IV. Taxation

4.1. Taxation of individuals

4.1.1. Taxpayers, global income tax

The legal acts, which deal with the legislation regarding the tax on income, are as follows:

	Government Ordinance no. 73/1999 on the income tax;
	Emergency Ordinance of the Government no. 87/2000 for the modification and completion of the Government Ordinance no. 73/1999 on the global income tax.

The taxation system provided by the Government Ordinance no. 73/1999 on the income tax, with further modifications and completion, contains both the taxation sum-up for income derived by an individual from the residence country and from abroad in a taxable period and the final withholding taxation for other kinds of income. 

The kinds of income which are taxed according to the income tax law are:

	income from independent personal services;
	income from salaries;
	income from rent;
	dividends and interest;
	pensions over the amount of 2,374,000 lei
	other kinds of income

The first three categories of income are subject to the globalization system, which means to compute the net income on each kind of income, as follows:

1. Net income from independent personal services is computed as the difference between the gross income and the relevant deductible expenses.

2. Net income from salaries is determined as:

-          in case of the income derived at the principal post, the net income is determined as a difference between the gross income and the following expenses: contribution for additional pension, contribution for social protection of the unemployed persons and contribution for the social securities of health, a share of 15% of the essential personal deduction. This last rate is given as professional expenses, at the same time with the essential personal deduction, for the same place of work.

-          in case of another income, the net income is determined as a difference between the gross income and the contribution for the social securities of health, as well as of the other mandatory contributions provided by the law, on each job, other than the principal post.

3. Net income from the demise of the right to use the goods is computed as a difference between the gross income and a rate of 30% of the gross amount, representing the related deductible expenses, excepting the income from the demise of the right to use the immovable goods which are used for dwelling. In this last case, the rate for the related deductible expenses is 50% on the gross income.

The personal deductions are allowed to the taxpayers in accordance with their own situation or the situation of individuals supported by the taxpayer. These deductions are given at the globalization of the annual income. 

At the end of each fiscal year, the taxpayers have to lay down the tax return for global income, on the basis of which the annual taxable income is computed. This annual taxable income represents the total amount of the net income derived by the taxpayer from independent personal services, from salaries, from the demise of the right to use of the goods, as well as from the income having the same nature derived from abroad by the Romanian taxpayers. The personal deductions and the carried forward losses are allowed to be deducted from this income. 

The following personal deductions are allowed to be deducted from the global income:

·         the essential personal deductions, on each month. In the first half-year of 2001, this deduction is 1,099,000 lei monthly;

·         the additional personal deduction is computed on the basis of essential personal deduction, as follows:

	0.6 multiplied by essential personal deduction - for wife or husband supported by the respective taxpayer.
	0.35 multiplied by essential personal deduction - for the first two children supported by the taxpayer and 0.20 multiplied by essential personal deduction - for the next children supported by the taxpayer.
	other additional personal deductions given to the taxpayer according to the own situation of the taxpayer or of the individuals supported by the taxpayer:
	multiplied by the essential personal deduction for the invalidity level I, that means persons who have serious handicap;

0.5 multiplied by the essential personal deduction for the invalidity level II, this means persons who have increased handicap.

The personal deductions are summed up and their total amount, which is allowed to be deducted, may not outrun 2.5 multiplied by essential personal deduction. The total amount is deducted on the basis of the derived income only.

The tax rate varies from 18% to 40% and it is applied on the annual taxable income.

The rest of the other income is not subject to the globalize system but the other income is taxed separately, the tax being final. This kind of taxation is used for: pensions, dividends and interest, gambling gains and other kinds of income.

For the income which is withhold taxed at the source, the following rates of taxation are provided:

·         5% on the dividends;

·         1% on the interest;

·         1% on the capital gains derived from the selling of the securities and shares;

·         18% - 40% on the pensions which outrun the amount of 2,374,000 lei monthly;

·         10% on the gambling gains and rewards, as well as other kinds of income. In this case it is allowed an exemption from taxation the amount of 4,119,000 lei;

·         15% on the income derived in Romania by the foreign artists and sportsmen or by Romanian artists and sportsmen who have not their domicile in Romania;

·         15% on the royalties derived in Romania by the Romanian individuals without a domicile in Romania and by the foreign individuals.

The foreign individuals as well as the Romanian individuals without a domicile in Romania are taxed in Romania only for the income derived in Romania.

4.1.2. Social contributions

Employers must pay various social security contributions calculated on the gross salary and abiding by Law 19/2000 on social protection.

-          Social security fund                             30% (generally)

-          Health fund                                           7%; 

-          Unemployment fund                              5%;

-          Social Solidarity Special Fund               3%;

-          Education Fund                                     2%;

-          Chamber of Labor commission           1%. 

The employee pays the following contributions, which are deductible for salary tax purposes:

-          Pension fund                                         5%; 

-          Unemployment fund                              1%;

-          Health fund contribution                         7%.

Foreign citizens working in Romania on a work permit and a labor contract bases, registered with the Labor Office, are considered Romanian employees and are required to pay most of the Romanian social security contributions.

A foreign citizen who is not employed or paid by an employer having a permanent establishment in Romania has no obligation to pay social security contributions and does not need to provide proof of payment of social security in another territory.

4.2. Taxation of corporations 

4.2.1. Taxpayers, rates

All legal entities doing business in Romania are liable to pay corporate income tax ("profit tax") on their taxable profits. From 2000, the standard profit tax rate is 25% applicable both to Romanian incorporated companies and foreign legal persons operating on a "permanent basis" in Romania. 

Companies that obtain hard currency incomes from export of goods and services pay a reduced profit tax of 5% for the profit related to these export operations. This is conditional on the hard currency being received in a bank account in Romania. 

4.2.2. Profit tax computation, deductions, non-deductible items, payments

The taxable income is determined on the basis of the accounting income adjusted for tax purposes. Generally, only expenses related to obtaining revenues are taxes deductible. 

The main non-deductible expenses are: expenses not based on specific justifying documents, provisions and reserves higher than the legal limits, contractual penalties and fines due to foreign businesses and to both Romanian and foreign authorities, social expenses over the legal limit. Protocol expenses are deductible up to 1% of profit and sponsorship expenses are deductible up to 5% of profit.

Expenses with services provided by non-residents are non-deductible for profit tax purposes (e.g. management and consulting) if their payment entails operational losses at the level of a tax year.

It is compulsory for a company to create legal reserve of 5% of the annual accounting profit before tax until it reaches 20% of the company's share capital. The legal reserves thus created can be deducted from the taxable base when computing the profit tax.

Dividends received by a Romanian legal person from another legal person, whether foreign or Romanian, are not subject to profit tax. On dividends paid by all Romanian companies, a 10% dividend tax is applicable for the dividends distributed to legal persons and 5% for those distributed to natural persons. These rates are subject to treaty relief. Dividends may be distributed only after the submission of the annual Balance Sheet (15th April of the following year). No interim dividend distribution is allowed.

Profit tax is computed monthly on a cumulative basis for the calendar year (which is the Romanian fiscal year). It is paid quarterly up to 25th of the month following the quarter it relates to.

4.2.3. Tax relieves, treatment of losses

If tax on profits/income is paid abroad, whether directly (related to a permanent establishment abroad) or by withholding it from the taxpayer's revenues obtained abroad, it can be deducted from the profit tax payable in Romania. 

Taxpayers acquiring technological equipment and transport vehicles (except cars) benefit from a tax deduction from the taxable base of 10% of the acquisition price.

A 5-year loss carry forward period is allowed. The fiscal losses cannot however be carried forward in case of merger or split. Loss carry-back is not permitted.

Currently there are no thin capitalization rules in Romania, but there are some limits concerning the deduction of the expenses generated by the interest.

4.3. Tax exemptions 

The main fiscal facilities in force concern companies operating in certain areas (disadvantaged area, free trade zones, industrial parks) or for companies that observe certain conditions (i.e. small and medium sized enterprises). These fiscal facilities include mainly:

	Customs duties and VAT exemption for specific imports (i.e. equipment, know-how, installations, means of transport, raw materials, other depreciable assets) under certain conditions;
	Profit tax exemption for specific cases.

4.4. Withholding taxes 

Non-resident legal and natural persons that are obtaining income from Romania are subject to the following main withholding taxes, if no overriding provisions in international treaties exist:

-          15% on royalties;

-          10% on interest (bank deposit interest paid by Romanian banks are excepted);

-          15% on commissions;

-          15% on revenues obtained from technical assistance and most other services if they are performed in Romania;

-          15% on revenues from international transport activities.

The Double Taxation Agreements signed by Romania may reduce the withholding tax rates on the payments listed above.  The Romanian authorities are frequently aggressive in collecting withholding tax, often disregarding international conventions on how treaties should be applied.

Failure by the payer to properly withhold taxes can lead to a penalty of up to 100% of the tax not withheld plus the delay penalties specified above.

4.5. Indirect taxation - Value Added Tax

4.5.1. Rates, payments

The Romanian VAT legislation generally follows the provisions of the EU Sixth VAT Directive.

A 19% VAT rate is applicable in Romania.  For export of goods and services a 0% VAT rate applies, provided the foreign currency related to the export operation is paid into an account opened with an authorized bank in Romania.

VAT should be paid monthly by the 25th day of the month following the month it relates to. The VAT reverse charge should be paid within 7 days from the date the external invoice is received.

 4.5.2. VAT exemption

A VAT exemption applies to a range of activities including banking, finance and insurance, types of research and development work and to specific activities performed inside the free trade zone. Romanian legislation also includes the concept of exemption with input VAT recovery.

4.5.3. Fiscal representative for VAT purposes

Foreign businesses can only register for VAT in Romania through a fiscal representative. In this case VAT on services and goods supplied in Romania is accounted for through a return submitted by the fiscal representative. The foreign business can recover VAT costs incurred through the returns.

4.5.4. VAT refundable

If a company is in a VAT reimbursable position, it is entitled to request a refund according to specific provisions, depending on its operations. Alternatively, the refundable balance can be offset against past or future VAT liabilities. In practice, if a refund is requested it can often take some months for the money to be effectively paid back.

4.6. Other Indirect Taxation

4.6.1. Customs duties

Romania's Customs Duties and Tariffs System is in line with EU Standards and the "Brussels Harmonised System" for the denomination and classification of goods. 

Certain internationally accepted factors are generally most significant in determining the amount of customs duty on imported goods, such as customs heading, value for customs duty purposes (i.e. expressed as a percentage - ad valorem) and country of origin of the goods.

Except for agricultural and food products, which have a specific regime, customs duties generally amount up to 30% depending on the type and technical characteristics of the goods.

Preferential rates apply for goods originating from EU, CEFTA and EFTA countries with which Romania has signed bilateral free trade agreements (Turkey, Moldova and Israel) and countries, members of P16 and GSTP. The trend is to reduce or eliminate the customs duties for the goods originating from these "Trade Blocks".

4.6.2. Excise tax

The excise tax applies on imports and production of excisable goods (i.e. alcohol, cigarettes, coffee, fuel, cosmetics and perfumes) and on some electric home appliances such as microwave ovens, video cameras or air conditioning units (i.e. Euro 270/ton for petrol, Euro 1,035/ton for roasted coffee, Euro 1.50/hl/1 degree alcohol for beer). The legislation regarding the excise duties will be revised this year. On this occasion, some new changes are going to be made to the current provisions regarding the excise duties.

4.6.3. Clearance fees

A customs commission of 0.5% is applied on the declared customs value of the imported goods. If the goods originate from the above-mentioned "Trade Blocks", no customs commission applies.

4.7. Tax treaties

Romania has signed a significant number of bilateral Double Tax Treaties. Most of these treaties follow the OECD model. The Double Tax Treaties prevail over domestic legislation, provided a certificate confirming the fiscal residency of the beneficiary of the payment made abroad is issued for Romanian taxpayers.

Double taxation Agreements to which Romania is a party

Specific agreements were concluded with the following countries: Albania, Algeria, Armenia, Austria, Bangladesh, Belarus, Belgium, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Ecuador, Egypt, Finland, France, Georgia, Germany, Greece, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Korea Democratic People's Republic, Korea Republic, Kuwait, Lebanon, Luxembourg, Malaysia, Malta, Moldova, Morocco, Namibia, Netherlands, Nigeria, Norway, Pakistan, Philippines, Poland, Portugal, Russia, Slovakia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Syrian Arab Republic, Thailand, Tunisia, Turkey, Ukraine, United Arab Emirates, United Kingdom of Great Britain and Northern Ireland, United States of America, Uzbekistan, former Yugoslavia - whose provisions are applied to Macedonia, Slovenia and Bosnia, Yugoslavia, Vietnam, Zambia.

Withholding tax rates provided by some DTAS

Conventions Concluded by Romania for Avoidance of Double Taxation and Prevention of Financial Evasion in Relation to Income and Capital Taxes

¹ D - Decree

² L – Law

³ M.Of. – The Official Gazette of Romania (“Monitorul Oficial”) is the official publication of the Romanian State, responsible for publishing the legal aspects