Corporate Taxation
Chapter I: Introduction to Corporate Taxation in Romania
Every successful business must understand the tax system within the jurisdiction it operates. The Romanian corporate tax landscape offers entrepreneurs various routes to drive fiscal efficiency and maximize profit. Here, we primarily focus on two significant taxes levied on corporations: Profit Tax and and Income Tax.
Profit Tax, a standard flat rate of 16%, is charged on the taxable income of a company, while Income Tax, a mere 1%, applies to micro-enterprises earning under €500,000 annually. This article will guide you through both systems, emphasizing the key components, and help you understand why and when you might choose one over the other. Romania's advantageous tax rates, when compared to the EU and US averages, make it an attractive location for businesses seeking tax efficiency and a favorable environment.
Remember, it's not just about understanding these taxes, but mastering how to navigate them strategically that sets thriving businesses apart. Let's delve into the nuances of the Romanian corporate taxation system.
Chapter II: Navigating the Landscape of Profit Tax
Profit Tax in Romania is set at a flat rate of 16%It is applied to the taxable income, calculated as revenues minus expenses, with certain adjustments. Below, we dissect the formula and delve into the key elements:
And then:
While revenues and expenses are self-explanatory, understanding the types of untaxed revenues, tax deductions, and non-deductible expenses can make a significant difference to your overall tax liability. Here's a summary:
Deductible Expenses: These are costs incurred for the purpose of your economic activity. They reduce your taxable income and include expenses such as wages, teleworking expenses for employees, protocol expenses, social spending, expenses for the proper functioning of establishments, and other business-related costs.
Non-Deductible Expenses: These are costs that cannot be subtracted from the taxable income. Examples include the corporation's own tax expenses, fines, penalties, and certain types of interest.
Untaxed Revenues: These are specific income types that are exempt from taxation. Examples include dividends received from another Romanian or foreign legal entity, income from the reversal, recovery, or reduction of provisions, and income from the change in fair value of investment property/biological assets.
| Category | Explanation |
|---|---|
| Deductible Expenses | Costs incurred for business purposes that reduce taxable income. |
| Non-Deductible Expenses | Costs that cannot be subtracted from taxable income. |
| Untaxed Revenues | Specific income types that are not subjected to taxation. |
Chapter III: The Advantages of Income Tax for Micro Companies
In contrast to the Profit Tax, Romanian micro-companies can opt to pay an Income Tax which stands at only 1% for companies generating under €500,000 in revenue annually. This flat, low rate is one of the reasons why Romania is considered a tax haven for startups and SMEs.
The formula for calculating income tax is straightforward:
Then,
Here's a visual representation of the above calculation:
| Taxable Base | Explanation |
|---|---|
| Income from any source | Total income generated by the business |
| Various types of income | Includes income from stock costs, services in progress, subsidies, provisions, etc. |
| Final Calculation | Taxable base (Income from any source - various types of income) x 1% |
This advantageous tax regime promotes entrepreneurial initiatives, fostering an ideal environment for business growth. By maintaining a lower fiscal burden, the Romanian tax system provides SMEs with the financial freedom to reinvest in their businesses and set the stage for future expansion.
Chapter IV: Changes to Romania's Tax Laws and a Global Perspective
Romania's tax landscape is dynamic, with frequent changes aimed at improving the business environment. There was a recent reduction in the revenue threshold for micro-companies, lowering it from €1,000,000 to €500,000 annually. While this might seem less favorable, the low 1% income tax rate still gives Romanian micro-companies an advantage compared to their peers in many other countries.
Additionally, the dividend tax increased from 5% to 8%. Although this represents a slight increase, it's important to keep in mind that this rate is still significantly lower than many European Union (EU) or United States (US) counterparts.
To offer a clear perspective, let's compare Romania's tax rates with those of other popular business hubs:
| Country | Income Tax Rate | Dividend Tax Rate |
|---|---|---|
| Romania | 1% | 8% |
| UK | 19% | Up to 38.1% |
| US | 21% | Up to 23.8% |
| Germany | 15% | Up to 26.375% |
| France | 28% | Up to 30% |
As seen above, Romania offers one of the lowest corporate tax rates in the world. Its favourable taxation framework makes it an appealing destination for entrepreneurs seeking to maximize their profits and minimize their tax liability.
Chapter V: Practical Aspects of Tax Management in Romania
Managing your taxes in Romania is relatively straightforward, thanks to the efforts of ANAF (National Agency for Fiscal Administration). This organization provides an online platform for taxpayers to manage their tax-related affairs digitally. This includes declarations, payments, and information about the latest changes in tax laws.
Let's dive into the key considerations to effectively manage your tax obligations in Romania:
Tax Declarations and Payments: Romania operates on a self-assessment tax system. This means businesses are responsible for calculating their taxes and submitting declarations to ANAF. Companies are expected to file their annual tax returns by March 25th of the following year, and tax payments are usually due at the same time.
Tax Audits: Businesses in Romania should prepare for potential tax audits. This includes maintaining accurate records and receipts related to income and expenditure, and understanding your rights and responsibilities during an audit.
Double Taxation Treaties: Romania has signed double taxation treaties with over 90 countries. These treaties prevent businesses and individuals from paying tax on the same income in both Romania and their country of residence. It's crucial to understand how these treaties might apply to you or your business.
Legal Support: Given the dynamic nature of Romanian tax laws, many businesses opt to use a tax adviser or attorney who specializes in Romanian tax law. This not only ensures compliance but also allows companies to make the most of the tax benefits available.
VAT considerations: Businesses with an annual turnover exceeding €88,500 are required to register for VAT. Some businesses may opt for voluntary registration if their turnover is below this threshold.