Last modified: 11/07/2023 10:09

Corporate taxation

Residence: What makes a company resident?

Basis: Taxable profit is made on a cumulated basis, taking into account taxable incomes and deductible expenses made from the beginning of the year up to the end of the given quarter; the tax owed in respect of a given quarter is then calculated as the difference between the 16% tax due on cumulated taxable profits, less the tax paid in previous quarters.

Taxable income: Small companies are required to pay tax under the micro-enterprise regime if the following conditions are satisfied at the end of the previous year: • Their income is derived from activities other than banking, capital markets (except broker’s activities in these areas), insurance and reinsurance, gambling, consultancy and management • Their annual turnover is lower than the RON equivalent of EUR 1 000 000 • Their shares are not held by the State or local authorities • They are not undergoing liquidation, and are registered with the Trade Register or with the Court

Significant local taxes on income: The tax rates used for micro-company income tax are: – 1% for micro-companies with one or more employees – 3% for micro-companies with no employees. Micro-companies can opt once for applying CIT if they fulfil both of the following conditions: 1. Have a subscribed share capital of at least lei 45,000; 2. Have at least two employees.

Alternative minimum tax: Alternative minimum taxes are between 1% and 3% if a company is allowed to apply the micro-enterprise regime.

Taxation of dividends: Dividends are taxed at a flat 5% final withholding tax

Capital gains: Capital gains obtained by Romanian-resident companies are included in ordinary profit and taxed at 16%. Capital losses related to the sale of shares are, in general, tax-deductible.

Losses: Tax losses incurred in taxable periods beginning in 2009 and thereafter may be carried forward for a maximum of seven years, and are set off against subsequent profits on a FIFO (first in, first out) basis. Previous losses may be carried forward for no more than five years. There is no carry-back of losses.

Foreign tax relief: Partial unilateral double tax relief is provided by way of a credit for income taxes paid abroad, which cannot exceed the corporate income tax calculated by applying the Romanian rate (i.e. 16%) to taxable profits obtained abroad. The Romanian company should have available documentation attesting to the payment of the foreign tax.

Participation exemption: Income from the dissolution of a reserve registered as a result of a participation in kind in the capital of other legal entities is non-taxable.

Tax-based incentives: Research and development (R&D) For research and development (R&D) incentives, companies can benefit from an additional deduction of 50% of the eligible expenses for their R&D activities. Moreover, accelerated depreciation may be applied for devices and equipment used in the R&D activity. In order to benefit from this supplementary deduction, the eligible R&D activities must be applicative research and/or technological development relevant to the taxpayer’s activity and must be performed in Romania or in the EU/EEA member states. Reductions for maintaining/increasing equity Starting with the calculation of the tax result of 2021, there are reductions for maintaining/increasing equity.

Reductions are granted when determining the CIT, micro-company tax, and activity-specific tax, depending on the maintenance/increase of equity, for a period of five years, from 2021 to 2025, as follows: A reduction of 2% if, in the year for which the tax is owed, the accounting own equity is positive and equal to at least half of the subscribed share capital. A reduction between 5% and 10% if the taxpayer registers an increase between 5% and 25% in the adjusted own equity in the year for which the tax is owed as compared to the previous year’s adjusted own equity. A reduction of 3% if there is an increase (between 5% and 20%) in the adjusted own equity in the year for which the tax is owed, as compared to the one computed for 2020.

Where two or three of the above-mentioned reductions apply, the corresponding percentages are added together to determine the total amount of the reduction. Accelerated depreciation According to the Romanian Fiscal Code, machinery and equipment, computers and their peripherals, as well as patents, may be depreciated by using the accelerated method, under which a maximum of 50% of the asset’s fiscal value may be deducted during the first year of usage, while the rest of the asset’s value can be depreciated using the straight-line method over its remaining useful life. Tax exemption for reinvested profits Profits invested in new technological equipment (machinery, tools and working plant), manufactured and / or acquired and commissioned during the period 1 July 2014 – 31 December 2021 are exempt from corporate income tax.

Technological equipment that is eligible for this incentive is that included in subgroup 2.1 of the Catalogue regarding the classification and the useful life of fixed assets. In order to benefit from this incentive, the technological equipment must be used by the taxpayer for business purposes for more than half of its useful life, but for no longer than five years. If the technological equipment is used for less than half of its useful life, the corporate income tax liability is recalculated. Consequently, interest and penalties for delay will be due from the taxpayer. The technological equipment to which this tax incentive applies may not be depreciated by using the accelerated method.

Group relief/fiscal unity: A tax group may consist only of Romanian legal entities and/or persons with their registered office in Romania, established in accordance with European legislation, and may include, in certain cases, the Romanian PE of a non-resident.

Ownership condition requirement to hold, directly or indirectly, at least 75% of the value/number of participation titles or voting rights for an uninterrupted period of at least one year prior to the beginning of the consolidation. Members of the group must be CIT payers (micro-enterprises cannot be part of the group, nor can those that carry out activities in bars/nightclubs, discos, or casinos, or those that are simultaneously taxpayers of CIT and activity-specific tax) that apply the same CIT payment system and have the same fiscal year, are not part of another CIT group, and are not in dissolution/liquidation.

The period of application of the system is five fiscal years. The system is optional. Requests for the application of the system should be submitted at least 60 days before the beginning of the period for which the application of fiscal consolidation is requested, with the system being applied as of the fiscal year following that in which the request was submitted. In order to maintain the group after five years, the option can be renewed. One of the members is designated as the responsible legal entity that will calculate, declare, and pay the CIT for the group, with the tax determined by summing the individual calculations of each member (thus giving the opportunity to offset the tax profits of companies within the group with the tax losses of others). Tax losses recorded by a member of the group before the application of the system cannot be compensated for at the group level. If the group is disbanded after five years, the losses recorded and not recovered during the consolidation period should be recovered by the responsible person.

Each member has to prepare a transfer pricing file, which will include transactions with group members. If one of the members no longer meets the conditions, that member and the responsible legal person recalculate the CIT due individually/for the group, including late-payment interest and penalties, if the case. The tax is not recalculated in the following situations: sale of participation titles held in one of the group members if the holding falls below 25%; dissolution of a member; or a member leaving as a result of reorganisation operations (merger, spin-off, transfer of assets, and exchange of shares). The provisions on consolidation do not apply if they are put in place for tax fraud and tax evasion purposes. One of the members is designated as the responsible legal entity that will calculate, declare, and pay the CIT for the group, with the tax determined by summing the individual calculations of each member , thus giving the opportunity to offset the tax profits of companies within the group with the tax losses of others.

Small company/alternative tax regimes: Simplified taxation is applied by the micro-enterprises. This regime is described at the section above “Significant local taxes on income”.

Corporate taxation: compliance

Tax year: The tax year is the financial year. Any change of the financial year has to be notified to the Romanian competent authority about this with 30 days before the new financial year starts. After a company has changed its financial year, it may change its tax year. The Romanian tax authority has to be notified about this change within 15 days of the start of the new tax year.

Consolidated returns: One of the members is designated as the responsible legal entity that will calculate, declare, and pay the CIT for the group, with the tax determined by summing the individual calculations of each member.

Filing and payment: Romanian corporate income tax must be computed, declared and paid on a quarterly basis, by the 25th of the first month of a calendar quarter, in respect of the previous quarter. By exception, no tax is declared and paid in respect of the 4th quarter of the year, but instead the last corporate income tax payment is to be made until a certain date of the following year, which is the deadline for submitting the annual corporate income tax return.

Penalties: The interest rate for late payment of tax is 0.03% for each day of delay.

Rulings: The tax provisions from the corporate income tax perspective are regulated by the Romanian fiscal code.

Taxation of individuals

Residence: For those who have proof of residence in a treaty-partner country, the rules under that treaty will determine when and if that individual becomes resident in Romania. Those rules look to permanent place of abode, centre of vital interests, habitual abode and nationality. All other individuals will become resident in Romania once their stay exceeds 183 days or their centre of vital interests becomes or is located in Romania.

Basis: Taxable income from employment consists of salaries and wages, and most other forms of remuneration or benefits associated with employment. Salary is defined as income in cash and / or in kind received by individuals based on employment agreements. Other types of remuneration treated as taxable include remuneration paid according to non-competition clauses and benefits such as meal vouchers, gift vouchers, childcare vouchers, holiday vouchers, amounts representing compensation payments (including termination payments), and the private use of company cars and telephones. Moreover, directors’ and managers’ remuneration is also normally treated as employment income.

Taxable income: Individuals who are resident in Romania for tax purposes are liable to income tax on their worldwide income, whereas non-residents are taxable only on their Romanian-source income.

Capital gains: Capital gains from the private disposal of movable tangible property are generally exempt, but there are some exceptions. Capital gains from the transfer of shares and securities are taxable. In the case of listed securities, tax is payable in advance on a quarterly basis. It is incumbent on the taxpayer to calculate, declare and pay the tax, again at a rate of 16%. Gains from the transfer of unlisted securities are calculated and paid on a one-by-one basis as they arise. The obligation to calculate and pay lies in this case with the person responsible for paying over the proceeds of disposal, usually the broker. Net annual loss resulting from the transfer of listed securities can be carried forward for up to seven consecutive tax years. Gains from forward transactions with foreign currency are taxed at the 16% rate on each transaction, with the withheld tax representing anticipated payment for the annual tax. A 16% tax is applied on gains obtained by shareholders from the liquidation of a company. The company concerned is required to calculate, withhold and pay the tax. Gains from the disposal of immovable property are subject to property transfer tax . On capital gains, foreign individuals are generally subject to the same tax treatment as Romanian individuals. Depending on the details of the transaction, the taxpayer has the obligation to compute, withhold and pay the capital gain tax from the sale of shares. To fulfil this requirement, non-residents may appoint a Romanian fiscal representative or a tax agent.

Deductions and allowances: Deductions An employee’s gross salary is reduced by the following items before deduction of income tax: • Mandatory state social-security contributions • Personal allowances • Contributions to voluntary pension funds administered by authorised entities established in EU Member States or the European Economic Area, up to the RON equivalent of EUR 400 annually. • Contributions to voluntary health funds and medical services. Area, up to the RON equivalent of EUR 400 annually. • Trade-union subscriptions Individuals with more than one employment receive personal allowances in respect of the main employment only. Allowances Employees (but not taxpayers in general) are entitled to a limited number of personal allowances, but these vary according to income levels as well as personal circumstances, and are withdrawn entirely at a relatively low income level.

Taxation of individuals: compliance

Tax year: Calendar year

Filing and payment: With certain exceptions, taxpayers have to file an annual income tax return with the tax authorities by 25 May of the following year. Taxpayers whose sole source of income throughout the entire tax year is from employment do not need to file returns, as their tax liabilities should have been settled by payroll deduction. Expatriates employed abroad but performing an activity in Romania should file monthly tax returns and pay monthly tax in Romania by the 25th of the following month if certain conditions are met.

Penalties: Non-filing of tax returns by the respective deadline may attract fines from RON 500 to RON 1000 for individuals. The late-payment interest and penalties applicable for individuals are the same as for companies. Additionally, for failure to withhold or failure to pay taxes withheld at source (taxes on salary income, dividend income and non-residents’ income), a fine ranging between RON 1000 and RON 27,000 may be applied.

Rulings: The tax provisions from the corporate income tax perspective are regulated by the Romanian fiscal code.

Withholding taxes

Branch remittance tax: The income tax rate on branch profits is the same as on corporate profits. In general, profits remitted abroad by a branch office are subject to a 16% tax rate.

Anti-avoidance legislation

Transfer pricing: Transfer-pricing rules must be used to establish the market price for a transfer made between the foreign legal entity and its permanent establishment. Transactions between related parties should observe the arm’s length principle. If transfer prices are not set at arm’s length, the Romanian tax authorities may adjust the taxpayer’s income or expenditure, so as to reflect the market value. Transactions with Romanian affiliated companies as well as transactions with non-resident related parties fall within the scope of the investigations regarding compliance with transfer-pricing legislation. Traditional transfer-pricing methods (comparable uncontrolled price, cost-plus and resale-price methods), as well as any other methods that are in line with the OECD Transfer Pricing Guidelines (i.e. transactional net-margin and profit-split methods) may be used for setting transfer prices. Domestic legislation expressly stipulates that when applying transfer-pricing rules, the Romanian tax authorities also consider the OECD Transfer Pricing Guidelines. Taxpayers engaged in transactions with related parties can request an Advance Pricing Agreement (APA) from the National Agency for Tax Administration.

Interest restriction: The rules are applied for the deductibility of interest and other costs economically equivalent to interest by Romanian companies. Under the limitation, the difference between borrowing costs and interest income and other economically equivalent income is deductible for corporate income tax purposes up to EUR 1 million, plus 30% of the company’s tax-adjusted EBITDA (earnings before interest, tax, depreciation and amortization). For 2018, deductions of excess borrowing costs were limited to 10% of tax-adjusted EBITDA for amounts exceeding EUR 200,000 following the transposition of the EU Anti-Tax Avoidance Directive (ATAD 1) into the Romanian tax code. Amendments to the 2018 rules were enacted in January 2019 to increase the deduction limitation as from 2019. In addition, the law contains the following clarifications: Taxpayers that report a loss are allowed to fully deduct exceeding borrowing costs up to EUR 1 million; and If a taxpayer with an excess borrowing cost carryforward ceases to exist as a result of a reorganiztion (e.g. a merger or division), the taxpayer that receives the taxpayer’s assets in the reorganization has the right to carry forward the exceeding borrowing costs in proportion to the assets it receives.

Controlled foreign companies: Under the Romanian CFC rules, a taxpayer should include in its taxable base, in proportion with its holding in the CFC, the latter’s non-distributed income derived from the following categories: Interest or any other income generated by financial assets.

Hybrid mismatches: The main measures transposed into the Romanian Fiscal Code with regard to hybrid mismatches are the following: – When a hybrid mismatch results in a double deduction, the deduction should be granted only in the Member State in which the payment originates. – When a hybrid mismatch results in a deduction without inclusion in the taxable base of another Member State, the Member State of the payer should deny the deduction of that payment.

Disclosure requirements: Romanian intermediaries and taxpayers are required to disclose to the Romanian tax authorities (“ANAF”) information on reportable cross-border transactions which fulfil the hallmarks mentioned by the Directive. ANAF will subsequently exchange this information through automatic exchange of information with the tax authorities in the countries involved in each transaction.

Exit taxes: If this is the case, any capital gains received upon a future exit are subject to 16% Romanian corporate income tax, save for the case where the seller is tax resident in a treaty country and has maintained a participation of minimum 10% in the target`s capital for at least 1 year prior the sale.

General anti-avoidance rule: Romanian tax authorities might not take a transaction without economic substance into consideration, and might adjust its tax effects. However, tax authorities are required to justify and prove this action. The Romanian Fiscal Code also includes provisions related to “artificial cross-border transactions”, transactions without economic substance, made for tax avoidance purposes or to obtain certain fiscal advantages. For these artificial cross-border transactions, the most favourable provisions of the double tax treaties are not applicable.

Value-added tax/Goods and services tax

Type of tax: EU-style Value added tax

Standard rate: 19%

Reduced rates: 9%; 5%

Registration: The annual turnover threshold for VAT registration is the RON equivalent of EUR 88 500, namely RON 300 000. Businesses with a turnover below this threshold may register voluntarily. To register for Romanian normal VAT would require filing the following documents with the Romanian tax authorities: – a standard registration form (form 700) – a copy of the company’s certificate – a power of attorney (notarized) with the appointed company would should action as tax agent of the new company – a standard affidavit attesting if the company’s administrators or associates have the events mentioned within the fiscal record. A taxable person who is already registered for VAT purposes whose turnover in the preceding year did not exceed the turnover threshold may apply to deregister between the first and tenth day of each month following the return period used (month or quarter). For companies established under the Romanian Companies Act, VAT registration is cancelled if the main shareholder (or where applicable, the sole shareholder) has previously committed criminal offences relating to tax.

Filing and payment: As a general rule, the return period is monthly. For taxable persons registered for VAT purposes whose previous year-end turnover did not exceed EUR 100 000 the return period is quarterly. Taxpayers on a quarterly return period are required to switch to a monthly period if during the previous calendar year they made a taxable intra-Community acquisition in Romania. VAT returns should be submitted to the tax authorities by the 25th day of the month following the end of the return period; the VAT is due on the same date.

Social security contributions

Self-employed

The tax rate is 10% and there is no income-tax-free allowance. There is, however, a different threshold, connected to the obligation to pay social charges. Up to yearly income of RON 30 600 these charges are zero. In practice, if the income does not exceed the minimum salary, namely RON 2,550 per month valid for 2022, only income tax must be paid.

Other taxes

Capital duty: A liquidation distribution from another Romanian company or foreign company resident in a state with which Romania has concluded a double tax treaty, provided that, at the date of commencement of the liquidation process, the taxpayer has held at least 10% of the share capital of the legal entity for an uninterrupted period of at least one year prior to that date.

Immovable property taxes: The property tax is established taking into consideration the number of square metres, the score of the particular location of the land and its type per the decision of the Local Council. Levies need to be paid annually in 2 equal rates, first until the 31st of March and second until the 30th of September.

Transfer tax: The tax is typically based on the value of the property.

Stamp duty: Stamp Duty Property transfer is subject to stamp duty based on a certain schedule. The rates are between 2.2% and 0.44%.

Net wealth/worth tax: There are no net wealth/worth taxes in Romania.

Inheritance/gift taxes: No inheritance taxes apply in Romania, except in relation to transfer of real estate in certain circumstances. Gift taxes are not levied in Romania.

Other: None

Tax treaties

Romania has double taxation treaties with many jurisdictions. General rules for the withholding tax rates are as follows: Non- Treaty Interest (%), Royalties (%) and Commissions (%)- 16- paid to a company; 10- paid to a natural person; Dividends (%)- 5. EU- Parent- Subsidiary Directive Dividends (%)- 0- if certain conditions are satisfied. EU- Interests and Royalties Directive Interest (%) and Royalties (%)- 0- if certain conditions are satisfied