The 1994 Profits Tax Ordinance with significant amendments was passed by Parliament on August 1997 and becomes effective 1 January 1997.
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) and permanent establishments.
CORPORATE RESIDENCE
A company is considered resident if it has its domicile or central administration in Romania.
OTHER TAXES
Value-Added Tax
VAT is imposed on goods sold and services rendered in Romania; the normal rate is 18%. There is a reduced VAT rate of 9% for certain basic foods and medicines (bread and domestic heating /power is exempt).
Border Tax
A border tax of 0.5% is applied on the customs value. A local tax of 1.5% of the value is levied on buildings on an annual basis. There is also a local tax on land.
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 basis is represented by the total revenues generated from advertising or selling of this category of product.
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 difficult working conditions the social security fund contribution can be increased up to 35%.
BRANCH INCOME
A company with its head office outside Romania may set up a branch. A branch office has rights similar to those of a Romanian limited liability company. A branch may carry out trading activities, but these must be conducted in lei, for the local market. The effective branch profits tax rate is 44.2%.
REPRESENTATIVE OFFICE
Companies that have their trading head office abroad and want to establish a representative office in Romania will be subject to all provisions concerning incorporation required by the home country.
However, the company does not have a Romanian legal status and as such could not engage in any contract work. 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 USD1,200 per annum plus an additional 10% for each additional company it represents. Representative offices must also pay a tax of between USD 2,000 and 14,000, based on the number of employees.
INCOME DETERMINATION
Taxable profit for a taxpayer is calculated as the difference between income and related expenses (deductions) plus nondeductible expenses.
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:
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, unless those revenues are subject to tax in the foreign state and a bilateral agreement between Romania and the said state stipulates otherwise.
STOCK DIVIDENDS
The payment of stock dividends (bonus shares) is not provided for in current legislation.
DEDUCTIONS
Companies may deduct all expenses incurred in realising revenues except for the following costs.
Taxes on income and taxes on foreign revenues paid by foreign entities operating in Romania.
Depreciation, amortisation and depletion above the rates provided by law (see below).
Fees and penalties due or paid to Romanian and foreign authorities.
Expenses for entertaining, advertising and publicity above 3% of the net profit.
Amounts used for the creation or increase of reserves in excess of those allowed by law.
Sponsorship expenses that exceed the limit of 5% of net income. Deduction of bad debts and other provisions are severely limited.
DEPRECIATION AND AMORTISATION
Tax depreciation of tangible assets is calculated on the same basis as accounting depreciation. This is by the straight-line method at useful lives determined by the authorities. There is an exhaustive list of items and rules, which is updated occasionally. These rates are generally lower than those applicable in the United States or the
United Kingdom.
Intangible fixed assets are generally depreciated over a five-year period on a straight-line method basis.
NET OPERATING LOSSES
The taxpayer has the right 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 a maximum of 36 months 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.
GROUP TAXATION
There is no concept of group taxation in current Romanian legislation, and each company in a group is taxed separately.
TAX INCENTIVES
The profits tax rate on profits generated from the export of goods and services is reduced by 50% (ie 19%).
Taxpayers are also entitled to a 50% reduction of the tax due for the profits reinvested in enterprises set up in Romania that are meant to widen and upgrade the technical and material bases, to improve manufacturing technology or expand activity, to obtain additional profits, and to secure protection of the environment.
Foreign investors benefit from the following additional incentives when they establish operations in Romania.
Imported machinery, equipment, installations, means of transport, etc., that represent the capital participation of the foreign investor or that are acquired and imported out of social capital are exempt from import duties and VAT.
Raw materials, supplies and components imported for production purposes are exempt from import custom duties and VAT for a period of two years from the date the project is commissioned.
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 are subject to the following withholding taxes if there are no other provisions in international treaties:
- 15% on interest on trade credits and commissions on commercial transactions;
- 15% on revenues from technical assistance, expertise, training, and all other services;
- 15% on royalties obtained through the concession of patents, licenses, trademarks, and other intellectual rights.
DOUBLE TAXATION TREATIES
The following double taxation treaties are currently in force.
Austria
Finland
Luxembourg
Russia
Bangladesh
France
Malta
Spain
Belgium
Germany
Malaysia
Switzerland
Canada
Hungary
Morocco
Sweden
China, P.R.
Italy
Niger
Turkey
Cyprus
Japan
Norway
Tunisia
Czech Republic
Jordan
Netherlands
United Kingdom
Denmark
Kuwait
Poland
United States
Egypt
Korea
Pakistan
Ukraine
Zambia
There are a number of additional treaties awaiting ratification. Furthermore Romania is currently renegotiating the treaties with their major trading partners.
TAX ADMINISTRATION
Returns
All entities are taxed on a calendar-year basis.
Taxpayers other than banks must file a quarterly return with the local tax office by the 25th of the month following the quarter end. Banks must submit monthly returns. An annual return is prepared by April of the following year.
Payment of Tax
The tax on corporate income must be paid by taxpayers (other than banks) at the time of submitting the return. Banks pay profit ten monthly, by the 25th of the following month.
Corporation tax calculation. (example for illustrative purposes only)
Calendar year ended 31 December 1996
In ROL thousands Net profit before tax 100,000 Less Deductions: Dividends received from Romanian entities 10,000 Deductible contribution to reserve fund (5% of profit) 5000 15000 85,000 Nondeductible expenses: Fees and penalties 2,500 Protocol and advertising expenses over 3% 1,500 Sponsorship expenses over 5% of taxable income 1,000 5,000 Taxable income before offset of losses brought forward 90,000 Less/Loss brought forward 10,000 Taxable income 80,000 Tax on profit (38%) 30,400 Less/Cumulated tax on profit paid from 28,000 the beginning\of the year Payable tax on profit 2,400
Note:
Official exchange rate at 31 December 1996: USD 1 = ROL 4,000. The market exchange rate at that date was approximately USD 1 = ROL 4,800.
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, contact the following Price Waterhouse Senior Tax Manager:
Ron Barden
Price Waterhouse Romania
Union International Centre
11 Ion Campineanu Street
Sector 1 Bucharest
Romania
Telephone: (40) (1) 311 24 55
Fax: (40) (1) 312 33 34
LN domain: Ron Barden@PriceWaterhouse-Europe
or
enter a text search 'Price Waterhouse' and 'Business Monitor'.