A two-and-a-half-year deadlock impeding the sale of Romanian farmland located outside buildable areas and acquired less than eight years ago seems to have been finally cleared. On 2 February 2023 a much-awaited normative act came into effect, filling a series of legislative gaps and allowing public notaries to authenticate sale agreements for certain types of farmland located outside buildable areas.
As mentioned in our previous articles on this topic (published here and here), the deadlock occurred back in October 2020 when Law No. 17/2014 on the regulation of the sale-purchase of agricultural land situated outside buildable areas, and the amendment of Law No. 268/2001 on the privatisation of companies administrating the State's publicly and privately owned land with an agricultural use, and for the creation of the Agency for the State's Domain ("Law 17") was amended by Law No. 175/2020 for the amendment and completion of Law 17 ("Law 175"). With no secondary legislation being adopted to clarify the interpretation and application of Law 175, a deadlock occurred, which has lasted until now.
80 % tax for certain real estate transactions
A series of legislative amendments introduced mid-2022 and in February this year brought much-awaited clarifications. The most recent of them, a joint Order issued by the Romanian Ministry of Agriculture and Ministry of Finance under no. 396/2022/883/2023 (the "Order") regulates the procedure for the calculation, collection and payment of the 80 % tax applicable to real estate transactions stipulated under Art. 42 of Law 17, as further amended by Law 175.
The tax is applicable to:
- The sale of farmland located outside buildable areas by means of an agreement signed in authenticated form in front of a public notary within eight years as of the date when the farmland was acquired ("standard sale");
- The sale of a majority stake in a legal entity that owns one or more farmland plots located outside a buildable area, when such farmland represents more than 25 % of that legal entity's assets, in case such sale is performed within eight years as of the date when any of the plots was acquired. The same applies to farmland contributed in kind to that legal entity's share capital by one of its shareholders when the eight-year period is calculated as of the date when the shareholder has acquired such farmland; and
- Entering into transactions similar to the ones mentioned above by means of a court ruling that acts as a sale-purchase agreement.
- How is the 80 % tax calculated, collected and paid?
- For the aforementioned transactions, an 80 % tax is applied to the positive difference between (i) the value of the farmland on the date when it is sold or the stake in the relevant legal entity is sold and (ii) the value of the farmland on the date of its acquisition, calculated according to expertise reports or market studies prepared by public notary associations for the relevant periods.
In case of a standard sale, the 80 % tax applies only to the sale of farmland located outside buildable areas purchased no more than eight years ago, and not to any other types of acquisition (e.g. barter, donation, inheritance, acquisitive prescription, transfer in lieu of payment). However, if the transaction refers to a stake in a legal entity owning such farmland, the tax is due irrespective of how the farmland was acquired.
Double taxation? What does the Romanian Fiscal Code say?
The 80 % tax is paid on top of other taxes regularly provided by the Romanian Fiscal Code with regard to real estate transactions and share deals, respectively. Moreover, if the seller is obliged to pay profit tax, then the 80 % tax is not a deductible expense on the computation thereof. Also, if the seller is not a tax resident of Romania, the 80 % tax is not covered by the double tax treaty (if one exists) between Romania and the country where the seller has its tax residence.
An interesting feature of this new tax, which might raise a number of practical questions, is that the relevant tax authority is in charge of calculating the 80 % tax in the case of transactions that refer to the sale of a stake in the legal entity owning farmland located outside a buildable area within no more than eight years of its acquisition. While the seller of such a stake is obliged to file tax statements regarding the income obtained from the sale (and not the values based on which the 80 % tax is calculated), it remains to be seen how the tax authorities will be able to calculate this tax. Another practical hurdle might be determining the obligations when multiple shareholders sell a relevant stake in such a legal entity through a single transaction.
Good news, but not yet for all
Since the Order came into force, standard sale as defined above finally becomes possible again. Notaries public now have the framework to calculate, collect and pay the relevant tax.
However, one more step is needed to complete the other two types of transactions mentioned above. To this end, the Romanian tax authorities must adopt new secondary legislation regulating the model and content of necessary documentation to be filed. Until then, transactions for the sale of stakes in legal entities that own farmland located outside buildable areas acquired no more than eight years ago is not possible, nor are transactions entered into by means of a court ruling that acts as a sale-purchase agreement.
So while the legislative changes that came into effect this month are a welcome development that finally clears the deadlock in relevant real estate transactions, this is only good news for some. The Romanian tax authorities should speed up the adoption of secondary legislation that would once again make all these types of transactions possible.
By Madalina Mitan, Managing Attorney at Law, Steliana Stroe, Attorney at Law, Adriana Stoian, Managing Director Tax, Schoenherr