The use of partnerships, especially for cross-border transactions, involves complex international matters. As partnerships are generally treated as either transparent entities or separate taxable entities, the differences between the Romanian tax law treatment and other jurisdictions may lead to difficulties in the application of double taxation treaties.
The Romanian law describes a partnership as an entity with no separate legal personality. For Romanian tax purposes, the partners of entities treated as partnerships may be individuals or legal persons.
Joint venture as a form of partnership
Under the Romanian law, the most regulated forms of partnerships from a tax and legal perspective are joint ventures (asocieri in participatiune). Generally, a joint venture is defined as a form of partnership between two or more investors (the partners) for the purpose of jointly conducting a commercial activity, or an entire business, for profit. Each partner makes a contribution (capital, inkind contribution, know-how, etc.), bears its share of expenses, and is entitled to part of the profits.
The “main partner”
Under Romanian law, joint ventures are defined as de facto partnerships, rather than legal entities serving as investment vehicles. Consequently, from a legal perspective, a joint venture established in Romania has one important feature: it does not involve the creation of a new legal entity, all of the joint venture business activities being practically assumed by one of the parties to the partnership. Romanian law provides that business operations must be carried out by only one of the partners (the “main partner”) on behalf of the partnership. Although acting for the benefit of the joint venture and on behalf of the other partners, only the main partner may enter into agreements with third parties. All rights arising under agreements with third parties are undertaken by the main partner in its own name; accordingly, all liabilities in connection with the joint venture operations toward third parties are also incurred by the main partner alone.
From a tax perspective, as the joint venture is merely a contract and not a legal entity with legal personality, the revenues and expenses incurred by the joint venture are generally distributed to the partners pro rata to their participation in the joint venture, and each partner is subject to taxation separately. To this extent, the Romanian Tax Code clearly specifies that a joint venture is not to be regarded as a separate legal entity for taxation purposes.
Payments of profits from the Romanian joint venture to the partners are not treated as dividends and are thus not subject to the withholding dividend tax. From a VAT perspective, the joint venture may be considered a separate entity from its partners unless all partners are Romanian taxable entities.
In terms of procedure, taxation depends, however, on the nationality of each partner. If all partners are foreign residents, one of them will be required to act as a representative before the tax authorities. The appointed representative will have to perform all mandatory tax procedures and then pay the income tax on behalf of the other partners. If the partners are both Romanian and foreign tax residents, then the mandatory tax procedures must be performed by the Romanian partner.
Double taxation treaties
Most Romanian’s double taxation treaties do not include any special provisions on the tax treatment of the partnerships and their partners. It may therefore be unclear how double taxation treaties limit the treatment under Romanian tax law. There are interpretations stating that entitlement to treaty benefits depends on whether a partnership is a resident person of a contracting state. Still, most of Romania’s double taxation treaties define the term person very broadly.
As mentioned, Romanian partnerships are not Romanian residents for purposes of double taxation treaties because partnerships are not separate taxable persons in Romania. Some interpretations state that if partnership is not regarded as a taxable person for treaty purposes, the treaty between the original source state and the residence state of each partner should apply.
As concerns the treatment of a foreign partnership with Romanian partners, some Romanian commentators are of the view that a non-Romanian partnership is fiscally transparent for Romanian tax purposes only if, in the country of organisation of the partnership, it is a non-juridical person (ie, cannot sue or be sued in its own name). Still, this lack of clarity may lead to conflicts in the application and interpretation of double taxation treaties.
Tax aspects of a partnership depend on its particular nature. As deriving income through a partnership creates complex matters of international tax law, each case should be carefully considered prior to implementation.
From a tax perspective, as the joint venture is merely a contract and not a legal entity with legal personality, the revenues and expenses incurred by the joint venture are generally distributed to the partners pro rata to their participation in the joint venture, and each partner is subject to taxation separately.