Please find below some of the changes of the provisions in the Tax Code that are valid starting June 2005. Our comments would refer to changes of the profit tax (including PE issues), income tax, and withholding tax provisions.

For changes regarding "Romanian microenterprise" please see |Microenterprise|

For other changes regarding income tax please see also |Income Tax|

General

• Amounts paid by an entity for goods or services in favour of a shareholder or associate should be treated as dividends.

• The percentage determining the affiliation of a person/entity decreased from 33% to 25%.

• New clarifications regarding arm’s lengths price of transactions between affiliated parties.

• The new definition of the "fiscal value" has different meanings depending of the economic category of the subjects.

• Tax authorities may not take into consideration a transaction with a taxpayer declared “inactive”, by an Order of the president of the National Tax Administration Agency.  

Profit tax

• New, more clear references in the Romanian Tax Code, regarding use of arm’s length principles by Romanian tax authorities in case of transactions between related parties for determining their profits.

• Among expenses “incurred for deriving taxable income” (deductible for profit tax purposes), it would be included “the expenses with the value of commercial payables alienated according to the law”.

• It would be considered an expense incurred for deriving income (deductible from profit tax perspective) losses registered in the following circumstances:

o        Bankruptcy procedure of the debtor was closed based on a decision of the court;

o        Debtor deceased and the liability could not be recovered from heirs;

o        Debtor has been dissolved or liquidated without a successor in case of a LLC with a sole associate;

o        Debtor registers major financial problems that are affecting its whole patrimony.

• The 5% legal reserve fund would be increased or decreased based on the level of the share capital paid, or depending on the patrimony of the company

• The 2% tax deductible limitation for social expenses, would be determined based on the "expenses with salaries of the employees as provided by the Work Code (Law 53/2003)". As a result the base for computation of the social expenses have been increased.

• Provisions for receivables from clients registered before January 2004, would be deductible for profit tax purposes up to 20% in 2004, 25% starting 2005 and 30% starting 2006, if debts would fulfil on a cumulative basis the following conditions:

1. are not guaranteed by another person;
2. are liabilities of an entity which is not a taxpayer’s affiliated person;
3. have been included in the taxable income of the taxpayer;
4. the liability is against an entity for which is has been opened the bankruptcy procedure, based on a decision of the court of law;
5. no other tax deductible provisions have been set up for the same liability.

• No deductibility for interest and HC losses (up to the value of interest income plus 10% of the other income of the taxpayer) would be permitted, if debt/equity ratio would exceed 3.

• However, interest and hard currency losses that would be subject to the debt/equity ratio limitations, would not include those in connection with loans from: Romanian or foreign banks, branches of foreign banks in Romania, credit cooperatives, leasing companies for leasing operations, mortgage companies, as well as from other entities providing loans according to the law.
  Moreover, no arm’s length interest limitation would apply for the interest paid following loans provided by the above mentioned entities.

• For computation of the debt/equity ratio, the debt would include (among other) loans for less then one year, if the initial loans have been prolonged and current reimbursement period cumulated with the previous reimbursement periods are exceeding one year;

• State premiums granted according to Law 541/2002 re collective saving and credit for building homes, would not be considered taxable income.

• Net income for taxi transportation of persons or goods would no longer be determined based on for-fait income.

• Certain categories of income that are subject to withholding tax at source (such as: income from rights upon intellectual property, consignment income, income from agent, commission and trade mandate contracts, etc.) will be subject to a 10% withholding tax at source (instead of previously 10% or 15% depending of the type of income).

• Income derived by administrators as well as other amounts paid to administrators from the net income of the entity (paid according to provisions in the statute of the company or according to a decision of the shareholders meeting), should be regarded as salaries and consequently, subject to salary tax.

• Value of the gifts granted to employees or employee’s children will be increased from 1,200,000 rol to 1,500,000 rol per person.

• The difference between preferential interest for loans or deposits charged following negotiation, and the market interest should not be regarded as BIK for the employee.

• The taxable income derived by an individual following liquidation/dissolution, without liquidation of a legal entity, is considered to be the distribution in kind or in cash exceeding the contribution to the share capital by the individual, and would be subject to a 10% tax.

• Dividend tax rate for individuals is 10% instead of previous 5%. 

• Gains from transfer of immovable property would be subject to a 10% tax (for transactions between June 2005 and 31^st December 2005).

• Non-taxable monthly pension income was increased to 9,000,000 ROL (from 8,000,000 ROL). 

Withholding tax (income derived by non-residents)

·         in case of a rendering of services contract, the amount received by the party that would use “its knowledge” for providing a service for the other party should not be regarded as royalty;

• Income from services rendered in Romania in connection with international transportation, should not be subject to withholding tax in Romania.

·         the 5% withholding tax for certain categories of interest would include interest received for collateral and escrow accounts;

For tax purposes, maturity date due beginning of June 2005 would be “assimilated” with the prior set up of the deposit date.

Current account interest would be considered the interest not exceeding the reference market interest for one month communicated by the corresponding financial markets.  

• for applying provisions in a DTT, non-residents should provide the document proving their tax residence, in the year when the income was obtained or the next year;  

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