A new taxation ordinance was introduced during late 1994 and technically came into force with effect from 1 January 1995. Although, the ordinance is applicable at this stage, it has not yet been ratified by the Parliament through a law and a number of changes have already been proposed. The information herein is based on the current provisions of the ordinance.

TAXES ON CORPORATE INCOME

All legal entities doing business in Romania are liable for payment of corporate income taxes. The normal corporate income tax rate is 38%. An additional rate of 6.2% is paid by foreign legal entities operating in Romania (branches).

For taxpayers for whom, during a fiscal year, agricultural revenues account for more than 80% of total revenues, the tax rate is 25%.

When revenue from gambling, including income from bars and nightclubs, represents more than 50% of a company's total revenue, an additional tax rate of 22% is levied on the profit deriving from these activities.

BUSINESS ENTITIES

According to the Company Law No 31 of 17 November 1990, companies with foreign participation (joint ventures) may be organized in any business form. The theoretical legislative framework, as described in article 2, identifies the following business forms.

1 PARTNERSHIP: Obligations guaranteed by the capital and by the unlimited and joint liability of the partners.


2 LIMITED PARTNERSHIP: Obligations guaranteed by the capital and joint liability of the general partners; limited partners are liable only up to the value of their participation.

3 LIMITED PARTNERSHIP BY SHARES: Capital divided by shares, and obligations guaranteed by the capital and by the unlimited and joint liability of the general partners; limited partners are liable only for the payment of their shares.

4 JOINT STOCK COMPANY: Obligations guaranteed by the registered assets; shareholders are liable only for the payment of their shares.

5 LIMITED LIABILITY COMPANY: Obligations guaranteed by the registered assets; shareholders are liable only for the payment of their contributions.

Companies registered in Romania, in one of the forms above, are Romanian legal persons. In addition to the above types of organization, Romanian law allows establishment of representative offices and branches of foreign companies. Representative offices are only allowed to carry on activities of an auxiliary and preparatory character. Branches are not Romanian legal persons, and they are not clearly defined in the law.

The most common types of business organization chosen by foreign investors are the following:

  • Joint Stock Company (S.A.);
  • Limited Liability Company (S.R.L.);
  • Branch;
  • Representative Office.

Prior to 31 December 1994 various tax incentives were available to companies with foreign participation. For entities established on or after 1 January 1995 the tax incentives have been severely restricted.

CORPORATE RESIDENCE

A company is considered resident if it is a Romanian legal person.

OTHER TAXES

  • Value-Added tax

VAT is imposed on goods sold and services rendered in Romania. The normal rate is 18%. Exempt supplies include: bread, heating combustibles, electrical and thermal energy for domestic use, water, sewerage and waste services. Exempt services include: financial, insurance, educational, and printing services. Imports of goods and services are also subject to VAT. Exports of goods and services (used outside the territory of Romania) are zero rated. A reduced VAT rate of 9% is also applicable for certain basic foods and medicines.

  • Excise Tax

Excise tax is imposed on the importation and production of some goods. The main categories of excise goods and the tax rates are as follows:

Refined alcohol                                             50
Beverages with a high alcohol content                      100
Cereal distillates (whisky, gin, rum)                      150
Wines                                                       20
Wine based drinks (eg champaign)                        45-150
Beer                                                     55-70
Coffee                                                      80
Cigarettes                                       1-12 ECU/1000
Tobacco products (except cigarettes)                       115
Perfumes and cosmetics                                      20
Cassettes and CD players                                    40
Cars with engines exceeding 1800 cc                         50
Motorcycles, scooters and mini-scooters                     30
Diesel fuel                                                  6
Gas (oil)                                                   15
Lead-free gas (oil)                                       13.5
Natural gas                                   30,400lei/1000mc

  • Border Tax

A border tax of 0.5% (0.25% for EU, EFTA, Czech Republic and Slovakia) is applied on the customs value.

  • Property Tax

Property tax is levied on natural and legal persons who are owners of property, such as; buildings, constructions used for business, and land that is not subject to agricultural tax.

The tax of 1.5% of the value is levied on buildings on an annual basis. The tax rate is of 1% for the buildings owned by natural persons. There is also a local tax on land.

Owners of vehicles (including boats) are subject to a tax which is determinated based on the engine's capacity.

  • Health Tax

Companies that obtain revenues from advertising cigarettes, tobacco and alcoholic beverages are subject to a 10% tax, while retailers of the same products must pay a 1% tax. The tax base is the total revenues from advertising or selling these categories of products.

  • Social Security Tax

Employers must pay social security contributions, calculated on the gross salary costs as follows:

- 23% Social security fund
- 2% Medical fund
- 5% Unemployment fund.

For hard working conditions, the social security fund contribution can be increased up to 35%.

  • Branch Income

A foreign company having its head office abroad, may set up a branch in Romania. A branch office has similar rights to a Romanian company. A branch may carry out trading activities, but these must be conducted in ROL, for the local market. The effective branch profits tax rate is 44.2%.

  • Representative Office

The representative office should be considered as the first step for a foreign company in setting up a presence in Romania. This form of organization should provide the investor with a relatively low set-up cost. However, the company does not have a Romanian legal status and, as such, could not engage in any contractual activity. Also, a representative office is not entitled to reclaim VAT.

Commercial representative offices must be licensed by the Ministry of Trade and Tourism. The cost of an operating license for a representative office is USD 1,200 per annum plus an additional 10% for each additional company it represents. Representative offices of foreign banks are to be licensed by the National Bank of Romania. The representative offices of foreign airlines are subject to Romanian Civil Aviation Department approval and the international civil aviation treaties signed by Romania.

Representative offices must also pay an annual tax of between ROL 100,000 and
ROL 800,000 based on the number of employees.

  • Income Determination

According to Corporate Tax Ordinance No 70/1994, taxpayers are divided into two categories:

- large taxpayers;
- small taxpayers.

A small taxpayer is defined as a Romanian legal entity that fulfills the following conditions:

a) a turnover of less than ROL 10 billion (approx USD 3.5 million) for a period of 12 months ended on 30 November of previous year.

b) less than 299 permanent employees at the beginning of the fiscal year; and

c) was a small taxpayer for all fiscal years since its inception.

The legal entities that do not fulfill all of the above conditions are considered large taxpayers. Any small taxpayer may apply to the Ministry of Finance to be considered as a large taxpayer. The approval is irrevocable. There are current proposals in the Parliament to eliminate the distinction between the different categories of taxpayers.

Taxable profit for a small taxpayer is calculated as the difference between income and related expenses, as shown below. Taxable profit for large taxpayers is generally calculated as the difference between the net assets of the entity at the beginning of the fiscal year, adjusted for inflation, and the net assets at the end of the fiscal year, plus nondeductible expenses, less any increase in share capital during the year.

  • Inventory Valuation

Most assets and liabilities are valued at acquisition cost or at the technical cost of production. The following methods are acceptable for inventory valuation for tax purposes:

1 Standard cost;
2 Average (weighted) cost;
3 FIFO.

Wholesalers value inventories at the proposed selling price. Conformity between book valuation and tax reporting valuation is required.

  • Capital Gains

Capital gains for corporations are taxed as ordinary income.

  • Intercompany Dividends

Dividends received from Romanian subsidiaries and other domestic corporations within Romania are not included in the taxable income of the recipient. Withholding tax of 10% does apply.

  • Foreign Income

Resident corporations are taxed on all income, including revenue from sources outside the Romanian territory. However, credit is given for tax paid in a foreign state, provided there is a bilateral agreement between Romania the other state.

  • Stock Dividends

The payment of stock dividends (bonus shares) is not provided for in current legislation.

  • Deductions

Companies may deduct all expenses incurred in connection with revenues, except the following:

1 Profit tax due as well as tax on foreign source revenues.

2 Depreciation charges over the rates set by law.

3 Fines and penalties due to Romanian or foreign authorities.

4 Expenses for entertaining, advertising and representation, above the limit set in the Annual Budget Law (3% according to 1996 Budget Law).

5 Amounts used for the setting up or increase of reserves, except for the statutory reserves.

6 Sponsorship expenses that exceed the limit of 5% of taxable income.

  • Depreciation And Amortization

The calculation of depreciation for tax purposes is different for large and small taxpayers. For a small taxpayer, tax depreciation is the same as the accounting depreciation. The list of fixed assets and rules are given in Goverment Decision 226/94. The rates are generally lower than those applicable in the US or UK.

Tax depreciation for large taxpayers is different from the accounting depreciation. Assets are divided into 6 pools based on their useful life, and are depreciated using a reducing balance depreciation method.

The pools and the rates are as follows:

CLASS/POOL               USEFUL LIFE            YEARLY RATE
                         No of years                  %

1                            1-4                   40.0

2                            4-8                   17.0

3                            8-12                  10.0

4                           12-20                   7.0

5                           20-30                   4.5

6                    More than 30                   2.0

Fixed assets whose useful life cannot be determined according to the legal provisions should be included in class 4. The opening balance of each pool and any additions in the year are adjusted for inflation.

If the value of disposals of fixed assets in a pool during the year is greater than the year-end balance, the difference is included in revenue, and the year-end balance is reduced to nil. If the balance of any pool at the year-end is less than ROL 200,000, the year-end balance is written off in full.

Intangible fixed assets are generally depreciated over a maximum five-year period using the straight line method of depreciation.

INTEREST EXPENSE

The maximum deductible interest expense for non-financial institutions is equal to total interest income plus 20% of other income of the company for the respective fiscal year. The interest expense which remained nondeductible portion may be carried forward (determined according to the law for small and big tax payers) to next year.

NET OPERATING LOSSES

Taxpayers are allowed to carry forward pre 1995 losses for a period of two years.

Losses incurred in periods commencing after 1 January 1995 may be carried forward for five years by large taxpayers (adjusted for inflation) and 36 months by small taxpayers. Losses incurred on foreign-source income may be deducted only from foreign revenues, on a source-by-source basis.

  • Taxes

Taxes on income are not deductible. Taxes for the use of state property lands and taxes on the means of transportation of the company that are included in expenses are deductible in full.

  • Reserves

Contributions to the statutory reserve fund of companies and to other special funds, are deductible up to the legally specified limits.

  • Group Taxation

There is no concept of group taxation in current Romanian legislation. Each company in a group is taxed separately.

  • Tax Incentives

Profit tax holidays are available only for companies with foreign participation that are established prior to 31 December 1994 provided that:

(1) the foreign party's underwritten and paid capital is at least 20% of the company's total nominal capital and

(2) the foreign contribution to capital is no less than USD 10,000. The above conditions are also necessary in order to benefit from customs duty and VAT exemptions (see below).

The profits tax holiday periods are the following:

1 Investments in industry, agriculture, exploration, exploitation of natural resources and in the construction sector: for a period of five years from commencement of productive operations.

2 Investments in the communications and transport sectors: for a period of three years from commencement of the respective operations.

3 Investments in trade, tourism, banking, and insurance services, as well as any other services: for a period of two years from commencement of the respective operations.

If voluntary liquidation of a foreign investment occurs within a time span that is shorter than twice the period for which tax exemptions have been granted, foreign investors must pay those taxes on profits imposed by the law for the whole duration of the investment.

With effect from 1 January 1995 Romanian legal entities established on or after that date are no longer entitled to a corporate tax holiday.

However, small taxpayers are entitled to a 50% reduction of the tax due for the profits reinvested in enterprises set up in Romania that are meant to improve manufacturing technology or expand activity, to obtain additional profits, and to protect the environment.

Foreign investors still benefit from the following incentives when they establish operations in Romania:

1 Imported machinery, equipment, installations, means of transport or other goods necessary for the investment that represent the capital participation of the foreign investor or acquired out of social capital are exempt from customs duties and VAT.

2 Raw materials, supplies and components imported, provided that they are imported for production purposes, are exempt from custom duties and VAT for a period of two years from the date the project is commissioned or from starting of operations.

  • Withholding Taxes

There is a withholding tax of 10% on dividends paid by companies.

According to Decree 276 of 1973 (modified in 1977 by Decree 125), nonresident legal and natural persons from countries with which Romania has no Double Tax Treaty are subject to the following withholding taxes:

- 15% on interest on trade credits and commissions on commercial transactions.

- 15% on revenues from technical assistance, expertise, training, and all other services.

- 20% on royalties obtained through the concession of patents, licenses, trademarks, and other intellectual property rights.

Double Tax Treaties

The following Double Tax Treaties are currently in force:

Austria             France             Netherlands 
Bangladesh          Germany            Russia
Belgium             Hungary            Spain 
Canada              Italy              Sweden
CMEA (Comecon)      Jordan             Switzerland
Cyprus              Japan              Tunisia      
Czech Republic      Kuwait             Turkey
China               Morocco            United Kingdom
Denmark             Malaysia           United States
Egypt               Niger              Zambia
Finland             Norway 

The following are awaiting ratification:

Albania             Kuwait             South Koreea
Algeria             Luxembourg         Sudan
Bulgaria            Lebannon           Thailand
Czech Republic      Poland             United Arab Emirates
Costa Rica          Philippine         Vietnam
Equador             Russia
Greece              Slovak Republic
Hungary             South Africa

TAX ADMINISTRATION

  • Returns

Large tax payers are taxed on a calendar year basis. A large taxpayer is required to file a return with the local tax office by no later than May 15 of the following year.

Small taxpayers must file a monthly return with the local tax office by the 25th of the following month.

  • Payment Of Tax

The tax on corporate income must be paid by large taxpayers in advance on a monthly basis, by the 25th of the following month. The payment should represent the amount of 1/12 of the tax on profit of the preceding fiscal year. The proportion of the preceding fiscal year's tax paid is adjusted for inflation for the period from the end of the preceding fiscal year to the month when the tax is paid. The final liability is due with submission of the annual return.

Small taxpayers pay monthly profits tax by the 25th of the following month.

EXAMPLE OF CORPORATION TAX CALCULATION (SMALL TAXPAYER)

Calendar year ended 31 December 1995.

                                          ROL (000's)   ROL (000's)

Net profit before tax                                      100,000

Less deductions:

Dividends received from Romanian entities     10,000
Deductible contribution to reserve fund       15,000       (25,000)

Net profit before tax less deductions                       75,000


Add non-deductible expenses:

Taxes on income                               40,000
Fees and penalties                             2,500
Protocol and advertising expenses 
over 3% limit                                  1,500
Sponsorship expenses over 5% of
taxable income                                 1,000
Nondeductible interest expenses                2,000

Total non-deductible expenses	                 47,000

Taxable income before offset of losses 
brought forward                                            122,000
Loss brought forward                                       (10,000)

Taxable income                                             112,000

Tax on profit @ 38%                                         42,560

Cumulated tax on profit paid from the 
beginning of the year                                      (31,000)

Payable tax on profit                                       11,560

Official Exchange rate at 31 December 1995: USD 1 = ROL 2,578. The market exchange rate at that date was approximately USD 1 = ROL 3,000.

Disclaimer

The above information is a short summary and is not intended to be advice on any particular matter. Price Waterhouse expressly disclaims any liability to any person in respect of anything done in reliance on the contents of this publication.

For additional information on taxation in Romania:

Ron Barden
Price Waterhouse Romania
Union Center International
Strada Ion Campineanu No 11
Sector 2 Bucuresti
Romania

or enter a text search 'Price Waterhouse' and 'Business Monitor'.