Corporate income tax

The Fiscal Code and the corresponding Methodological Norms of Application do not contain any specific provisions regarding the tax treatment applicable on the difference between the selling price and the production cost. Moreover, the legislation does not condition the deductibility of such expenses to obtaining profit. Considering the general deductibility rule stated in the Fiscal Code (only expenses incurred with the purpose of obtaining taxable revenues are considered tax deductible), as well as the fact that the sale below cost of these goods is related to obtaining a taxable income, these expenses should be tax deductible, even if this transaction generates or not profit.

The provisions of Ordinance No. 99/2000 apply only to sales to consumers (individuals), the provisions stating that the purchase cost shall be deductible only in case of sales performed below cost under discount and clearance sales, are not relevant for this transaction.

As a consequence, the losses resulted from the sale of the goods below the acquisition costs should be deductible for profit tax purposes.

Please assume that the Romanian subsidiary is alternatively (a) solvent or (b) heavily indebted.

From an accounting perspective, the more likely outcome is that the waiving of loans results into an income for the Romanian companies. This income would be included in their taxable base for profit tax purposes. Subsequently, based on the tax position of each company, such income would either be taxed at the local 16% tax rate if the company has a fiscal profit, or decrease the fiscal loss if the company is in a loss position.

Alternatively, but only when dealing with loans granted by their direct shareholders, it is possible that such waive is seen by the Romanian tax authorities as a contribution to the capital of the company rather than a revenue. In this case the Romanian tax authorities could challenge the deductibility of the interest carried forward by the Romanian entities. If this is the case, the deductibility of the interest which was carried forward could be argued by applying the following reasoning: if the loans would have not been waived, the related interest would have been deductible at some point, namely when the companies would have started to generate revenues and thus decreasing the debt to equity ratio below three / having a positive equity. When the wave of the loans was performed as a result of the reorganisation of a group, the interest should be deductible.

On a general note, the deductibility of interest expenses in Romania is conditioned by the following two limitations:
- thin cap rule - when the debt to equity ratio is higher than three or the company's equity is negative. If this is the case, the related interest expenses would be treated as non-deductible and can be carried forward indefinitely until the debt to equity ratio drops below three.
- threshold limit - the deductibility of the interest for loans is capped by a certain ceiling. As of 2009, the ceiling for loans granted in foreign currency was set at 8%. The interest exceeding this ceiling is non-deductible and cannot be carried-forward for the future periods.

From a Romanian legal perspective, it should make no difference if the Romanian company which benefits from the loan waiver is solvent or heavily indebted when the loans are waived.

Under Romanian Company Law, if the net assets of a company are less than half of the share capital, the company should call the Emergency General Shareholders Meeting in order to establish the next steps in this respect. If the company fails to observe this provision of the Company Law, any third party may address to the court for the dissolution of the companies. In order to mitigate this risk, the following steps could be undertaken:
- if by the end of the following financial year the net assets will not increase to half of the share capital, the share capital should be decreased at least to the amount of the losses that were not covered from reserves;
- the share capital could be increased so that it would lead to the increase of the company’s net assets. This is the solution most common in practice.

Under the Romanian legislation, a royalty is defined as a payment of any kind received as a consideration for the use of, or the right to use any scientific work, including software, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. Moreover, the Fiscal Code includes specific clarification in respect of the situations when payments for software are representing royalties. It is stated that the character of the payment received in a transaction involving the transfer of software, depends on the nature of the rights transferred.

In case of acquisition of partial rights in a copyright over a software, the remuneration paid is deemed as a royalty if the receiver obtains the right to use that software in a manner that would, without such license, constitute a breach of copyright (e.g. the transfer of the right for the reproduction and distribution to the public of any software as well as the transfer of the right to modify or publicly display any software). Moreover, the remuneration paid for using, or for the right to use the ideas or principles regarding the software (e.g. logic schemes, algorithms, programming languages) is deemed to be a royalty.

On the other hand, remuneration in cash or in kind, paid for acquisition of software exclusively destined for the operation of the software in question, with no other changes than those determined by its installation, implementation, storage or usage is not deemed as royalty. Remuneration for acquisition in full of copyright over software is not deemed as royalty.

Romanian legislation has specific provisions as regards deductibility of expenses with writtig-off receivables. Thus, such expenses are deductible if one of the following conditions is met:
- 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.

If the client company which benefits from such a debt write off does not find itself in any of the cases above, then the write-off of some amount of the financial lease receivable would result into an expense which would be non-deductible for profit tax purposes at the level of the company granting the write off. The direct consequence of this tax treatment would be that no offset against any revenues (current or future) would be possible.

On a related note, a separate analysis should be performed in respect of any potential bad debt provision set-up by the lending company in respect of the receivable that is planning to partly write off. from Generally such provisions are deductible for fiscal purposes within a certain limit (30% of the related receivables if several conditions are met). Note that a deduction would not be available if the receivable is guaranteed.  If provisions were set up, from an accounting point of view, when the writes-off of the receivables is granted, the grantor would also have to cancel the related provision - the tax impact of this operation would depend on the tax treatment applied at the moment when the provision was set up.