Romania: Taxation Of Investment Income – How To Apply Limited Tax Rules To Complex Transactions?

Non-resident investors face many challenges when it comes to assessing the tax impact of their financial transactions and complying with tax rules in Romania.

Attractive returns, a low degree of correlation, and contagion with world markets, as well as the emerging market status, have made the Romanian capital market attractive for foreign investors, in particular since the EU accession in 2007. The Romanian financial market has had the potential to generate robust returns for investors even during the global financial crisis of 2007-2008 and in the years that have followed.

Within this context, we have seen an increased interest from private and institutional foreign investors to trade in Romanian securities and thus having to deal with tax rules in Romania.

The tax legislation in Romania has simple but very general rules that are not tailored to easily accommodate very complex financial investment structures or products that may appear in the real world. At first glance, tax rules in Romania are clear, and as a matter of principle any financial investment income – be it capital gain, dividend, or interest – ends up being subject to a 16% Romanian tax, unless the benefits of a double tax treaty can be claimed.

Briefly, among the challenges that an investor in Romanian securities faces are the qualification of income for tax purposes, investment structures, and compliance requirements.

Qualification of income for tax purposes

Qualification of income for tax purposes may become an issue once the financial investment is not made in a traditional instrument, such as a plain stock or in coupon bonds. For example, qualification and tax treatment of income derived by non-resident investors from derivative instruments is often a delicate matter as the tax law has limited rules addressing taxation of derivatives. Some guidance is included in the secondary legislation (methodological application norms) only for resident individuals. Therefore, one has to use general taxation principles and specific limited guidance when analysing the taxation regime of such complex investment instruments.

Similar tax issues arise as to the qualification of income for structured products. Likewise for repo transactions and zero-coupon bonds, the fiscal law does not offer a clear answer as to whether the resulting income should qualify as interest or capital gain.

In practice, all investor circumstances and the terms of the financial transactions should be evaluated to be able to make a qualification for tax purposes that could be defended before the tax authorities.

Investment structure

The investment structure is critical in analysing the beneficial owner of the structure, being able to apply a double tax treaty to reduce taxation cost in Romania, and effectively dealing with potential double taxation issues. In the financial investment world, investments are often made via brokers or pooled accounts (eg, omnibus accounts), in which case the identity or tax residence of the ultimate beneficial owners often remains undisclosed. In such circumstances, the applicability of a double taxation regime becomes practically difficult and the 16% tax in Romania cannot be overcome.

But the Romanian law provides certain exemptions meant to address the possibility of applying a double tax treaty to pooled or collective investments. In particular, capital gains derived by non-resident transparent collective investment vehicles (open-end collective investment funds), as well as dividend and interest derived by pension funds within the EU, are tax exempt in Romania.

Although limited, these exemptions can be used by investors to structure investments in a more tax efficient way. For example, to get capital gain exemption, a foreign investor could consider the option of investing in a non-resident collective investment fund having exposure to the Romanian capital markets rather than directly investing in Romanian stocks.

Compliance

Compliance is another area of debate when it comes to investments made by non-residents in Romania. Under the current rules, there is a general requirement for non-residents deriving capital gains from Romania to register for tax purposes in Romania via a Romanian resident tax agent. But there are exceptions to this rule.

An example that may seem unusual is when a non-resident investor buys shares in a non-listed Romanian company from a Romanian resident individual. In this case, the buyer must register for tax purposes, declare, and pay any capital gain tax that may be due on the transaction. Without this tax registration, it would be difficult to pay the relevant capital gain tax in Romania, to carry forward fiscal losses (seven years), or to duly claim the tax benefits for capital gains under the double tax treaty.

To conclude, the current Romanian tax rules lack clear regulations on the tax treatment applicable to complex transactions with financial instruments. This often creates uncertainty about the tax treatment applicable to a specific financial instrument, and about compliance obligations.

Non-residents investing on the Romanian financial market should carefully plan the investment strategy from a tax perspective and duly evaluate potential tax costs and tax compliance costs. In this way, they can use the current tax rules to their advantage and maximise after-tax returns.

Quote: "All investor circumstances and the terms of the financial transactions should be evaluated to be able to make a qualification for tax purposes that could be defended before the tax authorities."

This article was originally published in the schoenherr roadmap`14 - if you would like to receive a complimentary copy of this publication, please visit: pr.schoenherr.eu/roadmap.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions