Romania: Important Update: Changes To The Romanian Fiscal Code

Last Updated: 18 December 2017
Article by Veronica Plop

Ordinance 79/2017 brought important updates to the Romanian Fiscal Code regarding corporate income tax, micro-enterprise income tax, personal income tax, statutory social contributions and value added tax (VAT). The new provisions will be effective from 1 January 2018.

Romania's Ordinance 79/2017 introduced rules against tax evasion practices that will have a direct impact on the operation of the internal market. These changes will impact companies already operating in Romania as well as companies that are planning to do business in the country. Here is a summary of the main changes.

Exceeding borrowing costs

Where the exceeding borrowing costs incurred in a fiscal period exceed the deductible threshold of EUR 200,000, they will be deductible for corporate income tax purposes up to the limit of 10% of the calculation base. The non-deductible exceeding borrowing costs can be carried forward indefinitely. This limitation also applies to any debt-related costs in regard to loans granted by financial institutions.

In case the calculation base is zero or negative, the exceeding borrowing costs will be considered non-deductible for corporate income tax purposes during the current tax period, but can be carried forward indefinitely. As an exception, independent entities can fully deduct the exceeding borrowing costs1.

The new rules will also apply to interest and foreign exchange losses carried forward from the past and accumulated as of 31 December 2017.

The tax regime of transfers of assets, tax and / or economic residence

In case of transfer of assets, transfer of fiscal residency or transfer of economic activity, the taxpayers will be subject to corporate income tax. The taxpayer will determine the difference between the market value of the assets transferred in one period and their fiscal value. If the difference represents a gain, a corporate income tax rate of 16% will be applied to this gain. In case of a loss, it will be carried forward and recovered from future gains resulting from similar operations for the next seven consecutive years.

The general anti-abuse rule

For the purpose of computation of the tax liabilities, the arrangements that are undertaken to obtain a fiscal advantage and not for commercial reasons that reflect the economic reality, will not be taken into consideration.

Rules on controlled foreign companies

Taxpayers that owe corporate income tax and control a foreign company, must include the revenues not distributed of the controlled entity in the corporate income tax taxable base, when these are coming from:

  • interests or any other revenues generated by financial assets;
  • royalties or any other revenues generated by intellectual property rights;
  • financial leasing;
  • insurance, banking or other financial activities;
  • companies that obtained revenues from goods or services bought from associated companies and resold to them without any economical added value or a small economical added value.
  • There can be exemptions to this rule if the controlled foreign entity can prove to be running a significant economic activity sustained by personnel, equipment, assets and spaces or if the entity has its fiscal residence in a member state of the Agreement of the European Economic Area.

Tax on micro-enterprises

The tax on micro-enterprises will be applied to all Romanian legal entities that, as of 31 December of the previous year, cumulatively meet the following conditions:

  • the entity obtained revenues of less than the equivalent in lei of 1,000,000 Euros, calculated at the exchange rate valid at the end of the financial year;
  • the share capital is not held by the state and by the territorial administrative entities;
  • the entity is not in dissolution, followed by liquidation, and is registered with the Trade Register or at the courts of law.

The above criteria is applicable to all taxpayers legal entities, including the ones that are payers of corporate income tax as at 31 December 2017.

Value Added Tax

The tax authorities will have the right to reject the deduction of VAT on transactions if they can prove beyond any doubt that the transactions are fraudulent and the taxable person was or should be aware of this fact.

Taking action

The above-mentioned changes will impact all Romanian taxpayers and foreign persons or institutions falling under the Romanian Tax regime.

Among other actions, it is recommendable for entities to perform an analysis of the entity's total revenues as of 31 December 2017 to determine if they will be required to pay the micro-enterprise tax as of January 1, 2018. In such case, entities must inform the tax authorities of this change by 15 January 2018.

Also, entities must analyse the impact of the new rules on the exceeding borrowing costs for the loans received by the Romanian entity and the related interest, and recurrently monitor the transactions performed, considering the rules against tax evasion practices.

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.

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