Contractual partnerships (such as joint ventures, consortia, etc.) are a viable structuring alternative for large scale projects in most market sectors, and in particular for infrastructure projects. Despite the encumbrance of having to deal with many and at times, inconsistent, compliance requirements, contractual partnerships can also bring certain tax benefits if they are rigorously and correctly planned from the beginning of the project.
Given the complex tax matters that contractual partnerships often pose in practice, we have presented below guideline answers to the most common questions companies usually face when implementing various forms of contractual partnerships.
1) Does one need to register the partnership with the Romanian tax authorities?
Corporate income tax: The necessity of registering a partnership for corporate tax purposes in Romania depends on whether the partnership is made up solely of resident entities or if it involves non-resident entities as well. In particular, under the current law, only those partnerships in which at least one member is a non-resident must be registered for profit tax purposes, i.e. the leader of the partnership will need to obtain a tax identification number for the partnership, which will be used to declare the profit tax liabilities in Romania of each individual non-resident partner.
One important point is that the current tax legislation applicable to partnerships is not aligned with the legislation applicable to permanent establishments (PEs). As such, PEs of non-resident members of partnerships may fall under the rules applicable to partnerships, as well as under the rules applicable to PEs, which may pose significant tax issues related to the tax compliance obligations these non-residents would have in Romania.
VAT: The partnership itself does not need to be registered for VAT purposes in Romania. However, that does not preclude individual non-resident partners from having to register for VAT purposes individually, depending on their activity in Romania (as part of the partnership or outside it). The best approach is to thoroughly analyse the complete set of transactions non-residents are going to perform in Romania before, during, and after the partnership in order to accurately assess whether they have VAT obligations in Romania.
2) Who accounts for the partnership’s revenue and expenses and who deals with its VAT obligations?
The partnership’s designated leader is normally in charge of the accounting of the partnership’s revenues and expenses. The corporate tax law requires these obligations to be carried out by a resident member if a partnership comprises both residents and non-residents. Therefore, a resident member is usually the designated leader for tax purposes.
The leader is also required, by law, to manage all of the partnership’s VAT rights and obligations, encompassing the following:
- The leader must make all of the partnership’s acquisitions in its name and claim input VAT credit on the partnership’s behalf.
- The leader is liable to issue invoices and charge VAT on the partnership’s output activity (assuming of course this activity is subject to VAT).
- If the case, the leader must / can adjust the input VAT for the goods and services which are contributed to the partnership by it or by the other members, as well as for the goods and services which are purchased by the leader in the partnership’s name.
3) What tax implications must one consider for the contributions made to the partnership?
The free of charge contribution of goods and services to a partnership is outside the scope of VAT on condition that the contribution is proportional to the contributor’s share in the partnership.
Whatever exceeds the individual share will be treated as a VAT-able supply of goods or services, as appropriate.
Another very important point is the "adjustment of input VAT", which is carried out by the leader in connection with the goods and services contributed by all members to the partnership. The input VAT adjustment may result in a VAT liability or in additional input VAT credit that will be paid / claimed by the leader on behalf of the partnership. The cost associated with the adjustment is normally a cost of the partnership and it should be distributed accordingly.
Input VAT adjustment is a very complex matter which needs to be thoroughly investigated and managed in order to avoid unexpected VAT costs for the partnership or for the individual partners.
4) How can a member distinguish between their own costs and those of the partnership?
This distinction is relevant for the correct assessment of the input VAT credit of the partnership, if the case.
If a member contributes goods and services to the partnership, the underlying costs should not be seen as a cost of the partnership and the related input VAT will be that member’s responsibility.
On the other hand, all of the acquisitions of goods and services made to satisfy the partnership’s needs (in excess of the members’ individual contribution) should be made by the leader in its own name, but on behalf of the partnership. In other words, the leader must account for the associated costs and for any input VAT credit, if the case. The costs would be further distributed to the members in accordance with their share in the partnership.
If partners other than the leader account for these costs or the related VAT, they will most likely face a risk when it comes to claiming full input VAT credit and corporate tax deductibility for the respective acquisitions.
5) How are the partnership’s proceeds distributed to the partners and who pays profit tax and VAT on these proceeds?
Corporate income tax: According to the law, both Romanian resident legal entities and non-resident members of a partnership that carry out an activity in Romania are obliged to pay 16% corporate income tax in Romania on their share of the profit derived from the partnership.
As regards resident members, they would aggregate the result (taxable revenues and deductible expenses) obtained from the partnership in the company’s overall profit/loss, which will then be subject to 16% corporate income tax.
Non-resident partners are normally also required to pay 16% profit tax in Romania on their share of profit attributable from the partnership. However, if a double taxation treaty is in place between Romania and the non-resident partner’s country of tax residence, then no corporate income tax should be due in Romania as long as the non-resident does not create a PE in Romania.
VAT: From a VAT perspective, the distribution made by the partnership’s leader to the rest of its partners of the proceeds (revenue less expenses) derived from the said partnership is outside the scope of VAT as long as it is made proportionally to each partner’s share.
If that individual share is not observed, there is a risk that the relief will be challenged and that the members will be assessed with VAT for their share of the partnership proceeds. Although the local legislation is not clear enough on this matter, there are arguments in the case law of the Court of Justice of the European Union to mitigate this reclassification risk, at least in some situations.
In conclusion, the tax requirements for contractual partnerships are quite complex and, in some instances, difficult to manage. This is partly due to the limitations of the existing legal framework, as well as to the limited case-law of the Romanian tax authorities when dealing with such complex arrangements.