Despite concerns raised throughout the business community regarding the impact of the recently announced fiscal policy plan and draft Government Emergency Ordinance, which introduced several significant changes to the Tax Code (the “Ordinance”), the Ordinance was published on 10 November in Official Gazette no. 885.
The Ordinance introduces drastic fiscal changes, with the following key amendments becoming effective on 1 January 2018:
Social contributions and personal income tax
One of the measures with the widest impact is the transfer of the burden of paying social security contributions from employers to employees. The new social contributions will consist of:
- social security contribution – 25% (owed by employees);
- social security contribution for special working conditions – 4% or 8% depending on working conditions (owed by employers);
- health insurance contribution – 10% (owed by employees); and
- work assurance contribution – 2.25 % (owed by employers).
Social security contributions on income from independent activities will be paid on a chosen income, which cannot be lower than the minimum gross salary. Health insurance contributions on income from independent activities will be paid based on the minimum gross salary. Currently, these contributions are paid based on the net income earned, capped to five times the average gross salary.
The income tax rate will be reduced from 16% to 10% and will apply to all types of income, including salaries, pensions, independent activities, intellectual property rights, rent, investments (except dividends), etc.
Corporate income tax
The Ordinance aims to implement provisions of EU Council Directive 2016/1164, laying down rules against tax avoidance practices that directly affect the functioning of the internal market (the “ATAD Directive”). Member States should have until 1 January 2019 to apply the ATAD Directive, however the Romanian government rushed the implementation of these measures without sufficient preparation needed prior to the ATAD implementation.
The Ordinance significantly transforms the current tax deduction regime of expenses with interest and foreign exchange (“FX”) differences. Romanian taxpayers will have to compute the excess cost of indebtness (regardless of if it was received from financial or non-financial institutions) and deduct the cost under a fixed cap of EUR 200,000 per fiscal year. Any excess over this cap will be deductible in a fixed quota of 10% of the taxpayer’s earnings before interest, tax, depreciation and amortisation.
Exit taxation and controlled foreign company rules are also new additions introduced by the Ordinance.
Preventing tax avoidance and abusive arrangements are also key features of the Ordinance, which introduces a general anti-abuse rule.
The Ordinance increases the revenue threshold for application of the micro-enterprise regime from EUR 500,000 to EUR 1 million. Companies, which currently carry out exempted activities such as oil and gas, banking or insurance, will also be obliged to apply the new regime starting with 1 January 2018 until yearly revenues of EUR 1 million are recorded. Although the micro-enterprise tax regime may prove beneficial for certain companies, the main concern about this regime is that expenses are not allowed to be deducted and consequently, there are no fiscal losses.
Tax authorities can only refuse VAT deductions if they are able to prove beyond any doubt that the taxpayer had information that companies with whom it entered into commercial relations were involved on VAT fraudulent schemes.
The Ordinance extends seizure measures to allow authorities to confiscate a company’s means of transport selling excisable products.