We present below the main changes brought to the Fiscal Code which will enter into force starting 1st of January 2018.
A. Corporate income tax
The amendments brought in the area of corporate income tax represent the transposal into the Romanian tax law of the EU Directive 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (Anti Tax Avoidance Directive) and refer to the following:
(i) Interest limitation rule, as follows:
▪ The current provisions regarding interest limitation and thin capitalization rules are repealed (i.e. art. 27 of the Fiscal Code is repealed);
▪ The new rules set forth the deductibility treatment of borrowing costs, whose definition was broadened (e.g. including the finance cost element of finance lease payments, capitalized interest included in the balance sheet value of a related asset, payments performed under profit participating loans etc.)
▪ Thus, according to the new rules, exceeding borrowing costs (i.e. difference between borrowing costs and interest revenues) which exceed the Lei equivalent of EUR 200,000 are deductible for corporate income tax purposes within the limit of 10% of the EBITDA; the EBITDA indicator is computed as follows: (i) total revenues recorded in the reporting tax period – (ii) expenses recorded in the reporting tax period – (iii) non-taxable revenues + (iv) corporate income tax expenses + (v) exceeding borrowing costs +(vi) deductible tax depreciation;
▪ If the EBITDA indicator is negative or NIL, the exceeding borrowing costs are non-deductible in the reporting tax period but are allowed to be carried forward over an indefinite period of time;
▪ By exception, independent entities defined as “entities that do not belong to a consolidated group for financial accounting purposes and that do not have any associated enterprise and any permanent establishment” are allowed to fully deduct the exceeding borrowing costs;
(ii) Exit tax
The transfer of assets, tax residency or business carried out through a permanent establishment to another Member State or to a third country will be subject to exit tax as follows:
▪ The gain derived from the transfer of assets, tax residency or business carried out through a permanent establishment for which Romania has no longer the right to tax the transferred assets due to the transfer, is subject to 16% flat tax; the gain is computed as the difference between the market value of the transferred assets and their fiscal value;
▪ If such transfers lead to loss, this may be recovered by offsetting the loss against revenues of a similar nature;
▪ Also, taxpayers are allowed to defer the payment of the exit tax in instalments under the conditions set out by the Fiscal Procedure Code and as long as the transfer takes place to an EU Member State or to a state which belongs to the EEA.
(iii) Controlled foreign companies (“CFC”)
The new Emergency Government Ordinance defines the concept of “controlled foreign companies”. An entity is considered a CFC if the following cumulative conditions are met:
▪ the entity is owned, directly or indirectly, by a taxpayer (itself or together with its associated enterprises) in a percentage higher than 50 percent of the voting rights/share capital or by a taxpayer who is entitled to receive more than 50 percent of the profits of that entity;
▪ the actual corporate tax paid on its profits by the entity or permanent establishment is lower than the difference between the corporate tax that would have been charged on the entity or permanent establishment under the Romanian tax rules and the actual corporate tax paid on its profits by the entity or permanent establishment.
In case an entity/permanent establishment is qualified as a CFC of a taxpayer, the Romanian taxpayer is required to include in its taxable base, proportionally to the participating quota, the non-distributed income of the entity or the income of the permanent establishment which is derived from the following categories: (i) interest or any other income generated by financial assets; (ii) royalties or any other income generated from intellectual property; (iii) dividends and income from the disposal of shares; (iv) income from financial leasing; (v) income from insurance, banking and other financial activities; (vi) income from invoicing companies that earn sales and services income from goods and services purchased from and sold to associated enterprises, and add no or little economic value.
However, the Emergency Government Ordinance provides for exceptions to the application of the CFC rules.
B. Micro-enterprise income tax
In the area of micro-enterprise income tax, the following main changes took place:
▪ The turnover ceiling for the mandatory application of the micro-enterprise tax regime was extended from EUR 500,000 up to EUR 1,000,000;
▪ Romanian legal entities operating in the following fields: banking, insurance/reinsurance, capital markets, gambling, exploring/development/exploiting petroleum and natural gas are no longer excluded from the application of the micro-enterprise tax regime;
▪ Also, starting 1st of January 2018, taxpayers that derive revenues from management and consulting activities in a percentage higher than 20%, which are currently not eligible for the micro-enterprise tax regime, are also required to apply this regime;
▪ The provisions according to which a legal entity falling under the micro-enterprise tax regime with a share capital higher than RON 45,000 may opt to apply the corporate income tax regime were repealed.
C. Personal Income Tax
The main amendments to the Fiscal Code refer to the following:
▪ Tax rate: The income tax rate is reduced from 16% to 10%; the tax rate applicable to dividends remains 5%.
▪ Personal allowance: the level of the monthly gross salary income based on which the personal allowance is computed is increased to RON 3,600 (from RON 1,950); individuals who earn a salary income higher than RON 3,600 are not able to enjoy personal allowance. The new levels of the personal allowance granted depending on the number of dependent persons is provided by the Fiscal Code.
▪ Dependent persons: the definition of “dependent person” is introduced: husband/wife, children or other second-degree relatives of the husband/wife whose monthly income (taxable and non-taxable) does not exceed RON 510, except for certain cases provided by the law.
▪ Income derived from IP activities: the income tax (to be withheld by the income payer) is reduced from 10% to 7% applied to the gross income; the settlement of the income tax is performed by the income recipient by the 25 May of the following year based on the 10% flat rate.
D. Social security contributions
The social security system has been restructured by way of: (i) reducing the number of mandatory social contributions and (ii) transferring the burden and liability from the employer to the charge of the individual (except for the work contribution and for the social contributions owed for individuals working under special conditions).
Thus, starting 2018, the mandatory contributions will be as follows:
1. Social contribution (i.e. Contribution to the Pension Fund)
The social contribution rates are:
(i) 25% owed by the employees or other individuals who are liable to pay this contribution (e.g. freelancers);
(ii) 4% owed by employers, for special work conditions;
(iii) 8% owed by the employers for other special conditions.
Regarding salary income, the social contribution is computed by applying the 25% quota to the gross salary income (including taxable benefits in kind and other revenues assimilated to salary income).
Individuals who carry out independent activities (e.g. freelancers, liberal professions) owe social contributions at a “chosen” amount which shall not be lower than the minimum monthly gross salary.
2. Health insurance contribution
The health insurance contribution is 10%, being owed by the employees or by the individuals who are liable to pay health insurance contribution.
In case of salary revenues, the 10% health insurance contribution is applied to the salary revenues (including taxable benefits in kind and other items assimilated to salary income).
Separate from the salary income which is subject to the health insurance contribution as mentioned above, individuals who earn annual revenues in amount of at least 12 minimum gross salaries from the following types of activities (on a cumulative basis):
- Independent activities;
- Renting;
- Investments;
- Agriculture;
- Other sources
are liable to pay health insurance contribution; the monthly health insurance contribution is computed by applying the 10% quota to the monthly minimum gross salary, with quarterly payments.
3. Work contribution
The work contribution is 2.25% applied to the gross salary revenues (including taxable benefits in kind and other items assimilated to salary income), being owed by the employers.
Hereby attached, we present various simulations for the computation of the income tax, social contributions and of the net income for the following cases: ▪ The case of a standard employee: (i) 1st Scenario: the employer does not increase the gross salary of the employee in 2018 (ii) 2nd Scenario: the employer increases the gross salary of the employee so the net salary of the employee is maintained in 2018 at the level of the net salary earned in 2017. ▪ The case of a tax-exempt employee working in the IT field: (i) 1st Scenario: the employer does not increase the gross salary of the employee in 2018 (ii) 2nd Scenario: the employer increases the gross salary of the employee so the employer’s total cost in 2018 is equal to the cost incurred in 2017 (iii) 3rd Scenario: The employer increases the gross salary of the employee; the gross salary in 2018 reaches the employer’s cost incurred in 2017.
A. Corporate income tax
The amendments brought in the area of corporate income tax represent the transposal into the Romanian tax law of the EU Directive 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (Anti Tax Avoidance Directive) and refer to the following:
(i) Interest limitation rule, as follows:
▪ The current provisions regarding interest limitation and thin capitalization rules are repealed (i.e. art. 27 of the Fiscal Code is repealed);
▪ The new rules set forth the deductibility treatment of borrowing costs, whose definition was broadened (e.g. including the finance cost element of finance lease payments, capitalized interest included in the balance sheet value of a related asset, payments performed under profit participating loans etc.)
▪ Thus, according to the new rules, exceeding borrowing costs (i.e. difference between borrowing costs and interest revenues) which exceed the Lei equivalent of EUR 200,000 are deductible for corporate income tax purposes within the limit of 10% of the EBITDA; the EBITDA indicator is computed as follows: (i) total revenues recorded in the reporting tax period – (ii) expenses recorded in the reporting tax period – (iii) non-taxable revenues + (iv) corporate income tax expenses + (v) exceeding borrowing costs +(vi) deductible tax depreciation;
▪ If the EBITDA indicator is negative or NIL, the exceeding borrowing costs are non-deductible in the reporting tax period but are allowed to be carried forward over an indefinite period of time;
▪ By exception, independent entities defined as “entities that do not belong to a consolidated group for financial accounting purposes and that do not have any associated enterprise and any permanent establishment” are allowed to fully deduct the exceeding borrowing costs;
(ii) Exit tax
The transfer of assets, tax residency or business carried out through a permanent establishment to another Member State or to a third country will be subject to exit tax as follows:
▪ The gain derived from the transfer of assets, tax residency or business carried out through a permanent establishment for which Romania has no longer the right to tax the transferred assets due to the transfer, is subject to 16% flat tax; the gain is computed as the difference between the market value of the transferred assets and their fiscal value;
▪ If such transfers lead to loss, this may be recovered by offsetting the loss against revenues of a similar nature;
▪ Also, taxpayers are allowed to defer the payment of the exit tax in instalments under the conditions set out by the Fiscal Procedure Code and as long as the transfer takes place to an EU Member State or to a state which belongs to the EEA.
(iii) Controlled foreign companies (“CFC”)
The new Emergency Government Ordinance defines the concept of “controlled foreign companies”. An entity is considered a CFC if the following cumulative conditions are met:
▪ the entity is owned, directly or indirectly, by a taxpayer (itself or together with its associated enterprises) in a percentage higher than 50 percent of the voting rights/share capital or by a taxpayer who is entitled to receive more than 50 percent of the profits of that entity;
▪ the actual corporate tax paid on its profits by the entity or permanent establishment is lower than the difference between the corporate tax that would have been charged on the entity or permanent establishment under the Romanian tax rules and the actual corporate tax paid on its profits by the entity or permanent establishment.
In case an entity/permanent establishment is qualified as a CFC of a taxpayer, the Romanian taxpayer is required to include in its taxable base, proportionally to the participating quota, the non-distributed income of the entity or the income of the permanent establishment which is derived from the following categories: (i) interest or any other income generated by financial assets; (ii) royalties or any other income generated from intellectual property; (iii) dividends and income from the disposal of shares; (iv) income from financial leasing; (v) income from insurance, banking and other financial activities; (vi) income from invoicing companies that earn sales and services income from goods and services purchased from and sold to associated enterprises, and add no or little economic value.
However, the Emergency Government Ordinance provides for exceptions to the application of the CFC rules.
B. Micro-enterprise income tax
In the area of micro-enterprise income tax, the following main changes took place:
▪ The turnover ceiling for the mandatory application of the micro-enterprise tax regime was extended from EUR 500,000 up to EUR 1,000,000;
▪ Romanian legal entities operating in the following fields: banking, insurance/reinsurance, capital markets, gambling, exploring/development/exploiting petroleum and natural gas are no longer excluded from the application of the micro-enterprise tax regime;
▪ Also, starting 1st of January 2018, taxpayers that derive revenues from management and consulting activities in a percentage higher than 20%, which are currently not eligible for the micro-enterprise tax regime, are also required to apply this regime;
▪ The provisions according to which a legal entity falling under the micro-enterprise tax regime with a share capital higher than RON 45,000 may opt to apply the corporate income tax regime were repealed.
C. Personal Income Tax
The main amendments to the Fiscal Code refer to the following:
▪ Tax rate: The income tax rate is reduced from 16% to 10%; the tax rate applicable to dividends remains 5%.
▪ Personal allowance: the level of the monthly gross salary income based on which the personal allowance is computed is increased to RON 3,600 (from RON 1,950); individuals who earn a salary income higher than RON 3,600 are not able to enjoy personal allowance. The new levels of the personal allowance granted depending on the number of dependent persons is provided by the Fiscal Code.
▪ Dependent persons: the definition of “dependent person” is introduced: husband/wife, children or other second-degree relatives of the husband/wife whose monthly income (taxable and non-taxable) does not exceed RON 510, except for certain cases provided by the law.
▪ Income derived from IP activities: the income tax (to be withheld by the income payer) is reduced from 10% to 7% applied to the gross income; the settlement of the income tax is performed by the income recipient by the 25 May of the following year based on the 10% flat rate.
D. Social security contributions
The social security system has been restructured by way of: (i) reducing the number of mandatory social contributions and (ii) transferring the burden and liability from the employer to the charge of the individual (except for the work contribution and for the social contributions owed for individuals working under special conditions).
Thus, starting 2018, the mandatory contributions will be as follows:
1. Social contribution (i.e. Contribution to the Pension Fund)
The social contribution rates are:
(i) 25% owed by the employees or other individuals who are liable to pay this contribution (e.g. freelancers);
(ii) 4% owed by employers, for special work conditions;
(iii) 8% owed by the employers for other special conditions.
Regarding salary income, the social contribution is computed by applying the 25% quota to the gross salary income (including taxable benefits in kind and other revenues assimilated to salary income).
Individuals who carry out independent activities (e.g. freelancers, liberal professions) owe social contributions at a “chosen” amount which shall not be lower than the minimum monthly gross salary.
2. Health insurance contribution
The health insurance contribution is 10%, being owed by the employees or by the individuals who are liable to pay health insurance contribution.
In case of salary revenues, the 10% health insurance contribution is applied to the salary revenues (including taxable benefits in kind and other items assimilated to salary income).
Separate from the salary income which is subject to the health insurance contribution as mentioned above, individuals who earn annual revenues in amount of at least 12 minimum gross salaries from the following types of activities (on a cumulative basis):
- Independent activities;
- Renting;
- Investments;
- Agriculture;
- Other sources
are liable to pay health insurance contribution; the monthly health insurance contribution is computed by applying the 10% quota to the monthly minimum gross salary, with quarterly payments.
3. Work contribution
The work contribution is 2.25% applied to the gross salary revenues (including taxable benefits in kind and other items assimilated to salary income), being owed by the employers.
Hereby attached, we present various simulations for the computation of the income tax, social contributions and of the net income for the following cases: ▪ The case of a standard employee: (i) 1st Scenario: the employer does not increase the gross salary of the employee in 2018 (ii) 2nd Scenario: the employer increases the gross salary of the employee so the net salary of the employee is maintained in 2018 at the level of the net salary earned in 2017. ▪ The case of a tax-exempt employee working in the IT field: (i) 1st Scenario: the employer does not increase the gross salary of the employee in 2018 (ii) 2nd Scenario: the employer increases the gross salary of the employee so the employer’s total cost in 2018 is equal to the cost incurred in 2017 (iii) 3rd Scenario: The employer increases the gross salary of the employee; the gross salary in 2018 reaches the employer’s cost incurred in 2017.
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.
