More than a year has passed since a regulation was adopted causing vast resonance with regard to general and agricultural land acquisition restrictions. During this time, SORAINEN practice has detected several problematic issues in relation to actual application of the regulation.
ATTRACTION OF INVESTMENTS FOR PURCHASE OF AGRICULTURAL AND FOREST LAND HAS BEEN LIMITED AND THE PROCEDURE FOR ACQUIRING CONSTRUCTION LAND IN RURAL AREAS IS CUMBERSOME.
Amendments to the law On Privatisation of Land in Rural Areas (Privatisation Law) introduced an absolute prohibition on acquiring agricultural and forest land with regard to EU, EEA or Swiss Confederation companies where any of the shareholders (irrespective of the amount of shareholding) are from so-called third countries, that is, countries outside the EU, EEA and Swiss Confederation that have not concluded treaties on investment facilitation and protection approved by the Parliament within the term specified in the Privatisation Law. Under the previous regulation, the shareholding criterion to qualify for acquisition of land was "more than half", which presently refers only to purchase of land in cities.
Thus, companies with third party capital, including companies that could freely purchase all kinds of land in rural areas up to August 2014, cannot purchase any new agricultural or forest land at all (even if they meet the criteria related to agricultural operations). Therefore, in order to continue their business and form a land portfolio, these companies must change their shareholding structure before acquiring new land in order to comply with the land purchase subject requirements, and must indicate the true beneficiaries plus confirm that all true beneficiaries are citizens of EU Member States, EEA states or the Swiss Confederation. Assuming that by analogy under the Commercial Law true beneficiaries are natural persons who directly or indirectly own or control at least 25% of shares in a company, then the obligation of confirmation would not apply to those persons who do not meet the 25% threshold.
It is significant that due to these amendments companies with off-shore or third country shareholders have limited options to use the reorganisation activities allowed in the Commercial Law if they own land in rural areas. For example, it is impossible to add one agricultural company to another in order to optimise costs if title to agricultural or forest land must be registered in the Land Book thereafter and any shareholder of the new acquirer is from a third country.
With regard to purchase of construction land in rural areas, companies with shareholders from off-shore or third countries are actually put at the same level as non-citizens; therefore they need a municipal permit to acquire construction land on condition that no limitations indicated by law apply to (for example, location in protected area of dunes and others). Thus companies which were among the subjects specified in the Privatisation Law that could purchase land in Latvia must now take into account additional administrative procedures during land purchase.
PPROBLEMS IN RECOGNISING A PROPERTY AS AGRICULTURAL LAND WITHIN THE MEANING OF THE PRIVATISATION LAW
We have detected problems with how a property being sold should be recognised as agricultural land within the meaning of the Privatisation Law, and whether a transaction with this land is subject to the restrictions indicated in the Privatisation Law.
In practice, an interpretation was spread that, when specifying whether land is agricultural land, land usage purpose is the criterion. For example, if the land usage purpose is "land whose main business is agriculture", the conclusion was that it should automatically be found to be agricultural land within the meaning of the Privatisation Law. This approach was supported by some Land Book departments. However, this is incorrect.
According to the Privatisation Law, the criterion for recognising land as agricultural land is the usage categoryfor the land. The situation can be that the land is included in the forest and bush usage category but the usage purpose is agricultural land. In this case, the procedure specified in the Privatisation Law for transactions with agricultural land would not apply.
Differences in both criteria (purpose and usage category) are significant. The land usage purpose is basically used to determine the cadastral value, whereas the usage category is determined according to the actual use of the land. The usage purpose can be changed by performing a comparatively simple administrative procedure, while the land usage category can be changed only by changing the actual use of the land; in practice, this most often means construction work. If construction work is started to change land usage (for example, to recognise that the land is located under buildings) and a construction permit is needed for construction work, such a land sale transaction could be subject to VAT.
Thus transactions with agricultural land (with the purpose of disposing of it for construction needs) require special attention in order to avoid adverse tax and legal consequences.