Foreign Entities

Foreign entities (legal entities but also any foreign entities, including mutual investment funds in movable assets without legal personality, that are not registered in Romania according to the law) are generally subject to Romanian tax on the income derived from Romania.

The extent to which a foreign entity is subject to Romanian taxation depends on its activities undertaken in, or related to, Romania.

A foreign entity can be subject to taxation by establishing a branch, creating a permanent establishment, representative offi ce or by becoming subject to withholding tax on the Romania sourced income.

Branches have to be registered with the Romanian Tax Authorities.

The registration, filing and payment requirements are similar to those for a Romanian company.

A branch is considered to have the same legal personality as the parent company and, therefore, is not a separate legal entity (no own share capital, separate name, etc.).

The branch's object of activity cannot be more extensive than that of the parent company.

Funds distribution to the head offi ce country are not regarded as dividend distribution, therefore, no withholding tax liability should arise. As with limited liability companies, however, profits are transferred at year-end, after the head office approves the branch's financial statements.


 

A Permanent Establishment is a tax term that means a taxable presence of a non-resident in Romania. While registration of a branch in Romania typically implies a Permanent Establishment, a Permanent Establishment can also be created without an official registration.

-    Thus, a Permanent Establishment is generally defi ned as being the place through which the activity of a non-resident is conducted, fully or partially, directly or through a dependent agent. Once a Permanent Establishment is created, Romania has the right to tax the profi ts of the foreign enterprise derived from the activity performed in that Permanent Establishment.

-    The Romanian legislation explicitly states  conditions which trigger a Permanent Establishment:

a) Fixed base Permanent Establishment – created through a place of business with a certain degree of permanency through which business is conducted in Romania (with some exceptions);
b) Agency Permanent Establishment – created through agents with a dependent status which operate in Romania on behalf of the foreign comapny.

-    The registration, filing and payment requirements are similar to those for a Romanian company.

A Representative Office can only undertake auxiliary or preparatory activities. A Representative Office cannot trade in its own name and cannot engage in any commercial activities.

There is a flat tax of EUR 4,000 per fiscal year on representative offi ces, payable in RON using the exchange rate valid on the payment date.

The tax is payable in two equal instalments, by 20 June and by 20 December.

In situations where a Representative Offi ce is set up or closed down during the year, the tax due for that year is pro-rated for the months the Representative Office is operational in that fiscal year.


 

Non-resident companies (not operating through a Permanent Establishment) are also subject to tax in Romania on income from sources in Romania.  The following types of income are subject to withholding taxes (unless an applicable double tax treaty applies):

- 16% on other revenues derived from Romania, such as:

-    Interest
-    Royalties
-    Revenues from services performed in Romania
-    Dividends
-    Revenues obtained from management and consultancy services, irrespective of where the services are performed
-    Commissions
-    Revenues derived from liquidation of a Romanian legal entity.

There are certain specific provisions and exceptions to the above rates, as follows:

- As Romania is an EU member state (1 January 2007), the provisions of the Parent Subsidiary Directive apply. Thus, dividends paid by Romanian companies to companies resident in one of the EU and EFTA member states are exempt from WHT if the dividend beneficiary has held a minimum of 10% of the shares of the Romanian company for a continuous period of at least two years by the date of dividends payment.

- From 1 January 2010, dividend and interest income obtained from Romania by EEA registered pension funds is exempt from withholding tax.

- Romania has fully implemented the Interest and Royalties Directivefrom 1 January 2011.  As a result, for interest and royalties paid by a Romanian company to a company resident in another EU or EFTA Member State, an exemption on withholding tax is granted provided that the non-resident company holds at least 25% of the share capital of the Romanian company for a continuous period of at least two years prior to the date of payment of interest / royalties.

- Withholding tax for gambling proceeds obtained by non-residents – 25%.

In order to apply European legislation, non-residents are required to present the certificate of tax residence and a declaration stating compliance with the necessary requirements provided by the European Directives.

Revenue not covered by withholding tax

The following categories of income derived from Romania by non-residents are exempt from withholding tax:

- Bonds issued and / or guaranteed by the Romanian government
- Revenues from international transportation and accessory services
- Prizes paid from public funds
- Income obtained from a partnership constituted in Romania by a non-resident company. Such income is taxed with corporate income tax.

Capital gains obtained by non-residents from the sale of real estate located in Romania or from the sale of shares held in Romanian companies are taxable in Romania at 16%. However, the more favourable provisions of the Double Tax Treaty apply in certain conditions.

The following income is not taxable in Romania:
- income of mutual investment funds without legal personality from the transfer of value titles owned directly or indirectly in a Romanian legal entity;
- income obtained on foreign capital markets from the transfer of value titles issued by Romanian residents.

Mergers, spin-offs, transfers of assets and exchanges of shares between a Romanian company and a company resident in another EU Member State are neutral from a tax perspective, under certain conditions, and generally should not trigger capital gains tax.

Withholding tax rates under the Double Tax Treaties concluded between Romania and the country of residence of the payment beneficiary may be applied. Please find attached appendix 1 including the list of countries with which Romania has Double Tax Treaties. Please find attached appendix 2 including withholding tax rates for companies in some representative Double Tax Treaties.

In order to avoid withholding at source, the recipient should provide the payer with a valid tax residency certificate prior to payment of the income.  The tax residency certificate should stipulate that the foreign beneficiary was tax resident during the year(s) the Romanian income was obtained. The tax residency certificate valid for the year for which the payments are made is also valid during the first 60 days of the following year provided the residency conditions have not changed.

Otherwise, domestic withholding taxes apply and a refund can be requested if the tax residence certificate is made available during the five-years following payment.

Non-resident companies deriving income from real estate property located in Romania or sale of shares held in a Romanian company are obliged to declare and pay the related profit tax. Nonresidents may appoint a tax agent to fulfi l this requirement. However, if the payer of the income is a Romanian company or a permanent establishment, the obligation to pay and declare the profit tax rests with the buyer.

For capital gains tax declaration and payment, the Romanian legislation requires the following tax returns to be submitted:
- quarterly statements, from the twenty-fifth of the month following the quarter in which the non-resident first earned capital gains taxable in Romania; annual profit tax return.

The quarterly statements and annual return have to be submitted during the entire period of time the non-resident is registered with the Romanian tax authorities, even if it no longer carries out transactions generating taxable revenues in Romania.