Law no. 296/2020 – Changes to the Fiscal Code
Law no. 296/2020 – Changes to the Fiscal Code
This new legislation, which amends the Fiscal Code, was published in the Official Journal of Romania (No. 1269) on 21 December 2020. Most of its provisions will take effect from 1 January 2021. Below are the main changes, as well as dates when they enter into force (if these are different from the general rule).
The definition of the place of effective management is clarified, and is defined as the place where a foreign legal entity conducts operations which have real and substantive economic purposes and where at least one of the following conditions is fulfilled:
- The economic and strategic decisions necessary for the conduct of the business of the foreign legal entity as a whole are taken in Romania by the executive directors/members of the board; or
- at least 50 % of the executive directors/members of the board of directors of the foreign legal entity are resident.
A Romanian resident is defined is a person who is subject to taxation in Romania on worldwide income from any source.
Establishing the tax residence based on place of effective management
The Romanian tax authorities will be able to establish, either on their own initiative or at the request of another authority, the place of effective management for a foreign company in Romania. Moreover, special anti-abuse rules are being formulated for establishing tax residence in Romania by self-declaration. A specific procedure has been introduced for this purpose, which requires the completion and submission of a questionnaire by foreign legal entities, similar to the questionnaire already applicable for individuals.
Foreign legal entities which have registered their place of effective management in Romania by 31 December 2020 inclusive will be required to submit the questionnaire, with the relevant documents, by 30 June 2021, in order to clarify whether they have their tax residence in Romania.
Reinvested profit tax exemption
Some clarifications have been made in relation to the exemption from corporate tax for investments made. In particular, the new legislation has clarified that the exemption is granted within the limit of the cumulative calculated corporation tax (not only within the limit of the tax due for the calculated period) as follows:
- From the beginning of the year to the quarter when the investments are made, for taxpayers applying the quarterly corporate tax return/payment system.
- From the beginning of the year when the investments are made up to the end of the year, for taxpayers applying the annual corporate tax return/corporate tax payment.
In addition, the profit for which the corporate tax exemption was granted may also be allocated to reserves during the following year.
The new legislation states that the following are deductible expenses for the purposes of determing tax due:
- Expenses related to teleworking activity, for employees who carry out their activity under this system.
- Expenditure on employee benefits in equity instruments with equity settlement in shares, at the time of the effective granting of benefits, irrespective of the tax treatment applied at the employee’s level.
Allowances for the impairment of unearned receivables in a period exceeding 270 days from the due date are not guaranteed and are payable by a non-affiliated entity (and not only up to a 30 % limit as hitherto).This provision (which should have entered into force from 2021) will now apply from 2022 (as set out in Government Emergency Ordinance no. 1332, 31 December 2020).
The following are listed as non-deductible expenditure for the purposes of determining the tax due.
- Expenditure related to the effective functioning of early childhood education units. This has been eliminated from the category of social expenditure, which has limited deductibility, as it is deducted, in order, from corporation tax, wage tax, value added tax or excise duty, up to a limit of USD 1500 per month per child.
- The depreciation of electronic fiscal marker equipment, since this is deducted from corporation tax.
- Expenditure on transactions with legal entities or individuals located in a state included in the EU List of Non-Cooperative Jurisdictions for tax purposes.
Specific provisions have been set out for leasing contracts which are applicable to taxpayers applying accounting regulations in line with International Financial Reporting Standards.
Tax losses in the context of merger/division/split operations involving micro-enterprises may now be recovered.
Tax consolidation has been made possible (optionally) for corporate income tax, i.e. to offset the tax profits of companies in a group against the tax losses of other jointly owned firms, directly or indirectly, if the member of the group which benefits from the offset holds a proportion of at least 75 % of the value/number of shareholdings or voting rights in the entity which incurs the tax losses, for an uninterrupted period of one year prior to the start of consolidation.
The period of application of the system will be five fiscal years, after which the option may be renewed. The application should be submitted at least 60 days before the beginning of the period for which the tax consolidation is requested, and the system will be applied from the tax year following the submission of the application.
One of the members should be designated as the responsible legal entity which will calculate, declare and pay corporate income tax for the group, determined by adding up the individual calculations of each member.
The tax losses incurred by a member of the group before the application of the system cannot be compensated at group level. If the group is abolished after five years, the losses incurred and not recovered during the consolidation will be recovered by the responsible entity/individual.
The new legislation clarifies that in the case of dividends paid to collective investment undertakings without legal personality, there is no obligation on a Romanian legal entity to retain, declare and pay dividend tax.
Micro-enterprise income tax
Dividend income received by a micro-enterprise from a Romanian legal entity has been made non-taxable for the purposes of the tax on the income of micro-enterprises.
Income tax and compulsory social contributions
Tax residence of individuals
The new legislation states that a non-resident individual who satisfies the conditions of residence is liable to income tax on income from any source, both in Romania and outside Romania, as from the first day on which he /she declares that their center of vital interests is in Romania (if this is the criterion fulfilled) or as from the first day of arrival in Romania (if present in Romania for more than 183 days in the calendar year concerned).
Income and salary benefits
The new legislation states that wage benefits received from third parties (in cash or in kind) as a result of a contractual relationship between the parties are also considered as salary related benefits, and the requirement to calculate, retain, pay and declare income tax and social contributions falls to:
- The Romanian tax resident employer, when the benefits in cash and in kind are granted by entities other than itself and the payment is made through the employer.
- Romanian tax payers who pay the benefits, when the benefits in cash and in kind are granted by entities other than the employer, where these entities are Romanian tax residents.
If the beneficiaries of benefits in money or in kind from third parties are not Romanian tax residents, specific rules apply.
The value of tourism and/or treatment services, including transport, during a holiday period for an employee and members of his/her family, granted by the employer, remains non-taxable and excluded from the basis for calculating social contributions only if the level of a gross average salary (established by law) is not exceeded in a fiscal year. Previously, these benefits were unlimited.
Amounts paid by an employer for the early education of the children of employees, in line with the exemption from income tax previously introduced by Law 239/2020, are excluded from the scope of social contributions.
Amounts granted to employees for utility expenses (electricity, heating, water and data subscription) and the purchase of office furniture and equipment are also exempt from tax and social contributions, up to a monthly ceiling of 400 lei corresponding to the number of days in the month in which the employee is active in telework activity. The exemption also applies to expenditure on epidemiological testing and/or vaccination of employees in order to prevent the spread of diseases which endanger the health of employees and public health.The legislation specifies that employees of micro-enterprises using company cars for personal purposes cannot be taxed on this advantage, as already specified for employees of companies paying corporate income tax in the same situation.
The tax treatment of income treated as income from management contracts, income of CA members, etc., will also be aligned when it is earned by construction companies as defined by the Fiscal Code in Article 60, paragraph. 5. Thus, this type of income will be exempt from health contributions and the application of the reduced percentage in the case of social security contributions (pensions). Previously, this income was only exempt from income tax.
Income from self-employment
The equivalent value of the assets and rights transferred when there is a transformation or change in the form of exercising an independent activity becomes non-taxable income. The arrangements will also apply to unearned claims. However, the value of goods and rights owned by a business that pass into the personal ownership of the taxpayer remain taxable.
Valuation of such assets and rights should be set according to the prices practiced on the market or established by technical expertise.
Income from the transfer of the use of the goods
Incomes obtained by the owner from the rental for tourist purposes of rooms located in personal property dwellings, when the number of rooms is between one and five inclusive, is determined exclusively on the basis of the annual income norm (without the option of applying the real system).
The definition of income from Romania from the transfer of securities has been modified to include instruments or operations involving issuers or intermediaries, which have their fiscal residence in Romania.
The category of non-taxable income from investments has been extended to include income resulting from the transfer of securities and / or gold at the time of their acquisition in the case of judicial or voluntary division, as well as the regime of separation of assets.
The deadline for intermediaries, investment management companies or self-managed investment firms to inform taxpayers and to submit the information statement on the total gains/losses on transactions made during the fiscal year has been set as the last day of February of the current year for the previous year (previously the deadline was 31 January).
Income from pensions
The new legislation states that when the monthly taxable income is determined for amounts received in installments, the non-taxable income ceiling is granted for each monthly installment from each pension fund.
Income from prizes and gambling
Non-taxable income in this category also includes commercial price reductions granted to individuals other than employed persons.
Income from other sources
Vouchers in the form of gift tickets awarded on the basis of the nominal record, for marketing campaigns, market research, promotion on existing or new markets, for protocol, or for advertising are now included within the definition of income from other sources.
Avoidance of double taxation through the tax credit method or the exemption method
If the competent authority of a foreign state does not issue a proof of payment of tax abroad, the following may also be used for the granting of the tax credit/exemption:
- The document issued by the taxpayer/withholding agent in the foreign state, or
- A copy of the tax return lodged with the competent foreign authority, together with documentation to prove payment.
The deadline for submission of the single income tax and social contributions declaration due from individuals, as well as the payment deadline, will be 25 May inclusive of the year following the year of the earning of the income. (The provision applies from and for the income earned in 2020, and hence 25 May 2021 will be the reporting deadline for 2020).
The same deadline applies to the submission of form 230 “Application for the destination of up to 3,5 % of the annual tax due” as well as for the declaration and payment of social contributions, for work carried out abroad, members of a board of directors, members of a board of supervisors, administrators, directors, censors, etc.
Tax on income from Romania by non-residents
The tax rate has been reduced from 16% to 10% on certain types of income accruing from Romania earned by individuals resident in a Member State of the European Union or in a state with which Romania has a double taxation convention. The new rate applies to income from interest, royalties, commissions, sports and entertainment activities in Romania, management or consultancy services and services provided in Romania.
The term ‘Romanian legal entity’ is replaced by a broader notion of resident in various provisions.
Value added tax
Right to deduct from the VAT return
Even if the limitation period has been passed, it is now possible to exercise the right to deduct VAT if the supplier issues correction invoices on its own initiative (not only following a tax inspection). However, the right must be exercised no later than one year after the date of receipt of the corrective invoice, and is subject to the penalty of revocation.
Adjustment of the tax base
The tax base may be adjusted in the case of unearned claims on debtors who are individuals. Thus, where the total or partial consideration of the goods delivered or services rendered has not been received from individuals within 12 months of the payment deadline set by the parties, or — failing that — of the date of issue of the invoice, the taxable amount of VAT may be adjusted.
The adjustment is subject to proof that commercial measures have been taken to recover claims of up to RON 1,000, including legal proceedings to recover claims of more than RON 1,000.
According to the new legislation, the above provisions apply only to claims for which the payment deadline set by the parties, or in the absence thereof, the date of issue of the invoice, is 1 January 2021 or later. We consider that this restriction is not in line with the fundamental principles of the VAT Directive and recent European case-law
Possibility to designate an authorized tax representative for VAT obligations
From 1 April 2021, legal entities or individuals not registered for VAT purposes in Romania which import goods into Romania, followed by an intra-Community supply of these goods, may appoint an authorized tax representative to fulfill their VAT obligations.
VAT on receipt
The turnover ceiling for the application of the VAT on collection system has been increased from RON 2.250.000 to RON 4.500.000.
VAT on customs
The actual payment of VAT to customs will no longer be made for certain categories of transactions as follows:
- Imports by taxable persons holding VAT deferral certificates.
- Imports by legal entities/individuals authorized as Authorized Economic Operators (AEOs).
- Imports by legal entities/individuals which have obtained authorization to lodge a customs declaration in the form of an entry in the declarant's records.
- Imports of certain categories of goods to which the internal reverse charge applies (waste, wood, some cereals and technical plants, mobile phones, integrated circuit devices, game consoles, tablets and laptops).
The conditions for the granting of a certificate for the deferral of VAT in customs have been amended. Thus, the conditions to be fulfilled are as follows:
- The taxpayer must have have no outstanding obligations to the state budget, including to the customs authority.
- The taxpayer must have, in the last six months preceding the month in which the certificate is applied for, imported from territories and third countries, products with a combined value of at least RON 50 million, except for products subject to harmonized excise duty.
- The taxpayer must have been registered for VAT purposes for at least six months before the application for the certificate is lodged.
- The taxpayer must not be undergoing insolvency, reorganization or winding - up proceedings.
During the period from 1 January 2021 to 31 March 2021, the specific excise duty on cigarettes will be 418,76 lei/1,000 cigarettes and the total excise duty will increase from 1 January 2021 to 546,21 lei/1,000 cigarettes.
The category of still fermented beverages benefiting from zero excise duty has been extended to include products obtained from forest fruits, without further added flavorings or alcohol.
Local taxes and duties
The definition of a building has been changed to establish the tax value of wind turbine support towers. The cost of tower foundations is to be included in the taxable amount.
In the case of taxes and charges on buildings owned by legal entities, a revaluation report to determine the standard rate (and hence to avoid the penalty rate) must now be obtained after 5 years (rather than 3 years as previously).
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