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Romania makes politically controversial income tax rate amendments

Romania
A new and unexpected amendment has recently been brought to the Romanian fiscal code (applicable as of 6 June 2013), introducing an amendment from the flat personal income tax rate of 16%. This amendment is an increased personal income tax rate of 85% applicable to certain types of income derived by individuals upon termination of employment. Taxand Romania investigates the consequences of these changes for taxpayers worldwide.

The recent amendment also introduced a clarification of the conditions under which the penalising 50% withholding tax rate applies for income obtained by certain “black listed” non-residents from Romania. The former lack of clarity on these conditions, as introduced from 1 February 2013, has had a noticeable impact on the business environment.

Another recent amendment introduced with effect from 1 July 2013 relates to a change in the method used to compute late payment penalties for delayed tax payments.

85% personal income tax for certain types of income
Per the recent amendments brought to the Romanian tax law the personal income tax rate shall now be 85%, instead of the standard flat rate of 16%, in cases of income representing salaries/allowances/compensatory amounts granted upon termination of an employment contract, labour relationship or mandate agreement. This provision applies to employees holding management positions or to persons who are appointed as members of the board of directors and management board.

The amendments do not provide the context in which the termination of the employment contract, the labour relation or mandate agreement may arise (eg if the agreement is terminated as a result of reduction and restructuring needs, passing in reserve, dismissals, collective redundancies, etc). This revision is currently under political debate, as it was initially announced as a method of discouraging such payments for state owned companies, while the text of the law indicates that the high taxation is also applicable in the case of private companies.

50% withholding tax on income obtained from Romania by non-residents
The new penalising withholding tax rate of 50% will be applicable for certain payments made by Romanian companies to entities residing in states with which Romania has not entered into a legal agreement, based on which the exchange of information may be carried out (implicitly “black-listed” countries). However, it should be noted that the new tax rate shall apply only to the extent that the aforementioned revenues are paid pursuant to a transaction qualified as “artificial” according to the Romanian Fiscal Code.

An artificial transaction is currently defined as a transaction or series of transactions without economic purpose and which cannot be used in the ordinary course of business (ie their main purpose being avoiding tax or obtaining tax benefits that would have otherwise not been granted).

Late payment penalties
As of 1 July 2013, the amendments to the Fiscal Procedural Code are as follows:

  • The terms “interest” and “late payment penalties” are defined.
  • The rate for late payment penalties applicable to tax liabilities due after 1 July 2013 shall be 0.02% for each day of delay, rather than the prior rates of:
    • 0% in case the tax liability is settled within the first 30 days from the payment deadline
    • 5% of the overdue tax liabilities settled, if the settlement takes place within the 60 days after the expiry of the first 30 days
    • 15% of the remaining overdue tax liabilities, if they are settled any time after the first 90 days from the legal deadline - although it should be noted that these penalties are in addition to the daily interest of 0.04% per day of delay.
  •  For tax liabilities that were due on or prior to 1 July 2013, and settled after this date, the applicable level of late payment penalties shall remain determined according to the legislation in effect prior to 1 July 2013.

Your Taxand contacts for further queries are:
Angela Rosca 
T. +40 21 316 06 45
E. angela.rosca@taxhouse.ro

Adriana Craciun
T. +40 21 316 06 45
E. adriana.craciun@taxhouse.ro

Taxand's Take

Companies should be aware of the challenges brought by the multiple recent changes to the Romanian tax legislation, to ensure that they are compliant and that their tax affairs are properly handled.

First, the new legal provisions regarding the 85% personal income tax applicable for certain types of income are now under great political and public debate, and official clarifications are expected to be announced.  
Next, non-resident multinational companies with operations in Romania should be aware of the recent clarifications regarding  the 50% withholding tax for certain payments to entities in non-treaty countries and should ensure compliance to mitigate risks of incurring additional tax liabilities for their local subsidiaries.

Finally, companies operating in Romania should take note of the new method of computing interest and penalties due on late tax payments as of 1 July 2013.

Taxand's Take Author

Angela Rosca
Romania

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