Taxation of international executives
Income tax information 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.
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.
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?
What are the compliance requirements for tax returns in Romania?
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/territory with which Romania has concluded a DTT and the individual is present in that country/territory 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.
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/territory 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.
What are the current income tax rates for residents and non-residents in Romania?
Ten percent flat tax rate (10 percent).
Ten percent flat tax rate (10 percent).
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:
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/territory with which Romania has concluded a treaty for the avoidance of double taxation.
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/territory for more than 10 days after their assignment is over and they repatriate.
See residence rules above.
What if the assignee enters the country/territory 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/territory before the assignment is also taken into account for determining the 183-day limit of presence in Romania.
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/territory. Within 15 days of submission the tax authorities will 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.
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.
Will an assignee have a filing requirement in the host country/territory after they leave the country/territory 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.
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.
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?
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:
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):
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).
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.
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.
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.
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.
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.
Income from sale of real estate properties is non-taxable if the property is valued at less than RON450,000 (approx. EUR100,000). 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 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.
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 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.
Are there additional capital gains tax (CGT) issues in Romania? If so, please discuss?
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.
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.
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 EUR400 per year each contribution.
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.
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.
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.
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/territory 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.
What are the general tax credits that may be claimed in Romania? Please list below.
This calculation3 assumes a married taxpayer resident in Romania with two children whose three-year assignment begins 1 January 2016 and ends 31 December 2018. The taxpayer’s base salary is USD100,000 and the calculation covers three years.
|Moving expense reimbursement||20,000||0||20,000|
|Interest income from non-local sources||6,000||6,000||6,000|
Exchange rate used for calculation: USD1.00 = RON 4.1477.
Calculation of taxable income
|Days in Romania during year||366||365||365|
|Earned income subject to income tax|
|Net housing allowance*||49.772||49,772||49,772
|Moving expense reimbursement***||82,954||0||82,954|
|Total earned income||685,705||622,860||685,075|
|Total taxable income||577,235||597,974||577,235
* 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.
** the use of company cars by its employees for personal purposes should be considered
*** 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.
**** Romanian tax residents are liable to Romanian income tax on their worldwide
Calculation of tax liability
|Taxable income as above||577,235||597,974||577,235|
|Romanian tax thereon||95,676||92,358||57,725|
|Domestic tax rebates (dependent spouse rebate)||0||0||0|
|Foreign tax credits||0||0||0|
|Total Romanian tax||95,676||92,358||57,725|
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/territory 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/territory employer but the employee’s salary and costs are recharged to the host entity, then the host country/territory 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/territory.
2 For example, an employee can be physically present in the country/territory 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.
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