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New Interest Rate Deductibility Cap

27 May 2010

Under the Romanian tax law, different interest deductibility caps apply to loans denominated in foreign currency, as compared to loans denominated in RON (i.e. the Romanian currency). The interest deductibility cap for loans denominated in foreign currency is generally updated on a yearly basis, while the cap for domestic currency denominated loans is the reference interest rate published by the Romanian Central Bank for a given month. Additionally thin cap rules also apply. Taxand Romania examines the decrease in the deductible interest rate and how this will affect foreign currency loans.

Government Decision no. 296 of 31 March 2010, published recently, sets the interest rate deductibility cap applicable to foreign currency-denominated loans starting with 2010 profits at 6%, this being decreased from 8% as applicable in 2009. The interest rate cap applicable to Romanian currency-denominated loans remains the reference interest rate published by the Romanian Central Bank for the last month of the reporting quarter, which, has also decreased from 10.14% in March 2009 to 7.25% in March 2010.

Taxand's Take

The decrease in the deductible interest rate might adversely impact Romanian taxpayers which accrue interest on existing loan agreements, especially those that have active loans in foreign currency concluded in the fourth quarter of 2008 (i.e. the beginning of the financial crisis in Romania) and afterwards, when the market cost of borrowing was significantly higher than at present. Therefore, adjustments to existing arrangements may need to be considered in light of the new limit.

Your Taxand contacts for further queries are:
Angela Rosca
T. +40 21 316 06 45

Manuela Licu
T. +40 21 316 06 45

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