TERRITORIALITY AND RESIDENCE

All Romanian individual tax residents are taxed in Romania on their worldwide income, regardless of their nationality. Generally, individuals are deemed to be resident if they are domiciled in Romania or are physically present in Romania for a period exceeding 183 days in any 12 month period. Non-resident individuals are taxed on Romanian-source income only. Individuals may be exempt from such taxation under the regulations of the international conventions for the avoidance of double taxation between Romania and their country of residence.

According to Foreign Investment Law No 35/1991, joint ventures can hire foreign citizens only in management and jobs requiring expertise. At this stage, there are no incentives granted by Romanian law to foreign employees.

GROSS INCOME

  • Employee gross income

Employee gross income includes basic pay, overtime pay, supplementary pay, awards and bonuses, compensations for unused holiday or vacation time, and all other monetary amounts and benefits-in-kind, as well as other services obtained without payment. Income from each source is defined as the total amount of revenues received during a month, irrespective of the period in which it was generated. The loss carryforward concept is not provided for in Romanian law for individuals.

According to Romanian law, there are no concessions for short-term residents.

  • Capital gains and investment income

There is no capital gains tax in Romania. The concept of income globalization is not yet defined in Romanian law.

Certain investment income is exempt from tax, such as income from interest on savings deposits and demand accounts (except from bank accounts operated for business purposes), interest on state treasury bonds, and the withdrawal of funds from trust funds.

Dividends are distributed from the net after-tax profit of a company. Dividends and shares in profits, as well as undistributable retained earnings, are not aggregated with income from other sources. The dividends are subject to a 10% withholding tax.

Nonresident individuals are also subject to the following withholding taxes unless a bilateral tax treaty between Romania and the individual's country of residence states otherwise.

1. 15% on interest on trade credits and commissions on commercial transactions.

2. 15% on revenues on technical assistance, expertise, training, and other services performed in Romania.

3. 20% on royalties obtained through concession of patents, licenses, trademarks, and other intellectual rights.

4. 25% on incomes of artists.

TAX-EXEMPT INCOME

The most important types of income that are tax exempt are specified below.

1. Monetary damages received on the basis of administrative law, civil law and other legal acts.

2. Receipts from property insurance and personal insurance claims.

3. Interest on savings and demand accounts, except for business accounts, and interest on state treasury bonds.

4. Money won in legally registered games of chance and in lotteries.

5. The income, of individuals (consultants) coming into Romania for a temporary period if that income derives from no cost funds established by international financial institutions or from resources allocated by other countries on the basis of agreements concluded with the Romanian government or other governmental organizations.

6. Reimbursement of an employee's costs for relocating to another place of employment if the transfer is in the company's interest.

7. Limited daily allowances due to employees for the duration of business trips.

8. The value of accommodation and other additional pay provided by an employer for employees working away from their place of permanent residence for short periods, according to the principles and limits outlined in the rules for state employees.

9. Social security allowances, and child allowances.

10. Limited payments for employees who use their private cars for company business.

11. Income originating outside Romanian territory, if an agreement for the avoidance of double taxation between Romania and the foreign country provides for exemption.

12. Foreign correspondents' are exempt for income tax purposes.

DEDUCTIONS

  • Business expenses

Taxpayers are not entitled to standard annual deductions.

  • Nonbusiness expenses

There are no allowable nonbusiness expenses.

  • Personal allowances

There are no personal allowances available to Romanian taxpayers.

  • Tax credits

A taxpayer's income originating abroad that is subject to Romanian taxation (ie not exempt from taxation in Romania under an agreement for the avoidance of double taxation) is accumulated on a monthly basis with income earned from work in Romania, and the tax is calculated on this sum, according to the tax table. Income tax is then reduced by the amount of tax paid outside Romania. The tax credit may not exceed the tax calculated on total income, multiplied by the proportion of income arising outside Romania to total income.

Other taxes

  • Social security taxes

Employers must pay social security contributions, calculated on gross salary, as follows:

1. Social security fund               23%.
2. Medical fund                        2%.
3. Unemployment fund                   5%.

The employee owes the following contributions:

1. salary tax depending on income level.
2. Pension fund                        3%.
3. Unemployment fund                   1%.

Foreign citizens working in Romania on the basis of a work permit and a labor contract registered with the Labor Office are considered Romanian employees and are generally liable for Romanian social security contributions based on the labour contract.

A foreign citizen who is not resident in Romania and is not employed or paid by an employer who has a permanent establishment in Romania has no liability to pay social security contributions and no requirement to prove payment of social security contributions in another territory.

Contributions owed by employees are withheld by employers and paid by the employer through bank disbursements at the same time as the contributions due from the employer.

STAMP DUTY

The following stamp tax rates apply to the selling value of land and buildings:

a) up to 1,000,000 lei - 4%, but not less than 10,000 lei
b) from 1,000,001 lei to 5,000,000 lei - 40,000 lei + 3% for the amount exceeding 1,000,000 lei
c) from 5,000,001 lei to 10,000,000 lei - 160,000 lei + 2% for the amount exceeding 5,000,000 lei
d) from 10,000,001 lei to 15,000,000 lei - 260,000 lei + 1.5% for the amount exceeding 10,000,000 lei
e) over 15,000,000 lei - 335,000 lei + 1% for the amount exceeding 15,000,000 lei

  • Local taxes on income

There are no local taxes on income.

TAX ADMINISTRATION

  • Returns

There is no requirement for individuals to submit tax returns. Semi-annually returns are filed by the employer with the local tax office as a statement of tax calculated and paid.

Husbands and wives are treated as individual taxpayers, and the legal concept of income splitting does not exist in the Romanian legal system.

  • Payment of tax

Individuals whose income derives from an employment contract, a civil/collaboration contract, or a retirement or disability pension will have tax withheld from sums due to them. The standard procedure for the employment contract and collaboration contract is to withhold the full amount of tax due (at the levels shown below) from the employee's monthly income.

In the case of a foreign employee who is paid in hard currency, the tax due is calculated by converting the monthly gross income into ROL at the official exchange rate of the last day of said month, and the taxes will be withdrawn from this amount. Net payment is received as the calculated difference, in hard currency at the above stated exchange rate.

Excess withholdings will be given back to the employee within 30 days after the reconciliation.

  • Tax rates

The individual tax rates in Romania are very high. The maximum marginal rate of 60% is applied to monthly income in excess of ROL 1,073,000 (approximately USD 350).

Note: Both the rates and the taxable levels are subject to change due to the relatively high inflation rate.

INDIVIDUAL TAX CALCULATION

  • Assumptions

The taxpayer arrived in Romania for a temporary stay (over 183 days in a given tax year) in order to take employment as an expert in a company with foreign participation.

TAX COMPUTATION

Monthly basis                                          ROL(000's)

Monthly salary (USD 6,000 approx)                      18,000,000

Tax on salary:
On first         (1,073,000)              (351,667)
On remaining     16,927,000 at 60%     (10,156,200)
                                                      (10,507,867)

Net monthly income                                      7,492,133

ANNUAL BASIS

Romanian law provides monthly rates and computation. However, the above tax computation example is presented below on an annual basis in order to have an international term of comparison.
                                                               ROL

Annual salary                                          216,000,000

Interest on savings                                      2,000,000

Annual gross income                                    218,000,000

Less tax-exempt income:

Interest on savings                                     (2,000,000)
Annual taxable income                                  216,000,000

Less: Tax on salary withheld during the year          (126,094,404)

Annual income                                           89,905,596

Note:

Official exchange rate at 31 December 1995: USD 1 = ROL 2,578. The market exchange rate at that date was approximately USD 1 = ROL 3,000.

Disclaimer

The above information is a short summary and is not intended to be advice on any particular matter. Price Waterhouse expressly disclaims any liability to any person in respect of anything done in reliance on the contents of this publication.

For additional information on taxation in Romania, contact:

Ron Barden
Price Waterhouse Romania
Union Center International
Strada Ion Campineanu No 11
Sector 1 Bucuresti
Romania

or enter a text search 'Price Waterhouse' and 'Business Monitor'.