As of 1 January 2014, Romania has introduced a participation exemption regime to encourage local and international businesses to set up corporate holding companies in Romania. This new tax regime, coupled with the wide double tax treaty network available and lower administrative costs, could make Romania an important hub for corporate holdings in the region and an important competitor with other European jurisdictions with a long tradition in this area, such as the Netherlands, Luxembourg, Cyprus and Switzerland.
Similar to the participation exemption regime in other jurisdictions, the one in Romania allows tax exemption for dividend income, capital gains and liquidation proceeds derived from subsidiaries, under certain conditions. These tax incentives could translate into reduced costs for financing within the group, a tax-efficient exit from businesses and a more flexible structure allowing for more effective operational management for various lines of business.
Taking advantage of the tax relief provided by the corporate holding regime is a tool available to new businesses in their initial set-up and existing ones that can restructure their operations.
Conditions for the application of the participation exemption regime
Three conditions must be met for the participation exemption regime to apply.
The first pertains to the tax residence of the subsidiary. The participation exemption applies only to income derived from subsidiaries that are resident for tax purposes in another EU member state or in a state with which Romania has concluded a double tax treaty (DTT). Considering that Romania has currently in place over 80 DTTs, the participation exemption regime allows for a broad application.
Furthermore, unlike the participation exemption regime in other jurisdictions, the one in Romania has the advantage that it applies not only to international participations but also to domestic ones. This in turn creates a good incentive for local businesses to create their own corporate holding structure in Romania rather than using foreign jurisdictions, with considerably higher administrative costs attached.
The other two conditions pertain to the minimum shareholding percentage and minimum holding period. For the participation exemption to apply, the holding must have owned at least 10% of the share capital of the subsidiary for an uninterrupted period of at least one year at the moment of deriving the income from the subsidiary. The participation exemption regime applies to all Romanian companies that have substantial holdings in other companies.
Besides the above three conditions, no other qualifying criteria apply. For example, there is no need for the Romanian company claiming these tax benefits to carry out only corporate holding business or to be incorporated under a specific legal form.
Why to choose a Romanian corporate holding
A Romanian corporate holding could secure the same tax and commercial benefits as any other holding in a foreign jurisdiction, such as tax-free distribution of dividends, tax efficient financing and exit from subsidiaries or consolidation of financial results.
As compared to traditional locations, such as Benelux countries, Switzerland and even compared to Cyprus and Malta, the Romanian corporate holding is most appealing for local and regional businesses that could achieve important cost savings from having a holding company in Romania. This is because of proximity, shorter travel distances and relatively lower set-up and administrative costs in Romania. Further, the participation exemption regime in Romania is fairly general, straightforward and easy to implement. It is not conditioned by any active business test and does not require a specific company status, as is often the case with holding legislation in Western Europe.
Such cost savings could be most significant for the groups of Romanian companies that would no longer have to cope with financial and time costs related to travelling abroad for shareholders’ resolutions; could better control the activities of the holding; could more easily comply with substance requirements; and could achieve significant economies of scale for administrative costs.
Potential downsides of Romanian holding structures
Investors interested in setting up a Romanian holding should be aware that the tax law is one step ahead the company law as regards the corporate holding structures. If a Romanian company is set up for a Romanian group of companies in the form of a limited liability company, the company law restricts it to act as sole shareholder in more than one Romanian company, which means that a minority shareholder must be brought in for all subsidiaries but the first one. This is not a significant impediment, but it will require more effort to adequately plan a proper structure and could render the structure more complex.
Another restriction of the company law inconsistent with a smooth corporate holding regime is that a Romanian company (and hence a Romanian holding) may not make interim distribution of dividends. So it may require more time to distribute profits out of a Romanian holding.
This new tax regime, coupled with the wide double tax treaty network and lower administrative costs, could make Romania an important hub for corporate holdings in the region.