Category: Uncategorized

Florin Gherghel, Manager Tax Services of Ensight Finance, the fiscal and financial consulting company of Ensight

The migration of the workforce raises serious problems for the Romanian economy, exacerbating the difficulties recorded in several industries. On the long term, the decrease of the number of employees and the reduction of the taxpayers will generate significant constraints to the social insurance budget. While waiting for a national strategy, a short-term solution to cover the shortage of personnel is represented by foreign workers from outside the EU, especially from Asia. In the last two years, the annual quota approved by the Government for permanent or posted workers has increased steadily.

Types of work permits	2016	2017	2018
Permanent workers	3 500	3 500	4 000
Internship workers	200	200	100
Seasonal workers	200	200	400
Cross-border workers	100	100	100
Highly skilled workers	800	800	500
Seconded workers	700	700	1 200
People transferred within the same company (ICT)	–	–	700
TOTAL	5 500	5 500	7 000

According to the data published by the Labor Inspection, in August 2018, 17,089 employees were employed by non-EU-EEA foreign citizens (European Economic Area), most of them being from:

• Turkey – 3,627

• China – 2,120

• Moldova – 1,787

• and Vietnam – 1,554.

The main areas of activity in which they work are as follows: restaurants, shipbuilding and floating structures, wholesale, clothing and footwear and construction works for residential and non-residential buildings.

In the first half of this year, the number of issued work permits increased by 50% compared to the same period of 2017, and those issued specifically for permanent employees doubled. Thus, for this period 4,395 employment / secondment notices were issued, most for citizens from:

• Vietnam – 1,520

• Turkey – 568

• Nepal – 358

• Serbia – 275

• Sri Lanka – 261

• China – 253

• and Moldova – 181

In July, the annual quota of permits was used. For the period remaining until the end of 2018, the Government approved its increase with 8,000: 4,000 permanent foreign employees and 4,000 seconded.

More bureaucracy and higher costs with foreign workers

The process of obtaining the work permit obliges the employer to a wide bureaucratic process. The employer must effectively carry out the activity for which it is requested to issue the employment notice, must have paid the obligations to the state budget and have not been sanctioned for undeclared work or illegal employment in the last 6 months prior to the application for permanent workers / seasoned / trainees / cross-border / highly qualified, respectively in 3 years prior to the submission of the application in the case of seconded workers and ICT (persons transferred within the same company). Also, the future employee must fulfill the special conditions of professional training, experience in activity and authorization, be medically fit, carry out the respective activity and have no criminal record that is incompatible with the activity that he will carry out on Romania’s territory.

To these are added a number of other procedures and costs, such as the obligation to pay the taxes necessary to obtain the right to stay and the right to work (eg 100 EUR tax for obtaining the work permit for permanent, seconded, cross-border workers, trainees; 25 EUR for seasonal workers; 120 EUR long stay visa for work / posting purposes; 259 RON residence permit; 120 EUR consular fee for obtaining / prolonging the residence permit), travel costs and accommodation of foreign employees.

Until the beginning of November 2018 the minimum wage costs imposed by the legislation were higher than in the case of hiring a Romanian employee because the salary registered in the individual employment contract for a permanent worker had to be at the level of the average gross salary per economy, respectively 4,162 RON for year 2018. At the beginning of November 2018, however, the authorities amended the legislation in the field, so that the minimum gross wage that employers are obliged to enter in the individual employment contract for a permanent worker will no longer be reported at the level of the average gross wage on the economy, but at the level of the gross minimum wage, respectively 1,900 RON in November 2018. Employers are willing to accept a higher employment cost (actual wage costs and adjacent monthly expenses with foreign workers), provided they offer stability, predictability, learning and adaptability fast and constant against the standards of quality imposed.

From the moment the employment contract is concluded with a local employer, the workers are treated like any Romanian employee. Therefore, the wage tax and social contributions related to the wages of Asian workers will be calculated, declared and paid by the Romanian employer.

In the case of the seconded workers and of the persons transferred within the same company (ICT) it is to be analyzed whether the respective worker can be exempted from the payment of social contributions in Romania: in general, for periods higher than 6 months, the income tax must be paid and is need for an analysis of the Double Tax Treaty between Romania and the country of residence of the employee. Such analyzes are performed in the case of seconded workers / ICT, as these types of missions have a limited scope, and the respective persons continue to remain insured in the social security systems in the country of origin.

Romania is part of the European Regulations for the coordination of social security systems, but it has concluded some bilateral agreements in the field of social security and with some non-EU states (eg Israel, Canada, Albania, Korea, Macedonia, Moldova and Turkey). However Romania has not concluded such treaties with countries in mainland Southeast Asia, such as Vietnam, Cambodia, Laos, Thailand, Malaysia and Burma. In these cases, Asian workers detached from these countries cannot benefit from exemptions from the payment of social contributions in Romania.

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.