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Taxation of foreign companies in Romania

Question: What is the tax regime for foreign companies, such as branches, opened in Romania?

Answer: Foreign entities are subject to taxation in Romania for revenues obtained on this territory. The tax regime varies according to activities conducted in this country or in connection with this country. Foreign entities are subject to taxation if they open a representative office, branch or a permanent establishment or if it functions according to provisions related to withholding of taxes at source financial scheme, obviously applied to incomes obtained in Romania.

The branch of a foreign company must be registered with the Romanian fiscal authorities. The registration procedures, submissions of documents and the payments are handled according to requirements applying to Romanian companies as well. Branches have no legal personality apart from their mother company; they have no separate share capital or a distinct name. The core business of the branch company cannot be extended to other levels, different from those of the mother company. Distribution of funds in the country of origin, where the mother company is located, is not considered distribution of the profit as dividends so there should be no tax obligations through withholding at source. Still as in the case of the limited liability companies, profits are to be transferred at the end of the year after the headquarters office approves the financial statements of the branch.

Question: Is the permanent establishment subject to taxation in Romania?

Answer: The permanent establishment is not always a legal person but, in Romania, it is subject to taxation. The permanent establishment can be defined as the place where the activity is carried out by the non-resident company or by a part of it, directly or via a dependent agent. Once a permanent establishment is being created, according to taxation of foreign companies in Romania regime, authorities have the right to tax the revenues of the foreign company, those obtained through its activity carried out in Romania.

The Romanian law mentions explicitly two main factors able to generate a permanent establishment: the fix basis – there must be a physical place where the activity is conducted (registered office, equipments), with a certain degree of continuity and the agents with a dependent status which have to conduct their activity in the state where the company is located. Registration procedures, submissions of documents and the payments are handled according to requirements applying to Romanian companies as well.

Question: I have a representative office in Romania, what can you tell me about the taxes I have to pay in this case?

Answer: The representative offices may conduct exclusively auxiliary activities and preparatory work. They cannot make transactions individually and cannot carry out commercial activities. For representative offices, in accordance with taxation of foreign companies in Romania regime, there is a fixed tax of 4,000 EURO for each fiscal year; this payment can be made in national currency at the effective date of payment.

Taxes are to be paid through two equal transactions, one heaving the deadline on the 25th of June and the other on the 25th of December. If a representative office is established or closed throughout the year, taxes for the functioning period are to be calculated according to the active months from the fiscal year.

Question: What is the withholding of taxes at source scheme in Romania?

Answer: Non-resident companies are subject to taxation according to withholding of taxes at source scheme. This applies to the following taxes withheld at source in a 16% for other incomes obtained in Romania: the interest rate, royalties, equities, revenues obtained from management and consulting services (no matter where these services are provided), commissions, revenues obtained when liquidating a Romanian legal person.

The above mentioned quotas are subject to specific provisions and exceptions such as: withholding of taxes at source applied to equities obtained in Romania by non-resident companies from member states of E.U or E.E.A is of 16%.

Starting with Romania’s accession to E.U (1st of January, 2007), specific stipulations were introduced through the Common system of taxation, applicable in the case of parent companies and subsidiaries of different Member State. Therefore, equities paid by a Romanian company to another company from one of the E.U or E.E.A member states are exempted from withholding of taxes at source, if the beneficiary of equities owns a minimum of 10% from the overall shares of the Romanian company for an entire period of time of at least two years which ends at the payment date of the equities;

Starting with the 1st of January, 2010, the taxation regime of the incomes, such as equities and interests rates obtained through retirement benefits plans in E.E.A,  was adopted in Romania as well. In this manner the interest rates and the equities paid to retirement benefits funds are exempted from withholding of taxes at source.

Question: What can you tell me about the taxes regarding interest rates and royalties in Romania?

Answer: Romania also adopted the regime concerning interest rates and royalties. Starting with the 1st of January 2011, for interest rates paid by a Romanian company to a resident company from EU or EEA there will be an exemption from withholding of taxes at source, only if the beneficiary non-resident company owns at least 25% from the capital share of the Romanian company for two years which ends at the payment date of the interest rates and royalties. In gambling activities, for non-residents obtaining incomes in this area, the quota when withholding of taxes at source is of 25%.

Question: I am a business owner interested in the taxation of foreign companies in Romania . What is the corporate income tax?

Answer: The regular profit tax rate is 16%. Profit tax payable by companies generating incomes from bars, nightclubs, discos, casinos and sports betting (including revenues obtained based on an association agreement) is calculated at the standard 16% rate, on condition that the tax is not less than 5% of the total declared revenue. In case the profit tax is below this threshold, the taxpayer is liable to pay corporate income tax calculated at 5% of the declared revenue from such activities.

Question: Which activities are exempted from withholding of taxes at source?

Answer:  In order to adopt the European stipulations, the non-resident entities are required to make proof of the tax residence certificate and a statutory declaration sustaining all conditions provided by the European laws. In agreement with taxation of foreign companies in Romania regime, the following revenues obtained by non-residents are exempted from withholding of taxes at source: bonds issued or guaranteed by the government, revenues from international transportation and adjacent services, prizes paid from public funds; revenues obtained from partnerships established by a non-resident company in Romania -  they are subject to corporate taxation. Capital profits achieved by non-residents from selling real estate located in Romania or from selling shares are subject to taxation with a 16% quota. There are situations when more favorable provisions are to be taken into account such as those concerning the Double taxation Convention.

Some of our experienced lawyers provide all necessary details regarding these specific taxation regimes  for foreign companies opened in Romania, offering effective alternatives, accurately explaining each particular risk and entirely protecting our clients’ position. We thoroughly understand all fiscal contingencies and our strategies are built to deliver rigorous solutions for every circumstantial instance. Contact us now for a free consultation!

by Cristian Darie

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