Insight

Investing in Romania – taxation considerations

June 2020


Romania is located in South-East Europe, ideally situated for access to markets in the EU, the Commonwealth of Independent States, and the Middle East. With a population approaching 20 million, Romania is the sixth largest EU country.

There are several reasons that make investing in Romania an attractive proposition, not least the country itself and the quality of its skilled and well-educated people. There exists also a well-established network of lawyers, accountants and consultants.

In this article, we will look at some taxation matters that you need to consider should you be thinking about investing in Romania.

Taxation of legal entities

Romanian law states that a company established in Romania, whether by someone resident or a foreign national, is deemed to be a legal entity and resident in Romania. The company will pay corporate tax in one of two ways.

Corporate income tax

Corporate income tax is due at the rate of 16% of profits. Romanian companies pay tax on worldwide income unless a double-taxation treaty exists. However, foreign businesses carrying out activities through a Romanian company pay tax at 10% of those profits arising through the Romanian business. These profits are determined in the same way as any other Romanian business, based on the revenue and expenses arising from that business.

Depending on the type of business, there may be an advantage in owning the Romanian company through a holding company, thus centralising profits and losses. However, this is a difficult area and professional advice is essential.

Micro-company tax

Companies with turnover of less than €1 million (around 4.5 million lei) pay micro-company tax based on turnover rather than profit. Tax is due at 1% of turnover for companies with one or more employees, or 3% for companies with no employees. Once a company has issued share capital of €10,000 or 45,000 lei, and at least two employees, it can choose to pay profit-based corporate income tax instead.

Salaries and associated taxes

Romania stipulates a minimum monthly wage of 2,230 lei (around €465) or 2,350 lei (around €490) for those with higher education. Employees pay income tax of 10% of salary and social contributions of 35% (25% social security and 10% health insurance). Employers also pay an insurance contribution of 2.25% of salaries.

A higher minimum wage of 3,000 lei (around €625) applies in the construction industry. On meeting certain conditions, construction workers are exempt from income tax and pay social contributions at a lower rate of 21.25%. Employers also pay a lower insurance contribution of 0.3375%. Other categories of employee entitled to preferential income tax treatment include people:

  • with disabilities
  • employed in the IT sector
  • employed in research and development.

Dividends

The remaining net profit after payment of corporate income tax or micro-company tax is available for distribution as dividends. Since 2018, it is possible to distribute a dividend based on the audited quarterly financial statements.

Dividends paid by one Romanian company to another Romanian company are generally subject to a 5% withholding tax; however, dividends may be exempt where the recipient has held at least 10% of the issued share capital for a minimum of 12 months.

Dividends paid by a Romanian company to a non-resident company are also subject to 5% withholding tax. However, where the recipient is resident in an EU member state, dividends may be exempt where the recipient has held at least 10% of the issued share capital for a minimum of 12 months.

Capital gains

Capital gains made by a Romanian company are included in profits and taxed accordingly. This includes gains arising from the transfer, rental or disposal of property located in Romania unless exempted by a double-taxation agreement. Capital gains made by non-resident shareholders in a Romanian company are also liable to tax unless exempted by a double-taxation agreement.

Looking ahead

While it isn’t possible to give an indication of future taxation developments – the Romanian government doesn’t announce these well in advance – lobbying by the private sector has always exerted enough pressure on governments to keep taxes low.

While the tax incentives that once existed to encourage investment in areas of unemployment are not currently available, there are still plenty of reasons to invest in Romania.

About the author

Andrei Badiu
Bucharest, Romania

Andrei is a partner at Russell Bedford’s Romania member firm 3B Expert Audit, where he is responsible for special audits.

Andrei holds a Master of Business Administration specialising in financial management and international banking and is a member of ACCA, Chamber of Financial Auditors, Romania (CAFR) and Chamber of Certified Chartered Accountants, Romania (CECCAR).

andrei@auditor.ro

Author: Andrei Badiu - 3B Expert Audit, Bucharest, Romania