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Romania

20 November 2017

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Romania Publishes Emergency Ordinance on EU Anti-Tax Avoidance Directive and Other Measures

Romania has published Emergency Ordinance No. 79 of 8 November 2017 in the Official Gazette. Some of the main measures are in relation to the transposition of the EU Anti-Tax Avoidance Directive (Council Directive (EU) 2016/1164 - ATAD1), which are summarized as follows:

Interest Deduction Restriction

The interest deduction restriction rules limit the deduction of net interest expense exceeding the RON equivalent of EUR 200,000. The excess is limited to 10% of a calculation basis, which is essentially EBITDA. Non-deductible amounts may be carried forward indefinitely. An exemption from the restriction is provided for independent entities without associated entities or permanent establishments (PE), and in respect of excess borrowing costs resulting from loans used to finance long-term public infrastructure projects.

Exit Tax

The exit tax rules provide that gains from the transfer of assets from Romania to another Member State or to a third State are calculated as the difference between the market value and the tax value of the assets transferred. Such gains are subject to corporate tax (currently 16% standard rate) to the extent that, as a result of the transfer, Romania loses the right to tax the transferred assets. Where assets are transferred to another Member State or a third EEA State, the tax may be paid in installments over five years, subject to certain conditions.

GAAR

The general anti-avoidance rule (GAAR) provides that the tax authority may ignore an arrangement or a series of arrangements that have been put into place with the main purpose of one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax provisions, and not for valid commercial reasons that reflect economic reality.

CFC Rules

The controlled foreign company (CFC) rules provide that a foreign entity or PE will be considered a CFC if:

  • The taxpayer directly or indirectly holds itself, or with associated enterprises, more than 50% of the foreign entity's (PE's) capital, voting rights, or rights to profit; and
  • The actual corporate tax paid by the foreign entity or PE on its profits is less than the difference between the corporate tax that would have been paid under Romania's tax provisions and the actual corporate tax paid on the profits by the entity or PE.

Where an entity or PE is considered a CFC, the controlling taxpayer will include in its taxable base the following undistributed income of the CFC:

  • Interest or any other income generated by financial assets;
  • Royalties or any other income generated from intellectual property;
  • Dividends and income from the disposal of shares;
  • Income from financial leasing;
  • Income from insurance, banking and other financial activities; and
  • 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.

The inclusion of income will not apply, however, if the CFC carries on a substantive economic activity supported by staff, equipment, assets, and premises, as evidenced by relevant facts and circumstances, and where the CFC has its residence or is located in an EEA country.

Other Measures

Other key measures of the Emergency Ordinance include:

  • A reduction in the general individual income tax rate from 16% to 10%;
  • A reduction in the overall social security contribution rate from 39.25% of gross salary to 37.25% along with a shift in the contribution burden, with employees subject to a 35% contribution rate on their gross salary and employers subject to a 2.25% rate on total gross salary (employee contribution will fund pension and health insurance; employer contribution will fund labor insurance for unemployment, sick leave, work accidents, etc.); and
  • An increase in the turnover threshold for the micro-enterprise regime from EUR 500,000 to EUR 1,000,000 (1% flat tax on turnover), as well as an expansion of the permitted scope of eligible activities to include taxpayers with consultancy and management revenues exceeding 20% of total revenue and no longer excluding taxpayers engaged in banking, assurance, reassurance, capital market, gambling activities and exploration, development, or exploitation of oil and natural gas.

The Emergency Ordinance applies from 1 January 2018.

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