Doing Business in Romania? Tax tips for foreign entrepreneurs and executives (A)

The standard corporate income tax rate is 16%, applicable to both Romanian companies and to foreign companies operating through a permanent establishment in Romania. Profit repatriation In case of the Romanian company being set up as a subsidiary of a foreign company profits may be repatriated solely by way of dividend distribution, which, according to domestic law, is allowed only after the annual financial statements are approved by the shareholders. Advance payments on distribution of dividends before the end of the financial year are not allowed. Domestic provisions As a general rule, non-resident companies not operating through a permanent establishment are subject to 16% withholding tax in Romania on income from sources in Romania (e.g. dividends, interest, capital gains, management and consulting fees, services rendered in Romania and outside Romania, with some exceptions). Tax Treaty provisions The domestic withholding tax rate can be reduced through the application of Double Taxation Treaty (DTT) concluded between Romania and other countries. Application of the DTT provisions requires the non-resident entity to present a certificate of fiscal residency from its home country to vouch for Treaty eligibility. So long as a tax treaty is in place and provided a fiscal residency certificate of the foreign supplier is made available, the purchase of “simple services” from a non-resident are as a general rule not subject to any withholding tax in Romania. (for example article 7 of the DTT between Romania and the UK). Note that a point of concern may arise with respect to services which could be deemed to involve a hidden transfer of know-how (this particular point of concern usually arises in the case of management, consultancy and technical assistance services). If such a transfer of know-how is deemed to arise, than the corresponding fees would be regarded as royalties, subject to withholding tax. As a general rule, withholding tax must be withheld by the Romanian payer of the income and must be paid to the Romanian State Budget by the 25th of the month following the month when the income is paid. Tax credit The DTT conventions concluded between Romania and other states may provide that non-residents deriving revenues from Romania may obtain credit for the tax paid in Romania in relation to such revenues. In accordance with the Romanian Tax Code, in order to obtain tax credit for the revenue derived from Romania, non-residents must file with the Romanian competent tax authorities an application requesting the issuance of a “Certificate attesting the tax paid to the Romanian state budget” by either the non-resident or by a person acting on their behalf. The competent tax authority will issue a “Certificate of tax paid by non-resident legal persons” which may subsequently be used by the non-resident in order to obtain tax credit in their countries, according to the provision of the laws of the respective countries.