Taxation in Romania - Febrary2007

 (a) See section related to profits tax.
 
(b) The withholding taxes referred to above are levied on income earned in Romania by non-resident individuals and legal entities (referred to below as ‘non-residents’), income that is not attributable to a Romanian permanent establishment of the non-resident income recipient.
 
(c) See section related to dividends.
 
(d) See section related to withholding tax.
 
(e) Withholding tax generally applies to services rendered in Romania, except for international transport and services related to such transport. However, income from management and consultancy services is taxable regardless whether these services are rendered in Romania or abroad, if such income is obtained from a resident or if it is a cost of a permanent establishment in Romania.
 
(f) Withholding tax applies to the proceeds from liquidation or dissolution without liquidation of a Romanian legal entity.
 
(g) See section related to determination of taxable income.
 
 
Taxes on corporate income and gains
The Fiscal Code came into effect on 1 January 2004. The code integrates key tax legislation and provides the basis for a stable framework of tax legislation, by requiring amendments to necessarily follow a specific juridical route.
 
Fiscal year
In Romania, the fiscal year is the calendar year.
 
Corporate income tax
Resident entities are subject to tax on worldwide income.  An entity is resident in Romania if it is incorporated in Romania or if its effective management and control are in Romania.
 
‘Associations’ or ‘consortia’ between Romanian legal entities, which do not qualify as a legal person, are taxable in Romania separately at the level of each partner.  For such associations between a Romanian legal entity and individuals or foreign entities, the tax must be computed and paid by the Romanian legal entity on behalf of the individuals or its foreign partners.
 
Non-resident companies are subject to tax on their Romanian-sourced income only.  Sale of shares held in Romanian companies by non-resident companies and sale of real estate located in Romania are also subject to profits tax in Romania (see section related to capital gains tax).
 
A foreign company is considered to have a permanent establishment in Romania, without a legal presence here, if it has any of the following types of presence in Romania: an office, a branch, an agency, a factory, a mine, land for oil and gas extraction, a building site that exists for a period exceeding six months.
 
Rates of corporate income tax
The standard profits tax rate is 16%.  Profits tax payable by companies earning revenues from bars, nightclubs, discos, casinos and sports betting (including revenues obtained based on an association agreement) is computed at the standard 16% rate, provided the tax amount is not less than 5% of the total declared revenue.  In case the profits tax payable is below this threshold, the taxpayer is liable to pay corporate income tax computed at 5% of the declared revenue from such activities.
 
If certain conditions are met, companies may opt for the micro-company regime, under which a 2% (2.5% in 2008 and 3% in 2009) income tax rate is applied to revenues derived by the Company. The conditions to qualify for the micro-company regime are the following:
-         annual turnover up to EUR 100,000;
-         the company should have between 1 and 9 employees; and
-         the company should derive more than 50% of its income from activities other than consultancy and management.
 
Representative offices are taxed on a yearly basis at a lump sum of the RON equivalent of EUR 4,000, payable in two equal instalments.
 
Capital gains tax
No separate capital gains tax is payable by resident entities. Capital gains from sale of immovable property located in Romania or from sale/transfer of shares held in a Romanian legal entity are taxed at the standard corporate tax rate of 16%.
 
Dividends
Under the EU Parent – Subsidiary Directive, dividends paid by resident legal entities to its shareholders (i.e. resident legal entities and EU resident legal entities) are exempt from withholding tax in Romania provided that the shareholders own minimum 15% (10% starting 1 January 2009) of the share capital of the Romanian legal entity for an uninterrupted period of two years ended at the date of dividends payment. Unless the above conditions are met, a 10% tax rate applies to dividends paid by resident entities to other resident entities, while a 16% tax rate applies to dividends paid to EU resident legal entities (or, if a double tax treaty is applicable, the tax rate available under the respective treaty, if favourable).
 
If the shareholding period condition is fulfilled at a later stage, the dividends beneficiary would be entitled to benefit from the exemption at that moment and ask for a reimbursement of the withholding tax paid.
 
Dividends paid by Romanian legal entities to non-resident legal entities (non-EU entities) are subject to a 16% withholding tax or, if a double tax treaty is applicable, to the tax rate available under the respective treaty, if favourable.
 
Dividends paid by a Romanian entity to individual shareholders are subject to a 16% withholding tax rate.
 
Payments made by a Romanian legal entity to any of its shareholders for goods or services provided by the latter, in excess of the market value of the transaction, are assimilated to dividends from a tax point of view.  The same tax treatment will apply to payments made for supply of goods/services to be used for personal purposes by the company’s shareholders or associates.
 
The dividend tax must be withheld and paid to the state budget by the 25th of the month following the payment of dividend.  In case of dividends declared to Romanian residents (legal entities or individuals) which were not effectively paid by the end of the year, the dividend tax must be paid by 31 December of the respective year.
 
Foreign tax relief
Foreign income of Romanian entities is included in the taxable income. This includes passive income as well as capital gains.  However, a credit is allowed for foreign taxes paid, up to the level of the Romanian tax on that income.
 
Dividends received from EU resident entities constitute non-taxable income at the level of the Romanian recipient, if the Romanian beneficiary of dividends holds at least 15% (10% starting 1 January 2009) of the shares of the EU entity for an uninterrupted period of minimum 2 years.
 
Determination of taxable income
 
Starting point for determining taxable income
Taxable income equals revenues from all sources, including the delivery of goods and the supply of services, less deductible expenses, non-taxable revenues and other deductions and adding the non-deductible expenses.
 
The following items are considered as non-taxable:
-         dividends received by a Romanian entity from another Romanian entity.  Dividends received from a non-resident (except for EU resident entities, under certain conditions) are taxable (see also the Foreign Tax Relief and Dividends sections);
-         gains in the value of participations in other entities, registered further to the increase of capital in those entities through incorporation of reserves, premiums, profits, etc.;
-         revenues from the reversal of non-deductible expenses and provisions;
-         non-taxable income, expressly provided by specific regulations.
 
Deductions
As a rule, expenses related to earning taxable revenues including those regulated by legal norms are considered deductible.
 
The Fiscal Code also provides for certain types of expenses that are specifically deductible such as:
-         expenses incurred for labour protection, prevention of professional hazards and diseases and insurance premiums for professional risks;
-         advertising and publicity expenses for the promotion of business, products and/or services, if properly documented, as well as expenses for other goods and services incurred to boost sales;
-         transport and accommodation expenses of employees as well as other authorised persons, based on contractual clauses;
-         subscription fees, dues and other mandatory contributions, as provided by legal norms;
-         contributions to the fund for the negotiation of the collective labour contract;
-         expenses associated with professional training of employees;
-         marketing expenses, market research and promotion expenses in existing or new markets, participations in fairs and exhibitions, business missions;
-         research and development expenses, in case these do not qualify as intangible assets from an accounting perspective;
-         expenses for the improvement of management, of information systems, for the implementation, maintenance and improvement of quality management systems, for the acquisition of certificates attesting quality standards;
-         expenses for the protection of environment and conservation of resources;
-         expenses related to losses made by companies when writing off doubtful or disputed uncollected receivables in case of bankruptcy (based on a final court decision), as well as in other cases such as death of the debtor (when the receivable cannot be collected from the heirs), dissolution of SRLs with sole shareholders or liquidation in case no successor exists and when the debtor has financial difficulties;
-         registration fees, dues and contributions owed to commercial chambers, unions and owners’ associations.
 
Key items which are partially deductible include, inter alia:
-         provision expenses and contribution to reserve funds exceeding specified limits (see the Provisions and reserves section);
-         protocol and entertainment expenses (i.e., gifts to clients, business lunches) up to 2% of the adjusted accounting profit before tax;
-         daily allowances for domestic and foreign travel expenses are deductible up to the level of 2.5 times the ceiling set for public institutions;
-         employee-related expenses (i.e., birth, death, incurable disease support, expenses aimed at the proper functioning of certain units/activities of taxpayers, e.g., kindergartens, health units, canteens, sports clubs, sponsorship for schools, as well as Christmas gifts for employees’ children, part of employees’ transport costs, treatment in health resorts) currently up to 2% of the total salary cost;
-         expenses for meal vouchers, in accordance with the law;
-         perishable goods within the limits provided by government-approved norms;
-         interest expenses and foreign exchange differences within the limits described in the Thin capitalisation rules section;
-         expenses on behalf of employees in relation to optional occupational pension schemes, within legal limits (i.e., EUR 200);
-         health insurance premiums within the legal limits (i.e., EUR 200);
-         expenses for the maintenance or repair of cars used by management and administrative personnel, limited to one car per person.
 
Key expenses which are non-deductible include, inter alia:
-         Romanian and foreign profits tax (a tax credit is allowed for taxes paid in other countries – refer to the Foreign tax relief section);
-         sponsorship expenses (a tax credit is allowed for sponsorship expenses on meeting certain conditions – refer to the Sponsorship section);
-         late payment interest, penalties and fines paid to Romanian or foreign authorities and non-residents;
-         losses from reduction in the value of inventory and assets which have not been insured, including the corresponding VAT;
-         VAT on goods given to employees as benefits in kind, if they were not taxed at employees’ level;
-         any expenses made in favour of shareholders or associates, other than those generated by payments for goods and services at the market value;
-         insurance premiums that are not related to the taxpayer’s assets or its business scope, except for rented and leased assets or assets used as collateral for a business-related loan;
-         insurance premiums and other employment-related expenses that are not taxable at the level of the employee;
-         expenses related to non-taxable income;
-         service expenses, including management and consultancy expenses, which cannot be substantiated by written contracts and documents proving the rendering of the services;
-         losses in the value of shares held in other entities, except for losses made by selling such shares;
-         contributions paid in excess of the legal limits or that are not regulated by legal norms.
 
Sponsorship
Taxpayers incurring sponsorship expenses in accordance with relevant legislation are entitled to a tax credit (i.e., deduction from the profits tax payable of an amount equal to the sponsorship expense) if the following conditions are cumulatively fulfilled:
-         sponsorship expenses do not exceed 0.3‰ of the turnover; and
-         sponsorship expenses do not exceed 20% of the profits tax liability.
 
Provisions and reserves
Under existing regulations, the following provisions and reserves are deductible for profits tax purposes:
-         Contributions to the legal reserve fund, generally up to 5% of the adjusted annual accounting profits before tax, until the reserve fund reached 20% of the share capital.
-         Bad debt provisions if certain conditions are met.
-         Provisions for quality performance guarantees granted to clients.
-         Specific provisions created by credit institutions, non-banking financial institutions registered in the National Bank of Romania General Register, as provided by the laws governing these entities, as well as specific provisions created by similar legal entities.
-         Technical reserves set by insurance and re-insurance companies, as provided by the relevant regulatory laws, except for the equalisation reserve.
-         Risk provisions for financial market operations, as provided by the regulations of the National Securities Commission.
 
Thin capitalisation rules
Usually, interest expenses incurred by companies (other than credit institutions) are subject to the following limitations:
-         Debt-equity ratio – interest expenses are deductible if the debt-equity ratio is lower than 3.  In case such ratio is higher than the aforementioned limit, interest expenses are non-deductible for profits tax purposes and can be carried forward until they are fully deductible under the same conditions.
-         Interest expenses for loans granted by companies other than lending institutions are deductible based on the following limits:
-          the reference interest rate of the National Bank of Romania relating to the last month of the quarter, for loans denominated in RON;
-          the annual interest rate of 6%, respectively 1.5% per quarter for loans in foreign currencies[1].
 
Separately, the difference between foreign exchange losses and foreign exchange revenues relating to long-term loans (over 1 year) is treated as interest expense and is subject to the debt-equity ratio limitation (see above).
 
The interest expenses as well as the foreign exchange differences related to loans obtained from Romanian banks (including subsidiaries of foreign banks), leasing companies (for leasing operations) and other legal entities allowed to grant credits according to the law are not subject to the thin capitalisation rules.
 
Deductibility of interest expenses incurred by lending institutions is not limited based on the above-mentioned rules.
 
Tax depreciation
Three alternative methods are available for the computation of tax depreciation, namely:
-         straight-line depreciation;
-         reducing balance depreciation; and
-         accelerated depreciation (for equipment and patents).
 
These methods must be followed consistently.
 
Buildings can be depreciated only on the straight-line method.  Land is not a depreciable asset.
 
From a tax perspective, the law prescribes the concept of ‘useful lives’, which are provided by Government Decision, as follows:

 

 
The useful life for each type of asset is provided as an interval. Upon commissioning, the taxpayer is allowed to choose a useful life within such interval.  In case of improvements upon depreciable assets that are expected to result in future benefits the useful life may be increased by 10%.
 
Patents, licences, know-how, manufacturer’s brands, trademarks, as well as other similar industrial and commercial property rights are depreciated over the period provided for their utilisation or the contractual period, as the case may be.  Goodwill is not considered a depreciable asset for tax purposes.
 
Any revaluation of fixed assets would be taken into account for fiscal purposes (except for revaluations of entirely depreciated fixed assets, made after 1 January 2004).
 
Reorganisation, liquidation, other transfers
Under domestic legislation, the following principles apply in relation to business reorganisation operations:
 
Capital contributions in exchange of shares are not considered taxable transfers.  The tax value of the assets received as contribution is equal to the tax value of these assets when held by the contributor.  At the same time, the tax value of shares received by the contributor equals the tax value of the contributed assets.
 
Asset distribution to shareholders, either as dividend or following liquidation, is taxable, except in case of:
-         merger, whereby the shareholders of merging entities receive shares in the resulting entity;
-         split, whereby shareholders receive proportional stakes in the resulting entities;
-         acquisition of the business of a Romanian entity by another Romanian entity in exchange of shares;
-         acquisition by a Romanian entity of at least 50% of shares in another Romanian entity, in exchange of its own shares, and, as the case may be, for a cash payment not exceeding 10% of the nominal value of the newly issued shares.
 
In the above-mentioned cases, the following rules apply:
-         transfers of assets/liabilities and exchange of shares held in one Romanian entity with the shares in another Romanian entity are not taxable;
-         in a split, distribution of shares is not treated as dividend payment;
-         tax value of assets/liabilities for the receiver equals the tax value of the same items for the transferor;
-         fiscal depreciation for assets continues in the same manner as before the transfer;
-         transfer of provisions/reserves is not taxable if the receiver takes them over and maintains them at the same value as before the transfer;
-         in a share exchange (as above), the tax value of shares received equals the tax value of the shares transferred;
-         in a split, the tax value of shares held before the distribution is allocated between these shares and distributed shares, proportionally with their market value immediately after the distribution.
 
Starting 1 January 2007, similar principles would apply to cross-border reorganisations, as a result of the implementation of the EU Merger Directive in the Romanian Fiscal Code. Under the Directive, cross-border business reorganisation operations (i.e. mergers, spin-offs, transfers of assets and exchange of shares) between different Member States of the European Union are tax neutral, subject to certain conditions.
 
Transfer pricing
According to Romanian fiscal legislation, transactions between related parties must be carried out in accordance with the arm’s-length principle (i.e., transactions should be carried out at the same price as if concluded among non-related parties).  The methods for the assessment of market value include: the Comparable Uncontrolled Price Method, the Cost Plus Method, the Resale Price Method and any other method recognised by the transfer pricing guidelines issued by the Organisation for Economic Cooperation and Development.
 
Relief for losses
Tax losses may be carried forward over five years and are not updated for inflation purposes. Loss carry-forward is not available for entities that cease to exist as a result of a split or merger.  The carry-back of losses is not permitted.
 
Fiscal consolidation
The legislation regarding consolidation of companies is at an early stage of development and till now only the consolidation for accounting purposes is regulated.  Special norms for consolidation of financial statements for credit institutions are available since 2002 for company groups headed by a bank and beginning 2003, for those held by a credit cooperative.
 
There is no existing provision in legislation on consolidation for profits tax purposes.
 
Filing tax returns
Taxpayers are required to file profits tax returns and pay profits tax quarterly by the 25th of the first month of the following quarter. The definitive annual tax return should be filed by April 15th of the following year. As an exception, certain categories of taxpayers have the liability to pay profits tax by February 15th of the following year.
 
Legal entities ceasing to exist need to file a final tax return and pay the profits tax until the date of submission of the financial statements to the Trade Registry.
 
The profits tax system with advance payments made on a quarterly basis is applied by Romanian banks and branches of foreign banks starting 1 January 2007. The other profits tax payers (with certain exceptions) will apply this system from 2008.


[1] Such interest rate level is to be updated periodically by Government Decision (the level for 2007 has not been published yet)