Romanian entities

The following entities are liable for corporate income tax:

-  Companies resident in Romania.
-  Foreign companies doing business in Romania through permanent establishments.
-  Foreign companies which derive revenues from or in connection with real estate transactions or from share transactions in Romanian companies.
-  Foreign companies and individuals doing business in Romania through partnerships
without legal capacity.
-  Resident individuals who form partnerships without legal capacity with Romanian
companies, for revenues derived in or outside Romania.
-  Legal persons set up in accordance with European legislation with the registered office in Romania.

A company is considered resident if its head office is registered in Romania or has its effective place of management in Romania.

The standard corporate income tax rate is 16%.

The profit tax liability due for nightclubs and gambling operations is the lower of 5% of the revenues obtained and 16% of the taxable profit corresponding to such activities.

The previously applicable minimum tax for companies was eliminated as of 1 October 2010. As a result, for taxpayers subject to the minimum tax for the first part of 2010, the year 2010 was split into two different fiscal periods: 1 January – 30 September and 1 October – 31 December.

The tax forms for the two periods are to be submitted as follows:

- For 1 January – 30 September 2010, the submission and payment of the profit tax (minimum tax) is to be made until 25 February 2011;

- For 1 October – 31 December 2010, the form has to be submitted and the profit tax paid by:

- 25 February 2011, for taxpayers which finalise their financial statements for the period 1 October – 31 December 2010 before this date, in which case for Q4, no profit tax is declared (using Form 100);

- 25 April 2011, for taxpayers who finalise their financial statements before this date. In this case, taxpayers will declare the profit tax for Q4 at the level of the profit tax computed for Q3 2010, by 25 January 2011, using Form 100.

Taxpayers which during 1 January – 30 September 2010 are not subject to the minimum tax only have to file a single tax return regarding their profit tax for the entire 2010 calendar year.



 

Accounting and fiscal period

The fiscal year is considered to be the calendar year or the period during which the entity existed if it was set up or ceased to exist during that calendar year.

The accounting year is also usually the calendar year, but from 2009, certain categories of entities (i.e. Romanian branches of foreign companies, Romanian consolidated subsidiaries and subsidiaries of the subsidiaries of foreign companies, except for credit institutions) are allowed to set an accounting year other than the calendar year, if the financial year of the parent company is different from the calendar year.

Establishing a financial reporting period, different from the calendar year, does not modify the period for which profit tax is calculated as defined by the Fiscal Code – namely the calendar year.
 
Tax base
 
The taxable profit of a company is calculated as the difference between the revenues derived from any source and the expenses incurred in obtaining taxable revenues throughout the tax year, adjusted for fiscal purposes by deducting non-taxable revenues and adding non-deductible expenses. Other elements similar to revenues and expenses are also to be taken into account when calculating the taxable profit.
 
Non-taxable revenues
 
The most relevant non-taxable revenues stipulated by the Romanian Fiscal Code are:
 
- Revenues from dividends received by a Romanian company from another Romanian company;
 
- Revenues from dividends received by a Romanian company from a subsidiary situated in an EU member state, subject to certain conditions, i.e. the Romanian company is a profit taxpayer and has held at least 10% of the subsidiary’s shares for a continuous period of at least two years by the date the dividends are paid;
 
- Unrealised favourable differences in the value of participation titles and long term bonds (e.g. effected according to accounting rules, or in case of titles following the capitalisation of reserves, benefits or shares premiums);
 
- Revenues from reversal or cancellation of provisions / expenses that were previously non-deductible, recovery of expenses that were previously non-deductible and revenues from reversal or cancellation of interest and late-payment penalties that were previously non-deductible;
 
- Non-taxable income expressly provided for under agreements and memoranda.
 
Deductibility of expenses
 
From the deductibility standpoint, expenses fall into three categories: deductible expenses, limited deductibility expenses and non-deductible expenses.
 
Deductible expenses
 
As a general rule, expenses are deductible only if incurred for the purpose of generating
taxable income.
 
Some of the expenses specifically mentioned by the Fiscal Code are:
 
- Expenses incurred for marketing, market research, promotion on existing or new markets, participation in fairs and exhibitions, in business missions and publishing of own brochures;
 
- Advertising expenses incurred in promoting the company, products or services, based on written contracts, as well as costs associated with the production of the materials necessary for broadcasting advertisements, including goods granted as samples, for product testing at selling units, as well as other goods and services received in order to stimulate sales;
 
- Research and development expenses that do not meet the requirements to be recognised as intangible assets for accounting purposes;
 
- Expenses incurred for environmental protection and resource conservation;
 
- Expenses incurred for improvement of management, IT, the introduction, maintenance and development of quality management systems, and obtaining quality compliance confirmation;
 
- Bad debts expenses are fully deductible in any of the following cases: the bankruptcy procedure of the debtor was closed based on a court decision; the debtor is deceased and the receivable cannot be recovered from the heirs; the debtor is dissolved or liquidated; the debtor has major financial difficulties affecting its entire patrimony;
 
- Travel and accommodation expenses related to business trips in Romania or abroad by employees and directors, and also individuals treated as holding these positions (directors based on mandate and secondees whose costs are covered by the Romanian company); this also includes personnel’s transport to and from the workplace;
 
- Expenses incurred from professional training and development of employees;
 
- Expenses incurred in relation to work safety, prevention of work accidents and occupational diseases, the related insurance contributions and professional risk insurance premiums;
 
- Expenses incurred from acquisition of packaging during their useful life;
 
- Fines, interest, penalties and other increased payments due under commercial contracts.
 
Limited deductibility expenses
 
The deductibility of certain expenses is limited as follows:
 
- Interest and foreign exchange losses under thin capitalisation rules (see details below);
 
- Depreciation of assets under fiscal depreciation rules (see details below);
 
- Perishable goods capped as set by the relevant central administration bodies;
 
- Protocol expenses are deductible up to the limit of 2% of the difference between total taxable revenue and total expenses related to taxable revenue, except for protocol and profit tax expenses;
 
- Daily allowances for expenses from domestic and foreign travel by employees are deductible up to the level of 2.5 times the ceiling set for public institutions;
 
- Social expenses are deductible up to 2% of salary expenses. Among others they can include maternity allowances, expenses for nursery tickets, funeral benefits and allowances for serious or incurable diseases and prostheses, as well as expenses for the proper operation of certain activities or units under taxpayers’ administration (i.e. kindergartens, nurseries, health services supplied for occupational diseases and work
accidents prior to admission to health establishments, canteens, sports clubs, clubs, etc); expenses incurred for benefits granted under a collective labour agreement are also deductible within this limit;
 
- Health insurance premiums are deductible for employers up to the limit of EUR 250 per year, per person; private pension insurance premiums are deductible up to the limit of EUR 400 per year, per person;
 
- Taxes and contributions paid to non-government organisations and professional associations
related to the taxpayer’s activity are deductible up to the limit of EUR 4,000 per year;
 
- Expenses from operation, maintenance and repair of vehicles used by individuals in company leadership and management positions for business purposes are deductible within the limits, but only for one vehicle per person.
 
Non-deductible expenses
 
Expenses which are specifically non-deductible include, among others, the following:
 
- Domestic profit tax and profit tax paid in foreign countries;
 
- Expenses related to non-taxable revenues; Note that revenues from dividends have no corresponding expenses;
- Expenses related to withholding tax supported by Romanian taxpayers on behalf of nonresidents;
 
- Interest, fines and penalties due to Romanian or foreign authorities;
 
- Expenses incurred from management, consultancy, assistance or other supply of services if no contracts or any other lawful agreements are entered into and the beneficiary cannot justify the supply of such services for the activities performed and their necessity;
 
- Sponsorship and patronage expenses and expenses for private scholarships. Taxpayers are, however, granted a fiscal credit up to whichever is the lower of 0.3% of turnover and 20% of the profit tax due;
 
- Other salary and / or similar expenses (if not taxed at the level of the individual), except for those specifically exempted from individual income taxation;
 
Expenses incurred from insurance premiums unrelated to company assets or business, save for those regarding goods which are bank collateral on loans used to conduct the activity for which the taxpayer is authorised or those used under rental or leasing contracts;
 
- Bad debts expenses in excess of the deductible provision (see below);
 
- Expenses recorded without “justifying” documents;
 
- Expenses in favour of shareholders, other than those related to goods or services provided by the shareholders at market value;
 
- Expenses incurred from fixed assets impairments as well as losses in value defined as provisory
adjustments by the accounting regulations transposing European Accounting Directives;
 
- Fuel expenses for company vehicles weighing under 3,500 kg and with fewer than nine passenger seats (including the driver’s seat) and used exclusively for passenger transport until 31 December 2011. Exceptions to this rule are vehicles used in the following activities:
 
- Intervention, repair, safety and security, courier services, transporting staff to and from work places, TV vans, cars used by sales agents and recruitment agents;
- Paid transportation services and taxi activities;
- Rental;
- Driving schools.

In general, provisions and reserves are non-deductible for profit tax purposes, however, there are certain provisions and reserves which can be considered deductible, including:
 
- Setting up or increasing the legal reserve fund to a limit of 5% of the yearly accounting profit before tax (with adjustments) until it reaches 20% of the share capital;
 
- Provisions for doubtful debts recorded after 1 January 2006 are deductible up to the limit of 30%, if the related receivables meet the following conditions simultaneously:
-          Booked after 1 January 2004
-          Not collected for a period exceeding 270 days from the due date
-          Not guaranteed by another person
-          Due by a person not affiliated with the taxpayer
-          Included in the taxable income of the taxpayer
 
- Bad debt provisions are fully tax deductible if all the following conditions are met:
-          Receivables are booked after 1 January 2007
-          The debtor is a company declared bankrupt by a court ruling
-          Receivables are not guaranteed by another person
-          The debtor is not a related party
-          Receivables were included in the taxable income of the taxpayer
 
- Specific provisions established by credit institutions, non-banking financial institutions and other similar entities;
 
- Technical reserves set up by insurance and reinsurance companies, in accordance with their regulatory legal framework except for the equalisation reserve;
 
- Risk provisions for transactions carried out on financial markets, in accordance with the rules issued by the National Commission of Movable Assets;
 
- Reserves from revaluation of fixed assets and land, made after 1 January 2004, which are deductible through depreciation or through expenses triggered by assets sold or written off, are taxable at the same time and for the same amount as the tax depreciation deduction, i.e. when the assets are sold or written off.
 
The reduction or cancellation of any provision or reserve deducted from the taxable profit, due to changing the destination of the provision or reserve, distribution towards shareholders in any form, liquidation, spin off, merger or any other reason, is included in the taxable revenues and taxed accordingly. The  reconstruction of the legal reserve is also non-deductible.

The Fiscal Code makes an explicit distinction between accounting and fiscal depreciation. For fi xed assets, fi scal depreciation is to be calculated based on the rules set out by the Fiscal Code and deducibility no longer depends on the level of depreciation recorded in the accounts.

-    Expenses of all intangible assets recognised for accounting purposes, with the exception of start-up costs and goodwill, will now be amortisable.

-    The calculation of depreciation of fixed assets for tax purposes is based on the fiscal value, and may need to be adjusted for revaluations according to accounting rules.

-    Fiscal depreciation should be calculated based on the asset's fiscal value and useful life for tax purposes, by applying one of the permitted depreciation methods:
(i) straight-line method,
(ii) accelerated depreciation and
(iii) reducing balance method.

-    Technical equipment, computers and peripherals can be depreciated by using any of the above depreciation methods. For any other fi xed assets (except for buildings for which only the straight line method can be applied), only the straight line or degressive method can be used. From 2009, the accelerated depreciation method may also be applied to equipment used in research and development activities.

-    If the fair value determined upon the revaluation of the fi xed assets drops below the fiscal value (i.e. equal to acquisition cost, production cost, market value of the fi xed assets acquired for free or contributed to the share capital, adjusted with accounting re-evaluations) the non-depreciated fiscal value of fixed assets is computed based on the fiscal value.

-    The same applies for revaluation of land should it result in a decrease in value to below the fiscal value. Thus, the new value recognised for fi scal purposes would be the fiscal value.

The deductibility of interest expenses and net foreign exchange losses related to loans loans is limited as described below.  However, such limitations do not apply to interest and forex related to loans contracted from parties which are credit institutions, non-banking fi nancial institutions or other entities that grant credit according to the law, and also do not apply to the interest related to bonds traded on a regulatory market:

-    “Interst Cap”. The Fiscal Code  limits the deductibility of interest on such loans to a maximum of 6% for loans denominated in foreign currency* and to the National Bank of Romania's reference interest rate for RON loans. Interest expenses recorded over this limit is tax non-deductible and cannot be carried forward in future periods.
* This upper limit for interest rates is to be updated by Government Decisions. The rate stated
above is valid from fiscal year 2010.


-    “Thin capitalisation rule”. The deductibility of interest expenses and net foreign exchange losses related to such loans granted for more than one year is further subject to the debt-to-equity ratio test. Debt included in the calculation of the debt-to-equity ratio is represented by all such (non-financial institution) loans with a maturity period of over one year. The equity includes share capital, share / merger premiums, reserves, retained earnings, current year earnings and other equity elements. Both debt and equity are calculated as the average of values existing at the beginning and at the end of the period for which profi t tax is calculated.

If the debt-to-equity ratio is higher than 3:1 or if the company's equity is negative, expenses incurred from interest charges and net losses from foreign exchange differences on loans with a maturity exceeding one year as debt are fully non-deductible. Expenses considered non-deductible after applying this rule e may be carried forward to subsequent fi scal years, however, and become fully tax deductible in the year the debt-to-equity ratio becomes lower than or equal to 3:1.

-    Transactions between related parties should observe the arm's length principle. If transfer prices are not set at arm's length, the Romanian Tax Authorities have the right to adjust the taxpayer's revenues or expenses, so as to refl ect the market value.

-    Transactions with Romanian affiliated companies as well as transactions with non-resident related parties fall within the scope of the investigations regarding compliance with transfer pricing legislation.

-    Traditional transfer pricing methods (comparable uncontrolled prices, cost plus and resale price methods), as well as any other methods that are in line with the OECD Transfer Pricing Guidelines (i.e. transactional net margin and profi t split methods) may be used for setting transfer prices.

-    Domestic legislation expressly stipulates that when applying transfer pricing rules, the Romanian tax authorities also consider the OECD Transfer Pricing Guidelines.

Transfer pricing documentation

-    Taxpayers engaged in related-party transactions have to prepare and make their transfer pricing documentation fi le available upon the written request of the Romanian Tax Authorities.

-    The content of the transfer pricing documentation fi le was approved by order of the president of the National Agency for Tax Administration. The Order is supplemented by the Transfer Pricing Guidelines issued by the OECD Transfer Pricing Guidelines and the Code of Conduct on transfer pricing documentation for associated enterprises in the European Union (EUTDP).

-    The deadline for presenting the transfer pricing documentation fi le will not exceed three calendar months, with the possibility of a single extension equal to the period initially established.

-    Failure to present the transfer pricing documentation fi le or presenting an incomplete fi le following two consecutive requests may trigger estimation of transfer prices by the tax authorities, based on generally available information, as the arithmetic mean of three transactions considered similar.

-    Transfer pricing audit activity has signifi cantly increased during the past year and requests for presenting the transfer pricing documentation fi le have started to become common practice. We are aware of recent cases where the Romanian tax authorities have adjusted the taxable result of a local taxpayer in accordance with the applicable regulations.

Advance Pricing Agreement

-    Taxpayers engaged in transactions with related parties can request the issuance of an APA from the National Agency for Tax Administration.

-    The term provided by the Fiscal Procedural Code for issuance of an APA is 12 months for unilateral APAs and 18 months for bilateral and multilateral APAs. The APA is issued for a period of up to fi ve years. In exceptional cases, it may be issued for a longer period for long-term agreements.

-    APAs are applicable and binding on the tax authorities as long as there are no material changes in the critical assumptions. In this view, the benefi ciaries are obliged to submit an annual report on the compliance with the terms and conditions of the agreement.

-    If taxpayers do not agree with the content of the APA, they can notify the National Agency for Tax Administration within 15 days. In this case, the agreement does not produce any legal effects.

-    Companies may request an Advance Tax Ruling be issued by the National Agency for Fiscal Administration, subject to a fee of EUR 1,000.
-    The taxpayer may propose the content of the Advance Tax Ruling in the request submitted. If the taxpayer does not agree with the Advance Tax Ruling, it may notify the issuing authority within 15 days; in this case, the tax ruling does not have legal effect.
-    Advance Tax Rulings are applicable and mandatory against tax authorities only if their terms and conditions have been observed by the taxpayers.

-    Partial unilateral relief is provided by way of a credit for income taxes paid abroad which cannot exceed the profi t tax calculated by applying the Romanian profi t rate (i.e. 16%) to the taxable profi ts obtained abroad. The Romanian company should have available documentation attesting to the taxes being paid abroad.

-    Underlying foreign corporate income tax is not creditable against Romanian income tax, except for corporate income tax calculated by foreign permanent establishments or branches.

-    Tax credits may be obtained in Romania for taxes paid to a foreign state only if the Double Tax Treaty concluded between Romania and the foreign state applies, and only if documentation is available proving that the taxes were paid in the foreign state concerned.

-    Companies are allowed to carry forward fi scal losses as declared in the yearly profi t tax returns for a period of seven years based on a FIFO method. The seven-year period only applies starting with 2009’s tax loss (for tax losses from previous years, the carry forward period remains five years).

-    For fiscal losses incurred during 2010, taxpayers subject to the minimum tax for part of the year will have to observe specific rules relating to utilisation of such losses.Any loss incurred by a permanent establishment of a Romanian company located in a non-EU / EFTA member state that  does not have a Double Tax Treaty in place with Romania is only deductible for tax purposes from the revenues derived by that permanent establishment abroad.

-    For foreign legal persons,  carry forward of losses applies only to revenues and expenses attributable to their permanent establishment in Romania, and only for a period of five years.

-    Dividend payments by a Romanian company to another Romanian company are subject to 16% dividend tax.

-    Dividends paid by a Romanian company or a company  that has its headquarters in Romania to a company or a permanent establishment of a company resident in another EEA country  are tax exempt if the non-resident company which  benefits from the dividends:
o    is  set up according to the law;
o    pays profit or a similar tax in their state of residency;
o    holds a minimum of 10% of the shares in the Romanian company for an uninterrupted period of at least  two years before the date of the payment.

-    Distributed dividends are also exempt from taxation if they are invested in the same or in another Romanian company’s share capital, to preserve and increase the number of employees and to develop the company’s registered object of activity.

-    Interest and royalty payments by Romanian companies to other Romanian companies are not subject to withholding tax but are taxable income in the hands of the benefi ciary with ordinary corporate income tax.

-    Starting 1 January 2011, income from interest or royalties derived from Romania by companies or permanent establishments of companies from EEA countries are tax exempt if the  beneficial owner of the interest or royalties payments holds a minimum of 25% of the value/number of shares in the Romanian company, for an uninterrupted period of at least two years before the date of the payment.

There is no tax consolidation or group taxation in Romania. Members of a group must file separate tax returns. Losses incurred by members of a group cannot be offset against profits made by other group members.

Capital gains obtained by Romanian resident companies are included in ordinary profit and taxed at 16%. Capital losses related to sale of shares are, in general, tax deductible.

Mergers, spin-offs, transfers of assets and exchanges of shares between two Romanian companies should not trigger capital gains tax.

In the case of a relocation of the registered office of a European Company (“SE”) and European Cooperative Society (“SCE”) from Romania to another EU Member State, if certain conditions are met there will not be a tax on the difference between the market value of the transferred assets and liabilities and their fiscal value. There will also be no tax on such movements at the shareholder level, and thus in the case of Romanian shareholders a tax basis step-up may be achieved.

If a Romanian company has a permanent establishment in another Member State, and the Romanian company is dissolved as a result of a cross-border reorganisation, the Romanian tax authorities will not have the right to tax the former permanent establishment.

General aspects

Fiscal statements must be submitted quarterly, together with the related amount of tax by the twenty-fifth day of the month following the end of the quarter.

Banks and branches of foreign banks in Romania apply the system of advance quarterly profit tax payments.

From 2012, regular corporate tax payers will also have the obligation to make quarterly advance profit tax payments The payments are calculated as a quarter of the previous year’s profit tax increased by the inflation rate and the payments are due by  the twenty-fifth of the month following the end of the quarter.

The inflation ratio is announced by the tax authorities by 15 April of the year when advance payments are made. For 2011, the inflation ratio to be used is set at 3.2%.

Newly established companies (e.g. without a previous year history) or those which incurred fiscal losses in the previous year make quarterly advance payments at the level of the amount resulted from applying the profit tax rate on the accounting profit of the period for which the anticipated payment is made.

Quarterly tax returns have to be submitted by the twenty-fifth of the month following the end of the quarter.Large and medium size taxpayers have the obligation to submit fiscal forms online, using the www.e-guvernare portal. The electronic signature of the tax returns can only be made using a qualified certificate issued by a legally-accredited certification services provider.

Other categories of taxpayer may use the electronic submitting method as an alternative way of compliance.

Annual profit tax returns have to be filed by 25 April the following year.

Non-profit organisations, taxpayers that obtain income mainly from crop production have to declare and pay annual profit tax by 25 February.

Taxpayers required to withhold tax, with the exception of salary payers, are obliged to submit a statement to the tax authorities regarding the tax withheld for each beneficiary by 30 June of the following year. This declarative obligation refers to tax withheld and paid by Romanian residents for income obtained in Romania by non-residents, as described in the chapter referring to the taxation of non-residents.

Late-payment penalty

As of 1 July 2010, late-payment interest and late-payment penalties will be applied for late payment of  fiscal claims owed to the State Budget. The late-payment interest was innitially reduced (starting with 1 July 2010) from 0.1% to 0.05% for each day of delay, and starting from 1 October 2010 the interest rate is set at 0.04%.