TAXES ON CORPORATE INCOME
All legal entities doing business in Romania are liable for payment of corporate income taxes. The normal corporate income tax rate is 38%. An additional rate of 6.2% is paid by foreign legal entities operating in Romania (branches).
For taxpayers for whom, during a fiscal year, agricultural revenues account for more than 80% of total revenues, the tax rate is 25%.
When revenue from gambling, including income from bars and nightclubs, represents more than 50% of a company's total revenue, an additional tax rate of 22% is levied on the profit deriving from these activities.
BUSINESS ENTITIES
According to the Company Law No 31 of 17 November 1990, companies with foreign participation (joint ventures) may be organized in any business form. The theoretical legislative framework, as described in article 2, identifies the following business forms.
1 PARTNERSHIP: Obligations guaranteed by the capital and by the unlimited and joint liability of the partners.
2 LIMITED PARTNERSHIP: Obligations guaranteed by the capital and joint liability of the general partners; limited partners are liable only up to the value of their participation.
3 LIMITED PARTNERSHIP BY SHARES: Capital divided by shares, and obligations guaranteed by the capital and by the unlimited and joint liability of the general partners; limited partners are liable only for the payment of their shares.
4 JOINT STOCK COMPANY: Obligations guaranteed by the registered assets; shareholders are liable only for the payment of their shares.
5 LIMITED LIABILITY COMPANY: Obligations guaranteed by the registered assets; shareholders are liable only for the payment of their contributions.
Companies registered in Romania, in one of the forms above, are Romanian legal persons. In addition to the above types of organization, Romanian law allows establishment of representative offices and branches of foreign companies. Representative offices are only allowed to carry on activities of an auxiliary and preparatory character. Branches are not Romanian legal persons, and they are not clearly defined in the law.
The most common types of business organization chosen by foreign investors are the following:
- Joint Stock Company (S.A.);
- Limited Liability Company (S.R.L.);
- Branch;
- Representative Office.
Prior to 31 December 1994 various tax incentives were available to companies with foreign participation. For entities established on or after 1 January 1995 the tax incentives have been severely restricted.
CORPORATE RESIDENCE
A company is considered resident if it is a Romanian legal person.
OTHER TAXES
- Value-Added tax
VAT is imposed on goods sold and services rendered in Romania. The normal rate is 18%. Exempt supplies include: bread, heating combustibles, electrical and thermal energy for domestic use, water, sewerage and waste services. Exempt services include: financial, insurance, educational, and printing services. Imports of goods and services are also subject to VAT. Exports of goods and services (used outside the territory of Romania) are zero rated. A reduced VAT rate of 9% is also applicable for certain basic foods and medicines.
- Excise Tax
Excise tax is imposed on the importation and production of some goods. The main categories of excise goods and the tax rates are as follows:
Refined alcohol 50 Beverages with a high alcohol content 100 Cereal distillates (whisky, gin, rum) 150 Wines 20 Wine based drinks (eg champaign) 45-150 Beer 55-70 Coffee 80 Cigarettes 1-12 ECU/1000 Tobacco products (except cigarettes) 115 Perfumes and cosmetics 20 Cassettes and CD players 40 Cars with engines exceeding 1800 cc 50 Motorcycles, scooters and mini-scooters 30 Diesel fuel 6 Gas (oil) 15 Lead-free gas (oil) 13.5 Natural gas 30,400lei/1000mc
- Border Tax
A border tax of 0.5% (0.25% for EU, EFTA, Czech Republic and Slovakia) is applied on the customs value.
- Property Tax
Property tax is levied on natural and legal persons who are owners of property, such as; buildings, constructions used for business, and land that is not subject to agricultural tax.
The tax of 1.5% of the value is levied on buildings on an annual basis. The tax rate is of 1% for the buildings owned by natural persons. There is also a local tax on land.
Owners of vehicles (including boats) are subject to a tax which is determinated based on the engine's capacity.
- Health Tax
Companies that obtain revenues from advertising cigarettes, tobacco and alcoholic beverages are subject to a 10% tax, while retailers of the same products must pay a 1% tax. The tax base is the total revenues from advertising or selling these categories of products.
- Social Security Tax
Employers must pay social security contributions, calculated on the gross salary costs as follows:
- 23% Social security fund
- 2% Medical fund
- 5% Unemployment fund.
For hard working conditions, the social security fund contribution can be increased up to 35%.
- Branch Income
A foreign company having its head office abroad, may set up a branch in Romania. A branch office has similar rights to a Romanian company. A branch may carry out trading activities, but these must be conducted in ROL, for the local market. The effective branch profits tax rate is 44.2%.
- Representative Office
The representative office should be considered as the first step for a foreign company in setting up a presence in Romania. This form of organization should provide the investor with a relatively low set-up cost. However, the company does not have a Romanian legal status and, as such, could not engage in any contractual activity. Also, a representative office is not entitled to reclaim VAT.
Commercial representative offices must be licensed by the Ministry of Trade and Tourism. The cost of an operating license for a representative office is USD 1,200 per annum plus an additional 10% for each additional company it represents. Representative offices of foreign banks are to be licensed by the National Bank of Romania. The representative offices of foreign airlines are subject to Romanian Civil Aviation Department approval and the international civil aviation treaties signed by Romania.
Representative offices must also pay an annual tax of between ROL 100,000 and
ROL 800,000 based on the number of employees.
- Income Determination
According to Corporate Tax Ordinance No 70/1994, taxpayers are divided into two categories:
- large taxpayers;
- small taxpayers.
A small taxpayer is defined as a Romanian legal entity that fulfills the following conditions:
a) a turnover of less than ROL 10 billion (approx USD 3.5 million) for a period of 12 months ended on 30 November of previous year.
b) less than 299 permanent employees at the beginning of the fiscal year; and
c) was a small taxpayer for all fiscal years since its inception.
The legal entities that do not fulfill all of the above conditions are considered large taxpayers. Any small taxpayer may apply to the Ministry of Finance to be considered as a large taxpayer. The approval is irrevocable. There are current proposals in the Parliament to eliminate the distinction between the different categories of taxpayers.
Taxable profit for a small taxpayer is calculated as the difference between income and related expenses, as shown below. Taxable profit for large taxpayers is generally calculated as the difference between the net assets of the entity at the beginning of the fiscal year, adjusted for inflation, and the net assets at the end of the fiscal year, plus nondeductible expenses, less any increase in share capital during the year.
- Inventory Valuation
Most assets and liabilities are valued at acquisition cost or at the technical cost of production. The following methods are acceptable for inventory valuation for tax purposes:
1 Standard cost;
2 Average (weighted) cost;
3 FIFO.
Wholesalers value inventories at the proposed selling price. Conformity between book valuation and tax reporting valuation is required.
- Capital Gains
Capital gains for corporations are taxed as ordinary income.
- Intercompany Dividends
Dividends received from Romanian subsidiaries and other domestic corporations within Romania are not included in the taxable income of the recipient. Withholding tax of 10% does apply.
- Foreign Income
Resident corporations are taxed on all income, including revenue from sources outside the Romanian territory. However, credit is given for tax paid in a foreign state, provided there is a bilateral agreement between Romania the other state.
- Stock Dividends
The payment of stock dividends (bonus shares) is not provided for in current legislation.
- Deductions
Companies may deduct all expenses incurred in connection with revenues, except the following:
1 Profit tax due as well as tax on foreign source revenues.
2 Depreciation charges over the rates set by law.
3 Fines and penalties due to Romanian or foreign authorities.
4 Expenses for entertaining, advertising and representation, above the limit set in the Annual Budget Law (3% according to 1996 Budget Law).
5 Amounts used for the setting up or increase of reserves, except for the statutory reserves.
6 Sponsorship expenses that exceed the limit of 5% of taxable income.
- Depreciation And Amortization
The calculation of depreciation for tax purposes is different for large and small taxpayers. For a small taxpayer, tax depreciation is the same as the accounting depreciation. The list of fixed assets and rules are given in Goverment Decision 226/94. The rates are generally lower than those applicable in the US or UK.
Tax depreciation for large taxpayers is different from the accounting depreciation. Assets are divided into 6 pools based on their useful life, and are depreciated using a reducing balance depreciation method.
The pools and the rates are as follows:
CLASS/POOL USEFUL LIFE YEARLY RATE No of years % 1 1-4 40.0 2 4-8 17.0 3 8-12 10.0 4 12-20 7.0 5 20-30 4.5 6 More than 30 2.0
Fixed assets whose useful life cannot be determined according to the legal provisions should be included in class 4. The opening balance of each pool and any additions in the year are adjusted for inflation.
If the value of disposals of fixed assets in a pool during the year is greater than the year-end balance, the difference is included in revenue, and the year-end balance is reduced to nil. If the balance of any pool at the year-end is less than ROL 200,000, the year-end balance is written off in full.
Intangible fixed assets are generally depreciated over a maximum five-year period using the straight line method of depreciation.
INTEREST EXPENSE
The maximum deductible interest expense for non-financial institutions is equal to total interest income plus 20% of other income of the company for the respective fiscal year. The interest expense which remained nondeductible portion may be carried forward (determined according to the law for small and big tax payers) to next year.
NET OPERATING LOSSES
Taxpayers are allowed to carry forward pre 1995 losses for a period of two years.
Losses incurred in periods commencing after 1 January 1995 may be carried forward for five years by large taxpayers (adjusted for inflation) and 36 months by small taxpayers. Losses incurred on foreign-source income may be deducted only from foreign revenues, on a source-by-source basis.
- Taxes
Taxes on income are not deductible. Taxes for the use of state property lands and taxes on the means of transportation of the company that are included in expenses are deductible in full.
- Reserves
Contributions to the statutory reserve fund of companies and to other special funds, are deductible up to the legally specified limits.
- Group Taxation
There is no concept of group taxation in current Romanian legislation. Each company in a group is taxed separately.
- Tax Incentives
Profit tax holidays are available only for companies with foreign participation that are established prior to 31 December 1994 provided that:
(1) the foreign party's underwritten and paid capital is at least 20% of the company's total nominal capital and
(2) the foreign contribution to capital is no less than USD 10,000. The above conditions are also necessary in order to benefit from customs duty and VAT exemptions (see below).
The profits tax holiday periods are the following:
1 Investments in industry, agriculture, exploration, exploitation of natural resources and in the construction sector: for a period of five years from commencement of productive operations.
2 Investments in the communications and transport sectors: for a period of three years from commencement of the respective operations.
3 Investments in trade, tourism, banking, and insurance services, as well as any other services: for a period of two years from commencement of the respective operations.
If voluntary liquidation of a foreign investment occurs within a time span that is shorter than twice the period for which tax exemptions have been granted, foreign investors must pay those taxes on profits imposed by the law for the whole duration of the investment.
With effect from 1 January 1995 Romanian legal entities established on or after that date are no longer entitled to a corporate tax holiday.
However, small taxpayers are entitled to a 50% reduction of the tax due for the profits reinvested in enterprises set up in Romania that are meant to improve manufacturing technology or expand activity, to obtain additional profits, and to protect the environment.
Foreign investors still benefit from the following incentives when they establish operations in Romania:
1 Imported machinery, equipment, installations, means of transport or other goods necessary for the investment that represent the capital participation of the foreign investor or acquired out of social capital are exempt from customs duties and VAT.
2 Raw materials, supplies and components imported, provided that they are imported for production purposes, are exempt from custom duties and VAT for a period of two years from the date the project is commissioned or from starting of operations.
- Withholding Taxes
There is a withholding tax of 10% on dividends paid by companies.
According to Decree 276 of 1973 (modified in 1977 by Decree 125), nonresident legal and natural persons from countries with which Romania has no Double Tax Treaty are subject to the following withholding taxes:
- 15% on interest on trade credits and commissions on commercial transactions.
- 15% on revenues from technical assistance, expertise, training, and all other services.
- 20% on royalties obtained through the concession of patents, licenses, trademarks, and other intellectual property rights.
Double Tax Treaties
The following Double Tax Treaties are currently in force:
Austria France Netherlands Bangladesh Germany Russia Belgium Hungary Spain Canada Italy Sweden CMEA (Comecon) Jordan Switzerland Cyprus Japan Tunisia Czech Republic Kuwait Turkey China Morocco United Kingdom Denmark Malaysia United States Egypt Niger Zambia Finland Norway
The following are awaiting ratification:
Albania Kuwait South Koreea Algeria Luxembourg Sudan Bulgaria Lebannon Thailand Czech Republic Poland United Arab Emirates Costa Rica Philippine Vietnam Equador Russia Greece Slovak Republic Hungary South Africa
TAX ADMINISTRATION
- Returns
Large tax payers are taxed on a calendar year basis. A large taxpayer is required to file a return with the local tax office by no later than May 15 of the following year.
Small taxpayers must file a monthly return with the local tax office by the 25th of the following month.
- Payment Of Tax
The tax on corporate income must be paid by large taxpayers in advance on a monthly basis, by the 25th of the following month. The payment should represent the amount of 1/12 of the tax on profit of the preceding fiscal year. The proportion of the preceding fiscal year's tax paid is adjusted for inflation for the period from the end of the preceding fiscal year to the month when the tax is paid. The final liability is due with submission of the annual return.
Small taxpayers pay monthly profits tax by the 25th of the following month.
EXAMPLE OF CORPORATION TAX CALCULATION (SMALL TAXPAYER)
Calendar year ended 31 December 1995.
ROL (000's) ROL (000's) Net profit before tax 100,000 Less deductions: Dividends received from Romanian entities 10,000 Deductible contribution to reserve fund 15,000 (25,000) Net profit before tax less deductions 75,000 Add non-deductible expenses: Taxes on income 40,000 Fees and penalties 2,500 Protocol and advertising expenses over 3% limit 1,500 Sponsorship expenses over 5% of taxable income 1,000 Nondeductible interest expenses 2,000 Total non-deductible expenses 47,000 Taxable income before offset of losses brought forward 122,000 Loss brought forward (10,000) Taxable income 112,000 Tax on profit @ 38% 42,560 Cumulated tax on profit paid from the beginning of the year (31,000) Payable tax on profit 11,560
Official Exchange rate at 31 December 1995: USD 1 = ROL 2,578. The market exchange rate at that date was approximately USD 1 = ROL 3,000.
Disclaimer
The above information is a short summary and is not intended to be advice on any particular matter. Price Waterhouse expressly disclaims any liability to any person in respect of anything done in reliance on the contents of this publication.
For additional information on taxation in Romania:
Ron Barden Price Waterhouse Romania Union Center International Strada Ion Campineanu No 11 Sector 2 Bucuresti Romania
or enter a text search 'Price Waterhouse' and 'Business Monitor'.