All legal entities doing business in Romania are liable to pay corporate income tax ("profit tax") on their taxable profits.

The actual profit tax rate is 25% applicable to both Romanian incorporated companies and to foreign legal persons operating through a "permanent establishment" in Romania. A reduced profit tax rate of 5% is applicable in case of exports of own goods and services. This is conditional on the hard currency proceeds being received in a Romanian bank account. The amount representing the tax difference between the 25% rate and the 5% rate cannot be distributed as dividends, but may be used as own financing funds (i.e. for the acquisition of assets from local or offshore markets).

From 1 August 2001, all companies obtaining revenues from exports of their own goods (whether direct or by a commission contract) or services, cashed in a Romanian bank account, must contribute to the "Romania fund" by applying 1% to the portion of the taxable profit, corresponding to export revenues from the total amount of revenues of the company. This is in addition and separate from the 5% profit tax that applies to such revenues.

The taxable income is determined based on the accounting income adjusted for tax purposes. Generally, only expenses related to obtaining revenues are tax deductible. The main non-deductible expenses are: expenses not based on specific justifying documents, provisions and reserves higher than the legal limits, contractual penalties and fines due to foreign businesses and to both Romanian and foreign authorities, social expenses over the legal limit. Protocol expenses are deductible up to 2% of profit and sponsorship expenses are deductible up to 10% of profit. Expenses relating to services provided by non-residents are non-deductible for profit tax purposes (e.g. management and consulting) if their payment creates operational losses for a tax year or they are not recovered through the selling price.

It is compulsory for a company to create a legal reserve of 5% of the annual accounting profit before tax until it reaches 20% of the company's share capital. The legal reserve thus created can be deducted from the taxable base when computing the profit tax.

Dividends received by a Romanian legal person from another legal person, whether foreign or Romanian, are not subject to profit tax. On dividends paid by all Romanian companies a 10% dividend tax is applicable for the dividends distributed to legal persons and 5% for those distributed to natural persons. These rates are subject to treaty relief. The dividends may be distributed only after the submission of the annual Balance Sheet (15th April of the following year). No interim dividend distribution is allowed.

Profit tax is computed monthly on a cumulative basis for the calendar year (which is the Romanian fiscal year). It is paid quarterly by 25th of the month following the quarter it relates to.

If tax on profits/income is paid abroad, whether directly (related to a permanent establishment abroad) or by withholding it from the taxpayer's revenues obtained abroad, this tax can be deducted from the profit tax payable in Romania.

The profit tax rates are reduced by 50% for profits reinvested during the current fiscal year in fixed assets. This tax saving also cannot be distributed as dividends, but can be used as own financing funds.

A 5-year loss carry forward period is allowed. The fiscal losses cannot however be carried forward in case of a merger or a split. Loss carry-back is not permitted.

Currently there are no thin capitalisation rules in Romania.

The main fiscal incentives in force are for companies operating in certain areas (disfavoured zones, free trade zones, industrial parks) or for companies, which observe certain conditions (i.e. small and medium sized enterprises).

Recently a Direct Investment Law applicable to cash investments of a minimum of USD 1 million or equivalent has become effective. These fiscal facilities mainly include:

·         Customs duties and VAT exemption for specific imports (i.e. equipment, know-how, installations, means of transport, raw materials, other depreciable assets) under certain conditions;

·         Profit tax reduction or exemption for specific cases;

·         Utilization of accelerated depreciation.

Non-resident legal and natural persons obtaining income from Romania are subject to the following main withholding taxes if there are no overriding provisions in international treaties:

·         15% on royalties;

·         10% on interest (bank deposit interest paid by Romanian banks are excepted);

·         15% on commissions;

·         15% on revenues obtained from technical assistance and most other services if they are performed in Romania;

·         15% on revenues from international transport activities.

The Double Taxation Agreements signed by Romania may reduce the withholding tax rates on the payments listed above. The Romanian authorities are frequently aggressive in collecting withholding tax, often disregarding international conventions on how treaties should be applied.

6.1. Rates, payments

The Romanian VAT legislation generally follows the provisions of the EU Sixth VAT Directive. A 19% VAT rate is applicable in Romania. The export of goods and services are exempted from VAT with the right of deduction.  VAT should be paid monthly by the 25th of the month following the month to which it relates.

6.2. VAT exemption

A VAT exemption applies to a range of activities including banking, finance and insurance, types of research and development work. Romanian legislation also includes the concept of exemption with input VAT recovery.

6.3. Import VAT

VAT on imported goods is in general payable at the time the import declaration is registered at the customs office. In certain circumstances, the payment of import VAT can be postponed for 60 or 120 days, subject to a prior authorisation issued by the Ministry of Finance. This procedure applies to installations, equipment (imported for investment or for developing existing capacities) and certain raw materials.

The taxation base for import VAT includes customs value, customs duty, customs commission and excise tax (if applicable) paid on the value of the goods in question.

6.4. VAT reverse charge

The import of services is also subject to VAT under a reverse charge mechanism. According to the Romanian VAT legislation, VAT reverse charge is payable by Romanian companies established in Romania in respect of services performed in Romania by foreign entities located abroad.

The reverse charge VAT is payable to the authorities within seven days from receipt of the invoice from the foreign supplier. Subject to eligibility, the reverse charged VAT could then be treated as input VAT on the beneficiaries' next VAT return.

6.5. Fiscal representation

Foreign businesses can only register for VAT in Romania through a fiscal representative. In this case VAT on services and goods supplied in Romania is accounted for through a return submitted by the fiscal representative. The foreign business can recover VAT costs incurred through the returns.

6.6. VAT administration

Suppliers subject to VAT must keep complete and detailed records for the computation of the VAT liability. VAT returns are submitted on a monthly basis, by the 25th of the following month, together with any VAT owing.

If a company is in a VAT reimbursable position, it is entitled to request a refund according to specific provisions, depending on its activities. Alternatively, the balance can be carried forward against VAT liabilities arising in future returns. In practice, if a refund is requested it can often take some months for the money to be paid over.

The VAT Law stipulates the possibility of granting VAT returns without immediate control from the fiscal authorities, on basis of risk analysis criteria.

7.1. Excise tax is applied on imports and production of excisable goods (i.e. alcohol, cigarettes, coffee, fuel and perfumes) and on some electric home appliances such as microwave ovens, video cameras or air conditioning units.

7.2. Clearance fees - a customs commission of 0.5% is applied to the declared customs value of the imported goods. If the goods are originated in the above mentioned "trade blocs", no customs commission applies.

A commission of Euro 8 per customs declaration is also applied for each customs declaration submitted and processed through ASYCUDA system (the national computerised system for processing the customs declarations).

7.3. Road tax - a lump sum tax of Euro 110/ton (for diesel oil), or Euro 125/ton (for gas) is payable for fuel oils bought from domestic producers or imported. The road tax is included in the taxation base for VAT.

Romania has signed a significant number of bilateral Double Tax Treaties. Most of these treaties follow the OECD model (see Tables 1 and 2).

Table 1. Double taxation agreements to which Romania is a party

The Double Tax Treaties prevail over domestic legislation, provided that a certificate confirming the fiscal residency of the beneficiary of the payment made abroad is issued for Romanian taxpayers.

Table 2. Withholding tax rates provided by some DTAs

                        Note:    X Not stipulated

              * The lower rate provided either by DTA or domestic legislation would apply