Romanian Tax Incentives Read Between the Lines: How to Use Them Effectively
→ Mihaela Popescu
→ Theodor Artenie
For eligible investors, Romania has a number of attractive tax incentives that can reduce the overall tax burden or improve cash flows during the investment phase.
A good place to start
In recent years we have seen several attempts by the Romanian tax authorities to introduce tax incentives to encourage specific activities or economic sectors. Of these, the R&D tax incentive and the income tax exemption for IT employees are worth particular attention as they are already in the law and can be immediately implemented.
In addition, for VAT the most effective tax incentives are those that can provide cash flow relief for one’s business, especially during the start-up phase. Romania has several types of VAT cash flow relief available, of which we will present the following: VAT cash accounting, VAT consolidation, and assignment of VAT receivables.
The R&D tax incentive
The R&D tax incentive was introduced in 2009 and provides for an additional notional deduction of 50% of eligible R&D costs for corporate income tax purposes. Even if it has been law for several years now, its practical applicability has been limited because the text of the law was rather general. In an attempt to clarify the applicability of the R&D incentive, the tax authorities have recently published a new draft order detailing the scope and application of this incentive. As a general rule, companies eligible for this incentive are those that carry out R&D activities or freely use R&D developed within the EU. Qualifying R&D activities must lead to results that are exploited by taxpayers in their day-to-day activities.
Even if the full scope of the R&D tax incentive remains a grey area, certain categories of taxpayers should qualify – especially software development companies, automotive companies, engineering companies, and pharmaceutical companies, which allocate significant budgets to developing new products/technologies. For such companies, the R&D incentive could prove an important tax saving tool.
Income tax exemption for IT
This exemption has been in the law for many years, and its main purpose was to stimulate software development activities by offering the possibility to reduce overall salary costs by 16%. The tax exemption applies in certain conditions that relate to the activity carried out by the taxpayer, its turnover, and the qualifications of eligible employees. These conditions are relatively easy to meet for software development companies, especially since the eligibility criteria have recently been clarified and extended. This exemption, together with a skilful workforce and relatively low costs, make Romania one of the most attractive locations in Europe for locating IT software development divisions of large multinational high-tech and telecom companies.
VAT cash accounting scheme
In a nutshell, VAT cash accounting is a system whereby Romania-based companies with turnover below EUR 500,000 in the previous calendar year can postpone the chargeability of VAT on their supplies and the deduction of input VAT on their acquisitions until the moment they receive or make payment. The VAT cash accounting scheme is a great way for operational start-up companies to avoid VAT cash leakages as a result of inefficient payment terms agreed with their clients.
VAT consolidation allows Romania-based companies that are related to consolidate their monthly/quarterly VAT positions, under certain conditions. This consolidation allows companies with outstanding VAT liabilities to make an offset with the excess input VAT credit of other companies in the consolidation group. This way, VAT cash is first settled between members of the consolidation group (under far more favourable terms than with the state treasury) and only the balance is paid to / claimed from the state treasury. This consolidation is usually beneficial where the consolidation group comprises an investment vehicle (with excess input VAT) and a trading business unit (with outstanding VAT liabilities).
Assignment of VAT receivables
Last, the Romanian tax procedural code contains provisions that allow companies with VAT receivables against the state treasury (ie, excess input VAT) to assign them to third parties, who can use the receivables to offset against their own outstanding tax liabilities. The procedure is simple; however, before the VAT receivable can be assigned, it must first be certified by the Romanian tax authorities following a tax audit. This relief is well suited for investment vehicles with significant VAT receivables who want to avoid the burden of the VAT refund process (which in Romania can take up to one year) and find “buyers” for their VAT receivables.