Despite of an unsteady political environment, a shifting tax framework grounded by an unpredictable tax policy, Romania still remains attractive for foreign direct investments. According to the World Investment Report for 2017 released by the United Nations Conference on Trade and Development, Romania has lately seen an upward trend of the foreign direct investments (“FDI”) inward flows. Also, according to the same publication, the announced greenfield investments during 2014-2016 have outpaced the volume of the cross-border M&A’s operations showing thus the higher appetite of foreign investors for “ground-up” ventures in Romania; however, the figures do not reach the ones from the pre-crisis period.
The aim of this article is to highlight the main tax provisions in force applicable to greenfield investments and to present the currently debated and controversial VAT split mechanism which becomes mandatory as of 1st of January 2018 (while optional starting 1st of October 2017).
In terms of corporate income tax, any newly set-up company is required to apply the microenterprise tax regime as of incorporation provided that the company does not purse activities in one of the following fields: exploration, development, operation of oil resources and natural gas, banking, insurance/reinsurance, gambling. The microenterprise tax regime could be avoided as long as the company has subscribed a RON 45,000 share capital. The tax rate applicable to the turnover derived is 1% (if the number of employees is minimum 1) or 3% (for no employees). Once the turnover of the company exceeds the EUR 500,000 threshold or the share of the revenues derived from consulting and management activities out of the total revenues is higher than 20%, the company is required to apply the standard profit tax regime.
The profit tax regime applicable in Romania is still defined by a flat tax rate of 16%. The taxable base is computed based on the well-known formulae: (i) total revenues – (ii) non-taxable revenues – (iii) total expenses + (iv) non-deductible expenses. The principle governing expense’s deductibility has been positively re-defined in 2016 and, presently, an expense is deductible provided that it was incurred for business purposes, while non-deductible and limited-deductible expenses are clearly defined by the law.
Once the Romanian entity is set up, the development of the greenfield project may require financing which can be contracted from banks, from shareholders (by way of share capital injections or shareholder loans) or, alternatively, a mix of them. The selected financing structure would need to be thoroughly analyzed in terms of tax efficiency. In this context, we outline the fact that the deductibility of the interest and FX losses related to shareholder loans are subject to interest limitation and thin-capitalization rules, as follows:
• Interest rate limitation: the interest is capped at the level of the reference interest rate provided by the National Bank of Romania (i.e. currently standing at 1.75%) for loans denominated in RON currency and an annual 4% rate for loans denominated in foreign currency; what exceeds the cap is permanently non-deductible for tax purposes.
• Deb-to-equity ratio: if the ratio of the borrower exceeds 3:1 or is negative, the interest expenses and the foreign exchange losses related to the shareholder loan are non-deductible for profit tax purposes. However, the amounts which are not deductible further to the application of this rule are to be carried forward over an indefinite period of time and, once the debt-to-equity ratio falls within the abovementioned range, the amounts may be deducted against future profits.
In the area of corporate income tax, the following tax incentives may be a good opportunity for a greenfield investment:
Tax exemption on reinvested profit – although initially this incentive was granted over a defined time period, it has been recently indefinitely extended. Companies reinvesting their profits in new technical equipment, computers, invoicing machines, software (including the right of use) used for business purposes are eligible for this tax exemption. The profit that qualifies for exemption is the gross accounting profit cumulated from the beginning of the year until the quarter/year when the asset became operational.
Tax exemption available for taxpayers exclusively operating in the area of innovation and R&D activities during the first 10 years of activity. Although the incentive might be seen very attractive, in practice, there are not many taxpayers in Romania exclusively carrying out innovation and R&D activities; nevertheless, the incentive might be an attraction pole for greenfield investment in R&D.
Repatriation of profits is also a key topic for a greenfield investment. The withholding tax on dividends is NIL provided that the dividend recipient is an EU entity which has held a minimum 10% of the share capital of the Romanian company for at least an un-interrupted 1-year period. Alternatively, the Romanian tax law provides for a 5% withholding tax rate or lower tax rates by virtue of double tax treaties concluded between Romania with the residence countries of the dividend recipient.
In terms of VAT, we mention that the VAT tax rate has been subject to amendments over the years. Currently, the standard VAT rate is 19%; lower VAT rates, exemptions and reverse charge mechanism are applicable to certain sectors. As a greenfield investment is prone to accumulate costs during the set-up and preparation period, the main challenge would be the reimbursement of the input VAT related to the acquisitions performed. In this regard, we would like to highlight the importance of gathering and making available strong back-up documentation attesting that the works were effectively performed. Our practical experience shows that, in lack of comprehensive justifying documents, tax inspectors are likely to disregard the input VAT related to such acquisitions. Such approaches regularly lead to time-consuming appeals against the decisions issued by the tax authorities and, in many cases, to further procedures in court.
Last but not least, a very controversial topic which is nowadays ardently debated is the new VAT split mechanism. According to this mechanism, starting 1st of January 2018, taxpayers registered for VAT purposes are required to open and manage a separate VAT account for cashing in and payment of VAT amounts. The VAT account may be opened with a private bank entity or with the State Treasury, this latter alternative being free of charge. Basically, a VAT registered purchaser would need to settle the invoices issued by its suppliers separately, i.e. the VAT would need to be transferred in the VAT account, while the VAT base in the account indicated by the supplier. Taxpayers are required to transfer to the VAT account the positive difference between the VAT collected and the VAT paid in cash or any other VAT amounts collected via debit/credit cards within 7 days from their collection. The amounts collected in the VAT account shall be used by the taxpayer for paying the VAT to its own suppliers or for settling VAT liabilities to the State Budget, any withdrawal being forbidden. Tax incentives are provided for taxpayers that choose to apply the VAT split system as of 1st of October 2017. The measure is generally not welcomed by taxpayers due to the administrative burden generating also additional costs in terms of time and money. Despite the strong disapproval shown by taxpayers, various commerce chambers and dedicated organizations, e.g. Coalitia pentru Dezvoltarea Romaniei, the Ordinance was published in the Official Gazette.
The goal of this article was to provide a potential non-resident investor with a tax background for Romania as well as the pitfalls which may be met in practice. In spite of an unpredictable tax framework, the general tax regime continues to appear attractive for greenfield investors.
The aim of this article is to highlight the main tax provisions in force applicable to greenfield investments and to present the currently debated and controversial VAT split mechanism which becomes mandatory as of 1st of January 2018 (while optional starting 1st of October 2017).
In terms of corporate income tax, any newly set-up company is required to apply the microenterprise tax regime as of incorporation provided that the company does not purse activities in one of the following fields: exploration, development, operation of oil resources and natural gas, banking, insurance/reinsurance, gambling. The microenterprise tax regime could be avoided as long as the company has subscribed a RON 45,000 share capital. The tax rate applicable to the turnover derived is 1% (if the number of employees is minimum 1) or 3% (for no employees). Once the turnover of the company exceeds the EUR 500,000 threshold or the share of the revenues derived from consulting and management activities out of the total revenues is higher than 20%, the company is required to apply the standard profit tax regime.
The profit tax regime applicable in Romania is still defined by a flat tax rate of 16%. The taxable base is computed based on the well-known formulae: (i) total revenues – (ii) non-taxable revenues – (iii) total expenses + (iv) non-deductible expenses. The principle governing expense’s deductibility has been positively re-defined in 2016 and, presently, an expense is deductible provided that it was incurred for business purposes, while non-deductible and limited-deductible expenses are clearly defined by the law.
Once the Romanian entity is set up, the development of the greenfield project may require financing which can be contracted from banks, from shareholders (by way of share capital injections or shareholder loans) or, alternatively, a mix of them. The selected financing structure would need to be thoroughly analyzed in terms of tax efficiency. In this context, we outline the fact that the deductibility of the interest and FX losses related to shareholder loans are subject to interest limitation and thin-capitalization rules, as follows:
• Interest rate limitation: the interest is capped at the level of the reference interest rate provided by the National Bank of Romania (i.e. currently standing at 1.75%) for loans denominated in RON currency and an annual 4% rate for loans denominated in foreign currency; what exceeds the cap is permanently non-deductible for tax purposes.
• Deb-to-equity ratio: if the ratio of the borrower exceeds 3:1 or is negative, the interest expenses and the foreign exchange losses related to the shareholder loan are non-deductible for profit tax purposes. However, the amounts which are not deductible further to the application of this rule are to be carried forward over an indefinite period of time and, once the debt-to-equity ratio falls within the abovementioned range, the amounts may be deducted against future profits.
In the area of corporate income tax, the following tax incentives may be a good opportunity for a greenfield investment:
Tax exemption on reinvested profit – although initially this incentive was granted over a defined time period, it has been recently indefinitely extended. Companies reinvesting their profits in new technical equipment, computers, invoicing machines, software (including the right of use) used for business purposes are eligible for this tax exemption. The profit that qualifies for exemption is the gross accounting profit cumulated from the beginning of the year until the quarter/year when the asset became operational.
Tax exemption available for taxpayers exclusively operating in the area of innovation and R&D activities during the first 10 years of activity. Although the incentive might be seen very attractive, in practice, there are not many taxpayers in Romania exclusively carrying out innovation and R&D activities; nevertheless, the incentive might be an attraction pole for greenfield investment in R&D.
Repatriation of profits is also a key topic for a greenfield investment. The withholding tax on dividends is NIL provided that the dividend recipient is an EU entity which has held a minimum 10% of the share capital of the Romanian company for at least an un-interrupted 1-year period. Alternatively, the Romanian tax law provides for a 5% withholding tax rate or lower tax rates by virtue of double tax treaties concluded between Romania with the residence countries of the dividend recipient.
In terms of VAT, we mention that the VAT tax rate has been subject to amendments over the years. Currently, the standard VAT rate is 19%; lower VAT rates, exemptions and reverse charge mechanism are applicable to certain sectors. As a greenfield investment is prone to accumulate costs during the set-up and preparation period, the main challenge would be the reimbursement of the input VAT related to the acquisitions performed. In this regard, we would like to highlight the importance of gathering and making available strong back-up documentation attesting that the works were effectively performed. Our practical experience shows that, in lack of comprehensive justifying documents, tax inspectors are likely to disregard the input VAT related to such acquisitions. Such approaches regularly lead to time-consuming appeals against the decisions issued by the tax authorities and, in many cases, to further procedures in court.
Last but not least, a very controversial topic which is nowadays ardently debated is the new VAT split mechanism. According to this mechanism, starting 1st of January 2018, taxpayers registered for VAT purposes are required to open and manage a separate VAT account for cashing in and payment of VAT amounts. The VAT account may be opened with a private bank entity or with the State Treasury, this latter alternative being free of charge. Basically, a VAT registered purchaser would need to settle the invoices issued by its suppliers separately, i.e. the VAT would need to be transferred in the VAT account, while the VAT base in the account indicated by the supplier. Taxpayers are required to transfer to the VAT account the positive difference between the VAT collected and the VAT paid in cash or any other VAT amounts collected via debit/credit cards within 7 days from their collection. The amounts collected in the VAT account shall be used by the taxpayer for paying the VAT to its own suppliers or for settling VAT liabilities to the State Budget, any withdrawal being forbidden. Tax incentives are provided for taxpayers that choose to apply the VAT split system as of 1st of October 2017. The measure is generally not welcomed by taxpayers due to the administrative burden generating also additional costs in terms of time and money. Despite the strong disapproval shown by taxpayers, various commerce chambers and dedicated organizations, e.g. Coalitia pentru Dezvoltarea Romaniei, the Ordinance was published in the Official Gazette.
The goal of this article was to provide a potential non-resident investor with a tax background for Romania as well as the pitfalls which may be met in practice. In spite of an unpredictable tax framework, the general tax regime continues to appear attractive for greenfield investors.
Any presented information is general and is not meant to address the specific conditions of a particular individual or legal person. Although we try to provide accurate and up-to-date information, there is no warranty that such information is accurate at the time of its receipt or that it continues to be accurate. No action should be taken based on this information without relevant professional assistance following a careful examination of the circumstances that are typical of a particular state of affairs.
