In January 2007, Romania joined the European Union (EU) and went through important reforms in order to comply with the EU membership requirements. As a member of the EU, Romania has adopted the EU fiscal legislation.

Romania imposes a flat tax system for both corporate and personal income tax on its residents (including Romanian subsidiaries of foreign entities) in respect of income and capital gains earned anywhere in the world. Non-residents who carry on business in Romania, are employed in Romania or sell certain types of properties are also subject to Romanian income tax.

Given the wide array of double taxation treaties (DTTs) available, investments are usually made by interposing a holding company located in a favorable tax jurisdiction, such as the Netherlands or Luxembourg. The use of a holding company allows for distributions of dividends or interest that may be made free of Romanian withholding tax, subject to certain conditions.

Romania concluded more than 80 DTTs with other EU member states or third states. Foreign tax credits may be granted if so provided in the treaty and if tax was paid abroad. Tax credits, however, may not exceed the Romanian tax on the income. In order to apply the provisions of the relevant DTT, the non-resident recipient of the income should provide to the Romanian payer a tax residence certificate attesting its tax residency for the purpose of the DTT.

In this chapter

• Legal system
• Taxation authorities
• Business vehicles
• Financing a corporate subsidiary
• Corporate income tax
• Cross-border payments
• Payroll taxes
• Indirect taxes

Legal system

The Romanian legal system is similar to other European civil law countries. Romania utilizes a civil law system and adopted a new Civil Code in 2011. In 2016, a new Fiscal Code along with a new Fiscal Procedure Code came into force. This Fiscal Code implemented important amendments to the majority of Romanian taxes. Its main purpose is to provide clarity and predictability to domestic taxation, stimulate investments and economic growth and reduce bureaucracy.

Taxation authorities

The tax system in Romania is administered by the National Agency for Fiscal Administration (ANAF), which is subordinate to the Ministry of Finance. There are also local tax authorities, subordinate to ANAF, which are responsible for collecting tax from taxpayers.

Business vehicles

Foreign investors may establish a business presence in Romania by creating a new company or purchasing a shelf company (among other methods). The main vehicles used by investors in this respect are limited liability companies (LLCs) and joint-stock companies (JSCs).

While LLCs are easier to create than JSCs, in the case of an envisaged transfer of shares for LLCs, the transfer may only be effected upon the expiry of a 30-day opposition term from the date of publication in the Official Journal of Romania of the decision approving the transfer of social parts. This opposition term for LLCs is provided in favor of the company’s creditors and is designed to prevent tax evasion.

The most common entities used for investment purposes in Romania are LLCs and JSCs. Below are highlights of the advantages and disadvantages of each.

Joint-stock companies

JSCs are the most complex and evolved of Romanian companies. They require a minimum of two shareholders, which can be either a legal person or a natural person. The social obligations of JSCs are guaranteed by the share capital, and the shareholders are only held liable up to the limit of their contributions. The minimum share capital is RON 90,000 (approximately €25,000). The share capital paid into the JSC upon incorporation by each shareholder may not be less than 30% of the subscribed share capital. The shares in the JSCs may be freely transferred and they may be traded in organized markets.

Limited liability companies

Foreign investment is usually made by way of incorporating Romanian special purpose vehicles. The most frequently used entity is the LLC, primarily due to its corporate flexibility and low capital requirements.

The LLC is the most commonly used type of company and may be established by a minimum of one member and a maximum of 50 members. The minimum share capital requirement for LLCs was eliminated in December 2020 and is no longer a requirement for incorporation purposes. Before this change, the minimum share capital for registration purposes of LLCs was RON 200 (approximately €45). The quotas do not represent negotiable titles and therefore may not be traded on organized markets. Members are liable for the company’s obligations only up to the value of their subscribed equity capital.

Representative office

Foreign companies may conduct marketing activities, such as advertisement and market research, through a representative office. It represents, and acts for and on behalf of, its parent entity with a specific mandate, limited to the promotion and technical support of the parent company's business activities.

Branch

A branch is an extension of the parent foreign entity, with no financial independence. It may only carry out the activities that the parent foreign entity has been authorized to carry out in its home jurisdiction.

Financing a corporate subsidiary

Financing of commercial entities usually involves a combination of debt and equity, with consideration of the applicable thin capitalization rules.

Equity financing

Equity includes the share capital, legal reserves, other reserves, retained earnings, current profit as well as other equity elements established by law.

Withholding tax implications – dividends

The Parent-Subsidiary EU Directive is applicable in Romania. The general withholding tax rate on dividends paid to a non-resident is 5%. In addition, when dividends are paid by a Romanian entity to another Romanian entity, a 5% tax is applicable and must be withheld, declared and paid by the dividend payer.

In June 2022, the government announced that the dividend tax will be increased to 8% starting January 1, 2023. As a result, the dividend tax has increased from 5% to 8% starting with January 1, 2023 for distributions made to legal entities and individuals which include both resident and non-resident.

Dividends received by a Romanian legal entity from another legal entity are not taxable at the level of the recipient; however, dividends received from a legal entity may be taxable to the recipient.  Under the Parent-Subsidiary EU Directive, dividends subject to an ownership of at least 10% and for an uninterrupted period of at least one year are exempt from tax.

Withholding tax implications – interest and royalties

The EU Interest & Royalties Directive is applicable in Romania. A 16% withholding tax is applied on interest and royalties paid to a non-resident company, unless there is a different reduced rate under a treaty of the EU Interest & Royalties Directive. However, under the directive, tax on interest and royalties is exempt subject to an ownership of at least 25% and for an uninterrupted period of at least two years.

Debt financing

Thin capitalization rules

In 2021, the excess borrowing costs (i.e., the difference between borrowing costs and interest income) that exceeds the deductible limit of €1,000,000 will be deductible to the extent it exceeds a 30% computation base. The computation base is calculated as the difference between income and expenses reserved under the accounting rules.

Stamp tax

Romania does not impose stamp tax in respect of debt or equity financing.

Corporate income tax

Income tax rate

For 2023, the standard corporate tax rate is 16%. Taxpayers of corporate income tax include:

1. Romanian legal entities, except for taxpayers subject to the micro-enterprises tax or specific tax, tax-transparent entities and certain institutions specifically defined in the Fiscal Code;
2. Non-Romanian legal entities that carry out activities through one or more permanent establishments in Romania;
3. Non-Romanian legal entities that have their place of effective management in Romania;
4. Non-Romanian legal entities that obtain income from the transfer of ownership or any other rights related to immovable property located in Romania; and
5. Legal entities established in accordance with European legislation that have their registered office in Romania. 

Fiscal year

As a rule, the fiscal year follows the calendar year. However, taxpayers can opt for a financial year-end that is different from the calendar year, and may also choose a taxation year that coincides with their financial year.

Deductibility of expenses

As a principle, expenses are deductible only if they are incurred for the purpose of carrying out economic activity. There are, however, certain types of expenses provided by the Fiscal Code as being non-deductible or have limited deductibility.

Tax losses

Tax losses may be carried forward for seven years, however, there is no carry-back of losses. Changes in ownership do not affect the carrying forward of tax losses.

Taxable base

A taxpayer is subject to tax on its profits from carrying on its business. Profit is generally considered to be revenues less deductible expenditures.

Income tax reporting

Romanian resident corporations and non-resident corporations that carry on business in Romania or that dispose of taxable Romanian property are required to file an annual corporate income tax return.

Micro-enterprise tax

The microenterprise tax regime is optional starting on January 1, 2023. The following conditions are required for a legal entity to use the microenterprise tax regime:

1. Total yearly income of €500 thousand;
2. Income from management and consulting services (excluding tax consultancy services) to be limited at 20% of the total income; and
3. The entity needs to have at least one employee (with a labor agreement in place). 

Starting 2023, the tax rate is 1%. The company’s shareholders should not hold more than 25% of the voting rights in more than three Romanian legal entities that are micro-enterprise taxpayers.

Cross-border payments

Transfer pricing

Specific transfer pricing rules apply to transactions between related parties. The rules also apply to transactions between related resident companies. There are different requirements relating to transfer pricing documentation depending on the type of taxpayer, type of transaction and materiality thresholds.

Romanian legislation is aligned with the Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the EU. The Organisation for Economic Co-operation and Development (OECD) guidelines outline the details and content of transfer pricing.

Large taxpayers carrying out intragroup transactions exceeding certain limits must prepare a transfer pricing file on an annual basis in the Romanian language, along with all related supporting documentation.

International tax reform

In 2021, Romania committed to the two-pillar plan for international corporate tax reform that supports the OECD Inclusive Framework’s “Tax Challenges Arising from Digitalisation” project.

On December 14, 2022, the Council of the European Union adopted Directive number 2022/2523, which EU Member States are required to implement by December 31, 2023. As of June 2023, Romania has not yet transposed the directive in its own legal system.

In this respect, Romania still needs to perform some internal adjustments to its legislation in order to fully become a member of the OECD.

First, Romania needs to implement all points and commitments made as a result of the Recovery and Resilience plan for Romania (PNNR). So far, Romania has implemented only part of the measures assumed by the PNRR - among others, the reduction of the number of micro tax payers from January 2023 and the reconsideration from 2025 of the taxation of properties owned by natural and legal persons. At the same time, the authorities continue the thorough digitization of the Tax Office's activity through the SAF-T file, the e-Invoice system, the e-Transport system and others.

With respect to Pillar One, which mainly targets revenues earned by major tech entities in countries where they have no physical presence, no significant progress has been made.

With respect to Pillar Two, discussions are more advanced and Romania is aiming to transpose any EU level legislation into its local jurisdiction. Currently however, no particular deadlines have been envisaged for this process.

Multilateral Instrument

Romania signed the MLI treaty on July 7, 2017, however, it has not ratified nor deposited its instrument of ratification yet. It is currently unclear when the Romanian state will ratify the MLI and when it will enter into force, but, considering that several years already passed since the signing date, it should take place in the near future.

Romania communicated to the OECD a document containing a draft of the amendments it wishes to introduce in its double taxation treaties. Out of the approximately 90 double taxation treaties which Romania has concluded with other countries, it is expected that at least 50 will experience changes.

Payroll taxes

Payroll taxes and capital duty

Neither capital duty nor payroll tax is due from the employer. However, employers must establish and withhold tax on salaries on a monthly basis and remit it to the state budget.

Indirect taxes

Value-added tax

Value-added tax (VAT) is established on the supply of goods and provision of services performed in exchange for remuneration. The standard VAT rate is 19%, with reduced rates of 9% for orthopedic products and medical products (among others), and 5% for school books, newspapers and magazines.

In June 2022, the government announced that effective July 1, 2022, it will increase the VAT to 19% for sugar drinks (currently to 9%). Moreover, the VAT will increase to 9% for the HoReCa industry (accommodation, catering and restaurants).

VAT registration is required for taxable persons carrying on taxable transactions or intra-EU acquisitions. VAT returns must be submitted with the tax authorities on a monthly or quarterly basis, depending on the company’s annual turnover.

Real property tax

Pursuant to the Fiscal Code, residential buildings and buildings owned by natural persons are subject to a tax rate between 0.08% and 0.2% of the taxable value of the building. Non-residential buildings owned by natural persons are subject to a tax rate between 0.2% and 1.3% on their value, which can be calculated as one of the following:

1. The amount resulting from an evaluation report prepared up by an authorized evaluator, during the last five years preceding the reference year;
2. The final value of construction work, new buildings built in the last five years preceding the reference year; or
3. The value of buildings resulting from the act of transfer ownership, acquired in the last five years preceding the reference year.

If the value of the building cannot be calculated according to the above, the tax is calculated by applying the rate of 2% on the taxable value determined under applicable residential buildings owned by individuals.

In regards to legal persons, the Tax Code provides the following rates:

1. For residential buildings, the tax rate is between 0.08% and 2% on the taxable value of the building; and
2. For non-residential buildings, the tax rate is between 0.2% and 1.3% on the taxable value of the building.
3. Owners of land are subject to a land tax with a fixed amount per square meter, depending on the location of the land and the category of the area in use.

Another measure announced by the government in June 2022 relates to the calculation of the real property tax. Based on the statements, the tax for residential buildings will be calculated based on the benchmark prices used by notaries rather than on the lower values used by municipalities. Tax on residential property will be 0.1% - 0.2% while on non-residential property will be 1% – 1.3%.

The Romanian state did not issue any legal provisions on the changes above. Moreover, their effective date is still uncertain, but likely starting on January 1, 2023.

Land transfer tax and share transfer tax

No land transfer taxes apply to the sale of real estate. However, stamp duties apply to the registering of real estate with the relevant land books. As a general rule, the buyer will be required to pay the notary fees along with the Land Registration Office fees. Sale of Romanian properties may be subject to a 19% VAT depending on the VAT regime of the seller and whether or not the property is considered new.

Acquiring shares in Romanian companies is not subject to any transfer tax. In addition, the sale of shares is not subject to VAT. Capital gains resulting from the sale of properties are taxed at a flat rate of 16%.