When doing business in Romania, in terms of taxes, there are a few important aspects which need to be kept in mind.

The first one is that Romania has a simple tax system: it is accounting-based system, with a 16% flat rate applying on profits. As we know, this is a relatively small rate in Europe, and more or less in line with the rates of other inbound investment countries in the region. On the other hand, the taxation base on which the 16% is applied is wide (without significant tax deductions or incentives generally available), which means that reducing your Romanian company’s effective tax rate below 16% is not always simple.

Another important (and positive) aspect is that, as an EU member from 2007, Romania has implemented all European Tax Directives into its legislation, and it knows and applies international tax principles. On the other side, the dialogue with the tax authorities is, in many areas, still slow. This is mainly due to the lack of experience with some international tax principles (e.g. transfer pricing), or of procedures for applying new pieces of legislation (for example, procedures for the recovery of withholding tax on dividends paid to EU parent companies have only recently been introduced).

Last but not least, the Romanian tax legislation changes frequently. Without going into any political considerations on the matter, it is important to always keep up to date with the significant changes in local legislation, as these could have a major impact on your Romanian business.

In this respect, please find below a selection of some of the most important changes applicable starting 2013, as introduced in the Romanian legislation in the second half of 2012 and in January 2013.

Corporate income tax

·  In the context of a cross-border reorganization (such as a merger) involving a Romanian company, tax losses of the Romanian company can now be recovered by the branch of the foreign company which needs to remain in Romania (subject to conditions and limitations, including the requirement to have valid business reasons for the restructuring, and not just tax reasons). This was not possible in the past, and is the result of the adaptation of the way in which the EU Merger Directive was implemented into the Romanian tax legislation.

When restructuring your international operations involving a Romanian company, it is however important to remember that any tax losses of the Romanian company can only be carried forward for a maximum period of 7 years.

·  The taxation basis for company car costs has been changed. Now, all company car costs are 100% deductible for corporate income tax purposes if they exclusively business-related, as proved by supporting documents. If they are not exclusively business related, 50% of all company car costs (i.e. previously 50% of fuel costs only) are not deductible. A similar adaptation in the law was made with respect to the VAT treatment of such costs.

·  Starting February 2013, the 3% tax on turnover for microenterprises becomes a compulsory regime for companies meeting the relevant requirements (previously, it was an optional regime). Thus, the 3% tax on gross (adjusted) income will have to be calculated and paid by micro-enterprises which fulfill the conditions set out by the Fiscal Code, i.e.:

• Annual turnover of maximum 65,000 EUR (previously the threshold was EUR 100,000);
• Privately owned only;
• Deriving income from activities other than consulting, management, banking, gambling, etc.

·  Also starting February 2013, companies involved in R&D activities can deduct an additional 50% (instead of 20% previously) of their eligible R&D expenses. The deduction is now also available for R&D activities carried out in other EU and EEA Member States.

VAT

·  The VAT cash accounting system, implementing the provisions of the EU Invoicing Directive 2010/45/EU is a very important adaptation of the Romanian VAT legislative framework. Designed at helping small and medium sized companies with difficulties in paying the VAT to the state budget before receiving payment of the invoices issued, the system (in broad terms) works as follows:

• Starting 2013, VAT taxable persons with their business establishment in Romania, and which are not part of a VAT group, are required to apply the system if their previous year’s turnover was less than RON 2,250,000 (approximately EUR 500,000);
• VAT becomes chargeable (i.e. is due to the Romanian state budget) when the payment of the issued invoice is received ; if however the payment of the issued invoice is not received within 90 days from the date of issue, the VAT still needs to be paid to the state;

• On the side of the transaction, VAT deduction is also postponed until the VAT is paid to the supplier;
• Specific registration and compliance formalities will have to be complied with.

·  Rules on the adjustment of input VAT are changed: now, a VAT adjustment is required on any missing goods (including capital goods), including stolen goods, and at the moment when it is discovered that the goods are missing.

·  Simplified measures are introduced with respect to the issuing of invoices of small value (i.e. less of EUR 100) and electronic invoicing.

Withholding taxes

·  An 50% tax is introduced on dividends, interest, royalties, commissions, income from rendering services in or outside Romania if the income is paid to a non-resident from a state with which Romanian does not have a legal instrument in place (e.g. Tax Treaty) providing for the exchange of information.

·  Simplified requirements for reporting and paying capital gains (e.g. from real estate in Romania, or from the sale of shares in a Romanian company) have been introduced.

Local taxes

·   Local tax authorities with arrears as at 31 December 2012 are required to increase the level of local taxes for 2013.

·   Going forward, we can also expect a change in the general taxation principle applicable to real estate, in function of the utilization of the real estate (e.g. housing / business), instead of in function of the owner (e.g. individual / legal person) as it is the case today.

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Additional information on the tax changes in Romania, including the recent measures introduced by the Government Ordinance 8 / 23 Jan 2013) can be accessed at the following link: … (link to presentation)

Contact:

Claudia Firulescu

KPMG Tax & Legal Advisers, Belgium

Tel: + +32 2 708 36 03

efirulescu@kpmg.com