INDIVIDUAL INCOME TAXATION

    By courtesy of the Ministry of Public Finance

Income taxation of individuals is established by the Law no 571/2003 regarding Fiscal Code, modified and completed by the Emergency Ordinance no 138/2004 and Emergency Ordinance no 24/2005.

Income taxation of individuals is based on taxation of every source of income from each category. Income tax is final and is calculated by applying a tax rate of 16% for most categories of income.

Income tax is levied on the following individuals:

- resident individuals;

- nonresident individuals who perform an independent activity through a permanent stablishment situated in Romania;

- nonresident individuals who perform dependent activities in Romania;

- nonresident individuals who obtain income, other than those from an independent activity through a permanent establishment situated in Romania, from dependent activities in Romania and taxable income obtained in Romania provided for in Title V of Fiscal Code.

Romanian resident individuals with domicile in Romania are liable to taxation on income of every source, in Romania and outside of Romania.

Nonresident individuals who perform dependent activities in Romania are liable to taxation on the net salarial income obtained from these dependent activities.

Nonresident individuals who perform an independent activity through a permanent establishment situated in Romania are liable to taxation on the net income attributable to the permanent establishment.

Individuals who meet the conditions for residence for a period of 3 years consecutively, are liable to taxation on the worldwide income beginning with the fourth year.

Income tax is levied on the following income categories:

- income from independent activities;

- income from salaries;

- income from investments;

- income from renting of the real estate;

- income from pensions;

- income from agricultural activities;

- income from gambling and prizes;

- income from transferring of immovable properties from the personal patrimony;

- income from other sources.

Tax payers who derived income from salaries must pay a final monthly tax which is calculated and withhold by the payers of income in this way:
a) at the place of base employment, applying a tax rate of 16% on the tax base which is calculated as a difference between net income from salaries (gross income diminished with mandatory monthly contributions) and the following:

- personal deduction for the respective month;
- syndical subscription paid in the respective month;
- contributions to facultative schemes of occupational pensions, so that there is no exceed of the equivalent of 200 Euro per year;

b) for the obtained income in the other cases, applying a tax rate of 16% on the tax base which is calculated as a difference between gross income and binding contributions of each places where they are carry out.

The payer of the income has the obligation to determine the aggregate value of annual income tax from salaries, for each taxpayer.

There is considered income from salaries all money income and/or in kind obtained by an individual who carries out and activity based on an individual labor contract or on special statute provided for by the law, irrespectively of the referred period, of the name of income or of the form in which it is granted in, together with indemnities for temporarily work disability.

The amount representing the personal deduction is granted for every month of the taxable period, in maximum value of income achieved only from salaries at the place where is the principal position and it is settled depending on the gross monthly income and the number of the persons supported by the individual taxpayer and it is settled in accordance with the Order of the Minister of Public Finances.

The payers of the salaries and income assimilated to the salaries has the obligation to calculate and withhold the tax due on the income derived in month on the date these income is paid, as well as to transfer it to the State budget until the 25^th of the month following the month in the income is paid for.

Also, the income payers have the obligation to fill in the fiscal records for the entire period of salaries payment, to keep them during the employment and to transmit a copy of them to the fiscal authorities, for each year, till the last day of February, present year, for the ended fiscal year.

The law stipulates some indemnities which, from the taxation point of view, are assimilated to the salaries.

Some of these indemnities are:

- the amount received in the administration council, in the executive committee and in the audit committee;
- the administator`s fees as well as the amount from the net profit due to the administrators of the commercial companies, accordingly the constituent document or established by the shareholders meeting.

In the same category of income from salaries there are included also the advantages received in connection with the dependent activity, which can be as follows:

- the use of any good, including the use of a vehicle of any kind, which is in the business patrimony, in personal purpose, excepting the route between home and work;
- accommodation, food, clothes, housekeepers, as well as some other goods and services, offered free of charge or with prices lower than the market price;
- subscriptions and the costs of telephone conversations, including the phone cards, for personal use;
- travel licenses for public transportation, for personal use.

For the taxpayers which carry on activities in Romania and obtain salary income from abroad there is the obligation to declare and to pay the monthly tax till the 25 ^th of the month following the month in which the income was realized, directly or through a fiscal delegate.The tax computation is mentioned above.

Starting with the 1^st of January 2006, the tax rate of 16% was extended over the income obtained by the individual from investments and from the transfer of immobile possessions from the personal patrimony, also.

Tax-exempt Income

The most important categories of tax-exempt income are:

• Allowance for maternity leave and for child care leave paid from state social security budget;

• Meal tickets;

• Stock options plan advantages, at the moment of employment and of their grant;

• Amounts received for covering transport and accommodation expenses incurred during delegation / secondment;

• Salary income related to the design and creation of software (certain conditions need to be met);

• Sponsorship and donations;

• Inheritance; and

• Income from sale of movable and immovable assets (with the exception of shares described as "capital gains").

Taxation of non-residents

Pursuant to the Fiscal Code, the income earned by non-resident individuals as a result of activities performed in Romania are also subject to taxation in Romania.

The following taxation quotas are applicable, depending on the income categories they relate to:

• 5 % for interest income derived from term deposits, certificates of deposits or other saving instruments at banks and other authorized credit institutions located in Romania;

• 20 % for the incomes resulting from gambling activities; and

• 15 % for any other incomes (i.e., dividends, royalties, commissions, management services and so on).

Should the income beneficiary be resident of a country Romania has concluded a Double Tax Treaty with, the more favorable tax rate shall apply. For the application of the provision of a double tax treaty, the non-resident is required to submit a certificate of fiscal residence to the payer of the income.

• Emergency Ordinance No. 30/2005
  
  Emergency Ordinance No. 30 amends para. (2) and (3) of art. III of the Emergency Ordinance No. 24/2005 for the amendment of Law No. 571/2003 regarding the Romanian Fiscal Code.

According to the herein Emergency Ordinance the following provisions of the Emergency Ordinance No. 24/2005 shall be applicable starting with the 1^st of June 2005, the initial enforcement date being 1^st May 2005:

• incomes from interest from sight/current deposits for which the interest rate is lower or equal to the level of the average interest
  rate on the inter-banking market – BUBID for a month, in force on the first working day of the month for which the calculation is
  made, as well as incomes from deposits to the mutual aid funds, are not considered when determining taxable incomes from
  interests;

• starting with June 1^st 2005, interest incomes are subject to tax by applying a rate of 10% to the total amount of interests. Until the
  date when the article enforces the tax rate is of 1%;

• tax on income from investments that represent gains from transferring bonds is determined by applying a rate of 10% if the titles are alienated within less than 365 days from the day of obtaining them, respectively by applying a 1% rate if these are alienated within more than 365 days from the day of obtaining them;

• a rate of 10% is applied to the gain from foreign currency sellingbuying operations based on a contract and on any other similar on term operations;

• the application of the new provisions regarding the taxation of the incomes from selling real estates from the personal patrimony and their inclusion in the category of taxable incomes;

• for the incomes from term deposit interests, deposit certificates and other bank-related saving instruments and certified credit institutions-related saving instruments and located in Romania, tax on income earned by non-residents in Romania is calculated
  by applying a rate of 10% to gross incomes. Until the enforcement of this article, these incomes will be taxed with a rate of 5%;

• starting with 1^st of June, the interest obtained by the nonresidents entities for the sight/current deposits in banks or other credit institutions from Romania, is tax-exempted if the interest rate is lower or equal to the level of the average interest rate of the inter-banking market – BUBID for a month, in force on the first working day of the month for which the calculation is made.

    NEW

Beginning with 1^st of January 2007 a New Fiscal Code will enter into force (for detailed information see Law 343/2006):

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:

1. 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;

2. 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:

1. Chapter III is transposing the provisions of the EU Directive 48/2003 regarding the taxation of savings income in the form of interest payments, in order to harmonize the internal legislation with this directive. The provisions of this chapter will apply after Romania’s accession into EU.

2. Chapter IV includes the provisions of EU Directive 2003/49 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States. The provisions of this chapter will apply after the closing of transition period, after January 1, 2011.

3. Chapter V includes the provisions of EU Directive 77/799 regarding the mutual assistance between the competent authorities of Member States in the field of direct taxation and premiums taxation.  

• Order No. 1393 of the Minister of Public Finance/2006 - Tax on Income

Order No. 1393 approves the Procedure regarding the establishment of tax on income for natural persons and the model and content of forms:·

• "Decision regarding the ex officio taxation", code 14.13.02.13/o, for the ex officio establishment of the tax on the income realized starting with the date of 1^st January 2005;

• "Decision regarding the ex officio taxation", code 14.13.02.13/s, for the ex officio establishment of the tax on the income realized until the date of 31^st December 2004.

The tax on the annual taxable net income shall be established by the competent fiscal body, on the each source and income category, in the situation when the taxpayer does not submit the income statement at the term provided by law. The ex officio establishment of the fiscal duties can not be done before the completion of a term of 15 days from the taxpayer notification regarding the legal term of submitting the fiscal declaration being overdue.

On the basis of the findings made, the fiscal body estimates according to the law the annual taxable net income or the annual earnings, by case.

In case no information is available to the fiscal body regarding the establishment of the tax on income, the respective taxpayer shall be immediately subject to the fiscal inspection.

The result of the findings made with the purpose of estimating the taxable base will be registered into a report regarding the estimation of the taxable base.

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