A standard question of any potential foreign investor in Romania is, what is the current situation in Romania regarding the taxation of companies. To assist potential investors, we have prepared a short note which outlines the basic principles of the taxation regime for companies and individuals. This note is not intended to provide an answer to all taxation questions but should allow potential investors to understand the basic taxation rules and requirements.
Corporate – Taxes on corporate profits
The standard rate of taxation on company profit is 16% for Romanian companies and foreign companies operating through a permanent establishment in Romania.
Micro–company tax regime
Micro-companies are subject to a mandatory revenue tax rate (see details below) in lieu of the standard Corporate Income Tax.
The condition for a company to be considered a micro-company is to have a maximum income at the end of the previous year of up to EUR 1 million.
The tax rates used for micro-company tax are:
• 1% for micro-companies with one or more employees.
• 3% for micro-companies with no employees.
Newly established companies are required to follow the micro-company tax regime starting with the first fiscal year.
Micro-companies can opt once to apply Corporate Tax on profit if they fulfil both of the following conditions:
• Have a subscribed issued share capital of at least RON 45,000.
• Have at least two employees.
The calculation and payment of tax for micro-companies is to be performed quarterly, by the 25th day (inclusive) of the month following the quarter for which the tax is calculated.
Losses may be set off against the same types of income. Losses that cannot be set off may be carries forward. The carry forward period is 7 years.
As a general rule, dividends paid by a Romanian company to another Romanian company are subject to a tax of 5%. However, the dividends paid are non-taxable if the beneficiary of the dividend has held, at the time of the distribution, a minimum of 10% of the share of the Romanian company for an uninterrupted period of at least one year.
Dividend income received by a Romanian company from another Romanian company is non-taxable in the recipient company’s hands.
Dividends distributed by a company resident in another EU member state to a Romanian company that pays Corporate Income Tax are tax-exempt at the level of the Romanian company if it has held a minimum of 10% of the shares in the respective non-resident company for an uninterrupted period of at least one year at the date when the dividend income was booked.
The Romanian Fiscal Code incorporates the amendments to the European Directive no. 2011/96/EU, relating to the application of a common system of taxation in the case of parent companies and subsidiaries of different member states. The legislation introduces the anti-abuse rule for preventing unlawful tax practices used to obtain tax benefits contrary to the Directive’s principles. Also, dividends received by a Romanian legal entity from a foreign legal entity under certain conditions mentioned above will not be taxed as long as those dividends are not treated as deductible expenses by the paying subsidiary.
Participation exemption also applies for dividend income derived by a Romanian legal entity from participation of at least 10%, held for a minimum period of one year, in a subsidiary established in a non-EU state with which Romania has a Treaty Against Double Taxation.
The tax rate on dividends is 5% for both dividends paid by a Romanian company to other Romanian companies (if the conditions regarding ownership of at least 10% for at least one year are not fulfilled) and to non-resident companies. Non-residents may be eligible for a reduced rate under Double Taxation Treaties.
The Standard VAT rate is 19%, 5% for supplies of social housing under certain conditions and to school books, newspapers, magazines, etc and 9% for water supply services, food & beverage, medical treatments etc.
The annual turnover threshold for VAT registration in Romania is the Romanian leu equivalent of EUR 88,500, computed based on the exchange rate from the date of EU accession (i.e. RON 300,000). Companies surpassing the VAT registration threshold will be liable to charge VAT for the advance payments received before registering for VAT purposes related to goods delivered/services performed after the registration date.
As a rule, the fiscal period is the calendar month. For taxable persons registered for VAT purposes whose previous year-end turnover (from taxable operations, VAT exempt, and outside the Romanian VAT scope operations with deduction right) did not exceed EUR 100,000, the fiscal period is the calendar quarter. Also, the fiscal period will change to the calendar month if the taxpayer performs intra-community acquisitions.
Taxable persons must keep complete and detailed records for calculation of VAT liabilities.
Reverse-charge mechanism VAT
Under the VAT reverse-charge mechanism, VAT is not actually charged and paid, but is only shown in the VAT return as both input and output tax, provided that both the beneficiary and the supplier are registered for VAT purposes.
As a rule, the reverse-charge mechanism applies either for intra-Community acquisitions of goods performed in Romania or for services performed by non-resident entities that are not established, nor have a fixed establishment, in Romania. Under the general rule, the place of supply of services is where the beneficiary is established or has a fixed establishment (e.g. consultancy, marketing, legal services).
Tax on salary
Income tax – the employee is charged at the rate of 10 % on income.
Social security and health insurance contribution – employee 35%
Social security and health insurance contribution-employee 2.25%
This brief overview is correct as at May 2022 and is for information purposes only. As stated at the beginning of this article, it is intended to provide only a brief outline of the current taxation rules as at this date and if a more detailed reply is need please contact us directly for an update or more detailed advice.