Personal income taxation

08.02.2013 ZF English

Standard rate: 16%

Taxpayers

Romanian tax residents are liable to Romanian tax on their worldwide income, whereas non-Romanian tax residents are liable to Romanian tax on their Romanian source income.

Tax residence

An individual is considered to be a Romanian tax resident if he/she meets at least one of the following conditions:

• The individual has his/her domicile in Romania (as proved by a valid ID card).
• The individual has his/her 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 fiscal year concerned.

Non-Romanian individuals are liable to Romanian tax only on their Romanian source income during the first year in which they meet the residence test (i.e. they exceed 183 days of presence during any 12 month period ending in the year concerned or they have their center of vital interests in Romania). However, if they still meet the residence conditions during the second consecutive year, they may become liable to Romanian income tax on their worldwide income starting with this second year, unless they can provide a certificate of tax residence from another country with which Romania has concluded a treaty for the avoidance of double taxation.

Romania has concluded Double Taxation Treaties with more than 80 countries around the world (see Annex 1). Most of these treaties are based upon the OECD Model Tax Convention on Income and Capital. If an individual qualifies as a resident of one of the two states, the relevant treaty can be applied.

The 16% tax rate applies to the following types of income:

• Income from independent activities
• Income from dependent activities
• Rental income
• Investment income
• Pension income
• Farming income
• Prizes
• Income from transfer of immovable property
• Other income

For investment income and income from transfer of ownership of immovable goods, see below applicable tax rates.

Income from independent activities is defined as:

• Income earned by freelancers
• Trade income
• Intellectual property rights

Income from independent activities (including freelancers, copyrights and similar revenue) is taxed at the 16% flat rate. The taxable base is calculated differently, as specific deductions are applicable, depending on the type of income.

An annual tax return for income from independent activities must be filed no later than 25 May for the previous tax year. After the annual tax return is filed, the tax authorities issue a tax assessment establishing the personal income tax due. The income tax must be paid within 60 days of the receipt of the tax assessment.

Employment income

Employment income includes income in cash and in kind. As a rule, all types of remuneration and benefits received by an employee for dependent activities are deemed as taxable regardless of where they are paid or received.

Monthly income from salary is subject to a 16% flat tax rate, applied to a base determined by deducting from the gross income:

• Mandatory social security contributions.
• Personal deductions allowed, if any.

• Monthly trade union contribution, if applicable.
• Contributions to a voluntary pension scheme (up to EUR 400 per year), if applicable.

Individuals earning only salary income under a local Romanian contract do not have to file a tax return. The employer withholds and pays all salary taxes and social contributions to the state budget.

Salary income earned by employees whose activity consists of computer software development is tax exempt, subject to certain conditions stipulated by Government Order.

Rental income

Rental income is subject to the 16% flat tax rate. However, a 25% notional deduction is available.

Income from prizes and gambling

Income from prizes above RON600 gross is taxed at 16%. Net income from gambling exceeding 600 RON is taxed at 25%.

Investment income

Capital gains from transfer of securities (including shares in limited liability companies) are taxed at 16%.

Dividends are taxed at 16%. Romanian resident legal entities paying dividends to individuals (residents or non-residents) have an obligation to withhold tax.

Income derived from foreign exchange/interest rate transactions (e.g. currency forward, currency and interest rate swap and options) is taxed at 16%. Losses from such transactions may be offset against similar gains.

Income from liquidation of a company (i.e. distributions in cash or in kind in excess of the contribution to the share capital) is taxed at 16%, to be withheld by the legal entity distributing the income.

Income from transfer of immovable property

Gross proceeds earned from sale of real estate are subject to a tax of 3% of the value of the property if sold within 3 years of purchase or 2% if sold after 3 years or more. For sales with a value over RON 200,000, the tax payable for income above this threshold is reduced to 2% if the property is sold within 3 years of purchase and 1% if sold after more than three years.

Taxation of Expatriates

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Immigration requirements

Generally, non-EU/EEA individuals who work in Romania either as assignees of a non-EU/EEA employer or as local employees of a Romanian employer must obtain work permits. The work permit for non-EU/EEA individuals who are assigned to work in Romania is generally issued for a 1-year period within a 5-year interval. If the individual wishes to continue to work in Romania after the initial 1-year period of assignment, he or she must obtain another type of work permit and conclude a local employment contract with a Romanian employer.

Nationals of EU/EEA member states do not require Romanian work permits. In addition, non-EU/EEA individuals who are employed by EU/EEA-based companies, who are assigned to work in Romania and have a valid residence permit in the respective EU/EEA country, are not required to obtain Romanian work permits, but only residence permits from the local Immigration Office.

Foreign citizens earning salary income for activities carried out in Romania and who are liable to Romanian income tax must register with the fiscal authorities. Currently, the Romanian immigration authorities issue a personal number to each non-Romanian national applying for a registration certificate/residence permit, and the same number is also used for tax purposes, as a personal tax number of the individual.

Foreign individuals liable to Romanian income tax must submit monthly income tax returns and pay tax (16%) by the 25th of each month for the previous month.

In terms of social contributions, for EU/EEA individuals the EU social security regulations apply. For non-EU/EEA individuals, where no bilateral social security convention is in place, Romanian law applies.

Taxation of non-residents

Non-residents are defined as: (i) Individuals who do not meet any of the residence conditions mentioned above (ii) Legal entities incorporated abroad and (iii) Undertakings for collective investment in transferable securities (UCITSs) which do not have legal status and are not registered in Romania.

Non-residents are liable for Romanian tax on Romanian-source income, which includes:

• Income attributable to a permanent establishment if the non-resident entity carries out independent activities through a permanent establishment in Romania.
• Income from dependent activities carried out in Romania.
• Income from services (including management or consulting services in any field).
• Dividends, royalties, and interest income derived from Romania.
• Income from independent activities carried out in Romania by doctors, lawyers, engineers, dentists, architects and auditors or income from other similar professions (in certain cases).
• Income representing remuneration received by non-residents who serve as administrators, founders or members of the Board of a Romanian legal entity.
• Income from prizes received in Romania.
• Income derived from sporting and entertainment activities performed in Romania.

Withholding tax

The following withholding tax rates are applicable to the gross income earned by non-residents from Romania:

• 16% - the general withholding tax rate, applicable to payments made towards non-Romanian entities in respect of dividends, interest, royalties, service fees (irrespective of the place of effective supply), liquidation proceeds, commission fees, capital gains etc.
• 25% for income from gambling activities.
• 50% for dividends, interest, royalties, commissions, income from rendering services in or outside Romania as well as income from carrying out a liberal profession, if this income is paid to a non-resident from a state with which Romanian has not concluded a treaty for the exchange of information and if the income is paid in relation to "artificial transactions" as defined under the Fiscal Code.

The tax rates mentioned above may be reduced (or eliminated) by virtue of a treaty for the avoidance of double taxation concluded between Romania and the residence country of the income recipient. For the purposes of applying the more beneficial tax treatment provided by tax treaties, a tax residency certificate should be obtained by the non-Romanian revenue recipient, issued by the tax authorities in its home country (and made available to the Romanian paying entity).

Also, the following types of income are exempt from withholding tax in accordance with EU legislation:

• Dividends paid to an EU/EFTA company, provided that the recipient holds at least 10% of the shares of the Romanian company for an uninterrupted period of at least 2 years. If payment of the dividend is made earlier (i.e. the 2-year holding period has not been fulfilled), then the exemption does not apply; but once the 2-year period elapses, the dividend recipient is entitled to claim a reimbursement from the Romanian tax authorities in respect of the withholding tax incurred in Romania;
• Interest and royalties paid to an EU/EFTA company, under the condition of direct minimum shareholding of 25% for at least 2 years.

Foreign legal entities that obtain income from immovable property (sale, lease) located in Romania or from the sale-assignment of participation titles in a Romanian legal entity are required to pay 16% profit tax.

Withholding tax is generally payable by the 25th of the month following that in which the payment was made abroad.

Double taxation relief

The method provided under domestic tax legislation for double taxation avoidance is the tax credit.

Relief from double-taxation for resident taxpayers may be provided by way of a tax treaty. Romania has concluded Double Taxation Avoidance Treaties with more than 80 countries around the world (please see the list below). Most of these treaties are based upon the OECD Model Tax Convention on Income and Capital.

* Treaty concluded with F.S.R. Yugoslavia, in force since 1989, applies to Bosnia-Herzegovina
** Treaty concluded with F.R. Yugoslavia, in force since 1998, applies to Serbia and Montenegro

Representative Offices

Authorized Representative Offices of foreign legal entities are required to pay an annual tax of the RON equivalent of EUR 4,000.

The tax on representative offices is payable in two equal instalments, by 25 June and by 25 December. An annual return also needs to be filed with the appropriate tax authority by 28 (or 29) February, covering the previous tax year up to 31 December.

Source: KPMG - Investment in Romania report (May 2013)