Romania – Emerging Market with “Tax Appeal”
Whenever called to give a few words on doing business in Romania, I always dedicate a substantial part of that to the Romanian corporate tax system. The reason is besides any personal bias, Romania does not lack a certain “tax appeal” making it a desirable target for entrepreneurs with an appetite for emerging markets.
This “tax appeal” may be briefly described through the following four key facts about the Romanian corporate tax system:
a) Romania is an EU member state with a harmonized tax legislation allowing all the benefits provided under the EU tax regulations;
b) corporate profits are subject to a 16% profit tax or lower;
c) Romania has concluded 80 double tax treaties (majority of which follow the OECD model treaty) with most of the business relevant jurisdictions around the world;
d) Capital gains are usually exempted from withholding tax in Romania under the double tax treaties, and so are dividends, interest and royalties, under transposed EU tax legislation.
In order to support this, let us briefly go through the main features of the Romanian corporate tax system.
General Tax Rates
Romanian corporations may be subject to one of the following corporate tax regimes:
a) profit tax payers – corporate profits are levied with a 16% profit tax;
b) microenterprise turnover tax payers – turnovers of the company are subject to a 3% turnover tax, subject to the cumulative fulfillment of conditions such as amount of yearly turnover, object of activity, number of employees;
c) night clubs, night bars, discotheques, casinos and businesses performing gambling activities, including those legal entities obtaining such through partnerships, have to pay the higher amount between the value represented by the 16% profit tax and the value represented by 5% income tax;
d) EUR 4,000 flat annual rep office tax.
The taxable base in case of profit tax is generally computed as the difference between the revenues derived from any source and the expenses incurred for obtaining the taxable income during the fiscal year. Dividends are not included in the taxable base for profit tax purposes.
Taxpayers are able to require advance tax rulings from the fiscal authorities against a fee. Uncontested advance tax rulings become binding on the taxpayer and fiscal authorities.
Recovery of Fiscal Loses
Losses incurred by corporations, as established by the profit tax statement, may be carried forward for a period of 7 years following the year when such losses have incurred based on a first-in first out method.
Depreciation is deducted using one of the following three methods, depending on the type of asset for which depreciation is calculated: the straight line method, the reduced balance depreciation and the accelerated method.
“Thin Capitalization” and deductibility cap
Interest paid by a Romanian company is fully deductible, unless the ratio between the long term debt of the company (> 1 year) and the total equity of the company is higher than 3. In case the ratio between the long-term debt of the company (> 1 year) and the total equity of the company is higher than 3, the interest paid by the Romanian legal entity shall not be deductible during the relevant fiscal year but may be carried forward to the following fiscal years, until fully deducted. Such “thin capitalization” rules shall not be applicable with regard to interest paid for financing obtained from banks, credit institutions and any other legal entities that, based on authorization, act as professional financing institutions.
Deductibility of interest on loans denominated in foreign currency is currently capped to 6%. This cap is established by Decision of the Romanian Government. Deductibility of interest on loans denominated in RON is set at the level of the reference interest established by the National Bank of Romania.
Dividends paid by a Romanian corporation to another Romanian corporation are subject to a 16% flat withholding tax.
In accordance with the participation exemption provided under the Parent Subsidiary Directive, dividends paid by Romanian corporations to legal entities registered in an EU or European Free Trade Association (EFTA) Member State or to the EU or EFTA permanent establishments of such legal entities are exempt from withholding tax in Romania, provided that: (i) the receiver of the dividends is established under a specific corporate form; (ii) is a profit tax (or similar tax) payer in its jurisdiction, and (iii) has held at least 10% of the Romanian dividend payer’s share capital for at least 2 years ending at the dividend distribution date.
Dividends paid by a Romanian legal entity to foreign legal entities or the Romanian permanent establishments of legal entities which do not fulfill the criteria mentioned above, are subject to a 16% withholding tax, unless a more favorable tax rate is provided under the relevant double tax treaty.
Interest and Royalties tax
Interest and royalties paid by a Romanian corporation to another Romanian corporation is included in the taxable profits of the receiver and subject to a 16% profit tax.
Royalties and interest paid by a Romanian corporation to corporations registered in an EU or EFTA Member State or to the EU or EFTA permanent establishments of such legal entities are exempt from withholding tax in Romania, provided that the beneficial owner of the royalties or interest has held at least 25% of the value of/number of shares in the Romanian royalties or interest payer share capital for at least 2 years ending at the royalties distribution date.
Royalties and interest paid by a Romanian legal entity to foreign legal entities or the Romanian permanent establishments of foreign legal entities which do not fall under any of the categories mentioned above are subject to a 16% withholding tax, unless a more favorable tax rate is provided under a relevant double tax treaty.
Capital gains obtained by foreign corporations from Romania by disposing of assets (e.g. participation titles in Romania entities, real estate properties located in Romania) are subject to a 16% flat withholding tax rate, except derogatory provisions are found in the relevant double tax treaty. We need to note that, usually, double tax treaties concluded by Romania provide that, save for capital gains obtained by disposing of real estate assets located in Romania; capital gains are exempted from withholding tax in Romania.
VAT, Excise and Custom duties
The Romanian standard VAT rate is 24% applied to the supply of goods and services. For certain goods and services like medical products, drugs, accommodation services, school materials, books, etc., a reduced VAT rate of 9% will apply. Also, a reduced 5% VAT rate is applicable on the sale of dwellings, under certain conditions, as part of a governmental social programme.
Customs duties are levied for goods imported from outside the EU are specified in the EU Common Customs Tariff.
The excise duty is levied for trading in several categories of goods such as beer, wines, fermented drinks other than beer and wine, strong alcoholic drinks, ethylic alcohol, tobacco products, electricity, energy products (liquid/fossil fuels), coffee, perfumes, jewellers (gold/platinum), sail and motor boats etc., regardless of their domestic or foreign origin.
Andrei heads the Finance Practice Group at Pachiu & Associates (www.pachiu.com), which includes the Tax and Estate Planning sub-practice groups. He is an experienced business lawyer specialising in finance, tax, estate planning and asset protection. In the field of taxation and asset protection, Andrei acts as advisor to domestic and foreign corporations and business ventures and high net worth individuals on matters relating to asset protection, planning of estate, domestic and cross-border tax optimization and compliance, general tax advice, structuring of financial investment, divestment, and profits repatriation and offshoring. Andrei is also a regular contributor to the business and legal media on topics related to finance and taxation He is fluent in Romanian and English and conversant in French and German. Andrei can be contacted on +4021 312 1008 or by email at firstname.lastname@example.org