Tax & Legal Guide Romania Corporate Income Tax

Last update: April 2011

Contents

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General provisions Calculation of the taxable profit Corporate Assessments and Payments Transfer pricing How we can help

General provisions
Tax payers The following entities are subject to corporate income tax: Romanian legal entities; Foreign legal entities doing business in Romania through permanent establishments; Foreign legal entities which derive income from or in connection with real estate transactions or from transactions with shares held in Romanian legal entities; Foreign legal entities and individuals doing business in Romania through associations without legal personality (partnerships); Resident individuals associated with Romanian legal entities for revenues derived in or outside Romania. Fiscal year The fiscal year is the calendar year. In 2010 the fiscal year was split into two time periods: 1 January 2010 30 September 2010 and 1 October 2010 31 December 2010, which individually were to be considered as fiscal years. This was due to the elimination of the minimum tax regime beginning 1 October 2010.

Corporate income tax rate The standard corporate income tax rate is 16%. Starting from 1st May 2009 and until 30th September 2010, taxpayers were liable to pay a minimum tax based on the level of the total income obtained as at 31 December of the previous year, as follows:
Total annual income (RON) 0 52,000 52,001 215,000 215,001 430,000 430,001 4,300,000 4,300,001 21,500,000 21,500,001 129,000,000 Over 129,000,001 Minimum Annual Tax (RON) 2,200 4,300 6,500 8,600 11,000 22,000 43,000

If the corporate income tax is less than the minimum annual tax corresponding to the abovementioned level of income, the taxpayers shall pay the minimum tax. Starting with 1st October 2010, the minimum tax was eliminated. In relation to this, the calendar year 2010 was split in two fiscal periods: 1 January 2010 30 September 2010 and 1 October 2010 31 December 2010. Taxpayers deriving revenues from nightclubs, bars, casinos and betting activities should pay the higher between profits tax and 5% applied on such revenues. Starting with January 2011, taxpayers who fulfill the conditions required for being a micro-company can opt for profit tax exemption and pay a tax on revenue of 3%.

Tax & Legal Guide - Romania Corporate Income Tax

Calculation of the taxable profit

Tax Base The taxable profit of a Romanian legal entity is calculated as the difference between the income derived from any source and the expenses incurred in obtaining the taxable income throughout the fiscal year, deducting non-taxable income and adding non-deductible expenses. Non-taxable income The non-taxable income expressly includes: Dividends received by a Romanian legal entity from another Romanian legal entity; Revenues from reversal or cancellation of provisions / expenses that were previously non-deductible and recovery of expenses that were previously non-deductible; Non-taxable income expressly provided in agreements and memoranda approved by law; During 2009, the income obtained from trading of shares on the market regulated by the Romanian National Securities Commission will be considered as non-taxable income for corporate income tax purposes, while the deductibility of the relevant expenses will be disallowed. Deductibility of expenses Expenses are considered deductible if they are directly related to deriving income and correspond to taxable income. As regards the deductibility criteria, the Romanian Fiscal Code provides that expenses may be considered as deductible expenses, limited deductible expenses and non-deductible expenses. Among the deductible expenses: Expenses made for acquisition of packaging; Expenses incurred for marketing and advertising with a view to promote the company; Research and development expenses that do not meet the requirements to be recognized as intangible assets for accounting purposes;

Transport and accommodation expenses for business trips in Romania or abroad incurred by employees and directors and secondees whose costs are covered by the Romanian company; Expenses incurred for professional training and development of employees; Write-off of receivables in certain conditions. Among non-deductible expenses: Business entertainment and protocol expenses, which exceed the limit of 2% applied to the difference between revenues and deductible expenses other than profit tax expenses and protocol expenses; Fines or penalties due to Romanian authorities or foreign authorities; Expenses with luncheon vouchers over the limit established by the Government (RON 8,72 for 2010, RON 9 starting with March 2011); Contributions to non-mandatory pension funds over certain legal limits (EUR 400 per year, per employee) are non-deductible expenses; Contributions to private health insurance over certain legal limits (EUR 250 per year, per employee) are non-deductible expenses; Social expense, which exceed the limit of 2% of the salary fund realized; Other expenses related to salaries which are not taxable to individuals; For the period 1st May 2009 31st December 2011, fuel expenses are non-deductible for corporate income tax purposes. As an exception, fuel expenses are granted deductibility if these are incurred in relation to vehicles that are used for certain activities (e.g. sales activities, paid transportation services, rental activities, security services, repairs, courier activities etc.) Sponsorship expenses are not deductible, but they can be taken as a credit from the profit tax liability provided that the following conditions are met: o They are within the limit of 3 of the turnover, and o Do not exceed 20% of the profit tax due For 2010, the expenses with limited deductibility are established for each fiscal period depending on the basis corresponding to each fiscal period.

Deductions for Research & Development activities For the purpose of computing corporate income tax, an additional deduction of 20% is allowed for expenses related to qualifying research and development activities. The accelerated depreciation method is also applicable for equipment used in such qualifying research and development activities. In August 2010 Norms where issued for the application of the fiscal incentives for research and development activities presented above by the Ministry of Education and Research and the Ministry of Finance. Thin capitalisation rules Interest expenses are deductible according to debt/ equity ratio. Thus, if the debt/equity ratio over 3 or the company is in a negative equity position the interest expenses and net losses from foreign exchange differences are non-deductible, but available to be carried forward in the following period until their full deductibility. These provisions are not applicable to banks, non-financial institutions. The law limits the level of interest deductibility for the loans obtained from companies, other than banks, their branches, credit cooperatives, non-banking financial institutions, at: The National Bank of Romanias (NBR) reference interest rate for the last month of the quarter for RON denominated loans and Currently 6% annual interest rate for foreign currency denominated loans. For 2010, the debt/equity ratio is computed separately for each fiscal period.

Provisions and reserves Amounts used for setting up or increasing reserves or provisions are deductible subject to certain conditions. In this respect, it should be mentioned that: The legal reserve is deductible to a limit of 5% of the yearly accounting profit before tax (with adjustments) until it reaches 20% of the share capital; Technical reserves set up by insurance and reinsurance companies, in accordance with their regulatory legal framework, except for the equalization reserve are fully deductible; Risk provisions made for transactions carried out on financial markets, in accordance with the rules issued by the Romanian National Security Commission are fully deductible; Bad debts provisions recorded after 1 January 2006 are deductible up to the limit of 30%, if the related receivables meet the following conditions simultaneously: o booked after 1 January 2004 o not collected for a period exceeding 270 days from the due date o not guaranteed by another person o due by a person not affiliated with the taxpayer o included in the taxable income of the taxpayer. In case a provision or reserve deducted from the taxable profit is reduced or cancelled due to changing the destination of the provision or reserve, distribution towards shareholders in any form, liquidation, spin off, merger or any other reason, such amount would be included in the taxable revenues and taxed accordingly. Also, the reconstruction of the legal reserve is non-deductible.

Tax & Legal Guide - Romania Corporate Income Tax

Depreciation Constructions should be fiscally depreciated using the straight line method. It is possible to apply accelerated or reducing balance depreciation to certain assets (machinery, tools and installations, computers and peripherals, as well as patents), without the authorization of the tax authorities. The accelerated depreciation method is also applicable for equipment used in research and development activities, as mentioned above. For other assets, generally straight line and reducing balance depreciation methods are available. Land and goodwill, among other things are not tax depreciable assets. As of 1st May 2009, revaluation reserves for fixed assets, including land, performed after 1 January 2004, which are deductible for corporate income tax purposes by way of depreciation or expenses with alienation/ write-off of the assets, will be taxed simultaneously with the deduction of the tax depreciation or at the moment of the disposal or write-off of the related fixed assets. Leasing Agreements The financial and operating lease concepts are separated from a tax point of view. A financial lease arises in several circumstances, including when the risks and benefits attributable to ownership are transferred to the user at the time of concluding the lease agreement. The lessee is allowed to claim depreciation under a financial lease. The revenue obtained by non-residents as interest (under a financial lease) or as royalties (in the case of an operating lease) is subject to withholding tax in Romania (subject to an applicable Double Tax Agreement). Losses Fiscal losses are available to be carried forward and offset against future fiscal profits within next 5 consecutive years. For losses incurred after January 1, 2009, the carry forward period is extended to 7 years.

The fiscal loss registered during the fiscal period 1 January 2010 30 September 2010 is available to be carried forward within the next 7 fiscal years, considering the period 1 October 2010 31 December 2010 as the first fiscal year. For fiscal losses incurred in 2009, the carry forward period is extended to 7 years, considering 2010 a single fiscal year. Dividend Tax Distribution of profits made by Romanian legal entities to Romanian legal entities is subject to dividend tax of 16%. In case the holding percentage is at least 10% and is maintained for a period of at least 2 years, no dividend tax is applied. Consolidation There is no consolidation or group taxation provided by the Romanian Fiscal Code under the corporate income tax related provisions. Micro-companies Companies can opt for the micro-companies regime if inter alias the following criteria is fulfilled: Derive revenue from activities different from banking, insurance, capital market, management and consultancy, gambling; Have between 1 and 9 employees; Recorded revenue amounting to less than the equivalent in RON of EUR 100,000; Its share capital is owned by persons other than the Romanian State or the local authorities and having less than 250 employees. The option to be taxed as micro-company should be exercised before 31 January of the subsequent year in case the above mentioned criteria are fulfilled. Starting with the year when one of the conditions is not met anymore, the taxpayer should pay corporate income tax and may not opt for the micro-company regime in the future.

Corporate Assessments and Payments

Profit tax should be determined and paid on a quarterly basis, based on actual figures. These quarterly payments are due by the 25th of the month following the reporting quarter. Profit tax returns should also be submitted on quarterly basis, within the same deadline. The definitive annual tax return should be filed by April 25th of the year following the reporting year or February 25th in case the taxpayer finalized the closing of financial year by this date. For taxpayers that until 30th September 2010 owed the minimum corporate income tax, the fiscal year is divided into two time periods: 1st January 30th September 2010 and 1st October 31st December 2010. For the first period the corporate income tax is established by comparison with the minimum corporate income tax due for these 9 months and it should be declared prior to 25th February 2011. For the second period, the corporate income tax is computed based on the general regulations and the tax should be declared within the legal deadlines. Legal entities that did not owe the minimum corporate income tax should submit only one annual tax return, for the whole year. Banks are liable to a quarterly profits tax compliance based on estimative figures. For the other corporate taxpayers this estimative system will apply starting with financial year 2012.

Transfer pricing
The tax regime of the group companies is maintained by the Fiscal Code, and is kept in line with general transfer pricing rules. Two legal persons are considered to be related parties if one holds directly or indirectly, 25% or more of the value or number of shares or voting rights in the other entity, or that actually controls the other entity. There are no consolidation rules available for corporate profits tax in Romania. As per Romanian legal provisions on transfer pricing, any type of transaction with related parties is subject to transfer pricing regulations. Transfer Pricing Documentation File In view of establishing the transfer prices, the taxpayer carrying out transactions with related parties is liable, upon tax authorities' request, to prepare and present, within certain timeframes, a file of the transfer prices. Further, according to the Order of Ministry of Economy and Finance no. 222/2008 regarding the content of the transfer pricing documentation file, the transfer pricing documentation file should comprise at least a masterfile and a country specific file. When performing the comparative analysis the Romanian legislation requires that the territorial criteria should be chosen in the following order: Romania, the European Union and then International. Going further the order stipulates that when preparing the transfer pricing documentation file the provisions of the OECD Transfer Pricing Guidelines and the EU Code of Conduct on transfer prices should be taken into consideration. Please note that the documentation file can be prepared in English language, however the tax authorities request only the version in Romanian. In addition, note that the Romanian legislation provides that all documents written in a foreign language (e.g., contracts) should be accompanied by a Romanian translation, certified by an authorized translator.

Tax & Legal Guide - Romania Corporate Income Tax

The deadline for presenting the transfer pricing documentation file to the Romanian tax authorities is set according to the size of the company and/or complexity of the transaction, however it cannot exceed three months following their written request. There is still the possibility of a single extension for a period equal to the term initially granted. Transfer pricing penalties Transfer pricing related penalties In case the transfer prices used by the taxpayer are deemed as not in compliance with the arms length principle, the Romanian tax authorities have the right to adjust the taxpayers revenues and expenses so as to reflect the market value. Any such adjustment made for transfer pricing purposes is subject to profit tax of 16%. In addition to this, at this moment, the following late payment penalties and interest are applicable: late payment interests of 0.04% per each day of delay, late payment penalties of: o 0% of the tax liability, if the tax liability is settled within 30 days from its due date; o 5% from the tax liability, if the tax liability is settled within the next 60 days; o 15% of the tax liability for all tax liabilities which were not settled within 60 days. Fines relating to transfer pricing requirements Failing to provide the transfer pricing documentation file or the provision of an incomplete file, may result in fines between RON 12,000 and RON 14,000 (approximately EUR 2,900 3,500).

Advance Pricing Agreements (APA) According to the Government order no. 92/2003 regarding the Fiscal Procedural Code a taxpayer has also the possibility to obtain an advance pricing agreement from the fiscal authorities regarding the terms and conditions based on which the transfer prices should be determined over a fixed period of time, for intercompany transactions. The APA is binding and enforceable against the fiscal authorities. The deadline for issuing an APA is: 12 months 18 months agreement. in case of a unilateral agreement; in case of a bilateral/multilateral

The agreement is issued for a period of up to 5 years (in exceptional cases it is possible to be issued for a longer period). The agreement produces effects only for the future (there are some exceptions).

How we can help:

Specific tax advisory services We may also help you with a full range of services in the field of taxation, which due to their complexity and nature would require specific investigation and analysis on our part. They may cover various aspects on corporate income tax, value added tax, withholding tax, analyses of the contracts from different tax perspectives, analysis of the business transaction chains, etc. Such issues may include: Special reports We would perform analyses and issue special reports or, where applicable, express opinions on tax matters which, due to their complexity, purpose or the level of responsibility they entail, require specific treatment that is more involved and in-depth. Strategic business planning We will help you in structuring business transactions to maximize after-tax profit. Our tax experts will analyze your business activities, recommend alternatives consistent with business requirements and applicable laws, and assist in implementation in order to reach optimal results. International tax planning Plan and advice on any international taxation issues that may be raised by you, such as tax structuring wherein bilateral tax conventions and international tax planning can be employed, etc.

Indirect Taxes Romanias accession to the European Union brought fundamental changes in the indirect taxes field. New regulations on VAT, excise and custom duties imposed a large number of requirements that directly affected the operations and organization of businesses. The VAT legislation and jurisprudence is in a constant state of flux in Romania, as well as in the European Union. Thus, it is highly important to be aware and observe, at all times, changes of the fiscal provisions that directly impact everyones businesses, as well as the (present and the past) jurisprudence of the European Court of Justice. We can help you optimizing the payment of such taxes, meet the compliance obligations and reduce the risks of penalties which compared to other taxes can be significant higher. The assistance could include: Consultation about the indirect tax treatment of local and cross-border transactions VAT review; Assistance for indirect tax compliance in Romania and abroad; Minimizing VAT risks by developing a system orientated risk management Recovery of foreign input VAT through 8th/13th Directive refund claims as well as for foreign businesses the recovery of Romanian input VAT; Training of personnel.

Tax & Legal Guide - Romania Corporate Income Tax

Contacts

Alexandru Reff Tax & Legal Partner-in-Charge Tel: +40 21 207 52 48 E-mail: areff@deloittece.com

Dan Badin Tax Partner Tel: +40 21 207 53 92 E-mail: dbadin@deloittece.com

Pieter Wessel Tax Partner Tel: +40 21 207 52 42 E-mail: pwessel@deloittece.com

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Deloitte service lines contacts

Maksim Caslli OMP +40 21 222 16 61 mcaslli@deloittece.com George Mucibabici Chairman + 40 21 207 52 55 gmucibabici@deloittece.com Audit Ahmed Hassan Partner-in-Charge + 40 21 207 52 60 ahhassan@deloittece.com Madeline Alexander Partner +40 21 207 52 51 madelinealexander@deloittece.com Farrukh Khan Partner +40 21 207 52 13 farrukhan@deloittece.com Enterprise risk services Andrei Ionescu Director + 40 21 207 54 85 aionescu@deloittece.com

Tax & Legal Alexandru Reff Tax & Legal Partner-in-Charge + 40 21 207 52 48 areff@deloittece.com Dan Badin Tax Partner +40 21 207 53 92 dbadin@deloittece.com Pieter Wessel Tax Partner +40 21 207 52 42 pwessel@deloittece.com Andrei Burz-Pinzaru Legal Services Partner + 40 21 207 52 05 aburzpinzaru@deloittece.com Consulting Doina Patrubani-Voicu Director + 40 21 207 98 35 dopatrubani@deloittece.com Financial advisory Hein van Dam Partner-in-Charge + 40 21 207 52 30 hvandam@deloittece.com

Tax & Legal Guide - Romania Corporate Income Tax

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