The sale procedure will become significantly harder. The re-sale of land sooner than 8 years will be possible only by paying a considerable tax. Find out what changes will be brought by Law no. 175/2020.
By Ioana Roman (partner), Ilinca Porojan (associate) at Filip & Company
Three years ago, a proposal to amend Law no. 17/2014 regarding certain measures regulating the sale and purchase of extra-muros agricultural land and amending Law no. 268/2001 on the privatization of companies managing the State’s publicly- and privately-owned agricultural lands and for the setting-up of the Agency for the State’s Domain (“Law 17/2014”) was submitted with the Senate. The stated aim of the proposal is to allow young people’s access to the Romanian land market and to consolidate such market. The proposal was amended by the Romanian Parliament and was definitively adopted on 3 June 2020.
Now, after a month form the dismissal of the objection of unconstitutionality that was raised in relation to this proposal, it was promulgated by the Romanian President and published with the Official Gazette no. 741 dated 14 august 2020, becoming Law no. 175/2020 for amending and completing Law no. 17/2014 regarding certain measures regulating the sale and purchase of extra-muros agricultural land and amending Law no. 268/2001 on the privatization of companies managing the State’s publicly- and privately-owned agricultural lands and for the setting-up of the Agency for the State’s Domain (“Law 175/2020”) .
Following its publication, Law 175/2020 will enter into force within 60 days as of the publication date, starting with 13 October 2020 and will thoroughly amend Law 17/2014. Please see below a summary of the main changes impacting the sale of extra-muros agricultural land (i.e. land found outside the buildable area).
- Pre-emption ranks
Law 175/2020 significantly expands the list of beneficiaries of pre-emption rights and changes their priority ranking. Thus, the sale of extra-muros agricultural land will only be possible if the pre-emption right of the following categories of pre-emptors is observed, in the following order: (i) 1st rank beneficiaries: co-owners, 1st degree of kin relatives, the spouses and relatives up to the 3rd degree of kin, inclusively; (ii) 2nd rank beneficiaries: owners of agricultural investments in fruit tree, vineyard, hop cultures, in exclusively private irrigations and/or agricultural leaseholders – if certain projects (i.e. agricultural investments in fruit tree, vineyard, hop cultures or in irrigations) are located on the lands on sale, these lands may be acquired with priority by the owners of such investments; (iii) 3rd rank beneficiaries: owners and/or agricultural leaseholders of agricultural lands neighbouring the land on sale; (iv) 4th rank beneficiaries: young farmers, meaning a person of up to 40 years of age that holds proper professional competencies and qualifications and who establishes himself/herself for the first time in an agricultural exploitation as head of the respective exploitation with the intention to conduct or who already conducts agricultural activities; (v) 5th rank beneficiaries: the Academy of Agricultural and Forestry Sciences “Gheorghe Ionescu-Șișești” and the research-development units in the agricultural, silviculture and food industry field, with a purpose to purchase extra-muros agricultural land strictly intended for agricultural research and located in the nearby area of the land plots already owned by them; (vi) 6th rank beneficiaries: natural persons domiciled/residing in the administrative-territorial units where the land is located or in the neighbouring administrative-territorial units; and (vii) 7th rank beneficiary: the Romanian State.
Law 175/2020 also imposes a series of additional conditions on some of the beneficiaries of the pre-emption rights, which are rather restrictive, and which must be accomplished as such in order for the pre-emptors to be able to exercise their pre-emption right.
- Preference right in favour of specialised purchasers
According to the current form of Law 17/2014, if none of the beneficiaries exercises its pre-emption right within the legal deadline, then the sale of the extra-muros agricultural land may freely be carried out towards any natural or legal person.
According to Law 175/2020, if none of the beneficiaries exercises its pre-emption right within the legal deadline, then potential purchasers that meet certain specific requirements have a preference. In order to benefit from this priority, it is necessary for these purchasers (i) to have their domicile/residence or registered office, as the case may be, located in Romania for at least 5 years before the registration of the sale offer, and (ii) to conduct agricultural activities in Romania for a period of at least 5 years before the registration of the same offer. In addition, natural persons must be registered by Romanian tax authorities at least 5 years before the registration of the sale offer.
Legal persons are required to: (i) submit documents showing that, out of the total income for the last 5 fiscal years, at least 75% represents income from agricultural activities, as stipulated in Law no. 227/2015 on the Fiscal Code, as further amended and supplemented, classified according to the NACE code by order of the minister of agriculture and rural development; and (ii) prove that the domicile of the controlling shareholder has been located in Romania for at least 5 years prior to registration of the sale offer; if, in the structure of legal persons, the controlling shareholders are other legal persons, the controlling shareholders must prove that their domicile has been located on the national territory for at least 5 years, before the registration of the offer for the sale of the extra-muros agricultural land.
The potential purchasers indicated above must express their intention to buy within 30 days as of the expiry of the 45 business days provided for the pre-emptors.
- Free sale
In the end, under Law 175/2020, only if (i) the beneficiaries of the pre-emption right fail to exercise their pre-emption right according to Section 1 above and, (ii) then, none of the potential purchasers expresses its interest and proves within the legal timeframe that it fulfils the conditions indicated in Section 2 to be able to buy the land, the land may be transferred by sale to any natural or legal person.
Failure to comply with the procedure and the requirements laid down in the previous Sections triggers the absolute nullity of the sale agreement.
- Observance of the agricultural use
With respect to the use of agricultural land located in the extra-muros, under Law 175/2020 the owners are required to use it exclusively for continuing to carry out the agricultural activities as carried out at the date of the purchase, and if on the agricultural land there are agricultural investments in fruit trees, vineyards, hops and exclusively private irrigation works, the agricultural use of such investment must be maintained. In light of this new requirement, it is therefore questionable to what extent the new owners will have the possibility to remove extra-muros land from the agricultural circuit, as the agricultural use would no longer be complied with and how these new provisions correlate with existing rules on removal of land from agricultural circuit.
- Substantial taxes introduced
Law 175/2020 also contains a series of tax rules in the case of successive sales of lands. Thus, for extra-muros agricultural land sold before the expiry of an 8-year term from the acquisition, Law 175/2020 establishes the obligation to pay an 80% tax on the amount representing the balance between the sale price and the purchase price, based on the applicable notary fees at the respective date.
A similar rule is also applicable to the indirect sale of land, by means of the sale of the controlling stake in companies that own extra-muros agricultural land representing more than 25% of their assets. Thus, in case of a direct or indirect sale of the controlling stake in the companies that fulfil the aforementioned conditions within the 8-year term as of the lands’ acquisition, the seller will have to pay an 80% tax on the balance value of the respective land calculated based on the applicable notary value lists between the acquisition of the land and the sale of the controlling stake. In this case, the tax on profit applied to price balance of the sold shares will be applied to a basis reduced pro rata with the share percentage that such agricultural land holds in the company’s fixed assets, any double taxation being prohibited. By way of exception, the obligation to pay the above-mentioned tax does not apply to the reorganization or reallocation of assets within the same group of companies.
Failure to comply with the above will trigger the absolute nullity of the sale agreement.
The obligation to pay the 80% tax is not applicable if the sale concerns a land that was acquired by means other than sale, such as inheritance, in kind contribution to the share capital, exchange etc. The provisions of the tax law will supplement the taxation of these operations accordingly.
- Change of the procedure. Sanction
Law 175/2020 is also aimed at amending the procedure regarding the exercise of the pre-emption right. A first amendment concerns the period for the exercise of the pre-emption right, which is extended from 30 days to 45 business days from the date on which the offer is posted by the competent city hall.
Another novelty consists in the cancellation of the opinions issued by the central structure or by the territorial structures in case the seller or the pre-emptor dies before the sale agreement is concluded or before the judicial decision in lieu of the sale agreement is rendered. Given that the law expressly mentions the death of the seller or beneficiary of pre-emption right, the question arises as to the extent to which those opinions remain valid in the event of the dissolution of the seller or beneficiary of pre-emption right in case it is a legal person. We consider that the reasoning is maintained in this case as well, the annulment being also applicable.
As regards the sanctions for non-compliance with the procedure laid down by Law 17/2014, Law 175/2020 establishes the absolute nullity of the sale agreement concluded in violation of the pre-emption right or without obtaining the specialist opinions.