Article as appeared in Sunday Mail - 22 July 2007
Foreign investments have significantly increased in Romania in the last two years, most of these being attracted by the real estate sector.
Romania’s risk grade has improved during the year previous to the EU accession (which took place on 1 January 2007) – S&P: BBB-, Moody’s: Baa3, Fitch: BBB and therefore the investors’ interest increased and speeded-up the yield comprising trend observed during the last 3 years (7-9% in 2006 vs. 12.5% in 2003). However, yields are still attractive for the investors, but also for the developers, who still have good opportunities (20-30% yields).
Approximately 48% of the funds attracted in 2006 were invested in residential development, 24% and 7% in commercial and industrial real estate projects respectively, while the remaining of 24% in the office market.
The residential market in Romania is more concentrated in the capital (Bucharest). The market is still booming, with demand much higher than supply, and therefore the price of the new residential property is expected to continue to increase. Apartments are constructed mainly for middle-class buyers, attracting the interest of a large variety of investors who seek to invest together with experienced developers.
The office market has also developed significantly – the demand is dominated by Class A office buildings, while the supply has been dominated by Class B. The yields are 7-7.5%, while the average rent ranges between 13 and 19 EUR/sqm and service charges are of 2.5-3.5 EUR/sqm. Pre-lease agreements are concluded with 6-12 months prior to the completion of the buildings.
The retail market is offering rental yields of around 8-9%, and is also focusing in the main cities. The market is dominated by hypermarkets and specialised stores.
As regards investing in Romanian land, this is still of high interest to investors, including a big number of Cypriot individual investors; however, such investments are not as profitable as in the previous years, as the market is becoming more stable. The current trend is to use land for development purposes, to satisfy the high demand in the Romanian market as regards commercial, residential and logistic spaces.
It is therefore not a surprise that investors are continuing to target the Romanian real estate market. In order to ensure profitability of the project, the investors have to carry out not only the necessary feasibility and due diligence checks, but also a tax planning process that should begin from the very early investment stages. Such a tax planning process should cover all the tax implications which may occur during each of the phases of the investment process (acquisition, financing, development, exploitation and exit), with a view of tax optimisation.
One of the first decisions which has to be taken by the real estate investors is whether to invest directly in Romanian properties / projects or to set up one or more acquisition company(ies) for this purpose – the so-called Special Purpose Vehicles. This decision was not a difficult one prior to Romania’s accession to the EU (on 1 January 2007), when foreign individuals and companies were not allowed to hold land in Romania, and the only way to invest in land was through such a Romanian vehicle.
New opportunities arose as of 1 January 2007, when entered into force the law allowing EU citizens to acquire land in Romania in the same conditions as the Romanian ones. However, there are still certain practical aspects pending in relation to the acquisition of land by EU companies.
In practice, depending on the specific nature of their investments in real estate, certain investors may prefer setting up separate Special Purpose Vehicles for each project. This represents a more costly alternative than using a single company for all the projects, however it provides for a clearer view on the costs, benefits and cash flows attributable to each of the projects, as well as for a more flexible exit strategy.
In setting up the legal structure of the group, one should also take into account the legal restrictions, such as the one of not being allowed to be a sole shareholder in two or more Romanian companies.
One should look at both direct and indirect taxes occurring both in Romania and abroad, at the level of the direct and ultimate shareholders, so that the investment structure should be flexible and tax efficient both locally and internationally, at the group level.
Investing in Romania is encouraged by the tax system and the various tax planning opportunities. Romania has a corporate tax rate of only 16%, an extensive network or Double Tax Treaties concluded with various countries (more than 80) and the implementation of the EU Directives, which are meant to ensure a neutral tax treatment for dividends, interest and royalties paid between EU member states, as well as during reorganisations.
Moreover, the Cypriot investors are benefiting from the tax advantages offered in Cyprus by the favourable corporate tax rate (10%), tax relief granted for withholding tax payments in Romania, as well as the tax exemptions for certain types of income received and the very important tax exemption of gains arising from the disposal of shares.
Dividends can be distributed tax free from Romania to Cyprus, in certain conditions, while capital gains would not be subject to taxation for the asset deals performed by the Cypriot investors in Romanian real estate. Financing of the investments can be also structured in a tax efficient manner, so as to minimise not only the withholding taxes payable in Romania, but also to ensure the deductibility of the interest charges from the taxable profits of the Romanian investment vehicle.
In view of the above tax efficiencies, Cyprus is currently one of the most important financial centres through which significant investments into Romania are being structured. Furthermore, the local Cypriot investors find that investing in Romania is not a costly affair from a tax perspective at all!
Such aspects, as well as many others, depending on the circumstances of each real estate investment, should be considered in order to achieve a profitable investment .
By Adina Opris, Tax Manager at PricewaterhouseCoopers Bucharest (Romania), during her secondment with PricewaterhouseCoopers Nicosia. She specialises in Real Estate and International Tax Structuring.
