When you are a foreign entrepreneur who runs a business in Romania you should be aware of the double tax treaties signed by Romania with other countries in order to avoid paying taxes in both countries. For this, you need the advice provided by a Romanian accountant who can guide you through the entire procedure. For best results in optimum time, you can work with our team of consultants in order to apply for the benefits of the double tax treaties and skip all the bureaucracy and legal and accountant actions.
Short facts about DTTs signed by Romania
Romania has signed several double tax treaties, with the main purpose of avoiding the double taxation on income both in Romania and in each country that has signed a bilateral agreement with Romania, meaning that by these treaties it is regulated the tax applied to the gains of a foreign company in Romania and also the taxes on the income realized by a Romanian legal entity in a foreign country. In the Romanian legislation, the unilateral approach can be seen in the drafting of the Government Ordinance no.7 of 2001 onincome tax. These regulations constitute the common law, defined by the concept of income earned in Romania and abroad, as well as elements of convergence between national law and international conventions for the avoidance of double taxation. The internal remedies involve unilateral legislative measures through which tax relief is granted for a specific type of report or tax for certain categories of persons or incomes.
In applying the territoriality criteria, the taxes are levied on all the income obtained in a State (State of source), regardless of the citizenship of the beneficiary or of the income or acquirer of the property, with the main condition of reciprocity. In principle, the international treaties use two basic methods of double taxation: the exemption method (exclusion from the calculation of taxable income of certain categories of income) and the credit method (use of foreign tax paid as a credit for the tax assessment in the origin country).
The exemption method
This method uses the hypothesis of the situation in which the state of residence of the recipient of income does not tax the income derived by it and taxed in the other State. The exemption may be a total one (the entire income from activities performed in a permanent establishment situated in the source State, but belonging to a trader resident in the other state), or a partial one (the mass total income taxable in the country of residence shall include income earned in another country, establishing the progressive share applied for that income). The difference between full and partial exemption is that those revenues, though taxable, are taken into consideration in calculating the overall taxable income and will, ultimately, be applied a higher tax rate in the state of residence.
The credit method
This implies the deduction by the state of residence of the tax calculated on the basis of all taxable income earned (internal revenues and foreign income) for the tax paid abroad. There are two situations: the partial credit method and the total credit method. The total credit involves the deduction of the tax in the state of residence for the total amount of tax paid abroad. The second situation, the partial credit, provides that the deduction of the tax in the state of residence for the tax paid abroad can be made only up only up to an amount corresponding to the tax that would be applicable in the state of residence for foreign income.
The countries that signed DTTs with Romania
The following countries signed double taxation agreements with Romania for avoiding the double taxation on profits: Albania, Armenia, Algeria, Australia, Azerbaijan, Austria, Belgium, Belarus, Bangladesh, Bulgaria, Bosnia and Herzegovina, Canada, China, Cyprus, Croatia, Czech Republic, Denmark, Ecuador, Egypt, Ethiopia Estonia, Finland, France, Germany, Georgia, Greece, Hungary, Iceland, India, Indonesia, Ireland, Iran, Israel, Italy, Japan, Jordan, Hong Kong, South Korea, Kazakhstan, North Korea, Kuwait, Latvia, Lebanon, Luxembourg, Lithuania, Macedonia, Malta, Malaysia, Mexico, Moldova, Morocco, Namibia, Nigeria, the Netherlands, Norway, Philippines, Pakistan, Poland, Portugal, Qatar, Russia, Singapore San Marino, Saudi Arabia, Slovakia, Serbia, South Africa, Slovenia, Spain, Sudan, Sri Lanka, Switzerland, Sweden, Syria, Tajikistan, Tunisia, Thailand, Turkey, Turkmenistan, UK, the UAE, United Kingdom, the USA, Uzbekistan, Uruguay, Vietnam and Zambia.
DDTs with Italy, the UAE and Norway
In matters of dividends, the DDT signed with Italy stipulates exemptions if the owner of a holding company has at least 10% of the capital of the firm that pays the dividends for at least 2 years. As for other types of companies, the dividends are levied at a 5% tax rate. In the case of UAE, the dividends are subject to a 3% tax rate except for the cases in which the owners of a company are part of the state’s government. The recent double taxation treaty signed by Romania and Norway mentions the 5% tax rate on dividends for company owners holding at least 10% of the business capital and 10% rate for other companies. In the case of interests, these are levied with 5% rate for companies from Norway and Italy and 3% for companies from UAE. The same thing is available for royalties. The elimination of double taxation for Romania and Italy, between Romania, Italy, Norway, and the UAE were signed in 2016 and entered into force a year later.
If you have a company in Romania and you need to know the tax regulations in this country, we kindly invite you to get in touch with our team of accountants in Romania who can also perform audits for your company in Romania.
The meaning of permanent establishment
An establishment means that the company has a place of management, an office, a workshop, a branch, a factory, a place of extraction if it is involved in oil and gas industry, a construction, or a building site. A business is not considered to have a permanent establishment if the operations are carried out by an agent or a broker without a place of business. The permanent establishment of a company is normally stipulated by the Articles of Association, the main documents in the firm. When determining the profits of a permanent establishment in one of the contracting states, the general and executive administrative expenses are deducted.
Taxation on shipping and air transport
The profits of companies involved in transportation by air and sea are levied in the contracting state where the profits are registered. The incomes registered from rented boats, ships, trailers, containers and aircraft with international operations are subject to the double taxation treaties signed by Romania and the above-mentioned countries.
Employment incomes and DTTs signed by Romania
The wages, the salaries and other personal income sources registered by a citizen with residency in Romania or in another contracting state will be levied in the country in which the remuneration is generated. As for the directors’ fees, these are also taxed in one of the contracting states. The incomes of entertainers, sportsmen, musicians are taxes in the country where such revenues are registered.
The importance of double tax treaties signed by Romania
The double taxation agreements signed by Romania with countries worldwide are of high importance when it comes to the taxation on incomes. The purpose is to avoid paying the taxes twice for the same incomes, once in the country of living and once in the country of origin. Romania continues to develop and establish other significant double taxation conventions with countries with which it collaborates in economic terms.
The history of double taxation treaties
The double tax treaties have a long history, since the 18th century when France and Italy signed the first regulation in this field, detected on the fees levied in these two countries. The first attempts at fiscal policy solution are found only in the 19th century when it began the first staging in the treatment of double taxation. The first concrete attempt to eliminate double taxation is seen in relations between the federal states of the same union (German Federal Law of 1870 and the Swiss Constitution of 1874). Then the semi-independents within the British Empire concluded conventions or bilateral agreements on avoidance of double taxation. This is followed by the removal of double taxation between independent sovereign states and the first double taxation treaty signed in 1899 between Prussia and the Austro -Hungarian Empire. In 1932, the League of Nations, the forerunner of today’s United Nations, published an official report proposing concrete solutions to avoid double taxation:
– The State of residence allows from lower taxes paid by its taxpayers and the tax paid abroad.
– The State in which the income has its source exempts non – residents to pay taxes, as they will already be taxed only in the state of residence.
– The taxes are divided between the two states: one in which the taxpayer is resident and one where the income has its source.
Short tax facts about Romania
The VAT rate is set at 19% for most of the goods and services meant for sale purposes. As for foodstuff, newspapers, medicines, hotel accommodation services, water supplies, catering, and some agricultural supplies, and restaurants are levied with a 9% VAT rate. Banks, insurance companies and other financial institutions are not subject to VAT. Since January 2018, the personal income tax was reduced from 16% to 10% and it is applicable to salaries, wages, investments, independent activities, real estate transactions, agricultural activities, and monthly retirement pensions. A rate of 16% represents the tax on profits of companies with establishments in Romania. We remind that the double taxation treaties signed by Romania are meant to protect companies and citizens from paying the taxes twice.
We invite you to get in touch with our team of accountants in Romania and find out more details about the double taxation agreements signed by Romania with the purpose of avoiding the double taxation on incomes.