ROMANIA: An Introduction

When looking at Romania as a potential destination for investment, you will definitely find significant strengths but also some inconsistencies that affect the overall competitiveness of the country. In 2017, Romania was the champion of the EU in terms of GDP growth, although most of this was at the expense of a higher budget deficit.

On the one hand, as pointed out in the previous Overview, Romania may be seen as being on the way to becoming a regional business hub. There are several arguments to support this statement:

• tax exemptions for capital gains and dividends (under certain conditions), introduced in 2014;
• a competitive rate of corporate income tax (16% represents one of the lowest tax rates in the EU);
• an extremely competitive flat personal income tax rate of 10% (reduced from 16% in 2018) and a 5% dividend tax (reduced from 16% in 2017);
• a large number of Double Taxation Treaties (DTTs) concluded with various countries;
• a member state of the EU, thus all EU Directives are included in the Romanian Fiscal Code. In addition, decisions of the European Court of Justice fully apply in Romania;
• even though Romania is not member of the OECD, it has fully implemented its Transfer Pricing Guidelines and fully adhered to the Anti-BEPS plan.

Worth mentioning is that Romania participated in the First Inclusive Framework on the Anti-BEPS Plan of the OECD meeting held in Kyoto in July 2016, being represented by Gabriel Biriș, State Secretary in charge of Fiscal Legislation at the time.

There are still discussions on whether to allow Romanian companies to consolidate their corporate tax returns, and it is a matter of time until this important measure is introduced in the Fiscal Code, strengthening the position of Romania among other possible holding locations.

Romania took a large step towards simplifying its very complex compulsory social contributions system by slashing the number of payroll contributions from 9 (3 by employee, 6 by employer) to just 3 (2 by employee, 1 by employer). Unfortunately, compulsory contributions remain at a very high level (totalling 35% for the employee and 2.25% for employer), with no cap for the base of calculation and considerable inequality between the respective rates of employees and freelancers.

On the other hand, stability is lacking in Romania's fiscal legislation and also in the quality of the Tax Administration. 

Speaking of stability and predictability, our politicians managed to adopt with a large majority new Fiscal and Fiscal Procedural Codes in the summer of 2015, which came into effect in 2016. These Codes were claimed to be a step forward in terms of clarity compared to the heavily modified old Codes enacted in 2004. Unfortunately, this did not happen, and all the effort made not only by companies but also by the Tax Administration to assimilate the New Fiscal Code was more or less in vain: the new Codes received in excess of 100 changes in no more than 2 years of application, and it is unlikely that this frenzy of changes will stop anytime soon.

One of the (very important) changes introduced in 2017 for 2018 is Romania's introduction of the now already famous ATAD – The Council Directive 1164/2016. Member States are obliged to adopt the ATAD by 2019, therefore Romania is ahead of schedule. The determination shown by the Romanian government to implement this Directive faster than needed may look positive, but the reality is slightly different.

Romania already had a very strong anti-abuse clause; therefore, it had no need for a new one. Romania also had excellent thin capitalisation rules, making it almost impossible for foreign companies to shift profits through interests. Romania does not have a problem with companies relocating their production facilities from Romania to elsewhere – on the contrary, Romania (still) attracts western production capacities, and therefore did not need to fast-track the implementation of the anti-extraction tax provided by the ATAD. Last but not least, Romanian companies do not have subsidiaries in low tax jurisdictions; therefore, the CFC rules included in the ATAD are useless. What Romania needs are the CFC rules focused on the UBO, but this subject is of course not very high on the agenda.

Most harmful for Romanian businesses is the fact that the government chose to opt for the minimum thresholds provided by the ATAD regarding deductibility of interest: EUR200,000 per year plus 10% of EBITDA. Because this limitation also applies to the interest paid for bank loans and finance leases, Romanian companies investing in their development or the ones that need intense financing of their working capital are severely affected by this option. It is expected that Parliament will react fast and curb the enthusiasm of the government by increasing the thresholds to the maximum allowed by the ATAD: EUR3 million + 30% of EBITDA, and compensate for the fact that the ATAD does not allow the exclusion of interest paid for bank loans and financial leases from its limitations, even if such an increase may help some to shift some of their profits abroad (which until now was not possible). Unfortunately, the ATAD shows that Brussels and Bucharest are no different when doing things on fast forward without a 360° analysis: they both make mistakes that harm their taxpayers.

In 2017 the Romanian government tried to push for another experiment and issued the Government Ordinance 23/01.09.2017 regarding split payment of VAT, which provided for the obligation of all Romanian companies to open separate accounts for VAT starting January 1st, 2018. Fortunately, Parliament amended the Ordinance and the obligation remained only with companies owing VAT to the State or those in insolvency, hence most companies remain unaffected by the application of this measure.

On the subject of Tax Administration and its modernisation, it is worth mentioning that efforts have been made. Although the project financed by the World Bank is currently on hold, we are seeing efforts to increase the number of returns submitted electronically and also to ease the payment of taxes. It is expected that this process will continue and the pressure to collect taxes more efficiently will lead to a more modern Tax Administration.

To conclude, even if 2017 was a very strange year when it comes to fiscal policies – especially in terms of coherence – with its competitive corporate and income tax rates, a much-simplified compulsory social contributions system but also with the ability to overcome problems generated by politicians, Romania has still a lot of arguments in its favour to attract the attention of investors.