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15. February 2022 | Taxes on the Canary Islands

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18. November 2022 | Special features in the tax law of Spain

25. April 2023 | Tax law in Italy: La tassa per favore...

16. June 2023 | Tax law in Romania (this contribution)

The tax law in Romania knows many of the tax types that also exist in Germany. Nevertheless, it is quite simple compared to German tax law. This is also due to the fact that Romania wants to create special incentives for foreign investors with its tax law. But even wealthy individuals may benefit from this. Because the uniform income tax rate of 10% in Romania is unrivaledly cheap compared to most other EU countries.

Romania has a long and varied history. In ancient times, the people of the Dacians lived on the territory of present-day Romania. The Dacians were known for their wealth, as Romania is home to some of the richest gold deposits in Europe. This certainly aroused the greed of the Romans. In the first years of the second century AD, Emperor Trajan commanded a successful military expedition to the Dac empire. As a result, the Dacians perished, their land became a Roman province and their treasures, hundreds of tons of gold and silver, arrived with Trajan in the then financially troubled Rome.

The far-reaching consequences of this event can be seen in the country name. For even in the 17th century the inhabitants of these lands called themselves Romans. And so Romania gradually developed into the nation-state that we now know as the western shore of the Black Sea. Romania has preserved a rich nature and culture. Especially the latter is characterized by the influence of a variety of ethnic groups; German culture is also included (for example through the Banat Swabians and Transylvanian Saxons).

Now let’s get to the current tax law in Romania, the tax code. We first look back a few decades.

After overcoming the socialist Ceaușescu regime, Romania oriented itself towards the previous EU states and sought membership. In order to meet all requirements, the tax law in Romania has also been adapted to Western standards. Therefore, the current tax law in Romania dates back to 2003. Of course, numerous adjustments have since been introduced into the tax code, just as it is probably the fate of all tax rights. One example of this is the introduction of the so-called witch tax, which we report on elsewhere.

In Romania, tax law provides in principle that only residents of Romania are taxable. Taxation is based on the world income principle. However, wages and salaries earned abroad are excluded. Furthermore, taxation in Romania is subject to all income earned in Romania, which thus corresponds to the German limited tax liability. Exceptions to this rule the numerous double taxation agreements signed by Romania. This also applies in general to other circumstances in which there is a simultaneous tax residence at home and abroad. Nevertheless, it is interesting that tax law in Romania establishes a certain tax relationship with the citizenship of potential taxpayers. In Germany, this is only provided for in a special case, namely the inheritance and gift tax.

The question of residence in Romania, which leads to tax liability, is based on four criteria, of which only one has to be met. Either you have a residence in Romania or the center of life is there. A center of life in Romania exists, for example, if close family members as well as private and economic interests are there. Furthermore, a residence in Romania must be affirmed if one stays in Romania for more than 182 days within a continuous period of twelve months. The fourth alternative applies to Romanian citizens who are abroad on a civil or state mission. A similar regulation exists, for example, for diplomats in German tax law.

As already mentioned, Romania has double taxation agreements with a large number of other states and tax regimes. Romania has also concluded a double taxation agreement with Germany, Austria and Switzerland in the field of income taxes. Double taxation agreements also apply with all other EU partner countries. Thus, tax law in Romania is in many cases internationally compatible.

The income tax for natural persons is very simple. So there is no progression. Instead, a uniform income tax rate of 10% applies. It is one of the lowest in the EU. However, there are exceptions for some types of income. Since 2023, Romanian tax law has taxed dividend income at a special tax rate of 8%.

It is also interesting that there is no tax for the feed-in of electricity from renewable energy sources up to an output of 27 kW per plant. In doing so, Romania is promoting energy production from renewable sources.

Furthermore, there are deviations in the taxation of income from lotteries and gambling winnings. Here, the tax rate varies between 3% for profits up to and including RON 10,000, 20% for exceeding amounts up to a level of RON 66,750 and 40% for each additional monetary unit. There are some distinctions depending on the type of profit achieved. For example, one distinguishes whether a profit has been incurred in a casino, at a poker tournament or via an online service. However, it is also interesting that it is a withholding tax with valid effect. Thus, the organizers are obliged to withhold the tax on the profit and pay it to the financial administration.

Unique in the EU is that the tax law in Romania provides for a tax exemption on income from self-employment if the work is done in the IT sector. This is certainly also a promising measure to promote Romania as a business location.

There are similar tax incentives under certain conditions for business angels who invest in startups as private individuals. However, this only applies if the startup is set up in the legal form of a Srl. The Srl is a limited company comparable to a GmbH. The tax exemption can be applied to both dividends and capital gains.

4.1.1.2. Payroll tax and social contributions

For income from self-employment, the tax law in Romania provides for a wage tax. As in Germany and most developed industrial nations, this ensures the ongoing flow of funds that serve the budget.

Since the tax law in Romania should be as simple as possible, only a few deductions are planned. For example, expenditure on social security is provided to influence the amount of taxable income. This applies to employees and workers as well as to self-employed persons and other entrepreneurs.

In the case of compulsory social security contributions for employees, employers also pay part of the contributions in Romania. These costs are deductible under the general corporate tax as operating expenses.

Since tax law in Romania has a special steering effect on the establishment of foreign companies, it is hardly surprising that many tax privileges are luring in the field of corporate tax. The general tax rate of 16% alone shines in international comparison. This applies to domestically registered companies as well as to foreign companies whose management takes place in Romania. Thus, corporate tax also applies to Romanian branches of foreign companies.

Of course, the world income principle also applies to corporate tax. Here, too, exceptions to tax law in Romania depend on the existence of different rules in any double taxation agreements.

What is remarkable about the tax law in Romania regarding corporation tax is that nightclubs and gambling operators and similar establishments either have to pay corporation tax according to the general tax rate, or have to pay 5% on their turnover, depending on which calculation leads to the higher tax.

4.1.2.2 Taxation as a micro-entity

4.1.2.2.1. Specific rules on the right to choose as a micro-enterprise

There is also the option to pay taxes as a micro company. This has the advantage that the applicable tax rate is then only 1%. However, instead of profit, turnover is the basis for this taxation. As a result, it is irrelevant whether a company has its own operating expenses that would be eligible for the normal corporate tax.

4.1.2.2.2 Requirements for taxation as a micro-enterprise in Romania

However, certain conditions must be met in order to use this special taxation option. For example, tax law in Romania stipulates that an applicant may expect a turnover of less than the equivalent of EUR 500,000 in the current marketing year. These revenues may be generated up to a maximum of 20 % by administrative, consultancy or management services, with tax advice being an exception. Dividends from foreign subsidiaries must be treated in accordance with the EU parent-subsidiary directive.

Taxation as a microenterprise continues to be eligible only if the shareholders or holders of voting rights hold 25 % or more of the shares in a maximum of three companies, provided that they pay taxes as a microenterprise under the tax law in Romania.

Other restrictions on the taxation of micro-enterprises are that they do not represent banks or insurance companies providing services on the capital market or intermediary such business. Also for gambling operators and companies involved in the exploration, development or extraction of oil or natural gas, taxation as a micro-enterprise is excluded.

Other legal conditions exclude this special taxation if companies are in dissolution or liquidation or if there is a public participation.

Furthermore, tax law in Romania requires opting companies to employ at least one employee in Romania throughout the entire season.

4.1.2.2.3. The procedure for taxation as a micro-entity in Romania

For the application of taxation as a micro-entity, the tax law in Romania provides for quarterly tax declarations and advance payments. If a tax microenterprise achieves sales in a quarter that exceed the maximum amount of EUR 500,000 extrapolated to the annual result, the quarterly profit is subject to regular corporate tax. This also applies if the profit share due to administrative activities and similar services exceeds the legal limit of 20% in one quarter.

Furthermore, companies can only opt for taxation as micro-enterprises if they have been able to establish compliance with the above conditions in the previous marketing year. Because this is the basis for applying for this predisposition.

For some industries, however, the requirements are irrelevant. Because if companies in the hotel industry or gastronomy want it, they can simply exercise their right to vote.

Anyone who does not exercise this right to vote, by the way, automatically taxes the profit according to the general rules prescribed by the tax law in Romania.

4.1.3. Business tax

The tax law in Romania is without trade tax. In this respect, it is similar to most tax regimes worldwide. Other local or supra-regional taxes for traders are also unknown in Romania.

4.1.4. Capital gains tax on box holdings

Just as in Austria or Germany, there is no tax in Romania on profit distributions between corporations (holding structure) if there is a participation rate of at least 10% over a minimum period of one year. Otherwise, such dividends are subject to taxation at an 8 % rate.

4.1.5. Withholding tax

There is an area where tax law in Romania is very close to German in terms of complexity. When it comes to protecting its own tax base, Romania has incorporated a whole series of provisions into its tax code, in accordance with the EU requirements in this regard. Since the list of use cases and exceptions in which Romania withholds or waives a withholding tax is very long and each item requires its own explanation, we refer here to only three examples.

For example, for the purposes of Romanian tax law, limited taxpayers who receive prize money or similar awards from the public in Romania as athletes or artists are not subject to withholding tax.

Royalties and interest paid to companies abroad are subject to withholding tax. Such payments are excluded if they flow to taxpayers in EU or EEA countries in compliance with the requirements of the EU Interest and License Fees Directive. Otherwise, provisions on withholding tax apply, which require a withholding tax of 8% in the case of dividends and a tax rate of 16% in the case of other payments. This again excludes rules on withholding taxation, as agreed in double taxation agreements with third countries.

Under certain circumstances, a 50% withholding tax is imposed when payments are made to recipients in a country with which there is no exchange of information based on bilateral agreements. This is obviously intended to prevent tax evasion in tax havens that are on the EU blacklist.

Sales tax is subject to a general tax rate of 19%. There is also a reduced sales tax rate of 9% on food and certain medical services and hotel accommodation. In addition, the tax law in Romania provides for a highly reduced VAT rate of 5 % on, inter alia, books and magazines (including in electronic form), firewood and the installation of photovoltaic and other renewable energy installations and all kinds of cultural performances, including cinematographic visits. 5 % VAT is also charged on real estate purchases by private individuals, provided they purchase a property with a living space of up to 120 m2 and a price below RON 600,000. Furthermore, there are transactions subject to 0 % taxation (e.g. intra-Community maritime and air transport and certain services related thereto) and those which are generally exempt from VAT (e.g. financial services, education, certain health services, postal delivery and international passenger transport).

4.2.2 Small Business Regulation in Romania

Entrepreneurs in Romania can be exempt from the obligation to calculate VAT as a small business owner. We also know this in Germany. However, the small business regulation in Romania provides for an annual amount of RON 4,500,000 as a turnover ceiling, i.e. about EUR 900,000. This gives entrepreneurs significantly greater freedom than the German small business regulation with its annual turnover limit of EUR 17,500. However, one should bear in mind that then also the deduction of VAT is excluded. Nevertheless, this small business regime in Romania can be a great relief for certain sectors, which at best manage without significant acquisitions, because then the burden of a regular VAT declaration is eliminated. So this could be quite interesting for influencers who settle in Romania.

So there is also a small business tax regime in Romanian VAT law, which exists in addition to the taxation of micro-enterprises within the framework of corporate tax. Often, companies can use both options for tax purposes.

Although the tax law in Romania does not have a registered property tax or an independent inheritance or gift tax, at least certain assets and inheritances are still subject to some taxation.

4.3.1. Taxation of estate property: stamp duty

Although Romania has so far waived a general taxation of capital transfers by way of inheritance, in such situations there are still taxes. These are stamp duties. They are calculated on the basis of the asset of the estate, whereby certain deductions that reduce the property can be recognised (for example, the funeral costs of the deceased person).

The tax rate of the stamp duty is degressively staggered. For inheritances up to RON 1,000, the tax rate is 3%. On an estate value up to a level of RON 5000, only 2% of stamp duty is incurred. The tax rate for discount values up to RON 10,000 falls further to 1%. In addition, only 0.5% of the tax on stamp duty is due.

If real estate is also subject to this taxation, there may be tax relief if a property served as the first residence of the deceased at the time of death. If he has shared this residence with his family or heirs, this is not harmful for the granting of the tax relief. The tax relief consists in the fact that only 50 % of the market value of the property has to be taken into account as a tax base.

4.3.2. Income tax on the acquisition of real estate through inheritance

Furthermore, capital transfers through inheritances are generally excluded from income tax. Another exception is real estate, in which the Romanian Treasury recognises 1 % of the market value as income tax.

A taxation of assets is provided for in the tax law of Romania only for real estate. However, this is not a classic property levy. Therefore, there is no independent property tax in Romania. Much more it refers solely to the taxation of real estate. It thus comes very close to the property tax in Germany. Therefore, we refer to the next section, in which we take a closer look at this taxation.

In the taxation of assets, therefore, only real estate is affected. The legal situation in 2023 has changed somewhat here. Natural and legal persons are now on an equal footing. In addition, taxation differentiates between land and buildings.

4.5.1. Building tax

A distinction must be made between inner-city and outer-city buildings. Furthermore, there is a three-part distinction between residential buildings, agricultural buildings and all other types of buildings. The tax rate can vary between 0.08% and 3% depending on the type of building. However, with 0.08% to 0.2%, tax law in Romania clearly privileges residential buildings.

For taxation, however, the current market prices of real estate are much more important. The determination of this benchmark is based on the notarial sales prices in the respective regions. In Romania, too, notaries are entrusted with the certification of real estate purchases. Therefore, a continuous survey of market values takes place separately by location and type of building to which the tax administration can refer in the tax calculation.

4.5.2. Property tax

When taxing land, a fixed local (municipal) price per area is calculated as property tax.

4.5.3. Collection of Building Tax and Property Tax in Romania

Tax law in Romania assigns both tax types to local tax authorities. So these taxes go to municipal coffers.

Payment of these taxes shall be made in two annual discounts, once on 31 March and once on 30 September of each year. There is the possibility to receive a tax rebate of 10% if the entire annual contribution already on the 31st deadline. Arriving at the financial treasury in March.

Even a real estate transfer tax, as we know it from Germany, has not yet found a way into tax law in Romania. Nevertheless, there is also some expenditure here. The fact that transfers of real estate are subject to notarial deed in Romania, as in Germany, requires a notarial fee dependent on the purchase price.

If you want to find out more about the acquisition of real estate in Romania, you can consult the current brochure of the German-Romanian Chamber of Commerce and Industry on this topic.

Tax law in Romania has many facets that make it more attractive compared to German tax law. Although the bureaucracy in Romania is said to have little momentum, certain characteristics of Romanian tax law make it easier for the authorities to deal with taxpayers.

For example, it is interesting how Romania handles the taxation of real estate, which roughly corresponds to the German property tax. One can see that a simplification of the rules has succeeded despite differentiated approaches for different tax objects, something that Germany, despite current property tax reform, can only dream of.

Tax law in Romania is even more interesting for entrepreneurs. Here, Romania has been very progressive and has created generous tax incentives to encourage foreign investors to create jobs in Romania. This is hardly surprising, given that Romania is in direct competition with its southern neighbour Bulgaria, which also has a very business-friendly tax policy. In addition to the tax privileges, Romania also has completely different advantages to offer entrepreneurs. The country has a large number of well-trained specialists. In the IT sector in particular, Romania has qualified resources. A special bonus is that many specialists have excellent knowledge of the German language, which makes Romania particularly attractive for German investors. This also makes it easier to meet the appropriate condition for choosing taxation as a micro-enterprise, as it is easy to find employees who can be employed in the company.

So our conclusion is that Romania is tax attractive without being considered an exotic tax haven. It is therefore a veritable alternative to other better known locations such as Malta or Cyprus. At the same time, Romania also offers the advantage of benefiting from a positive international reputation as a member state of the EU. Romania is therefore certainly worth considering for potential investors.