FISCAL ASPECTS REGARDING TRADING COMPANIES IN ROMANIA Author: Dragomir & Asociatii Law Office Law Firm: Dragomir & Asociatii Law Office Published on: August 2011 Updated on: August 2011 1. Premises In Romania, trading companies are governed by Law 31/1990, which provides that legal persons shall be set up under one of the following forms: general partnership, limited partnership, joint-stock company, limited partnership by shares and Limited Liability Company. The most frequent types of companies are limited liability and joint-stock companies. Taxes in Romania are governed by the principle of neutrality of tax measures, ensuring equal conditions both for Romanian and foreign investors, the principle of certainty of taxation, ensuring a clear interpretation of the legal norms, the principle of tax fairness on natural person by imposing in different ways the incomes, depending on their size and the principle of efficient imposing, ensuring long-term stability of the Fiscal Code provisions, so that these provisions not to cause adverse retroactive effects for natural and legal persons. Trading companies are obliged to tax register, receiving a tax code which coincides with the sole identification number granted on the occasion of registration with Trade Registry. The identification code number for VAT purposes has the prefix RO. Based on data contained in the tax form, is organized at the competent fiscal body the tax records of each taxpayer. The fiscal vector includes 13 tax liabilities. Below, we shall present a brief description of the frequent tax liabilities which devolve on trading companies in Romania. 2. Value Added Tax According to article 153 from the Fiscal Code, trading companies with the registered office in Romania, which carry out or intend to carry out an economic activity which
implies taxable operations and/or exempt of VAT with right of deduction are required to apply for registration for VAT purposes to the tax authorities in two moments: At registration: - In case of declaring it shall be achieved a turnover that meets or exceeds the annual exemption limit (35.000 euro, calculated at the exchange rate after accession in EU - 119.000 lei); - In case of declaring it shall be achieved an annual turnover inferior to the annual exemption limit, but chooses the normal tax regime; After registration: - If during a calendar year reaches or exceed the exemption limit; - If the turnover achieved during a calendar year is inferior to the annual exemption limit, but chooses the normal tax regime; - If carries out exempt operations and chooses to charge them. In Romania, there are three VAT rates: - standard quota 24% It applies to taxable base, for the taxable operations which are not tax exempt or are not subject to reduced rates; - reduced quota of 9% a) services consisting in: entrance to castles, museums, memorial houses, historical monuments, architectural and archaeological monumets, zoological and botanical gardens, fairs, exhibitions and cultural events, cinemas; b) the supply of textbooks, books, newspapers and magazines, except those exclusively or primarily for advertising; c) the supply of certain medical and orthopedic products; d) Accommodation in the hotel sector or similar sectors, including the rental of land for camping; - reduced quota of 5% It applies to taxable base for the delivery of housing as part of social policy, including the land they are built. According to article 126 (9) from the Fiscal Code, the VAT operations are classified as follows: a) Taxable operations subject to VAT b) Exempt operations with right of deduction (exports, intra-community supplies when the buyer provides to the supplier a valid code for VAT purposes)
c) Exempt operations with no right of deduction (examples: agricultural rent, concession, rental and leasing of real estate) d) Intra-Community imports and acquisitions, which are tax exempted. According to article 1582 from the Fiscal Code, the National Agency for Fiscal Administration keeps the Registry Of Intra-community Operators, so that companies are obliged to request the registration in this record before carrying out purchases or deliveries within the Community. 3. Profit tax The taxable profit is calculated as difference between the incomes from any sources and the expenses made in order to achieve incomes, on a fiscal year, minus nontaxable incomes plus non-deductible expenses. The tax quota that applies to the taxable income is of 16%. The Fiscal Code provides an exception for the taxpayers which carry out activities of the nature of night-bars, night-clubs, discos, casinos or sports betting, including the legal persons obtaining these incomes based on deed of partnership, and for which the profit tax owed for the activities provided in is less than 5% of the respective incomes, being liable to pay a tax equal to 5% of such obtained incomes. When calculating the taxable profit, law grants the following incentives: a) For the research and development activities: - The additional deduction in the calculation of taxable profit amounting to 20% of the eligible expenses for these activities; -The application of the accelerated depreciation method also in case of appliances and equipment intended for research-development activities. b) Exemption from taxation of the reinvested profit in the production and / or purchase of technological equipment (machinery, and equipment work) c) Choosing a derogatory depreciation regime to allow the postponement of profit tax (Article 24 of the Tax Code). 4. Tax on dividends According to trading company law, the dividend represents the quota of the profit to be distributed to each associate in proportion to its participation in the registered capital. A Romanian legal entity which pays dividends to a Romanian legal person is required to withhold, declare and pay tax on dividends. Tax on dividends is determined by applying the rate of tax on the gross dividend. Tax quota applicable on the gross dividend distributed / paid to a Romanian legal entity is of 16%. In calculating the taxable profit, incomes from dividends received from a Romanian legal person are not taxable.
Exemptions from tax on dividends: a) The dividends reinvested starting with 2009 in respect of preservation and growth of new jobs in order to develop the activity of Romanian legal persons which distribute dividends, in accordance with their object of activity registered with the Trade Register. b) The dividends invested in the registered capital of another Romanian legal person in order to create new jobs, to develop its business, in accordance with the object of activity registered with the Trade Registry. Dividends shall not be distributed later than 6 months as of the date of approving the annual financial statements for the ended financial exercise. The tax which must be withheld shall be declared and paid to the state budget by the 25th of the month following the month when the dividend is paid. In case the allocated dividends have not been paid by the end of the year in which the annual financial statements have been approved, the relevant tax on dividends shall be paid by 25 January of the next year. The right to sue for the reimbursement of the dividends, paid against the provisions of law, shall be prescribed within 3 years since the day of their distribution. 5. Salary tax Tax liabilities resulting from granting wages are: tax on income from salary, social contributions and special funds. a) Tax on income from salary is of 16% of the net income, paid by the employee; b) Quotas of the state social insurance contributions are presented below: Quotas of the State Social Insurance Contributions in accordance with the law provisions in force 1. Individual social insurance contribution art. 17 from Law 287//2010 2. The employer s contribution on social insurance 3. Total quotas of the state social insurance contributions Work conditions normal unusual special 10,5% 10,5% 10,5% 20,8% 25,8% 30,8% 31.3% 36,3% 41,3%
c) Insurance contribution rates for accidents at work and illness are established from 0,15% to 0,85% according to risk class; d) Contributions to the unemployment insurance budget owed by the employer amounts 0,5%; the individual contribution owed by the employee is 0,5%; e) Contributions payable by the employer to the Guarantee Fund for payment of wage claims under art. 7 (1) of Law no. 200/2006, as amended, is 0, 25%; f) health insurance contribution is 5,2% on behalf of the employer and 5,5% from the employee ( Law no. 95 from the 14th of April on health reform and Law 288/2011); g) Contribution for leave and benefits is 0.85% (GEO 158/2005) 6. Micro-enterprise income tax A micro-enterprise is a Romanian legal person that fulfills the following conditions cumulatively, on December 31st of the previous fiscal year: a) Achieves incomes other than those derived from activities from banking, insurance and reinsurance, capital market, gambling, management and consulting; b) No shareholder or associated legal person with more than 250 employees participate in their registered capital; c) Has 1 to 9 employees including; d) Achieved incomes that did not overcome the equivalent in lei of 100.000 Euros; e) The capital is not held by any other persons than the state and the authorities. Micro-enterprises have the power to choose between paying the profit tax or microenterprise income taxes. A company may choose to pay taxes on the income of microenterprises beginning with the first fiscal year, if the conditions provided by lit. e) are fulfilled until the date of the registration in the Trade Registry and the condition provided by lit. c) is fulfilled in 60 days time including the day of the registration. The income tax rate on the incomes of micro-enterprises is of 3%, the imposable base of the micro- enterprises income tax, consisting of incomes from any source. 7. Facilities provided by Romanian law for foreign investors According to GEO 85/2008 on the investment stimulation, different state support types of facilities can be provided in order to ensure compatibility with community law and to assure that the criteria for granting state aid is kept in a transparent way, facilities such as: a) providing irredeemable money for the purchase of tangible and intangible assets; b) granting financial contribution from the state budget for newly created jobs; - c) providing bonus interest for credit contraction, as well as other types of facilities provided by the legislation in force.
According to GD 1680/2008, for the establishment of a state aid scheme for ensuring economic development, foreign companies that invest in Romania and fall into one of the following categories: a) make an initial investment of 5 to 10 million Euros including the equivalent in lei, and create at least 50 new jobs as a result of achieving their initial investment; b) make an initial investment of 10 to 20 million Euros, including their equivalent in lei, and create at least 100 new jobs as a result of achieving their initial investment; c) make an initial investment of 20 to 30 million Euros, including their equivalent in lei, and create at least 200 new jobs as a result of achieving their initial investment; d) make an initial investment exceeding 30 million Euros, equivalent in lei, and create a minimum of 300 new jobs as a result of their initial investment. may benefit from state support worth 28,125 million Euro, equivalent in lei, if they make investments and create new jobs as a result of achieving an initial investment in any region except the development region Bucharest-Ilfov. For the investments and newly created jobs in the region of Bucharest-Ilfov the maximum level of state aid a trader may benefit from is the equivalent in lei of 22,5 million Euros. 8. Affiliated and holding companies The Romanian law system does not provide any kind of special legislation regarding holding companies. At this moment there is a draft law that covers these types of companies. The bill was proposed by the Ministry for SMEs and includes regulations on the legal and tax regime of the group of companies and holding, as well as the general framework of economic, financial and legal relations between the holding, the branches and the corporate group. The project defines holding as a body-stock company, resident in Romania which has the control over one or more branches and whose main object is the management and control of the shares on subordinate companies. From a fiscal point of view, this bill provides the following regulations: - income tax is applied to the consolidated financial result, not to the financial result achieved by each company that is a member of the holding group; - transactions made between members of the same group of companies are VAT free and are considered to be intra-group transfers of goods and services; VAT is paid only for transactions with companies outside the group; D&A - Excise duty is suspended during the movement of products between the producer of excisable goods, a member of the group of companies, organized as a tax warehouse and any other company that is a member of the same group of societies. - Tax on dividends made by member companies of a corporate group is owed and will only be paid by the holding.
In the practice of Romanian companies real situations can be found where the companies were established in accordance with Law 31/1990 on companies, having activity of holding companies as a main activity, NACE code 6420, without being able to benefit from the tax advantages supplied to holding companies by establishing such an activity. At this point, the tax code only contains regulations regarding affiliated companies that are defined as being the legal persons that directly or indirectly hold 25% of the total number of shares or voting rights of other companies, exercising control over the management of the latter. Incomes are earned from dividends and the sale of shares, from the performed activity of an affiliated company. The tax code stipulates in art. 36 paragraph 4 that are tax free the dividends distributed to entities that hold a minimum of 10% of the joint stock for a period of 2 years turned until the date of their payment. The amounts representing dividends distributed to the affiliated companies are transferred by the entities where the companies hold shares in the gross unaffected by dividend taxes. According to art. 19 (5) of the Tax code, the transactions between affiliates are realized in accordance with the principle of the free market price, which states that the transactions between affiliates are performed under the terms set or imposed which should not differ from commercial or financial relations between independent enterprises. While determining the profits the principles of transfer pricing must be taken into account. In a transaction between Romanian persons and affiliated persons that are not residents of Romania, as well as between Romanian affiliated people, tax authorities may adjust the amount of income or expense of any person, as needed, in order for it to reflect the market price of the goods or services provided by the transaction. Another issue is the tax deduction on losses caused by the failure to receive invoices. According to the provisions of art. 22 from the Tax code, in some situations these losses may be deducted from taxable incomes if the debtor is not an affiliated person. Hence, affiliates do not benefit from the advantages of tax deductibility of losses generated by the failure to receive bills. Disclaimer: The information provided in the articles appearing in the website or the facebook page of Law Europe International do not constitute legal advice and are not intended by either the authors or by Law Europe International to do so. Persons in need of legal advice related to a subject discussed in any article appearing in the website or the facebook page of Law Europe International should contact a lawyer who is qualified to practice in that area of law. The articles are the property of the individual authors.