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Romania

8 January 2021

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Romania Introduces Fiscal Consolidation for Corporate Income Tax Purposes and Several Other Changes

Romania has introduced measures for a consolidated tax group regime and several other tax-related changes as part of Law No. 296 of 18 December 2020, which generally applies from 1 January 2021.

Tax Consolidation

Under the new regime, a consolidated tax group may be formed by:

  • A Romanian legal entity or legal entity with their registered office in Romania and established under European law and one or more other such entities where the first-mention legal entity directly or indirectly holds at least 75% of the value/number of shares or voting rights in the other entities;
  • At least two Romanian entities in which a Romanian natural person directly or indirectly holds at least 75% of the value/number of shares or voting rights;
  • At least two Romanian entities in which a foreign natural or legal person directly or indirectly holds at least 75% of the value/number of shares or voting rights, where such foreign person is resident in a state with which Romania has concluded a tax treaty or exchange of information agreement; and
  • At least one Romanian legal entity and the permanent establishment in Romania of a foreign legal person directly or indirectly holding at least 75% of the value/number of shares or voting rights in the Romanian legal entity, where such foreign legal person is resident in a state with which Romania has concluded a tax treaty or exchange of information agreement.

The consolidated tax group regime is optional and applies for five fiscal years, calculated starting with the first year of application of the regime. Applications for tax consolidation must be submitted at least 60 days before the start of the period for which tax consolidation is requested. Tax consolidation will apply starting with the fiscal year following the submission of the application.

To apply for the regime, the following conditions must be met on the date of submission of the application:

  • The conditions for the types of consolidation noted above must be fulfilled for an uninterrupted period of at least one year prior to the beginning of tax consolidation;
  • The members of the group must be corporate taxpayers;
  • The members of the group must follow the same fiscal year;
  • The members of the group must not be members of another tax group;
  • The members of the group must not be payers of income tax on micro-enterprises or specific tax;
  • The members of the group must not fall under the provisions of the special scheme for taxpayers carrying out activities such as night bars, nightclubs, discos, and casinos; and
  • The members of the group must not be in dissolution/liquidation.

After the initial five-year period, the consolidated tax group may be renewed, with an application for renewal to be submitted at least 60 days before the beginning of the period for which the application of the fiscal consolidation system is requested to continue.

Additional group members may also join a consolidated tax group starting with the fiscal year following the fulfillment of the conditions, subject to request. If an existing member no longer meets the conditions, it will leave the group starting from the quarter following the one in which the conditions are no longer met. Additions must be requested at least 60 days before the fiscal year and removal from a group must be notified with 15 days of the conditions no longer being met.

With respect to tax compliance when forming a consolidated tax group, one of the group members must be designated as the responsible legal person to determine the consolidated tax result of the tax group, file the tax return, and make tax payments on behalf of the group. Every member of a consolidated tax group must also prepare a transfer pricing file that includes both the transactions carried out with the members of the tax group and with the affiliated entities outside the tax group.

Lastly, an anti-abuse provision is included, which provides that the consolidated tax group regime is not available where applying the regime is aimed at tax fraud and evasion.

Other Changes

In addition to the tax consolidation regime, Law No. 226/2020 also provides for several other changes, summarized as follows:

  • Clarification is provided on the corporate income tax exemption for reinvested profit, including that the exemption for new investments is granted up to the amount of corporate income tax calculated cumulatively from the beginning of the year until the quarter when the investments are made or until the end of that year, depending on the declaration and payment system applied by the taxpayer (quarterly or annually);
  • The rules on the treatment of expenses are amended to provide that expenses are non-deductible if incurred from transactions carried out with a person located, on the date of recording the expense, in a jurisdiction listed in Annex I and/or Annex II of the EU list of non-cooperative jurisdictions (Annex I is the primary list of non-cooperative jurisdictions and Annex II is the list of jurisdictions that are non-cooperative but committed to implementing required changes);
  • It is provided that expenses incurred by employers for teleworking activities performed by employees are deductible for corporate tax purposes;
  • The 30% deductibility threshold for provisions for doubtful debts is repealed (i.e., full deduction allowed), while the limitations on the deductibility of losses in case of sales of receivables remain unchanged (will apply from 2022);
  • New rules on tax losses are introduced in relation to the transfer of tax losses in a legal reorganization, including additional cases where tax losses may be transferred when taxpayers of the income tax of micro-enterprises are involved;
  • The threshold for the VAT cash accounting regime is increased from turnover of RON 2.25 million in the previous year to RON 4.5 million in the previous year, with provisions for taxpayers previously exceeding the prior lower threshold to apply the cash accounting regime;
  • It is clarified that in the case of dividends paid to collective investment undertakings without legal personality, there is no obligation for a Romanian legal entity to withhold, declare, and pay dividend tax; and
  • The deadline for the submission of the declaration on the calculation and withholding of tax for each beneficiary of income on tax withheld is changed from 31 January to the last working day of February each year in respect of the prior year.

Several changes are also made to the place of effective management and residence rules. This includes a revised definition of place of effective management, which means the place where, unless otherwise proven, a foreign legal entity carries out operations corresponding to real and substantive economic purposes and where at least one of the following conditions is met:

  • The economic and strategic decisions necessary for the management of the activity of the foreign legal entity as a whole are taken in Romania by the executive directors/members of the board of directors; or
  • At least 50% of the executive directors/members of the board of directors of the foreign legal entity are resident (in Romania).

Along with the revised definition, new rules are introduced providing that the Romanian tax authorities are able to establish, either on their own initiative or at the request of another authority, the place of effective management for a foreign legal entity in Romania. If a foreign legal entity is found to have their place of effective management in Romania, they will become subject to several obligations, including the obligation to:

  • Register with the competent authority within 30 days of being notified;
  • Keep meeting minutes in Romania;
  • Keep accounting records and prepare financial statements according to Romanian accounting legislation; and
  • Register as a corporate taxpayer for at least one year.

New rules are introduced for the determination of residence in Romania, including that the residence of a foreign legal entity may be established on the basis of a questionnaire and the submission of relevant documents. It is also provided that if a foreign legal entity is considered resident in both Romania and a signatory state of a tax treaty to which Romania is a party, the residence will be established according to the provisions of the tax treaty. Lastly, an anti-abuse provision is included, which provides that the establishment of residence in Romania by a foreign legal entity should not be based on artificial arrangements for the purpose of reducing taxes that should have been paid in a foreign state and should not create opportunities for non-taxation or lower taxation in Romania.

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