The new package of tax provisions, introduced by Law No 296 of 26 October 2023 regarding some fiscal-budgetary measures to ensure Romania’s long-term financial sustainability, although heavily criticised by specialists in tax law and related fields, has passed the Constitutional Court and will start to gereate effects shortly.
We recall that this law was adopted following the Government’s accountability to the Chamber of Deputies and the Senate in a joint session on 26 September 2023; on the 18th of October 2023 it was declared constitutional and subsequently promulgated by the President as well as published in the Official Gazette on the 27th of October 2023.
The law entered into force on the 1st of November 2023, but some of its provisions, including those referred to below, will only apply starting 2024.
Among the areas covered by this new law is real estate, specifically residential real estate. Thus, the rules of the game are changing yet again in the housing sector.
The discussion of interest revolves around the change in the VAT rate from 5% to 9% for housing (as well as solar and photovoltaic panels, heat pumps, etc.).
People who want to benefit from the previous tax provisions, which were more favourable to the new law, still have two months until the zero date, from which the harsher provisions take effect, i.e. 1 January 2024.
The amendment comes in the context where the conditions for applying the reduced VAT rate of 5% to housing have already been changed as of 1 January 2023, as an effect of GO no. 16/2022, i.e. the price cap has been lowered from 700,000 lei to 600,000 lei in order for the preferential regime to be applied.
The new tax regime, applicable from 1 January 2024, provides for the application of the reduced VAT rate – now 9% – to the purchase of a dwelling under the same conditions as for the previous year:
- The useful floor area of the dwelling must not exceed 120 square metres, excluding outbuildings;
- Their value, including the land on which they are built, must not exceed 600,000 lei, excluding value added tax;
- The dwelling, at the time of delivery, must be habitable as such;
- The purchase of a single dwelling at 9% VAT rate, which meets all the above conditions, during 2024.
Law 296/2023 introduces certain transitional derogations from the provisions mentioned above, which are the rule in the matter, applicable in exceptional situations.
Thus, the Law provides as follows:
“During the period beginning January 1st until the 31st of December 2024, a reduced VAT rate of 5% shall be applied to the supply of dwellings having a usable area of no more than 120 sqm, excluding household annexes, the value of which, including the land on which they are built, does not exceed the sum of 600,000 lei, excluding value added tax, purchased by individuals individually or jointly with another individual/other individuals, if they have concluded a contract among the living, between 1st January and 31st December 2023, concerning the advance payment for the purchase of such a dwelling“.
Therefore, for situations where contracts were concluded before the 1st of January 2024 for dwellings to which the reduced VAT rate of 5% was applicable, the law provides for a transitional tax regime.
Therefore, these transactions will continue to be subject to the 5% VAT rate instead of the new 9% rate, provided that these conditions listed above are met, and the following two additional conditions:
-The contract must be concluded between 1 January 2023 and 31 December 2023
– Delivery of the dwelling must take place by 31 December 2024.
The transitory regime equally applies – as mentioned by art. III of GO no. 16/2022 – to older contracts concluded in 2022 or 2021 that shall only be executed in 2024, provided that the conditions in the applicable law were met, insofar as the reduced VAT rate is concerned, at the time such contracts were concluded.
Therefore, individuals who want to take advantage of the 5% VAT rate when buying a house should hurry up and conclude a preliminary contract by the end of this year. Moreover, they must ensure that the home is delivered by the end of 2024.
The dwelling, at the time of delivery, must be habitable as such, and this is defined by the following cumulative criteria:
- there must be free individual access to the habitable space, without disturbance of possession and exclusive use of the space owned by another person or family;
- there is access to electricity, drinking water, controlled disposal of sewage and domestic waste;
- they must consist of at least a resting place, a space for preparing food and a toilet;
- the external finishes must include at least: roof, windows, entrance door;
- interior finishes include at least: walls finished with paint, wallpaper, tiles or other elements used for finishing, floors finished with tiles, parquet or other elements used for finishing, interior doors, depending on the project;
- there must be sanitary installations and sanitary ware, i.e. toilet bowl, washbasin and washbasin with basin, with the associated batteries;
- there must be electrical installations, including switchboard, sockets, switches/switches and sockets.
The question that arises in this context is the recurring question – what is the legal fate of the assignments of these contracts?
We start from the hypothesis that there is a legal act between the spouses, for example a promise of sale and purchase, regarding a property, by which an advance was paid (regardless of the amount of the advance, regardless of the form in which it was concluded, respectively in authentic form or by written document under private signature), concluded before 1 January 2024, which, in 2023, complies with the requirements imposed for the application of the reduced rate of 5%, but after the legislative changes, the rate of 9% VAT would be applied. In the situation presented, the rate provided at the time of the conclusion of the legal act, namely 5%, will be applied.
Following on from the hypothesis set out above, we will look at the situation in which this promise to purchase is assigned.
From the legal definition provided by Art. 1315 para. (1) of the Civil Code, it follows that the assignment of a contract is a bilateral agreement by which a third party – the assignee – is substituted in the contractual relations of the assignor, i.e. in the contractual position of the assignor. In this situation, the contractual position changes independently of the content of the contract, the third party replacing the buyer in the original contract. As a result of the assignment, all the contractual rights and obligations of the assignor will be transferred to the assignee.
Thus, the transferee replaces the original purchaser in the sale-purchase agreement and is granted all the rights enjoyed by the original purchaser, including the right to the reduced rate of VAT of 5%, provided that the original purchaser has not benefited from the reduced rate for another dwelling during the same calendar year.
Therefore, the condition concerning the purchase of a single dwelling at the 5% VAT rate is verified at the time of the conclusion of the final act, the sale-purchase contract, in the person of the actual purchaser (in this case, the transferee – the third party who took over the contract).
We therefore conclude that the same transitional provisions which apply to persons who have concluded contracts of sale under the conditions laid down in the transitional rules also apply to persons who take over such contracts from the original purchaser by concluding an assignment.
Definitions of the used terms
A dwelling is, according to Law No 114/1996, “a building consisting of one or more living rooms, with the necessary outbuildings, fittings and utilities, which meets the living requirements of a person or family”.
The usable floor area of a dwelling is defined by Law 114/1996 as “Living room, bedrooms, bathrooms, WC, shower, kitchen, storage and circulation spaces inside the dwelling. It does not include: the surface area of loggias and balconies, the thresholds of door openings and passageways with openings of up to 1.00 m, radiator niches, and the surfaces occupied by stoves and bathroom boilers (0.50 sq m for each stove and bathroom boiler), if heating is provided by stoves; in the case of duplex dwellings, the ramp, less the landings, is not included in the useful surface area of the dwelling”.
Household annexes, according to Law 50/1991, are constructions of a permanent or temporary nature, intended to house specific activities, complementary to the housing function, which, by their location in the vicinity of the dwelling, form together with it a distinct functional unit (including summer kitchens, storerooms, warehouses and the like, similarly, garages, greenhouses, swimming pools and the like are also assimilated to the notion of household annexes).
This article was prepared, for the Blog of Costaș, Negru & Asociații, by Ms. Clara Dohotar (Bucharest Bar Association) and Ms. Rovena Fetico (Arad Bar Association).
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