Profit TaxAs of December 2003, Romanian tax system has become much more coherent as result of the Fiscal Code enactment. Published in the Official Gazette No. 927 dated December 23, 2003 (entered into force on January 1, 2004), The Fiscal Code stands for consolidating Romania's most important tax laws including corporate profit tax, individual income tax, withholding tax, VAT, excise duties and local taxes.
The Fiscal Code has been amended by means of Government Emergency Ordinance no. 138/2004, which entered into force on the 1st of January 2005.
The Fiscal Code includes stabilization provisions, so that it can be amended and supplemented only by law, which should be promoted (as a general rule) six months before the date of entering into force. Moreover, in principle, any amendment to the Fiscal Code will enter into force starting the first day of the year subsequent to the one when the law has been adopted.
Taxpayers
Pursuant to the Fiscal Code, the following are considered as taxable subjects:
(i) Romanian legal entities, for the taxable profit obtained from any source, both in Romania and abroad;
(ii) foreign legal entities that carry out activities through permanent establishment in Romania, for the related income;
(iii) foreign legal entities and non-resident individuals that carry out activity in Romania in an association without legal personality, for the portion of the taxable profit of the association attributable to each person;
(iv) foreign legal entities obtaining incomes from/or in connection with immovable property located in Romania or from the sale/assignment of shares of a Romanian legal entity for the taxable profit related to such incomes; and
(v) Romanian legal entities and resident individuals, for the income obtained both in Romania and abroad from associations without legal personality for the taxable profit of the association attributable to the resident individuals.
- Profit Tax Rate which is applicable for taxable profit is 16%;
- profit tax is calculated and register quarterly, cumulated from the beginning of the year;
- the term of payment is inclusively 25th of the first month, following the quarter for which the profit tax is computed;
- the taxable profit is calculated as difference between the income derived from any source and the expenses performed with the object of achieved income, in a fiscal year, from which the untaxable income is subtracted and non-deducible expenses are added;
- for stimulate the technological equipment investment, computers and peripheric (secondary) equipment of those, the tax-payers can deduce the depreciation expenses through accelerated depreciation method - it means recognition up to 50% of the entering value of the technological equipment in the first year of their using;
- annual loss is recovered from taxable profits obtained by the tax payer in the next 5 consecutive years;
- transactions between affiliated parties are analyzed in accordance with the arm's length principle. For establishing the arm's length price of a transaction, tax authorities use the most adequate method recognized in transfer pricing directives issued by OECD. At this moment, there are no legal regulations regarding advance pricing agreements (APA) between tax payers and tax authorities.
Deductible expenses
An expense is tax deductible provided that it is incurred with the purpose of generating taxable revenues including that which is provided by legal enactments in force.
According to the Fiscal Code the following expenses are considered to be incurred for the purpose of obtaining incomes:
expenses for acquiring packages for the lifetime of goods, established by the taxpayer;
expenses effected, according to law, for labor protection and expenses effected for the prevention of labor accidents and professional illness;
contributions for insurance against labor accidents and professional illness, as well as professional risk insurance premiums;
advertising and publicity expenses effected in order to promote the firm, products or services, based on a written contract, as well as costs associated with the production of materials necessary for dissemination of publicity messages;
transport and accommodation expenses within the country and abroad performed by employees and directors, provided that the company records profit either in the current and/or the previous years;
subscription fees, dues and mandatory contributions, as regulated by legal enactments in force, as well as contributions to the fund for negotiating the collective labor agreement;
professional training expenses;
expenses for marketing, market research, promotion on existing or new markets, participation in fairs and exhibitions, business missions, publication of own informative materials;
research expenses as well as development expenses which are not considered intangible assets;
expenses for the improvement of management, IT systems, implementation, maintenance and improvement of quality management systems, obtaining certifications of conformity with quality standards;expenses for the protection of the environment and the conservation of resources;
losses incurred in result of writing-off non-cashed receivables, in the following cases:
a. the bankruptcy procedure of the debtors has been closed based on a court decision;
b. the debtor has deceased and the receivable can not be cashed from the successors;
c. the debtor is dissolved in case of the limited liability company with a sole shareholder or is liquidated without successor; and
d. the debtor encounters major financial difficulties which affect its entire patrimony.Limited deductibility expenses
The following expenses have limited deductibility:
protocol expenses within the limit of 2% of the difference between total taxable incomes and total expenses related to taxable incomes, other than protocol expenses and profit tax expense;
reimbursement of travel allowances of employees for travel in Romania and abroad, within the limit of 2.5 times the legal level established for public institutions, provided that the taxpayer obtains profit in the current and/or previous years; if this condition is not met, then such expenses are deductible up to the level established for public institutions;
social expenses, within the limit of up to 2% of the salary fund realized.
perishables, within the limits established by specialized bodies of the central administration, together with specialized institutions, with the endorsement of the Ministry of Public Finance;
expenses for meal tickets granted by employers;
expenses for fees and dues to non-government organizations or professional associations, within the annual limit of the ROL equivalent of 2,000 Euro;
expenses for provisions and reserves, within certain limits;
expenses for interest and differences in the exchange rate, within certain limits;
depreciation, within certain limits;
expenses effected on behalf of an employee for optional occupational pension schemes, within the limit of the equivalent in ROL of EURO 200 within a fiscal year for each participant;
expenses for private health insurance premiums, within the limit of the equivalent in ROL of EURO 200 within a fiscal year for each participant;
expenses for the operation, maintenance and repair of job dwellings located in the locality wherein the company's registered office or the secondary offices are established, deductible within the limit corresponding to the constructed areas as provided in the law on dwellings, which is increased (from a fiscal perspective) by 10%. The non-deductible difference must be recovered from beneficiaries, respectively lessees/users;
expenses of operation, maintenance and repairs related to an establishment within a dwelling owned by a natural person, used for personal purposes, deductible within the limit corresponding to the areas made available to the company on the basis of contracts concluded for this purpose; and
expenses of operation, maintenance and repairs related to cars used by employees with management or administrative positions of the legal person, deductible within the limit of a single car for each physical person with such position. In order to be deductible for tax purposes, such expenses must be justified with legal documents.
Fiscal depreciation
The expenses related to the acquisition, production, construction, assembly, installation or improvement of depreciable fixed assets are recovered from a fiscal standpoint by deducting depreciation expenses.
The depreciation regime for a depreciable fixed asset is to be determined in accordance with the following rules:
in case of constructions, the straight-line method of depreciation is to be applied;
in case of technological equipment, respectively machines, tools and installations, as well as for computers and equipment peripheral to computers, the taxpayer may choose the straight-line method, the declining balance method or the accelerated depreciation method; and
in case of any other depreciable fixed asset, the taxpayer may elect to use the straight-line method of depreciation or the declining balance method of depreciation.
Facilities granted to investors:
- for direct investment with a significant role in economy realized until December 31, 2006, tax payers may deduct an additional rate of 20% from their value.
- for investment realized in industrial parks until December 31, 2006, is granted an additional deduction from taxable profit, to a rate of 20% from the value of investments mentioned in the law.
Any tax incentive which constitutes a state aid is regulated by the Law regarding state aid.
The tax on the income obtained by nonresident and
the tax on representatives of foreign companies
Are regulated by the provisions of the TITLE V of the Fiscal Code (Law No. 571/2003), with the subsequent amendments and adjunctions
The rise of tax rate from 5% to 10% for the interest income on bank deposits, certificates of bank deposit and other saving instruments at banks or at another authorised institutions of credit situated in Romania.
NEW
Beginning with 1st of January 2007 a New Fiscal Code will enter into force (for detailed information see Law 343/2006):
From the point of view of the direct taxation, the new draft law concerning the modification of the Tax Code that has been approved by the Government mentions the followings:
The draft law regarding the modification of the Tax Code provides legal measures to reach the 16% flat tax rate objective in the Governance Program, to extend the taxation base, to implement the EU Directives in the field, and to improve and simplify the legislation in the field.
Thus, the main legal changes by types of direct taxes are the followings:
for profit tax:
- To extend the taxation base through the following measures:
reduce the deductible reserves categories from the taxable profit for the commercial banking institutions or other authorized credit institutions, mortgages companies and insurance companies by eliminating those specific against the other categories of taxpayers;
eliminate some of the tax facilities provided by special laws considered not compliant with EU principles like the facilities for the agriculture cooperation and tourist boarding houses.
- eliminate the administrative barriers when establishing the deductibility of expenses for cases like accommodation, transportation, per diem that will be linked to profitability and bidding in case of fixed assets selling;
- to insure quality and security standards for the airline companies, the provisions made by these companies in Romania will be deducted to cover the maintenance and repair expenses for the aircrafts and their components abroged by the Romanian Civil Airline Authority;
- undertake the provisions related to the common tax regime for the mother companies and their subsidiaries in the different states of EU for the dividend distribution in compliance with the Directive no 90/435/EEC and to the regime of mergers, dividing, partial dividing, assets transfer and shares exchange between the companies in different member states, in compliance with the Directive no 90/434/EEC.
for income tax
The current legal provisions will be completed with the purpose of more efficient administration and to clear the way the taxation is done by categories of income:
- provide the competence to establish the centralization of the activities where the net income is determined by income norms at the territorial general directorates of public finance;
- eliminate the tax exemption of the income made of salaries in IT sector, starting January 1, 2007 measure expressly requested by the Competition Council;
- retain tax during the year for revenue from securities transactions and from currency selling-buying in due time based on contract and regularize with the 16% tax based on the annual net gain;
- extend the taxation base by including the income from agriculture activities and from income obtained from selling the agriculture products from the private ownership lands or from lands leased for collection by specialized units, industrial processing units or by other units;
- provide the possibility to deduct taxable income of salaries obtained at the basic position of the spending related to the collective saving system for locative field within maximum 300 RON per year /per individual.
Regarding the tax on micro enterprises please consult Law 343/2006.
For the tax on
income obtained by non residents in Romania and the tax paid by the foreign companies
subsidiaries established in Romania:
- there has been
introduced in the category of taxable revenue the income obtained from
liquidation/dissolution without liquidation of a Romanian legal person, that is done by
withhold 16%
- unify the 16%
flat rate for all categories of taxable income obtained in Romania by non
residents (art. 116 paragraph (2)).
Concerning this provision there are two exceptions:
the 10% tax rate for the transition period in order to harmonize with the EU Directive 2003/49 regarding the common system of taxation for interest and gains made between associated enterprises from different member states;
interest for the deposits, current accounts, certificates of deposits and saving instruments done/obtained before January 1, 2007 will be taxed with the rate established by the tax legislation effective when they were established.
- the adding
brought to art. 118 paragraph (2) establishes a period to regularize the tax debt owed by
a non resident when he/she did not presented the certificate of tax residence;
- there have been
introduced new three chapters: