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Like all EU countries, Romania has implemented all of the EU’s VAT directives, such as VAT Directive 2006/112/EC or the VAT Refund Directive 2008/9/EC for entities from other EU Member States. EU VAT Regulations are also applicable in Romania.

However, Romania has some of the most burdensome (even arbitrary) procedures for registering for VAT purposes, as the Romanian tax authorities want to fight against VAT fraud with a rigid VAT registration procedure applicable to Romanian companies.

Fortunately, Romanian branches of foreign companies / EU companies registering directly for VAT purposes in Romania are not subject to the VAT risk analysis below. Compared to local companies, the VAT registration procedure is simplified for nonresident companies which intend to register for VAT purposes in Romania, however, both procedures mean documents justifying the intention to perform an economic activity in Romania must be provided to the tax authorities.

VAT scoring
The tax authorities analyse various topics, allocate negative points for each topic (the exact scoring is not public) and compute the overall score by adding 100 points to the sum of the allocated points. If the overall score is below 51 points (i.e. negative aspects dominate), the fiscal risk is high and the VAT registration is rejected.

Aspects considered during VAT registration
Having considered the above, below we present some aspects which should be avoided by Romanian companies registering for VAT purposes (the examples are not exhaustive).

A Romanian company may not have its headquarters within a lawyer’s office and the period of use for the headquarters should be more than one year. The company should perform its activity in its headquarters and or working units.

The administrators / shareholders (with more than 25% of the shares) must not have committed any fiscal offences / crimes, and they
may not have been administrators / shareholders in other Romanian companies in the following cases: insolvency / bankruptcy /
fiscally inactive / trade registry inactive / VAT registration annulled / overdue taxes.

The company should have an employee with a university degree in economics as the chief accountant, or it should conclude an agreement
with an authorised bookkeeping provider. The company should also have other employees.

Furthermore, the company should have bank accounts and every person authorised to use the bank accounts should be an administrator /
shareholder / employee of the company.

What is also interesting is that the Romanian tax authorities consider it negative if at least one of the administrators is a non-Romanian
tax resident individual, and the company applying for VAT registration has share capital below RON 45,000 (roughly EUR 9,600).

Conclusions
In light of the above, VAT registration can take more than a month. The most important aspect of the current procedure (such rules are not new in Romania) is that the Romanian tax authorities are compelled to have discussions with the company applying for VAT registration (in the past, the tax authorities could simply reject the VAT application without allowing the companies to provide explanations).

Foreign entities wanting to establish a Romanian subsidiary should consider the above recommendations as part of their entry strategy in Romania, and for tax planning, especially from an operational / timing point of view.

For example, if a Romanian company is not to have employees, its administrator will be a foreign individual, it will have the minimum share capital and its headquarters will be in the premises of a service provider, then its VAT registration process will not be straight-forward, even if the new company has a sustainable business model.

The article is signed by Florin Gherghel, Tax Manager Ensight Finance.

 

Companies who only carry out innovation and research& development activities (specific definitions of such activities have to be taken into consideration) are exempt from paying corporate income tax in the first ten years of their activity. State aid rules have to be observed to apply this facility.

Additional deductions for corporate income tax assessment

A supplementary deduction of 50% of the expenses eligible for research & development activities (in addition to the value of these expenses) can be made for corporate income tax purposes.

Accelerated depreciation for specific equipment used in research & development activities (e.g. technological equipment, control devices) may also be claimed. Thus 50% of the value of the asset can be deducted in the first year.

Eligible activities for this incentive may include applied research and / or technological development. Research & development can be performed in Romania / EU and has to be relevant for the company’s activity. Research & development activities have to be included in a project fulfilling specific conditions.

Research & development should generate results usable by the company (e.g. for its own benefit, or sale / use of results). If the objectives of the research & development project are not accomplished, the facility can still be applied.

Eligible expenses have to be allocated to a research& development activity, and they are as follows:

• depreciation expenses for assets used in research & development,
• salary expenses of research & development employees,
• maintenance & operational expenses for used assets,
• operational expenses allocated to this activity, such as raw materials, third-party services,inventory, etc.,
• direct costs allocated to research & development activity.

State aid rules must be observed to apply thisfacility.

The Ministry of Education should have set up a register of experts, who can certify that the activities performed are indeed research & development activities. Unfortunately, this register has not been set up yet, and companies are reluctant to claim the above-mentioned incentive in the absence of expert verification.

Exemptionfrom salary tax for research & development employees

No salary tax is to be withheld by employers for the salary remunerations of employees involved in research & development activities, provided that specific requirements are fulfilled (mainly a well-defined research & development project).

The article is written by Florin Gherghel, Tax Manager Ensight Finance

Setting up a company in Romania involves certain steps related to the legal incorporation at the Trade Registry, as well as to the fiscal registration with the tax authorities. The same rules and procedures apply for domestic and foreign investors who decide to set up a company in Romania.

Registration at the Trade Registry
This usually happens with the support of a legal advisor who gathers all the documents and information required, prepares the Constitutive Deed and registers the documentation with the Trade Registry. The documentation covers the following necessary information: type of company, share capital structure, company activity according to NACE code (activity classification codes), company name, company premises, identification documents from shareholders and appointed administrators, proof of share capital deposit at bank, specimen signatures.

Entities with legal personality can take on one of the five legal forms provided by Romanian Company Law 31/1990, the most common being an LLC (limited liability company) and an SA (joint stock company).

A company can be set up in about 10 working days once in possession of all the supporting documents required. 

Registration at the fiscal authorities
After the incorporation at the Trade Registry, the company must also register at the Romanian fiscal authorities for the direct and indirect taxes related to its activity. Also, documentation for obtaining the electronic signature allowing the registration of tax returns must be prepared and registered with the authorities.

Tax on micro-company revenues versus corporate income tax
Newly established Romanian entities are required to pay a micro-company tax from the first fiscal year. Micro-companies pay 1% or 3% tax on revenues, while corporate taxpayers pay 16% on taxable profits. The tax rates applicable for micro-company revenues are:
→ 1% for micro-companies with at least one employee
→ 3% for micro-companies with no employees.

If a micro-company generates revenues exceeding EUR 1,000,000 during the fiscal year, it becomes a corporate taxpayer starting from the quarter in which this threshold is exceeded. Micro-companies with share capital of at least RON 45,000 (roughly EUR 9,700) may opt to pay corporate income tax from their registration.

Registration for VAT purposes
VAT registration is mandatory once an annual turnover threshold of RON 300,000 (roughly EUR 88,500) is exceeded. However, any taxable person can optionally apply for VAT registration.

New companies voluntarily registering for VAT before the turnover threshold is exceeded will have to prove their capacity to perform economic activities. The VAT registration involves a risk analysis by the tax authorities based on predefined criteria (declared premises, level of share capital, number of employees, activity type, good conduct certificates of administrators, etc.). In some cases, the VAT registration process also includes interviews with the company administrator as required by the tax authorities, to clarify if the taxable person qualifies for VAT. Following this analysis, the VAT registration can be granted or rejected. The deadline for settling VAT registration requests is 45 days from the submission date.

Registration with Territorial Labour Inspectorate
Once the company is set up, personnel can be hired. Each labour contract must be notified to the Labour Inspectorate at least one day before the labour contract takes effect, via an online electronic ledger of employees (REVISAL).

The article is signed by Alexandra Săvulescu, Senior Tax Consultant Ensight Finance.

 

Until July 2018, the distribution of dividends by Romanian companies was possible only after the financial year was closed and the net profit of the closed financial year was determined. As it can be imagined, such prohibition had implications from a cash-flow perspective for the shareholders of Romanian companies.

In this respect, the Romanian company law allowed for dividends to be distributed only from profits determined according to the law (i.e. after the closing of the financial year). Furthermore, the same law provided that the distribution of dividends, amongst others, in the absence of financial statements was fraud, action punishable with prison for the administrator of the company distributing such dividends.

To disallow such prohibition, the distribution of dividends in advance is possible starting from July 2018 when the company law and accounting law were modified to enable the distribution in advance on quarterly basis.

There are some conditions for allowing the quarterly distribution. The interim distribution can be performed during the year – only up to the quarterly net profit (after the mandatory reserves, if any, are set-up), but the carried forward losses must be off-set before the dividends can be distributed. The interim distribution must be based on interim financial statements approved by the shareholders. Such interim financial statements must be prepared therefore quarterly and they must be audited if the company is subject to mandatory audit (thus, increasing the costs and the administrative burden of the company).

The distribution of quarterly dividends is recorded in accounting as receivable against the shareholders and the settlement of the interim dividends must be performed after the annual financial statements are approved. In case the dividends distributed in advance are higher than the dividends approved through the annual financial statements, the overpaid dividends must be returned in 60 days from the date when the annual financial statements were approved (otherwise, interest would be due).

Having considered the above, the new provision is a step forward, from a cash-flow perspective, for the shareholders of Romanian companies.

Article signed by Ensight Finance