Source investment guide Deloitte 2023
Accounting and fiscal period
The accounting and fiscal year is considered to be the calendar year or the period during which the entity existed, if it was set up, or ceased to exist during that year. Certain categories of entities (i.e. Romanian branches of foreign companies, Romanian consolidated subsidiaries and subsidiaries of the subsidiaries of foreign companies, except for credit institutions) are allowed to set an accounting year other than the calendar year, if the financial year of the parent company is different from the calendar year. Further to the change of the financial year, companies may opt also for the change of the tax year in order to align with the accounting period.
Tax base in Romania
The taxable profit of a company is calculated as the difference between the revenues derived from any source and the expenses incurred in obtaining taxable revenues through- out the tax year, adjusted for fiscal purposes by deducting non-taxable revenues and adding nondeductible expenses. Other elements similar to revenues and expenses are also to be taken into account when calculating the taxable profit.
Non-taxable revenues in Romania
The most relevant non-taxable revenues stipulated by the Romanian Fiscal Code are, inter-alia:
• Revenues from dividends received by a Romanian company from another Romanian company • Revenues from dividends received by a Romanian company from a subsidiary situated in an EU member state, subject to certain conditions, i.e. the Romanian company is a profit taxpayer and has held at least 10% of the subsidiary’s shares for a continuous period of at least two years by the date the dividends are paid.
• Unrealized favorable differences in the value of participation titles and long term bonds (e.g. effected according to the accounting rules, or in case of titles following the capitalization of reserves, benefits or share premiums).
• Revenues from reversal or cancellation of provisions / expenses that were previously non- deductible, recovery of expenses that were previously non-deductible and revenues from reversal or cancellation of interest and late-payment penalties that were previously non- deductible.
• Non-taxable income expressly provided for under agreements and memoranda.
Deductibility of expenses
From the deductibility standpoint, expenses fall into three categories: deductible expenses, limited deductibility expenses and non- deductible expenses.
As a rule, expenses are deductible only if incurred for business purposes. The following expenses are considered as being incurred for generating taxable income:
• Expenses incurred for marketing, market research, promotion on existing or new markets, participation in fairs and exhibitions, in business missions and publishing of own brochures; • Advertising expenses incurred in promoting the company, products or services, based on written contracts, as well as costs associated with the production of the materials necessary for broad-casting advertisements, including goods granted as samples, for product testing at selling units, as well as other goods and services granted in order to stimulate sales;
• Research and development expenses that do not meet the requirements to be recognised as intangible assets for accounting purposes;
• Expenses incurred for environmental protection and resource conservation;
• Expenses incurred for improvement of management, IT, the introduction, maintenance and development of quality management systems, and obtaining quality compliance confirmation;
• Bad debts expenses are fully deductible in any of the following cases: the bankruptcy procedure of the debtor was closed based on a court decision; the debtor is deceased and the receivable cannot be recovered from the heirs; the debtor is dissolved or liquidated; the debtor has major financial difficulties affecting its entire patrimony;
• Travel and accommodation expenses related to business trips in Romania or abroad by employees and directors, and also individuals treated as holding these positions (directors based on mandate and secondees whose costs are covered by the Romanian company); this also includes personnel’s transport to and from the workplace;
• Expenses incurred from professional training and development of employees; • Expenses incurred in relation to work safety, prevention of work accidents and occupational diseases, the related insurance contributions and professional risk insurance premiums; • Expenses incurred from acquisition of packaging during their useful life.
• Fines, interest, penalties and other increased payments due under commercial contracts.
Limited deducibility expenses
The deductibility of certain expenses is limited as follows:
• Financial costs under certain rules aligned with the European provisions (see details below);
• Depreciation of assets under fiscal depreciation rules (see details below);
• Perishable goods capped as set by the relevant central administration bodies;
• Protocol expenses are deductible up to the limit of 2% of the difference between total taxable revenue and total expenses related to taxable revenue, except for protocol and profit tax expenses;
• Daily allowances for expenses from domestic and foreign travel by employees are deductible up to the level of 2.5 times the ceiling set for public institutions;
• Social expenses are deductible up to 5% of salary expenses. Among others they can include maternity allowances, expenses for nursery tickets, funeral benefits and allowances for serious or incurable diseases and prostheses, as well as expenses for the proper operation of certain activities or units under taxpayers’ administration (i.e. kindergartens, nurseries, health services supplied for occupational diseases and work accidents prior to admission to health establishments, canteens, sports clubs, clubs, etc.); expenses incurred for benefits granted under a collective labor agreement, such as holiday tickets granted to employees.
• Taxes and contributions paid to non-government organizations and professional associations related to the taxpayer’s activity are deductible up to the limit of EUR 4,000 per year.
• 50% of expenses from operation, maintenance and repair of vehicles not used solely for business purposes.
Expenses, which are specifically nondeductible, include, among others, the following:
• Domestic profit tax and profit tax paid in foreign countries;
• Expenses related to non-taxable revenues; Note that revenues from dividends have no corresponding expenses.
• Expenses related to withholding tax supported by Romanian taxpayers on behalf of nonresidents; • Interest, fines and penalties due to Romanian or foreign authorities;
• Sponsorship and patronage expenses and expenses for private scholarships. Taxpayers are granted a fiscal credit up to whichever is the lower of 0.5% of turnover and 20% of the profit tax due.
• Expenses incurred from insurance premiums un-related to company assets or business, save for those regarding goods which are bank collateral on loans used to conduct the activity for which the taxpayer is authorised or those used under rental or leasing contracts; • Bad debts expenses in excess of the deductible provision (see below); • Expenses recorded without proper “justifying” documents;
• Expenses in favour of shareholders, other than those related to goods or services provided by the shareholders at market value;
• Expenses incurred from fixed assets impairments (i.e. losses in value defined as provisory adjustments by the accounting regulations transposing European Accounting Directives).
Provisions and reserves
Amounts used for setting up or increasing reserves or provisions are deductible as follows:
• Setting up or increasing the legal reserve fund to a limit of 5% of the yearly accounting profit before tax (with adjustments) until it reaches 20% of the share capital. • Provisions for doubtful debts are deductible up to the limit of 30%, if the related receivables meet the following conditions simultaneously: – not collected for a period exceeding 270 days from the due date – not guaranteed by another person – -due by a person not affiliated with the tax- payer – included in the taxable income of the tax- payer.
• Bad debt provisions are fully tax deductible if all the following conditions are met: – the debtor is a company that entered into the bankruptcy process – another person does not guarantee receivables – the debtor is not a related party
• Specific provisions established by credit institutions, non-banking financial institutions and other similar entities.
• Technical reserves set up by insurance and reinsurance companies, in accordance with their regulatory legal framework except for the equalisation reserve.
• Risk provisions for transactions carried out on financial markets, in accordance with the rules issued by the National Commission Securities.
As a general rule, the reduction or cancellation of any provision or reserve deducted from the taxable profit, due to changing the destination of the provision or reserve, distribution towards shareholders in any form, liquidation, spin off, merger or any other reason, is included in the taxable revenues and taxed accordingly. The reconstruction of the legal reserve is also non-deductible.
Accounting and fiscal depreciation
The Fiscal Code makes an explicit distinction between accounting and fiscal depreciation. For fixed assets, fiscal depreciation is to be calculated based on the rules set out by the Fiscal Code and deducibility no longer depends on the level of depreciation recorded in the accounts.
• Expenses of all intangible assets recognized for accounting purposes, with the exception of start-up costs and goodwill will now be amortizable.
• The calculation of depreciation of fixed assets for tax purposes is based on the fiscal value, and may need to be adjusted for revaluations according to accounting rules.
• Fiscal depreciation should be calculated based on the asset’s fiscal value and useful life for tax purposes, by applying one of the permitted depreciation methods:
A. straight-line method,
B. accelerated depreciation and
C. reducing balance method.
• Technical equipment, computers and peripherals can be depreciated by using any of the above depreciation methods. For any other fixed assets (except for buildings for which only the straightline method can be applied), only the straight line or digressive method can be used. From 2009, the accelerated depreciation method may also be applied to equipment used in research and development activities.
• If the fair value determined upon the revaluation of the fixed assets drops below the fiscal value (i.e. equal to acquisition cost, production cost, market value of the fixed assets acquired for free or contributed to the share capital, adjusted with accounting reevaluations) the non-depreciated fiscal value of fixed assets is computed based on the fiscal value.
• The same applies for re-evaluation of land should it result in a decrease in value to below the fiscal value. Thus, the new value recognized for fiscal purposes would be the fiscal value.
Deductibility of borrowing costs
Starting with January 1, 2018, the ATAD Directive has been transposed into the Romanian domestic legislation, as such the interest and FX expenses are subject to a different limitation rules. The exceeding borrowing costs (computed as the difference between borrowing expenses and revenues) are subject to the following deductibility limits:
• are deductible expenses within the threshold of EUR 1 million;
• if the exceeding borrowing costs exceed the above mentioned threshold, the companies could deduct a further amount of 30% of a tax adjusted EBITDA.
• If the tax adjusted EBITDA is zero or negative, the borrowing costs exceeding the 1,000,000 threshold are treated as non-deductible for corporate income tax purposes during the current tax period, but can be carried forward indefinitely. The new rules also apply to interest and foreign exchange losses carried forward from the past and accumulated as at 31 December 2017.
• Transactions between related parties should observe the arm’s length principle. If transfer prices are not set at arm’s length, the Romanian Tax Authorities have the right to adjust the taxpayer’s revenues or expenses, to reflect the market value. When the taxpayer fails to submit the file or when an incomplete transfer-pricing file is submitted, the tax authorities have the right to estimate the transfer prices. The transfer prices will be adjusted/estimated by using the median of the market range.
• Traditional transfer pricing methods (comparable uncontrolled price, cost plus and resale price methods), as well as any other methods that are in line with the OECD Transfer Pricing Guidelines (i.e. transactional net margin and profit split methods) may be used for setting and justifying transfer prices.
• Domestic legislation expressly stipulates that when applying transfer-pricing rules, the Romanian tax authorities also consider the OECD Transfer Pricing Guidelines.
• Transfer pricing documentation
• The local transfer pricing legislation provides for specific TP documentation requirements based on the category of taxpayer (large or small and mediumsized), the annual value of inter-company transactions and the type of transaction, as follows:
• Large taxpayers, which carry out intercompany transactions with a total annual value higher than any of the following thresholds, have the obligation to prepare the TP file annually:
– EUR 200,000 for interest received/paid for financial services;
– EUR 250,000 for services received/ provided; – EUR 350,000 for acquisitions/sales of tangible and intangible goods.
• The deadline for the preparation of the transfer-pricing file is the legal deadline for the submission of the annual corporate income tax return, for each fiscal year. The deadline for submission of the transfer-pricing file is of maximum 10 days from the request date, and not earlier than 10 days from the expiration of the preparation deadline. The submission of the transfer-pricing file is made at the specific request of the tax authorities either during a fiscal inspection or outside such process.
• For small and medium-sized taxpayers as well as for the large taxpayers that do not fulfill the criteria mentioned above, which carry out inter-company transactions with a total annual value higher than any of the following thresholds:
– EUR 50,000 for interest received/paid for financial services;
– EUR 50,000 for services received/ provided;
– EUR 100,000 for acquisition/sale of tangible and intangible goods
• The transfer-pricing file will be prepared based on the specific request of the tax authorities, during a tax audit. The deadline for the presentation of the transfer pricing file is of 30 to 60 days and can be extended only once with a period of maximum 30 days, upon the written request of the taxpayer.
• the taxpayers performing intra-group transactions for which the materiality thresholds are lower than those described at points above have the obligation to document the compliance with the arm’s length principle during a fiscal inspection, according to general rules provided by the financial-accounting and fiscal legislation in force.
• the content of the transfer pricing documentation file is approved by order of the president of the National Agency for Tax Administration no. 442/2016. The Order is supplemented by the Transfer Pricing Guidelines issued by the OECD Transfer Pricing Guidelines and the Code of Conduct on transfer pricing documentation for associated enterprises in the European Union (EUTDP).
• Transfer pricing audit activity has significantly increased during the past years and requests for presenting the transfer pricing documentation file have started to become common practice. We are aware of cases where the Romanian tax authorities have adjusted the taxable result of a local taxpayer in accordance with the applicable regulations.
Advance Pricing Agreement
• Taxpayers engaged in transactions with related parties can request the issuance of an APA from the National Agency for Tax Administration. They also have the possibility to schedule a pre-filing meeting to discuss the feasibility of the APA.
• The request for an APA is filed together with the relevant documentation and payment evidence of the fee (ranging between EUR 10,000 and EUR 20,000). The required documentation is based on the EUTPD and suggests up-front the content of the APA.
• The term provided by the Fiscal Procedural Code for issuance of an APA is 12 months for unilateral APAs and 18 months for bilateral and multilateral APAs. The APA is issued for a period of up to five years. In exceptional cases, it may be issued for a longer period for longterm agreements. • APAs are applicable and binding on the tax authorities as long as there are no material changes in the critical assumptions. In this view, the beneficiaries are obliged to submit an annual report on the compliance with the terms and conditions of the agreement.
• If taxpayers do not agree with the content of the APA, they can notify the National Agency for Tax Administration within 30 days. In this case, the agreement does not produce any legal effects.
Advance Tax Ruling
• Companies may request an Advance Tax Ruling be issued by the National Agency for Fiscal Administration, subject to a fee of EUR 5000 for large taxpayers and EUR 3000 for other taxpayers.
• The taxpayer may propose the content of the Advance Tax Ruling in the request submitted. If the taxpayer does not agree with the Advance Tax Ruling, it may notify the issuing authority within 30 days; in this case, the tax ruling does not have legal effect.
• Advance Tax Rulings are applicable and mandatory against tax authorities only if the taxpayers have observed their terms and conditions.
• unilateral relief is provided by way of an ordinary credit for income taxes paid abroad which cannot exceed the profit tax calculated by applying the Romanian profit rate (i.e. 16%) to the taxable profits obtained abroad. The Romanian company should have available documentation attesting to the taxes being paid abroad.
• Underlying foreign corporate income tax is not creditable against Romanian income tax, except for corporate income tax calculated by foreign permanent establishments or branches.
• Companies are allowed to carry forward fiscal losses as declared in the yearly profit tax returns for a period of seven years based on a FIFO method.
• No related adjustment for inflation is allowed.
Dividends, interest, royalties paid to resident companies in Romania
• Dividend payments by a Romanian company to another Romanian company are subject to 5% dividend tax. • as of January 1, 2007, the provisions of the Parent-Subsidiary Directive are applicable.
• Consequently, the dividends received by a Romanian company from another EU resident (including Romanian) company are not taxed if the beneficiary has held at least 10% of the Romanian company’s shares for a continuous period of at least 1 year by the date of dividends payment.
• Distributed dividends are exempt from taxation if they are invested in the same or in another Romanian company’s share capital, to preserve and increase the number of employees and to develop the company’s registered object of activity.
• Interest and royalty payments by Romanian companies to other Romanian companies are tax-able income in the hands of the beneficiary with ordinary corporate income tax.
• There is no tax consolidation or group taxation in Romania. Members of a group must file separate tax returns. Losses incurred by members of a group cannot be offset against profits made by other group members. There are currently discussions and it appears that tax consolidation for corporate income tax purposes will be available under certain conditions.
• Capital gains obtained by Romanian resident companies are included in ordinary profit and taxed at 16%. Capital losses related to sale of shares are, in general, tax deductible.
• Mergers, spin-offs, transfers of assets and ex-changes of shares between two Romanian companies should not trigger capital gains tax.
• In the case of a relocation of the registered office of a European Company (‘SE’) and European Cooperative Society (‘SCE’) from Romania to another EU Member State, if certain conditions are met there is no tax on the difference between the market value of the transferred assets and liabilities and their fiscal value. There will also be no tax on such movements at the shareholder level and, thus, in the case of Romanian shareholders a tax basis step-up may be achieved.
• If a Romanian company has a permanent establishment in another Member State, and the Romanian company is dissolved because of a cross-border reorganization, the Romanian tax authorities will not have the right to tax the former permanent establishment.