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2 FOREWORD A country's tax regime is always a key factor for any business considering moving into new markets. What is the corporate tax rate? Are there any incentives for overseas businesses? Are there double tax treaties in place? How will foreign source income be taxed? Since 1994, the PKF network of independent member firms, administered by PKF International Limited, has produced the PKF Worldwide Tax Guide (WWTG) to provide international businesses with the answers to these key tax questions. As you will appreciate, the production of the WWTG is a huge team effort and we would like to thank all tax experts within PKF member firms who gave up their time to contribute the vital information on their country's taxes that forms the heart of this publication. The PKF Worldwide Tax Guide 2014 (WWTG) is an annual publication that provides an overview of the taxation and business regulation regimes of the world's most significant trading countries. In compiling this publication, member firms of the PKF network have based their summaries on information current on 1 January 2014, while also noting imminent changes where necessary. On a country-by-country basis, each summary such as this one, addresses the major taxes applicable to business; how taxable income is determined; sundry other related taxation and business issues; and the country's personal tax regime. The final section of each country summary sets out the Double Tax Treaty and Non-Treaty rates of tax withholding relating to the payment of dividends, interest, royalties and other related payments. While the WWTG should not to be regarded as offering a complete explanation of the taxation issues in each country, we hope readers will use the publication as their first point of reference and then use the services of their local PKF member firm to provide specific information and advice. Services provided by member firms include: Assurance & Advisory; Financial Planning / Wealth Management; Corporate Finance; Management Consultancy; IT Consultancy; Insolvency - Corporate and Personal; Taxation; Forensic Accounting; and, Hotel Consultancy. In addition to the printed version of the WWTG, individual country taxation guides such as this are available in PDF format which can be downloaded from the PKF website at PKF Worldwide Tax Guide

3 IMPORTANT DISCLAIMER This publication should not be regarded as offering a complete explanation of the taxation matters that are contained within this publication. This publication has been sold or distributed on the express terms and understanding that the publishers and the authors are not responsible for the results of any actions which are undertaken on the basis of the information which is contained within this publication, nor for any error in, or omission from, this publication. The publishers and the authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication. Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances. PKF International is a network of legally independent member firms administered by PKF International Limited (PKFI). Neither PKFI nor the member firms of the network generally accept any responsibility or liability for the actions or inactions on the part of any individual member firm or firms. PKF INTERNATIONAL LIMITED JUNE 2014 PKF INTERNATIONAL LIMITED All RIGHTS RESERVED USE APPROVED WITH ATTRIBUTION PKF Worldwide Tax Guide

4 STRUCTURE OF COUNTRY DESCRIPTIONS A. TAXES PAYABLE NATIONAL TAXES AND OTHER TAXATIONS COMPANY TAX BRANCH PROFITS TAX BRANCH OF A FOREIGN ENTITY PERMANENT ESTABLISHMENT REPRESENTATIVE OFFICE VALUE ADDED TAX (VAT) FRINGE BENEFITS LOCAL TAXES OTHER TAXES EXCISE DUTY CONSTRUCTION TAX SOCIAL SECURITY CONTRIBUTIONS B. DETERMINATION OF TAXABLE INCOME DEPRECIATION STOCK / INVENTORY CAPITAL GAIN TAX DIVIDENDS INTEREST DEDUCTIONS LOSSES FOREIGN SOURCE INCOME INCENTIVES C. FOREIGN TAX RELIEF D. CORPORATE GROUPS E. RELATED PARTY TRANSACTIONS F. WITHHOLDING TAXES INTEREST AND ROYALTIES DIVIDENDS G. EXCHANGE CONTROLS H. PERSONAL TAXES INDIVIDUAL SOCIAL CONTRIBUTIONS TAX RESIDENCY REPORTING OBLIGATIONS FOR INCOME PAYERS REGULATIONS APPLICABLE TO INCOME OBTAINED FROM FIDUCIARY OPERATIONS EQUAL TAX TREATMENT FOR THE SAME CATEGORIES OF REVENUES I. TREATY AND NON-TREATY WITHHOLDING TAX RATES PKF Worldwide Tax Guide

5 MEMBER FIRM For further advice or information please contact: City Name Contact information Bucharest Florentina Susnea Bucharest Adrian Marghescu Timisoara Carmen Mataragiu BASIC FACTS Full name: Romania Capital: Bucharest Main language: Romanian Population: million (2014 estimate) Major religion: Christianity Monetary unit: Romanian Leu (RON) Internet domain:.ro Int. dialling code: +40 KEY TAX POINTS Corporate income taxes are chargeable on resident companies, and non-resident companies with a permanent establishment in Romania. Capital gains are generally treated as ordinary business income and taxed accordingly. Residents and non-residents owning one or more buildings are subject to a real estate tax. Dividends paid to non-resident companies are subject to withholding tax. Subject to exceptions, dividends paid by resident companies to other resident companies are exempt. Transactions between legal affiliated persons are subject to arm's length requirements for tax purposes. There is no concept of group relief. Profits and losses cannot be transferred between affiliated companies. The standard rate of VAT is 24%. A reduced rate of 9% is applied to certain goods and services. Resident, and certain non-resident, individuals are subject to individual income tax on their worldwide income and capital gains. PKF Worldwide Tax Guide

6 A. TAXES PAYABLE NATIONAL TAXES AND OTHER TAXATIONS COMPANY TAX In Romania, the following entities are subject to corporate income tax: Romanian legal entities; Foreign legal entities doing business in Romania through permanent establishments; Foreign legal entities which derive income from or in connection with real estate transactions or from transactions with shares held in Romanian legal entities; Foreign legal entities and individuals doing business in Romania through associations with or without legal personality (partnerships); Resident individuals associated with Romanian legal entities for revenues derived in or outside Romania, through associations without legal personality; in this case the tax due by the individual is computed, withheld and paid by the Romanian legal entity; Legal persons with a registered office in Romania incorporated in accordance with European legislation. A company is considered resident if its head office is registered in Romania or has its place of effective management in Romania. From 1 January 2012, associations with legal status set up under the legislation of another state, to which a Romanian legal entity participates are subject to corporate income tax in Romania on their corresponding part of the taxable income of the legal entity. The standard corporate income tax rate is 16%. Resident banks, credit institutions and other similar entities as well as Romanian branches of foreign banks are liable to make quarterly pre-payments on account of annual corporate income tax, as adjusted for inflation. The fiscal year is the calendar year. For fiscal year 2013, taxpayers must submit an annual corporate income tax statement by 25 March As of 1 January 2014, the companies which chose, as per the accounting laws, for accounting purposes for a financial year different form the calendar year, may choose to have the fiscal year identical to the financial year. From 1 January 2013, taxpayers can choose to declare and pay corporate income tax quarterly in advance payments. The tax authorities should be notified by 31 January of the year for which the taxpayer wishes this system to be applied and must be maintained for a period of two consecutive years. There are some categories of taxpayer that are not allowed to choose this system. These include taxpayers who: Are newly established; PKF Worldwide Tax Guide

7 Are in a fiscal loss position at the end of the previous year; Have been in a state of temporary inactivity; Do not conduct activities at their registered/subsidiary office Were micro-enterprises in the previous period. In order to establish the amount to be paid via the advance payments system, the corporate income tax due for the previous period is uprated by the consumer price index, published by order of the ministry of public finance no later than 15 April of the fiscal year for which the advanced payments are performed. Taxpayers who have chosen the advance payments system and record a fiscal loss in the first year of the two year mandatory period must, nevertheless, make quarterly payments based on the accounting result of the period for which the advance payment is performed. There are further requirements for those taxpayers involved in reorganisation operations, both on a local and cross-border level. Taxpayers who do not choose the anticipated payments system are obliged to declare and pay quarterly corporate income tax by 25th of the first month following the first, second and third quarters of the year. Any remaining corporate income tax should be declared and paid by 25th March of the following year. The deadline for submitting the annual corporate income tax return is modified: the new deadline is until 25th March of the following year except for certain category of taxpayers specifically mentioned. BRANCH PROFITS TAX Foreign entities are generally subject to Romanian tax on income derived from Romania. The extent to which an 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 office or by becoming subject to withholding tax on the Romanian-sourced income. BRANCH OF A FOREIGN ENTITY 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 distribution of funds to the head office is not regarded as a dividend distribution and no withholding tax liability should arise. However, as with limited liability companies, profits are transferred at year-end, after the head office approves the branch's financial statements. The taxable profits of the branch are subject to general Romanian tax rules, provided that the following conditions are met: Only income that can be assigned to the branch shall be included within taxable income; and, Only expenses incurred in relation to the branch's activities are included in deductible expenses. PKF Worldwide Tax Guide

8 PERMANENT ESTABLISHMENT A permanent establishment is not necessarily a legal entity but is taxable in Romania. Thus, a permanent establishment is defined 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 profits of the foreign enterprise derived from the activities performed. When a foreign company performs economic activities in Romania through more than one permanent establishment, it is obliged to appoint only one permanent establishment to meet the tax administrative obligations regarding the economic activities performed by all the permanent establishments. REPRESENTATIVE OFFICE 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 offices, payable in the Romanian currency of RON using the exchange rate valid on the payment date. The tax is payable in two equal instalments: by 25 June and 25 December. VALUE ADDED TAX (VAT) In Romania the VAT legislation is in line with the European Union VAT Directives and Regulations. The standard VAT rate is of 24% applicable to most of the supplies of goods and services. However, a reduced VAT rate of 9% is in force and is applicable to various goods and services including: (a) Cinema tickets and entrance fees to other attractions; (b) Books, newspapers and magazines, school books, except those exclusively for advertising; (c) Certain medicinal products; (d) Within the hotel sector or similar sectors, including camping. Also, a lower rate of 5% applies to the sale of certain buildings carried out as part of the country's social policy. There are also certain transactions which are VAT exempt, for example: (1) VAT exempt transactions with deduction right on input VAT: the supply of goods transported outside EU, intra-community supplies of goods, goods placed in free trade zones, international transport of passengers; (2) VAT exempt transactions without deduction right on input VAT: activities in the financial field, such as banking, finance and insurance, medical and educational activities performed by licensed entities, rental and leasing operations of immovable property, as well as the supply of certain immovable properties (e.g. old buildings, non-constructible land plots). However, certain VAT exemptions on immovable properties are optional. PKF Worldwide Tax Guide

9 The reverse charge mechanism is applicable for the intra-community acquisitions of goods or services, for local transactions with certain products. However, for import of goods the reverse charge mechanism will not apply until 1 January From 1 January 2013, a new VAT cash accounting system applies to all resident taxpayers registered for VAT purposes with an annual turnover of less than RON 2,250,000 (approx. EUR 500,000 at an exchange rate of 4.5 RON : 1 EURO). Non-resident taxpayers registered for VAT purposes in Romania or that have a fixed establishment in Romania will not be able to apply the VAT cash accounting system. The VAT cash accounting system is also not applicable to transactions carried out between related parties. The VAT cash accounting system allows payment of VAT to be postponed until the relevant invoices are paid, however, the cash accounting system has become optional as of 1 January 2014 for the companies which meet the above mentioned conditions. Also, simplification measures (i.e. reverse charge mechanism) are applicable to domestic supplies (i.e. such that both persons must be registered for VAT purposes in Romania) of certain categories of goods such as: wheat, barley, rye, com, soya, rape, sunflower, sugar beet. The simplification measure applies until 31 May Additionally, the reverse charge mechanism is applicable for intra-community acquisitions of goods or services. Additional information (1) From a VAT compliance point of view, the taxable persons have registration and reporting obligations for the operations under the VAT scope for each fiscal period. Thus, in Romania the fiscal period is the calendar month, however, for the taxable persons who do not exceed a turnover of EUR 100,000 in the previous year, the fiscal period will be the calendar quarter. Moreover, taxable persons must keep records of the VAT liabilities for each fiscal period and are obliged to submit certain tax returns, namely the VAT return, the monthly return on domestic transactions and the recapitulative statement of intra-community transactions (VIES form). The due date for payable VAT and for submitting the returns is the fifteenth day of the month following the fiscal period in which the transactions were performed. However the VIES form shall be submitted on a monthly basis. (2) The transfer of a business is considered out of the VAT scope if certain conditions are met. Therefore, any type of partial or total transfer of assets i.e. transfer of a going concern, irrespective of its form) which forms an independent and autonomous which is considered to carry out an economic activity independently is not considered to be a supply of goods if the beneficiary is a taxable person. Moreover, the beneficiary is regarded as the assignor's successor for purposes of adjustment of the VAT deduction right. (3) The VAT fiscal group is allowed in Romania for VAT consolidation purposes. Namely, entities which are legally independent, but closely related from a financial, economic and organisational perspective are allowed to form a VAT fiscal group as long as they are administrated by the same fiscal body in order to consolidate their VAT position. FRINGE BENEFITS Fringe benefits are any benefits received by the employee under their employment contract, if applicable. Benefits in kind or in money must be taxed along with the salary income in the month they are granted to the employees. PKF Worldwide Tax Guide

10 The income tax rate is 16% and the tax must be withheld from the income taxpayer. LOCAL TAXES In Romania, local taxes are set under the Fiscal Code. Local taxes represent a distinct category of taxes set by the local administration, due by both individuals and legal entities. Building tax: Residents or non-residents owning one or more buildings are subject to real estate tax. All buildings, regardless of their purpose, are taxed according to their value. Rates range between 0.25% and 1.5% and are set by the local councils. The building's taxable value is determined by the area used and the building type. Building tax payable other than on a person's place of residence is set at higher rates: 65% higher for the first, 150% for the second and 300% for the third or additional building. From 1 January 2012, if a building has not been revalued, the taxable base will be set as follows: - Between 10% and 20% higher than cost for buildings not revalued within the last three years - Between 30% and 40% higher than cost for buildings not revalued within the last five years. From 1 October 2011, the local Council may grant an exemption from or reduction of the building tax, over a period of a minimum of seven years, to owners who have performed significant refurbishment work on their apartments or buildings at their own expense. Exemptions from building tax can also be granted for a period of five consecutive years for owners performing architectural improvement work on their buildings. Land Tax: is payable by owners of land. Generally, the tax is established as a fixed amount per hectare, depending on the location of the land within certain determined zones, towns or villages and depending on land use. The tax is payable annually in two equal instalments on 31 March and 30 September. Vehicle Tax: is payable by owners of land/water vehicles registered in Romania. The tax depends on the engine's capacity and is determined as a fixed amount per 200 cubic centimetres. The tax is payable annually in two equal instalments on 31 March and 30 September. Other local taxes and duties include fees for the issuance of certificates, permits and authorizations; fees for using advertising and publicity materials and hotel fees. OTHER TAXES Certain legal documents are subject to a stamp fee. Stamp fees also apply on other documents and services related to authorisations issued by State institutions such as hunting or fishing licences, driving licences, transport licences and similar documents. Local Councils, the General Council of Bucharest Municipality, and County councils may charge duties for the temporary use of public places and for admission to museums, memorial houses, or historical, architectural or archaeological monuments. Duties are also payable for the possession or use of equipment and tools held for the purpose of obtaining income which involves the use the local public infrastructure. Duties are also payable on some activities which have an impact on the environment. PKF Worldwide Tax Guide

11 EXCISE DUTY The Excise Duty is a tax on consumption and is payable when the excise goods are released for consumption. The Excise Duty chargeability date for imported goods is the date of the import. In case of an intra-community acquisition, the Excise Duty chargeability date is the date when the goods are received on Romanian territory and for the locally produced excise goods the chargeability date is the date when the goods are produced as long as they are not introduced under an Excise Duty suspension regime. The Excise Duty is determined as a fixed amount per unit of product. In Romania there are two categories of goods subject to Excise Duty: (1) Goods subject to harmonised excise duties: beer, wine, fermented beverages other than beer and wine, intermediary products, ethyl alcohol, tobacco products, energy products, electrical power; (2) Goods subject to non-harmonised excise duties: green, roasted and soluble coffee, certain types of beer and fermented beverages and under certain conditions - gold jewellery, fur coats, boats and boat engines, vehicles and weapons and ammunition. In Romania the Excise Duty legislation is in line with the European Union Directive 2008/118/CE concerning the general arrangements for Excise Duty. In Romania, under certain conditions, for certain excise goods an Excise Duty exemption is available. Thus, the ethyl alcohol and other alcoholic products are Excise Duty exempt if they are denaturated, used for vinegar production, medicine production and under clear conditions in food industry. Such products, when used to obtain final products which do not contain alcohol, are excise duty exempt. Some energy products are exempt if used under certain conditions and by authorised users. Manufactured tobacco is also excise duty exempt when used exclusively for scientific and quality testing. CONSTRUCTION TAX As of 1 January 2014 a new tax has been included within the Romanian Fiscal Code the construction tax. Such tax is due for other constructions than the ones subject to local taxes (i.e. building taxes). The construction tax is due by Romanian legal entities and foreign legal entities carrying out activities in Romania through a permanent establishment. In case that the construction is owned through a financial leasing agreement the tax payer is the user (lessee), if it is owned through an operational leasing agreement the tax payer is the lessor. The entities exempt from the construction tax are the public entities, the national institutions, NGOs and other legal entities without patrimonial purposes. The construction tax rate is of 1.5% applied to the value of the constructions owned by the taxpayer. The declaration of the tax due shall be performed until May 25 of each year. The payment of the construction tax should be performed in two equal instalments until May 25 and September 25 of each year. SOCIAL SECURITY CONTRIBUTIONS Social assistance contributions are payable jointly by the employee and by the employer on gross PKF Worldwide Tax Guide

12 salary, subject to a maximum monthly limit. The joint rate from February 2009 is 31.3% and it is divided between the employer (20.8%) and the employee (10.5%). Under particular work conditions, the joint rate is 36.3% or 41.3%. In these cases, the employer's contribution is 25.8% and 30.8% respectively. B. DETERMINATION OF TAXABLE INCOME DEPRECIATION The Fiscal Code makes an explicit distinction between accounting and fiscal depreciation. For fixed assets, fiscal depreciation is to be calculated based on the rules set out by the Fiscal Code and deductibility no longer depends on the level of depreciation recorded in the accounts. Fiscal depreciation should be computed based on the asset's fiscal value and useful life for tax purposes, by applying one of the permitted depreciation methods: Straight-line depreciation; Reducing-balance method; Accelerated depreciation. The method used for the depreciation of buildings is the straight-line method. Land is not a depreciable asset. Technical equipment, computers and peripherals can be depreciated by using any of the depreciation methods available, i.e. straight-line method, accelerated method or reducing balance method. For any other fixed assets (except for buildings for which only the straight-line method can be applied), only the straight-line or digressive method can be used. Under the accelerated method, the maximum depreciation in the first year of use of an asset is 50%. STOCK / INVENTORY The inventory must be valued according to generally accepted accounting principles (GAAP) and must include all acquisition, processing and administration costs. CAPITAL GAIN TAX Capital gains are treated as ordinary business income and taxed at the general corporate income tax rate of 16%. Income earned by non-residents from the sale of real estate located in Romania or from the sale or assignment of securities held in a Romanian entity is also taxed at the general corporate income tax rate of 16%. DIVIDENDS Dividends paid to resident companies are subject to a final withholding tax of 16% or are exempt PKF Worldwide Tax Guide

13 where the recipient company has held at least 10% of the distributing company's share capital for at least one year prior to payment of the dividend. Companies paying dividends must compute, withhold and pay the tax. The tax must be paid by the 25th day of the month following that in which the dividends were paid. However, from 2010, withholding tax on dividends which have been declared but not paid by the end of the year must be paid by 25 January of the following year. INTEREST DEDUCTIONS The deductibility of interest expenses and net foreign exchange losses related to loans is limited under the safe harbour rule and the thin capitalisation rule, as set out below. These rules do not apply to interest and forex arising on loans from credit institutions, non-banking financial institutions or other entities that grant credit according to the law. "The safe harbour rule" limits the deductibility of interest on loans to 6% for loans denominated in a foreign currency. The upper limit for interest rates is set with reference to the National Bank of Romania's interest rate for RON loans, of the last month of the quarter. Interest exceeding this limit is tax non-deductible and cannot be carried forward in future periods. Under the "thin capitalisation rule", if the debt-to-equity ratio is higher than 3:1 or if the company's equity is negative, interest charges and net foreign exchange losses on loans with a maturity date exceeding one year are not deductible. However, such non-deductible expenses may be carried forward to subsequent fiscal years and become fully tax deductible in the year when the debt-toequity ratio becomes lower than or equal to 3:1. LOSSES Losses may be carried forward for five years if incurred before 1 January 2009 or for seven years if incurred on or after 1 January Starting from October 2012, losses can be used by the successor company when the associated trade is transferred from one company to another under transactions such as mergers, spin-offs, transfer of going concern or other types of reorganisation transactions. FOREIGN SOURCE INCOME Resident companies are subject to taxation on their worldwide income. Foreign losses can be deducted from foreign income on a source by source basis. Foreign exchange differences arising from the re-evaluation of monetary assets and liabilities at the end of the year are deemed to be realised and taxable. INCENTIVES Authorised companies, set up and performing their activity in under-privileged areas, can benefit from tax exemptions for new investments, on condition that the investor has received an investor certificate before July C. FOREIGN TAX RELIEF Unilateral relief is provided by way of an ordinary credit for income taxes paid abroad. The credit cannot exceed the Romanian tax suffered on the same income. PKF Worldwide Tax Guide

14 D. CORPORATE GROUPS There is no 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. E. RELATED PARTY TRANSACTIONS 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 reflect the market value. Traditional transfer pricing methods, as well as any other methods that are in line with the DECO Transfer Pricing Guidelines may be used for setting transfer prices. Taxpayers engaged in related-party transactions have to prepare and make their transfer pricing documentation file available upon the written request of the Romanian tax authorities within the deadline set by them. F. WITHHOLDING TAXES As a general rule, non-resident companies are subject to 16% withholding tax on income derived from Romania such as interest, royalties, dividends, revenues from services performed in Romania and outside Romania (from 2013), revenues derived from liquidation of a Romanian legal entity. From February 2013, revenues provided outside Romania in the form of management consultancy in any domain, marketing, technical assistance, research and design in any domain, of advertising and publicity in whatever form they are performed and those provided by lawyers, engineers, architects, notaries, accountants, auditors, are subject to taxation. From February 2013, income such as dividends, interest, royalties, commissions, income from freelancer services performed in Romania {such as doctor, lawyer, engineer, dentist, architect, auditor and other similar professions) or income referred to in the previous paragraph paid in a state with which Romania has no legal instrument under which to carry out the exchange of information, is subject to 50% withholding tax, if the transactions are considered as artificial. According to the definition of the Romanian fiscal law: a transaction is qualified as artificial if it has no economic content, and cannot be utilised with the regular economic practice, the only purpose being to avoid taxation or to obtain fiscal advantages that could not be otherwise received. From October 2011, income derived under a trust agreement by a non-resident beneficiary of a resident trust is taxable in Romania, except for cases where the non-resident beneficiary is the settlor. The fiscal obligations of the non-resident settler are fulfilled by the trustee. From October 2011, income obtained by non-resident individuals from participating in gambling activities in another state are exempt from taxes in Romania, even if the funds are paid from a Romanian source. INTEREST AND ROYALTIES The tax rate is 16% unless a lower treaty rate applies. Under the EU Interest and Royalties Directive, from 1 January 2011, no withholding tax applies to payments of interest and royalties made by Romanian companies to companies resident in EU to entities holding at least 25% of the share PKF Worldwide Tax Guide

15 capital of the Romanian company for a continuous period of at least two years prior to the date of payment of interest/royalties. DIVIDENDS The tax rate is 16% unless a lower treaty rate applies. As Romania is an EU member state, the provisions of the Parent Subsidiary Directive apply. Therefore, dividends paid by Romanian companies to companies resident in EU or to a permanent establishment of a company resident in EU are exempt from withholding tax if the dividend beneficiary owns a minimum of 10% of the Romanian company for a period of one year ending on the date when the dividend is paid. From 2010 interest and dividends paid to pension funds as defined under the legislation of the EU Member State is exempt from tax. In addition, non-residents must provide a tax residency certificate as well as a self-certified statement on the fulfilment of certain conditions in order to qualify for the more favourable EU treatment. G. EXCHANGE CONTROLS The exchange control regulations applicable in Romania are administered by the Romanian National Bank, which can take safeguarding measures related to monetary capital operations. There is an obligation to notify the Romanian National Bank at least 10 days before the intention to conclude monetary capital operations on a short-time basis. Limitations apply to monetary capital operations applied on a short-term basis which generate incoming/outgoing of capital. H. PERSONAL TAXES The following categories of taxpayers are subject to income tax: (a) Resident natural persons, meaning any person who meets at least one of the following conditions: He or she is domicile is located in Romania; The centre of their vital interests is located in Romania; He or she stays in Romania for more than 183 days in any 12 month period; (b) Non-resident natural persons who perform an independent activity through a permanent establishment in Romania; (c) Non-resident natural persons who perform dependent activities in Romania; (d) Non-resident natural persons who obtain other income in Romania. Categories of income which are subject to income tax: (1) Income from independent activities: This includes commercial income, income obtained from liberal professions, income from intellectual property rights. The taxable income is, as a general rule, the difference between gross income and deductible expenses. Starting from 1 July 2012, a percentage of 50% of the expenses related to motor vehicles which are not used exclusively for business purposes are not deductible. PKF Worldwide Tax Guide

16 The tax rate is of 16% and the income tax is paid quarterly, in advance, as established by the fiscal authority through the tax decision which is based on estimated annual income or net realized income in the previous year. Taxable income can also be established based on the income norms, which are approved in the fourth quarter of the year previous to the one they are being applied in. Income payers are required to calculate and transfer withholding tax for the following categories of income: (a) Income from intellectual property rights; (b) Income from activities carried out based on civil contracts/agreements concluded according to the Civil Code as well as the ones based on agent contracts. Contracts are classified as civil contracts, either contracts of commission, commercial mandates or consignment. Taxpayers that are fiscally registered according to applicable legislation and are realising these types of incomes, are excepted. (c) Income from accounting and technical, judicial and extra-judicial expertise; (d) Income obtained by a natural person from an association with a legal person which is a taxpayer, which does not generate a legal person. For income mentioned above in a) to c), the tax rate applicable is of 10% and it is applied on the difference between gross income and mandatory withholding social contributions. Taxpayers have the possibility to choose the 16% tax rate. In this case the tax rate is applied to the gross income. The tax which must be withheld shall be transferred to the state budget until 25 th inclusive of the month following the month the income was paid. Starting from 1 July 2012, the net income from author rights is determined by deducting 20% of the gross income, representing deductible expenses related to that specific obtained income, as well as withholding social contributions. A rate of 25% representing deductible expenses is applied for author rights related to monumental art. (2) Income from wages: Income from wages shall be all income who carries on an activity based on an individual labour contract or a special statute provided by the law. Also, they are considered income similar to salaries and are object of taxation luncheon vouchers, gift vouchers, nursery tickets, holiday tickets. In addition, from 1 February 2013, allowance over the limit of 2.5 times the legal level established is taxable as income from wages; the allowance which is not taxable represents an amount of 2.5 times the legal level established for employees of the public institutions. Taxable income includes all benefits in kind such as free accommodation, use of a vehicle belonging to the business for personal use, personal telephone calls, insurance premiums paid by the payer for its own employees other than mandatory ones. The following amounts shall not be included in wage incomes and shall not be taxable within the meaning of the income tax: social aids, incomes from wages obtained by the natural PKF Worldwide Tax Guide

17 persons with severe or serious handicap, income of employees developing computer software. The following deductions from the monthly net income are granted for an employee for the incomes from wages at the place of work of the main position: - For the taxpayers earning monthly gross incomes from wages up to RON 3,000 these deductions are depending the level of gross income and on number of dependants taxpayers have. For gross income up to RON 1,000, deductions are in between RON 250 and RON 650 and for income between RON 1,001 and RON 3,000 they are digressive compared to the above mentioned; - The trade union subscription; - Contributions made on behalf of employees to optional pension funds, in accordance with legislation in force, within the limit of the equivalent in RON of EUR 400 every year for one person. The income tax rate is 16%. The tax shall be calculated and monthly withheld on the date when the payment is made, and is transferred by the 25th of the month following the date of their effecting payment. (3) Income from the grant of use of goods: Income from the grant of use of goods is established by subtracting from gross income a fixed deduction of 25% of the gross income. Alternatively, the taxpayer may opt to calculate taxable income by deduction of actual expenses. Starting from 1 January 2014, the taxpayers who obtain incomes from the lease of land shall not be able to opt for simple entry accounting in determination of income. As a consequence, payers of income from lease of land are obliged to withhold the tax on income. (4) Income from investments: Income from investments include dividends, interests, earnings from the transfer of securities, sale and purchase of foreign currency etc. Income from dividends and interest is taxed through the withholding tax regime. However, the following types of interest are exempt from income tax: income distributed to members of mutual benefit funds based on the share capital held. For the gain/loss resulted from the transfer of transferable securities, others than the securities in open investment funds and the shares, which are obtained starting from 1 January 2013, the quarterly tax decision is not required anymore and no payments in advance are required. (5) Income from pensions. (6) Income from agricultural, forestry and fish farming activities: Regarding this category of revenues, several modifications have been introduced since 1 February The revenue from agricultural activities is deemed based on income tax norms. The tax is computed by applying 16% rate to the annual revenue and it is final. The revenue from agricultural activities, for which income tax norms have not been established, as well as the revenue obtained from turning to good account products resulted from agricultural activities, are considered revenues from independent activities and are subject to the applicable tax regime of independent activities. For forestry and fish farming revenues, the tax regime of independent activities with revenue PKF Worldwide Tax Guide

18 established based on simple entry accounting is applicable. Starting from 1 February 2013, the 2% tax on revenues from putting to good account products sold to specialized units for collection, processing or utilization is repelled. (7) Income from prizes and from gambling: The revenues from prizes are taxed with a tax rate of 16% while the revenues from gambling are taxed with a tax rate of 25%. Revenues from either category, below RON 600, are exempted. (8) Income from the transfer of real estates: Are subject to a transfer tax rather than income tax. Property owned for less than three years is subject to tax of 3% on proceeds up to RON 200,000 or RON 6,000 and 2% on any excess above RON 200,000. For property owned for more than three years, the rate is 2% on proceeds up to RON 200,000 or RON 4,000 and 1% on proceeds over RON 200,000. (9) Income from other sources, which include any taxable revenues that have not been included at points 1 8. The net annual taxable revenue is determined on each source of income by deducting from the net annual revenue the fiscal losses carried forward, only for the following category of incomes: Incomes from independent activities; Incomes from the grant of use of goods; Incomes from agricultural activities taxed based on simple entry accounting, income from forestry and fish farming. The fiscal loss is recorded on each source from the above mentioned categories, and it can be carried forward and offset with the revenues from the same source during the next five years. The net annual loss from the transfer of securities, other than securities of limited companies, established through the statement of income, can be offset from the net gains obtained during the next seven consecutive fiscal years. INDIVIDUAL SOCIAL CONTRIBUTIONS The individuals that obtain revenues from independent activities, agricultural activities and associations without a legal personality are considered tax payers in the public pension insurance system and the public health insurance system. In case of voluntary insurance to the public pension system, the contribution rate is 31.3%, which represent the contribution owed by employer (20.8%) and employee (10.5%). Starting from 1 January 2014 the tax payers that derive revenues from the grant of use of goods owe health insurance contribution (5.5%). In case of income from lease of land, health insurance contribution is withheld by the payer of revenue. The income payer must also declare the amounts withheld (tax on revenue and health insurance contribution) in the tax form 112. PKF Worldwide Tax Guide

19 - Social insurance contribution: 10.5% - Health social insurance contribution: 5.5%* - Unemployment insurance contributions: 0.5% Any activity can be reconsidered as dependent activity if it fulfils at least one of the following criteria: - The beneficiary of the revenue is in a subordination relationship towards the payer of the revenue, respectively the management of the payer, and respects the work conditions imposed such as: attributions, means for fulfilling the attributions, the place of work, the work schedule etc.; - In the rendering of services, if the beneficiary of the revenue uses exclusively the material base of the payer of the revenue, such as: work spaces with proper equipment, work and protection equipment, work tools or any alike, and the beneficiary contributes only with physical or mental capacity; - The payer of the revenue incurs the expenses related to travels of the beneficiary, such as travel allowance, as well as any other expenses of such nature; - The payer of the revenue incurs the leave of absence allowance and the medical leave allowance of the beneficiary of the revenue. Where independent (i.e. self -employed) activities are deemed as dependent (i.e. employed), the beneficiary and the income payer will be both held responsible and will be required to pay any related income tax and social security contributions plus late payment interest. TAX RESIDENCY In the absence of a tax certificate issued by a state, regardless if Romania has signed or not a Double Tax Treaty with that state, the foreign citizen will be taxed as a resident of Romania if it meets at least one of the following: Their centre of vital interests is located in Romania; or, They spend herein a period or periods that exceed in aggregate 183 days during any period of 12 consecutive months ending in the calendar year concerned. In these conditions, the foreign citizen will be subject to the tax on revenue for all the revenues obtained, regardless of their source, whether they are obtained in Romania or not, starting from 1 January of the year subsequent to the year during which he meets the criteria to become a tax resident in Romania. Foreign individuals previously faced this tax treatment if they were meeting any of the above mentioned conditions for a period of 3 consecutive years. Also, individuals who met the conditions above during the period 2010 and 2011 respectively, will be subject to income tax on their worldwide income starting with 2012 Declaring and paying the tax on revenue and social contributions. PKF Worldwide Tax Guide

20 The employers have the obligation to compute, declare and pay to the tax budget and the social security's budgets the tax on revenue and the social contributions monthly, until the 25th of the month subsequent to the month during which the salaries are paid. By exemption, the following categories of tax payers can opt for the declaration and payment on a quarterly basis, until the 25th of the month subsequent to the quarter during which the salaries are paid: (a) Associations, foundations or other non-profit entities, except the public institutions, that had an average number of employees in the previous year of at most three; (b) Legal entities, corporate income tax-payers that recorded total revenues of up to Euro 100,000 in the previous year and that had an average number of employees of at most three; (c) Legal entities, small entities tax payers that had an average number of employees of at most three; (d) Self-employed persons, individual enterprises, individual who derive incomes from liberal professions and associations between individuals without legal personality that have employed personnel. REPORTING OBLIGATIONS FOR INCOME PAYERS Payers of income subject to withholding tax (including salary income) must submit a tax statement in which to declare the computation of the income tax for each beneficiary of income. The statement must be submitted until the last day of February of the subsequent year to the year during which the income is obtained. Resident and non-resident individuals that perform activities in Romania and obtain incomes from salaries from employers located in other states, that are not subject to the EU Regulations regarding the coordination of social security systems or states with which Romania has not signed agreements or conventions regarding social security systems, must submit the tax form 112, directly or through a tax representative, and pay the social contributions of the employer and of the employee only if there is an agreement regarding this obligations signed between employee and employer. Same rules apply in the case of non-resident employers that do not have the legal headquarters or a representation in Romania and that owe social contributions for their employees, according to the international legal instruments to which Romania is a party. The employers have the obligation to send to the tax authority information regarding the agreement between the employer and employees, as described in the above paragraph. If no such agreement had been signed, the obligation of computing, declaring and paying the social contributions is due to the employer. The declaration can be made directly or through a tax representative. REGULATIONS APPLICABLE TO INCOME OBTAINED FROMFIDUCIARY OPERATIONS New regulations concerning income obtained from fiduciary operations have been introduced from 1 October Under the new rules, the transfer of the fiduciary portfolio from the constitutor to a fiduciary, at the moment of transfer, will not generate taxable income for either of the two parties involved. The fiduciary's remuneration (advocate or public notary) obtained from the administration of the portfolio will be treated as income from an auxiliary activity, subject to the same tax rules applicable PKF Worldwide Tax Guide

21 to the rest of the advocate or public notary's activities. However, the income obtained from the administration of the fiduciary portfolio, other than the fiduciary's remuneration, will be taxed according to the rules applicable to each type of income obtained. Losses incurred by the constitutor are final losses, being non-deductible for tax purposes. If the constitutor is a taxpayer according to Title Ill of the Fiscal Code, his or her financial obligations related to the income obtained from the fiduciary portfolio administration will be handled by the fiduciary. Also, the same article mentions that the income obtained by the beneficiary, as an individual, at the moment of the transfer of the fiduciary portfolio will be subject to income tax regulations as "Income from other sources", according to Title Ill, Chapter IX of the Fiscal Code. However, if the beneficiary is the same person as the constitutor, the income obtained from the transfer of the fiduciary portfolio will not be taxable. From 1 January 2012 compulsory social contributions must be made for certain categories of individuals who obtain income from independent activities. The deadline for filing annual personal income tax returns is now 25th May following the end of the tax year (formerly 15th May). EQUAL TAX TREATMENT FOR THE SAME CATEGORIES OF REVENUES Starting from 1 January 2014, the legal frame regarding deductions was extended: - Deductions from the gross salary of the social contributions apply also in the situation when the salaries are paid in another EU member state, according to the EU regulations or conventions regarding coordination of social security systems at which Romania is a party; - Resident individuals in an EU member state or EES state, which obtain taxable revenues from Romania, are granted the same deductions as for an individual resident in Romania. The tax base is determined based on the individual rules for each type of revenues; - Deductions are granted in the limit established by the Romanian law for resident individuals, if the individual presents justifying documents and if this documents are not deducted in the state of residency of the individual; - The provisions mentioned before do not apply to individuals resident in an EES state, other than an EU member state, with which Romania has not signed a legal instrument regarding the exchange of information. Also from 1 January 2014 the same tax treatment for the revenues obtained in Romania is applicable for the revenues obtained outside Romania. Therefore, for the revenues obtained outside of Romania that would have been exempted if they were obtained in Romania, are now also exempted. I. TREATY AND NON-TREATY WITHHOLDING TAX RATES The table below contains the withholding tax rates applicable to dividend, interest and royalty payments by Romanian companies to non-residents under the tax treaties currently in force. In a specific case, where a treaty rate is higher than the domestic rate, the latter will apply. PKF Worldwide Tax Guide

22 Dividends Individuals / Companies (%) Dividends Qualifying Companies² (%) Interest¹ (%) Royalties (%) Treaty countries: Albania Algeria Armenia Australia Austria 5 0 0/3 3 Azerbaijan Bangladesh Belarus Belgium Bosnia Herzegovina Bulgaria Canada /10 China (People s Republic) Croatia Cyprus Czech Republic Denmark Ecuador Egypt Estonia Ethiopia Finland /5 5 France Georgia Germany /3 6 3 Greece /7 7 Hungary Iceland India Iran Ireland /3 9 PKF Worldwide Tax Guide

23 Dividends Individuals / Companies (%) Dividends Qualifying Companies² (%) Interest¹ (%) Royalties (%) Israel / Italy Japan /15 11 Jordan Kazakhstan Korea (DPRK) Korea, Republic of /10 12 Kuwait Latvia Lebanon Lithuania Luxembourg Macedonia Malaysia Malta Mexico Moldova /15 13 Montenegro Morocco Namibia Netherlands /3 14, 15 0/3 14 Nigeria Norway Pakistan Philippines /15/25 16 Poland Portugal Russia San Marino 10 0/5 3 3 Saudi Arabia Serbia Singapore PKF Worldwide Tax Guide

24 Dividends Individuals / Companies (%) Dividends Qualifying Companies² (%) Interest¹ (%) Royalties (%) Slovak Republic /15 18 Slovenia South Africa Spain Sri Lanka Sudan Sweden Switzerland Syria Thailand /20/ Tunisia Turkey Turkmenistan Ukraine /15 18 United Arab Emirates United Kingdom /15 United States /15 20 Uzbekistan Vietnam Zambia NOTES: 1 Many treaties provide for an exemption for certain types of interest, such as interest paid to the State local authorities, central bank, export credit institutions or in relation to sales on credit. Such exemptions are not considered in this column. 2 Unless otherwise indicated, recipient companies qualify for the reduced rates if they hold at least 25% of the capital or the voting power in the Romanian company, depending on the applicable treaty. 3 This rate applies to participations of at least 10%. 4 The treaty concluded with the former Yugoslavia. 5 The lower rate applies to royalties for computer software and industrial, commercial or scientific equipment. PKF Worldwide Tax Guide

25 6 The lower rate applies if, and as long as, Germany does not levy withholding tax on interest paid to a resident Romanian under its domestic law. 7 The higher rate applies to industrial royalties. 8 The rate applies to participations of at least 40%. 9 The lower rate applies to copyright royalties. 10 The 5% rate applies to interest paid in connection with the sale on credit of any industrial or scientific equipment, or of any merchandise by one enterprise to another enterprise or on a loan granted by banks. 11 The 10% rate applies to cultural royalties and the 15% to industrial royalties. 12 The lower rate applies to industrial royalties, know-how and equipment leasing. 13 The lower rate applies to industrial royalties (excluding patent royalties) and know-how. 14 The lower rate applies if, and as long as, the Netherlands does not levy a withholding tax on interest/royalties paid to a resident of Romania. 15 Interest paid to a bank or financial institution and interest paid on a loan made for a period of more than two years are exempt. 16 The 10% rate applies to royalties paid by companies registered at the Romanian Agency for Development and carrying on specific activities. The 15% rate applies to film royalties. 17 A minimum holding period of two years applies. 18 The lower rate applies to industrial royalties. 19 The 10% rate applies to interest paid to financial institutions; the 20% rate applies to interest on credit sales. 20 The lower rate applies to copyright royalties. PKF Worldwide Tax Guide

26

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