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“Romania is a dynamic, vibrant and innovative country who offers an attractive tax environment with its flat rate taxation applicable also to companies (16% corporate income tax) and individuals (10% personal income tax) and offers a rather large domestic market (Romania’s population is the 2nd largest in Central Europe)”, says Mihaela Iacob, Tax Manager Accace Romania, in a brand new interview for the TaxLinked community. She spoke with Mateo Jarrin Cuvi about tax benefits, FDI, tax avoidance and more in her jurisdiction.
Romania has offered in the last years a steady growth in terms of macroeconomic indicators; for example, the economic growth in 2017 reached 7%, one the highest in the European Union. Even if Romania is not part of the Euro Zone yet, the national currency (Romanian Leu) is stable, without any major fluctuations since Romania’s accession to the European Union in 2017. Romania has seen higher and more diversified foreign direct investments on a yearly basis.
However, the IT sector seems to be the “star” of the Romanian economy in the recent period with major companies opening hubs and shared services centers in Romania, benefiting from a combination of skilled workforce, competitive labor costs and tax incentives. The automotive industry has also attracted significant foreign investments and the trend will surely continue in both manufacturing, as well as research&development.
Companies established in Romania by foreign companies are benefitting from the same tax conditions as any other Romanian owned company. Romania offers a competitive corporate flat tax rate of only 16%, the withholding tax on dividends is as low as 5% or even zero for EU shareholders. Companies acting in IT or carrying out R&D activities may benefit from exemption of corporate income tax. Also, employees carrying out IT or R&D activities may benefit from the exemption of income tax in certain conditions (currently flat at 10%).
Even if Romania not is an OECD member, the domestic legislation transposes the main OECD principles regarding tax avoidance, transfer pricing and tax evasion. Romania has also concluded around 90 double tax treaties, which provide a mechanism of exchanging information for tax authorities.
As the BEPS provisions have also been adopted at EU level, these requirements have been also transposed into the Romanian domestic legislation and companies are obliged to observe the BEPS related reporting with the 2016 financial year. The level of bureaucracy/reporting in this area in Romania appears comparable with other EU countries.
Romania applies the general principle of substance over form and the tax authorities are paying extra attention to apparently “artificial” transactions. One positive trend in recent period is that the communication with the tax authorities has improved and efforts are being made to increase the “electronic” interaction and simplify the bureaucracy. Also, a new introduced principle stated that “first offenders” that acted wrongly unintentionally, due to the lack of know-how, will be given first recommendations to correct the tax treatment and penalized only if not corrected.
In order to gain a better visibility over the business environment and to reduce tax avoidance and fraud, tax authorities have introduced, in the recent period, additional VAT related reporting and they intend to collect electronically the data from all the cash registers in Romania online starting later in 2018.
The transfer pricing regulations have been introduced in the Romanian domestic legislation more than 10 years ago and the focus of the tax authorities on this topic has increased gradually. Currently, large tax payers are obliged to prepare the transfer pricing file on an annual basis while the other tax payers are obliged to prepare the transfer pricing file upon request from the tax authorities. During tax audits, tax authorities are paying special attention to transactions with related parties and we are seeing more and more requests to prepare the transfer pricing documentation. Special attention is paid especially to company making losses for several years and carrying out significant transactions with related parties.
Romania offers an attractive tax environment with its flat rate taxation applicable also to companies (16% corporate income tax) and individuals (10% personal income tax) and offers a rather large domestic market (Romania’s population is the 2nd largest in Central Europe). Also, Romania’s authorities are committed to reducing its red tape and move the communication in the digital age, also thanks to its skilled and digitalized work force.