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-second-edition/
How often is tax law amended and what are the processes for such amendments?
Tax and tax procedural laws 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 on 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.
In respect of filling the accounts, according to the Romanian Accounting Law, depending on the threshold of the entity, the Romanian companies and the Romanian branches of foreign companies from countries other than those in the European Economic Area (SEE), are required to prepare semiannual accounting reports and annual Financial Statements. There are certain thresholds above which the annual financial statements shall be audited.
The branches opened in Romania by companies from countries members of European Economic Area (SEE), according to the Romanian accountancy law, are required to submit annual accounting reports.
In addition, the Ministry of Public Finance annually issues regulations requiring interim financial reporting as of 30 June. For the last years, this requirements applied to entities that reported in the previous financial year an annual turnover exceeding RON 220,000 (i.e., app. USD 56,000). Separately, the entities that opt for a financial year different from the calendar year under the conditions set out in Accounting Law, are required to file, in addition to the annual financial statements prepared for the selected financial year, annual accounting reports as of December 31st of each year.
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 Public 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 that 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 letter of bank guarantee or an insurance policy).
By Government Ordinance no. 30/2017 an important amendment was brought in what regards the submission of the letter of bank 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 letter bank of guarantee. In this regard, the enforcement will continue/will start in case the taxpayer does not submit the letter of bank 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?
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.
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?
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 became 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.
Can the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Transfer pricing (“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 does not include a CFC regime, yet. However, it is expected to be implemented soon, further to the transposition of the Anti-Tax Avoidance Directive (“ATAD”) into local law. On the other hand, Romania tax legislation provides for a Thin Cap regime, which limits the deductibility of inter-group loans, under certain conditions. Also, in this case, it is important to note the relevance of ATAD, which provides for a new Thin Cap regime to be considered for EU countries. The implementation of ATAD and impact on the current Thin Cap rules should be monitored, including any grandfathering of the existing provisions.
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, how is it applied 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, in light of Anti-Tax Avoidance Directive (ATAD) provisions, additional measures will be set against tax avoidance practices that directly affect the functioning of the internal market. In this framework, special attention must be paid to any aspects which may trigger suspicions of criminal offenses being committed by the taxpayer.
Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?
Yes, 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. Separately, at the level of EU, the BEPS measures were centralized in the provisions of ATAD. Thus, Romania will be significantly affected by BEPS, mainly starting 2019, when all these changes will be in force.
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.
How will BEPS impact on the government’s tax policies?
The implementation of the measures from BEPS project will determine certain key changes in the Romania tax legislation. As a first impact, taxpayer should be aware of a greater transparency related to their assets, activities, functions, cash movements, etc. Also, one key focus of the BEPS project is to increase the collection of funds in the source states, where activities are performed. We will need to see which will be the impact on tax policy but it is clear that these changes will increase the attention of tax authorities on cross-border transactions and transfer pricing.
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 recommendation. 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 tax on 16% for business profits and personal income, except for dividends which are subject to 5% tax (if they are not exempted, subject to certain conditions). A special 1-3% tax on revenue is applicable for small incorporated businesses, having an annual turnover of less than EUR 500,000.
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 thin capitalization 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 incomes 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 incomes 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 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, these 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 takes 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.
From the perspective of an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered by the jurisdiction?
From a tax perspective, Romania offers a competitive environment centered on the flat tax rate of 16% applicable (with some exceptions) to income of individuals, corporate profits and capital gains. In addition, there are several advantages for investors in Romania, as follows:
- Salary tax exemption for employees working as IT programmers. This incentive was introduced in the tax legislation approximately 15 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 has also been extended to employees working 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 distribution of these profits as dividends.
Romania enjoys a very large tax treaty network (close to 90) including a tax treaty with the US without the limitation of Benefits clause.
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 by referring the case to a Romanian or European court of justice.