Taxation in Romania - Local taxes - February 2007

The local taxes include:

Building tax
Building tax is payable by owners of buildings located in Romania, regardless of their residence. The tax rate ranges between 0.1% and 0.2% for individuals and between 0.5% and 1% for legal entities. For buildings not revaluated three years prior to the concerned year, the tax payable by legal entities may vary between 5% and 10% applied on the book value of the building. The tax is applied on the value of the building (minimum established values are provided) for individuals and on the book value of the building, for legal entities. The tax must be paid quarterly, latest by the 15th of the last month of the quarter. For the fourth quarter, the tax is payable by 15 November.


Land tax
Land tax is payable by owners of land. Generally, the tax is established as a fixed amount per hectare, depending on the location of the land within certain determined zones, towns or villages and depending on the use of the land. The tax is payable annually, in two equal instalments by 31 March and 30 September.

Local councils may grant full or partial exemptions from the payment of building and land tax to legal entities performing investments exceeding EUR 500,000.

Vehicle tax
Vehicle tax is payable by owners of land/water vehicles, which should be registered in Romania. The tax depends on the engine capacity, and is computed as a fixed amount per 200 cubic centimetres. The tax is payable annually, in two equal instalments by 31 March and 30 September.

Tax for construction authorisations
The tax is established as a percentage on the construction value and is payable upon obtaining the construction authorisation.

Publicity and advertising tax
Advertising tax is payable by the 10th of each month during the execution of the contract by the suppliers of publicity and advertising services rendered in Romania, except for publicity and advertising services through audio, video and the print media. The tax rate is established by the local councils and ranges between 1% and 3%. It is applied on the value of the publicity and advertising services. Users of outdoor advertising have to pay an outdoor media advertising tax computed as a fixed quota per square metre, depending on the surface used for advertising. Such tax should be paid in four equal instalments by 15 March, 15 June, 15 September and 15 November.

Resort tax
The tax is payable by individuals over 18 years for their stay in resorts and is included in the accommodation tariff. The tax rate is established by local councils and ranges between 0.5% and 5% on the accommodation tariff.

Show tax
Show tax is payable by individuals and entities for public performances at a rate of between 2% and 5% of revenues, or a fixed fee depending on the surface area of the premises. The show tax is payable monthly in arrears by the 15th of the month following the one in which the performance took place.

Other local taxes
The local councils may impose a daily fee for temporary use of public places and for admissions to museums, memorials, or historical, architectural and archaeological monuments and also for the ownership or use of equipment that is held for the purpose of obtaining income, as well as fees for activities with an impact on the environment.

Stamp duty
Stamp duty is payable on most judicial claims, issue of certificates and licences, and documentary transactions which require authentication.

There are two existing types of stamp duty:
- judicial stamp duty; and
- extra-judicial stamp duty.

Judicial stamp duty is levied on claims and requests filed with courts and the Ministry of Justice, depending on the value of the claim. Quantifiable claims are taxed under the regressive tax mechanism. Non-quantifiable claims are taxed at fixed amount levels. A judicial stamp duty may also be levied at the transfer of real estate property under certain circumstances.

Extra-judicial stamp duty is charged for the issue of various certifications such as identity cards, car registrations, etc.

Individual taxation
Romanian citizens domiciled in Romania are considered to be Romanian tax residents and are taxed in Romania on their worldwide income. Foreigners and Romanian individuals without a Romanian domicile, who become Romanian tax residents, may be subject to taxation in Romania on worldwide income under certain circumstances (see Taxpayers section below).

Residence
An individual is considered to be a Romanian tax resident if he/she fulfils at least one of the following conditions:
a) individual has domicile in Romania;
b) individual’s centre of vital interest is located in Romania;
c) individual is present in Romania for a period or periods exceeding 183 days during any 12-month period ending in the respective calendar year; or
d) individual is a Romanian citizen working abroad as employee of the Romanian state.

Taxpayers
Taxpayers of individual income tax can be:
- residents, Romanian individuals domiciled in Romania for incomes obtained from any source, both from Romania and abroad and residents other than Romanian individuals domiciled in Romania – only for Romanian sourced income;
- non-residents, who either:
- carry out independent activities through a permanent establishment in Romania, for the net income attributable to the permanent establishment; or
- carry out dependent activities in Romania, for the net income from such dependent activities; or
- earn other types of income.

If a non-resident individual complies with one of the conditions mentioned in the Residence section above under b) or c) for a period of three consecutive years starting 1 January 2004, he/she becomes subject to taxation on worldwide income starting from the fourth year. Until the end of the three-year period, the respective individual is subject to Romanian income tax only for Romanian-sourced income.

Individuals who are tax residents in countries that have signed double tax treaty with Romania may benefit from a reduced tax rate or a tax exemption under the terms of the respective treaty. Individuals who are tax residents in countries that have not entered into a double tax treaty with Romania are subject to Romanian taxation from the first day of presence in Romania.

Categories of income subject to taxation
A flat income tax rate of 16% applies to the following categories of income:
- income from freelance activities;
- salary income;
- rental income;
- pension income;
- prizes;
- agricultural income;
- other income.

The Fiscal Code provides for special tax rates in case of income obtained from investments, gambling and transfer of ownership rights over real estate.


Employment income
Taxable compensation includes salaries, income in cash or kind, wage premiums, rewards, temporary disability payments, paid holidays and any other income received by an individual based on an employment agreement. Taxable compensation also includes salaries received by daily or temporary workers, fees and compensation paid to directors and managers of private commercial companies, to members of the board of directors and General Shareholders Meeting, to members of the administration council and to members of the audit commission.

For employment, the monthly tax is determined by deducting from the gross income:
- mandatory social security contributions;
- personal deductions allowed, if any;
- monthly trade union contribution;
- contribution to the voluntary occupational pension scheme (up to EUR 200 per year).

Income from independent activities
Income from independent activities includes:
- income from commercial activities;
- income from freelance activities;
- income from intellectual property rights.

Income from freelance activities
The net taxable income from freelance activities is computed as gross income less specified deductible expenses that may be subject to certain limits. Authorised individuals are obliged to maintain single entry books. Alternatively, income earned by certain categories of freelancers who do not have employees is subject to income tax based on income quota(s), which are annually established by the Ministry of Finance.

Freelancers are required to make anticipated payments on a quarterly basis, by the 15th of the last month in each quarter.

Income from intellectual property rights
The net income from intellectual property rights results by deducting from the gross income the following:
- deductible expenses representing 40% of gross income;
- compulsory social security contributions.

Payers of intellectual property rights compensation are required to compute, withhold and pay a 10% advance income tax by the 25th of the following month.

Income from other independent activities
Income from the following sources is also taxed at 10% advance income tax:
- income from sale of goods on consignment;
- income from agent, commission or commercial mandate agreements;
- income from civil conventions based on the Civil Code;
- income from accounting, technical, judicial and extra-judicial expertise.

Payers of such income are required to compute, withhold and pay the advance income tax by the 25th of the following month.

Separately, payers of income required to compute, withhold and pay the advance income tax are required to submit a statement for each individual by 30th June for the previous year. Only payers of salary income are exempt from this obligation.

Income from all types of independent activities is subject to an annual regularisation, which is performed by applying a 16% tax rate to the annual taxable income less carried forward fiscal losses for a period of five consecutive years (if any).

Rental income
Gross rental income consists of amounts in cash or kind stipulated in the rental agreements and related to a fiscal year (regardless of the time of effective cashing), as well as certain expenses borne by the tenant and which, based on the law, are the landlord’s liability.

The taxable amount is determined by deducting a 25% expense quota from the gross income. Tax on rental income is determined by applying 16% on the taxable amount.

As an exception, taxpayers may opt for the determination of the net rental income based on single entry accounting.

Investment income
Investment income includes:
- dividend income;
- interest income;
- gains from transfer of securities;
- income from futures/forward transactions with foreign currencies and other similar operations;
- income from liquidation/dissolution without liquidation of a legal entity.

Dividend income
Dividends are defined as any grant of benefits in cash or kind by a legal entity to shareholders or associates, as a consequence of holding participation titles in that legal entity (with certain exceptions). Any amount paid by a legal entity for goods or services provided by a shareholder is treated as a dividend in case the value of such goods or services exceeds the market value. Also, any amount paid by a legal entity for goods and services provided in favour of a shareholder is considered dividend. Additionally, for taxation purposes, amounts received from holding participation titles in closed investment funds are treated in the same manner as dividends.

The tax rate applicable to dividends distributed to resident individuals is 16% and is calculated, withheld and paid by the payer of dividend. The tax should be paid by the 25th of the month following the dividend payment; in case of dividends distributed but not paid till the end of the year, the tax is payable by December 31st of that year. The dividend tax is final (i.e., the income is not subject to regularisation). The withholding tax for non-resident individuals is either 16% or, if a double tax treaty is applicable, the more favourable rate available under the respective treaty (refer to section on withholding taxes).

Interest income
The taxable income from interest is any income in the form of interest other than:
- interest from current account/on-sight deposits and deposits for which the interest rate is less than the reference monthly interest rate on the inter-banking market, as well as interest for deposits with mutual assistance institutions;
- interest related to debt instruments and municipal bonds, bonds issued by the National Agency for Housing, and other entities that issue bonds for housing construction;
- interest for deposits made in accordance with the provisions of Law 541/2002 regarding real estate collective savings and loan.

The tax rate applicable to interest income is 16%, and is calculated, withheld and paid by the payer of interest on a monthly basis, by the 25th of the following month. The interest tax represents a final tax. The withholding tax applied to interest income earned by non-resident individuals as per the domestic legislation is 16% or, if a double tax treaty is applicable, the more favourable rate available under the respective treaty (see section on withholding taxes).

Gains from transfer of securities
Capital gain represents the positive difference between the sale price and the purchase price of different types of securities, reduced by related costs, as the case may be. In case of transfer of shares in a limited liability company, the capital gain represents the difference between the sale price and the nominal value/purchase price of such shares. In case of redemption of investment titles held in open-ended investment funds, the capital gain is the positive difference between the redemption price and the purchase/subscription price. Capital gains on shares obtained as a result of a stock option plan is defined as the difference between the sale price and the preferential acquisition price.

A concept of “net capital gain” has been introduced as representing the difference between gains and losses registered during one year (i.e., positive or negative differences between the sale and purchase price, less the related transfer costs).

Starting January, 1 2007, the net capital gains from sale of shares in open companies and open investment funds are subject to:
- a 16% tax applied to the gains obtained from the sale of the shares sold within a period of less than 365 days as of acquisition; and
- 1% tax in case of shares held for a period exceeding 365 days as of acquisition.

Gains from transfer of shares and participation titles in closed companies are subject to 16% tax.

Income from futures/forward transactions with foreign currencies and other similar operations
Gains from sale-purchase transactions of foreign currencies with subsequent term settlement, as well as from any other similar operations, are taxable at the rate of 16%. The tax is computed and withheld by the intermediary of such transaction (e.g., a bank), upon finalisation of the operation. Subsequently, the tax is payable by the 25th of the month following the date when the tax was withheld. The tax is final (i.e., the gain is not subject to year-end adjustment).

Income from pensions
Income from pension comprises any amount received in form of pension from funds created from mandatory social contributions made to a social insurance system. Income from pension includes any amount from optional occupational pension schemes and those financed by the state budget. Monthly pension income of up to RON 900 is not taxable. The tax is to be determined by levying 16% on the taxable amount. The tax is final.

The tax computed for pension is to be withheld on the date of actual payment of the pension and remitted to the state budget by the 25th of the month following the pension payment.

Income from agricultural activities
Taxable income from agricultural activities is to be determined on income quotas issued by the Ministry of Agriculture. Alternatively, taxpayers earning income from agricultural activities may choose to determine the income based on single entry bookkeeping. The tax is computed by levying 16% on the taxable income.

Prizes and gambling income
The tax on prizes is 16% and is levied on the net income representing the balance between gross realised income and the tax free amount (i.e., currently RON 600).

The tax is payable by the 25th of the following month and the liability to compute, withhold and pay the tax rests with the payer of the income. The tax is final.

The tax on gambling is final and is determined by applying a tax rate of 20% on the net income not exceeding RON 10,000 and a tax rate of 25% on the net income that exceeds RON 10,000.

The net income in case of gambling income is computed similar to income from prizes.

Taxation on real estate transactions
The real estate transfer tax, which has to be paid by the taxpayer in the event of the transfer of the property right or parts of it, is computed as follows:
- for buildings and the related land, as well as for land without constructions, acquired and sold within a three years period inclusively:
− 3% of the sale amount, if this amount is up to RON 200,000 inclusively;
− for a sale amount over RON 200,000, the due tax is RON 6,000+2% of the amount which exceeds RON 200,000 inclusively.
- for buildings and the related land, as well as for land without constructions, acquired and sold after 3 years:
− 2% of the amount, if this amount is up to RON 200,000 inclusively;
− for a sale amount over RON 200,000, the due tax is RON 4,000+1% of the amount exceeding RON 200,000 inclusively.

Income from other sources
Income from other sources include, inter alia:
- insurance premiums borne by a freelancer or any other entity on behalf of an individual who is not an employee of the respective freelancer/entity. Such income is taxable in the hands of the recipient at 16%, through withholding, the tax being final;
- income received by pensioners or former employees arising out of the employment contracts concluded with their former employers or based on some special laws, in the form of price differences for certain goods, services or other rights. Such income is taxable in the hands of the recipient at 16%, through withholding, and the obligation for the calculation and withholding rests with the payer of such income.

Tax on income from other sources is payable by the 25th of the month following the realisation of the income.

Deductions

Personal deductions
Romanian individuals domiciled in Romania as well as foreigners meeting the residence criteria for three consecutive years are entitled to personal deductions, which vary depending on the gross monthly income and the number of dependents, as follows:
- for gross monthly income up to RON 1,000, the monthly deductions vary between RON 250 for persons without dependents and RON 650 for at least four dependents;
- for gross monthly income between RON 1,000 and RON 3,000, the digressive deductions have been established through an order issued by the Ministry of Finance;
- for gross monthly income higher than RON 3,000, the taxpayer’s right to deductions is withdrawn.

Filing and payment requirements
Taxpayers, with certain exceptions, have to file an annual income tax return as well as special declarations with the tax authorities by 15 May of the following year. The tax authorities compute the annual income tax on the basis of the information provided in the annual income return. The taxpayers are subsequently informed about the tax payable/reimbursable and the deadline for its payment.

Taxpayers earning only salary income throughout the entire fiscal year fulfil their tax liabilities through employer withholdings. Employers withhold the income tax on a monthly basis.

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.

Social security
Under Romanian employment regulations, both employer and employee are required to contribute to the social security system.

Social security contributions at the individual level
- Social security contribution – 9.5% on the gross salary, capped at the level of five times the national average salary (for the respective year);
- Health fund contribution – 6.5% on the gross monthly income subject to income tax; and
- Unemployment fund contribution – 1% on basic monthly salary.

Social security contributions at the employer level
- Social security contribution – between 19.5% and 29.5% (depending on working conditions) of the total salary fund, which is capped at the level of five times the national average salary, multiplied by the average number of employees;
- Health fund – 6% of total salary fund;
- Unemployment fund – 2% of total salary fund;
- Contribution for medical leave and indemnity – 0.85% of total salary fund, capped at 12 national minimum gross salary multiplied with the number of insured persons).
- National insurance fund for work accidents and professional diseases – the contribution ranges between 0.4%% and 3.6% of total salary fund, depending on the risk category; and
- Labour Chamber commission – 0.25% or 0.75% of total salary fund, depending on whether the company or the Labour Chamber keeps the workbooks;
- Contribution to the Guarantee Fund for payment of salary debts - 0,25% of the total gross salary fund.

Contribution to the health fund by foreign individuals
According to existing regulations regarding the health fund, foreign individuals requesting the extension of their residence right in Romania are liable to pay a monthly health contribution of 6.5% calculated at the level of the taxable income obtained from Romania. In case no income is obtained from Romania, the above-mentioned foreign individuals are liable to pay a monthly 6.5% contribution calculated at the level of one national minimum gross salary.

Citizens of European Union countries benefit from coverage of medical expenses incurred on Romanian territory, as well as exemption from the above mentioned contribution, according to the EU legislation on social security, based on certificates of coverage.