Romanian micro companies are still attracting interest from potential foreign investors. Micro companies are companies incorporated in accordance with Law 30/1990 Companies law as Limited Liability Companies (“SRL”) and therefore from the legal perspective they are no different from other Romanian SRL companies except in the realm of taxation.
For companies qualified as microenterprises under the Romanian Law a different tax rate is applied other than the normal tax regime of tax on profit of a Romanian company.
What constitutes a microenterprise for taxation purposes?
A company will be considered as being a microenterprise for taxation purposes if all following criteria are met in respect of that company, namely:
- On the 31st of December of the previous fiscal year the company’s income (without VAT) was below one million (1.000.000) Euro. The applicable rate of exchange is the one in force at the end of the relevant fiscal year.
- The company’s social capital is privately held.
- No dissolution procedure has been registered with the Trade Registry or with the Court regarding the company.
Further companies who have as their main or secondary object of activity one or more of the following are also considered to be microenterprises:
- 5510 – Hotels and similar accommodation
- 5520 – Holiday and other short-stay accommodation
- 5530 – Camping grounds, recreational vehicle parks and trailer parks
- 5590 – Other accommodation
- 5610 – Restaurants and mobile food services activities
- 5621 – Event catering activities
- 5629 – Other food services activities
- 5630 – Beverage serving activities
For these companies to be classified as a microenterprise by the 31st December of the previous fiscal year the company must have registered in its statutes at least one of the above and must not be subject to a dissolution procedure.
Tax on Microenterprise
The tax payable by microenterprises is calculated as a percentage of their gross income. For microenterprises this percentage is:
- Three percent (3%) for companies that do not have any full-time employees.
- One percent (1%) for companies that have at least one full time employee.
The Company to benefit from the lower rate must have by the end of the period at least one full time employee. However, the reduced rate will apply if the company has two or more part-time employees and their total working hours add up to at least one full-time employee.
When a company which has no employees employs one person in order to change the applicable tax percentage, the employment agreement signed with the new employee must be concluded for an unlimited time or for at least twelve months.
Procedural aspects regarding the income tax
The fiscal year for microenterprises is the calendar year, starting on 1st January and ending on 31st December. For newly formed microenterprises or for those that cease to exist, the fiscal year is the part of the year when the company existed.
When a Romanian company is incorporated the rules regarding the taxation of a microenterprise will apply as long as the company’s social capital is not owned by the state or by any territorial administrative unit. When registering with the Fiscal Authorities the company must mention that its status is that of a microenterprise.
Tax on dividends
The tax payable on company dividends is five percent (5%) of the dividend. This tax must be calculated and retained by the company at the time of payment.
When the dividends had been declared, but not paid to the shareholders by the end of the financial year, the tax on dividends must be paid by 25th January of the following year.
When the tax on income for microenterprises is no longer applicable.
If during any fiscal year a microenterprise has income greater than one million (1.000.000) Euro, then the company must pay tax on profit starting from the quarter when the limit has been exceeded. The standard rate of tax on profit is sixteen percent (16%) calculated on the actual accounting profit.
Should the number of employees fall below the required minimum then the rate of tax on income will change accordingly.
If during the fiscal year, the dissolution procedure of a company is initiated in respect of a microenterprise or the capital will no longer be private held, then these changes must be registered with the fiscal authorities by 31st March of the following year. If the company will be dissolved, it still has to declare and pay the income tax applicable for the time it was functioning.
When a Romanian company fulfils all of the necessary legal requirements to be a micro enterprise it will be taxed on its income. The company will pay a different rate of tax of one (1%) or three (3%) percent, depending on the number of employees.
If the company does not meet the legal requirements to be taxed as a micro enterprise, it must register the changes with the fiscal authorities and will pay the standard tax rate on profit of sixteen percent (16%). The company can elect to be taxed as a normal corporate taxpayer and pay tax on profit if it has a social capital of more than forty-five thousand (45.000) Lei and at least two employees. In this situation, the election by the company can only be made once.
These taxation options should be borne in mind by all investors who incorporate a company in Romania. It is important that all investors understand the rules as there may be advantageous tax planning applications which can benefit the person incorporating the company. Clients should also not lose sight of the fact that their expenses incurred in a microenterprise the company will not qualify in reducing the tax payable by the company which they might in other tax jurisdictions. All these points need to be understood at the time of incorporation.