Global Tax Services Tax Consultants
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Income tax Taxation of foreign individuals in Romania Please find below some of the most important income types that could be subject to Romanian income tax in case of a foreign individual deriving Romanian source income. Provisions in a Double Tax Treaty concluded by Romania with another country may be applicable, (only based on a tax resident certificate available on a yearly basis for the individual) and would override provisions in the Romanian domestic legislation. We would also highlight from the beginning that Romania has a Tax Code starting with January 2004. One of the changes in the code provides that, depending of circumstances, expatriates could be liable to pay Romanian income tax on their world - wide income (starting 2007). Income derived by foreign individuals qualified for Romanian residence would be liable for Romanian taxation on a world wide basis (no categories of foreign income are excepted anymore). Previously, independent activity income, rental income, agricultural income were excepted from world-wide taxation. However, from Romanian perspective, taking into consideration that: the impact of taxation on a world-wide basis could be envisaged as low (however depending of the former tax residence conditions of the expatriate). Please see also |Tax_Code| page. Shareholders Individual shareholders in Romanian companies would be subject to a 10% withholding tax on dividends (the rate could be decreased if provisions in a DTT would be applicable, and would provide for a lower rate). In case of transactions with shares, the tax treatment that would apply would depend on the type of company, and the way the transaction is carried out. The applicable tax should be 1% or 10% on the capital gain. The capital gain following the sale of shares would be taxable with:
In case of shares acquired starting June 2005, the capital gain following sale of shares would be subject to a tax of:
Capital gains from sale of shares would have different due dates (annual versus monthly) depending of the type of transaction. Capital gains from transfer of shares (other then participation in open investment funds) irrespective of the 365 days rule, would be subject to regularisation at the end of the year. Net capital gain following the sale of shares, would be determined at the end of the fiscal year for all transactions carried out by the taxpayer during that year. The gain would be determined as a positive balance between gains and losses. Losses would be regularised only between transactions during the year. At the end of the year no losses could be carried over for the next year. Special return forms should be filed in case of net gain/loss generated by transactions with shares. In case of share option schemes, different tax rates may apply for different portions, at different moments, for the possible benefits received, depending of the structure of the transaction. Self – employed Self – employed foreign individuals deriving income from Romanian sources should be taxable in Romania. However, a first condition for carrying out a self – employed activity in Romania, is to register with Romanian tax authorities. During the registration process, among other steps that should be performed, is recognition of the Romanian competent bodies. Usually, the recognition of the right to carry out a self-employed activity is granted by a "license" (such as for lawyers, auditors, etc). The taxable income for a Self – employed, is determined by deducting from the income derived, the deductible expenses incurred for deriving the income. The taxable income would be subject to a flat tax of 16% (starting January 1st, 2005). Employees From a practical perspective, expatriates carrying out activities in Romania could be:
The income tax due following employment (irrespective if on Romanian payroll or assigned to work in Romania) should be paid on a monthly basis. Tax registration & filing procedures are different for "Romanian payroll" and for "assignment". From immigration perspective, a residency permit or a residency permit and a work permit, would be necessary depending of the circumstances (homecountry of the expatriate, type of employment/assignment contract, etc.). The tax treatment of the amounts derived by an individual would depend of gross/net basis of the amounts received and/or the tax equalization schemes in place. However, in case of assignments in Romania, appart of the income tax implications for the individual, care should be given to the tax implications from Permanent Establishment (PE) perspective. Moreover, the impact should be also evaluated from the perspective of existence (if case) of another contract for provision of services (such as management agreement) between a non-resident entity and the Romanian entity where the individual is assigned. Consequently, from both form over substance and as well substance over form perspectives, related tax implications should be carefully evaluated before implementation of any such schemes. Because of the complex tax implications for such services contracts we strongly recommend you to discuss/consult with us:
prior to enforcement of such contracts. Such a discussion would:
From individual taxation and related social costs perspective, being assigned to work in Romania is more tax efficient. As a result being assigned to work in Romania should conduct to significant less social charges then being on the payroll of the Romanian company. Total social costs (employer + employee) may exceed 50% if the expatriate would be on the payroll of the Romanian company (however taxable base for computation of social insurance contribution is limited). Romanian income tax that would be due, is determined based on the same flat tax rate of 16% (starting January 1st, 2005). Another issue that should be taken into consideration in determining the possible Romanian income tax liabilities, are the benefits in kind (BIK) received by the employee. Payment of Romanian income tax would ultimately depend of application of provisions in a Double Tax Treaty concluded by Romania with the country where the individual is fiscal resident. You can check our |Tax Treaties| link to see if the tax resident certificate that may be available for you, would provide you access to application of provisions in a DTT concluded by Romania. ATTN: For enforcing provisions in a DTT availability of a tax resident certificate on a yearly basis is a must. Otherwise, Romanian domestic legislation would apply. Depending of circumstances, applying provisions in a DTT could conduct to tax exemptions. A particular situation for deriving income in Romania is incorporation of a |Microenterprise|. Rental income Rental income for individuals would be subject to a 16% flat tax (after a 25% tax deduction would be applied). Capital gains The capital gain following the sale of shares would be taxable with:
In case of shares acquired starting June 2005, the capital gain following sale of shares would be subject to a tax of:
Capital gains from sale of shares would have different due dates (annual versus monthly) depending of the type of transaction. Capital gains from transfer of shares (other then participation in open investment funds) irrespective of the 365 days rule, would be subject to regularisation at the end of the year. Net capital gain following the sale of shares, would be determined at the end of the fiscal year for all transactions carried out by the taxpayer during that year. The gain would be determined as a positive balance between gains and losses. Losses would be regularised only between transactions during the year. At the end of the year no losses could be carried over for the next year. Special return forms should be filed in case of net gain/loss generated by transactions with shares. Starting June 2005 the taxable interest income would be subject to a 10% tax (until end of 2005), instead of previously 1%. The tax would apply for:
from that date on. For fiscal purposes, due date would be assimilated with set up date in case of deposits set up, savings instruments acquired, civil contracts concluded, before June 2005, having a due date after June 2005. Starting January 1st 2006, interest would be subject to a 16% tax. For qualifying as non-taxable “current account interest”, the rate should not exceed the average banking interest for one month. Gains from transfer of immovable property would be subject to a 10% tax (for transactions between June 2005 and 31st December 2005). Starting 2006, transfer of immovable property would be subject to a 16% tax. Among the exceptions from taxation allowed by the law, we would mention gains derived from transfer of properties that were held for more then 3 years, in kind contribution to the share capital, property received as donation or inherited. Gains derived following hard currency buy-sell contracts (or similar) would be subject to a 10% tax. Gambling income Gambling income would be subject to taxation on a net taxable basis (a deduction is allowed). The applicable income tax rate is:
The non-taxable gambling income amounts to 6,000,000 ROL (approx. 200 USD) person/day. Starting 2006, dividends, interest income, gain from transfer of shares, gains derived following hard currency buy-sell contracts (or similar) would be subject to a 16% tax.
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