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Romania - Income Tax

Romania - Income Tax

Taxation of international executives

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Tax returns and compliance

When are tax returns due? That is, what is the tax return due date?

Annual tax returns are due by 15 March of the year in order to estimate the income to be obtained during the current year and declare the income obtained during the previous year. The above mentioned deadline also represents the payment deadline for the income obtained during the previous year. The deadline for filing the annual tax returns for 2019 may be extended until 25 May 2020 (the information has not been published yet in the Official Gazette).

In certain cases, such as for employment income derived from non-Romanian employers, tax returns are due on a monthly basis by the 25th day of each month for the previous month.

What is the tax year-end?

31 December.

What are the compliance requirements for tax returns in Romania?

Residents and non-residents

Romanian employers are required to withhold tax at source on salaries paid to employees on their payroll and to pay such tax to the Romanian government on a monthly basis.

However, in case of assignments, the Romanian employer no longer has the obligation to withhold and pay the Romanian income tax due to the Romanian government, provided that the individual is assigned to a country/jurisdiction with which Romania has concluded a DTT and the individual is present in that country/jurisdiction for a period longer than the period mentioned in the DTT. Note importantly that although no Romanian income tax is paid during the year, at the end of the year a regularization of the income tax should be made and it is the individual’s obligation to file an annual tax return in this respect.

Romanian residents who derive rental income in foreign currency, self-employment income, capital gains from sale of securities or income from intellectual property rights must file an annual tax return by 15 March of each year for the previous year (or 25 May 2020 for the income obtained during 2019 if the prolongation of the deadline is approved by the Romanian authorities).

Individuals who receive taxable remuneration from a non-Romanian payroll are taxed from the moment of their arrival in Romania irrespective of the assignment duration in Romania, unless they can claim protection under the relevant tax treaty.

In terms of social security, should social security contributions be due in Romania, it is the employer’s obligation to calculate, withhold and pay the Romanian social contributions. In this respect, the non-Romanian employer must register in Romania for social security purposes. Alternatively, the individual may take over the responsibility of declaring and paying Romanian social security contributions, based on an agreement concluded with the employer in this respect.

As of 2016, where the employer is resident of a country/jurisdiction which is not covered by the EC Regulation 883/04 or with which Romania has no bilateral agreement on social security coordination, it is the individual’s responsibility to declare and pay the full social security contributions.

An informative declaration has to be filed by the Romanian company where the individual carries out activity in Romania within 30 days from the beginning of their activity.

The non-Romanian employer or in certain cases the Romanian entity where work is performed also has the obligation to file an informative form with the Labor Authorities in Romania no later than 1 working day before the individual’s first day of activity in Romania.

Tax rates

What are the current income tax rates for residents and non-residents in Romania?

Residents

Ten percent flat tax rate (10 percent).

Non-residents

Ten percent flat tax rate (10 percent).

Residence rules

For the purposes of taxation, how is an individual defined as a resident of Romania?

An individual is considered a Romanian tax resident if they meet at least one of the following conditions:

  • the individual has their domicile in Romania
  • the individual has their center of vital interests in Romania
  • the individual is present in Romania for a period (periods) exceeding 183 days during any 12-month period, ending in the calendar year concerned.

There are exceptions to this rule for Romanian citizens working outside Romania as employees of the Romanian government, who remain Romanian tax residents irrespective of whether they meet the above-mentioned conditions or not, as well as for non-Romanian citizens working in Romania as employees of foreign governments, who are not treated as Romanian tax residents, irrespective of whether they meet the above mentioned conditions or not.

As a general rule, Romanian tax residents are liable to Romanian tax on their worldwide income, whereas Romanian tax non-residents are liable to Romanian tax only on Romanian- sourced income.

However, the non-Romanian individual who qualifies as a Romanian tax resident according to Romanian tax legislation may remain liable to Romanian income tax only on the Romanian-sourced income, if they can provide a tax residence certificate from a country/jurisdiction with which Romania has concluded a treaty for the avoidance of double taxation. In such case, the individual remains tax non-resident for the period of validity mentioned in the tax residence certificate.

Romania has an extensive network of double tax treaties which determine the circumstances under which non-Romanian individuals are treated as Romanian tax residents. If an individual can demonstrate that during their assignment to Romania, they remain a tax resident of another state with which Romania has concluded a tax treaty, then the provisions of the treaty will prevail.

All individuals who spend more than 183 days in Romania within any 12-month period ending in the fiscal year concerned, must submit a special Questionnaire, together with relevant documentation, no later than 30 days after the end of the 183-day period. Within 30 days of submission of this form, the tax authorities will notify the individual as to whether they have full tax liability in Romania or if they are taxable only on income derived from Romania. As of 1 January 2018, fines are imposed by the Romanian authorities for late filing of the Questionnaire upon arrival to Romania (between RON50-100).

Is there a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country/jurisdiction for more than 10 days after their assignment is over and they repatriate.

See residence rules above.

What if the assignee enters the country/jurisdiction before their assignment begins?

A Romanian tax liability may occur even for periods before assignment if the person performs work in Romania. The period spent in the country/jurisdiction before the assignment is also taken into account for determining the 183-day limit of presence in Romania.

Termination of residence

Are there any tax compliance requirements when leaving Romania?

Upon the termination of residence in Romania, an individual should notify the tax authorities. A questionnaire needs to be filed with the authorities at least 30 days before leaving the country/jurisdiction. Within 15 days of submission the tax authorities should notify the individual whether they will remain fully taxable in Romania and also whether they will be maintained in/removed from the tax records. As of 1 January 2018, fines are imposed by the Romanian authorities for late filing of the Questionnaire upon departure from Romania (between RON50-100).

Also, the Romanian company where the individual carries out activity in Romania has to file an informative declaration at the end of the individual’s assignment, within 30 days from the end of the individual’s activity in Romania.

The individual should deregister for Romanian income tax and / or social security purposes within 15 days as of the end date of activity.

What if the assignee comes back for a trip after residency has terminated?

Any time spent in Romania is taken into account upon determining the 183-day limit of presence in Romania, irrespective of whether the person is on a formal assignment to Romania or not. If the person carries out work in Romania, then the person might be liable to tax in Romania.

Communication between immigration and taxation authorities

Do the immigration authorities in Romania provide information to the local taxation authorities regarding when a person enters or leaves Romania?

Note that currently, the Romanian immigration authorities issue a personal number to each non-Romanian national applying for a registration certificate or residence permit, and the same number is also used for tax purposes, as a personal tax number of the individual.

Currently, there is not an automatic transfer of information between the immigration and tax authorities. However, the tax authorities may request information from the immigration authorities in order to determine the number of days a person has spent in Romania.

Filing requirements

Will an assignee have a filing requirement in the host country/jurisdiction after they leave the country/jurisdiction and repatriate?
 

A filing requirement may occur if the person derives Romanian-sourced income or if the person qualifies as a Romanian tax resident and derives income which is taxable in Romania.

Economic employer approach

Do the taxation authorities in Romania adopt the economic employer approach to interpreting Article 15 of the Organisation for Economic Co-operation and Development (OECD) treaty? If no, are the taxation authorities in Romania considering the adoption of this interpretation of economic employer in the future?

There is not much practice of the tax authorities applying the economic employer concept; however, current legislation in force allows tax authorities to use the concept.

De minimus number of days

Are there a de minimus number of days2 before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?

Not applicable.

Types of taxable compensation

What categories are subject to income tax in general situations?

As a rule, all types of remuneration and benefits received by an employee for work done are deemed as taxable regardless of where paid or received, unless these are specifically exempted under Romanian tax legislation. Typical items of an expatriate compensation package set out below are fully taxable unless otherwise indicated:

  • cost-of-living allowances
  • premiums/hardship allowances for working in Romania
  • benefits in cash and in kind.

Intra-group statutory directors

Will a non-resident of Romania who, as part of their employment within a group company, is also appointed as a statutory director (i.e. member of the Board of Directors in a group company situated in Romania trigger a personal tax liability in Romania, even though no separate director's fee/remuneration is paid for their duties as a board member?

A case by case analysis should be performed.

a)   Will the taxation be triggered irrespective of whether or not the board member is physically present at the board meetings in Romania?

See above.

b)  Will the answer be different if the cost directly or indirectly is charged to/allocated to the company situated in Romania (i.e. as a general management fee where the duties rendered as a board member is included)?

See above.

c)   In the case that a tax liability is triggered, how will the taxable income be determined?

See above.

Tax-exempt income

Are there any areas of income that are exempt from taxation in Romania? If so, please provide a general definition of these areas.

Exempt income includes the following (however certain conditions must be met):

  • employment income derived from non-Romanian employers in respect of work done outside Romania, unless this income is paid by or on behalf of a Romanian employer
  • costs borne by employers for their employees while on business trips in Romania or abroad, including per-diem (within certain limits), travel, and housing costs, if it can be demonstrated that they are business-related
  • reimbursable loans granted to employees free of interest or with interest lower than the market interest
  • employer’s contributions to qualifying voluntary pension funds, up to EUR400 per year
  • private health insurance and medical subscriptions paid by employers for their employees, up to EUR400 per year
  • benefits in kind represented by the personal use of vehicles for which expenses are only 50 percent deductible for corporate tax purposes, as per current legislation.

Expatriate concessions

Are there any concessions made for expatriates in Romania?

Certain remuneration items, such as assignment allowances, housing allowances, travel costs covered by employers, received during assignments may qualify as non-taxable (within certain limits).

Salary earned from working abroad

Is salary earned from working abroad taxed in Romania? If so, how?

Remuneration earned by Romanian tax residents for work done outside Romania is not taxable in Romania, provided that the remuneration is not paid by or on behalf of a Romanian resident employer and the remuneration is not borne by a permanent establishment in Romania of the non-Romanian employer.

Employment income earned from working abroad by Romanian non-resident individuals is not taxable in Romania unless it relates to work carried out in Romania.

Taxation of investment income and capital gains

Are investment income and capital gains taxed in Romania? If so, how?

Resident individuals are liable to tax on investment income and capital gains. See below detailed information on applicable tax rates on various types of income.

Non-resident individuals are also liable to withholding tax on investment income, provided that such income qualifies as Romanian-source income. The applicable tax rates to income derived by non-resident individuals are similar to the tax rates applicable to resident individuals.

Individuals who are tax residents of countries/territories that have concluded tax treaties with Romania can potentially obtain treaty relief to reduce these taxes.

Dividends, interest, and rental income

Generally, interest is subject to a 10 percent tax rate and dividends are taxed at 5 percent as of 2016. Romanian resident persons paying interest or dividends to individuals (residents or non-residents) have an obligation to withhold tax.

As a general rule, capital gains from sale of shares are subject to a 10 percent tax rate.

Rental income is subject to a 10 percent flat tax rate; however, a 40 percent notional deduction is available without supporting documents.

Gains from stock option exercises

Under current Romanian tax law, employees deriving income from stock option plans qualified as such according to Romanian law, are not liable to tax at the moment of grant or at the moment of exercise of the options. Upon sale of underlying shares, individuals derive capital gains subject to capital gain tax. The taxable income is determined as the difference between sale proceeds and exercise price, less broker’s fees.

Foreign exchange gains and losses

Income derived from foreign exchange/interest rate transactions (such as, currency forward, currency and interest rate swap, and options) is subject to a 10 percent tax rate. Losses from such transactions may be offset against similar gains.

Principal residence gains and losses

Income from sale of real estate properties is non-taxable if the property is valued at less than RON450,000 (approx. EUR 100,000). If the property’s value exceeds RON450,000, the sale is subject to 3 percent tax due on the amount exceeding RON450,000.

Capital losses

Capital losses from sale of shares in listed companies may be deducted from similar gains. Annual capital losses can be carried forward for the following 7 years, provided dully declared.

Personal use items

Capital gains on the sale of personal belongings are not taxable, except from income from sale of real estate properties, although certain exemptions may be available.

Gifts

Gifts are not subject to tax. Also, gifts consisting of real estate properties may be subject to tax, unless the gift is between relatives up to the third degree or between spouses.

Additional capital gains tax (CGT) issues and exceptions

Are there additional capital gains tax (CGT) issues in Romania? If so, please discuss?

No.

Are there capital gains tax exceptions in Romania? If so, please discuss?

No tax is due upon transfer of ownership right over real estate properties by virtue of special restitution laws, gifts between relatives, or inheritance if the inheritance procedure is finalized within 2 years from the death of the predecessor. If the inheritance procedure is not finalized within 2 years, a 1 percent tax is applied on the value of the inheritance.

Pre-CGT assets

Not applicable.

Deemed disposal and acquisition

Contributions in kind to the share capital, consisting of real estate properties, are deemed as disposals of such real estate properties and are consequently subject to 3 percent tax if the value of the property exceeds RON450,000, depending upon the value of the property and the period for which the property is owned.

General deductions from income

What are the general deductions from income allowed in Romania?

For employment income, a personal deduction is allowed to Romanian tax residents, depending upon level of the individual’s monthly gross income and the number of dependent persons.

Mandatory social security contributions are generally allowed for deduction for the purpose of calculating the Romanian income tax due.

Also, employees’ contribution to qualifying voluntary pension plans and employee’s private health insurance contributions/medical subscriptions are deductible for income tax purposes up to EUR 400 per year each contribution.

Tax reimbursement methods

What are the tax reimbursement methods generally used by employers in Romania?

The current month gross-up method is the normal method of recognizing tax reimbursements paid by the employer (see glossary for explanation of terms). The current year reimbursement and 1 year rollover methods might also be acceptable in some instances.
Loan/bonus arrangements may also be used as a method for tax reimbursements paid by the employer.

Calculation of estimates/prepayments/withholding

How are estimates/prepayments/withholding of tax handled in Romania? For example, Pay- As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.

Pay-as-you-go (PAYG) withholding

Employment income paid by Romanian employers is subject to monthly withholdings (PAYG withholding). Employment income paid by non-Romanian employers has to be declared by the individual taxpayer on a monthly basis.

When are estimates/prepayments/withholding of tax due in Romania? For example: monthly, annually, both, and so on.

For employment income, tax has to be withheld and paid on a monthly basis, by the 25th of each month for the previous month.

For self-employment income or rental income, payments on account should be made by the individual taxpayer annually.

Relief for foreign taxes

Is there any Relief for Foreign Taxes in Romania? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?

Based on the provisions of the double tax treaties concluded by Romania with other countries/territories, as well as based on the Romanian law, if Romanian tax residents are liable to income tax in a country/jurisdiction with which Romania has concluded a tax treaty, then a tax credit or a tax exemption will be granted by the Romanian state to each individual. The credit is granted at the level of the tax paid abroad, but it cannot exceed the tax due in Romania.

General tax credits

What are the general tax credits that may be claimed in Romania? Please list below.

Not applicable.

Sample tax calculation

This calculation3 assumes a married taxpayer resident in Romania with two children whose 3-year assignment begins 1 January 2018 and ends 31 December 2020. The taxpayer’s base salary is 100,000 US dollars (USD) and the calculation covers 3 years.

  2018
USD
2019
USD
2020
USD
Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Housing allowance 12,000 12,000 12,000
Company car 6,000 6,000 6,000
Moving expense reimbursement 20,000 0 20,000
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Interest income from non-local sources 6,000 6,000 6,000

Exchange rate used for calculation: USD1.00 = RON 4.1477. 

Other assumptions

  • All earned income is attributable to local sources.
  • Bonuses are paid at the end of each tax year, and accrue evenly throughout the year. Interest income is not remitted to Romania.
  • The company car is used for business and private purposes and originally cost USD50,000. Additionally, the car is an asset of the non-Romanian employer.
  • The employee is deemed resident throughout the assignment.
  • Tax treaties and totalization agreements are ignored for the purpose of this calculation.

Calculation of taxable income

Year-ended

2018

RON

2019

RON

2020

RON

Days in Romania during year

365

365

366

Earned income subject to income tax

 

 

 

Salary

414,770

414,770

414,770

Bonus

82,954

82,954

82,954

Cost-of-living allowance

41,477

41,477

41,477

Net housing allowance*

49.772

49,772

49,772

Company car**

705

705

705

Moving expense reimbursement***

82,954

0

82,954

Home leave

0

20,739

0

Education allowance

12,443

12,443

12,443

Total earned income

685,075

622,860

685,075

Other income****

24,886

24,886

24,886

Total income

709,961

647,746

709,961

Deductions

0

0

0

Total taxable income

552,349

573,088

552,349

* accommodation costs granted by an employer to an employee during business trips or assignments are not deemed as taxable income at the level of the employee, provided supporting documents are available (i.e. rental agreement, etc.). For the purpose of the calculation, we have considered that the monthly rent indicated in the rental agreement is USD12.000. Therefore, there are arguments to consider the entire housing allowance non-taxable benefit at the level of the individual.

** the use of company cars by its employees for personal purposes should be considered as benefit in kind and should be treated as taxable income at the level of the employees.

However as we have no information regarding the number of kilometers driven for personal purposes versus number of kilometers driven for business purposes we have assumed a personal usage of the car of 20 percent. In order to determine the value of the taxable benefit, 1.7 percent is applied to the entry value of the car.

*** reimbursement of relocation expenses by the employer to an employee due to business reasons, and granted in accordance with the law, should not be treated as taxable income at the level of the individual, provided supporting documents are available. For the purpose of the calculation we have considered that supporting documents are available covering the entire moving expense reimbursement, thus this amount has not been considered taxable benefit at the level of the individual.

**** Romanian tax residents are liable to Romanian income tax on their worldwide income, unless a tax residence certificate from a country with which Romania has concluded a treaty for the avoidance of double taxation cannot be obtained. Personal income received from abroad, other than salary income, is generally declared separately, through an annual tax return.

Calculation of tax liability

 

2018
RON

2019
RON
2020
RON

Taxable income as above

552,349

573,088

552,349

Romanian tax thereon

55,235

57,309

55,235

Less:

 

 

 

Domestic tax rebates (dependent spouse rebate)

0

0

0

Foreign tax credits

0

0

0

Total Romanian tax

55,235

57,309

55,235

Footnotes

1   Certain tax authorities adopt an "economic employer" approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country/jurisdiction for a period of less than 183 days in the fiscal year (or a calendar year or a 12-month period), the employee remains employed by the home country/jurisdiction employer but the employee’s salary and costs are recharged to the host entity, then the host country/jurisdiction tax authority will treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country/jurisdiction.

2   For example, an employee can be physically present in the country/jurisdiction for up to 60 days before the tax authorities will apply the ‘economic employer’ approach.

3   Sample calculation generated by KPMG in Romania, the Romanian member firm affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity, based on the Romanian Tax Code, Law no. 227/2015 in force beginning 1 January 2016.

Disclaimer

All information contained in this publication is summarized by KPMG in Romania, the Romanian member firm affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity, based on the New Romanian Tax Code, Law no. 227/2015 in force beginning 1 January 2016.

© 2020 KPMG Tax SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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