Tax alert 37 – Amendments brought to the Tax Code

Government Emergency Ordinance no. 79/8 November 2017 for amending and completing the Law no. 227/2015 regarding the Tax Code, published in the Official Gazette no. 885 of 10 November 2017.

Amendments brought to the Tax Code

We have summarized below the main amendments brought to the Tax Code according to the Government Emergency Ordinance no. 79/8 November 2017 for amending and completing Law no. 227/2015 regarding the Tax Code published in the Official Gazette no. 885 on 10 November 2017. The provisions will enter into force from 1 January 2018.

Corporate Income Tax

The amendments brought to the corporate income tax provisions refer to the transposition into the Tax Code of the provisions of the 2016/1164 EU Council Directive of 12 July 2016 laying down the rules against tax avoidance practices that directly affect the functioning of the internal market (“ATAD”).

New provisions are introduced in relation to:

Deductibility limitation of interest and of other costs economically equivalent to interest (these provisions replacing the provisions of art. 27 “Interest expenses and foreign exchange differences“), including:

  • The new provisions are applicable also for banks and non-banking financial entities, as well as in relation to borrowing costs owed to them;
  • The borrowing costs include, for example, also the interest capitalized in the accounting value of an asset, arrangement fees, etc.;
  • The taxpayers can deduct, during a fiscal period, the exceeding borrowing costs (the amount by which the borrowing costs exceed the interest revenues) up to the deductible limit of the RON equivalent of EUR 200,000 (the exchange rate to be used will be the one from the last day of the fiscal quarter/year, as the case may be);
  • The exceeding borrowing costs, which exceed the above mentioned limit, will have limited deductibility, in the fiscal period in which they are incurred, up to 10% from the basis of calculation;
  • The basis of calculation for the deductible exceeding borrowing costs will be: total revenues – total expenses – non-taxable revenues + corporate income tax expense + exceeding borrowing costs + deductible tax depreciation (adjusted EBITDA);
  • In case the basis of calculation is negative or is equal to zero, the exceeding borrowing costs will become non-deductible in the fiscal period in which they are incurred and they will be carried forward for an unlimited period of time under the same deduction conditions;
  • By way of exception, the taxpayers who are independent entities, not part of a consolidated group from a of financial accounting perspective and have no affiliated entities or permanent establishments, will be able to fully deduct the exceeding borrowing costs, during the fiscal period in which are incurred;
  • The new provisions are applicable to interest expenses and net foreign exchange losses carried forward according to art. 27. In case of independent entities, these carried forward costs will be totally deductible.

Fiscal regime of transferred assets, tax residency and/or economic activity carried out through a permanent establishment for which Romania loses its right to tax:

The exit tax will be calculated by applying the tax rate of 16% to the difference between the market value and the fiscal value of the transferred assets;

There will be a mechanism of rescheduling the payment over a five-year period in case of transfers in which EU Member States or countries part of the EEA Agreement are involved;

Exit taxation will be applied for the following types of transfers:-assets transferred from the permanent establishment in Romania to its head office or another permanent establishment in another EU Member State or third country, in so far as Romania no longer has the right to tax the transferred assets;-transfer of business carried on in Romania through a permanent establishment to another EU Member State or a third country, in so far as Romania no longer has the right to tax the transferred assets.

  • transfer of the tax residency from Romania to another EU Member State or third country (with the exception of assets that remain    effectively linked to the permanent establishment from Romania);
  • assets transferred from the head office in Romania to its permanent establishment in another EU Member State or third country, in so far as Romania no longer has the right to tax the transferred assets

General anti-abuse rule:

  • For the purpose of calculating the corporate income tax liabilities, there shall be ignored an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage and not for commercially valid reasons that reflect the economic reality. In this case, the tax liability is computed according to the Corporate Income Tax chapter.

Controlled foreign company rule:

  • Based on the rules on controlled foreign companies, there will be included in the tax computation base certain types of non-distributed revenues (interest, royalities, financial lease revenues, insurance revenues, etc.) proportionally to the taxpayer’s participation in the controlled entity;
  • A company will be treated as a controlled foreign company of a corporate income tax taxpayer, if the following conditions are met at the same time:
  • the taxpayer, by itself or together with its associated companies, holds more than 50% of the voting rights, holds directly or indirectly more than 50% of the capital of the controlled entity or is entitled to receive more than 50% of the profits of that entity; and
  • the actual corporate income tax paid by the entity or permanent establishment on its profits is less than the difference between the corporate income tax that would have been charged on that entity or permanent establishment within the Romanian corporate income tax system and the actual corporate income tax paid on its profits by the entity or permanent establishment (in principle, the tax rate applicable in the other country should not be below 8%, with certain adjustments).
  • The provisions are applicable also to the permanent establishments from the EU Member States/third countries, whose profits are not subject to or are exempt from corporate income tax in Romania;
  • Some exceptions to the application of the above provisions are also provided.

 

Tax on income derived by micro-enterprises

The amendments brought to the provisions related to the tax on income derived by micro-enterprises refer mainly to:

  • There will be included in the micro-enterprise income tax regime the taxpayers that are currently performing activities exempt from this regime (e.g. banking, insurance, reinsurance, capital markets, gambling, exploration, development and exploitation of oil and natural gas resources, etc.), as well as those who obtain revenues from consulting and management activities over 20% of the total revenues;
  • The threshold for qualifying as micro-enterprises was increase from EUR 500,000 to EUR 1,000,000;
  • The option of applying the corporate income tax regime (instead of the micro-enterprises income tax regime) by newly set-up legal entities that hold a minimum share capital of RON 45,000 was removed. Through this provision, the legislation goes back to the legislation applicable before the introduction of the option possibility, not allowing, for example, the recognition of tax losses by companies that have in the investment phase high expenses, but income under the threshold that allowed for the application of the corporate income tax regime;
  • The new provisions will be applicable inclusively for the taxpayers which until 31 December 2017 are excluded from the application of the micro-enterprise income tax regime or chose to apply the corporate income tax regime.  

The micro-enterprise income tax rates remained the same, meaning 1%, respectively 3%, depending on the number of employees.

 

Income tax  

Decrease of the income tax rate

The Ordinance provides for the decrease of the income tax rate from 16% to 10% for income from independent activities, salaries and assimilated to salaries, rental, investment, pension, agricultural activities, forestry and aquaculture, prizes and other sources, except for which the Tax Code provides different quotas.

 

Independent activities

For income from intellectual property rights, the advanced income tax rate which is withheld at source has been reduced from 10% to 7%. For taxpayers who obtain such income and opt for final income tax withholding at source, the final income tax of 10% withheld at source will be applied to the gross income decreased by the lump-sum expense of 40%. We note that the previous provisions were allowing the deduction of the social contributions withheld at source. For changes regarding the obligation of social contributions payment for such income, please consult the “Social contributions” part below.

Health insurance contributions paid by individuals performing independent activities will no longer represent deductible expenses for income tax purposes.

 

Income from salaries and assimilated to salaries

The Ordinance stipulates the increase of the minimum monthly gross income for personal deduction from 1.500 lei to 1.950 lei and of the maximum one from 3.000 lei to 3.600 lei. The personal deduction will range between 15 lei and 1.310 lei, depending on the number of dependents and income earned.

Transitional provisions 

For income obtained in the 2017 fiscal year, the applicable tax liabilities are the ones in force when the income was obtained.

The amendments regarding the income tax apply for the income obtained and the costs incurred as of 1st of January 2018.

The changes of the tax liabilities for income from salaries and assimilated to salaries, as well as for pension income, will apply starting with income related to the month of January 2018.

 

Social contributions

Social security contribution (pension)

The Ordinance provides for the following social security contribution rates:

    • 25% due from employees;
    • 4% due from employers, for particular work conditions;
    • 8% due from employers, for special work conditions.

The monthly computation base for the social security contribution has been amended for individuals who obtain income from independent activities higher than the national minimum gross income. As such, the tax payer may choose the monthly income for social security insurance and payment purposes, but, it cannot be lower than the national minimum gross income in force in the month for which the contribution is due.

Health fund contribution

The Ordinance provides for the health fund contribution rate of 10%, being due from the employees or from other individuals who are liable to pay the health fund contribution. The health insurance contribution is due from the individuals who obtain a cumulated annual income equal to, at least, 12 national minimum gross salaries, from the following types of income:

-income from association with a legal person;

-investment income;

-income from agricultural activities, forestry and aquaculture;

income from rental of goods;

-income from independent activities;

income from other sources.

The monthly computation base for the health fund contribution due from individuals who obtain the abovementioned types of income is the national minimum gross salary in force in the month for which the contribution due. Thus, even if the individuals obtain salary income or income from independent activities, they are liable to pay the health fund contribution also for the other types of income, at the computation base indicated above. Also, the individuals who obtain rental income, will continue to be liable for health fund contribution payment, but the computation base will be the national minimum gross salary in force in the month for which the contribution is due.

The individuals who are liable to pay the health fund contribution for the above mentioned types of income will have the obligation to file annually a statement regarding the income obtained as follows:

  • either within 30 days from the date when the event occurred (in case of estimated income reporting for income tax purposes); or
  • by 31st of January of the year following the year the income was obtained (e.g., investment income, income from other sources).

For individuals who obtain income below the threshold provided by the law, the filing of the statement and contribution payment are optional.

 

Work insurance contribution

The work insurance contribution is due from employers or individuals assimilated to employers for income from salaries and assimilated to salaries.

The work insurance contribution of 2.25% is due for income from salaries and assimilated to salaries.

The work insurance contribution is due to be reported and paid by the 25th of the following month the income relates to.

 

Transitional provisions

For income obtained prior to 2018 fiscal year, the social contributions are the ones in force in the period to which the income relates to.

The amendments related to social contributions apply for the income obtained as of 1st of January 2018.

 

Value Added Tax  

The case-law of the Court of Justice of the European Union („CJEU”) is part of the European Union acquits, and, thus, Romania, as an EU member State, was required to comply with it as of 2007. However, the specific provision regarding the fact that, in the field of VAT, the tax authorities must take into account the EU case-law was only introduced in the Tax Code in 2016.

According to CJEU decisions, the VAT deduction right is a fundamental principle of the common VAT system which cannot, in principle, be limited. As an exception, the VAT deduction right may be denied to a taxable person by the competent tax authorities only if it is established, based on objective evidence, by means provided by the law, that the taxable person knew or should have known that the operation in relation to which the VAT deduction right is requested is involved in a fraud which occurred either downstream or upstream, within the supply chain.

Starting with 1 January 2018, the possibility that the tax authorities deny the VAT deduction right in situations such as the one mentioned above, established beyond any doubt, will be expressly provided by the Tax Code.

Thus, we recommend companies to check if they were in situations where their VAT deduction right was refused by the tax authorities further to discovering the existence of a fraud within the supply chain, without the latter proving that the company whose deduction right was denied had information in respect of the fraud. If such cases are identified, companies can analyze the possibility of recovering the refused VAT amounts, taking into account also the new provisions.

 

Excise tax

The amendments envisaged to be brought to excise taxes refer to the sanction of the holding outside a tax warehouse or the commercialization on Romanian territory of excise goods subject to marking, without being marked, marked inadequately or falsely marked, by confiscation of tankers, containers and methods of transportation used in the transport of above-mentioned excise goods.

The new measure for the confiscation of the transportation means will require an increased attention from the taxpayers regarding the correctness and completeness of the transportation documentation and the compliance with the legislation applicable for the transported goods. We recommend the review of all processes and procedures relevant for such transports.

 

Local taxes

The car tax related to cars used for transport of goods with a total weight of at least 12 tons and the combination of cars, articulated cars or road trains, used for transport of goods with a maximum authorized weight equal to or above 12 tons will be increased (mainly with under 10%);

It is clarified that the taxpayers will be able to pay half of the minimum value of a fine, in case of payment within 48 hours from the date of issuing the minutes or, as the case may be, from the time of its communication.

 

Authors:

Cristina Clujescu – Tax Senior Manager

Stela Andrei – Tax Senior Manager

Catalina Cambei – Tax Manager



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