Key points on Romania’s fiscal regime
This year marks Romania’s six-month rotating Presidency of the EU, which will run from January 1st to June 30th, 2019. In the course of its first mandate since joining the EU in 2007, Romania will seek to coordinate EU policy and legislative framework amid key political and economic milestones such as Brexit discussions, European parliamentary election in May and EU’s Long-Term Budget for 2021-2027.
Romania registered a positive economic outlook during the last years with one of the highest real GDP growth rates in the EU bloc. The labor market in Romania registered strong growth, with unemployment rates decreasing from 5.9% in 2016 to 3.8% in January 2019 whilst the EU-28 average is 6.5%, but the market also faces increased pressure due to a large number of employees that left the country.
In order to consolidate its position as a gateway for investments in the CEE area, Romania’s tax rules have been subject to constant updates and amendments to ensure consistency with EU and international developments.
For individuals that want to work and live in Romania, a 10% flat income rate is applicable to revenues obtained from dependent activities, including employment or activities assimilated to employment, as well as independent or freelance activities.
Starting with the 1st of January 2018, employees pay 25% from their salaries and related benefits as social security contribution, 10% for health insurance contribution while the employer pays 2.25% as work insurance contribution. Dependent activities are subject to the social security contribution of 35% paid by the employee and 2.25% paid by the employer.
Starting with the 1st of January 2019, the minimum monthly gross salary, without bonuses or other benefits, increased to RON 2,080 - approximately EUR 440.
Over the past years, Romania has emphasized the development of the IT industry, by introducing income tax exemption for IT employees. Employees of companies that create or develop software programs can benefit from income tax exemption if the legal conditions are met.
From 2019 employees working in the field of constructions benefit from income tax exemption whilst the minimum monthly gross salary in this sector was set at RON 3,000 - approximately EUR 630.
Potential investors should know that Romanian companies are subject to a 16% flat corporate tax rate applicable on their profits. Fiscal losses recorded may be carried forward for up to 7 years. Dividends are subject to a 5% tax that may be eliminated if there is a shareholding percentage of a minimum of 10% for a continuous period of at least one year.
In the initial phase of the investment, companies can choose the microenterprise regime, applicable to entities that generate revenues of up to EUR 1,000.000 and have at least one employee. A microenterprise pays 1% tax of its revenue. If the microenterprise has no employees, the tax is 3% of its revenue.
For Romanian companies that make payment to non-residents, the withholding tax rate on dividends, interest, royalties or services is 16%. However, the tax may be eliminated or reduced for payments made to EU companies, using the Interest & Royalty and Parent Subsidiary EU Directives or to other non-resident companies outside the EU, using one of Romania’s 85 tax double tax treaties.
Transfer pricing is a hot topic in Romania, with numerous audits carried out by the authorities to check if the price of related party transactions is set at the market level, to avoid the shifting of profits from Romania. The transfer pricing report is mandatory for taxpayers if the value of transactions is higher than the minimum thresholds. Service received by local companies from non-resident related parties is particularly scrutinized by tax inspectors.
Romania offers tax incentives for local R&D activities that are applicable either at company level, with an impact on the corporate tax position, or at employee level, with an impact on the personal income tax of the individual and ultimately on the payroll cost of the company. Companies can benefit from a maximum 50% additional deduction for certain R&D expenses and accelerated depreciation for equipment used in R&D projects is available.
The VAT registration threshold is RON 300,000 – approximately EUR 63,200, starting with April 2018. The standard VAT rate is 19%. Romania applies reduced rates of 9% for medicines or bread and 5%for books or sales of residential homes, under certain conditions. Starting with November 2018, a 5% VAT reduced rate applies to accommodation, restaurant and catering services, tickets for amusement parks etc. VAT exempted activities include hospital and medical services, financial and banking services, insurance, sale and rental of real estate, certain types of educational and training activities, and other activities of public interest.
There are two main categories of local taxes in Romania: tax on land and on buildings. Local Councils set the level of the tax, taking into account various criteria such as the type of building (i.e. residential or non-residential), the location or the size of the land. Taxes levied on land and buildings are among the lowest at the level of the EU.
Although investors may face constant changes of the local fiscal legislation, the principles of the tax regime are the same applied by most EU countries. Combined with the important growth potential of the local market, this makes Romania an attractive destination for business opportunities and investments.
GDP – Gross Domestic Product
CEE – Central and Estern Europe
This article was written by Liviu Gheorghiu, Senior Manager Transfer Pricing and was published on Romania - Tax, Legal & Investment Supplement, launched in April in Romania.
The 2019 edition of the Tax, Legal & Investments Supplement by Romania-Insider.com brings together the essentials to doing business in Romania:
- Deals of the year in Romania
- Foreign investments to Romania
- Taxation overview
- Doing business in Romania from an intercultural perspective
- Moving to Romania
- Visa & Immigration overview
- Main competition topics for 2019
- Real estate lowdown
- HR & salaries
You can browse through the supplement below at this link.