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Romania - Taxation of cross-border mergers and acquisitions

Romania - Taxation of cross-border M&A

This report addresses three fundamental decisions that face a prospective buyer undertaking a merger and acquisition (M&A) transaction from a Romanian perspective


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Central city fountain in Bucharest capital of Romania


This report addresses three fundamental decisions that face a prospective buyer undertaking a merger and acquisition (M&A) transaction from a Romanian perspective:

  • What should be acquired: the target’s shares or its assets?
  • What will be the acquisition vehicle?
  • How should the acquisition vehicle be financed?

Company law governs the legal form of a transaction, and accounting issues are also highly relevant when selecting the optimal structure. These areas are outside the scope of the report, but some of the key points that arise when planning M&As in Romania are summarized later in the report.

Asset purchase or share purchase

In Romania, an acquisition usually takes the form of a purchase of the shares of a company, as opposed to its business and assets (although the number of asset deals is increasing). The benefits of asset acquisitions for the buyer should not be ignored, particularly given that a step-up in the value of the assets can be recovered through depreciation (subject to specific considerations). Some of the tax considerations relevant to each method are discussed later in this report. The relative advantages are summarized at the end of the report.

Purchase of assets

A purchase of assets usually results in an increase in the base cost of those assets for both capital gains tax and capital allowances purposes, although this increase is likely to be taxable to the seller. However, goodwill is not recognized for tax purposes in Romania. In addition, historical tax liabilities generally remain with the company and are not transferred with the assets.

In principle, where the seller is declared insolvent (due to unpaid debts to the state), the buyer may be held liable for such debts where the insolvency was caused by the transfer of assets.

Purchase price

Where the transfer takes place between related parties and at below market value, there is a technical risk of a transfer pricing adjustment.


As noted above, amortization of goodwill is not tax-deductible.


Fixed assets purchased are usually booked at their acquisition cost and depreciated for tax purposes over their remaining useful life. Where assets are acquired for which the history is unknown or that have exceeded their normal life, new useful life must be established by a technical committee or expert. The useful lives of each category of assets are set by the government.

Tax attributes

Tax losses are not transferred on an asset acquisition. They remain with the company or are extinguished.

Value added tax

Valued added tax (VAT) is levied at the rate of 19 percent on a large number of goods and services, although goods dispatched outside Romania are not subject to VAT. The transfer of a business as a going concern is outside the scope of VAT, provided certain conditions are met.

Transfer taxes

Transfers of real estate may result in land/building registry taxes and notary fees of about 1 percent of the value of the transaction.

Purchase of shares

Where shares of a company are purchased, there is no change in the base value of its assets for tax purposes (i.e. no step-up in tax depreciation basis).

Capital gains derived by non-residents from a sale of shares are generally subject to 16 percent tax. However, an exemption may apply, provided that certain conditions are fulfilled (e.g. minimum 10 percent shareholding, minimum 1-year holding period, tax residency of the seller in a state with which Romania has concluded a double tax treaty).

Tax indemnities and warranties

In a share acquisition, the buyer is taking over the target company together with all related liabilities, including contingent liabilities. Therefore the buyer normally requires more extensive indemnities and warranties than in the case of an asset acquisition.

Where significant sums are at issue, it is customary for the buyer to initiate a due diligence exercise, which would normally incorporate a review of the target’s tax affairs.

Tax losses

Tax losses may be offset against future profits for a maximum of 7 years. There is no withdrawal of the tax losses carry forward right on a change of ownership or activity. Tax losses can only be carried forward, not back.

Tax losses recorded by companies that cease to exist due to a merger or demerger operation may be recovered by newly established taxpayers or by those that take over the assets of the absorbed or spin-off company, as applicable, proportional to the assets and liabilities transferred to the beneficiary legal entity, according to the merger/spin-off project.

Where a taxpayer does not cease to exist as a result of a transfer of part of its assets, the fiscal loss, transferred as a whole, is recovered by the taxpayer itself or by those that partially take over the assets of the transferring company, as applicable, proportional to the assets and liabilities transferred to the beneficiary legal entity, according to the merger/spin-off project or proportional to those maintained by the legal entity.

Pre-sale dividend

In certain circumstances, the seller may prefer to realize part of the value of their investment as income by means of a pre-sale dividend because the dividend may be subject to no or only a low effective rate of Romanian tax. This reduces the proceeds of the sale and thus any gain on the sale, which may be subject to a higher rate of tax.

Generally, a 5 percent dividend tax rate applies on dividends paid to non-residents (whether individuals or companies).

However, dividend payments made by a resident legal entity to an EU legal entity may be tax-exempt (subject to conditions, e.g. minimum 10 percent shareholding, minimum 1-year holding period).

Tax on dividends also may be reduced where payments are made to a company in a country or jurisdiction with which Romania has a tax treaty. Romania has concluded approximately 85 tax treaties with other countries/ jurisdictions.

Transfer taxes

Trade registry fees are due on the issue of share capital by a resident company or on registration of ownership of shares, but these fees do not depend on the value of the share capital and are modest (less than 1,000 euros (EUR)).

Choice of acquisition vehicle

Most foreign investors carry out business in Romania via either joint stock or limited liability companies.

Joint stock companies involve more extensive and formalized corporate governance structures than limited liability companies (e.g. more requirements for audit and board oversight). Therefore, a joint stock company generally is a suitable legal form for a business with a dispersed shareholder base. Only a joint stock company may be listed on a Romanian stock exchange.

For closely held businesses, the limited liability company is usually more suitable because of its simpler corporate governance structure and thus lighter administrative operating burden.

Investment via branches or unincorporated, tax-transparent entities (e.g. associations in participation) has the advantage of not being liable for tax on profits paid to the head office or shareholders/partners.

Local branch

As an alternative to the direct acquisition of the target’s trade and assets, a foreign buyer may structure the acquisition through a Romanian branch.

A branch is an extension of its parent company, so it has no legal personality and no financial independence. Where a foreign company has a branch in Romania, the foreign company may be held liable to any creditors of the branch, including employees, for any debts and obligations incurred by the branch. A branch may undertake only those activities that its parent company has been authorized to carry out under its constitutional deed

Romanian branches of foreign companies are subject to Romanian corporate tax on their profits.

Joint venture

Romanian law provides for various forms of business partnerships (‘tax transparent entities’), with particular legal and tax regimes. Such business partnerships may consist of two or more partners (individuals or legal entities). Special requirements in the law for partnerships may apply, depending on the agreement between partners, the tax residence of the partners (foreign or Romanian) and other matters.

From a tax perspective, the profits derived from an association are generally subject to 16 percent tax (either corporate tax, personal income tax or WHT).

The tax treatment of associations depends on the nature of the particular association and needs to be carefully investigated before implementation.

Choice of acquisition funding

A buyer using a Romanian acquisition vehicle to carry out an acquisition for cash needs to decide whether to fund the vehicle with debt, equity or a hybrid instrument combining characteristics of both. The principles underlying these approaches are discussed below.

Note that company law includes specific restrictions on financing the acquisition of shares in certain types of companies by third parties.


The principal advantage of debt is the potential tax- deductibility of interest (see ‘Deductibility of interest’). Another potential advantage of debt is the deductibility of expenses, such as guarantee fees or bank fees, in computing trading profits for tax purposes.

Where a long-term loan (granted for a period exceeding 1 year) is made by a non-resident lender, the National Bank of Romania (NBR) must be notified within 30 days of signing of the loan agreement. No such notification is required for short-term loans (granted for periods less than 1 year) unless the loan period is subsequently extended beyond 1 year.

Where it is decided to use debt, a further decision must be made as to which company should borrow and how the acquisition should be structured. To minimize the cost of debt, there must be sufficient taxable profits to offset the interest payments. The following comments assume that the buyer wishes to offset the interest payments against the Romanian target’s taxable profits. However, consideration should be given to whether relief would be available at a higher rate in another jurisdiction.

A Romanian company may be used as the acquisition vehicle, funding the purchase with debt either from a related party (i.e. debt pushdown) or directly from a bank. In principle, interest paid can be deductible for corporate tax purposes in Romania (see ‘Deductibility of interest’).

Deductibility of interest

The interest-deductibility rules that were in force until tax year 2017 (i.e. interest limitation cap and debt-to equity ratio) have been replaced. As of 1 January 2018, any excess borrowing costs (calculated as the difference between any debt-related costs – including capitalized interest – and income from interest and other economically equivalent income) incurred in a fiscal period that exceed the deductible threshold of EUR200,000 are deductible for corporate income tax purposes up to the limit of 10 percent of ‘tax earnings before interest, taxes, depreciation and amortization’ (EBITDA). The excess borrowing costs that are treated as non-deductible in a particular year can be carried forward indefinitely. The limitation also applies to any debt-related costs connected to loans from financial institutions. The tax EBITDA is determined as the gross accounting profit, minus non-taxable revenues, plus excess borrowing costs, plus deductible tax depreciation. If tax EBITDA is zero or negative, the excess borrowing costs are not tax-deductible during the current tax period but can be carried forward indefinitely.

These interest-deductibility rules also apply to financial institutions but not to independent entities (entities that are not part of a consolidated group for financial accounting purposes and do not have related parties and permanent establishments), which can fully deduct excess borrowing costs.

The new rules also apply to interest and foreign exchange losses carried forward and accumulated as of 31 December 2017. Some changes to these rules are expected to be adopted during 2018.

Checklist for debt funding

  • The use of bank debt may avoid transfer pricing problems.
  • 16 percent WHT applies to interest payments to non- Romanian entities unless a lower rate applies under a relevant tax treaty or EU directive.


A buyer may use equity to fund its acquisition, possibly by issuing shares to the seller in satisfaction of the consideration or by raising funds through a seller placing. Further, the buyer may wish to capitalize the target post-acquisition.

Generally, no capital duty or stamp duty tax is applicable to issues of new shares. Domestic law applies a 5 percent WHT tax on dividends paid by a Romanian company, but lower rates might apply under a relevant tax treaty or EU directive.

Although equity offers less flexibility should the parent subsequently wish to recover the funds it has injected, equity may be more appropriate than debt in certain circumstances. For example, where the target is loss making, it may not be possible to obtain immediate tax-deductibility for interest expenses.

There may be non-tax grounds for preferring equity. For example, in certain circumstances, it may be desirable for a company to have a low debt-to-equity ratio.

For mergers and demergers, the following tax rules apply:

  • By virtue of the EU Merger Directive, which has been incorporated in Romanian law, mergers and demergers are generally tax-neutral; in other words, the transfer of assets from one company to another company in a merger or demerger is not a taxable transfer. Likewise, the transfer of previously untaxed reserves (reserves created from gross profit) is not taxable, provided the reserve is booked in the same account in the absorbing company.
  • Assets transferred from one company to another company in a merger or demerger are recognized for tax purposes (including future tax depreciation purposes) at their tax base value on the transferring company’s books.
  • The right to carry forward interest expenses and net foreign exchange losses for taxpayers that cease operations due to a merger or demerger transaction may be transferred to newly established taxpayers, or to those that take over the assets and liabilities of the absorbed or divided company, as appropriate, proportionally with the assets, equity and liabilities transferred to the beneficiary legal entities, as provided in the merger/demerger plan.
  • For taxpayers that do not cease operations as a result of a merger or demerger transaction, the right to carry forward interest expenses and net foreign exchange losses must be divided between them and the taxpayers that partially take over the assets and liabilities of the transferor, proportionally to the transferred assets, equity and liabilities, according to the demerger plan.
  • Under an anti-avoidance rule, tax neutrality may not be achieved in cases where tax avoidance is the principal objective for the merger/demerger.

Contributions in kind are not taxable for the person making the contributions, provided that they are part of a transfer of a going concern. Otherwise, such operations are taxable transfers for corporate tax purposes, falling within the scope of the general VAT rules.

Where a company receives an asset from another company via a contribution in kind, the asset is recognized for tax purposes (including future tax depreciation purposes) at its tax base value on the transferring company’s books before the contribution.

Where a company contributes an asset to another company via a contribution in kind, the tax base value of the shares received in the second company is assumed to be the same as the tax base value of the assets contributed.


In practice, Romanian companies tend to issue ordinary share capital. More complex equity structures are unusual.

No Romanian law specifically applies to hybrid instruments, but debt may be re-characterized as equity, or vice versa, according to general anti-avoidance rules based on the principle of substance-over-form; that is, the tax authorities may disregard a transaction that does not have an economic purpose or may re characterize the form of a transaction to reflect its economic substance.

Other considerations

Concerns of the seller

Sale of assets

  • The sale of assets may create a taxable capital gain for the seller.
  • Capital gains realized by corporate entities are deemed to be corporate profits and are taxed at 16 percent. Transfer taxes (about 1 percent of the value) are also applicable where the transaction involves real estate.
  • Capital gains realized by individuals from transfers of real estate are subject to lower tax rates, depending on the value of the transaction.
  • Where all assets have been allocated to a specific line of business (which technically is a standalone unit capable of carrying out separate economic activities), the transaction could be viewed as a transfer of a going concern, so it may fall outside the scope of VAT.

Sale of shares

  • Any capital gain arising on the disposal of shares is subject to tax for the outgoing shareholders (individuals or companies).
  • Where the seller of the shares is an individual, the tax rate applicable to the realized gain is 10 percent of the gain earned on a disposal of shares, whether or not the companies are listed.
  • Capital gains obtained by companies from the sale of shares in Romanian companies are non-taxable, provided that certain conditions are fulfilled (e.g. minimum 10 percent shareholding, minimum 1 year holding period).
  • Non-Romanian sellers may be entitled to claim Romanian tax exemption under a tax treaty (subject to the treaty’s conditions).

Company law and accounting

The Company Law (Law 31/1990) prescribes how Romanian companies may be formed, operated, reorganized and dissolved.

Under this law, the term merger includes both acquisitions (fuziune prin absorbtie) and mergers (fuziune prin contopire). As such, a merger may be carried out as an absorption of the assets and liabilities of one or more companies by another company or as a transfer of the assets and liabilities of two or more existing companies to a newly formed company. A demerger involves the division of a company into two or more companies (whether existing and/or newly formed).

Group relief/consolidation

There are no corporate tax consolidation rules in Romania. It is not possible for the losses of one company to be offset against the profits of another group company or for companies in a group to offset the tax liabilities of one group company against the tax receivables of another group company. Each member of the group is treated as a separate entity.

VAT position consolidation is permitted in Romania (under specific conditions).

Transfer pricing

Romanian corporate tax law contains transfer pricing rules closely resembling the international principles of the Organisation for Economic Co-operation and Development (OECD). Adjustments to the tax base are possible based on the arm’s length principle (but they are unlikely for domestic transactions).

The Romanian Fiscal Procedure Code requires taxpayers who carry out transactions with related parties to prepare a transfer pricing file with proper documentation and present it to the fiscal authorities on request. The file’s purpose is to illustrate how the transfer prices used by the taxpayer in transactions with related persons were set and demonstrate that the prices were set following the arm’s length principle.

Companies are considered as ‘related parties’ under Romanian legislation where there is a minimum 25 percent direct or indirect shareholding and/or economic control.

Taxpayers who carry out transactions with related parties may approach the tax authorities for an advance pricing agreement (APA). An APA is an agreement between a taxpayer and the tax administration for a fixed number of years that specifies the methods for determining transfer prices for future transactions between related enterprises. The fee for granting the APA ranges from EUR10,000 to 20,000. The fee for amending a completed APA ranges from EUR6,000 to 15,000. To date, APAs have been uncommon in practice.

Comparison of asset and share purchases

Advantages of asset purchases

  • Generally, no previous liabilities are inherited.
  • More flexibility in funding.
  • Possible to acquire a part of the business.
  • Step-up in taxable base of assets.

Disadvantages of asset purchases

  • Need to re-negotiate supply, employment and technology contracts.
  • Unattractive to seller, so buyer likely to pay premium.

Advantage of share purchases

  • More likely to be attractive to seller, so the price may be lower.
  • May gain benefit of existing supply or technology contracts.
  • May be simpler and involve lower transaction-related fees.

Disadvantage of share purchases

  • Liable for any claims or previous liabilities of the entity.
  • No step-up in taxable base of assets.

KPMG in Romania

Ramona Jurubita
DN 1, Sos. Bucuresti-Ploiesti nr.69-71
P.O. Box 18-191
Sector 1

T: +40 741 800 800

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