Newsletter November 2017

NEW FISCAL REQUIREMENTS FOR MULTINATIONAL GROUPS OF COMPANIES

New fiscal requirements (i.e. notification and / or reporting obligations) in the area of transfer pricing will be imposed on Multinational Enterprise Groups (MNE) operating in Romania and fulfilling certain criteria from the 2017 financial year onwards. These new requirements are a consequence of the transposition of the EU Directive 2016/881 into national legislation by means of the Emergency Ordinance 42/2017, which came into force on 23 June 2017. They shall apply to all reporting years beginning on or after 1 January 2016.

Multinational Enterprise Groups which (i) have a related party in Romania, a branch or permanent establishment of a foreign company in Romania and (ii) which have registered a consolidated group revenue of more than EUR 750 million in the fiscal year immediately prior to the fiscal year under review (i. e. fiscal year 2015) must meet the following additional tax obligations:

• Obligation to notify the Romanian tax authorities (including information on the name of the company, tax number, tax domicile, fiscal year of the group / Romanian company). General deadline for submission of the notification: The application is due by the last day of the MNE Group’s reporting fiscal year, but no later than the deadline for filing a tax return for the respective constituent entity for the preceding fiscal year. Special case: According to the current tax regulations, the deadline for 2016 should have been set at 25 March 2017. However, since (i) the legislation governing the reporting obligation has not been published until after 25 March 2017 and (ii) the legislation governing the content of the notification is still drafted and not yet published, further clarifications are expected in the short term as to when to prepare and submit the notification to the local tax authorities.
• Obligation to prepare and submit a country-by-country (CbC) report (report with aggregated information for each jurisdiction in which the MNE Group operates, including aggregated information on: total revenues, gross profit/loss, income taxes paid/deferred, reported capital, accumulated profits, number of employees and property, plant and equipment, and tax sovereignty and tax liability information)
  Deadline for submitting the CbC report: within 12 months after the last day of the MNE Group’s reporting year (the first deadline for submitting the CbC report is therefore 31 December 2017 – if the Group’s reporting year corresponds to the calendar year). As mentioned above, the legislation regulating the exact content of the report has not yet been published.
  The specific obligations of the local part of the MNE Group and the deadlines to be met under Romanian tax legislation depend on the status of the Romanian company within the Group (i.e. ultimate parent controlling the MNE Group/surrogate parent/designated constituent entity/ constituent entity) and on whether certain conditions for simplifying the automatic exchange of information between Romania and the country in which the reporting entity has its tax domicile apply.

Failure to provide the CbC report, failure to comply with the deadline or incomplete/incorrect provision of data will be punishable by penalties of up to RON 100,000 in accordance with the Romanian tax law.

EMERGENCY ORDINANCE NO. 79/2017 FOR THE AMENDMENT AND SUPPLEMENTATION OF THE TAX CODE (APPLICABLE FROM 1 JANUARY 2018)

1. TAX FOR MICRO-BUSINESSES

• The conditions for classifying a legal entity as a microenterprise change with effect from 1 January 2018, according to which companies with revenues of less than €1,000,000 (previously €500,000) as at 31 December of the previous year are considered to be microenterprises. Furthermore, the exemption is abolished, according to which companies with consulting and management revenues of more than 20% of total revenues may not be micro-enterprises.
• As a reminder: Miko companies pay taxes on the basis of the revenues generated and not on their profits.

2. PROFIT TAX 

Deductibility of indebtedness costs

• Up to now, a company’s debt to equity ratio has been decisive in determining whether expenses related to loans granted by affiliated companies are deductible. From 01.01.2018, the deductibility of these expenses will now depend on the level of debt costs or the additional costs of debt.
• Debt costs include the following: interest expenses for all types of liabilities (current and non-current liabilities; bank/shareholders/leases), interest included in current assets or the amortisation of capitalised interest, certain gains and losses from exchange rate differences on loans, guarantee commissions for financing mechanisms, brokerage fees and similar expenses for fund loans.
• The additional cost of debt is defined as the amount by which a taxpayer’s debt exceeds the interest and other equivalent operating income of the taxpayer.
• The new regulation stipulates that during a tax assessment period, additional costs for indebtedness may be deducted up to a maximum limit of €200,000. The conversion into lei is carried out at the exchange rate communicated by the Romanian National Bank on the last day of the fiscal quarter/year.
• Additional debt costs exceeding the maximum limit of €200,000 are limited deductible. In the respective assessment period, a maximum of 10% of the following tax base can be deducted: operating income – expenses – non-taxable operating income + expenses for profit tax + additional costs of debt + tax depreciation.
• Non-deductible additional costs of debt that cannot be deducted during an assessment period are carried forward to the next few years without any time limit.
• These rules also apply to interest expenses carried forward until 31 December 2017 and to net losses from exchange rate differences.
• The above rules do not apply to independent companies that do not belong to a group, have no affiliate or permanent establishment. All expenses in connection with loans received are fully deductible.

3. INCOME TAX

• The income tax rate is reduced from 16% to 10%. This applies to all income from non-employed activities, self-employment, surrender of assets, capital assets (except for income from dividends for which the 5% tax rate remains unchanged), pensions, agricultural activities, forestry and fisheries, premiums and other income.
• The gross monthly income level up to which a personal allowance is granted increases as follows:
  – from 1500 Lei to 1950 Lei – up to which a fixed exemption is granted, depending on the number of dependants;
  – from 3000 Lei to 3600 Lei – from 3000 Lei to 3600 Lei – up to which the tax-free amounts are granted degressively;
  – Employees who receive monthly gross wages of more than 3,600 Lei are not granted a tax-free allowance.
• The income tax rate on income from intellectual property rights is reduced from 10% to 7%.

4. SOCIAL SECURITY CONTRIBUTIONS

4.1. Income from non-independent activities

• The currently 9 social security contributions (employer and employee contributions) are combined into the following three contributions:

4.2. Income from self-employment, rent, investments and other income

• The pension contribution rate changes to 25% and the health insurance contribution rate changes to 10%.
• In the case of self-employed activities, the contributor may now generally determine the amount of the basis for calculating the pension insurance contribution rate himself. However, the tax base may not be lower than the gross minimum wage applicable in Romania
• The basis for calculating the health insurance contribution rate shall be the gross minimum wage applicable in Romania.
• The health insurance contribution is due if the income of the contributor, with the exception of income from wages and salaries, exceeds 12 gross minimum wages per year.

In the appendix you will find several examples of the calculation of net wages and total wage costs when applying the current regulations or those that are expected to apply from 1 January 2018.

APPENDIX

1. Calculation of the net wages and the total wage costs for employees liable to pay income tax. It is assumed that from 1 January 2018 the gross wage will be increased so that the net wage remains unchanged.

Für die Beibehaltung desselben Netto-Lohnes ab dem 01. Januar 2018, werden die Gesamtkosten des Arbeitgebers etwa gleich bleiben, bzw. unwesentlich geringer sein.

2. Calculation of net wages and total wage costs for exempted employees (IT programmers, R&D workers, severely and severely disabled persons). It is assumed that from 1 January 2018 the gross wage will be increased so that the net wage remains unchanged.

For employees exempt from wage tax, the total costs of the employer will increase by about 7% if the net wage remains unchanged.

Calculation of net wages and total wages if the gross minimum wage in Romania is raised to L1900 from 1 January 2018.

If the draft law on raising the gross minimum wage in Romania is adopted, the total costs of the employer for employees will increase the minimum wage by about 9%.

ORDINANCE NO. 82/08.11.2017 WITH REGARD TO THE NEGOTIATION OF GROSS WAGES

• All employers are obliged to initiate collective wage negotiations in the period from 20.11.2017 to 20.12.2017, taking into account the changes in legislation regarding social security contributions from 2018, with a direct impact on the net wages of employees.
• Employers who have not concluded a collective employment contract and have registered with the Territorial Labour Inspectorate are obliged to start these negotiations internally without informing the Territorial Labour Inspectorate about the progress of the negotiations.
• Employers who have concluded collective employment contracts and registered with the Territorial Labour Inspectorate are obliged to begin collective bargaining negotiations, to include the outcome of the negotiations in the supplement to the collective employment contracts and to register them with the Territorial Labour Inspectorate. Here the same procedure applies as for the registration of a supplement to the collective employment contract in accordance with Article 6.1 of law 62/2011.
• In addition to employee representatives, trade union representatives or representatives of the Federation of Trade Unions may also participate in the negotiation of collective employment agreements or supplements thereto. Workers must be informed that negotiations have been initiated and when they are concluded, they must be informed of the impact on wages.
• Notice: With regard to the practical implementation, in view of the lack of implementing or procedural provisions, the Sibiu Territorial Labour Inspectorate interprets the provisions of the emergency decree 82/2017 as described above.
• Employers can be sanctioned by the authorities with fines of between 5,000 and 10,000 lei if they refuse to initiate the negotiation of the collective labour agreement, in accordance with the law of social dialogue.