Real Estate Review, Mid-Year 2009 - Taxation aspects
by Colliers International
Taxation of rental and disposal of assets rental activities
Rental income is subject to a flat 16% tax that is applicable to both companies and individuals but with certain differences in the computation of the tax base.
Specifically, in case of Romanian companies, apart from other tax deductible expenses, the tax base is decreased by the fiscal depreciation of the building (except for land which may not be depreciated). Further to the latest changes of the tax regulations introduced in May 2009, reserves from the revaluation of fixed assets, including land, performed after 1 January 2004 will be recognised as taxable income either gradually, proportionally with the recognition of tax depreciation of these assets, or at once, at the time of their disposal. This rule concerns the revaluation reserves that are deducted from profits for tax purposes through depreciation or through expenses with alienation of assets. In effect, this change eliminates the tax revaluation of assets which was available for several years.
With regards to the rental income obtained by individuals, the tax base is determined by deducting a 25% expense quota from the gross income, which in effect reduces the tax rate to 12%. Alternatively, individuals also have the option of deducting actual expenses. If an individual closes more than 5 rental agreements, he/she has to register as merchant and pay a 16% tax on rental income less relevant deductible expenses.
Disposal of the real estate
Capital gains obtained by Romanian companies from disposal of Romanian real estate properties are subject to a 16% profits tax. The taxable gain is determined as the difference between the selling price and the fiscal value of the fixed assets sold. In the case of depreciable fixed assets (buildings), the deductible fiscal value is defined as the entry value less fiscal depreciation. As of May 1st 2009, a minimum income tax is in force, taxing companies regardless whether they made a profit or loss on their operations (including real estate disposal).
Distribution of net profits is further taxed with a 16% dividend tax. However, there are situations when the tax can be reduced below 16% and even to nil (e.g. via tax treaties, EU Parent-Subsidiary Directive).
As an alternative, the shareholders of a Romanian company can opt to sell the shares of the company rather than selling the companya��s property. In this case, they are liable only to the 16% income tax applied to the capital gain obtained through the company sale.
In case of capital gains obtained by individual investors from disposal of real estate property, the tax depends on the period of time the property was owned for. Namely, the tax for real estate properties sold within 3 years of acquisition stands at 3% of the transaction value for transactions up to RON 200,000, while for transactions exceeding RON 200,000, the due tax is RON 6,000 plus 2% of the amount which exceeds RON 200,000.
Sales of properties held for more than 3 years, are taxed at 2% of the transaction value for transactions under RON 200,000, while for transactions exceeding RON 200,000 the due tax is RON 4,000 plus 1% of the amount exceeding RON 200,000. Individuals performing sales of real estate as a business cannot apply the above rules but instead they need to follow a taxation scheme similar to that applicable for companies.
Rental of real estate property is normally VAT exempt. However, any taxable person performing rental activities may opt to charge a 19% VAT on such transactions.
As a rule, the sale of old buildings/parts of buildings and the underlying land, as well as of any other type of land is VAT exempt without deduction right unless the taxable person performing such transactions opts to tax the sale with 19% VAT. This exemption is not applicable to sale by a taxable person of a new building1 or land on which buildings can be erected.
Starting with December 2008, a 5% VAT tax rate has been introduced for the sale of social housing (including related land) under certain conditions (i.e., houses of maximum 120 square meters and not exceeding RON 380,000 in value - net of VAT).
Individuals trading in real estate as a business are to be treated as taxable persons. Thus, when performing taxable operations (e.g. sale of new buildings) the individuals are liable to register for VAT purposes if the volume of their transactions exceeds EUR 35,000.
Owners of buildings are liable to pay an annual building tax to the local authorities. For companies, such building taxes range between 0.25% and 1.5% of the book value of the building. However, the building tax may increase to up to 10% if the building has not been re-valued for 3 years. For individuals, the tax rate is 0.1% and is applied to the value of the building, which is calculated based on minimum established values provided by law. Hence, for equivalent property, the tax base for individuals can be considerably lower than for companies.
With regards to the tax on land, both companies and individuals owning land are liable to pay a tax which is established as a fixed amount per square meter, depending on the location of the land. Local councils may grant exemptions from payment of building and land taxes to companies under certain state aid schemes established for regional development.