The corporate income tax result of a company is calculated as the difference between the total revenues and expenses booked in accordance with the accounting regulations, adjusted for fiscal purposes by deducting non-taxable revenue and adding non-deductible expenses. Other elements similar to revenue and expenses are also to be taken into account when calculating the taxable result.
For taxpayers that apply International Financial Reporting Standards (IFRS) (i.e. financial institutions and listed companies), there are specific rules in relation to the fiscal value assessment, corporate income tax computation, adjustments for step-down in value, depreciation, and fiscal treatment of deferred result.
The methods permitted for inventory valuation under Romanian law are standard cost, detailed sale price, average (weighted) cost, first in first out (FIFO), and last in first out (LIFO). The accounting method is also recognised for tax purposes.
Assets are generally valued at their acquisition cost, production cost, or market value. Fixed assets may be re-valued at certain points in time for various purposes.
Capital gains earned by a Romanian resident company are included in its ordinary profits and are taxed at 16% corporate income tax rate. Participation exemption applies for income derived by a Romanian legal entity from the sale of shares held in a Romanian legal entity or in a foreign legal entity resident in a state with which Romania has a DTT, in case of participations of at least 10%, held for a minimum period of one year.
Capital gains derived by non-residents from real estate property located in Romania or from the sale of participation titles held in a Romanian company or in a foreign company tax resident in Romania due to place of effective management are also taxable in Romania at 16% corporate income tax rate. However, an exemption could apply as per Romania law in case of the sale of participation titles, under certain conditions (i.e. at least 10% ownership for an uninterrupted period of at least one year, tax residency in a DTT country). Moreover, such capital gains may be subject to treaty protection.
Dividend income received by a Romanian company from another Romanian company is non-taxable.
Dividends distributed by a company resident in another EU member state to a Romanian company which pays corporate income tax are tax exempt at the level of the Romanian company if it has held, minimum 10% of the shares in the respective non-resident company for an uninterrupted period of at least one year, at the date when the dividend income was booked.
The Romanian Fiscal Code incorporates the amendments to the European Directive no. 2011/96/EU, relating to the application of a common system of taxation in the case of parent companies and subsidiaries of different member states. The legislation introduces the anti-abuse rule for preventing unlawful tax practices used to obtain tax benefits contrary to the Directive’s principles. Also, dividends received by a Romanian legal entity from a foreign legal entity under certain conditions mentioned above will not be taxed as long as those dividends are not treated as deductible expenses by the paying subsidiary.
Participation exemption applies also for dividends incom derived by a Romanian legal entity from participation of at least 10%, held for a minimum period of one year, in a subsidiary established in a non-EU state with which Romania has a DTT.
The tax rate on dividends is 5% for both dividends paid by a Romanian company to other Romanian companies (if the conditions regarding ownership of at least 10% for at least one year are not fulfilled) and to non-resident companies. Non-residents may be eligible for a reduced rate under DTTs.
Interest and royalty income
Interest and royalty income obtained by Romanian legal entities should be treated as taxable for corporate income tax purposes.
Romanian-sourced interest and royalty payments of an affiliated company, resident in an EU member state, are exempt from withholding tax (WHT), provided that certain conditions are met, e.g.:
- 25% minimum direct holding of the share capital (i.e. one company has a direct minimum holding of 25% in the share capital of the other company or a third company has a direct minimum holding of 25% in the share capital of both companies involved in the payment of the interest and royalties).
- The holding period must be maintained for an uninterrupted period of at least two years prior to the payment of the interest and royalties.
- The company receiving the interest or royalty payments must be the beneficial owner of these payments.
If the settlor of a fiduciary contract is also the beneficiary, then:
- the transfer of the patrimony from the settlor to the fiduciary is not considered a taxable transfer, and
- the fiduciary will keep separate bookkeeping entry for the fiduciary patrimony and will communicate to the settlor, on a quarterly basis, the income and expenses resulting from the administration of the patrimony.
If the beneficiary is the fiduciary or a third party, the expenses incurred with respect to the transfer of the patrimony from the settlor to the fiduciary should be considered non-deductible.
Other significant items
The other most relevant types of non-taxable revenue stipulated by the Romanian Fiscal Code are:
- Revenue from reversal or cancellation of provisions/expenses that were previously non-deductible, recovery of expenses that were previously non-deductible, and revenue from reversal or cancellation of interest and late payment penalties that were previously non-deductible.
- Revenue from the annulment of a reserve registered as a result of a participation in nature to the capital of other legal entities.
- Revenue from deferred income tax.
- Revenue resulting from the change in the fair value of real estate investments/biological assets owned by the taxpayers applying IFRS.
- Non-taxable revenue expressly provided for under agreements and memoranda enforced by regulatory documents.
Resident companies are taxed on their worldwide income unless a DTT provides otherwise. In case of foreign subsidiaries of Romanian companies, income is not taxed in Romania until remitted back. Otherwise, there is no specific tax deferral regime in place.