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.
Taxable base
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
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.
Dividend tax
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 payers 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
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.