From 2021 significant changes entered into force to the Fiscal Code of Romania. The amendments were published under Law no. 296/2020 in the Romanian Official Gazette no. 1269 on 21 December 2020 and most of them took effect on 1 January 2021. Below we summarise the main changes affecting corporate income tax (CIT) and value added tax (VAT) that could be important for foreign investors.
One of the most important amendment of the Fiscal Code of Romania affects the reinvested profit exempt from CIT. It represents the cumulated gross accounting profit from the beginning of the year obtained until the quarter / year of commissioning of the eligible assets. The CIT exemption related to the performed investments is granted within the limit of the cumulated CIT computed from the beginning of the year until the quarter / year of putting the assets into operation.
Place of effective management
The definition “place of effective management” (POEM) has also been changed in the Fiscal Code of Romania. According to the new definition, a foreign legal entity is considered to have the POEM in Romania if it performs operations that correspond to economic, real and substantial purposes. It also has to meet at least one of the following conditions:
- the economic-strategic decisions necessary for the management of the activity of the foreign legal entity as a whole are taken in Romania by the executive directors / members of the board of directors; or
- at least 50% of the executive directors / members of the board of directors of the foreign legal entity are Romanian residents.
If a foreign legal entity is considered to have the POEM in Romania and is considered Romanian resident, it will have, amongst others, to have accounting records in Romania, to register as a CIT payer and to maintain its residence in Romania for a period of at least one fiscal year.
Non-deductible expenses with entities from non-cooperating states
Expenses incurred as a result of transactions with a person located in a state included in the EU List of non-cooperating jurisdictions for tax purposes (American Samoa, Anguilla, Barbados, Fiji, Guam, Palau, Panama, Samoa, the Seychelles, Trinidad and Tobago, the American Virgin Islands and Vanuatu) are non-deductible in the computation of the CIT.
Fiscal consolidation for CIT purposes
The amendment to the Fiscal Code of Romania introduces the concept and rules for CIT fiscal consolidation. The fiscal group for CIT purposes consists of at least two of the following entities:
- a Romanian legal person / legal person with its registered office in Romania established according to European legislation and one or more Romanian legal persons / legal persons with registered office in Romania established under European legislation in which it holds, directly or indirectly, at least 75% of the value / number of participation titles or their voting rights;
- at least two Romanian legal entities in which a Romanian natural person holds, directly or indirectly, at least 75% of the value / number of participation titles or voting rights;
- at least two Romanian legal persons held, directly or indirectly, in proportion of at least 75% of the value / number of participation titles or voting rights, by a legal / natural person, resident in a state with which Romania has concluded a double tax treaty or in a state with which an agreement on the exchange of information has been concluded;
- at least one Romanian legal person held, directly or indirectly, in proportion of at least 75% of the value / number of participation titles or voting rights, by a legal person resident in a state with which Romania has concluded a double tax treaty or in a state with which an agreement was concluded regarding the exchange of information and the permanent establishment / designated permanent establishment in Romania of this foreign legal entity.
The period of application of the fiscal consolidation system is five fiscal years and starts with the next fiscal year following the submission of the application (hence, it can be applied starting with 2022). The system is optional and is required to be communicated at least 60 days before the start of the period for which the fiscal consolidation is requested.
Certain cumulative conditions must be met, such as the fulfilment of the holding condition for an uninterrupted period of one year, prior to the beginning of the fiscal consolidation period. A legal person will be appointed for computing the consolidated fiscal result of the fiscal group, submitting the CIT return and paying the CIT on behalf of the group.
Each member of the fiscal group determines the fiscal result individually, and the consolidated fiscal result of the fiscal group is determined quarterly / annually by summing the fiscal results determined individually by each member of the fiscal group. The CIT is calculated by applying the rate of 16% on the positive consolidated fiscal result of the group. Each member of the fiscal group has the obligation to prepare the TP documentation which will include both the transactions carried out with the members of the fiscal group, as well as with the affiliated entities outside the fiscal group.
Special rules are provided both for entering / leaving the fiscal group and for cases in which the group no longer meets the mandatory conditions during the five years.
Changes to VAT in the Fiscal Code of Romania
The most relevant VAT-related amendments to the Fiscal Code of Romania include the increase of ceiling for VAT-cash accounting system and the VAT exemptions for certain imports.
The ceiling for entities wishing to apply the VAT cash accounting system has increased from RON 2,250,000 (roughly EUR 460,000) to RON 4,500,000 (roughly EUR 920,000).
According to the new rules in the Fiscal Code of Romania amongst others, the VAT is not actually paid to the customs authorities for certain imports of goods subject to simplification measures (for example, imports of cereals), made by entities registered for VAT purposes (if certain conditions are met). The VAT will be paid through the reverse charge mechanism.
If you would like to know more about the latest amendments to the Fiscal Code of Romania or if you have any tax related question in Romania, please visit the homepage of Ensight, the exclusive representative of WTS Global in the country.