Taxation

2019 | academic and other publication

Foreword

The business environment has always played a particular role in a state's fiscal policy, as this impacts decision-making on starting a business, growing operations or reducing / closing-down the activity.

Romania is an attractive country for investors, the main driving reasons being the low taxation and the high-quality workforce. On the other hand, one of the problems with the Romanian tax environment remains the administrative apparatus in charge of implementing, overseeing and enforcing the tax legislation.

As regards the construction sector in Romania, this is viewed as a priority sector, of national importance for the Romanian economy within the next 10 years, starting with 1 January 2019. The construction activity has been identified as crucial for the realization of public and private investment projects.

For this purpose, several tax exemptions and reductions have been implemented to ensure workforce in the construction field.

As for the overall picture of Romanian taxation, although the main tax rates did not change, the business environment still craves for a stable and predictable legislative framework, as it makes significant efforts in keeping track of all the legislative amendments adopted as urgency measures.

Tax procedure and administration

VAT refund

The VAT refund is made following the taxpayer's request via their VAT return. Depending on certain risk criteria, a tax audit might be conducted for the settlement of the VAT refund claim (for taxpayers regarded as having a high tax risk), which makes this process excessively cumbersome.

Claims settlement

The Romanian tax authorities are required to answer to taxpayers' claims within 45 days. In certain cases, the term can be extended up to 6 months. The legal deadline for issuing binding tax rulings is of 3 months, and of 12 to 18 months in the case of advance pricing agreements.

Statute of limitation

The statute of limitation for tax liabilities is of 5 years, starting with 1 July of the year following that to which the tax liability relates.

Interest and late payment penalties

Interest and penalties apply for each day of delay in settling outstanding tax liabilities (interest: 0.02%/day; late payment penalties 0.01%/day; non-compliance penalties: 0.08% per day).

1. Investing in Romania

1.1 Micro-company income tax

Tax regime applicable to newly established companies and companies not exceeding EUR 1 million in turnover during a fiscal year;

Tax rates: (i) 3% or (ii) 1% of the income if the company has at least one full-time employee (or more part-time employees whose working time fractions add up to a full-time employee);

Tax deduction of expenses is not permitted. 

1.2 Profit tax

Tax regime applicable to companies (i) exceeding EUR 1 million in turnover during a fiscal year or (ii) opting to apply for said tax regime, provided they have a share capital of at least lei 45,000 and at least 2 full-time employees;

Tax rate: 16% of the taxable income;

Taxable profit: accounting profit minus non-taxable income and tax deductions plus non-deductible expenses.

1.3 Dividend payments

  • 5% withholding tax;
    or
  • 0% withholding tax if the conditions set forth in the Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States apply;
    or
  • the more favourable tax rate based on the double tax treaty.

1.4 Interest/royalty payments

  • 16% withholding tax;
    or
  • 0% withholding tax, if the conditions set forth in the COUNCIL DIRECTIVE 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States apply;
    or
  • the more favourable tax rate based on the double tax treaty.

1.5 Value added tax

  • VAT is applicable to supplies of goods and services if the turnover exceeds lei 300,000, or if the taxpayer opts for applying VAT before the threshold is exceeded.

1.6 Salary costs

Minimum gross wage per country: lei 2,080 per month5.
Minimum gross wage per country for employees with a higher education: lei 2,350 per month6
Minimum gross wage per country for the construction sector: lei 3,000 per month7

1.7 Deduction of interest expenses

The excess borrowing costs represent the positive difference between interest expenses (and economically equivalent expenses) and interest income (and economically equivalent income) and are:

  • Fully deductible up to EUR 1 million;
  • Partially deductible up to 30% of EBITDA (reduced with non-taxable income) for amounts exceeding EUR 1 million;
  • If the adjusted EBITDA is negative or nil, the excess borrowing costs over EUR 1 million are non-deductible and can be carried forward indefinitely.

2. Doing business in Romania

2.1 Value added tax ("VAT") applicable to sale of real estate

Sale of real estate can be: (i) taxable via regular taxation, (ii) taxable via reverse charge or (iii) VAT exempt without credit, with an option to apply VAT.

2.1.1 Sale of real estate under the regular VAT regime

The sale of new buildings (or part thereof) and building land performed by a taxable person is always subject to VAT.

A new building is a building which is:

  • Unfinished/under construction;
  • Sold by 31 December of the year following the year when the building is first occupied;
  • transformed, if the cost of the transformation is at least 50% of the value of the building after transformation.

Applicable VAT rate

Reduced 5% rate - applicable to the sale of real estate and the land on which it is built as part of the social policy (e.g. homes for the elderly, homes for orphans, recovery centres, properties having a maximum 120 square meters and a price of maximum lei 450,000 exclusive of VAT). The reduced VAT rate is applicable under certain conditions.

Standard VAT rate - applicable to the sale of other taxable land and buildings.

2.1.2 Sales of real estate subject to reverse charge

If both the seller and the buyer are registered for VAT purposes, the latter will account for the VAT (the buyer will register both the output and the input VAT).

If the buyer has full VAT deduction right, the reverse charge mechanism will not impact their cash resources.

2.1.3 Sale of real estate VAT exempt without credit, with an option to apply VAT

The sale of old buildings and non-building land is VAT exempt without credit, the seller being able to opt for applying VAT, in most cases, by submitting a notification to the tax authorities. If the seller did not opt for taxation, it may incur costs with non-deductible VAT (from the retroactive adjustment of the input VAT credit claimed in relation to the construction/acquisition of said real estate). Therefore, the option to apply VAT on the sale of real estate must be carefully considered.

2.1.4 Sale of multiple real estate assets (land + buildings)

The VAT treatment applicable to the item with the higher value will dictate the VAT treatment of the entire transaction. If the values are equal, the transaction will be subject to VAT according to the rules applicable to the real estate asset with the largest surface.

If the land and the building are not a single real estate unit, each asset will be analysed individually to determine the applicable VAT treatment.

2.2 Rental and leasing of real estate and similar services

The rental, leasing, concession, granting of rights over real estate is VAT exempted without credit. The taxable person performing said services may opt to apply VAT, by submitting a notification (similar to the case of the sale of real estate). If no VAT is applied, in this case also, a cost with non-deductible VAT may be generated for the taxable person in question from the retroactive adjustment of the input VAT credit claimed in relation to the building/acquisition of said real estate.

2.3 Transfer pricing

Transactions between related parties must be performed at arm's length (e.g. sale of real estate, rental of spaces etc). A company is considered related to another company if it holds, directly or indirectly, 25% of the share capital of the other company or if it holds control over said company. The concept of related parties also applies to individuals.

Lack of documentation to prove compliance with the arm's length principle (e.g. transfer pricing file, evaluation report for the sale of the real estate etc.) may result in negative tax consequences over the taxpayer concerned as the tax authorities can assess (i) the positive adjustment of the taxable base for profit tax or micro-company tax by increasing the income obtained from related parties and/or by reducing the expenses incurred from related parties, as the case may be; (ii) adjustment of the taxable base for VAT related to the real estate transaction; (iii) by applying fines for non-compliance with the transfer pricing obligations.

2.4 Property taxes

Persons who own a building/land located in Romania as at 31 December of the previous year are required to pay an annual tax for these.

Exception from the obligations to pay property tax:

  • Buildings in industrial parks, science and technology parks, and those used by business incubators under certain conditions;
  • Buildings used for providing social services by non-governmental organizations and social enterprises as providers of social services under certain conditions;
  • Buildings used by non-profit organizations used exclusively for non-lucrative activities under certain conditions.

The tax on land is computed based on the surface of the land, the rank of the locality where the land is located, the area and purpose for which the land is used. 

3. Exit

Romanian taxation of income obtained by shareholders from Romanian entities

This article was first published in the report Residential Market Genome 2019, edited by SVN Romania.


Footnotes:

  1. Conditions for the application of tax relief: (i) employers perform activities in the construction field or related activities according to the NACE codes expressly mentioned in the law; (ii) turnover from construction activities is at least 80% of the total turnover, calculated from the previous month, including the month in which the tax facilities are applied; (iii) the salaries of the employees to whom the facilities apply - range from 3,000 lei to 30,000 lei; (iv) the provisions of the Common Order of the Ministry of Finance, Ministry of Work and Social Justice and Ministry of Health no 611/138/127/2019 for approving the instructions for filling in the 112 tax form are complied with
  2. Applicable starting with January 2019
  3. For special working conditions
  4. To be applied in accordance with the provisions in the state aid sector, after the approval of the aid scheme (at the date of publishing this report the aid scheme is not yet approved)
  5. Values applicable starting with 1 January 2019, according to Government Decision no 937/2018 for establishing the minimum gross wage per country guaranteed for payment 
  6. Idem 5
  7. Idem 5
  8. If the owner is a legal entity and it has not updated the value of the building within the last 3 years prior to the reference year, the property tax rate will be of 5%.
  9. Idem 8.
  10. Subject to the conditions of the applicable double tax treaty
  11. Subject to a minimum 10% holding of the share capital for an uninterrupted period of one year
  12. Subject to the condition regarding the minimum number of employees
  13. Subject to a minimum 10% holding of the share capital for an uninterrupted period of one year or subject to the conditions of the double tax treaty
  14. If conditions under point 13 are not fulfilled or no double tax treaty applies or the double tax treaty applicable grants the taxation right to Romania (i.e. if the value of the real estate of the Romanian company whose shares are sold is at least 50% of the value of the assets)
  15. Subject to the conditions of the applicable double tax treaty
  16. Subject to the conditions of a minimum 10% holding of the share capital for an uninterrupted period of one year
  17. Idem 12
  18. Subject to the conditions of the applicable double tax treaty
  19. If no double tax treaty applies or the double tax treaty applicable grants the taxation right to Romania

Theodor Artenie

Managing Director Tax

T: +4021 319 67 90
t.artenie@schoenherr.eu

Linkedin

Anamaria Tocaci

Tax Manager

T: +40 2 131 96 790
a.tocaci@schoenherr.eu

Linkedin

Alexandra Barbu

Senior Tax Consultant

T: +40 21 319 67 90
a.barbu@schoenherr.eu

Linkedin

legal service:

tax

country:

romania

publishing house

SVN Romania | Residential Market Genome 2019