Adventures with the Romanian Capital Gain
Adresa
Splaiul Independentei, Nr. 52
Bucuresti, Sector 5
Telefon
+40-21-315.61.00
Fax
+40-21-315.61.02
Website
www.bakertillyklitou.ro
In the context of the international downturn, every investor in the Romanian Real Estate market has to look forward and seek the best way to surpass the challenging times.
As we all know in the past the real-estate market has gone through a boom, attracting numerous investments from foreign companies.
Starting with the last half of 2008 the market has slowly began to lose her glamour and many companies have decided to exit the market.
The question puzzling some of the investors is the way to keep value in their companies by finding the best exit strategy at this time. A short presentation of the most common way in exiting a business is presented in the pages below.
A short background of this exercise would be that ROM CO SRL is a Romanian real estate company who has in its property one completed building, worth less than 50% of the total fixed assets value of the company. The building is rented to third parties under a lease agreement duly concluded and already enforceable.
The sole shareholder of ROM CO is ABC, a company organised and functioning under the laws of Cyprus.
The company to be sold has gained the interest from two potential buyers. One non-resident company, who is interested in acquiring only the shares of Rom Co and a Romanian resident company who would prefer to acquire the assets of the company.
The question arises at the exiting option. The current plan is to exit the business via one of the two following routes, meaning either through a:
- share deal under which ABC will sell the shares held in ROM CO to a non-resident third party buyer;
- or an asset deal under which ROM CO will sell the assets (i.e. land and buildings) to a limited liability company resident in Romania
Let's see what are the tax consequences at the level of the seller, under both scenarios.
Sale of shares
The first option is for ABC to sell the shares in ROM CO to the non-resident third party buyer.
Profit tax / Capital gain tax
Further to the sale of shares, ABC would record a capital gain resulted from the difference between the sale proceeds and the fiscal value of the shares. In accordance with the Fiscal Code, this capital gain obtained by ABC is subject to 16% capital gain tax in Romania. The Fiscal Code also states that if Romania concluded a Double Tax Treaty ("DTT") with the country of residence of the company deriving incomes taxable in Romania, the provisions of the DTT would prevail over the Romanian legislation, if more favorable.
The DTT concluded between Romania and Cyprus deals with the taxation of capital gains under Article 14.
Based on paragraph 1 of Article 14 of the DTT concluded between Romania and Cyprus, gains derived by a resident of Romania or Cyprus from the alienation of immovable property may be taxed in the country where the immovable property is situated (i.e. in our specific case,Romania).
The term immovable property as referred to in the DTT is defined in Article 6 as being in accordance with the law of the state where such property is situated (i.e. Romania). Therefore, it is relevant to refer to the Romanian definition of immovable property in order to assess whether the taxation of capital gain at the sale of shares would fall under the first paragraph of Article 14 of the DTT and if the envisaged transaction would generate capital gain taxation in Romania.
The term immovable property is defined under the Romanian Fiscal Code (article 7) as any plot of land, building or other structure attached to the land. It results from this definition that shares are not treated as immovable property under the Romanian legislation. Therefore, the provisions of paragraph 1 of Article 14 of the DTT do not apply to the sale of shares in a Romanian company.
Article 14 further stipulates in paragraph 4 that the gains from the disposal of any property, other than gains from the alienation of immovable property or derived by a permanent establishment, shall be taxable only in the state of which the seller is resident.
Therefore, at the sale of shares in Rom Co by Cyprus Co, the capital gain shall be taxable only in Cyprus, as being the seller's country of residence and no tax shall be due in Romania.
Under the Double Tax Treaty (DTT) concluded between Romania and Cyprus, the right to tax the capital gains obtained from sale of shares is allocated to Cyprus, therefore nil capital gain tax would apply in Romania provided that ABC makes available its tax residency certificate.
Under the Fiscal Code, ABC has the obligation to file a profit tax return in Romania for the gain obtained from the sale of shares. Based on the existing fiscal legislation, ABC has to appoint a fiscal representative in Romania even if no Romanian profit tax is due under the more favourable DTT provisions.
