Romania: Managing The Tax Pitfalls Of Contractual Partnerships Structures

Last Updated: 9 September 2013
Article by Theodor Artenie and Mihaela Popescu

Contractual partnerships (such as joint ventures, consortia, etc.) are a viable structuring alternative for large scale projects in most market sectors, and in particular for infrastructure projects. Despite the encumbrance of having to deal with many and at times, inconsistent, compliance requirements, contractual partnerships can also bring certain tax benefits if they are rigorously and correctly planned from the beginning of the project.

Given the complex tax matters that contractual partnerships often pose in practice, we have presented below guideline answers to the most common questions companies usually face when implementing various forms of contractual partnerships.

1. Does one need to register the partnership with the Romanian tax authorities?

Corporate income tax: The necessity of registering a partnership for corporate tax purposes in Romania depends on whether the partnership is made up solely of resident entities or if it involves non-resident entities as well. In particular, under the current law, only those partnerships in which at least one member is a non-resident must be registered for profit tax purposes, i.e. the leader of the partnership will need to obtain a tax identification number for the partnership, which will be used to declare the profit tax liabilities in Romania of each individual non-resident partner.

One important point is that the current tax legislation applicable to partnerships is not aligned with the legislation applicable to permanent establishments (PEs). As such, PEs of non-resident members of partnerships may fall under the rules applicable to partnerships, as well as under the rules applicable to PEs, which may pose significant tax issues related to the tax compliance obligations these non-residents would have in Romania.

VAT: The partnership itself does not need to be registered for VAT purposes in Romania. However, that does not preclude individual non-resident partners from having to register for VAT purposes individually, depending on their activity in Romania (as part of the partnership or outside it). The best approach is to thoroughly analyse the complete set of transactions non-residents are going to perform in Romania before, during, and after the partnership in order to accurately assess whether they have VAT obligations in Romania.

2. Who accounts for the partnership's revenue and expenses and who deals with its VAT obligations?

The partnership's designated leader is normally in charge of the accounting of the partnership's revenues and expenses. The corporate tax law requires these obligations to be carried out by a resident member if a partnership comprises both residents and non-residents. Therefore, a resident member is usually the designated leader for tax purposes.

The leader is also required, by law, to manage all of the partnership's VAT rights and obligations, encompassing the following:

  • The leader must make all of the partnership's acquisitions in its name and claim input VAT credit on the partnership's behalf.
  • The leader is liable to issue invoices and charge VAT on the partnership's output activity (assuming of course this activity is subject to VAT).
  • If the case, the leader must / can adjust the input VAT for the goods and services which are contributed to the partnership by it or by the other members, as well as for the goods and services which are purchased by the leader in the partnership's name.

3. What tax implications must one consider for the contributions made to the partnership?

The free of charge contribution of goods and services to a partnership is outside the scope of VAT on condition that the contribution is proportional to the contributor's share in the partnership.

Whatever exceeds the individual share will be treated as a VAT-able supply of goods or services, as appropriate.

Another very important point is the "adjustment of input VAT", which is carried out by the leader in connection with the goods and services contributed by all members to the partnership. The input VAT adjustment may result in a VAT liability or in additional input VAT credit that will be paid / claimed by the leader on behalf of the partnership. The cost associated with the adjustment is normally a cost of the partnership and it should be distributed accordingly.

Input VAT adjustment is a very complex matter which needs to be thoroughly investigated and managed in order to avoid unexpected VAT costs for the partnership or for the individual partners.

4. How can a member distinguish between their own costs and those of the partnership?

This distinction is relevant for the correct assessment of the input VAT credit of the partnership, if the case.

If a member contributes goods and services to the partnership, the underlying costs should not be seen as a cost of the partnership and the related input VAT will be that member's responsibility.

On the other hand, all of the acquisitions of goods and services made to satisfy the partnership's needs (in excess of the members' individual contribution) should be made by the leader in its own name, but on behalf of the partnership. In other words, the leader must account for the associated costs and for any input VAT credit, if the case. The costs would be further distributed to the members in accordance with their share in the partnership.

If partners other than the leader account for these costs or the related VAT, they will most likely face a risk when it comes to claiming full input VAT credit and corporate tax deductibility for the respective acquisitions.

5. How are the partnership's proceeds distributed to the partners and who pays profit tax and VAT on these proceeds?

Corporate income tax: According to the law, both Romanian resident legal entities and non-resident members of a partnership that carry out an activity in Romania are obliged to pay 16% corporate income tax in Romania on their share of the profit derived from the partnership.

As regards resident members, they would aggregate the result (taxable revenues and deductible expenses) obtained from the partnership in the company's overall profit/loss, which will then be subject to 16% corporate income tax.

Non-resident partners are normally also required to pay 16% profit tax in Romania on their share of profit attributable from the partnership. However, if a double taxation treaty is in place between Romania and the non-resident partner's country of tax residence, then no corporate income tax should be due in Romania as long as the non-resident does not create a PE in Romania.

VAT: From a VAT perspective, the distribution made by the partnership's leader to the rest of its partners of the proceeds (revenue less expenses) derived from the said partnership is outside the scope of VAT as long as it is made proportionally to each partner's share.

If that individual share is not observed, there is a risk that the relief will be challenged and that the members will be assessed with VAT for their share of the partnership proceeds. Although the local legislation is not clear enough on this matter, there are arguments in the case law of the Court of Justice of the European Union to mitigate this reclassification risk, at least in some situations.

In conclusion, the tax requirements for contractual partnerships are quite complex and, in some instances, difficult to manage. This is partly due to the limitations of the existing legal framework, as well as to the limited case-law of the Romanian tax authorities when dealing with such complex arrangements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions