The real estate sector remains an area of interest for investors and the population, with a growing contribution to the Romanian economy, accounting for approximately 15% of the Gross Domestic Product (GDP) in 2023.
Thus, this year, a legislative initiative was put forward for the creation of a specific regulatory and taxation framework for listed companies specialising in real estate investments. The objective of the initiative is to ensure an appropriate framework for the establishment of open investment vehicles in the real estate sector, which would facilitate the attraction of funds for collective investments in this sector.
Real Estate Investment Trusts (REITs)
The concept of REITs was first introduced in the USA in 1960, and a decade later, it was adopted in Europe, with the Netherlands being the first European country to implement specific legislation. Subsequently, the example of the Netherlands was followed by other European Union (EU) countries, such as Greece, France, Bulgaria, Germany, the United Kingdom (a member of the EU at the time), Hungary, as well as non-EU countries like Turkey.
“Globally, over 40 countries have implemented the legislation for the regulation of REITs, with a total of more than 940 listed REITs. By the end of 2023, these had a market capitalization of approximately $2 trillion, of which about $ 1.3 trillion represented the market capitalization of the USA, as the pioneer in the field.”, mentioned Lucian Dumitru, Tax Partner, Forvis Mazars in Romania.
In the general context, REITs were designed as investment vehicles in the real estate sector, generating income from the operation of real estate assets and allowing investors to participate collectively in the real estate market without directly owning properties. This regime was created to encourage investment in the real estate sector by pooling funds from a large number of investors and to increase stock market liquidity, while also offering favourable tax treatment for the profits earned at the level of the listed entity.
At the European level, the characteristics of the regimes regulating REITs vary from country to country, but, in general, they align around the objectives of investment transparency, portfolio diversification, and accessibility for both small and large investors. In 2023, there were approximately 240 listed REITs in Europe, with a market capitalization of €120 billion.
In general, most countries have adopted a favourable tax regime that exempts profits at the REIT level, with taxation occurring at the level of each investor in the REIT, once profits are distributed to shareholders. Variations exist in the taxation of the final investor, depending on each country – for example, in Romania, dividend income is currently taxed at a rate of 8%.
Although the tax regime is adapted according to the policy of each country, there are several essential common aspects, which we will present below.
The qualification of a company as a REIT requires meeting certain conditions and fulfilling specific “tests” regarding the activities carried out and the types of income recorded. In most EU member states, the main criteria for classification are:
- The registered office must be located in the respective country;
- Listing part of the share capital on a regulated market (stock exchange) is mandatory;
- Minimum share capital, which can range from €25,000 (e.g., Ireland) to amounts over €20 million (e.g., €25 million in the case of Greece);
- The activities carried out must be in the real estate sector and must generate income directly or indirectly from this sector, typically at a minimum ratio of 75%;
- At least 60% – 70% of the profits obtained must be distributed as dividends.
Lucian adds: “When we refer to the tax regime applicable to a REIT entity, it is common for it to benefit from a favourable tax regime, either through the exemption from taxation on profits or by treating certain income as non-taxable. Thus, countries such as France, the United Kingdom, the USA, Germany, Hungary, and the Netherlands either exempt REITs from paying corporate income tax or consider the income from these activities to be non-taxable, provided the specific qualification criteria previously outlined are met.”
In addition to the favourable regime applied to corporate income tax, it is worth noting that there are countries that have chosen to apply separate taxes/fees, such as the imposition of a tax on the value of assets, as is the case in Greece.
- Romania’s approach
General framework and definition of REIT
The real estate sector in Romania has generated significant investments and created increased attractiveness in recent decades, as evidenced by the volume of investments recorded, according to a Report prepared by CBRE Research.
Chart representing the evolution of investment volumes in the Romanian real estate sector, for the period 2017 – the first half of 2024
The current regulatory proposal in Romania stipulates the following conditions necessary for qualifying an entity as a REIT:
- The registered office must be in Romania;
- Its shares must be traded on a regulated market in Romania;
- The main business activity must exclusively involve real estate-related activities (e.g., buying, selling, renting its own real estate, operating, managing, and/or developing real estate assets and/or real estate projects), as well as the direct or indirect operation of real estate companies owned by it;
- At least 75% of its income must come from specific activities, including dividends distributed by other REITs or real estate companies in which it holds stakes;
- It must distribute at least 90% of the profits made as dividends annually.
Additionally, a real estate company is defined as a company that is at least 95% owned by a REIT-type entity, whose main business activity involves the buying and selling of real estate, the operation, management, and/or development of real estate projects, or the renting of its own real estate assets.
Aspects related to the activity test and the correlation with the minimum percentage of qualified income remain points to monitor for clarification and practical application, especially in the case of carrying out secondary activities.
The proposed taxation regime for REITs and real estate companies under their ownership
From a taxation perspective, the legislative proposal provides for the introduction of a favourable tax treatment at the REIT level, in terms of corporate income tax, by exempting income from qualified activities from taxation, as follows:
- Income from the sale of real estate assets;
- Income from the transfer of the use of real estate assets;
- Income from maintenance and/or management of real estate assets;
- Income from dividends from real estate companies and other REIT entities;
- Income from the sale of shares in real estate companies and securities from other REIT entities;
- Income from interest on loans granted to real estate companies in the portfolio.
“Additionally, the proposal similarly provides for an exemption from corporate income tax for the same categories of income at the level of real estate companies in the portfolio of a REIT. It is worth mentioning that the corporate income tax rate in Romania is 16%, and it applies to taxable profit calculated according to the specific rules of Law no. 227/2015 on the Fiscal Code. Thus, through this mechanism, taxation ultimately rests with the investor who holds a stake in a REIT entity, once dividends are distributed by the latter, applying the current tax rate of 8%.”, mentioned Andreea Ignătescu, Tax Manager, Forvis Mazars in Romania.
At this moment, the proposal does not specify to what extent the expenses incurred for generating these non-taxable incomes will be deductible or non-deductible, or whether the general rules provided by the Fiscal Code will apply in this case.
Moreover, the application method for the withholding tax exemption based on European Directives for the distribution of dividends/interest payments and royalties by a REIT entity in Romania to beneficiaries in other EU member states will need to be clarified. This exemption requires, among other things, that both the income payer and the beneficiary are subject to corporate income tax or a similar tax. Furthermore, it remains to be clarified how and if this exemption will apply in the reverse situation, where the REIT entity in Romania receives dividends from other EU member states.
An atypical aspect of the legislative proposal under discussion is the application of the tax treatment of exemption from taxation of qualified income also at the level of the real estate companies owned by a REIT, creating a “chain” exemption for corporate income tax purposes. Therefore, the question may arise regarding the justification of this exemption in light of the principle of fiscal neutrality, considering that a company directly owned by an investor is subject to corporate income tax on the same income that, at the level of a real estate company, is exempt.
“The legislative proposal does not include an impact study to assess the effects from a fiscal perspective, and the proposed specific tax regime, in principle, would lead to a reduction in the tax base. Therefore, it remains to be seen whether, in the current and forecasted economic climate and public finances, the proposal will be approved in its current form.”, mentioned Ioana Constantinescu, Tax Consultant, Forvis Mazars in Romania.
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