Tax & Legal
The Romanian legislation governing domestic and foreign investment has undergone radical changes since the 1989 Revolution, particularly with the introduction of the Company Law in 1990 (re-issued in 1998, modified again in May 2001 and April 2003, and republished in November 2004). The current legislative bases for investment and business operations in are described below. The Company Law governs certain forms of business organizations. The Law covers registration procedures and documentation, capital and shares, administration and shareholders, mergers and liquidations. The Commercial Register Law regulates the organization and functioning of the Trade Register, stipulates the obligation of business entities to register their incorporation and any subsequent changes in status, (e.g. management, shareholding structure) operation, or nature of business, and details the registration procedure.
Tax Aspects / Corporate Income Taxes
Operating profits and Capital gains
The Romanian Fiscal Code was introduced for the first time on January 1st, 2004, and constitutes a comprehensive compilation of all types of taxes and duties that apply in on an individual and entity levels and which were previously scattered in a number of different laws. With effect as of January 1st 2005, the tax rate for corporate profits was reduced to 16%. Moreover, the 16% tax rate does also apply to any capital gains which are realized by entities in . The taxation of capital gains is furthermore reduced to 10% in specifically enumerated cases including the transfer of ownership right in real estate on condition that the following criteria are met:
The real estate was held for a period of two years minimum by the taxpayer;
The buyer of the real estate is not a related party;
The taxpayer acquired the property after December 31, 2003.
Taxes that will become relevant throughout the lifetime of the Ghencea Residence Project and which will affect the financial results of the undertaking will reflect mostly on the operating income of Ghencea Residence Investment Romania and potentially on the capital gains that will be realized upon the sale of ready apartments. Vision Holdings has secured an alerted team of tax professionals which is standing by and ready to work out the most tax efficient structure, both onshore and offshore.
Depending on the overall financing structure applied in the Oasis Park project (i.e. re-investment of profits to fund subsequent phases of the project vs. debt financing) profits realized by the operating entity Ghencea Residence Investment Romania might potentially be distributed at the end of every fiscal year to Ghencea Residence Investment Holding. Though this option would not be the preferred option in this venture, as initially outlined the project should not pay out dividends until maturity (i.e. the 45 month lifespan of the project), the actual investment plan determined by Vision Holdings and the strategic investor may eventually provide otherwise. In such an unlikely event and in accordance with currently applicable tax rates in the tax cost to distribute dividends is set at 15%. Investors will repatriate their investment out of Ghencea Residence Investment Holding, which is the very entity into which initial capital contributions were made.
Vision Holdings and the tax advisory team will endeavor to minimize the tax cost upon distribution of profits in form of dividends to Ghencea Residence Investment Holding but also back from Ghencea Residence Investment Holding to the jurisdiction of the individual investor. The intended means to achieve that is through the utilization of the wide Treaty Network that and eventually the holding jurisdiction maintains with other countries. These Treaties, better known as “Tax Treaties on the Avoidance of Double Taxation on Capital and Income” should allow mitigation of the dividend and/or interest withholding tax upon payment to Ghencea Residence Investment Holding. Proper selection and subsequent implementation of the right Treaty should reduce the 15% dividend cost down to even 0%. Withholding tax considerations might under circumstances impact the total tax cost of the project in various ways depending on the actual tax elements that will enter the structure (debt financing/interest etc) and also the selection of the exact Treaty jurisdiction.
At the end of the entire project, Ghencea Residence Investment Romania will be liquidated. Any liquidation proceeds over and above the paid-in capital will be subject to the currently applicable capital gains tax at the rate of 16%. The taxed liquidation proceeds will then be returned to the shareholder which is Ghencea Residence Investment Holding in its respective favorable offshore jurisdiction. Proper tax planning at this stage of the project should similarly allow for the mitigation of taxes of capital gains. It is furthermore attempted to structure the ultimate repatriation flow of the principal investment amount plus profits back to the investor home country at minimum tax cost.
The final stage comprises the liquidation of Ghencea Residence Holding and the replication of the same process as above. The overall aim is to achieve an overall effective tax cost which should not exceed 20%. Please note that the present proposal does not contain any tax considerations that need to be addressed at the investors’ home country, for which Vision Holdings encourages you to contact your local tax advisors. At the same time the currently applicable corporate profits tax rate in cannot be safeguarded throughout the entire duration of the Ghencea Residence project. Vision Holdings reserves the right to any adjustments on the return rates which will be affected by changes of the taxation environment in Romania or any other involved jurisdiction.
Indirect tax / VAT
A number of indirect taxes that will hit the Ghencea Residence project primarily comprise the VAT of the construction phase, whereby it is anticipated that the project will be in a refund position during the entire period. To this end, VAT will basically have a cash-flow impact on the project.
Next to VAT and the above listed direct taxes that have to be paid in the course of the investment period, a series of rather insignificant indirect taxes which are imposed on a recurring basis are also due. These taxes refer to Property tax which is imposed on the holding of buildings and which ranges between 0,5% and 1% on the net book value, as well as land tax at fixed amounts (currently 0,25 EUR) per square meter of land surface. Companies are not subject to land tax on land that is used to host buildings or special constructions used for agricultural activities.
Vision Holdings has received advice from the leading international legal and accounting firms in order to structure its operations in a manner best suited to its investor base. During the course of its activities, Vision Holdings will continue to liaise with these advisors to ensure that it operates to the optimum value of its investors.