clarifying obligations in certain context. Thus, for the buildings not yet registered at the Office of Cadaster and Real Estate Publicity, the owners are obliged to submit tax declaration for local taxes and pay tax on building. Also, the new changes clearly state the obligation to pay tax on buildings whose construction was not completed within the time schedule provided in the building permit and /or the authorisation was not renewed. Declaring buildings for taxation and registration in the records of local authorities will be a legal obligation of taxpayers who own these buildings, even if they have been executed without a construction permit. As it is clear that companies should declare at the tax authority every building finalized or in progress, legally built or not, let’s see what it must be taken into consideration regarding payments. Owners of buildings and special constructions are subject to building tax, irrespective of their location or function. Building tax ranges 0.1% on taxable value of the building, in case of individuals, by taking into consideration factors such as floor area or nature or age of the building, the place where it is situated and the purpose for which it is used. Taxable value shall be reduced depending on the age of the building. Building tax ranges between 0.25% and 1.5% local tax on buildings, on the net book value, in case of companies, or 5 - 10% on the building if the building has not been revaluated in the last three years, in force up to 1st January 2012. Starting with 1st of January 2012, the tax rate on buildings that have not been revaluated in the past 3 years varies between 10% to 20% of the inventory value of building, while for buildings that have not been revaluated in the past 5 years varies between 30% to 40%of the inventory value of building. Therefore, if the companies do not perform revaluation of buildings one at each 3 years, they should pay the value of the building to the Romanian state within 5 years or even earlier if they will not revalue building within 5 years. It is obvious recommendation to proceed to reevaluation of buildings at least at these time intervals in order to save taxes. Besides all tax and financial risks and challenges, 1st of January 2012 will bring an opportunity as well, as change related to the right of acquiring ownership of land for secondary residences, respectively secondary locations for foreign citizens, citizens of EU Member States or non-resident legal entity established in accordance with the laws of the EU Member State. These natural persons and legal entities may acquire land in Romania starting with next year.