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New year, new rules: Amendments to the Romanian Fiscal Code
The main amendments concern provisions for favourable tax regimes for holding companies – related to the tax treatment of income derived from capital gains, dividends, and the liquidation of a legal entity. Additionally, as of 1 January 2014 the Fiscal Code introduced a new construction tax.
The provisions designed to create a favourable tax regime for holding companies are related to the tax treatment of income obtained by a Romanian corporate income taxpayer from dividends, liquidation proceeds and capital gains related to the sale of shares. This income may be deemed non-taxable in Romania provided certain conditions are fulfilled.
The key elements to benefit from these favourable provisions are twofold, namely:
- the required stake must be held for a minimum period, and
- There must be a tax treaty between Romania and the third countries where the paying/beneficiary companies are tax residents. NB: this is the case with the exception of qualifying companies located in EU member states which may benefit from the provisions of the transposed EU directives (for dividends)
For dividends received by a Romanian company from an EU qualifying subsidiary, where the EU parent-subsidiary provisions (as transposed into Romanian tax legislation) apply, the minimum holding period required to exempt income from taxation will be reduced to 1 year (previously 2 years). The other conditions remain unchanged, however.
In addition, dividends received by a Romanian company from a Romanian subsidiary or a foreign subsidiary, which is subject to corporate income or a similar tax and is located in a third country with which Romania has concluded a tax treaty, will be deemed non-taxable. This is the case provided that the Romanian entity receiving the dividends has held at least 10% of the share capital of the legal entity distributing the dividends for a continuous period of 1 year, at the time of recognition of the dividend income as per the Romanian accounting regulations (previously, the Fiscal Code provided that dividend income received by a Romanian company from another Romanian subsidiary is deemed non-taxable).
Dividends paid by a Romanian legal entity or foreign legal entity having its legal seat in Romania (formed pursuant to European legislation) will now benefit from exemption from withholding tax in Romania, provided that the beneficiary has a minimum holding of 10% for a period of 1 year (previously 2 years) and it is either:
- a qualifying legal entity resident in an EU member state, or
- a permanent establishment located in an EU member state of a qualifying company resident in another EU Member State
Moreover, from the 1 January 2014, the exemption from withholding tax for dividends, interest and royalties paid to companies resident in non-EU member states of the European Free Trade Association (ie Iceland, Liechtenstein, and Norway) has been eliminated. The 16% domestic withholding tax rate may, however, still be reduced under the tax treaty concluded between Romania and each of these States. The exemption will continue to apply to these payments when made to EU-resident qualifying companies meeting the relevant requirements.
Unlike the rules applicable to dividends, the exemption from withholding tax in case of payments made to EU qualifying companies, representing interest and royalties, will continue to apply under the same conditions, (i.e. minimum holding period of 2 years and a participation of at least 25%).
Income derived from the sale of shares held in a Romanian legal entity or in a foreign legal entity located in a country with which Romania has concluded a tax treaty, will be exempt from corporate income tax in Romania, provided that the taxpayer has held for a continuous period of 1 year at least 10% of the share capital of the legal entity whose shares are sold.
Income derived from the liquidation of a Romanian legal entity or of a foreign legal entity located in a country with which Romania has concluded a tax treaty, will be deemed non-taxable in Romania, provided that the taxpayer has held for an uninterrupted period of 1 year, at least 10% of the share capital of the legal entity subject to liquidation, as of the date when the liquidation procedure is initiated.
Effective from 1 January 2014, a construction tax has been introduced by the Romanian government. This tax will be computed as 1.5% of the gross book value of structures (with certain exceptions) included in the assets of taxpayers (like Romanian legal entities, permanent establishments of foreign companies, etc.). This value will be taken from the accounting books prepared as at 31 December of the previous year (no construction tax is due however for constructions which are subject to building tax).
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Quality tax advice, globally
The changes introduced in the Romanian Fiscal Code were enacted as necessary urgent measures to boost economic growth and to encourage investment in Romania. They have also been implemented as part of Romania’s commitment to the International Monetary Fund under a Stand-by Arrangement to increase the efficiency of its tax system.
These amendments, which entered into force on 1 January 2014, significantly impact all industries and are of major interest to all investors, both those already doing business in Romania and those planning to invest in Romania in the future.
Likewise, the new construction tax will impact several industries, including for instance the energy industry, where building work related to energy projects will now be affected, eg power plants, transformer stations, connection points, electrical networks, mine galleries, oil and gas wells, drilling and extraction platforms, towers, roads, etc.
Multinationals should assess these new legislative changes to ensure that they remain compliant while maximising opportunities where appropriate.
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