A new Government Emergency Ordinance in amending the Romanian Fiscal Code will introduce several new measures applicable as of 1 January 2018.
1. Social contributions paid on employment income
As of 1 January 2018, the amount of social contributions paid on employment income in Romania will be as follows:
- Contributions deducted from gross salaries:
- Pension insurance contribution – 25%
- Health insurance contribution – 10%
- A work insurance contribution of 2.25% of the gross salary due by employers
- Additional pension insurance contributions of 4% and 8% due by employers for particular and special working conditions, respectively.
Lower contributions for pension and health insurance
While the new levels of pension and health insurance contributions are lower than those currently in force (i.e. 26.3% and 10.7%, respectively), should employers decide to maintain current levels of staff net income (i.e. by increasing gross salaries), then the amount of social contributions paid to the state budget will increase.
For employees currently subject to the 16% income tax rate, this increase will be counterbalanced by the reduction to 10% of the income tax rate (see point III below).
For income tax exempt employees (e.g. IT employees, disabled persons), the fiscal impact on net salaries and on the employers’ labour costs will need to be assessed carefully.
2. Social contributions on other types of income
Social contributions for freelancers in Romania
Freelancers deriving income from independent activities will be liable to pay pension and health insurance contributions (25% and 10%, respectively) on their monthly gross minimum salary (although they may opt to pay pension contributions corresponding to a higher income level of their choice). Currently, freelancers pay pension insurance (10.5% or 26.3%) and health insurance (5.5%) contributions on their realised income.
Contributions for investment income
Investment income (e.g. dividends, interest payments, capital gains, liquidation proceeds, etc.) will be subject to a 10% health insurance contribution on the taxable basis equal to the monthly gross salary. (Currently, a 5.5% rate applies on investment income, unless the individual is also a freelancer, an employee, a retired individual or falls into certain other categories.)
3. Personal income tax in Romania
A 10% personal income tax rate will apply as of January 2018 on revenues derived from salaries, pensions, independent activities, copyright, interest, rental activity, agriculture and capital gains. This represents a decrease from the current personal income tax rate of 16% in Romania.
4. Micro-enterprise income tax regime
As of 1 January 2018, companies with a turnover of up to EUR 1 million will qualify as micro-enterprises irrespective of their type of activity or the value of their share capital. The following companies will therefore be subject to this regime:
- Companies with a share capital greater than RON 45,000 – these companies will no longer be able to opt for corporate income tax (as is currently the case)
- Companies performing activities such as banking, insurance, gambling or the exploitation of oil fields and natural gas, or consulting and management services – these companies will no longer qualify as corporate income tax payers (as is currently the case).
The income tax rates remain un-changed
- 3% for micro-enterprises without employees
- 1% for micro-enterprises having 1 or more employees.
5. Corporate income tax in Romania
5.1 Deductibility restrictions for financing costs
The current provisions regarding the deductibility of interest expenses and foreign exchange losses are to be repealed and replaced with the following rules:
- Financing costs subject to deductibility restrictions will include a wide area of costs, such as: interest on financial leases, payments under profit participating loans, interest capitalised in the book value of an asset or the depreciation of capitalised interest, notional interest under derivative financial instruments, financing related commissions, etc. These financing costs will represent net amounts, i.e. financial expenses minus interest income and other similar income
- Financing costs may be deducted up to a limit of EUR 200,000. The deductibility of amounts exceeding this threshold is limited to 10% of the borrower’s gross profit adjusted for certain items (minus non-taxable income, add back financing costs and tax depreciation)
- If the calculation basis for the 10% deductibility limit is negative or zero, the financing costs are non-deductible in the current period but may be carried forward over an indefinite period
These restrictions do not apply to taxpayers that are not part of a group and have no affiliates or permanent establishments.
5.2 Transfer of assets, fiscal residency and the activity of a permanent establishment
- A 16% corporate income tax rate will apply on gains derived from the transfer of assets, the tax residency or the activity of a permanent establishment. The gains are to be defined as being the difference between the market value and the fiscal value of the transferred assets
- If the transfer generates losses, these may be offset against future gains resulting from similar activities, over a 7-year period.
5.3 Anti-abuse rule
Anti-abuse rules in the Fiscal Code are reinforced by new provisions stipulating that tax-driven arrangements are to be disregarded for tax purposes.
5.4 Rules for controlled foreign companies
New rules have been introduced in Romania for taxpayers that control foreign companies.
Taxpayers controlling foreign entities must include in their taxable basis (and hence will be liable to pay corporate income tax on) their quota of that entity’s undistributed revenues, such as interest, royalties, dividends, capital gains, etc.
A qualifying controlled foreign company must cumulatively meet the following conditions:
- the taxpayer has a direct/indirect minimum participation of 50% of the voting rights or of the share capital of that entity, or has the right to receive more that 50% of its profits
- the corporate income tax paid by this entity is lower than the difference between (i) the corporate income tax that would have been due in Romania and (ii) the corporate income tax paid by this entity
These rules do not apply if the controlled foreign company performs significant economic activity sustained by staff, equipment, assets and facilities, as demonstrated by relevant facts and circumstances, or if the controlled foreign company has its fiscal residency in a third state that is a party to the Agreement on the European Economic Area.
6. VAT in Romania 2018
The tax changes in Romania stipulate that tax authorities are entitled to reject the deductibility of input VAT provided they can prove beyond any doubt that the taxable person knew or should have known that the underlying transaction was part of a VAT fraud.
In 2017 there have been many tax and legal changes in Romania, find out more about current tax rates in Romania in our news summary:
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