For the last couple of years the Romanian government has initiated various tax measures meant to attract foreign investors and to develop their long-term operations in Romania. In fact, as we will try to highlight below, all these initiatives have put the country on the map of the European countries with the most favorable holding legislation, on the same level with well-known countries like the Netherlands, Cyprus and Luxemburg.
In order to answer the above question of whether Romania is a future business hub, we need to first present the corporate income tax rate of 16 percent, one of the most competitive taxes in all the EU member states. Only Bulgaria and Cyprus (with 10 percent) and Latvia and Lithuania (with 15 percent) have a lower rate. This 16 percent rate has been applicable since 2005 and it looks like the Romanian government will keep it unchanged. This actually contributed a great deal to the stability of the Romanian corporate taxation environment and, consequently, is one of the factors that will certainly attract long-term investment in the country.
At the same time, the latest tax legislation amendments brought by the government with regards to the taxation of dividends and capital gains also sustain this softer approach, in which a long-term vision of foreign investments is encouraged, rather than a speculative approach that would have led to short-termism. The main reason behind all this is Romania’s goal for the ensuing years, namely its tax stability.
The recent amendments on the taxation of dividends highlight that dividends distributed by a Romanian company to a non-resident company established in a state that concluded a Double Taxation Treaty (“DTT”) with our country, are tax-exempt if this non-resident company (either
EU or non-EU member) holds minimum 10 percent of the Romanian company’s share capital for a period of more than one year, as opposed to the two-year period, which was previously applicable.
These current provisions are actually more favorable than those of the parent–subsidiary directive for the dividend–beneficiaries resident in EU member states, while for those from non-EU countries with which Romania has a DTT concluded, this exemption is very often more advantageous than the dividend tax rate stated in the respective DTT.
Similarly, the capital gains obtained following the sale of shares held in a company resident in Romania or in a country with which the country has a DTT concluded are tax-exempt if the beneficiary of these gains hold a minimum 10 percent of that company’s share capital for a period of more than one year.
Regarding the countries for which these favorable measures are applicable, we have to mention the fact that Romania is one of the EU member states having the largest number of DTT concluded: 85. That includes all EU countries, almost all the European countries, the United States and Canada, Australia, the largest four Arabian countries, 20 Asian countries, 12 African countries and two Latin-American countries.
Comparably, the Netherlands, Cyprus and Luxembourg, countries renowned for favorable holding legislation, have 95, 53 and 77 DTTs concluded respectively. We could say, therefore, that Romania has started to have its tax legislation comparable to that of the other EU member states.
Also, it is worth mentioning that the latest amendments were completed by a left-wing government, but were also included in the former right- wing government’s program, which shows a unanimous approach of the Romanian politicians with regards to the holding taxation intended to be applied to the country. Therefore, in the eventuality of a government change, these measures will remain unchanged, thus contributing to the overall stability of long-term holding taxation in Romania.
To conclude, you might want to keep all eyes on Romania, as it shows good potential to become an important regional hub for the foreign investment, considering the latest amendments and its importance in Eastern Europe.
Gabriel Biris is a partner at at Biris Goran SCPA in Romania.