OUG no. 79/2017 for amending Law no. 227/2015 regarding the Fiscal Code was published in the Official Gazette no. 885/10.11.2017. The Ordinance shall apply starting 1 January 2018.
The main amendments to the Fiscal Code are as follows:
New terms are defined, such as: borrowing costs, financial enterprise, transfer of assets, transfer of tax residence.
New rules are introduced to limit interest deductibility and other interest-equivalent costs from an economic point of view.
The limitation applies to the deductibility of borrowing costs which cover a wide range of costs related to financing (e.g. interest related to convertible bonds or zero coupon bonds, interest corresponding to financial leasing contracts, payments made for profit participating loans, capitalized interest that is included in the accounting value of an asset, islamic finance financing costs).
The taxpayer has the right to deduct, in a fiscal period, the excess borrowing costs up to the deductible ceiling represented by the RON equivalent of 200,000 euros.
The excess borrowing costs, calculated as the difference between borrowing costs and income from interest and other equivalent income from an economic perspective, that exceed the equivalent in RON of 200,000 euro can be considered deductible for corporate tax purposes only up to 10% of the profit less non-taxable incomes, plus corporate tax expenses, plus excess borrowing costs and tax depreciation (EBITDA adjusted for tax purposes).
If the above tax base is 0 or negative, the excess borrowing costs are treated as non-deductible for corporate tax purposes and can be carried forward for an unlimited period of time.
For associates that have carried forward interest and foreign exchange differences the above rules apply.
Independent entities that don’t have associated companies do not apply the above rules and can deduct all borrowing costs. Interests and foreign exchange losses, carried forward under the present deductibility rules, are fully deductible under the new rules.
The tax regime for transfers of assets, of the tax residency and / or of the economic activity carried out through a permanent establishment for which Romania loses the right to tax
The gain derived from the transfer of assets, of tax residency or of the economic activity of a permanent establishment for which Romania loses taxing right is subject to a 16% corporate tax. The gain is calculated as the difference between the market value and the tax value of assets transferred.
If a loss is incurred, the taxpayer can offset losses against gains derived from operations of the same nature during the next 7 years.
This rules will apply to the following operations for which Romania loses the taxing right of assets transferred:
- transfer of assets from a company’s Romanian head office to a permanent establishment located in a third country;
- transfer of assets from a Romanian permanent establishment to its head office located in a third country;
- transfer of tax residency from Romania to a third country, except for the assets which remain effectively connected with a permanent establishment in Romania;
- transfer of business carried out through a Romanian permanent establishment to a third country.
The taxpayers that apply the above provisions can pay the tax in installments provided that they fulfill the Fiscal Procedure Code provisions regarding the payment of tax in installments and that the transfer is made towards an EU member state or a state that is a party to the Agreement regarding European Economic Space.
General Anti Abuse Rule
For the purpose of calculating the tax liabilities it shall be ignored an arrangement containing one or several steps, taking into consideration all relevant facts and circumstances, are not genuine, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage and not for valid commercial reasons which reflect economic reality.
Controlled Foreign Company (CFC) rules
Controlled Foreign Company it is defined as:
- the taxpayer has a direct or indirect holding of more than 50% of the voting rights or directly or indirectly owns more than 50% of the entity’s capital or is entitled to receive more than 50% of the profits of the entity;
- the actual corporate tax paid on its profits by CFC is lower than the difference between the corporate tax that would have been charged on the foreign entity under the Romanian corporate tax provisions and the actual corporate tax paid on its profits by the foreign entity.
In case an entity is treated as a controlled foreign company, the corporate taxpayer controlling it, includes in the taxable base the following types of undistributed income: interest or any other incomes generated by financial assets, royalties, dividends and incomes from participating titles transferred, financial leasing incomes, income from insurance, banking etc.
The CFC rules should not apply in cases where the foreign controlled company carries on a substantive economic activity supported by staff, equipment, assets and premises, as evidenced by relevant facts and circumstances.
Tax on micro-enterprises
The threshhold for applying the tax on micro-enterprises is increased from 500,000 euros to 1,000,000 euros.
All taxpayers carrying out activities that are currently exempted are included in the tax on micro-enterprises system (it will apply to legal entities that obtain income from consultancy and management more than 20% of total revenues, for Romanian legal entities that carry out activities in the banking, insurance and reinsurance and capital markets, gambling field, etc.).
The provisions permitting an entity with a minimum share capital of 45,000 lei to apply by option the provisions of Title II “Tax on profit” is eliminated.
Income tax rate is reduced from 16% to 10%.
For intellectual property income, the tax rate on advance payments is set by applying the 7% tax rate on gross income (previously was 10%). The tax rate on income as final tax is 10%.
Increase in personal deductions that are granted to individuals with a gross monthly income of up to 1,950 lei inclusive, as well as up to 3,600 lei. For a monthly gross income exceeding 3,600 lei, no personal deduction is granted.
For income earned in fiscal year 2017, tax liabilities are those in effect at the date of obtaining the income.
Compulsory social contributions
Starting from 1 January 2018, social security contributions are:
- 25% social insurance contribution due by employees, 4% due by employers for special working conditions, 8% due by employers for special and other working conditions;
- 10% health insurance contribution due by employees;
- 2.25% work insurance contribution due by employers.
The social security contribution and the health insurance contribution due by persons who receive income from wages or salary equivalent under a full-time or part-time individual labor contract may not be lower than the level of social contributions related to the country’s minimum gross salary in force in the month for which social contributions are due.
The provisions on social security contributions will apply to income made as of 1 January 2018.
Income from independent activities
The monthly basis for calculating the social security contribution for freelancers is the income chosen by the taxpayer, which can not be lower than the national minimum gross salary guaranteed in payment.
The monthly basis of calculation for freelancers is the national minimum gross salary, regardless of the level of income earned.
Individuals who earn monthly income from independent activities less than the national minimum gross salary are not required to pay CAS / CASS, but may choose to pay the contribution under the same conditions as those required to pay the contribution.
The competent tax authorities have the right to refuse deduction of VAT if, after administering the evidence provided for by law, they can prove beyond any doubt that the taxable person knew or should have known that the transaction relied on to justify the right to deduct was involved in a VAT fraud that occurred upstream or downstream of the supply chain.