TAX NEWS - 2010

Romania tax: Emergency tax measures adopted

In response to the economic downturn and need to increase state budget revenue, the Romanian government adopted several amendments to its tax rules in an emergency ordinance (Ordinance No. 58), published in Official Gazette No. 431 on 28 June 2010. The changes, which affect both corporate and individual income taxpayers, became effective on 1 July 2010, but the Ministry of Finance has until 27 July 2010 to issue rules for implementing the new measures.

The most important amendments are as follows:

- A tax credit can be claimed in respect of corporate income tax paid to a foreign country only if a tax treaty between Romania and the foreign country applies and the Romanian company submits documentation attesting to payment of the foreign tax. Before the amendment, a taxpayer only needed to show proof that tax had been paid in another jurisdiction, regardless of whether a treaty existed.

- Losses incurred by a Romanian permanent establishment (PE) located in a non-EU/EFTA or non-tax treaty country may be offset against income earned by the PE on the same source of income, and unused losses may be carried forward and offset against income generated in the following five years. Although not specifically stated, it is understood that the losses of a PE established in an EU/EFTA state or country that has concluded a tax treaty with Romania may be offset in Romania.

- The withholding tax rate on dividends paid between Romanian entities is increased from 10% to 16% (the rate currently withheld on payments to nonresidents) if the conditions for application of the EC Parent-Subsidiary Directive are not satisfied. These conditions require the recipient company to hold at least 10% of the capital of the distributing company for a continuous period of two years.

- For individuals:
     . Taxable income is expanded to include certain previously exempt income (holiday, gift and vouchers).
     . Only 25% of expenses incurred to generate income from intellectual property may be deducted for tax purposes (reduced from 50%).
     . The minimum threshold of annual taxable income from the provision of independent services may not be lower than 12 times the guaranteed minimum monthly wage.
     . A 16% tax applies on previously exempt severance payments, capital gains derived from trading shares on a stock exchange, interest income from deposits, current accounts and savings accounts, and income derived from the trading of derivatives in Romania (the latter applies only to nonresident individuals).
    . A quarterly filing obligation is introduced where capital gains are derived from trading shares on a stock exchange.

- The tax authorities may recharacterize an activity carried out by a Romanian taxpayer as a dependent activity (i.e. as income from employment rather than income earned as an independent contractor) in certain circumstances. If an activity is recharacterized, income tax and mandatory social charges will be reassessed, with the income payer and beneficiary subject to joint and several liability.

- The standard rate of VAT increased from 19% to 24%.