The real estate market in Romania is maturing. Transactions are becoming more complex and the number of stakeholders is increasing. The first signs of a boom on the Romanian real estate market occurred in early 2004, when the official declarations about Romania joining the EU in 2007 were made. Since then, the local real estate market has experienced tremendous development. Small deals seem to be outnumbered by medium to large ones, where investment funds play a strong role. These large deals require advanced legal, environmental and technical due diligence reports before commencing an acquisition project. They impose conditions precedent to the transfer of ownership that a few years ago were considered deal-breakers. The conditions are now acceptable because the prices that investment funds are ready to pay are no longer "Romanian" – they have reached western European levels. But the opportunities are enormous in this EU member state where 21 million (and unofficially 22.5 million) inhabitants live. Unfortunately, they live in old ugly communist blocks of flats and are eager to move in new dwellings. Also, the country has poor infrastructure (it is crossed by only about 300 km of highway), has the poorest stock of office and logistic space in eastern and central Europe (sharing last place with Bulgaria) and has poor agriculture despite the quality of its farmland. So investors head to Romania to benefit of the development of this country.

Who can own land?

Only Romanian citizens or entities are allowed to own or acquire ownership over plots of land in Romania. Foreign persons (natural or legal) are allowed to own or acquire ownership right over buildings in Romania.

So, to obtain indirect ownership over land, foreign persons must establish a Romanian special purpose vehicle (often in the form of a limited liability company, Societate cu raspundere limitata or SRL, or a joint-stock company, Societate pe actiuni or SA). The special purpose vehicle can be 100% owned by the foreign person. However, as of January 1 2007, when Romania joined the EU, the citizens of EU-member states have the right to own land in Romania, provided they are resident in Romania. Also as of January 1 2007, legal entities that are established according to the laws of an EU member state have the right buy land in Romania to establish a secondary residence, provided that other technical conditions (for example, reciprocity of treatment of Romanian entities in the EU-member state of origin of the non-Romanian entity) are also met.

The law is more restrictive regarding agricultural land. Citizens of EU member states, as well as legal entities established according to the laws of an EU member state, will only be able to buy agricultural land and forests after January 1 2014 (seven years after Romania's accession to the EU).

The Romanian legal practice with regard to EU member state entities or citizens acquiring land in Romania is unclear and contradictory. Public notaries are reluctant to notarize transfer agreements, due to incomplete and ambiguous legislation. Even if notaries do accept notarization of agreements, there is a risk that the real estate register agencies will refuse the registration of the operation. However by the end this year, the legal practice should be clarified and made more predictable. Until then, the Romanian special purpose vehicle will in almost all cases be the instrument used for the acquisition of land in Romania.

Requirements for transferring ownership

Any transfer of land is legally valid only if a public notary authenticates the underlying transfer agreement. Failure to comply with this requirement results in the nullity of the contract. The public notary is obliged ex officio to register the buyer's ownership with the real estate register. The registration with the real estate register does not have constitutive but merely declarative effect. For ranking priority reasons it is highly recommended that the registration with the real estate register are performed within a maximum of three days after the ownership is transferred to the buyer. The ownership right of the new owner only becomes opposable towards third parties as of the date of entry in the real estate register.

The Romanian real estate register system has only been in place in Romania since 1999, so most owners of real estate objects in Romania are not registered. However, owners are obliged to register their ownership right with the real estate register if they intend to dispose of their real estate assets (for example, transfer ownership or mortgage property).

Due to the fragmentary state of registration, it is common practice that, once the seller and buyer agree on the main terms of the transaction, a pre-contract is executed between the parties. By concluding the pre-contract, the parties undertake to conclude the sale-purchase contract against payment by the seller of an advance, which in most cases is between 5% and 10% of the sale price. It is not mandatory to execute the pre-contract in the presence of a public notary but it is advisable to do so because the pre-contract represents an enforceable title required for restitution of the advance payment and of the related penalties. If the seller refuses to conclude the main contract, the other party is entitled to ask the court to stipulate the conclusion of the contract by way of a court decision, which has the same legal effect as a regular sale-purchase contract.

The term agreed by the parties for the execution of the main sale-purchase contract is usually one to three months, depending on the conditions precedent agreed by the parties. During this period, the seller needs to undertake the procedures for: (i) registration of its right with the real estate register; (ii) obtaining the fiscal certificate attesting that it has paid all due tax on the transferred property; and (iii) delivery of an excerpt from the real estate register certifying that the seller is the owner of the respective real estate asset and that the asset is free of any mortgages or encumbrances. The buyer usually uses this period to undertake legal, technical and financial due diligence to gain a thorough understanding of the status of the respective real estate. The more sophisticated the buyers are, the more conditions precedent are imposed within the pre-contracts executed. It has become almost common practice that, before signing the main sale-purchase contract, the buyer is contractually obliged to obtain a certificate of urbanism providing details on the conditions and technical requirements with regard to permitted development measures. Sometimes the price is adjusted depending on the specific information and requirements provided by the certificate of urbanism. This certificate does not represent a building permit, it only represents the first step of the process of obtaining a permit.

Financing real estate acquisitions

A local company acquiring and operating real estate can be financed either by equity or debt financing. Equity financing would normally be tax neutral. With loan financing, several tax implications related to deductibility should be considered. There are a few peculiarities relating to financing obtained from a Romanian bank.

Developers should be aware that Romanian banks, when granting financing to a certain project, have several standard rules:

Two subsequent forms of financing are used: construction financing and investment financing.

Construction financing agreements are usually concluded for a term of one to three years and are valid during the construction of the project. In construction financing, the interests are capitalized and repayments are not due to the bank if investment financing arrangements are also concluded. As security, the bank usually asks for a mortgage on land and work in progress and a pledge over the shares issued by the special purpose vehicle.

Investment financing agreements usually are concluded for a term of 10 to 20 years. During this time, the total amount of the debt and related interests are to be paid back in instalments, taking into account the periodical revenue generated by the project, and most of the financing is re-payable only at the end of the arrangement. To secure the investment financing, in addition to the mortgage on the asset and pledge on the shares, the bank will usually ask for guarantees in the form of assignment of account receivables generated by the project and assignment of the insurance policy related to the finalized project.

The purchase of real estate will not be financed if it is bought for speculative reasons.

In most cases banks require that the developer is the owner of the real estate. The developer needs to submit its own feasibility study with the bank.

Based on the feasibility study submitted, the banks will develop their own feasibility study regarding the project. Various business factors are taken into account: evolution of the market, specific location of the real estate, destination and type of project, conclusions of research studies performed by reputable real estate agencies active in Romania, and a benchmark corroborated with the growth of the local GDP. The developer must be able to provide pre-lease agreements for the proposed project.

The cost of financing usually amounts to 3% to 5 % of the total amount of the financing, while the interest applicable varies between Euribor plus 1.5% and Euribor plus 3.5%.

Operational stage

From the profit-tax perspective, a special purpose vehicle will tax the rental income related to the immovable property at the standard profit tax rate of 16%. It would also be allowed to claim tax depreciation charges of the real estate based on the acquisition price. Land, however, is a non-depreciable asset.

Although the rental of immovable property is usually VAT-exempt without credit, legislation allows the landlord to opt-in for charging VAT on rentals.

Separately, owners of buildings should pay an annual tax on the real estate objects they own to the local authorities. For companies, building tax would range between 0.5% and 1% of the book value of the building. Landowners are liable to pay the tax on land, which is established as a fixed amount per square metre, depending on the location.

Dividends paid abroad by a local company from its profits are subject to a 16% withholding tax in Romania. However, this tax is reduced to zero for shareholders that are EU state member residents and that fulfil certain additional conditions (for example, a shareholding of at least 25% in the Romanian company, held for at least two years). Withholding tax might also be reduced (even to zero) in accordance with the provisions of some of the double-tax treaties signed between Romania and other countries.

Exit scenarios

To exit from a real estate investment in Romania, the investor can either sell the shares of its Romanian subsidiary (share deal), or the Romanian subsidiary directly sells the real estate (asset deal).

Share deal

Based on the existing provisions of the Fiscal Code, non-residents are taxable in Romania at the standard profits tax rate of 16% for any capital gains realized from selling ownership rights in a local company.

However, under most of the double-tax treaties signed by Romania with other countries, income deriving from the sale of shares in a Romanian company is generally subject to tax only in the state where the seller is resident, even if most of company's assets are represented by real estate. Income from direct sale of real estate does not benefit from treaty protection.

Asset deal

If the seller is a company, the sale price of the real estate represents a part of the company's taxable revenue. The standard profit tax of 16% also applies in this case. If the seller is a private person, the transfer tax is calculated as follows:

• For real estate assets acquired within three years before the moment of transfer:
• 3% if their value does not exceed L200,000 ($80,000);
• if their value exceeds L200,000, the tax amounts to L6,000 + 2% of the value exceeding L200,000.
• For real estate assets acquired more than three years before the moment of transfer:
• 2% if their value does not exceed L200,000;
• if their value exceeds L200,000, the tax amounts to L4,000 + 1% of the value exceeding L200,000.

Direct sale of real estate is also subject to notary fees, usually agreed to be payable by the buyer, while the transfer of shares in a Romanian entity is not. The total expenses of the buyer in connection with a direct transfer amounts to about 2.5% of the value of the transaction.

The applicable tax and notary fee are calculated considering the value indicated by the signing parties of the legal act transferring the ownership right. Each year, the Public Notary Chamber elaborates and updates the index regarding the value of real estate. This index is a chart with minimal values, depending on the location and category of the transferred real estate. If, to avoid the tax provisions, the signing parties indicate a value below the minimal value estimated by the Public Notary Chamber, the tax would be calculated considering the chart issued by Chamber.

As a rule, transfer of immovable property in Romania is subject to VAT charged at the standard rate of 19%. However, special VAT simplification measures apply in the case of acquisition of land and buildings (or parts of buildings), provided both the seller and the buyer are registered in Romania for VAT purposes. Specifically, the measures imply application of VAT through the reverse-charge mechanism, under which the seller and the buyer account for both input and output VAT without any VAT cash flow.

Author biographies

Ovidiu Valeanu Gilescu&Partenerii CHSH Ovidiu Valeanu has been a partner of Gilescu&Partenerii CHSH since 2000. His main areas of practice are M&A, real estate and commercial. He has advised various national and international clients, especially foreign investors, in greenfield investments, real estate, retail, agricultural and industrial land acquisitions. Valeanu graduated from the University of Bucharest in 1998. In 2004 he also graduated from the Romanian-Canadian MBA programme and has a master's degree in business administration. Mark Krenn CHSH Cerha Hempel Spiegelfeld Hlawati Mark Krenn is an associate of Cerha Hempel Spiegelfeld Hlawati. He has been with the firm since 2004. His main areas of practice are M&A, corporate restructurings and distribution law and he is member of the M&A practice group. Krenn has been involved in various takeover proceedings and privatizations in eastern Europe and acts for international clients in Bucharest. He graduated from the University Vienna (Mag iur, 2003). He held lectures at the University of Applied Sciences of BFI, Vienna, and was managing director of a new media agency before joining CHSH.