Romanian Tax Code (Fiscal Code)

Starting 2004 Romania has again a Tax Code after more then 60 years.

From the beginning we should mention that the code is a step forward for the Romanian tax system.

Until now various tax laws were governing different taxes applicable in Romania.

The tax code picked up the legislation valid for different type of taxes and gathered them in one place. Moreover, provisions, definitions, and procedures valid for more taxes have been discussed in one place instead of repeatedly defined in each of the laws (sometimes differing from one law to another).

Before approval, the code have been drafted with help of foreign tax advisors and have been discussed with big four consulting firms and as well with other tax consultants active on the Romanian market.

The tax code is bringing some changes to the Romanian taxation system.

Please find below some brief comments on some of the tax changes brought by the law:

• New definition regarding association of two or more entities which do not create a legal entity – broader and modern definition;
• Financial leasing:
  • risks and benefits are transferred upon the lessee (user) at the moment when the leasing contract is producing effects (vs the moment when the contract is concluded);
  • no more purchase price condition (previously it was 50% of the market value);
  • the leasing period is including any prolongation of the leasing contract;
• Operational leasing – less ambiguity;
• Dividends definition is not including:
  • Additional distribution of shares which are not modifying the percentage held by each of the shareholders in the company;
  • In cash or in kind payments in exchange for sell-back of shares (except in case of sell-back of shares for all shareholders which is not modifying the percentage owned in the company);
  • Distribution in kind/in cash in connection with liquidations of a legal entity;
  • Distribution in kind/in cash in case of decrease of the share capital initially contributed by the shareholder;
  • Arm’s length price principle apply for all above mentioned transactions; If exceeding – considered as dividends;

• New definitions for affiliated persons (directly or indirectly owning 33%);
• New categories of individuals non-residents in Romania;
• New definition for royalties;

• Selling the goods in the name of the non-resident (except by an independent agent), could conduct to existence of a PE in Romania;
• Possible reqalification of the independent agent status (subject to tests);

• New rules for taxation of interest, royalties, management services, consultancy services, and commissions in case of PE’s;

• Expatriates qualifying for the residency conditions (according to Romanian law) for three consecutive years, would be liable to pay Romanian income tax on their world-wide income starting with the fourth year (starting January 1, 2008); However, they would be liable to pay Romanian income tax on a world-wide basis only for certain categories of income; Nevertheless they would be entitled to Romanian personal deductions.
• Subject to certain qualifying criteria, non-resident individuals (from Romanian tax code perspective) carrying out dependent activities in Romania are liable to pay income tax on the net salary; However, depending of the circumstances, they may escape Romanian taxation. 
• It is not a taxable income:
  • the income from effective application in Romania (by the owner or by its "licensees") of inventions first registered in Romania including production of the good or, as the case may be, from applying the "the process" in the first 5 years from the first application (included in the license validity period);
  • Income obtained by the owner of the license following a cessation;
• Global income tax declarations should not be filed by:
  • Individuals (residents and non-residents) deriving only income subject to final income tax;
  • Foreigners considered non-residents from income tax perspective.

Income derived by non-residents from Romania would be taxable in Romania depending of:

• The categories of taxpayers paying the income (for specific types of income), or
• The type of income (irrespective who the payer is) for other categories of income.

The Romanian profit tax rate is 25% and is applied on the taxable profit.

Night-bars, night-clubs, discos, casinos, and sport betting, would be liable for a minimum profit tax. As a result the profit tax liable should be at least 5% of the income derived by the above mentioned entities.

Profit tax should be paid quarterly. An exception from the rule is for banks, which would have to pay profit tax on a monthly basis.

If subject to profit tax, non-for-profit organizations would be liable to pay the tax on an annual basis.

However, profit tax liabilities would be determined at each due date on a cumulative basis.

The taxable profit in a fiscal year =

income from any sources - expenses incurred for deriving income - non-taxable income + non-deductible expenses.

From deductibility of expenses perspective we would like to mention:

• broader deductibility for advertising expenses;

• transportation and lodging expenses in Romania or abroad are deductible (for both employees and administrators) if the taxpayer is/was in a profitable position in the current and/or previous years; if the company is in a loss position in the current year, and/or preceding years deductibility of transportation and lodging expenses for employees are limited to the trash-holds established for government employees when travelling for business purposes;

• marketing expenses, promotions on existing or new markets, participation in trade fairs and exhibitions, business missions, printing of informative prospects would be deductible for profit tax purposes if the taxpayer is/was in a profitable position in the current and/or previous years or if he is in a legal loss carry forward situation;

• per diem for employees travelling for business purposes in Romania or abroad, is deductible for profit tax purposes:

• up to a limitation equal to 2.5 x the per diem established for Government employees, if the company is in a profitable position in the current and/or previous years;
• limited to the per diem established for Government employees if the company is in a loss position in the current year, and/or previous years;

• perishable goods would be deductible up to the limitations that would established with the supervision of the Romanian Ministry of Finance

• expenses with company cars (gas, repairs, depreciation etc.) used by management and administrators of the company may be deductible only for one car per individual, and only based on substantiation documents.

• management, consultancy, assistance or other rendering of services, would be deductible only based on a contract, and only if the taxpayer would be able to substantiate the necessity of receiving such services for carrying out its business activity.

• Sponsorship and mecenate expenses would not be deductible for profit tax purposes. Such expenses incurred according to provisions in the sponsorship law would reduce the profit tax owed if:

• they would not exceed 3/1000 of the turnover, and
• would not represent more then 20% of the profit tax owed.

• Bad debts provisions would be deductible for profit tax purposes (subject to certain qualifying criteria) up to:

• 20% starting with January 2004
• 25% starting with January 2005
• 30% starting with January 2006
• 100% starting with January 2007 (however, slightly different qualifying criteria would apply starting with 2007)

• Interest expenses are deductible if debt/equity ratio is smaller then 1. (Debts are considered to be loans for more then one year). Starting 2006 interest expenses are deductible if debt/equity ration is smaller then 3.

• for Romanian lei loans – the National Bank of Romania reference interest rate for the last month in the quarter;
• for hard currency loans (during 2004) - a 9% yearly interest rate;
• Amounts exceeding the above two mentioned limitations would never be deductible for profit tax purposes, and consequently would not be carried forward.

• Depreciation for a depreciable fixed asset may be determined as follows:

• Only straight line depreciation in case of buildings;
• Straight line, digressive or accelerated depreciation for technologic equipment, machinery, installations and computers;
• For any other depreciable fixed asset the taxpayer may opt for straight line or digressive depreciation.

• In kind contributions in exchange for "shares" should be treated according to the following rules:

• In kind contributions should not be considered taxable transactions;
• Fiscal value of the in-kind contributions should be the same with the fiscal value of the assets at the contributor;
• Fiscal value of "shares" received should be the same with the fiscal value of the in-kind contributions.

• Foreign legal entities deriving income from immovable properties situated in Romania, or from selling-cessation of shares in Romanian legal entities, would be liable to pay profit tax for the taxable profit corresponding to such income.

• Permanent investor certificate in underdeveloped areas, will continue to grant profit tax exemption for existence of the area;
• Free trade area licensed taxpayers, which have invested more then 1,000,000 USD in processing depreciable assets until July 1^st 2002, would continue to benefit of profit tax exemption until June 30, 2007. However, if shareholders structure changes (more then 25% of the shares during one year), this would terminate the profit tax exemption;
• The rest of licensed taxpayers in free trade area will continue to benefit of a reduced profit tax rate (5%) until end of 2004;
• Any benefit of the above mentioned tax incentives would not permit use of accelerated depreciation and 20% tax deduction;
• Taxpayers directly involved in producing films and registered with the Cinema Register, would continue to benefit until 31^st December 2006 of:
  • Profit tax exemption for the gross profits reinvested in cinema;
  • 20% profit tax reduction, for creating new jobs that would result in increase of the number of employees with minimum 10%;
• until end of 2006 it would not be considered a taxable income the income from application in Romania of inventions first registered in Romania including from production of the good or from applying the "the process" in the first 5 years from the first application (included in the license validity period);
• "Direct investments with significant economic impact" completed until end 2006 would benefit of an additional 20% tax deduction and accelerated depreciation (except buildings);
• Other exemptions that were previously granted, are available only for certain companies that were qualified according to certain qualifying criteria at the moment of investment on a case by case basis;

The dividend tax rate is 10% for the gross dividends paid to a Romanian legal entity.