During the property bubble in Romania a number of investors bought properties using a local company. This was because a local company could own land even if the shareholders were foreign. This was so even if even for the purchase of an apartment which included the implied purchase of an undivided share in the land on which the apartment block was built. These properties were purchased to turn them and sell for a profit, or to let the property to a third party who would pay the rent and increase the value of the investment.
The use of a company to buy land was not new. The cost of setting up a Romanian company was not exorbitant. The use of the company allowed the client to control the ownership of the land as well as the building on the land. It should be remembered that the law in Romania allows a foreigner to own a building on land or an apartment in a block but not the land, although this is changing in part after 1st January 2014. Some investors to escape the necessity of a company bought an apartment and allowed a Romanian to be the owner of the piece of land on which the apartment was built. This is another complication upon which I will not comment today. What the clients were not told in many cases was the on-going costs of the company.
What we are now seeing is that we are being approached by a number of people who find themselves in this situation and want to know what to do. There is also the question that in many cases the value of the property is considerably less than the original purchase price.
Once a company is formed it is under an obligation to file returns with the Ministry of Finance; it is required to pay the land tax in relation to the property; it has to keep a registered address and it is required to have administrators. If it does not do this, then after a period of time the Romanian State through the Trade Registry will apply to have the company liquidated and any assets distributed in specie to the shareholders. If the company bought the land with the aid of a bank loan then there will be further complications. The distribution of the land in specie will not be a problem after 2013 when EU citizens are allowed to own land including farming land after 31st December 2013, but the problems will still remain for non EU citizens.
The most important thing is to protect the client’s investment. If the state has not made any application to liquidate and strike of the company the position is easier than if steps to liquidate have already been taken. If steps have not been taken then it will be necessary to arrange to have the account filings brought up to date; arrange a new registered address and deal with any other matters. Once this was done then the company must be maintained as required by law. All this will cost money which could have been saved if the position had been explained at the onset of the transaction.
What is worrying is that there will be a number of people who purchased properties through companies and who think that the company is protecting their investment. The reality may well be that the company has been liquidated and they will then have the even more expensive task of dealing with the land and property after the liquidation.
So the maxim caveat emptor applied even if you bought land and property in Romania through a company.