Romanian
Tax Laws: an Overview
Adrian Tomescu
Buzescu Ca, Romania
Adrian
Tomescu is Partner, Buzescu Ca, Romania
This article provides an overview of tax
legislation in Romania.
The relevant Romanian
tax laws are:
Fiscal Code approved
by Law no. 227/2015 ("Fiscal
Code");
Fiscal Procedure
Code, approved by Law no. 207/2015;
Order no. 222 of
2008 of the President of the National Agency for Tax Administration
regarding the Transfer Pricing Documentation ("Order
no. 222");
OECD Transfer
Pricing Guidelines.
I.
Corporate Profit Tax
A.
Applicability
The revenues of the
following entities are subject to corporate profit tax:
companies tax
resident in Romania;
foreign companies
doing business in Romania through permanent establishments;
foreign companies
which obtain revenues from or in connection with real estate
transactions or from share transactions in Romanian companies;
foreign companies
and nonresident individuals doing business in Romania through
partnerships with or without legal personality;
resident individuals
who form partnerships without legal personality with Romanian
companies, for revenues obtained in or outside Romania;
companies having
their registered office in Romania, established according to
European legislation.
A company is
considered resident if its head office is registered in Romania or
has its effective place of management in Romania.
B.
Corporate Profit Tax Rate
The standard
corporate profit tax rate is 16%.
C.
Calculation of the Taxable Profit
This is calculated as
the difference between the revenues obtained from any source and the
expenses incurred in obtaining taxable revenues throughout the fiscal
year, adjusted by deducting non-taxable revenues and adding
non-deductible expenses. When calculating the taxable profit, the
elements similar to revenues and expenses are also taken into
account.
The fiscal year is
considered to be the calendar year or the period during which the
entity existed, if it was established or dissolved during that
calendar year.
D.
Non-taxable Revenues
The Fiscal Code
provides for several non-taxable revenues such as:
revenues resulting
from dividends received by a Romanian company from another Romanian
company;
revenues resulting
from dividends received by a Romanian company from a subsidiary
located in an EU Member State, subject to the following conditions:
the Romanian
company is a registered profit taxpayer; and
the Romanian
company has held at least 10% of the subsidiary's shares for a
continuous period of at least two years until the date the
dividends are paid.
revenues resulting
from the cancellation of provisions or expenses that were previously
non-deductible, revenues resulting from the recovery of expenses
that were previously non-deductible and revenues resulting from
reversal or cancellation of interest and late-payment penalties that
were previously non-deductible;
revenues obtained
from the sale of shareholding participations held in (a) Romanian
companies or in (b) foreign companies located in a state with which
Romania has concluded a double taxation convention, if, at the date
of the sale, the taxpayer has held for a continuous period of at
least one year at least 10% of shares of the company of which the
shareholding participations are sold. This exemption does not apply
if the taxpayer who sells shareholding participations in a Romanian
company is resident in a state with which Romania did not sign a
double taxation convention.
non-taxable income
expressly provided under agreements and memoranda approved through
legal enactments.
E.
Deductibility of Expenses
There are three
categories of expenses:
deductible expenses;
limited
deductibility expenses;
non-deductible
expenses.
1.
Deductible Expenses
The expenses are
deductible only if incurred for the purpose of generating taxable
income.
Some of the
deductible expenses are expressly mentioned in the Fiscal Code, such
as:
expenses incurred in
professional training and development of employees;
advertising expenses
incurred in promoting the company, products or services, based on
written agreements, as well as costs related to the production of
the materials required for broadcasting advertisements, including
goods granted as samples, with product testing at selling units, as
well as other goods and services received in order to stimulate
sales;
expenses incurred in
marketing, market research, promotion in existing or new markets,
participation in fairs and exhibitions, in business missions and
with publishing of own brochures;
expenses incurred in
environmental protection and resource preservation;
expenses incurred in
the improvement of management, IT, the introduction, maintenance and
development of quality management systems, and in obtaining quality
compliance confirmation;
travel and
accommodation expenses related to business trips in Romania or
abroad by employees and directors;
expenses incurred in
relation to work safety, prevention of work accidents and
occupational diseases, the related insurance contributions and
professional risk insurance premiums.
2.
Non-deductible Expenses
The Fiscal Code
provides for certain non-deductible expenses, such as:
domestic profit tax
and profit tax paid in foreign countries;
expenses related to
non-taxable revenues;
expenses related to
withholding tax borne by Romanian taxpayers on behalf of
nonresidents;
interest, fines and
penalties due to Romanian or foreign authorities;
expenses incurred
with the management, consultancy, assistance or other services if no
related agreements were concluded and the beneficiary cannot justify
the supply of such services for the activities performed or for
their necessity;
sponsorship and
patronage expenses and expenses for private scholarships. However,
the taxpayers are granted a fiscal credit up to an amount consisting
of the lowest value between 0.5% of the turnover and 20% of the due
profit tax;
expenses recorded
without justifying documentation;
salary expenses
which are not taxed at the level of the individual;
expenses made in
favor of the shareholders, other than the ones related to goods or
services provided by the shareholders at market value;
50% of the fuel
expenses for company vehicles weighing under 3,500 kg and with less
than nine passenger seats including the driver's seat; the Fiscal
Code though provides that in certain cases the fuel expenses are
fully deductible.
3.
Limited Deductibility Expenses
Certain expenses have
limited deductibility, such as:
depreciation of
assets under the regulations related to fiscal depreciation;
perishable goods
within the limits established by the relevant central administration
bodies;
protocol expenses
are deductible up to the limit of 2% of the accounting profit, to
which the protocol and profit tax expenses are added; the collected
VAT related to gifts offered by taxpayers, of which value is higher
than 100 Romanian Lei, is included in the protocol expenses;
daily allowances for
expenses from domestic and foreign travel by employees are
deductible up to the level of 2.5 times the legal threshold
established for public institutions;
taxes and
contributions paid to non-government organizations and professional
associations related to the taxpayer's activity are deductible up to
the limit of4,000 euros per year;
health insurance
premiums are deductible up to the limit of 250 euros per year, per
employee;
private pension
insurance premiums are deductible up to the limit of 400 euros per
year, per person.
4.
Provisions and Reserves
As a general rule,
provisions and reserves are non-deductible for profit tax purposes.
However, the Fiscal
Code provides for certain provisions and reserves which can be
considered deductible.
F.
Accounting and Fiscal Depreciation
The Fiscal Code
establishes a distinction between accounting and fiscal depreciation.
With regard to fixed
assets, the fiscal depreciation is calculated according to the
provisions of the Fiscal Code. Therefore, the deductibility level of
the expenses related to the depreciation of the fixed assets does not
depend on the level of depreciation recorded in the accounts.
The calculation of
the depreciation of fixed assets for tax purposes is based on the tax
value.
The said depreciation
may need to be adjusted for revaluations according to the accounting
rules.
The fiscal
depreciation should be calculated based on the asset's tax value and
useful life for tax purposes, by applying one of the allowed
depreciation methods:
straight-line
method;
accelerated
depreciation method; and
reducing balance
method.
The Fiscal Code
provides an incentive for the purchase of machinery and equipment,
computers and their peripherals, as well as patents. These can be
depreciated by using the accelerated method which consists of the
deduction of a maximum of 50% of the asset's tax value during the
first year of usage. The rest of the asset's value can be depreciated
using the straight-line method over the remaining useful life.
G.
Filing Tax Returns and Payment of Tax
Profit tax returns
are filed and profit tax is usually paid on a quarterly basis.
Nonresident companies
obtaining income from real estate property located in Romania or sale
of shares held in a Romanian company are obliged to declare and pay
the related profit tax. For this purpose, such companies may appoint
a tax representative or an authorized person to fulfil this
requirement. However, if the buyer is a Romanian company or a
Romanian permanent establishment (“PE”) of a nonresident company,
the obligation to declare and pay the said profit tax will remain
with the buyer.
From January 1, 2013,
taxpayers (with certain exceptions) may opt for computing, declaring
and paying the annual profit tax in quarterly advance payments.
H.
Loss Carried Forward
The annual loss, as
established by the profit tax return, is to be recovered from the
taxable profits obtained during the following seven consecutive
years. This seven-year period applies starting with the tax loss
established for 2009. The tax losses from previous years are carried
forward for a period of only five years.
I.
Tax Exemption for Reinvested Profit
The reinvested profit
is the balance of the profit and loss account, i.e. the accounting
gross profit cumulated starting with the beginning of the year. Such
reinvested profit, if used for the purchase of equipment, will be
tax-exempt. This exemption will be applicable for the year when the
respective equipment is put into use.
The tax exemption for
reinvested profit is applicable in the case of equipment manufactured
and/or purchased as of July 1, 2014 and put into use until December
31, 2016.
Taxpayers which
benefit from this tax exemption must retain the equipment in their
property for a minimum period equal to half of the commercial life of
the equipment. There are certain exceptions to this rule, i.e. if the
equipment is destroyed, lost, stolen or sold during the insolvency
procedure. This retention period cannot exceed five years.
Furthermore,
taxpayers which benefit from this tax exemption may not use the
accelerated depreciation method for the relevant equipment.
II.
Transfer Pricing
Transactions with
Romanian affiliated companies as well as transactions with
nonresident related parties are subject to audits regarding
compliance with transfer pricing legislation.
When auditing such
transactions, the tax authorities may adjust the amount of income or
expense of either person as necessary in order to reflect the market
price for the goods or services provided in the transaction.
The methods that may
be used for setting transfer prices are provided by the OECD Transfer
Pricing Guidelines. The Romanian audit authorities also refer to
local precedents, and interpretation of relevant Romanian laws.
Taxpayers which
perform such transactions must prepare their transfer pricing
documentation and make the file available upon the written request of
the Romanian tax authorities.
The content of the
transfer pricing documentation file was approved by Order no. 222.
The said Order is supplemented by the Transfer Pricing Guidelines
issued by the OECD Transfer Pricing Guidelines and the Code of
Conduct on transfer pricing documentation for associated enterprises
in the European Union ("EUTDP").
The deadline for
submitting the transfer pricing documentation file must not exceed
three months. However, a single extension equal to the period
initially established is possible.
Failure to submit the
transfer pricing documentation file or the submission of an
incomplete file following two consecutive requests will trigger the
assessment of the transfer prices by the tax authorities.
III.
Foreign Fiscal Credit
Romanian companies
are granted a fiscal credit for income taxes paid abroad which cannot
exceed the profit tax calculated by applying the Romanian profit rate
of 16% to the taxable profit obtained abroad.
In this respect, the
Romanian company is required to have on file the documentation
attesting the payment of taxes abroad.
Fiscal credits may be
obtained in Romania for taxes paid to a foreign state only if the
double taxation conventions concluded between Romania and the
respective state apply, and based on the documentation which proves
that the taxes were paid in the foreign state.
IV.
Dividend Tax Payable by Resident Companies
Dividend payments
made by a Romanian company to a Romanian resident shareholder, or to
a nonresident shareholder, are subject to 16% dividend tax. As of
January 1, 2017, the dividend tax will be 5%.
Dividends paid by
Romanian companies/companies having their registered office in
Romania, incorporated according to the European regulations to other
such companies are tax-exempt if the beneficiary of the dividends
holds a minimum of 10% of the shares in the other company for an
uninterrupted period of at least one year before the date of the
payment.
Dividends paid by a
Romanian company or a company that has its registered office in
Romania, to a company or a PE of a company resident in an EU Member
State are tax-exempt if the nonresident company which benefits from
the dividends:
is set up according
to Article 201 (4) of the Romanian Fiscal Code;
is a resident of the
respective state and, based on a double tax convention concluded
between the respective state and a non-EU state, the said company is
not considered to be a resident with the purpose of taxation outside
EU;
pays profit or a
similar tax in their state of residency;
owns a minimum of
10% of the shares in the Romanian company.
Interest and royalty
payments by Romanian companies to other Romanian companies are not
subject to withholding tax but are considered as taxable income for
the beneficiary and are subject to ordinary corporate profit tax.
V.
Consolidation
There is no tax
consolidation in Romania between entities which have a distinct legal
personality. Starting July 1, 2013, the Romanian tax law allows
corporate income tax consolidation between all of the PEs, i.e.
management offices, branches, plants, stores, mines, and oil and gas
wells which a foreign legal entity operates in Romania, but no change
was made with regard to the tax consolidation of entities with
distinct legal personality, e.g., subsidiaries.
VI.
Capital Gains Obtained by Residents
Capital gains
obtained by Romanian resident companies are taxed at 16%.
Capital losses
related to sale of shares are, in general, tax deductible.
Mergers, spin-offs,
transfers of assets and exchanges of shares between two Romanian
companies should not trigger capital gains tax.
VII.
Corporate Tax Payable by Branches and Representative Offices of
Nonresidents
A.
General Issues
Nonresident foreign
legal entities are generally subject to Romanian taxation for the
revenues sourced in Romania.
Nonresident foreign
entities become subject to Romanian taxation by establishing (i) a
branch, (ii) a representative office, or (iii) a PE. They also have
to pay withholding tax on the Romanian sourced income.
B.
Branch
The branch is a mere
extension of the parent company; it does not have a legal
personality. The activities of the branch are controlled and limited
by the decisions of the parent company.
Given the lack of
legal personality, the branch itself cannot be a party to a contract.
The contract can be concluded by the parent company acting through
its branch, or directly by the parent company.
In terms of taxation,
there are no major differences between the branch and the subsidiary,
i.e. a company registered as a Romanian legal person. From the tax
perspective, a branch of a foreign company is considered a taxpayer
in Romania, given that the branch can qualify as a PE according to
the provisions of the Romanian Fiscal Code.
The first step of the
tax registration is performed at the same time as the registration
with the Trade Registry, by filing a fiscal registration form with
the Trade Registry.
After the
registration of the subsidiary/branch with the Trade Registry, the
second step of the tax registration can be carried out, i.e. the
issuance by the relevant tax authority of the tax registration
certificate, or the VAT registration certificate (if the branch will
be registered as a Romanian VAT payer). Such formality is usually
carried out by the accountants of the newly-registered branch.
The branches must be
registered with the Trade Registry and with the Romanian tax
authorities.
The distribution of
funds to the nonresident parent company is not regarded as dividend
distribution, therefore no withholding tax liability arises.
C.
Representative Office
A representative
office can only perform auxiliary or preparatory activities. It
cannot perform trading activities in its own name and cannot engage
in any commercial activities.
There is a flat tax
of 4,000 euros per year for representative offices, payable in two
equal instalments, and a tax of 1,200 euros per year for the renewal
of the authorization.
If a representative
office is set up or dissolved during the year, the tax due for the
respective year is pro-rated for the months when the representative
office is operational.
VIII.
Permanent Establishment
A PE refers to a
taxable presence of a nonresident in Romania. A PE is a place where
the activity of a nonresident is conducted, fully or partially,
directly or through a dependent agent. The Fiscal Code includes in
this category the following:
a place of
management;
a branch;
an office;
a factory;
a shop;
a workshop;
a mine;
an oil or gas well;
a quarry or other
places of extraction of natural resources;
the location where a
certain activity involving the assets and liabilities of a Romanian
legal entity entering into reorganization continues to be performed.
The profit derived
from the activity performed of the PE is subject to profit tax.
IX.
Withholding Tax
Nonresident companies
which are not operating through a PE are subject to tax in Romania
for the income from Romanian-based sources. The withholding tax
(“WHT”) covered by the double tax conventions to which Romania is
a party range from 0% to 15%.
WHT is applicable to
the following revenues:
commissions;
revenues from
services rendered in Romania;
revenues resulted
from the liquidation of a Romanian legal entity.
If there is no
applicable double tax convention, the revenues of the respective
nonresident sourced from Romania are taxed at the rate of 16%.
There are certain
exceptions to the above rate, such as:
dividends—dividends
paid by Romanian companies to companies resident in one of the EU
Member States are exempt from WHT, if the dividend beneficiary:
-is set up according
to Article 201 (4) of the Romanian Fiscal Code;
-is a resident of the
respective EU Member State, and based on a double tax convention
concluded between the respective EU Member State and a non-EU state,
the said company is not considered to be a resident of the EU Member
State for the purpose of taxation outside the EU;
-pays profit or a
similar tax in its state of residency;
-owns a minimum of
10% of the shares in the Romanian company;
interest and
royalties—interest and royalties payments are exempted from WHT if
the beneficiary is (i) a company resident in another Member State,
or (ii) a PE of a company resident in a Member State, located in
another Member State.
gambling—the
applicable WHT rate is 25%;
revenues paid in a
state with which Romania did not conclude any legal agreements
providing an exchange of information between the states, i.e.
revenues paid in tax havens: as of February 1, 2013, the applicable
WHT rate is 50%.
In order to apply the
favorable European legislation, nonresidents must submit a tax
residency certificate and must issue a declaration attesting
compliance with the requirements provided by the relevant EU
directives.
As of June 1, 2015,
nonresident taxpayers which earn interest income in Romania may opt
to apply the tax treatment provided for resident taxpayers. Thus,
nonresident taxpayers may opt to register for profit tax purposes in
Romania, directly or through a tax agent. The option is available for
nonresident legal entities which reside in the EU or in the European
Economic Area Member States which concluded double tax conventions or
information exchange agreements with Romania.
C.
Capital Gains Obtained by Nonresidents
Capital gains
obtained by nonresidents from the sale of real estate located in
Romania or from the sale of shares held in Romanian companies are
taxable in Romania at a rate of 16%. However, double tax conventions
may provide more favorable rates.
D.
Double Tax Conventions
Double tax
conventions concluded between Romania and the country of residence of
the payment beneficiary may provide different WHT rates.
The list of countries
with which Romania has concluded double tax conventions is found at
http://static.anaf.ro/static/10/Anaf/AsistentaContribuabili_r/Conventii/Conventii.htm.
In order to avoid
withholding, the nonresident recipient has to provide the resident
payer with a valid tax residency certificate prior to the payment of
the income. The tax residency certificate should stipulate that the
foreign beneficiary was a tax resident in a country other than
Romania, during the period when the Romanian income was obtained.
The tax residency
certificate valid for the year for which the payments are made is
also valid during the first 60 days of the following year if the
residency conditions did not change.
The WHT rates
provided by the Romanian Fiscal Code will apply if a tax residency
certificate is not available. However, a refund can be requested if
the tax residency certificate is submitted during a five-year period
following the receipt of income from a Romanian resident.
E.
Special Provisions
When establishing the
amount of a tax or of a charge according to the provisions of the
Fiscal Code, the tax authorities may not take into account a
transaction which does not have an economic purpose or may reclassify
the form of a transaction in order to reflect the economic content of
the transaction. In case the transactions or series of transactions
are classified as being artificial, provisions of the relevant double
tax treaty will not apply, and the transactions in question will be
taxed according to the Romanian Fiscal Code. Artificial transactions
are transactions or series of transactions which do not have an
economic content and which cannot be normally used within regular
economic practices, the essential purpose thereof being to avoid
taxation or to obtain tax advantages which could not be granted
otherwise.
X.
Local Taxes and Other Taxes
The Fiscal Code
provides certain local taxes, such as:
building tax;
land tax;
tax on means of
transport;
tax related to
promotion and advertising;
taxes for the
issuance of certain certificates, licenses and authorizations;
tax on revenues
obtained from public performances.
A.
Building Tax
For buildings owned
by companies, the building tax rate is established by the local
council at a rate between 0.25%–1.5% of the registration value of
the building, adjusted, by case, with the value of reconstruction,
consolidation, modernization, modification and extension works.
If the building has
not been reassessed in the previous three years, the tax rate is
increased by the local council by 5% to 10%. The taxable value of
fully depreciated buildings is reduced by 15%.
The building tax is
due twice a year, by March 31 and September 30, and is paid in equal
instalments.
B.
Land Tax
Owners of land must
pay a land tax per square meter, according to the classification
established by the municipality where the land is located, and the
zoning of the area where the land is located. The zoning is
determined by the local municipality.
The land tax is due
twice a year, by March 31, and September 30, and is paid in equal
instalments.
C.
Registration of the Agreements Concluded between Nonresidents and
Romanian Entities, and Natural Persons Regarding Certain Services
Rendered in Romania
According to Order
no. 2310 of 2007, Romanian legal and natural persons have the
obligation to register agreements concluded with foreign legal
entities or nonresident natural persons which render on Romanian
territory services such as construction works, installation works,
surveillance works, consultancy works, technical assistance works and
any other activities which may be considered a PE in Romania.
These agreements must
be registered with the territorial tax authorities in the
jurisdiction in which the Romanian legal entities benefitting from
the above-mentioned activities have their fiscal domicile, or, in the
case of medium-sized and large taxpayers, with the competent tax
authority.
D.
Contributions to the Social Security System
Under the Romanian
employment and tax regulations, both the employer and employee are
required to make contributions to the social security system.
1.
Social Security Contributions at the Individual Level
social security
contribution—10.5% on the monthly gross income;
health fund
contribution—5.5% on the monthly gross income;
unemployment fund
contribution—0.5% on the monthly gross income.
2.
Social Security Contributions at the Employer's Level
social security
contribution—between 15.8% and 25.8%, depending on the working
conditions, of the total gross amount paid to employees on a monthly
basis;
health fund
contribution—5.2% of the total gross amounts paid to employees on
a monthly basis;
unemployment fund
contribution—0.5% of the total gross amount paid to employees on a
monthly basis;
contribution for
medical leave and indemnity—0.85% of the total gross amount paid
to employees on a monthly basis;
insurance
contribution for labor accidents and professional diseases—0.15%
to 0.85% of the total gross amount paid to employees on a monthly
basis, depending on the risk class, according to the law;
contribution to the
guarantee fund for payment of salary debts—0.25% of the total
gross amount paid to employees on a monthly basis.
3.
Contribution to the Health Fund by Foreign Individuals
Citizens of the
European Economic Area ("EEA")
countries and Switzerland benefit from coverage of medical expenses
incurred in Romania, as well as from exemption from social security
contributions. Such exemptions are granted if expatriates obtain the
A1 certificate from another EU Member state where their employer is
located or the E101 certificate from Norway, Iceland, Liechtenstein,
and Switzerland, for expatriates whose employers are located in these
states.
If an individual is
not subject to social contributions in his or her home country, that
person will be subject to the jurisdiction of the Romanian social
security system and will be liable to pay social security
contributions due under Romanian regulations.
E.
Late Payment Penalties
Late payment interest
and late payment penalties are applied for late payment of the fiscal
claims owed to the State Budget. The late payment interest rate is
0.02% per day.
Other late payment
penalties are as follows:
the late payment
penalty is 0.01% per day;
in case the main tax
obligations are established by the tax audit authority to be due to
the fact that they were undeclared or incorrectly declared, the late
payment penalty is 0.08% per day.
F.
Additional Taxes to be Paid by Certain Economic Operators
As of 2013, the
following additional taxes have to be paid by economic operators
which carry out activities related to the extraction and trading of
natural resources:
special tax of 0.5%
applied to the revenues obtained from the exploitation of natural
resources, other than gas—to be paid by economic operators which
carry out activities related to the exploitation and trading of
natural resources;
tax of 60% applied
to the additional revenues obtained from the deregulation of the
prices from the natural gas sector—to be paid by economic
operators which carry out activities related to both extraction and
trading of natural gas.
The content of
this article is intended to provide a general guide to the subject
matter. Specialist advice should be sought about your specific
circumstances.
Adrian
Tomescu is Partner, Buzescu Ca, Romania
He
may be contacted at: [email protected]