The new Romanian Fiscal Code was adopted on September 10, 2015, but most measures will apply starting January 1, 2016.
With a promising perspective for fiscal relaxation measures, including lower dividend tax, lower social security contributions and even a lower flat-tax rate, the first draft of the new Romanian Debating Code initially announced by the Government in early 2015 was sent back to Parliament by President Klaus Iohannis, who refused to sign it. The political parties represented in Parliament reviewed the tax cuts together with the Government and kept only a few; most were either postponed until 2017 or removed completely.
The most relevant amendments of the Debating Code applicable starting January 1, 2016, are:
- The dividend tax rate will be cut from 16% to 5% for all dividends paid or distributed to be paid by a Romanian company to all its shareholders, individuals or companies, Romanian or non-residents.
- The current standard 24% VAT rate is cut to 20% on January 1, 2016, and to 19% January 1, 2017.
- VAT on food and non-alcoholic beverages will remain at a reduced 9% rate.
- The lowest 5% VAT rate will still apply to the sale of social housing (to individuals), with new conditions more favorable for the buyer, and will be extended to books, textbooks, admission to athletic or cultural events, museums, etc.
- Application of the reverse charge mechanism for the sale of buildings/land (under certain conditions) started.
- The profit tax remains at 16%. For bars, nightlife, nightclubs, discos or casinos, the tax will be 16%, but not less than 5% of total revenues.
- Dividend income received by a Romanian company from another Romanian company is non-taxable for the purposes of corporate income tax, irrespective of any holding requirements.
- For micro-enterprises (entities with annual turnover of less than 100.000 euro) already incorporated, income tax will be form 1% up to 3% on total incomes (with few exceptions) according to their number of employees;
- For income from intellectual property rights, for which the tax is withheld at the source, the share of expenditure lump sums is increased from 20% to 40%. This income is freed from the payment of health insurance premiums in 2016 if the person has other income subject to health contributions, such as wage income.
- Social security contributions for employees will be reduced from 10.5% to 7.5%, and those paid by employers will drop from 15.8% to 13.5% on January 1, 2018.
- The taxable base for the health insurance contribution is enlarged as to the source of income (e.g. dividends), but capped starting January 1, 2017.
- The tax on buildings will be determined based on the utilization of the building (e.g. residential, nonresidential, mixed use), which may lead to significant increases. Local authorities will also be able to charge higher taxes for unattended buildings and land.
It is a very comprehensive law containing both good and unpleasant aspects. Resources for sustaining a lower VAT rate are to be identified with increased taxation at the individual level, especially enlarging the base of incomes not currently taxed. There are tax increases such as increased local taxes for individuals, including substantial increases, and often for homes used as offices for self-employment. We also see an expansion of the types of income for which contributions are due to individual pension or health funds.
However, there are positive aspects, too, as noted in a recent Erste Bank report on the new Fiscal Code. Included are greater economic growth, higher private investments, greater consumption and savings and the improvement of credit quality. At the same time, companies will have supplementary funds and banks will benefit from increased issuing of government bonds if Romania maintains its investment-grade ratings.
This is a very comprehensive law, containing both good and unpleasant aspects.
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