The fiscal consolidation system for CIT has been established starting 1 January 2021. The relevant aspects include the following:
- A tax group may consist only of Romanian legal entities and/or persons with their registered office in Romania, established in accordance with European legislation, and may include, in certain cases, the Romanian PE of a non-resident.
- Ownership condition requirement to hold, directly or indirectly, at least 75% of the value/number of participation titles or voting rights for an uninterrupted period of at least one year prior to the beginning of the consolidation.
- Members of the group must be CIT payers (micro-enterprises cannot be part of the group, nor can those that carry out activities in bars/nightclubs, discos, or casinos, or those that are simultaneously taxpayers of CIT and activity-specific tax) that apply the same CIT payment system and have the same fiscal year, are not part of another CIT group, and are not in dissolution/liquidation.
- The period of application of the system is five fiscal years. The system is optional. Requests for the application of the system should be submitted at least 60 days before the beginning of the period for which the application of fiscal consolidation is requested, with the system being applied as of the fiscal year following that in which the request was submitted. In order to maintain the group after five years, the option can be renewed.
- One of the members is designated as the responsible legal entity that will calculate, declare, and pay the CIT for the group, with the tax determined by summing the individual calculations of each member (thus giving the opportunity to offset the tax profits of companies within the group with the tax losses of others).
- Tax losses recorded by a member of the group before the application of the system cannot be compensated for at the group level.
- If the group is disbanded after five years, the losses recorded and not recovered during the consolidation period should be recovered by the responsible person.
- Each member has to prepare a transfer pricing file, which will include transactions with group members.
- If one of the members no longer meets the conditions, that member and the responsible legal person recalculate the CIT due individually/for the group, including late-payment interest and penalties, if the case.
- The tax is not recalculated in the following situations: sale of participation titles held in one of the group members if the holding falls below 25%; dissolution of a member; or a member leaving as a result of reorganisation operations (merger, spin-off, transfer of assets, and exchange of shares).
The provisions on consolidation do not apply if they are put in place for tax fraud and tax evasion purposes.
Consolidation of PEs
Foreign legal entities that perform economic activities in Romania through several PEs must register one of them as their PE designated to fulfil the fiscal obligations for all the PEs owned.
The revenues and expenses of all the PEs belonging to the same foreign legal entity will be cumulated at the level of the designated PE.
Transfer pricing requirements are applicable to transactions between Romanian related parties as well as foreign related parties.
Transactions between related parties should be carried out considering the arm’s-length principle. If transfer prices are not set at arm’s length, the Romanian tax authorities have the right to adjust the taxpayer’s revenue or expenses in order to reflect the market value.
Traditional transfer pricing methods (i.e. comparable uncontrolled prices, cost plus, and resale price methods), as well as any other methods that are in line with the OECD Transfer Pricing Guidelines (i.e. transactional net margin and profit split methods), may be used for setting transfer prices.
Transfer pricing documentation
Taxpayers engaged in related party transactions must prepare and provide their transfer pricing documentation file to the Romanian tax authorities upon the latter's request.
Transfer pricing audit activity has significantly increased during the past few years, and requests for presenting the transfer pricing documentation file have started to become common practice. We are aware of recent cases where the Romanian tax authorities adjusted the taxable result of local taxpayers in accordance with the applicable regulations.
The content of the transfer pricing documentation file has been approved by order of the president of the National Agency for Tax Administration. The Order is supplemented by the Transfer Pricing Guidelines issued by the OECD and the Code of Conduct on transfer pricing documentation for associated enterprises in the European Union Transfer Pricing Document (EUTPD). The content of the transfer pricing documentation as per the Romanian legislation is broadly aligned with the content of the local file and master file documentation under BEPS Action 13.
Upon request of the tax authorities, the deadline for presenting the transfer pricing file documentation is as follows:
- Maximum of 10 calendar days for large taxpayers performing intra-group transactions above a specific threshold (stipulated by the law). In this case, taxpayers have the obligation to prepare the transfer pricing documentation on an annual basis, by the legal term for submitting the annual CIT return (i.e. 25 March of the following year in case of a calendar fiscal year). The transfer pricing file does not have to be submitted to tax authorities together with the annual tax return, but it has to be presented to tax authorities within 10 calendar days from their request during or outside a tax audit.
- Between 30 and 60 calendar days, with the possibility of one extension with another 30 calendar days maximum for (i) large taxpayers performing intra-group transactions that are not exceeding the specific threshold referenced above but exceeding other lower thresholds stipulated by the law and for (ii) other categories of taxpayers performing intra-group transactions exceeding the lower thresholds stipulated by the law. In this case, taxpayers have to prepare the transfer pricing documentation and present it to tax authorities within the mentioned deadline, only upon their request during a tax audit.
Failure to present the transfer pricing documentation file or presenting an incomplete file may trigger estimation of transfer prices by the tax authorities based on generally available information.
Advance pricing agreement (APA)
Taxpayers engaged in transactions with related parties have the possibility to apply for an APA. These taxpayers can also schedule a pre-filing meeting to discuss the feasibility of the APA.
The request for an APA is filed together with the relevant documentation and payment evidence of the fee (ranging between EUR 10,000 and EUR 20,000). The required documentation is based on the EUTPD and suggests, up front, the content of the APA.
The term provided by the Fiscal Procedural Code for issuance of an APA is 12 months for unilateral APAs and 18 months for bilateral and multilateral APAs. The APA is issued for a period of up to five years. In exceptional cases, such as long-term agreements, it may be issued for a longer period.
APAs are opposable and binding on the tax authorities as long as there are no material changes in the critical assumptions. In this view, the beneficiaries are obligated to submit an annual report on compliance with the terms and conditions of the agreement.
If taxpayers do not agree with the content of the APA, they can notify the National Agency for Tax Administration within 15 days. In this case, the agreement does not produce any legal effects.
Country-by-country (CbC) reporting
Romania implemented CbC reporting requirements, transposing the provisions of Directive (EU) 2016/881 into the national legislation. The new CbC reporting provisions follow the OECD Base Erosion and Profit Shifting (BEPS) Project Action 13 initiative.
As such, a Romanian tax-resident entity that is the ultimate parent entity of a multinational enterprise (MNE) group with consolidated revenues of EUR 750 million or more, and is required to prepare consolidated financial statements of the group, has to file a CbC report with the Romanian tax authorities within 12 months of the last day of the MNE group’s reporting fiscal year. The Romanian legislation also provides for filing of CbC reporting by a so-called ‘surrogate parent’ (i.e. a Romanian tax-resident entity may be appointed by the MNE group to file a CbC report in Romania on its behalf).
In addition, other Romanian resident entities will be required to file a CbC report if one of the criteria below is met:
- The ultimate parent entity of the group does not have the obligation to file a CbC report in its own jurisdiction of tax residence.
- The jurisdiction in which the ultimate parent entity is resident for tax purposes has a current international agreement to which Romania is a party but does not have a qualifying competent authority agreement in effect to which Romania is a party.
- There is a persistent failure in the automatic exchange procedure with the competent authority of the ultimate parent company required to file CbC reporting.
Moreover, failure to provide the CbC report in time or with incomplete/incorrect data will trigger the following penalties:
- For failing to file a CbC report, the penalty ranges from RON 70,000 to RON 100,000.
- For late filing of a CbC report or for incomplete/incorrect data in a CbC report, the penalty ranges from RON 30,000 to RON 50,000.
Interest deductibility rule
The exceeding borrowing costs (calculated as the difference between any debt-related costs, including foreign exchange expenses and capitalised interest, and income from interest and other economically equivalent income) incurred in a fiscal period that exceed the deductible threshold of EUR 1 million are deductible for CIT purposes up to the limit of 30% of the calculation base. The non-deductible exceeding borrowing costs can be carried forward indefinitely. The limitation also applies to any debt-related costs in connection with loans granted by financial institutions.
The calculation base is determined as the gross accounting profit, minus non-taxable revenues, plus CIT, exceeding borrowing costs and deductible tax depreciation.
The above-mentioned interest deductibility rules also apply to financial institutions, but not to independent entities (i.e. entities that are not part of a consolidated group for financial accounting purposes and do not have related parties and PEs), which can fully deduct exceeding borrowing costs.
Controlled foreign companies (CFCs)
Under the Romanian CFC rules, a taxpayer should include in its taxable base, in proportion with its holding in the CFC, the latter’s non-distributed income derived from the following categories:
- Interest or any other income generated by financial assets.
- Royalties or any other income generated from intellectual property (IP).
- Dividends and income from the disposal of shares.
- Income from financial leasing.
- Income from insurance, banking, and other financial activities.
- Income from invoicing companies that earn sales and services income from goods and services purchased from and sold to associated enterprises and add no or little economic value.
A company is considered a CFC if the following conditions are both met:
- The taxpayer by itself, or together with its associated enterprises, holds a direct or indirect participation of more than 50% of the voting rights, or owns directly or indirectly more than 50% of the capital or is entitled to receive more than 50% of the profits of that company.
- The actual CIT paid on its profits by the company or PE is lower than the difference between the CIT that would have been charged for the company or PE under the applicable Romanian CIT provisions and the actual CIT paid on its profits by the company or PE.
Romania transposed the provisions of the Anti-Tax Avoidance Directive (ATAD) into national law, introducing rules on exit tax. Thus, a taxpayer will be subject to CIT (at 16% tax rate) for transfer of business carried out by a PE, transfer of assets, or transfer of residence. The taxable base should be calculated as the difference between the market value of the assets and their fiscal value.
The provisions of ATAD II have been implemented in the Romanian tax legislation. The Ordinance implementing ATAD II (published in the Official Gazette on 31 January 2020) is in line with ATAD II provisions.
A hybrid mismatch is described as a situation involving a taxpayer or an entity that leads to deduction without inclusion or double deduction. The 'hybrid element' is defined in the legislation as follows: the same payment/entity/instrument/transfer/economic activity that qualifies differently in two tax jurisdictions involved.
If a hybrid mismatch results in double deduction, the deduction should be denied in the investor member state as a primary rule or, as a secondary rule, in the member state of the payer (if the investor’s jurisdiction allows the deduction).
In case a hybrid mismatch results in a deduction without inclusion, the deduction should be denied in the member state of the payer, as a primary rule, or, as a secondary rule, the amount of the payment shall be included as taxable income in the beneficiary’s member state (if the jurisdiction of the payer allowed the deduction).