In 2019, Romania was among top performers in the EU, with a GDP growth of 4.11%. Thanks to numerous structuring reforms and international funding, the country is craving its way to becoming a booming economy.
While the standard corporate tax in Romania is 16%, the Microenterprise scheme offers tax advantages to small and medium companies with a turnover less than an equivalent of 1,000,000 Euro in the preceding period. They pay only 3% tax based on net sales and, if they employ at least one full-time employee, the tax rate further goes down to 1%.
The Microenterprise scheme is outlined in detail in articles 47-57 of the Romanian fiscal code. Fiscally transparent entities with legal personality and some sectors are excluded.
For international groups of companies, it is therefore interesting to set up structures in a way that the Romanian Microenterprise has little costs and receives mainly revenue.
Company structures in Romania
Both local or foreign shareholders, individuals or companies, can benefit from the Microenterprise scheme. The same person may own 100% shares in more than one company.
Sole entrepreneurs and branches of foreign entities do not qualify for the scheme. For partners of general partnerships and limited partnerships, it depends on whether they opt to be taxed like a company.
This freedom of choice may bring about tax benefits if, for example, a partnership qualifies as untransparent in the source country and is being treated as transparent in the residence country.
Structure costs include company formation fees (starting from 400 Euro) and ongoing costs for domicile, company administration and accounting, which range between 2,000 and 5,000 Euro per year.
To benefit from the lower 1% tax rate on net sales, a company needs to employ a full-time employee. To meet this criterion, a Romanian company owner can pay himself a minimum salary of 461 Euro per month in 2020. In this case, the total tax and social charges sum up to 2,320 Euro. Consequently, if there are little costs and the profit is less than 100,000 Euro, it is cheaper to avoid employment costs and pay 3% tax.
A small additional optimization is possible, because art. 48 allows the scheme to be applied if there are 60 days without employment. This reduces the approximative 2,320 Euro fix costs to 1,933 Euro.
How to calculate the tax basis
The starting point for the tax declaration is the net turnover, and transactions are booked based on accrual accounting (not cash accounting). For the Microenterprise scheme, some types of revenue do not count (see the complete list in art. 53 of the Fiscal Code).
Microcompanies in Romania must submit tax declarations on a quarterly basis, by the 25th day of the following month. For example, statements for January-March are due by April 25th.
If a company exceeds the 1,000,000 EUR revenue limit (art. 52 of the Fiscal Code), it will switch to the standard 16% corporate tax rate in the same quarter when it exceeds the limit. Therefore, it is recommended to keep an eye on income and timing, as well as split activities between a couple of companies.
How to move money from corporate to private level
For those who live in Romania, the dividend tax is 5%, while the personal income tax is 10%.
For corporate shareholders within the EU, the Parent-Subsidiary Directive provides for tax-exempt dividend transfer between a Romanian and an EU company, if the parent company holds at least 10% of the subsidiary’s shares for an uninterrupted period of one year.
In case of private and corporate shareholders outside Romania, double tax treaties between the source state and the residence state define the withholding tax in Romania, with the residence state normally taxing the passive income.
However, there is an Anti-abuse rule: the Romanian authorities can cancel tax benefits if profits were allegedly obtained from abusive arrangements.
Less critical are the CFC regulations: they are applicable only in case of a lower corporate income tax rate than in Romania (less than 1% in case of microenterprises).
This makes the Romanian Microenterprise scheme an attractive onshore solution without the risk of being blacklisted: investors can target the metropolitan area of Bucharest, green industrialized regions in the countryside or the beautiful Mamaia beach at the Black Sea.
A company in Romania is a fully EU compliant onshore solution that provides tax benefits comparable with some major tax havens. It is easy to arrange substance, as highly qualified labor is available at a moderate wage level.
A microenterprise in Romania can be a good starting point for doing business in the EU, accumulating and reinvesting profits. It is cost-effective and fully compliant with international BEPS regulations. Worth a try!