This country-specific Q&A provides an overview to tax laws and regulations that may occur in Romania.
It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.
This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-3rd-edition/
How often is tax law amended and what are the processes for such amendments?
Tax and tax procedural law are often amended in Romania, in some instances even several times during the course of one year. Usually, the amendments are made by Emergency Government Ordinances, which are used by authorities in order to bypass the more lengthy procedures of the Romanian Parliament. Such normative deeds are subsequently approved by the Parliament, yet their entry into force is not conditioned by the existence of such approval. When the amendments are significant (e.g. such as the enactment of the new Fiscal Code and Fiscal Procedure Code as of January 1st, 2016), they are made under laws issued by the Parliament.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
Specific obligations are prescribed with regard to the various types of tax obligations incumbent to a taxpayer. As a general rule, bookkeeping obligations are set for all taxpayers performing economic activities, while the obligations related to filing tax returns depend on the type of taxpayer, its activity etc. Starting 2016 the new Tax Procedure Code introduced a new penalty imposed on taxpayers for not declaring the taxable base, which is 29% per annum and is computed until the payment of the assessed liability. In reality, this penalty is a sanction for all additional liabilities assessed through a tax audit because under the Romanian tax system any tax due has to be initially declared by the taxpayer. Thus, the beginning of a tax audit constitutes a very important deadline for making any final corrections in order to avoid such a penalty. Health checks for every tax period are becoming a real necessity for any taxpayer.
The Romanian Accounting law provides that the accounting books of an entity need to be kept on a contemporaneous basis, in Romanian language and in national currency (lei).
Moreover, the statutory trial balances should be available annually, quarterly or whenever the tax authorities are requesting such documents.
In respect of filling the accounts, according to the Romanian Accounting Law, in case of Romanian entities and non-SEE resident entities, depending of the threshold of the entity, the entities are required to prepare semiannual accounting reports and annual Financial Statements. There are certain thresholds above which the entities which are preparing annual financial statements are required to be audited.
In case of subsidiaries opened in Romania by members of European Economic Area (SEE) resident entities, according to the Romanian accountancy law, are required to submit Annual Accounting reports.
In respect of the maintenance of records, as per the local legislation in place, the payroll statements shall be archived for 50 years, the accounting registers, accounting documents and supporting documents shall be retained for 10 years (with exceptions applicable for certain types of documents for which the retention period is 5 years).
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
The main regulatory bodies are the Ministry of Finance and the National Agency for Fiscal Administration (“NAFA”). As a general rule, taxpayer guidance is performed by NAFA and, in principle, any taxpayer can address its questions or issues with this body. However, taxpayer guidance is often vague (i.e. reiteration of the provisions of tax law) and the answering time is often long, in case such answer is effectively provided to the taxpayer.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Tax disputes must be initially referred to administrative bodies functioning within NAFA (i.e. administrative appeal). If such bodies fail to issue a decision or the decision is not satisfactory to the taxpayer, it can file a claim with the courts of law, where the dispute usually undergoes two tiers of jurisdiction. Usually, tax disputes are brought in front of the courts of law, since the decisions issued in the administrative appeal phase are usually not satisfactory to the taxpayer. As of the issuance of the challenged tax deed and until the definitive settlement of the dispute by the courts of law, the tax dispute may take up to 4 or even 5 years.
As regards the transactions conducted between affiliated companies located in different states (i.e. Romania and another state) that were adjusted from a transfer pricing (“TP”) perspective by the Romanian tax authorities, the available remedies consist either of the national challenging proceedings, or the international proceedings (only) in case of double taxation. In what regards the international proceedings, taxpayers may revert also to the proceedings under the Double Taxation Treaty (the “DTT”) concluded between Romania and another state or under the EU Arbitration Convention (the “EUAC”). We underline that although the mutual agreement procedure provided under DTT and under the EUAC are both international dispute resolution instruments with certain similarities, there are major differences between them. Advanced Pricing Agreements (“APA”) are available as a tool to mitigate TP controversy.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
The dates for payment depend on the taxes involved and on the tax deed incorporating them (e.g. tax decision issued by the tax authorities as a result of a tax audit or tax return filed by the taxpayer). In case of tax decisions issued as a result of a tax audit performed by NAFA, the additional taxes imposed under the decision must be paid either until the 5th, or the 25th of the following month after the tax decision is communicated to the taxpayer, depending on the exact date of such communication. In case of disputes regarding the amounts imposed by NAFA, the taxes imposed under tax deeds are still owed, unless their enforcement is suspended as per the law.
However, under the current legislation, challenging the tax assessment does not imply also the suspension of its effects. Hence, in order to avoid immediate tax payment, the taxpayer could either obtain a court decision with that effect or provide the authorities with a payment guarantee (i.e. a bank letter of guarantee or an insurance policy).
By Government Ordinance no. 30/2017 an important amendment was brought in what regards the submission of the bank letter of guarantee. Specifically, the legal provisions now stipulate that the enforcement is suspended/does not start if the taxpayer notifies the tax authority, after receiving the tax assessment decision, that it will submit a bank letter of guarantee. In this regard, the enforcement will continue/will start in case the taxpayer does not submit the bank letter of guarantee within 45 days as of receiving the tax assessment decision.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?
Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
As a general rule, the fiscal secrecy rules prevent the tax authorities from disclosing taxpayer information and data to third parties. However, tax authorities may disclose such information and data to other public authorities and judiciary bodies, as per the law.
Yes, Romania is a signatory to the Common Reporting Standard. At this stage, we are not aware of an intention of the Romanian authorities to maintain a public register of beneficial ownership.
What are the tests for residence of the main business structures (including transparent entities)?
Typically, Romania is following OECD guidelines in respect of tax residency tests. Basically, a legal entity is tax resident in Romania, if it is incorporated in Romania. Additionally, a foreign legal entity may become tax resident in Romania if it has the place of effective management in Romania. The residency concept related to place of effective management is becoming very important starting 2016 since a foreign legal entity having the place of effective management in Romania has also become subject to corporate income tax. There is no specific definition of residence in the context of transparent entities. Furthermore, the concept of transparent entities is not very well defined in terms of tax law and rarely arise in practice. In Romania, most often it arises in the context of SPARL - limited liability partnership, which are generally used by law firms. Apart from these, the transparency concept was recently elaborated in case of payments made by Romanian legal entities to foreign entities, which can be considered as transparent or not, under the law of that respective state.
Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
TP aspects related to pricing of related party transactions (including cross-border transactions within a multinational group) represent one of the key focus areas in tax audits conducted by Romanian tax authorities. TP documentation prepared in accordance with specific Romanian TP documentation requirements is expected to be already available (for certain taxpayers) or provided within certain deadlines specified by the regulations. Scrutiny of the tax authorities is related not only to the content of the TP documentation but also in relation to substance of the related party transactions (e.g., we have observed challenges of the functional and risk profile of the entities, challenges in terms of compliance with specific Romanian TP requirements of the benchmarking analyses). The number of TP adjustments resulting from audits concluded by the Romanian tax authorities has increased significantly in the last period.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
The Romanian legislation has implemented the CFC regime, further to the transposition of the Anti-Tax Avoidance Directive (“ATAD”) into local law. The CFC rules became applicable starting 1 January 2018. Basically, these state that certain types of undistributed income pertaining to (directly or indirectly) controlled low taxed subsidiaries/permanent establishments of Romanian corporate income taxpayers would be included (proportionally to the participation held in the controlled subsidiary) in the tax base of the respective (controlling) taxpayer – approach A provided by ATAD.
The Romanian tax legislation provided for Thin Cap regime until 31 December 2017 when it was replaced by the interest deductibility rules based on EBITDA, further to the implementation of the ATAD into local law. As per these rules, the exceeding borrowing costs (i.e. the amount by which deductible borrowing costs exceed taxable interest revenues) above the annual threshold of EUR 200,000 in relation to various types of financing (including e.g. bank loans, inter-company loans, finance leasing, etc.) may be deducted for corporate income tax purposes only up to 10% of the company’s EBITDA, adjusted for tax purposes. Non-deductible borrowing costs (i.e. exceeding 10%) would be available for carry forward for an unlimited period of time.
The investors should analyze the impact of these rules from two perspectives:
- 10% EBITDA: Even if the Directive gives the possibility to the EU Member States to choose a limit up to 30%, Romania opted for only 10%. Clearly, the companies recording a small EBITDA or in the investment phase will be affected by this limit as they might not be able to deduct the entire exceeding borrowing costs during the period they are incurred.
- Bank loans: Unlike under the interest deductibility restrictions until 31 December 2017, the interest related to bank loans is now included and subject to the same rules mentioned above. As the bank loans represent one of the main source of financing several industries, this new measure will have a significant impact for the Romanian companies.
Apart from the TP rules provided for under Romanian regulations (that also make reference to OECD TP Guidelines and contain local specific requirements), the Romanian legislation provides for the possibility to obtain advance pricing agreements (“APA”). Initially, the procedure for obtaining APAs was quite cumbersome, however, the process was streamlined in the last couple of years. In the current market environment and high focus of tax authorities on transfer pricing matters, it is strongly recommended to consider obtaining APAs, since this would mitigate TP disputes with the tax authorities on transactions subject to the APAs.
Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?
Yes, a general anti-avoidance rule is regulated under Romanian law and it is applied by the tax authorities in cases where the economic reality of the verified transactions is challenged. In addition, the tax authorities are compelled to refer the tax disputes to the criminal investigation authorities – whenever the transactions performed by the taxpayer were “suspected” by the tax inspectors as being fraudulent. Moreover, the GAAR rules provided by ATAD were implemented in the Romanian tax legislation as of 1 January 2018, stating that. for the purpose of calculating the tax liabilities, it shall be ignored an arrangement or series of arrangements which, taking into consideration all relevant facts and circumstances, are not genuine, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage and not for valid commercial reasons which reflect economic reality. In this framework, special attention must be paid to any aspects which may trigger suspicions of criminal offenses being committed by the taxpayer.
Have any of the OECD BEPs recommendations been implemented or are any planned to be implemented and if so, which ones?
At the level of EU, the BEPS measures were centralized in the provisions of ATAD. The Romanian tax legislation transposed 4 out of 5 measures included in ATAD starting 1 January 2018 (i.e. 1 year before the deadline for the transposition of the respective measures). More specifically, Romania transposed the following measures:
- interest limitation rule based on EBITA;
- Controlled Foreign Company (CFC) rules;
- exit taxation rules;
- general anti-abuse rule (GAAR).
Additionally, the recent amendments brought to the Directive 2011/16/EU with respect to mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (inspired by Action 12 BEPS), with effect from 25 June 2018, should be carefully considered and closely monitored by the business environment. Although the potential reporting obligation begins with 2020, the retrospective effect provided by the Directive should be considered.
Separately, Romania signed the multilateral instrument (‘MLI”) which will implement BEPS treaty measures. For instance, Romania is going to implement: (i) the principal purpose test for applicability of double tax treaties, (ii) it opted to include the treaty measures related to “avoidance of permanent establishment status” and (iii) the provisions related to mandatory mutual agreement procedure.
Specifically on the TP side, as the Romanian TP regulations make reference to OECD TP Guidelines to be considered for local TP purposes, any amendments of these guidelines resulting from the BEPS project would be considered for Romanian purposes as well.
Starting 2016, major changes were introduced in the Romanian legislation regarding the TP documentation requirements applicable to Romanian taxpayers. The information that should be included in the TP documentation has been significantly expanded, considering the amendments of the OECD TP Guidelines further to the BEPS project, Action 13.
Also, the Romanian legislation was amended so as to implement the mandatory automatic exchange of information on the country-by-country reports, following the adoption of Directive 2016/881/EU, with effect from 13 June 2017. The new reporting requirements apply to multinational enterprise groups having consolidated income reported in the last fiscal year prior to the reporting period equal to or exceeding EUR 750 million.
In your view, how has BEPS impacted on the government’s tax policies?
The implementation of the measures from the BEPS project is currently determining several key changes in the Romania tax legislation. It seems to be clear that these measures provide to the tax authorities additional instruments in achieving one of the key focus areas of the BEPS project, respectively increasing the collection of funds in the source states, where activities are performed / the value is created. Also, these instruments may offer the authorities a better visibility over the cross-border transactions and transfer pricing. A taxpayer should be aware about a greater transparency related to their assets, activities, functions, cash movements, etc.
Does the tax system broadly follow the recognised OECD Model?
Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.
If so, what are the current rates and are they flat or graduated?
Despite the fact that Romania is not an OECD member, our domestic legislation is in line with the OECD guidelines and recommendations. All the above mentioned areas of the taxation are covered. Worth mentioning is that the capital gains are not taxed in an unitary matter but are subject to business profits / personal taxation rules, depending on the taxpayer obtaining that capital gain.
Romania has a flat corporate tax rate of 16%, 10% income tax on most personal income and 5% on dividend income (if this is not exempted, subject to certain conditions). A special tax on revenue of 1% or 3% (depending on certain conditions) is applicable for small incorporated businesses, having an annual turnover of less than EUR 1 million.
Starting 1st of January 2018 the tax legislation in respect of payroll was amended as the employer social charges were transferred to employee. The following social contributions are applicable: the employee pension contribution, for normal work conditions is 25%, the employee health fund contribution is 10%, and the personal income tax is 10%. The only contribution due by the employer is work insurance contribution of 2.25%.
As of 1 January 2018, employee social charges are of 35% and employer social charge is of 2.25%.
Under certain conditions, individuals who derive income certain type or private sources (such as investment, independent activities, rental, excluding salary) are liable to pay health fund contribution if the cumulated net annual income exceeds 12 minimum salaries per economy (approx. EUR 4,900 for 2018). The contribution of 10% is due at a capped computation base of 12 minimum national salaries per economy.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
The taxable profit which is the basis for the corporate income tax is calculated starting from the accounting profit which is adjusted with non-deductible expenses and non-taxable revenues. Among non-deductible expenses there are certain types of provisions, interest falling outside the interest deductibility rules limits, expenses with goods and services which cannot be proved as being acquired for the benefit of the business, depreciation of cars exceeding a certain threshold, etc. Non-taxable revenues consist in dividends received from subsidiaries (under certain conditions), recovery of non-deductible expenses, etc.
Broadly in case of Romanian taxpayers having the obligation of keeping the accounting as per the Romanian legislation, the Fiscal Code provides that the tax result is computed as the difference between the income and expenses recorded according to the applicable accounting regulations, minus non-taxable income and tax deductions, plus non-deductible expenses. In determining the tax result, other elements similar to income and expenses are also taken into consideration, according to the methodological norms, as well as the fiscal losses that are recovered of taxable profits earned over the next seven consecutive years. The positive tax result is named taxable profit, and the negative tax result is named tax loss.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
Individuals and incorporated businesses are recognized as taxpayers and have to pay taxes in Romania. Unincorporated structures as joint-ventures, partnerships or other similar structures are transparent for tax purposes with partners / participants being subject to business tax or individual income tax, as the case may be.
Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?
Both. Romanian legal entities, as well as foreign entities that have the place of effective management or a “permanent establishment (PE)” in Romania are subject to corporate income tax in Romania. Conditions for a foreign taxpayer to generate a PE in Romania are similar with those provided in the OECD Model Tax Convention.
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Generally, the tax exemption related to a certain geographical area or industry were eliminated from the tax legislation, the incentives being available for all the taxpayers operating in Romania (e.g. tax exemption for business profits re-invested in production equipment, IT and software). The only remaining special facilities are for companies operating in R&D which can benefit by an additional tax deduction of 50% of the R&D related expenses. Moreover, employees involved in R&D activities and IT programming are exempted from salary tax.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
No special tax regimes, except for the R&D incentives as mentioned above.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
The Romanian tax legislation does not allow any tax consolidation for groups of companies for the purpose of corporate income tax (except in case of several Romanian permanent establishments of a non-resident company). A tax loss can be transferred from one entity to another only in the case of a legal merger.
Are there any withholding taxes?
Any income obtained by a non-resident from Romania is generally subject to WHT in the rate of 16%, except for dividends which are subject to 5% WHT. In case the income is paid in a bank account located in a country which does not have concluded with Romania an exchange of information agreement, the WHT rate is 50%, but only if it is related to a transaction qualified as artificial.
However, this can be reduced to lower rates and even eliminated under certain conditions.
Are there any recognised environmental taxes payable by businesses?
Contributions to environmental fund is due by corporate taxpayers generating greenhouse gas emissions from fixed sources (e.g. heating plants) and those putting on the market packaging materials, oils, tires, batteries, electronic devices, etc. The formula for calculating these taxes is complex and take into consideration several factors, e.g. the amount of materials which are recycled by the taxpayer.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
The general rule is that the dividend is subject to 5% WHT irrespective of the tax residence of the taxpayer. However, this can be reduced to lower rates and even eliminated under certain conditions.
If you were advising an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered?
From a tax perspective, Romania offers a competitive environment centered on the flat tax rate of 16% applicable to corporate profits and capital gains. Generally, income of individuals is taxed at a flat rate of 10%. In addition, there are several advantages for investors in Romania, as follows:
- Salary tax exemption for employees working in the IT field. This incentive was introduced in the tax legislation approximately 17 years ago, attracting a lot of international companies to create IT hubs in Romania. Combined with the fact that our country has very good IT schools, Romania is now a regional leader in software programming. Moreover, starting 2017, this incentive was also extended to employees involved in R&D activities developed in Romania.
- There are other tax incentives available for companies involved in R&D: companies operating exclusively in R&D may benefit of a 10 years tax holiday for the corporate income tax, while those doing beside R&D also other types of activities, can deduct an additional amount representing 50% of the R&D expenses, when calculating corporate income tax (i.e. R&D related expenses are 150% tax deductible).
- Companies investing in production equipment, IT equipment and software are exempted from corporate income tax for the part of the profits reinvested in such assets. This incentive was introduced in 2014, is applicable for an indefinite period of time and requires that such profits are kept in the company’s retained earnings during at least half of the useful life of the investments. Hence, a company doing such investment can postpone the payment of tax for the reinvested profits until the moment when decide to distribute these profits as dividends.
Regarding the main disadvantages, we can point out a certain degree of bureaucracy and lack of transparency in tax administration, combined with an aggressive approach of the tax authorities in case of tax audits. However, these problems can be overpassed with the support of good advisers or after a court case in the Romanian or European courts of justice.