Simple Tax Guide for Americans in Romania
US Expat Taxes - Romania
At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and green card holders working in Romania for over 8 years. Our clients hail from all parts of the country - Iasi, Cluj-Napoca and Timisoara, Constanta and Craiova.
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.
We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS.
The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.
We have many clients living in Romania and know how to integrate your U.S. taxes into the local income taxes you pay. Any Romanian income tax you already pay can be claimed as against the tax liability on your U.S. return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in Romania for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.
Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax; we look forward to working with you.
Below we include information on the Romanian Tax System for the American Expatriates.
Romania personal income tax rate is a flat 16%.
Individuals subject to Romanian tax include domiciled residents and non-domiciled residents who're employed by a permanent establishment, carry on self employed activities or obtain other income from Romania.
The following categories of taxpayers are subject to income tax:
(a) resident natural persons, such as any person who meets at least one of the following conditions:
. his domicile is located in Romania
. the centre of his vital interests is located in Romania
. he stays in Romania for more than 183 days in any 12 month period
(b) non-resident natural persons who perform an independent activity through a permanent establishment in Romania
(c) non-resident natural persons who perform dependent activities in Romania
(d) non-resident natural persons who obtain other income in Romania.
Categories of taxable income include the following:
(1) income from independent activities: commercial, freelance, intellectual property rights. The taxable income is, as a general rule, the difference between gross income and expenses. A taxpayer who performs independent activities must make tax payments on account at a rate of 16%, except for income achieved by selling under consignment, intellectual property rights, commission contracts, civil convention and accounting expertise which is subject to tax conventions at a rate of 10%
(2) income from salaries: based on an individual's employment contracts or by statute provided by law
(3) trading activities, other than those listed in (1) above
(4) income from investments: dividends, interests, earnings from the transfer of securities, sale and purchase of foreign currency etc
(5) income from pensions
(6) income from agricultural activities
(7) income from awards and gambling
(8) capital gains from the sale of immoveable property is subject to a transfer tax rather than income tax. Property owned for less than three years is subject to tax at 3% on proceeds up to RON 200,000, or RON 6,000 and 2% on any excess above RON 200,000. For property owned for more than three years, the rate is 2% on proceeds up to RON 200,000 or RON 4,000 and 1% on proceeds over RON 200,000.
Income from dividends and interest is taxed through the withholding tax regime. However, the following types of interest are exempt from income tax:
- interest on sight deposits and current accounts
- interest on state and municipal bonds
- interest on certain bank deposits
- income distributed to members of mutual benefit funds based on the share capital held.
Capital gains from the disposal of shares in 'closed' companies are subject to 1% advance tax payment.
'Short term' gains from sales of shares are subject to tax at 16%, the 1% advance payment being deducted from this. For 'long term' gains, the 1% advance payment represents the total tax due on such gains. All other capital gains are exempted from taxation.
Other income exempted from taxation includes scholarships, income from external consultancy projects, work on approved projects in Romania, income from insurances and other damage compensation.
Personal allowances are available up to a maximum of RON 650. If the monthly gross income is between RON 1,000 and RON 3,000, personal deductions are reduced. For monthly gross incomes that exceed RON 3,000, personal deductions are not available. Taxable income is calculated after deducting allowable expenses, union contributions and private pensions contributions up to EUR 200 per year. The rate of tax is 16%.
The income of employees developing computer software is exempt from income tax. Taxable income includes all benefits in kind such as, for example, free accommodation, use of a vehicle belonging to the business for personal use, personal telephone calls and credit cards used for a personal purpose. Net rental income is established by subtracting from gross income a fixed deduction of 25% of the gross income. Alternatively, the taxpayer may opt to calculate taxable income by deduction of actual expenses.
Trading losses can be carried forward for five years to offset against trading profits from the same source. However, losses may not be offset against employment income. Annual net income is determined for each source from the following categories:
- Income from independent activities
- Income from trading
- Income from agricultural activities
Foreign profits may be offset against losses from the same source arising in the same tax year.
Salary taxes are payable monthly by the 25th day of the month following the month in which the salary is paid, or quarterly by the 25th day of the month following the end of the quarter.
Social insurance contributions, health social insurance contributions and unemployment insurance contributions are paid both by the employer and by the employee. The following rates are applied to gross salary and charged on the employee:
Social insurance contribution: 10.5% employee
Health social insurance contribution: 5.5%*
Unemployment insurance contributions: 0.5%
All the above contributions are tax deductible.
Romania Corporate TaxCorporate income tax rate in Romania is 16%.
Certain businesses are subject to a minimum tax equal to 5% of turnover.
In Romania, trading companies consist of the following types: general partnerships, limited partnerships, joint-stock companies, companies limited by shares, and limited liability companies (pursuant to Law on trading companies No. 31/1990). The most common types of establishment are joint stock companies (SA) and the limited liability companies (SRL).
Also subject to corporate income tax are European companies (SE) as per the EC Regulation No. 2157/2001 and European Cooperative Companies (SCE) as per the CE Regulation No. 1435/2001 that have their head office in Romania. These legal entities are subject to corporate income tax in Romania on their worldwide income.
Corporate income taxes are chargeable on resident companies and non-resident companies with a permanent establishment in Romania. 'Romanian company' is defined as being any company established under Romanian legislation or with its business or management premises in Romania.
Profits earned by Romanian companies are taxed at the corporate income tax rate which is generally 16%. Certain businesses such as night clubs, discos, casinos and gambling establishments are subject to a minimum tax equal to 5% of turnover.
A concept of "minimum tax" has also been introduced. This sets a minimum tax to be payable by companies, based on the revenues reported up to 31 December of the previous year, using the following thresholds:
|Total annual revenue (RON)||Annual minimum tax (RON)|
|0 - 52,000||2,200|
|52,001 - 215,000||4,300|
|215,001 - 430,000||6,500|
|430,001 - 4,300,000||8,600|
|4,300,001 - 21,500,000||11,000|
|21,500,001 - 129,000,000||22,000|
Banking trading companies are liable to pay profit tax every year, making advance payments on a quarterly basis, updated by the inflation index (December as in December of the previous year), estimated on drawing up the initial budget of the year for which the advance payments are carried out. Starting in 2010, this system will apply to all corporate taxpayers.
Romania tax year is the calendar year. From 2010 taxpayers must submit an annual profit tax statement by 25 April following the end of the tax year. An advance payments system for corporation tax was also introduced from 2010. Payments are due on the by the 25th of the month following the quarter end.
BRANCH PROFITS TAX
Foreign companies that perform activities through a Romanian branch office are subject to corporate income tax on the worldwide profits of the branch in the same manner as Romanian companies.
Taxable profits are determined according to the general taxation rules for companies, under the following conditions:
- only income that can be assigned to the permanent branch office shall be included within taxable income.
- only the expenses incurred for the purpose of the branch activity are included in deductible expenses.
According to the Romania Fiscal Code, any foreign legal person that has a commercial representative office in Romania must pay an annual tax in RON equal to the equivalent of EUR 4,000. If an office is set up or ends its activity during a calendar year, the tax shall be calculated proportionately.
Starting in 2010, this tax must be paid in two equal instalments on 25 June and 25 December.
Fringe benefits are any benefits received by the employee in accordance with their employment contract, if applicable. Benefits in kind or in money are taxed together with the income from salaries in the month in which they are granted to the employees.
The tax rate is 16% and the tax is retained at source by the income tax payer.
Local taxes in Romania are regulated by the Fiscal Code. Local taxes represent a distinct category of taxes set by the local administration, which are payable by both individuals and entities in Romania.
Building tax: Residents or non-residents owning one or more buildings are subject to real estate tax. All buildings, regardless of their purpose, are taxed according to their value. Rates vary from 0.25% to 1.5%. The rate is decided by the local council. The building taxable value is determined by the area used and the building type.
Land tax: is payable by owners of land. Generally, the tax is established as a fixed amount per hectare, depending on the location of the land within certain determined zones, towns or villages and depending on land use. The tax is payable annually, in two equal installments, on 31 March and 30 September.
Vehicle tax: is payable by owners of land/water vehicles registered in Romania. The tax depends on the engine capacity and is computed as a fixed amount per 200 cubic centimetres. The tax is payable annually, in two equal instalments on 31 March and 30 September.
Other local taxes and duties include fees for the issuance of certificates, permits and authorisations; fees for using advertising and publicity materials; and hotel fees.
Certain legal documents are subject to a stamp fee. Stamp fees also apply on other documents and services related to authorisations issued by State institutions such as hunting or fishing licences, driving licences, transport licences and similar documents.
Local Councils, the General Council of Bucharest Municipality, and County councils may charge duties for the temporary use of public places and for admission to museums, memorial houses, or historical, architectural or archaeological monuments.
Duties are also payable for the possession or use of equipment and tools held for the purpose of obtaining income which involves the use the local public infrastructure. Duties are also payable on some activities which have an impact on the environment.
Excise duty is a consumption tax and is payable on import and sales of locally produced items on the domestic market and is determined as a fixed amount per unit or as a percentage of a specified taxable base. In Romania there are two categories of excise duties:
1. Harmonised excise duties: beer, wine, fermented beverages other than beer and wine, intermediate products, ethyl alcohol, tobacco products, energy products, electrical power
2. Non-harmonised excise duties: green, roasted and soluble coffee, natural fur products, gold and/or platinum jewelry, perfumery products, guns (including hunting guns), yachts and other boats for recreation with or without engines, engines with a capacity over 25 HP for yachts and other boats for recreation. The excise duty for coffee will be gradually decreased to nil by 2011.
With effect from 1 April 2010, Romania will incorporate the provisions of EU Directive 2008/118/CE which sets out general arrangements for excise duties into the national legislation. The main amendments refer to:
- Amendments to certain definitions and concepts such as "Member State", "territory of a Member State", "Community" and "territory of Community" etc. Detailed provisions will be introduced regarding the functioning of the EMCS (European computerized system) for monitoring the movement of excisable products placed under the excise duty suspensive regime.
- The only product on which excise will be due which is not included in the EU's standard harmonised list will be green, roasted and soluble coffee.
SOCIAL SECURITY CONTRIBUTIONS
Social assistance contributions are payable jointly by the employee and by the employer on gross salary, subject to a maximum monthly limit. The joint rate from February 2009 is 31.3% and it is divided between the employer (20.8%) and the employee (10.5%).
Under particular work conditions, the joint rate is 36.3% or 41.3%. In these cases, the employer's contribution is 25.8% and 30.8% respectively.
DETERMINATION OF TAXABLE INCOME
Three alternative methods are available for the computation of tax depreciation, namely:
- straight-line depreciation
- reducing-balance depreciation
- accelerated depreciation (for equipment and patents)
The method used for the depreciation of buildings is the straight-line method. Land is not a depreciable asset.
For technological equipment such as cars, tools and installations, a choice of straight-line, reducing- balance depreciation and accelerated methods is available. For other fixed assets, the taxpayer can choose between the straight-line method and reducing- balance method.
Under the accelerated method,the maximum depreciation in the first year of use of an asset is 50%.
The inventory must be valued according to generally accepted accounting principles (GAAP) and must include all acquisition, processing and administration costs.
CAPITAL GAIN TAX
Capital gain tax is treated as ordinary business income and taxed at the general corporate income tax rate of 16%.
Income earned by non-residents from real estate located in Romania or from the sale or assignment of securities held in a Romanian entity is also taxed at the general corporate income tax rate of 16%.
TAXATION OF DIVIDENDS
Dividends paid to resident companies are subject to a final withholding tax of 10% or are exempt where the recipient company has held at least 10% of the distributing company's share capital for at least two years prior to payment of the dividend.
It is the responsibility of the person paying the dividend to calculate and withhold the tax. The tax must be paid by the 25th day of the month following that in which the dividend was paid. However, with effect from 2010, withholding tax on dividends which have been declared but not paid by the year end must be paid by 25 January following the year end.
Interest expenses arising on loans from non-financial banking institutions (eg shareholder loans, inter-company loans) are not deductible if the debt/equity ratio is higher than 3 but any disallowed interest can be carried forward for an indefinite period of time until it has been fully relieved.
The law limits the deductibility of interest on loans obtained from non-financial banking institutions, with reference to an interest rate set by the National Bank of Romania, and a rate of 8% for loans denominated in foreign currency. Any excess is permanently non-deductible.
Where foreign exchange losses exceed foreign exchange gains, the difference (ie loss) is treated as an interest expense.
Interest expenses as well as foreign exchange differences related to loans obtained from Romanian banks (including subsidiaries of foreign banks), leasing companies (for leasing operations), and other specified lending bodies are not subject to the thin capitalisation rules.
Losses may be carried forward for five years if incurred before 1 January2009 or for seven years if incurred on or after 1 January 2009.
Losses cannot be used by the successor company when the associated trade is transferred from one company to another.
FOREIGN SOURCE INCOME
Resident companies are subject to taxation on their worldwide income. Foreign losses can be deducted from foreign income on a source by source basis. Foreign exchange differences arising from the re-evaluation of monetary assets and liabilities at the end of the year are deemed to be realised and taxable.
ROMANIA TAX INCENTIVES
Qualified companies that are set up and perform their activity in underprivileged areas can benefit from tax exemptions for new investments but only for those investors who have received an investor certificate before July 2003.
FOREIGN TAX RELIEF
In the absence of a treaty, unilateral relief is provided by way of an ordinary credit for income taxes paid abroad on taxable income up to the amount of Romanian tax payable on the same income.
Profits and losses cannot be transferred between affiliated companies. Dividends received by a resident company are exempted from corporate taxation but are subject to final taxation at source at a rate of 10%, subject to exemptions (see the section above Headed 'Dividends').
RELATED PARTY TRANSACTIONS
Transactions between related parties are recognised for tax purposes according to the arm's length principle (or, in other words, on terms that would have been established between independent enterprises). When establishing the profits of related parties, the transfer pricing principles established by the OECD guidelines are taken into consideration. If the price agreed for a transaction between legal affiliated persons is different from the arm's length value and the difference cannot be justified accordingly, the agreed price shall be replaced by the market value for taxation purposes.
Withholding taxes are payable at the following rates on income paid to non-residents:
INTEREST AND ROYALTIES
The tax rate is 16% unless a lower treaty rate applies. Moreover, Romania has implemented a transitional period for the application of the Interest and Royalties Directive until 2011. During the period between the accession date of 1 January 2007 and 31 December 2010, 10% withholding tax applies on payments of interest and royalties made by Romanian companies to companies resident in EU and EFTA member states to entities holding at least 25% of the share capital of the Romanian company for a continuous period of at least two years prior to the date of payment of interest/royalties. Such payments are withholding exempt from 1 January 2011.
The tax rate is 16% unless a lower treaty rate applies. As Romania is an EU member state, the provisions of the Parent Subsidiary Directive apply. Therefore, dividends paid by Romanian companies to companies resident in EU and EFTA countries are exempt from withholding tax if the dividend beneficiary owns a minimum of 10% of the Romanian company for a period of two years ending on the date when the dividend is paid. For all other companies resident in the EU or EFTA the tax rate is 10%. From 2010 interest and dividends paid to pension funds as defined under the legislation of the EU Member State is exempt from tax.
In addition, non-residents must provide a tax residency certificate as well as a selfcertified statement on the fulfillment of certain conditions in order to qualify for the more-favourable EU treatment.
The exchange control regulations applicable in Romania are administered by the Romanian National Bank, which can take safeguarding measures relating to monetary capital operations. There is an obligation to notify the Romanian National Bank at least 10 days before the intention to conclude monetary capital operations on a short-time basis. Limitations apply to monetary capital operations applied on a short-term basis which generate incoming/outgoing of capital.
Romania vat (Value Added Tax) RateThe general VAT rate in Romania is 19%. The VAT reduced rate is 9% and is applied to various goods and services including:
(a) cinema tickets and entrance fees to other attractions
(b) books, newspapers and magazines, school books, except those exclusively for advertising
(c) certain medicinal products
(d) accommodation within the hotel sector or similar sectors, including camping.
Also, a lower rate of 5% applies to the sale of certain buildings carried out as part of the country's social policy.
Companies with an annual turnover of at least EUR 35,000 must register for VAT. Companies with turnover below this threshold may register voluntarily.
Filing and VAT payment - VAT returns must be submitted monthly. Quarterly payments and filing are available for taxable persons with an annual turnover of less than EUR 100,000.