Fiscal Code amendments

21/11/17

In brief

Government Emergency Ordinance no. 79 / 8 November 2017 concerning the modification and completion of Law no. 227/2015 regarding the Fiscal Code has been published, with its provisions entering into force on 1 January 2018. We present below the provisions regarding corporate income tax, micro-enterprise income tax, personal income tax, statutory social contributions and value added tax (VAT).

In detail

Title II - Corporate income tax

The above-mentioned Government Emergency Ordinance transposes the Anti-Tax Avoidance Directive into national law, introducing new rules and amending existing ones:

 

1.      Interest deductibility rules

The interest deductibility rules currently in force (i.e. interest limitation cap and debt-to-equity ratio) are being replaced by new rules. 

As of 1 January 2018, the exceeding borrowing costs (calculated as the difference between any debt-related costs – including foreign exchange expenses and capitalised interest - and income from interest and other economically equivalent income) incurred in a fiscal period which exceed the deductible threshold of EUR 200,000 will be deductible for corporate income tax purposes up to the limit of 10% of the calculation base. The non-deductible exceeding borrowing costs can be carried forward indefinitely. The limitation also applies to any debt-related costs in connection with loans granted by financial institutions.

The calculation base is determined as the gross accounting profit, minus non-taxable revenues, plus exceeding borrowing costs and deductible tax depreciation. 

If the calculation base is zero or negative, the exceeding borrowing costs are treated as non-deductible for corporate income tax purposes during the current tax period, but can be carried forward indefinitely.

The above-mentioned interest deductibility rules also apply to financial institutions, but not to independent entities (entities that they are not part of a consolidated group for financial accounting purposes, do not have related parties and permanent establishments), which can fully deduct exceeding borrowing costs.

The new rules will also apply to interest and foreign exchange losses carried forward from the past and accumulated as at 31 December 2017. 

 

2.      Exit taxation

A taxpayer will be subject to corporate income tax (at 16% tax rate) for transfer of business carried out by a permanent establishment, transfer of assets or transfer of residence. The taxable base should be calculated as the difference between the market value of the assets and their fiscal value.

 

3.      General anti-abuse rule

The Ordinance also introduces a new anti-abuse rule applicable to an arrangement or a series of arrangements which, with regard to all relevant facts and circumstances, are not genuine, having been undertaken for the main purpose of, or having as one of the main purposes, obtaining a tax advantage that defeats the object or purpose of the applicable tax law. Specifically, the above-mentioned arrangements are to be ignored when calculating the tax liabilities attributed to a taxpayer.

 

4.     Controlled foreign company rules

New rules have been introduced regarding the taxation of controlled foreign companies. Under these rules, a taxpayer should include in its taxable base, in proportion with its holding in the controlled foreign company, the latter’s non-distributed income derived from the following categories:

(i) Interest or any other income generated by financial assets;

(ii) Royalties or any other income generated from intellectual property;

(iii) Dividends and income from the disposal of shares;

(iv) Income from financial leasing;

(v) Income from insurance, banking and other financial activities;

(vi) Income from invoicing companies that earn sales and services income from goods and services purchased from and sold to associated enterprises, and add no or little economic value.

A company is considered a controlled foreign company if the following conditions are both met:

a) The taxpayer by itself, or together with its associated enterprises holds a direct or indirect participation of more than 50% of the voting rights, or owns directly or indirectly more than 50% of the capital or is entitled to receive more than 50% of the profits of that company;

and

b) The actual corporate income tax paid on its profits by the company or permanent establishment is lower than the difference between the corporate income tax that would have been charged for the company or permanent establishment under the applicable Romanian corporate income tax provisions and the actual corporate income tax paid on its profits by the company or permanent establishment. 

 

Title III - Micro-companies income tax

The revenue threshold under which a company is considered a micro-company has been increased from EUR 500,000 to EUR 1,000,000.

The current exceptions under which certain companies are not considered micro-companies companies have been repealed. Specifically, all companies, including companies obtaining at least 20% of their revenues from management and consultancy activities, companies with a share capital higher than RON 45,000 or companies active in certain industries (e.g. banking; insurance and reinsurance; capital market; gambling; exploration, development, operation of oil resources and natural gas) are considered micro-companies if their revenues as at 31 December of the previous year do not exceed the RON equivalent of EUR 1,000,000.

 

Title IV – Personal income tax  

  • The income tax rate has been decreased from 16% to 10% and its applicability remains unchanged – income from independent activities, salary income and income treated as salary, rental income, investment income (except dividend income, for which the 5% income tax rate remains the same), pension income, income from agricultural, forestry and fishery activities, prizes and income from other sources.
  • The income tax rates applicable for intellectual property income have been decreased:
    • from 10% to 7%, for establishing the advance payments, performed on account of the annual income tax;
    • from 16% to 10%, for establishing the income tax as final income. In this case, the calculation base is determined by the gross income minus the fixed expenses allowance.

  • The tax authorities perform the reassessment of the net income from independent activities, determined in real system, by deducting the social insurance contribution from the annual net income.
  • The monthly gross salary income for which the personal deduction applies has been increased to RON 1,950. Digressive personal deductions apply to monthly gross salary income between RON 1,951 and RON 3,600. In order to qualify as dependent persons, individuals’ taxable and non-taxable income must not exceed RON 510 per month.
  • Provisions have been copied from the Methodological Norms of the Fiscal Code to qualify as pension income the rights received in accordance with Law no. 411/2004 regarding private pension funds and with Law no. 204/2006 regarding voluntary pensions. In addition, for establishing the monthly taxable income, each fund can grant only one non-taxable threshold for one-off payments granted based on the special legislation.
  • The submission of the tax return on the calculation and withholding of income tax for each beneficiary of income has been reintroduced for payers of income from intellectual property rights, land lease and income generated by associations between individuals and legal entities. The tax return filing deadline is the last day of February of the current year for income derived during the previous year.

 

Title V - mandatory social contributions

  • Social contributions applicable on salary income and other income treated as such have been amended and the fiscal burden is borne as follows:
    • Employees: 25% social insurance contribution and 10% health insurance contribution;
    • Employers (individuals or legal entities) and other entities treated as such: insurance contribution for work of 2.25% and social insurance contribution of 4% for uncommon work conditions and 8% for special work conditions.

 

  • Social insurance contributions and health insurance contributions due by employees concluding a full-time or part-time employment contract cannot be lower than the social contributions due on the national minimum gross salary in force during the month for which the social contributions are due, corresponding to the number of working days during the month for which the contract is active. Certain exemptions apply e.g. pupils or students younger than 26 years, apprentices younger than 18 years and disabled individuals.
  • The insurance contribution for work is due by employers (individuals or legal entities) or other entities treated as such and by employees deriving in Romania salary or income treated as such from employerssubject neither to the European social security rules nor to the social security agreements Romania applies. The monthly contribution calculation base is the total gross salary income or other income treated as such.
  • The social insurance contribution due by individuals deriving income from independent activities is calculated by applying the 25% rate to an income amount chosen by the taxpayer; such income cannot be lower than the national minimum base gross salary. The social insurance contribution is not due by individuals whose monthly net income derived during the previous year / monthly estimated net income or whose monthly value of the income norms is below the level of the national minimum gross salary.
  • Individuals deriving cumulated annual income which is at least equal to 12 national minimum gross salaries, from one or more income sources (income from independent activities, income from association with a legal entity, rental income, investment income, income from agricultural, forestry and fishery activities or income from other sources), have to pay the health insurance contribution of 10%. The monthly calculation base of the contribution is the national minimum gross salary in force during the month for which the contribution is due. Individuals who are required to pay the health insurance contribution must file with the relevant tax authority a declaration concerning the monthly threshold for health insurance contribution purposes. The annual declaration filing deadline is 31 January of the year for which the health insurance contribution is established.
  • The exception from the payment of the health insurance contribution due on investment income or on income from other sources no longer applies to individuals who obtain other income such as salaries or pensions.
  • New categories of individuals exempt from the payment of the health insurance contribution have been introduced (e.g. individuals who benefit from income support, individuals unlawfully incarcerated, monastic members of recognised religions).
  •  EGO provisions in the income tax area apply to income derived and expenses incurred as of 1 January 2018, as well as to salary income, income treated as such and to pension income related to January 2018. In respect of mandatory social contributions, EGO provisions apply to income derived as of 1 January 2018. Income related to periods prior to the 2018 tax year are subject to the mandatory social contributions in force during the period to which the income relates.

 

Title VII – Value added tax

  • The tax authorities are allowed to deny the VAT deduction right of taxpayers only if, after checking all available evidence under the law, they can prove beyond any doubt that the taxable person knew or should have known that a transaction involved VAT fraud which occurred upstream or downstream in the supply chain.
[Source: Government Emergency Ordinance no. 79 / 2017 concerning the modification and completion of Law no. 227/2015 regarding the Fiscal Code published in Official Gazette no. 885 / 10 November 2017]

 

The takeaway

The provisions of GEO 79/2017 will come into force as of 1 January 2018. Among the most important elements are:

Corporate income tax

Anti-Tax Avoidance Directive provisions have been transposed into the Romanian Fiscal Code. This brings a new set of interest deductibility limitation, exit taxation, anti-abuse and controlled foreign company rules.

Micro-companies income tax

The micro-company tax regime rules have been amended by increasing the revenue threshold to EUR 1,000,000 and repealing all exemptions.

Companies, especially companies with carried-forward losses and holding companies currently qualifying as profit taxpayers that may become micro-companies, should assess the potential impact of these changes and identify solutions for minimising any adverse implications. For undertaking such an assessment, you can arrange a meeting with the PwC team right now!

Personal income tax and mandatory social contributions

  • The tax rate has been decreased from 16% to 10% for most types of income.
  • The level of personal deductions applicable to salary income has been increased.
  • The social contributions due by employees have been increased to 35% and the social contributions for normal working conditions due by employers have been decreased to 2.25%. In addition, employers owe a social insurance contribution of 4% for uncommon working conditions and 8% for special working conditions.
  • Individuals deriving income from independent activities owe the social insurance contribution of 25% applicable on a chosen income, which cannot be lower than the national minimum gross salary.
  • The health insurance contribution (10%) is due, in certain conditions, by individuals deriving income from independent activities, income generated by association with a legal entity, rental income, investment income, agricultural, forestry and fishery activities income or income from other sources. The monthly calculation base of the contribution is the national minimum gross salary in force for the month for which the contribution is due.
  • The exception from payment of the health insurance contribution due on investment income or on income from other sources no longer applies to individuals who obtain other income such as salaries or pensions.

Value added tax

  • The tax authorities are allowed to deny the VAT deduction right of taxpayers only if, after checking all available evidence under the law, they can prove beyond any doubt that the taxable person knew or should have known that a transaction involved VAT fraud which occurred upstream or downstream in the supply chain.

 

A bill for approving GEO 79/2017 has been published on the Senate website, but we understand that the text will undergo some changes.

Contact us

Mihaela Mitroi

Partner, Tax Services, Romania

Tel: +40 21 225 3672

Ionuț Simion

Country Managing Partner, Romania

Tel: +40 21 225 3708

Daniel Anghel

Tax and Legal Services Leader, Romania

Tel: +40 21 225.3794

Diana Coroabă

Partner, Tax Services

Tel: +40 21 225 37 94

Ionuţ Sas

Partner, Tax Services, Romania

Tel: +40 21 225 3741

Contact us

Mihaela Mitroi

Partner, Tax Services, Romania

Tel: +40 21 225 3672

Ionuț Simion

Country Managing Partner, Romania

Tel: +40 21 225 3708

Daniel Anghel

Tax and Legal Services Leader, Romania

Tel: +40 21 225.3794

Diana Coroabă

Partner, Tax Services

Tel: +40 21 225 37 94

Ionuţ Sas

Partner, Tax Services, Romania

Tel: +40 21 225 3741

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