Taxation Guide Sep 07

8/8/2019 Taxation Guide Sep 07

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Tax aspecTsof InvesTIng InRomanIa

al mr Ba B mBa aITI is widely known for hisregular 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

stbr 2007


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INTRODUCTION

ROMANIAN TAX

IRISH TAX

UK TAX

WAYS TO INVEST

YOUR OWN NAME

AN IRISH COMPANY

A ROMANIAN COMPANY

A QUALIFYING OFFSHORE FUND

A HOLDING COMPANY

SUMMARY

kronstadt estatewww.kronstadt-estate.com
http://www.kronstadt-estate.com/http://www.kronstadt-estate.com/


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INTRODUCTION


InTRoducTIonT lli rrt tli t t t t

ri trtr r iti i Ri. Ti rrt

i i ririly t Iri rit iiil.

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


IRIsh Tax

ResIdence and domIcILeYou 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.

If you are non-Irish domiciled (the country you regard as home,

as determined by your fathers place of birth is other than

Ireland), for example, a Spanish national living in Ireland, you are

entitled to the remittance basis of taxation. This means you are

not subject to Irish income tax or capital gains tax on income or

gains derived from outside Ireland or the UK unless such income

or gains are brought into Ireland.

If you are self-employed, or in receipt of rental inc~me, you must

pay your incom~ tax, and le your tax return, on or before 31

October each year. If you do not include rental income from a

foreign property in your return, or if you do not le a return, you

are exposed to prosecution, interest and penalties ..

IRIsh Income Tax, pRsI & heaLTh LevYThe rst 34,000 of your income (38,000 if you are a single

parent) is subject to tax at 20%, with the balance at 41 %.

If self-employed, you are also subject to PRSI (3%) and the healthlevy (2% in general, but 2.5% if your income exceeds l 00,000).

If you are an employee, PRSI only applies up to your threshold of

48,800.

IRIsh capITaL gaIns TaxIf Irish resident or ordinarily resident, you are subject to Irish

capital gains tax at 20% on your worldwide gains.

IRIsh coRpoRaTe TaxAn Irish companys trading income is taxed at 12.5%, but rental

income and foreign income is taxed at 25%.

IRIsh gIfT/InheRITance TaxWhen 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:

up to 496,824 in the case of each of your children,1.

up to 49,682 in the case of your brother, sister, nephew or2.

nieces, grandchildren, (c) up to 24,841 in most other cases.

The tax rate is 20% for the recipient.

IRIsh Tax TReaTY

The tax treaty between

Ireland and Romania covers

income tax, corporate tax

and capital gains tax. Thismeans that an Irish resident

in receipt of Romanian

income is subject to Irish

tax on the income and

is given a credit for the

Romanian tax on the same

income. Under the terms

of the treaty, Romania

applies withholding tax at

3% to dividends paid by a

Romanian company to its

Irish shareholders.


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ROMANIAN TAX


RomanIan Taxes

Tax ReTuRnThe Romanian tax year runs from 1 January to 31 December and the annual

declaration of income has to be led 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 deadLInesReturns must be led by February 15th of the following year e.g. tax returns for

the year ended 31 December 2006 must be led 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 prots.

Fines can be applied for late submission of the annual tax returns

together with 0.1% interest per day.

ResIdenceYou are a tax resident in Romania if :

you are domiciled in Romania1.

your centre of vital economic interests is in Romania or2.

you are physically present in Romania for more than 183 days in any 123.

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 TaxAs 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 IndIvIduaLsFrom 1st January 2007, Transfer tax has replaced withholding tax.

The RaTes aRe as foLLowsIf 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 IncomeNon-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 at rate deduction available whencalculating rental income 25% at deduction.

weaLTh TaxThere is no wealth tax in Romania


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ROMANIAN TAX


LocaL pRopeRTY TaxOwners 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:Stamp duty ranging from 0.3% to 0.5% which is calculated on the value of1.

the property must be paid for notarisation of the property deeds this is

dependant on the value of the property,

Between 0.5% and 1.5% on mortgages and transfers of real property.2.

vaT on pRopeRTY TRansacTIonsReal 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

requirement to pay 19% VAT on the sale proceeds.

Rental payments are generally VAT exempt, however it may be possible to optto tax in certain circumstances i.e. operate VAT on the rent.

coRpoRaTIon TaxTo 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 prots 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 ve year period and losses can not be

carried back to a preceding year in any circumstances.

pRopeRTY Tax foR companIesFor 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


uK Tax

ResIdenceThe 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, yearafter 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 fathers 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 TaxThe income tax rates and band applicable in the UK for 2007-8

are as follows:

Starting rate 10% 0 - 2,230

Basic rate 22% 2,231 - 34,600

Higher rate 40% Over 34,600

capITaL gaIns TaxThe amount chargeable to capital gains tax is added onto the top

of income liable to income tax for individuals and is charged toincome tax at the appropriate rates, after deducting the annual

exempt amount, which for 2007-08 is 9,200.

coRpoRaTIon TaxThe corporation tax rates applicable in 2007-08 are as follows:

Small companies rate 20% 0 - 300,000

Marginal relief

Main rate 30%Marginal Relief 300,001 - 1,500,000

Main Rate 30% 1,500,001 or more

gIfT and InheRITance TaxInheritance 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.

uK Tax TReaTY

The tax treaty between

UK and Romania covers

income tax, corporate taxand capital gains tax. This

means that a UK resident

in receipt of Romanian

income is subject to UK

tax on the income and

is given a credit for the

Romanian tax on the same

income.


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WAYS TO INVEST

YOUR OWN NAME

AN IRISH COMPANY

A ROMANIAN COMPANY


A HOLDING COMPANY


waYs To InvesTBroadly, you may invest in Romanian property in the followingways:

Directly in your own name.1.

Through an Irish company (for example, the company through2.

which you already may operate an Irish business).

Through a Romanian company (with the shareholder being3.

yourself, or your pension fund).

Through a qualifying offshore fund (with the investor being4.

yourself, or your pension fund).

Through a holding company located in an EU State which5.

grants tax exemption to dividends received from subsidiaries

(dividend participation exemption), for example, the

Netherlands, Luxembourg, Cyprus, Sweden.

e t t it,

i ill b tri by yr rrt t

rt itt bjti.

Considering each of these in turn ...


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WAYS TO INVEST

YOUR OWN NAME


InvesTIng In YouRown nameYou 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 ow. You must include the net rental income in your Irish

self-assessment tax return and le 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.

Normally, a disadvantage of acquiring foreign property in your

own name is the potential exposure to signicant inheritance

taxes on passing the assets to your children. This is

not the case with Romanian property.

when ThIs maKes senseIf you are non-Irish domiciled, because you will not, be caught1.

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.

If you know the interest charges will cover the rental income2.

and there ,will ,be no signicant cash ow from the property

for ve to ten years, i.e., all the gain will be capital on exit.


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WAYS TO INVEST

AN IRISH COMPANY


InvesTIng ThRoughan IRIsh companYMany Irish business owners have signicant 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 creditfor 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 ow advantages

of investing through an Irish company.

when ThIs maKes senseIt generally doesnt. If your company has surplus cash, and you do

not wish to pay tax on the extraction of such cash, it may makesense 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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WAYS TO INVEST

A ROMANIAN COMPANY


InvesTIng ThRougha RomanIancompanYTo benet 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 prots and gains. The current

legislation prohibits non Romanians from purchasing land. Under

the terms of their accession to the EU in January 2008 this lawmust be repealed within 7 years. If you are considering purchasing

land in Romania then you must rst form a Romanian company.

Purchasing property using a Romanian company can have positive

cash ow benets 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

When you want to build a substantial cash-owgenerating portfolio and reuse equity from appreciated properties

to acquire further properties in Romania.


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WAYS TO INVEST



InvesTIng ThRougha QuaLIfYIngoffshoRe fundThis 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 nal tax rate of 23%(income) and 20% (gains on exit).

when ThIs maKes senseWhen a large number of small investors wish to pool their funds

to acquire a large property or series of properties.


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WAYS TO INVEST

A HOLDING COMPANY


InvesTIng ThRougha hoLdIng companYSeveral EU States grant tax exemption to dividends received from

subsidiaries ,(dividend participation exemption), for example, theNetherlands, Luxembourg, Cyprus, Sweden~

Under the EU-Parent Subsidiary Directive, dividends can be paid

free of withholding tax from the holding companys 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 benet from this type of structuring the company must be

tax resident in (for example) Luxembourg. This means the booksand 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 prots of the company are then

taxed in Luxembourg at nil, as there is no tax on prots from

participations in other companies within the percentage limits.No local CGT arises on the liquidation of the company.


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SUMMARY

summaRYThe above are broad guidelines and you should take specic advice

tailored to your own circumstances, for example, in relation todomicile 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

ow 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 specic

advice to ensure it does not apply to your circumstances.

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