maandag 23 november 2020

New law from 13 October 2020 in place in Romania for foreigners on buying agricultural land.

 New provisions on the sale of farmland located outside of the buildable areas is installed as per 13 October 2020.

As per 13 October, the foreigners can still buy agricultural land if they buy a company via a share deal. Other transactions are not possible any more for foreigners. Romania has put as single European country a limit for European citizens and other foreigners. Not very correct towards the citizens of Europe in my opinion.

On 3rd June 2020, the Romanian Parliament passed a law meant to modify and amend the current Law no. 17/2014 on the sale and purchase of agricultural lands in Romania located outside the built-up area (extravilan), “Law no. 17/2014”.  

The new Law has been sent on 9th June 2020 to the President of Romania for promulgation who in 20 days must either send it back to the Parliament for review and additional amendments or to promulgate it and send it for publication in the Official Gazette.

The president has sent it back for execution.

On 14 August 2020, 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”) was published with the Official Gazette no. 741.

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).

The new Law changes completely this list of persons with pre-emption rights adding new entities and persons entitled to have a preference. The list in the new law is as follows, in this specific order:

  1. Co-owners, relatives, spouses, and in-laws up to and including the third degree.
  2. Owners of agricultural investments over agricultural land for tree, vines, hops, exclusively private irrigation and or tenants.  If on the land is located agricultural investments for tree crops, vines, hops and for irrigation, priority to the purchase of these lands have the owners of these investments.
  3. Landlords and/or tenants of the neighbouring lands.
  4. Young farmers as provided by the EU regulations.   
  5. The Academy of Agricultural and Forestry Sciences and research and development units in the fields of agriculture, forestry, and food industry, as well as educational institutions.
  6. Individuals with domicile/area where the land is located or in the neighbouring areas.
  7. The Romanian State.

The new Law also provides that two new articles will be introduced into Law no. 17/2014 regulating what happens if the persons with the pre-emption rights above do not intend to exercise their rights.
In this respect, we note that the most important change brought by this new Law is that no foreign individual will be able to buy directly agricultural land in Romania.
According to this new article, if the pre-emption rights mentioned above are not exercised the selling of agricultural land located outside the built-up area can be done only to individuals who meet the following cumulative conditions:
have their domicile/residence located in Romania for a period of at least 5 years prior to the registration of the selling offer.

  • perform agricultural activities in Romania for a period of at least 5 years prior to the registration of the selling offer.
  • Are registered with the Romanian fiscal authorities for at least 5 years before the registration of the selling offer of the agricultural lands.  

For companies, the conditions are even more severe:

  • to have their headquarters/secondary office located in Romania for a period of at least 5 years prior to the registration of the selling offer.
  • to have perform agricultural activities in Romania for a period of at least 5 years prior to the registration of the selling offer.
  • to present documentation showing that from the total income of the last 5 fiscal years a minimum of 75% represents income from agricultural activities as classified by the NACE code. 
  • the controlling shareholder of the company must have had their domicile in Romania for a period of at least 5 years prior to the registration of the selling offer.
  • if the controlling shareholders are other legal entities, then their controlling shareholders must have their domicile located in Romania for at least 5 years before the registration of the selling offer.Pre-emption ranks

In its current form, Law 17/2014 regulates the right of pre-emption upon sale of extra-muros agricultural land that the following categories of persons enjoy (in this order): (i) land co-owners, leaseholders, neighbouring owners as well as (ii) the Romanian State.

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-emptor’s to be able to exercise their pre-emption right.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:

a) 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;

b) 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 submit to the competent city hall a file containing the documents proving that they meet the conditions provided above, within 30 days as of the expiry of the 45 business days within which pre-emptors had to express their intention to buy. These documents are to be set by methodological rules.

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.

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.

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.

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. Furthermore, within 10 business days from the registration of the application, the city hall has the obligation to notify the beneficiaries of the pre-emption right at their domicile, residence or, as the case may be, at their registered office, about the registration of the sale offer; if the holders of the pre-emption right cannot be contacted, the notice will be posted at the city hall or on the city hall website. Compared to the current regulation in which the advertising of the sale offer is made exclusively by posting at the headquarters or on the website, the new procedure establishes a more cumbersome form of primary advertising, consisting in notifying beneficiaries of the pre-emption rights, and a form of secondary advertising, consisting in posting the offer at the city hall’s headquarters or on the city hall website.

Law 175/2020 also gives the seller the right to submit a request to withdraw the sale offer within the 45-day term for the exercise of the pre-emption right. In this case, the city hall needs to draw up a procedure cancellation report. However, Law 175/2020 does not provide the possibility to withdraw the offer within the 30 days from the expiry of the term for exercising the pre-emption right, within which specialized purchasers may accept the offer. Nevertheless, we consider that for the same reasons, the possibility of withdrawing the offer should be provided in this situation as well.

Law 175/2020 also explicitly outlines the order of beneficiaries of pre-emption rights if the right has been exercised by several of them. Priority will be given to those of higher rank or, if they are of the same rank, the order established by the law for the respective category of pre-emptor’s will be taken into account. However, a specific situation is that in which a lower-ranking beneficiary of pre-emption right offers a better price than the one in the sale offer or than that of the higher-ranking beneficiaries. In such a case, the seller may resume the procedure of the sale offer with this higher price, only once and within 10 days from the expiry of the 45-business day term from the display of the offer. The change in the offer data during these two terms requires the resumption of the whole procedure by re-submitting the application and the corresponding documents for the re-display of the sale offer.

The fulfilment of legal conditions by pre-emptor's or specialized purchasers with the preferential right will be verified by the central structure and, respectively, by the territorial structures from the place of the immovable asset, within 10 business days from the expiry of the 30-day term, and these authorities will issue the favourable opinion necessary for the conclusion of the sale agreement in authentic form. If it is found that the chosen beneficiary of pre-emption right or potential purchaser does not meet the conditions provided by this law, a negative opinion will be issued, within 5 business days from the expiry of the term for verifying the conditions provided by the law.

If none of the beneficiaries of the pre-emption right exercises their pre-emption right and no purchase offers were submitted by the purchasers with preferential rights, the city hall must issue a report on the completion of the procedure within 10 business days from the expiry of this term.

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 the 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.

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vrijdag 13 november 2020

Digital Due Diligence (DD) and Pre-DD performed on 1700 hectares agricultural land and a farm by PBS in Romania

After selling large plots of agricultural land during 2003-2007 we shifted from sales to due diligence and used our expertise to evaluate farms and agricultural land in Romania. Since then we performed a due diligence almost every year in a classical way. We also used our expertise for share deals with factories that were bought by investors as we active in Romania since 2003.

The DD was always done with a classical approach: we go on-site during 7-10 days. After this we write our report and conclusions and provide the investor (buyer) with a printed report and attachments. On average we produce around 10-20 cm of paperwork nicely printed and presented as the main report and conclusions with corresponding attachments. The duration of the works is around 2 to 3 weeks.

“Due to the COVID19 we had to re-think our business model and we started to work from a distance as per October 2020.”

The first digital DD case was a farm with 1700 hectares of land in ownership in Romania.

How does it work ?

  • We start with an NDA and a mandate from the investor (buyer) that is interested in the share deal.
  • We build the initial frame that we will use for a structural approach of the DD.
  • We start to ask questions to the seller and the seller opens a data room.
  • The seller is giving a reply to the questions that we ask and he puts the answers in his shared data room as task 1, task 2, task 3, …
  • We open a separate data room for the buyer and insert the tasks from the data room of the seller into the structure that we defined.
  • As we build the data room for the buyer we start to write the report per topic according to the structure that we created. We refer to the data room as proof for each topic. The buyer can follow the progress online as the report and the corresponding proofs are available in the data room.
  • We have skype conferences every 5 days in order to explain the findings and progress and with the seller and separately with the buyer.
  •  After 10-15 days we start to structure the report and structure in the data room of the buyer and adapt the structure if needed because of extra points for investigation found during the DD.
  • After maximum 21 days, the final report and final data room are ready.
  • We have the final skype with the buyer and the buyer can decide on the future steps to acquire the shares of the targeted company.

What are the advantages of a digital Due Diligence ?

1.     We do not have to travel to Romania

2.     We can work more accurate as we do not lose time on site with the seller

3.     We write better reports and we can go into more detail

4.     In general, it is much faster compared to the classical method that we used before

Example of some of the topics handled.

1.     Register of commerce and monitor of Romania

2.     Organizational chart

3.     Employees

4.     FinData

5.     Own Equity

6.     Shareholder loans

7.     Bancary loans

8.     VAT & Taxes

9.     Buildings

10. Land for agriculture

11. APIA

12. Irrigation plan and irrigation

13. Depreciation of all assets

14. Commercial contracts clients & suppliers

15. Law cases

16. Organic farming

17. Permits

18. Subvention files

19. Observations accountancy

20. Fusions

21. General conclusions

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