Romania is a place where you should focus on next, be it for your business or for expanding your client base. The recently adopted legislation and the amendments that are to come are encouraging investment funds and big companies to establish their base here.
In Romania, micro companies have the same legal status as a standard limited liability company, but with a different tax regime.
The tax regime applicable to micro-enterprises was significantly modified in 2018 compared to the one applicable in previous years, and the novelties in this respect were introduced through GEO no. 79/2017.
First of all, the revenue threshold used to classify a company as a micro-enterprise has been revised to EUR 1 million, which is double the threshold applicable between February-December 2017 (EUR 500,000).
What does this mean? Effectively, companies with 2017 revenues ranging between half a million and one million euros, which paid a 16% tax on profit, have since 2018 been transferred to the tax category for microenterprises, where they apply either a tax rate of 1% (in the case of having at least one employee), or a 3% (for companies with no employees).
Additionally, the micro category will also be applicable to companies generating income from consultancy or management services ( even if the share of revenue from these activities is over 20%), as long as they don’t exceed the EUR 1 million revenue threshold. Moreover, companies operating in the banking, insurance and reinsurance, capital markets or gambling sectors are also included in the scope of micro-enterprise income tax.
A Romanian company can be used for international tax planning purposes mainly due to:
• The tax incentives and extensive Double Tax Treaties (DTT) network Romania has secured with other countries (86 DTTs currently in place);
• Low corporate tax rate of 16 %, one of the lowest in the E.U.;
• Low flat personal income tax of 10%;
• The ability to pull profits from the country of the subsidiary with no or very low withholding tax, provided a DTT is in existence;
• The fact that it can benefit from the application of the provisions of the EU Parent-Subsidiary Directive, the EU Interest and Royalties Directive, and the EU Merger Directive;
• Local tax on dividends is 5%;
• Currently, with good chances to be adopted, the Parliament is discussing about fiscal consolidation, meaning that in case of a group of companies where one company exhibits a profit and another has financial losses, these amounts can be offset so that the group doesn’t suffer a supplementary burden with the tax on profit. The tax consolidation system for corporate tax is valid for 5 years of tax and the system is optional;
• A bank account can easily be opened for the company, provided that the UBO is known and that is not a PEP person or has no restrictions in having an account opened (a clear Due Diligence must be performed)
The corporate tax has been at the same level ( 16%) since 2005 and it looks like the Romanian government will keep it stable for the next period. This actually contributes a great deal to the stability of the Romanian corporate taxation environment and, consequently, is one of the factors that will certainly attract long-term investments in the country.
Also, it is worth noting that dividends distributed by a Romanian company to a non-resident company established in a state that has concluded a DTT with the country are tax-exempt if this non-resident company (either EU or non-EU member) holds a minimum of 10% of the Romanian company’s share capital for a period of more than one year.
These provisions are actually more favourable than those of the Parent- Subsidiary Directive for dividend beneficiaries resident in EU Member States, while for those from non-EU countries with which Romania has concluded a DTT, this exemption is very often more advantageous than the dividend tax rate stated in the respective DTT.
Similarly, capital gains obtained following the sale of shares held in a company resident in Romania or in a country with which the country has concluded a DTT are tax-exempt if the beneficiary of these gains holds a minimum of 10% of that company’s share capital for a period of more than one year.
The recent implementation of a new Tax Code and new Tax Procedure Code has brought various changes meant to encourage not just holdings but any type of investment in Romania.
Even though from a political perspective Romania has been relatively unstable due to high-level changes in the government as well as a popular anti-corruption movement, the general direction seems to be towards a more efficient tax system, accompanied by a general reduction in taxation rates.
The most important tax developments are the reduction of the standard VAT rate from 24% to a final rate of 19% in 2017, but with lower rate applicable for food and beverages (including draft beer) 9 % and even lower for hotels and restaurants at 5%. The implementation of the reverse-charge mechanism was a real benefit for real estate transactions, as it provides a much needed simplification in this area, as well as a change regarding the taxation of buildings – which was previously differentiated based on the type of owner (giving rise to significant differences in taxation between corporate entities and individuals) – to a more equitable system based on the type of usage (i.e. business or residential).
Almost all banks are able to open bank accounts for holding and micro companies provided that the UBOs are known and that they have no interdictions of any kind in having an account in a European country. Internet banking is widely used and offers direct connection to the business account which can be easily managed from outside Romania.
In addition to banks, professionals like consultants, lawyers, accountants, and tax advisors are continuously developing and increasing their skills to be able to offer professional support, especially for holding structures, with services such as management, accounting, payroll, and registered offices.