Direct taxes

08.02.2013 ZF English

Corporate taxation

Standard rate: 16%

Corporate taxpayers

The following entities are subject to corporate tax in Romania:

• Romanian companies (defined as “any legal entity that has been established in accordance with the legislation of Romania or that has its place of effective management in Romania”).
• Foreign companies which have a permanent establishment in Romania, on the profits attributable to the permanent establishment.
• Foreign companies or individuals which carry out activities in Romania through partnerships or associations that do not qualify as a Romanian legal entity, on the income derived from Romania.
• Foreign companies which realize income in connection with immovable property located in Romania or from the sale of shares in Romanian companies. Some tax treaties entered into by Romania offer protection from Romanian corporate tax to non-Romanian companies earning revenues from the sale of shares in Romanian companies (even if the assets of the Romanian company whose shares are being sold mainly consist of immovable property located in Romania).
• Public institutions on income derived from economic activities.
• NGOs on income derived from economic activities exceeding EUR 15,000 in one year.

Tax year and accounting period

• The accounting and the fiscal year generally follow the calendar year.
• Tax losses can be carried forward and deducted from taxable profits to be recorded in the following 7-year period (the carry forward period for losses recorded up to 31 December 2008 is 5 years), on a first-in-first-out basis. No carry back of tax losses is available.
• Corporate tax is payable on a quarterly basis (for quarters I-III), by the 25^th of the month following the relevant quarter. An annual corporate tax return must be filed by 25 March of the following year. Most taxpayers may now opt for an advance payment system (under changes which took effect from January 2013), i.e. paying corporate tax advances on a quarterly basis, based on the previous year’s results rather than current year results. For banks, the advance payment system is compulsory.

Taxable base

The taxable profit of a company is determined based on the accounting result, which is, adjusted for tax purposes by deducting non-taxable revenues and adding back non-deductible expenses.

Non-taxable revenues

The following types of income are non-taxable for corporate tax purposes:

• Dividends received by a Romanian company from another Romanian company. Dividends may be paid only out of profits reflected in annual financial statements, which must be approved by shareholders (no interim dividends may be paid by Romanian companies).
• Dividends received by a Romanian company from its subsidiary (more than 10% shareholding), in another EU member state, if the shares have been held for at least two years. Even if the shares have been held for less than 2 years, the dividends may still be tax exempt, provided that the shares continue to be held for sufficient time so as to fulfil the 2-year holding period. In this case however, the dividends are initially treated as taxable revenues upon recognition, and only once the 2-year holding period is fulfilled may the exemption be claimed.
• Income from the reversal of previously non-deductible provisions, as well as income from the reversal or recovery of expenses which were previously treated as non-deductible.

Non-deductible expenses

As a general rule, expenses are deductible only if they are incurred with a view to generating taxable income. Certain expenses are specifically provided under the Fiscal Code as being non-deductible, for example:

• Corporate tax due in Romania or abroad.
• Withholding tax paid by a Romanian taxpayer on behalf of non-residents (i.e. tax which has not been withheld, but has been recorded as an expense of the Romanian income paying entity).
• Fines or penalties due to Romanian and foreign authorities.
• Expenses recorded in relation to the write-off of missing or damaged inventories and non-current assets (except in certain circumstances), as well as the related VAT. 
• Expenses recorded in relation to bad debts written off (these may be partially or fully deductible under certain circumstances).
• Expenses which are not properly backed-up by supporting documents.
• Expenses related to management, advisory and other services, if such expenses are not backed-up by a written agreement and by documents which prove that the services were effectively rendered.
• Sponsorship expenses (a tax credit may be claimed for some sponsorship expenses up to a certain threshold).
• "Protocol" (entertainment) expenses exceeding 2% of gross profit.
•  50% of the expenses incurred in relation to functioning, maintenance and repairs of motor vehicles used for passenger transport with a maximum authorized weight of 3.5 tons and maximum 9 seats (including the driver’s seat) that are not used exclusively for business activities. Depreciation of the relevant vehicles is deductible up to RON 1,500 per month.  

Provisions and reserves

Companies are required to set up a legal reserve which is calculated as 5% of the gross accounting profit (to which certain tax adjustments are made), until this reserve reaches 20% of the paid in share capital. This reserve is deductible for tax purposes.

Specific provisions set up by credit institutions, non-banking financial institutions and other similar legal entities, as well as technical reserves set up by insurance and reinsurance companies (in accordance with specific legal provisions) are fully deductible for tax purposes.

Provisions for doubtful customers are deductible under certain conditions.

Depreciation

The following depreciation methods are available for tax purposes:

• Straight-line method;
• Reducing balance method (may be applied only to certain assets). When using this method, a coefficient of between 1.5 and 2.5 is applied to the straight-line depreciation rates, depending on the useful life of the assets;
• Accelerated depreciation method (applied in the case of technological equipment and patents). The accelerated method allows for a deduction of up to 50% of the cost of the asset during the first year of operation.

Ranges of acceptable depreciable useful lives for certain categories of assets:

• Buildings:
  Office and industrial buildings - between 40 and 60 years
  Buildings used in trading activities (e.g. stores) - between 24 and 36 years
• Motor vehicles - between 4 and 6 years
• IT equipment - between 2 and 4 years
• Furniture - between 9 and 15 years
• Telecom equipment - between 4 and 6 years

Thin capitalization rules

The following rules apply to the deductibility of interest expenses:

1. Interest expenses and foreign exchange losses recorded in relation to loans obtained from a financial institution (e.g. bank loans) are fully deductible.
2. Deductibility of interest expenses recorded in relation to loans obtained from non-financial institutions (e.g. shareholder loans) is subject to the following limits:
   • Interest rate limitation: deductibility of interest expenses may be claimed only up to a 6% interest rate (for loans denominated in foreign currencies) and the reference interest rate published by the National Bank of Romania for loans denominated in RON. Any interest in excess of the relevant threshold is permanently non-deductible for corporate tax purposes.
   • Debt-to-equity limitation: if the company’s debt-to-equity ratio (calculated as the ratio between borrowings obtained from non-financial institutions maturing after more than 1 year and the company’s equity) exceeds 3:1 (or is negative), interest expenses and foreign exchange losses recorded in relation to loans obtained from non-financial institutions should be treated as non-deductible for corporate tax purposes.

However, they may be carried forward over an indefinite period of time in order to be deducted against taxable profits of the company to be earned in future years, if and when its debt-to-equity ratio falls below the relevant threshold.

Transfer Pricing

Transactions between related parties must respect the arm’s length principle.  OECD transfer pricing methods are also recognized by the relevant Romanian legislation. Romanian companies are required to maintain documentation to demonstrate that their transfer pricing policy is arm’s length.

Withholding tax on dividends to Romanian shareholders

Romanian companies are required to withhold tax from dividends paid to resident shareholders by applying the following tax rates:

• 0% for dividends paid to corporate shareholders, provided that the dividend recipient has held at least 10% of the shares of the dividend paying entity for an uninterrupted period of at least 2 years.
• 16% for dividends paid to individuals or to corporate shareholders which do not fulfil the conditions mentioned above.

Source: KPMG - Investment in Romania report (May 2013)