Tax Aspects

of Investing in
Romania
September 2007

Alan Moore BA Bcomm MBA AITI is widely known for his

regular taxation features in the Sunday Business Post and his annual
publication, Tax Magic. He has 29 years experience in taxation, 13 of
these with Revenue, in the areas of VAT, Capital Acquisition tax, Income
Tax, Corporation Tax and Capital Gains Tax. A former inspector of taxes
and council member of the Institute of Taxation, he was private sector
consultant to the Revenue Commissioners on the drafting of the Taxes
Consolidation Act 1997
 INTRODUCTION

IRISH TAX

ROMANIAN TAX

UK TAX

WAYS TO INVEST

YOUR OWN NAME

AN IRISH COMPANY

A ROMANIAN COMPANY

A QUALIFYING OFFSHORE FUND

A HOLDING COMPANY

SUMMARY

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 INTRODUCTION

Introduction
The following report outlines the tax aspects of the
various structures for investing in Romania. This report
is aimed primarily at Irish resident individuals.
I have also included a summary of the main UK tax provisions
applicable to a UK resident investor. The double taxation issues
which arise for Irish resident investors will also arise for UK
resident investors. Relief from double taxation operates in the
same manner under the UK/Romania double taxation agreement
as it does under the Ireland/Romania agreement.

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 Irish tax
RESIDENCE AND DOMICILE
You are subject to Irish income tax if you are resident or ordinarily
resident in the Republic of Ireland. You are resident for the 2007
tax year if you spend 183 or more midnights here in 2007, or 280
midnights in 2007 and 2006 combined.
You are ordinarily resident here in 2007 if you were resident
here in 2006, 2005, and 2004. If you are not Irish resident, you are
subject to Irish income tax only on Irish source income. IRISH TAX
If you are non-Irish domiciled (the country you regard as home,
as determined by your father’s place of birth is other than
Ireland), for example, a Spanish national living in Ireland, you are Irish Tax Treaty
entitled to the remittance basis of taxation. This means you are The tax treaty between
not subject to Irish income tax or capital gains tax on income or Ireland and Romania covers
gains derived from outside Ireland or the UK unless such income income tax, corporate tax
or gains are brought into Ireland. and capital gains tax. This
If you are self-employed, or in receipt of rental inc~me, you must means that an Irish resident
pay your incom~ tax’,’ and file your tax return, on or before 31 in receipt of Romanian
October each’ year. If you do not include rental income from a income is subject to Irish
foreign property in your return, or if you do not file a return, you tax on the income and
are exposed to prosecution, interest and penalties .. is given a credit for the
Romanian tax on the same
IRISH INCOME TAX, PRSI & HEALTH LEVY income. Under the terms
The first €34,000 of your income (€38,000 if you are a single of the treaty, Romania
parent) is subject to tax at 20%, with the balance at 41 %. applies withholding tax at
3% to dividends paid by a
If self-employed, you are also subject to PRSI (3%) and the health
Romanian company to its
levy (2% in general, but 2.5% if your income exceeds €l 00,000).
Irish shareholders.
If you are an employee, PRSI only applies up to your threshold of
€48,800.

IRISH CAPITAL GAINS TAX

If Irish resident or ordinarily resident, you are subject to Irish
capital gains tax at 20% on your worldwide gains.

IRISH CORPORATE TAX

An Irish company’s trading income is taxed at 12.5%, but rental
income and foreign income is taxed at 25%.

IRISH GIFT/INHERITANCE TAX

When you pass assets by way of gift or on your death, the recipient
(other than your spouse, who is tax exempt) can take up to the
following amounts free of tax:
1. up to €496,824 in the case of each of your children,
2. up to €49,682 in the case of your brother, sister, nephew or
nieces, grandchildren, (c) up to €24,841 in most other cases.
The tax rate is 20% for the recipient.

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 Romanian taxes
Tax Return
The Romanian tax year runs from 1 January to 31 December and the annual
declaration of income has to be filed by the 15th of May of the following year.
Fines can be applied for late submission of the annual tax returns together with
.1% interest per day.

Filing & Payment Deadlines

Returns must be filed by February 15th of the following year e.g. tax returns for
the year ended 31 December 2006 must be filed by 15 February 2007. Payment
of corporation tax is payable in quarterly advance installments, however if the
company was loss making in the prior period it only has to make four quarterly
installments based on the current years profits.
Fines can be applied for late submission of the annual tax returns
together with 0.1% interest per day. ROMANIAN TAX

Residence
You are a tax resident in Romania if :
1. you are domiciled in Romania
2. your centre of vital economic interests is in Romania or
3. you are physically present in Romania for more than 183 days in any 12
month period
As a foreign national, if you meet the conditions in (b) and (c) for three
consecutive years, you are treated as a Romanian tax resident from the start of
the fourth year

Romanian Income Tax

As a non-resident of Romania you are subject to 16% tax on gross income, less
expenses incurred in earning that income ( for example interest )

Romanian Capital Gains Tax For Individuals

From 1st January 2007, Transfer tax has replaced withholding tax.

The rates are as follows

If you have owned the property for at least three years :2% of the sales proceeds
up to Ron 200,000 (€61,000) plus 1% on excess over Ron 200,000 (€61,000).
If you have owned the property for less than three years : 3% up to Ron 200,000
(€61,000) plus 2% on excess over Ron 200,000 (€61,000)

Romanian Property Tax

Rental Income
Non-resident property owners must make an annual declaration in Romania
when their property is let during the year. Income received from renting a
Romanian property is subject to Romanian tax rates at 16%.
Under Romanian tax law there is only a flat rate deduction available when
calculating rental income – 25% flat deduction.

Wealth Tax
There is no wealth tax in Romania
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 Local Property Tax
Owners of buildings and special constructions are subject to building tax,
irrespective of their location or function. For individuals, 0.2% is applicable on
the value of buildings located in urban areas, and 0.1% elsewhere.

Costs OF Buying A Property In Romania:

1. Stamp duty ranging from 0.3% to 0.5% which is calculated on the value of
the property must be paid for notarisation of the property deeds – this is
dependant on the value of the property,
2. Between 0.5% and 1.5% on mortgages and transfers of real property.
VAT On Property Transactions
Real estate transfers are subject to VAT. However, if both the vendor and
purchaser are VAT payers (Romanian VAT registered Company) then VAT on
such a transfer will be ‘reverse chargeable’ for both vendor and purchaser, i.e.
the net VAT cost for both parties is nil and no payment of VAT needs to be made,
however if the property is later sold to an individual there will be a ROMANIAN TAX
requirement to pay 19% VAT on the sale proceeds.
Rental payments are generally VAT exempt, however it may be possible to ‘opt
to tax’ in certain circumstances i.e. operate VAT on the rent.

Corporation Tax
To own land in Romania, Irish and UK resident individuals have to set up a
Romanian company as the Romanian constitution does not allow foreign residents
own property – for apartments it is different as you do not own the land that
the apartment is situated on therefore you do not have to set up a Romanian
company ( it is common for the land associated with Apartment ownership to
be held in trust for foreign purchasers until the ownership legislation changes
which must happen before 2012 under EU law )
All corporations have to pay Corporation Tax on profits of 16%.Taxes payable
by a Romanian company is the gross income less the allowable deductions which
include the following:
• Depreciation
• Interest paid (the deduction is subject to a limitation imposed by the debt
equity ratio in the company, any unused interest can be carried forward)
• Maintenance Charges
• Management Charges
• Local taxes
• Repairs etc
Losses can only be carried forward for a five year period and losses can not be
carried back to a preceding year in any circumstances.

Property Tax for Companies

For companies, building tax ranges between 0.5% and 1% of the accounting
value. This percentage is increased to between 5% and 10% if the building has
not been revaluated in the last three years – therefore it is important to have
the building valued on a regular basis.

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 UK tax
RESIDENCE
The UK residence rules are broadly similar to those in Ireland.
You are regarded as resident in the UK if you spend 183 or more
days in the UK during a tax year, for example, the tax year 6 April
2006 to 5 April 2007 . You are treated as “ordinarily resident” in
the UK if you are habitually and normally resident there, year
after year, apart from temporary or occasional absences of long
or short duration. You are subject to UK income tax if you are
resident or ordinary resident in the UK.
If you are non-UK domiciled (the country you regard as home,
as determined by your father’s place of birth is other than UK),
you are entitled to the remittance basis of taxation. This means
you are not subject to UK income tax or capital gains tax on
income or gains derived from outside the UK or Ireland unless
such income or gains are brought into the UK.

INCOME TAX
The income tax rates and band applicable in the UK for 2007-8
are as follows:
• Starting rate 10% £ 0 - £2,230 UK TAX
• Basic rate 22% £2,231 - £34,600
• Higher rate 40% Over £34,600
UK Tax treaty
CAPITAL GAINS TAX The tax treaty between
The amount chargeable to capital gains tax is added onto the top UK and Romania covers
of income liable to income tax for individuals and is charged to income tax, corporate tax
income tax at the appropriate rates, after deducting the annual and capital gains tax. This
exempt amount, which for 2007-08 is £9,200. means that a UK resident
in receipt of Romanian
CORPORATION TAX income is subject to UK
The corporation tax rates applicable in 2007-08 are as follows: £ tax on the income and
Small companies’ rate 20% £0 - £300,000 is given ‘a credit for the
Marginal relief Romanian tax on the same
income.
• Main rate 30%
• Marginal Relief £300,001 - £1,500,000
• Main Rate 30% 1,500,001 or more
GIFT AND INHERITANCE TAX
Inheritance tax is, a tax levied on the estate of individuals where
the value of the estate exceeds certain thresholds.The inheritance
tax threshold for 2007-08 is £300,000.The value of estates above
the threshold is taxed at 40%. The tax is levied on the worldwide
estate of a UK domiciled individual an on the UK estate only of
non UK domiciled individuals.
A lifetime gift is potential1y exempt from gift tax where the
disponer is living for 7 years fol1owing the date of the gift.
Marginal relief applies in the case of gifts within 7 years of date of
death of the disponer.

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 Ways to invest
Broadly, you may invest in Romanian property in the following
ways:
1. Directly in your own name.
2. Through an Irish company (for example, the company through
which you already may operate an Irish business).
3. Through a Romanian company (with the shareholder being
yourself, or your pension fund).
4. Through a qualifying offshore fund (with the investor being
yourself, or your pension fund).
5. Through a holding company located in an EU State which
WAYS TO INVEST
grants tax exemption to dividends received from subsidiaries
(dividend participation exemption), for example, the
Netherlands, Luxembourg, Cyprus, Sweden.
Each of these has advantages and disadvantages, YOUR OWN NAME
which will be determined by your current net
worth and investment objectives. AN IRISH COMPANY
Considering each of these in turn ...
A ROMANIAN COMPANY

A QUALIFYING OFFSHORE FUND

A HOLDING COMPANY

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 INVESTING IN YOUR
OWN NAME
You are caught for both Irish income tax and Romanian income
tax on the net income (after interest). Your effective rate is
your marginal Irish rate, 46.5% in most cases, with credit for the
16% Romanian tax serving to reduce the net amount payable in
Ireland. If the interest is high relative to the rental income, then
Irish marginal rate will only apply to the surplus, but as the loan
gets paid down and the interest reduces, tax will eat into the net
cash flow. You must include the net rental income in your Irish
self-assessment tax return and file that return on or before 31
October following the end of the tax year.
On selling the property you are caught for Irish capital gains tax
(20%) on the net gain, with credit for the Romanian tax against
the Irish tax. The effective rate is therefore the Irish rate. WAYS TO INVEST
Normally, a disadvantage of acquiring foreign property in your
own name is the potential exposure to significant inheritance
taxes on passing the assets to your children. This is
YOUR OWN NAME
not the case with Romanian property.

When this makes sense

1. If you are non-Irish domiciled, because you will not, be caught
for Irish income tax or capital gains tax unless you remit the
net income or gains to Ireland. In other words, your tax will
be limited to the Romanian tax.
2. If you know the interest charges will cover the rental income
and there ,will ,be no significant cash flow from the property
for five to ten years, i.e., all the gain will be “capital” on exit.

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 INVESTING THROUGH
AN IRISH COMPANY
Many Irish business owners have significant amounts of cash
locked up in their companies and the Irish company may use
such cash to acquire Romanian property.
The Irish company must then pay tax at 25% on its net (after
interest) income from the Romanian property, and it will get a
credit for the 16% Romanian corporate tax against the Irish 25%
tax.
The disadvantage is that the Irish company is caught for a 20%
surcharge if it does not distribute its investment income within
18 months, and on distribution, you (as company shareholder)
are caught for income tax at up to 46.5% (your marginal rate).
This double taxation also applies when the company sells the
property. It is caught for 20% Irish capital gains tax, with a credit WAYS TO INVEST
for the Romanian gains tax at 16%, leaving an effective overall
rate of
20% (the higher rate being the Irish rate).
The double taxation and the fact that the property is trapped
inside the company negate any “cash flow” advantages
AN IRISH COMPANY
of investing through an Irish company.

When this makes sense

It generally doesn’t. If your company has surplus cash, and you do
not wish to pay tax on the extraction of such cash, it may make
sense to have the company make a contribution to your personal
pension fund (such a fund can now hold up to €5.l65m), and have
the pension fund buy shares in a Romanian company.

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 INVESTING THROUGH
A ROMANIAN
COMPANY
To benefit from this type of structuring the company must be tax
resident in Romania. This means the books and records must be
kept, there, the accounts must be audited there, the bank account
must be held there, and all decision-making must take place there,
with the annual general meeting being held there. In practice, with
an investment company, there is very little decision making to be
made, with key changes being made once a year at the AGM.
When these conditions are met, the company is only exposed
to Romanian tax (16%) on its profits and gains. The current
legislation prohibits non Romanians from purchasing land. Under
the terms of their accession to the EU in January 2008 this law WAYS TO INVEST
must be repealed within 7 years. If you are considering purchasing
land in Romania then you must first form a Romanian company.
Purchasing property using a Romanian company can have positive
cash flow benefits as the company can register for VAT and thus
avoid paying the 19% VAT on the purchase price, however this
is offset against the requirement to pay 19% VAT on the sales
proceeds when the property is later sold .

When this makes sense A ROMANIAN COMPANY

When you want to build a substantial cash-flow
generating portfolio and reuse equity from appreciated properties
to acquire further properties in Romania.

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 INVESTING THROUGH
A QUALIFYING
OFFSHORE FUND
This type of investment structure must be regulated. Generally no
one investor can own more than 1 % of the entirety, or control
the investment choice. It is expensive to set up and maintain.
The advantage is that you are subject to a final tax rate of 23%
WAYS TO INVEST
(income) and 20% (gains on exit).

When this makes sense

When a large number of small investors wish to pool their funds
to acquire a large property or series of properties.

A QUALIFYING OFFSHORE FUND

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 INVESTING THROUGH
A HOLDING COMPANY
Several EU States grant tax exemption to dividends received from
subsidiaries ,(dividend participation exemption), for example, the
Netherlands, Luxembourg, Cyprus, Sweden~
Under the EU-Parent Subsidiary Directive, dividends can be paid
free of withholding tax from the holding company’s subsidiaries
to the holding company, provided that company owns at least
15% of the ordinary share capital of the subsidiary. In some
countries the participation requirement may be lower than 15%.
For example, in Luxembourg it is 10%.
To benefit from this type of structuring the company must be
tax resident in (for example) Luxembourg. This means the books WAYS TO INVEST
and records must be kept, there, there must be a majority of
Luxembourg directors (2:1), the accounts must be audited there,
the bank account must be held there, and all decision-making
must take place there, with the annual general being held there. In
practice, with an investment company, there is very little decision
making to be made, and general guidance can be given to the local
directors, with key changes being made once a year at the AGM.
Under tax treaty and EU law, the profits of the company are then
taxed in Luxembourg at nil, as there is no tax on profits from
participations in other companies within the percentage limits.
No local CGT arises on the liquidation of the company.

A HOLDING COMPANY

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 Summary
The above are broad guidelines and you should take specific advice
tailored to your own circumstances, for example, in relation to
domicile or residence, which can effect the outcome.
If you intend to make a one-off investment in Romania, on a smal1
scale, with a view to realising a capital gain on exit, with little cash
flow during the investment period, buying in your own name has
advantages.
If you intend to buy multiple properties, but keeping within
Romania, buying through a Romanian company has advantages. If
you intend to buy multiple properties within Romania, and wish
to preserve your ability to recycle the surplus from Romania
into other EU countries, having a holding company with dividend
participation exemption has advantages.
Final1y, bear in mind that the Irish tax code contains anti-avoidance
provisions to attribute income (section 806-810) and gains
(section 590) of foreign companies to their Irish owners. While
this legislation is aimed at offshore havens, you should take specific
advice to ensure it does not apply to your circumstances.

SUMMARY

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