Romania is on the road to becoming an Eastern European tax haven for holdings as well as a generally attractive investment destination.
Throughout the last couple of years, the Romanian government initiated various tax measures intended to attract foreign investors to develop long-term operations in Romania. In fact, all these initiatives have marked the country on the map of European countries with the most favourable holding legislation, on the same level as well-known countries such as the Netherlands, Cyprus and Luxembourg.
Romania may be viewed on the route of becoming a regional business hub, with several legislative measures already supplemented:
- tax exemptions for capital gains and dividends (under certain conditions);
- a lower rate of corporate and personal income tax (16% represents one of the lowest tax rates in the EU);
- a large number of Double Taxation Treaties (DTTs) concluded with various countries.
- Of course, other steps have to be taken in order to aim for a regional/business hub:
- a modern Companies Law;
- tax consolidation at the level of the holding;
- an efficient tax administration (giving the possibility to quickly obtain advance tax rulings or advance pricing agreements); and
- legislative stability and predictability.
We need to first look at the corporate income tax rate of 16%, one of the most competitive taxes in all the EU Member States. Only Bulgaria (with 10%), Cyprus (with 12.5%), and Latvia and Lithuania (with 15%) have a lower rate. This 16% rate has been applicable since 2005 and it looks like the Romanian government will keep it unchanged for the coming period. This actually contributed a great deal to the stability of the Romanian corporate taxation environment and, consequently, is one of the factors that will certainly attract long-term investments in the country.
At the same time, the latest tax legislation amendments made by the government with regard to the taxation of dividends and capital gains also sustain this softer approach, which encourages a long-term vision of foreign investments, rather than a speculative approach that would have led to short-termism. The main reason behind all this is Romania's goal for the following years, namely its tax stability.
The most recent amendments to the taxation of dividends have brought a substantial reduction in the standard dividend tax rate from 16% to an attractive rate of 5%.
Also, it is worth noting that dividends distributed by a Romanian company to a non-resident company established in a state that has concluded a DTT with the country are tax-exempt if this non-resident company (either EU or non-EU member) holds a minimum of 10% of the Romanian company's share capital for a period of more than one year.
These provisions are actually more favourable than those of the Parent–Subsidiary Directive for dividend beneficiaries resident in EU Member States, while for those from non-EU countries with which Romania has concluded a DTT, this exemption is very often more advantageous than the dividend tax rate stated in the respective DTT.
Similarly, capital gains obtained following the sale of shares held in a company resident in Romania or in a country with which the country has concluded a DTT are tax-exempt if the beneficiary of these gains holds a minimum of 10% of that company's share capital for a period of more than one year.
As for the countries to which these favourable measures are applicable, we have to mention the fact that Romania is one of the EU Member States that has the largest number of DTTs concluded: 86, among which are all EU countries, almost all the other European countries, the USA and Canada, Australia, the largest four Arabian countries, 20 Asian countries, 12 African countries and three Latin American countries.
Comparably, the Netherlands, Cyprus and Luxembourg are renowned for favourable holding legislation, with approximately 94, 53 and 75 DTTs concluded respectively. We could say, therefore, that Romania has started to make its tax legislation comparable to that of the other EU Member States.
The recent implementation of a new Tax Code and new Tax Procedure Code has brought about many changes meant to encourage not just holdings but any type of investment in Romania.
Even though from a political perspective Romania has been relatively unstable due to high-level changes in government and a popular anti-corruption movement, the general direction seems to be towards a more efficient tax system, accompanied by a general reduction in taxation rates.
The most important tax developments are the reduction of the standard VAT rate from 24% to 20% and 19% in 2017, thus encouraging consumption, and the implementation of the reverse-charge mechanism for real estate transactions, which provides much needed simplification in this area, as well as a change regarding the taxation of buildings - which was previously differentiated based on the type of owner (giving rise to significant differences in taxation between corporate entities and individuals) - to a more equitable system based on the type of usage (i.e. business or residential).
Also worth noting is the Romanian Companies Law which, although it has a very modern approach, still contains certain provisions which do not fully encourage holdings.
However, the same cannot be said about the overall stability and predictability of Romanian tax legislation. In fact, a relatively recent analysis made by the lawyer Gabriel Biriș revealed that, over five years, the Romanian Tax Code and Tax Procedure Code had been modified by no less than 153 legislative acts. Therefore, we can say that with an average of more than 30 changes per year made to its two most important pieces of tax legislation, Romania cannot secure the tax legislation stability and predictability that any interested investor would seek. This is actually one of the main aspects that the Romanian government needs to improve in the future.
Another important aspect that Romania needs to improve is the regulation of tax consolidation in the Tax Code, which has not been done yet despite all the requests coming from the Romanian business environment. In practice, at this moment a parent company cannot act in a unitary manner from the tax point of view at the level of the entire holding, such that it may use the profits obtained by some of the companies within the group to offset losses sustained by some other companies within the group.
Perhaps one of the areas where Romania has the largest shortcomings is in the poor efficiency of its tax administrative system, although a recent influx of highly skilled individuals from the professional environment towards high-level management positions within the Romanian Ministry of Finance can be seen as a source of potential improvement in this specific area. The best indicator is the huge delays between taxpayers requesting advance tax rulings or advance pricing agreements and receiving them from the Romanian tax authorities.
To conclude, even if the latest holding tax legislation changes and tax rate reductions do not compensate entirely for the other defects of the Romanian tax environment, you might want to keep an eye on Romania, as it shows high potential to become an important regional hub for foreign investments, especially considering the latest changes, its importance within Eastern Europe and also future legislative modifications, which will hopefully improve the other conditions Romania has to meet in order to be fully compliant with the expectations any investor might have of a tax haven for holdings.
Originally published by Chambers Europe Guide.
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