Investment in Romania

Taxation		Updated: 27/1/2005
	Taxation
	Corporate Taxation
			Corporate Income Tax
			Tax on Dividends
			Income tax for micro-enterprises
			Tax for Representative Offices
			Indirect Taxes
	Taxation of Non-residents/Withholding Taxes
	Tax Incentives for Investment
			Tax Incentives for Direct Investments
			Free Trade Zones
			Tax Incentives for Disadvantaged Regions
	Taxation of individuals
			Employee Taxation
			Taxation of Expatriates
			Taxation of Other Income
	Local Taxes and Duties
			Taxes on Buildings
			Taxes on Land
			Taxes on Vehicles
			Taxes on Advertising, Promotion and Display Facilitites
			Tax on shows
			Hotel tax

	Other Taxes and Duties
			Stamp duties (conformity marks)
			Contributions to special funds
	Late payment penalties

Taxation

Romanian law provides for the following taxes:

•	corporate income tax (tax on profit);
•	individual income tax (tax on salary and tax on income of independent professionals);
•	tax on agricultural income;
•	tax on dividends;
•	withholding tax on income earned by non-residents;
•	value added tax;
•	excise duties (on several products);
•	customs duties (on imports);
•	real estate taxes (on buildings and land);
•	tax on domestic production of crude oil and natural gas;
•	local taxes.

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Corporate Taxation

Corporate Income Tax

Corporate profits are subject to taxation in accordance with Romanian Fiscal Code as approved by Law 571/2003, in force since 1 January 2004; a number of amendments having been made, however, since 1 January 2004.

Taxpayers are:

•	Romanian legal persons, subject to tax on their worldwide profit;
•	Foreign legal persons carrying out activities in Romania through a permanent establishment (PE) - on profits attributable to this PE. The definition of a PE provided for by Romanian legislation is generally in line with the standard tax treaty definition, as contained in the OECD tax model treaty;
•	Public institutions on income derived from economic activities;
•	Non-Romanians carrying out activities in Romania through partnerships or associations that do not qualify as Romanian legal entities, on income derived from Romania. Foreign individuals are subject to special rules of taxation, established by the Fiscal Code;
•	Associations or partnerships formed by Romanian individuals in association with Romanian companies;
•	Non-resident companies realizing revenues from the sale of shares and similar rights in a company whose assets mainly consist of - whether directly or not - real estate located in Romania, and revenues from sale of any property right held by a Romanian company. Note that some treaties for the avoidance of double taxation protect these revenues from being levied in Romania.
Tax rates are as follows:
•	Standard rate of 25% (16% starting 1 January 2005);
•	A 5% reduced rate on the taxable profit corresponding to revenues from activities performed within the free zones based on licenses until 31 December 2004. As from 1 January 2005, profits earned from operations in a free trade zone will be subject to the regular corporate income tax (16%). However, until 31 December 2006 a special corporate profit tax exemption continues to apply to certain companies carrying out manufacturing activities, which invested in the Free Trade Zone prior to 30 June 2002.
•	Profits earned from nightclubs, casinos, discotheques and sport betting organizers, inclusively on the basis of an association agreement, are levied at the higher of the standard rate of 25% (16% starting 2005) and 5% of qualifying gross revenue earnings.
The Fiscal Code provides for the following generally applicable tax incentives:
•	Accelerated depreciation - this regime may be used for technological equipment such as machinery and installations, computers and related equipment. The accelerated depreciation regime allows for a deduction of at most 50% of the entry value of the fixed asset. This regime may also be used for patents.
•	20% additional deduction - Taxpayers investing in depreciable fixed assets and/or amortizable patents which are intended to be used for their authorized business activities, may deduct additional depreciation expenses of 20% of their initial value. The remaining value to be depreciated during their useful life is determined by subtracting the 20% deduction from the initial value. Taxpayers have to keep ownership of the relevant fixed assets for a period equal to at least half of the assets’ useful lives. The 20% deduction is applicable also for financial lease arrangements with definitive clause of transfer of ownership at the end of the agreement.

Taxpayers cannot benefit from both of the above incentives. Taxpayers benefiting from reduced profit tax rates for activities performed within Free Trade Zones can benefit either from the 20% deduction or from accelerated depreciation. Additionally, until 31 December 2006 a special tax exemption from corporate profit tax applies to certain companies carrying out manufacturing activities, which had been pre-invested in the Free Trade Zone prior to 30 June 2002 (i.e. for investments in depreciable tangible assets used in manufacturing activities of at least USD 1,000,000).

Additionally, until 31 December 2006:

•	Taxpayers directly involved in production of cinematographic films registered with the Cinematographic Register (1) are exempt from profit tax for the part of the profits reinvested in cinematography, (2) benefit from a 20% profit tax deduction if year-on-year, they increase the number of employees by at least 10%.
•	For investments of at least USD 1,000,000 with major impact on the economy registered with the Agency for Foreign Investments according to Law 332/2001, taxpayers may deduct, besides the regular depreciation charges, a supplementary deduction of 20% of the investment value.

The taxable base is defined as income from any source, less the related expenses incurred for realizing income plus non-deductible expenses minus non-taxable income.

Non-taxable income includes:

•	Dividends received by a Romanian company from another Romanian company;
•	Favorable differences of value for participation titles resulting further to the incorporation of reserves, benefits or issuance premiums by the legal entities where such titles are held and differences of valuation of long-term financial investments. Such differences are taxable at the date of their free-of-charge transfer, assignment, withdrawal of the participation titles, as well as at the date of the withdrawal of the share capital in the entity where the titles are held;
•	Incomes from cancellation of expenses which were previously non-deductible;
•	Incomes related to reversal of previously non-deductible provisions.

The general principle for deductibility of expenses is that expenses are deductible only if they are related to the generation of taxable income. Certain expenses are deductible only within certain limits provided by law.

Non-deductible expenses include:

•	Corporate tax;
•	Fines or penalties due to Romanian and foreign authorities. Penalties due to foreign public authorities or contractual penalties arising under contracts concluded with non-residents are also considered non-deductible expenses;
•	Expenses related to missing or obsolete stocks and uninsured tangible fixed assets. However, perishable goods are deductible for profit tax calculation purposes;
•	VAT on goods granted to employees as benefits in kind if salary tax was not withheld on value of such goods;
•	Expenses incurred on behalf of the shareholders or associates (i.e. depreciation charges, repair and maintenance cost of the transportation means put at their disposal, goods granted, rent and maintenance related to space put at their disposal);
•	Expenses recorded on the basis of supporting documents that do not comply with the provisions of Romanian Accounting Law 82/1991;
•	Unfavorable differences in value of participation titles held in legal entities as well as unfavorable differences in value of long-term bonds (except for those resulting from the sale – assignment);
•	Expenses related to the non-taxable incomes;
•	Insurance premiums paid by an employer on behalf of an employee that are not included in the salary income of the employee;
•	Services of management, consulting, assistance or other supplies of services for which the taxpayer may not justify the necessity of such supply for the purpose of carrying out the own activity and for which contracts are not concluded;
•	Insurance premiums that are not related to the assets of the taxpayer as well as those that are not related to the object of activity;
•	Losses recorded when writing off from the records doubtful or contested uncollected receivables, for the portion that is not covered by a provision.

Expenses with limited deductibility include:

•	"Protocol" (i.e. entertainment) expenses exceeding 2% of the taxable profit (total taxable revenues income minus total expenses related to taxable revenues, other than entertainment expenses and tax on profit, before corporate tax and protocol expenses);
•	Per diem allowances granted to employees, for trips within Romania and abroad within the limit of 2.5 times the legally established level for public institutions and provided that the taxpayer realizes profit in the current financial exercise and/or from preceding years. If the taxpayer realizes losses in the current financial exercise and/or from preceding years are limited to the legal level established for public institutions (i.e. currently the level for public institutions is ROL 105,200, approximately EUR 2.5);
•	Social expenses (i.e. indemnities for child birth, funerals, grave or incurable illnesses and prosthesis, kindergartens, nursery schools, museums, libraries, canteens, sports clubs, clubs, schools under taxpayers’ patronage, gifts in money or in kind granted to minor children of employees, to female employees, the cost of supplies for treatment and rest for own employees and their family members, indemnities for employees who suffered household losses), within the limit of up to 2% of the salary expenses;
•	Expenses incurred as a consequence of setting up provisions for bad debts relating to doubtful customers (25% of such provisions are deductible, 30% in 2006); note however, that write-offs of bad debts are fully deductible in certain circumstances.
•	Perishables, within the limits established by specialized bodies of the central administration;
•	Meal tickets granted to employees within the legal limit;
•	Provisions within the legal limits;
•	Expenses effected on behalf of an employee to an optional occupational pension scheme and in respect of private health insurance, within the limit established by law (i.e. currently this limit is of EUR 200 per annum for each);
•	Operation, maintenance and repair cost related to cars used by employees with management or administrative positions of the legal person, deductible within the limit of one car for each such individual.

The Fiscal Code provides for certain limitations with respect to the deductibility of interest related to loans received by Romanian taxpayers (thin capitalization rules), as follows:

For loans received from entities other than Romanian or foreign banks, credit cooperatives, leasing companies, mortgage credit companies and legal entities that grant credits in accordance with the law, deductibility of interest is restricted to 9% for non-ROL denominated loans (this limit is to be updated through Government Decision) and to the level of the interest rate of the National Bank of Romania corresponding to the last month of the quarter for loans denominated in ROL. This limitation is applicable for each loan. The restriction of deductibility is determined before the calculation of the debt-to-equity ratio. Amounts of interest non-deductible after the application of this rule are permanently non-deductible.
The second limitation, applied after the above is linked to the debt-to-equity ratio. Interest expenses are wholly deductible if the "debt-to-equity" ratio of a borrowing company is less than 3:1 from 2005 on. If debt-to-equity ratio is 3:1 or greater, interest expenses are non-deductible. Any amounts of interest which are not deductible can be carried forward to be deducted against income earned in future periods, if and when the company’s “debt-to-equity” ratio falls below the relevant threshold. However, it appears that as from 1 January 2006 any amounts treated in 2006 and future years as non-deductible under these rules will be permanently non-deductible.

If foreign exchange losses relating to any monetary item suffered by a company exceed the foreign exchange gains, then the deductibility of net foreign exchange losses is subject to the same restrictions as interest.

However, from 2005 on, interest and foreign exchange losses from all banks (and related to financial leasing agreements with leasing companies) will be exempt from the scope of thin capitalization rules.

Fiscal losses can be carried forward over the next five years and are covered in the order of their appearance.

Income tax is paid quarterly by the 25th day of the first month of the following quarter. On the same date a corporate tax return must also be filed. The corporate tax return for the whole fiscal year (1 January - 31 December) shall be filed with the Tax Authority on the same date with the annual balance sheet (usually by the end of March of the following year).

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Tax on Dividends

The tax on dividends is:

•	10% for dividends paid to another Romanian legal entity;
•	5% for dividends paid to a Romanian individual (10% starting 1 January 2005);
•	15% if paid to a non-resident.

The allocation of dividends is made by the decision of the General Meeting of Shareholders on the basis of the annual balance sheet. Dividend tax is due on any profit distribution towards shareholders, individuals or companies, whether Romanian or non-Romanian. Dividend tax must be withheld and paid by the company that distributes the dividends at the date when the payment is made to shareholders. The dividend tax must be paid by the 25th of the month following the month of paying the dividend.

However, if dividends were withheld but not paid to shareholders by the end of the financial year when the annual financial statements were approved, the dividend tax is payable by December 31 of that year.

For non-resident shareholders, the dividend tax rate can be reduced through the application of Double Taxation Avoidance Treaties concluded between Romania and other countries (more than 80 treaties are currently in force). Reduction of the withholding tax on dividends must be supported by certificates of fiscal residence issued by the competent authorities from the country of residence of the dividends recipient.

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Income tax for micro-enterprises

Micro-enterprises are defined as legal entities having one to nine employees, revenues of no more than EUR 100,000 and fully private share capital. Instead of paying the regular corporate tax (25% in 2004, 16% starting 2005) on profit, micro-enterprises may choose to pay a tax of 3% of the total gross revenues of the micro-enterprise (prior to 1 January 2005 the rate applicable was 1.5%).

The computation and payment of tax on incomes of micro-enterprises is made on a quarterly basis, by the 25th of the month that follows the quarter for which the tax is computed.

Micro-enterprises do not carry forward a fiscal loss similar to the carry-forward of losses by regular profit taxpayers.

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Tax for Representative Offices

An authorized Representative Office opened in Romania by a foreign legal entity is liable to pay an annual tax of EUR 4,000 in ROL equivalent.

The tax on representative office is paid to the state budget in two equal installments, i.e. before 20 June and 20 December . An annual return need also to be filed with the competent fiscal authority on or before February 28th, respectively February 29th, of the year of taxation.

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Indirect Taxes

Value Added Tax

Romanian VAT regulations are, as a general rule, in line with the EU 6th VAT Directive. As of 1 January 2004, the legislation regarding VAT has been governed by the Fiscal Code as approved by Law 571/2003 and its Application Norms, provided by 44/2004.

VAT payers are taxable persons. "Taxable person" means any person that carries out, in an independent manner and regardless of the place, economic activities such as the activities of producers, traders and service suppliers, including mining and agricultural activities and free profession activities, or the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuous basis.

Registration as a VAT payer, through local tax administrations, is compulsory for all businesses with turnover in excess of ROL 2 billion from 1 January 2004. For businesses with turnover under this threshold, the decision to become a VAT payer is optional.

Freelancers (including lawyers and public notaries) are liable to pay VAT (if the income obtained exceeds the ROL 2 billion threshold).

For businesses whose annual taxable income exceeds EUR 100,000, the VAT return must be filed with the Tax Office on a monthly basis, by the 25th of the following month. Businesses under this threshold file quarterly VAT returns by the 25th of the first month following each quarter. If input VAT exceeds output VAT, the VAT payers may apply for reimbursement of the VAT credit (i.e. if the VAT credit exceeds ROL 50 million). VAT credits can be offset against other taxes and duties owed to the state, upon request.

Operations subject to VAT fall into several categories:

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Taxable operations;

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Exempt operations without credit (i.e. the related input VAT may not be deducted), including:

-	Education;
-	Health care/medical services;
-	Insurance and re-insurance;
-	Banking and financial activities: issuance and transfer of shares and other financial instruments, factoring, granting of credits;
-	Broadcasting rights and licenses for imported films and programs for radio and television, except for advertising, gambling activities performed by authorized entities;
-	Rental, concession of immovable goods (with the exception of rental of equipment and machinery fitted in immovable goods, rental of safes, parking services, accommodation services within the hotel sector).

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Exempt operations with credit (i.e. equivalent to "zero rated operations") including:

-	Export of goods, transportation and services connected to export;
-	International transport of persons and related services;
-	Supply of services, including transport and transport-related services directly linked to export of goods or goods placed under suspensive customs arrangements;
-	Transport, transport-related services and other services directly linked to the import of goods provided that their value is included in the VAT taxable base of the imported goods;
-	Supplies of services performed for the direct needs of the ships and/or for their cargo;
-	Supplies of goods and services for foreign embassies, consular offices and representative offices of other international organizations in Romania;
-	Supplies of goods and services towards the army forces of states which are NATO members;
-	Supplies of goods and services, financed by non repayable loans granted by foreign governments or international organizations;
-	Building, consolidation, extension, restoration and rehabilitation of religious buildings;
-	Supply of goods to be sold through duty-free shops and other shops located in international airports and supplies of goods made through such shops;
-	The bringing in of goods directly from outside Romania into Free Trade Zones or Free Harbors for storage purposes without involvement of customs formalities, sales-purchases taking place (without involvement of customs formalities) within Free Trade Zones or Free Harbor of goods intended to be sent out of Romania and the taking of goods from the Free Trade Zone or Free Harbor outside Romania without drafting export customs declarations and if the goods are in the same condition as when brought into the Free Trade Zone or Free Harbor.

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Exempt importations including:

-	Importation of goods whose supply is VAT exempt in Romania;
-	Importation of goods to be sold in duty-free regime, or for exclusive use of diplomatic representative offices and their personnel;
-	Goods brought into Romania by travelers or other natural persons, under certain conditions and limits;
-	Importation of goods by the army forces of foreign states which are NATO members;
-	Importation of goods by diplomatic mission and consular offices;
-	Importation of carrier media, such as films, magnetic tapes and disks that have recorded on them films or programs intended for radio or television activities, with the exception of publicity related materials;
-	Importation of goods financed by non-repayable loans granted by foreign governments, international organizations and/or foreign or domestic non-profit organizations;
-	Importation of: goods of Romanian origin, foreign goods that according to law become the property of the state, goods repaired abroad or goods that replace defective goods which are returned to the foreign partners during the warranty period, goods that are returned to the country as a result of an erroneous dispatch, certain equipment for environmental protection.

Deduction right is granted based on the following documentation:

•	Fiscal invoice;
•	Import customs declaration for importation-related exemptions.

Specific documentation is separately set out in orders issued by the Ministry of Public Finance for applying the VAT exemptions provided under the law.

Whenever business outputs are VAT exempted, input VAT paid cannot be deducted, except where the law expressly allows for this.

The standard VAT rate in Romania is 19%.

A reduced rate of 9% is applicable for certain supplies of goods and services, such as:

•	Entrance to castles, museums, memorial houses, historical monuments, architectural and archaeological monuments, zoos, botanical gardens, fairs, exhibitions;
•	Supplies of books, newspapers and magazines, school manuals, with the exception of those intended exclusively for publicity;
•	Supplies of prostheses of any type and accessories to them, with the exception of dental prostheses;
•	Supplies of orthopedic products;
•	Medicines for human use and veterinarian use;
•	Accommodations within the hotel sector or within sectors with a similar function, including the rental of land prepared for camping.

Entities which carry out taxable activities, other than those for which VAT is paid by the Romanian customer according to the territoriality rules, and do not have a fixed place of activity or residence in Romania, should assign a fiscal representative who has his residence in Romania. In certain cases, if the foreign suppliers of services did not appoint a fiscal representative, the Romanian beneficiary would account for and pay the VAT for such operations (reverse charge).

For the following services taxable in Romania contracted by Romanian legal persons and supplied by foreign entities whose place of activity or residence is abroad, VAT is due in accordance with the reverse charge mechanism:

▪	The rental of tangible movable goods;
▪	Leasing operations of tangible or/and intangible movable goods;
▪	Cessions and/or concessions of copyright, patents, licenses, trademarks and other similar rights;
▪	Marketing and advertising services;
•	Services of advisors, engineers, offices of studies, lawyers, chartered accountants and other similar services;
•	Data processing and/or information supply;
•	Banking, financial, insurance and/or reinsurance services;
•	Secondment;
•	Telecommunications;
•	Radio and television broadcasting services;
•	Electronically supplied services (i.e. web-site supply, web-hosting, distance maintenance of programs and equipment, the furnishing of software and the updating of software, the furnishing of images, text and information, and making databases available, the furnishing of music, films, and games, including gambling, the transmission and broadcasting of political, cultural, artistic, sporting, scientific, and entertainment events, and the furnishing of distance teaching);
•	The obligation to refrain from carrying out or exercising, in whole or in part, an economic activity or a right among the above mentioned ones;
•	Supply of services via agents in respect of the aforementioned services.

For Romanian customers that are VAT registered, currently the reverse charge mechanism does not involve actual payment of the due VAT to the Romanian State Treasury. Instead, the Romanian VAT registered customer needs to self-invoice the amount and record the corresponding VAT in the Romanian customer’s VAT books and returns.

VAT payment exoneration is possible for:

•	Import of industrial machinery, equipment, installations, measurement and control devices, automations intended to carry out investments, as well as the import of agricultural machines and transportation means intended to carry out productive activities;
•	Import of raw materials and consumable materials that are not produced or that are insufficient in Romania and that are intended for use within the economic activity of the person that carries out the import, a list of which is specified in the norms to the law.

Excise Duties

New legislation on excise duties has come into effect as of 1 January 2004 when the Fiscal Code came into force.

The products subject to excise duties are:

• Beer,

• Wines,

• Fermented beverages other than beer and wines,

• Intermediate products,

• Ethyl alcohol,

• Tobacco products,

• Mineral oils,

• Other products subject to excise duty: green, roasted and soluble coffee; natural fur products; articles from crystal; gold and/or platinum jewels; cars, including imported cars; perfumery products; appliances (i.e. video cassette recorders and players, dual-cassette recorders with radio and CD player, video and photo cameras, microwave ovens, air conditioning units); hunting guns and guns for personal use; yachts and motor boats for recreation.

Excise duty is due by:

•	Companies – legal entities, family associations and authorized individuals – which produce or import products subject to excise duties (except for coffee);
•	Companies importing coffee;
•	Individuals bringing cars into the country.

Excise duties are payable by the 25th of the month following the month when they become chargeable.

Excise duty is generally chargeable at the moment of release for consumption (i.e. taking out of the suspensive regime, production outside the suspensive regime, use of excisable products other than raw material inside the fiscal warehouse) or at the moment when stock minuses are noticed. Chargeability of excise duty on imports is the moment of registration of the customs declaration, except for the cases when wither the excisable products are placed under a suspensive regime (i.e. in a fiscal warehouse) or under an import regime with exoneration of all import duties (i.e. customs duties, VAT, excise duties).

Exports of excisable products are not subject to excise duties if they are delivered from the Romanian fiscal warehouse directly to another country, based on adequate supporting documentation.

The Fiscal Code provides for a series of exemptions from the payment of excise duties, such as:

•	Ethyl alcohol used for production of vinegar;
•	Ethyl alcohol used for medical purposes in hospitals and drug stores, in production of medicines;
•	Mineral oils used for production of electric energy or used by individuals as fuel for the heating of dwellings.

Fiscal warehouses

As from 1 January 2004 a “fiscal warehouse system” is applicable in Romania. The fiscal warehouse is applied to alcohol (including alcoholic beverages), tobacco products and mineral oils.

The fiscal warehouse is a place under the control of the relevant tax authorities where “excisable products” are produced, transformed, held, received or dispatched under a suspension regime, by the authorized warehouse-keeper, in carrying out its activity, under certain conditions provided by the Fiscal Code and its Application Norms.

The production of excisable products outside fiscal warehouses is forbidden.

Holding of any excisable product outside of fiscal warehouses, if excise duty related to that product was not paid, is forbidden.

The fiscal warehouse may operate only on the basis of a valid authorization issued by the competent tax authority and be used only for production and/or storage of excisable products.

Production and/or storage of excisable products for which the excise duty was not paid, is possible only in a fiscal warehouse.

The fiscal warehouse cannot be used for retailed selling of excisable products. An exception to this rule is the case of fiscal warehouses which deliver mineral oils to airplanes and ships, or that supply excisable products from duty-free shops.

Requirements for obtaining fiscal warehouse authorization:

•	A place may be authorized as a fiscal warehouse if it is to be used for production, bottling, packaging, receipt, holding, storage and/or dispatch of excisable products;
•	The quantity stored in a fiscal warehouse has to be greater than the quantity for which the amount of potential excise duties is of EURO 5,000, respectively EURO 50,000 for alcoholic beverages subject to marking;
•	The administrators of the company which is to be a warehouse-keeper must have not been convicted for fiscal evasion, abuse of trust, forgery nor use of false documents.

Once such authorization was revoked, renewal is possible only following a 5-year period.

Any authorized warehouse-keeper has to deposit a guarantee in respect of distributing such products.

Customs Duties

The Customs regime is regulated by the Romanian Customs Code, in force as of 1 October 1997, and by Government Decision 1114/2001 for the approval of the Norms for Application of the Customs Code. The Romanian Customs Code is quite similar to the European Customs Code.

Goods introduced in Romania can have a final (definitive) customs status or a suspensive/temporary one.

Definitive customs status are:

•	imports of goods; and
•	nexports of goods.

Imported goods are subject to customs duties, as set in the Import Customs Tariffs, which have been successively amended over the past few years. Duties are set as a percentage applied to the import price or customs value of goods.

Suspensive customs regimes are temporary arrangements, the effect of which is the suspension of customs duty payment. The customs authority asks for a guarantee (in local currency) enabling it to collect the import duties which may be due, in case the suspensive status is changed. Suspensive customs regimes include the following:

•	transit of commodities;
•	customs warehousing;
•	inward processing;
•	processing under customs control;
•	temporary admission;
•	outward processing.

The approved suspensive customs arrangement comes to an end when the commodities are given a definitive customs status.

Romania has been a contracting party to the General Agreement on Trade and Tariffs (GATT) since 1971 and has ratified most codes of the Tokyo Round and Uruguay Round. Romania is also an original member of the World Trade Organization (WTO) and a signatory of the conventions on Preferential Trade among Developing Countries and on the Generalized System of Trade Preferences among Developing Countries. Romania has signed the Convention on International Sale of Merchandise of Vienna and the Convention on Prescription on International Merchandise Sale of New York.

European Community

On 1 February 1993, Romania signed an Association Agreement with the European Community (EC). This Association came into force on 1 February 1995 after it was ratified by the European Parliament as well as by the Parliaments of the EC member countries. The Agreement includes a program, structured on categories of goods and specific time periods, for exemption or reduction of customs duties on goods imported from the European Community. Starting on 1 January 2002, customs duties on manufactured products originating from the EU, but agricultural in nature, are 0%. Romania has also concluded a free trade pact with the European Free Trade Association (EFTA) which came into force on 1 May 1993.

C.E.F.T.A
Since 29 May 1997 Romania has ratified and applied the Central European Free Trade Agreement concluded with the Czech Republic, Hungary, Poland, Bulgaria, Slovak Republic, Slovenia and Croatia.

Other treaties

Romania has also ratified other customs agreements with various countries in the world providing for reductions and/or exemptions from customs duties, such as:

•	Agreement with the European Association of Free Exchange (AELS), ratified in 1993. Countries which are members to the Agreement include: Iceland, Liechtenstein, Norway, Switzerland;
•	Free Trade Agreement with Israel, ratified in 2001;
•	Free Trade Agreement with Latvia, ratified in 2002;
•	Free Trade Agreement with Republic of Moldova, ratified in 1994;
•	Free Trade Agreement with Turkey ratified in 1997.

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Taxation of Non-residents/Withholding Taxes

Non-residents in Romania are defined as individuals living permanently abroad or spending less than 183 days in Romania during any 12-month period, as well as legal persons incorporated abroad. The taxation system applied to non-residents, individuals or companies, is regulated through the Fiscal Code.

Starting 1 January 2004, the following withholding tax rates are applicable in respect of income earned from Romania by non-residents:

•	5% for incomes from term deposits, deposit certificates and other saving instruments with banks and other credit institutions authorized and located in Romania;
•	20% for incomes resulting from gambling;
•	15% for any other incomes earned from Romania by non-residents (i.e. dividends, interest, royalties, service fees).

Withholding tax is payable by the 25th of the month following the month when the income was paid. The tax is paid in ROL at the exchange rate communicated by the National Bank of Romania from the date when the tax was withheld.

Note that Romania concluded double taxation avoidance treaties with more than 80 countries. The provisions of the treaties override the provisions of the Fiscal Code, and generally provide for reduced withholding tax rates, or even zero.

In order to benefit from the reduced tax rates available under the treaties, Romanian payers of income need to be supplied by the non-Romanian recipients with a certificate of fiscal residence.

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Tax Incentives for Investment

Incentives are provided:

•	for direct investments;
•	for investments in disadvantaged areas;
•	for investments in oil and gas businesses.

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Tax Incentives for Direct Investments

Romania enacted from 3 July 2001 a law concerning direct investments, defined as those investments whose value exceeds the equivalent of USD 1 million. This law applies only to new investments made by private natural or legal persons.

According to the law, qualifying entities may benefit from the following incentives:

•	Customs duties exemption for imported technological machinery, installations, equipment, measurement and control equipment, automation and software products, in compliance with the list approved by mutual order of the Ministry of Development and Prognosis and the Ministry of Public Finance;
•	A supplementary deduction upon the calculation of the taxable profit of an amount equivalent to 20% of the new investments value for investments realized until 31 December 2006 (thus enabling an overall deduction of 120% of the value of the assets);
•	Accelerated depreciation regime for the investments performed under this law, except for investments in buildings.

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Free Trade Zones

Establishing and carrying out activities in free trade areas are regulated by Law no. 84/1992, as further amended, to which special stipulations from other laws add (ex: foreign exchange regulations, Customs Code).

A free trade zone denominated by a Government Decision, which clearly establishes for each case the free trade zone’s geographical co-ordinates, appoints the Free Trade Zone Administration, and lists the activities that can be carried out and how they will be carried out within the free trade area.

Due to Romania’s strategic location, several Free Trade Zones have been set up where investors benefit from various customs and tax incentives. Currently, there are six Free Trade Zones, located as follows: Sulina (set up under Government Decision 156/1993), Constanta-Sud (set up under Government Decision 410/1993, as amended), Galati (set up under Government Decision 190/1994), Braila (set up under Government Decision 330/1994), Giurgiu (set up under Government Decision 788/1996, as amended by Government Decision 1295/2000), Curtici-Arad (set up under Government Decision 449/1999).

According to Law 84/1992, further modified, on Free Trade Zones, any activity provided in the National Code for Activities Permitted in the National Economy may be performed in the Free Trade Zones. However, activities within the Free Trade Zones are permitted only based on licenses issued by the Administrations of the Free Trade Zones and in accordance with the principles of free competition.

Under the Free Trade Zones regime investors benefit from various advantages, such as:

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Unrestricted import and re-export of goods;

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Tax and customs incentives:

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-	Regional state aid, consisting in a reduction of the fees payable under the concession agreements concluded with the local administration, (subject to certain conditions and limitations) for investments realized under commercial contracts;
-	Exemption from the payment of VAT for the bringing in of goods directly from outside Romania into Free Trade Zones for storage purposes without involvement of customs formalities, and sales-purchases taking place - without involvement of customs formalities - within Free Trade Zones of goods intended to be sent out of Romania, and the taking of goods from the Free Trade Zone outside Romania without drafting export customs declarations and if the goods are in the same condition as when brought into the Free Trade Zone;
-	Import of excisable products into Free Trade Zones is not subject to excise duties.
-	Until 31 December 2006, a special profit tax exemption applies to investors which pre-invested into Free Trade Zone at least USD 1,000,000 into depreciable tangible assets for manufacturing activities;

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Free repatriation of profit and capital after the payment of all due taxes;

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Transportation of goods from one Free Trade Zone to another Free Trade Zone is made without payment of any customs duties;

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All financial operations may be performed in any free convertible currency, except for financial operations made during the period of building within the Free Trade Zone, and performance of services between Romanian residents which can also be performed in Romanian currency.

It is possible to lease or rent land and buildings within free zones for a period of up to 49 years.

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Tax Incentives for Disadvantaged Regions

Disadvantaged regions (“D-zones”) are isolated regions with weak infrastructure and high unemployment rates, where mass redundancies have been made. “D-zones” are declared as such through Government Decision for a period of between 3 to 10 years, with the possibility of extension in time. Companies set up in “D-zones” may benefit from several tax incentives, such as:

•	Customs duties exemption for raw materials and components used for production purposes in the disadvantaged region;
•	Exemption from taxes payable for the modification in the destination or taking out from the agriculture of land used for the investment;
•	Companies which have obtained prior to 1 July 2003 the certificate of investor benefit from corporate (profit) tax exemption throughout the period of existence of the “D-zone”;
•	Also, VAT exoneration is possible under general investment background set through the Fiscal Code for imports of industrial machinery, equipment, installations, measurement and control devices, automations intended to carry out investments, as well as the import of agricultural machines and transportation means intended to carry out productive activities; and for import of raw materials and consumable materials that are not produced or that are insufficient in Romania and that are intended for use within the economic activity of the person that carries out the import, a list for which is approved through Government Decision.

These tax incentives are granted within the limit of the maximum state aid allowed under state aid regulations.

The conditions to qualify for the application of such investments are:

•	To have the headquarters in the disadvantaged region;
•	To obtain a certificate of investor (which is preliminary, for newly set-up companies), whereby the investor commits himself to making a new investment (in the area) and to create new jobs for the local population. There is no specific indication in the law as to the value of the investment and the number of jobs;
•	Companies established in the “D-zones” and acting in the food industry have to submit a special declaration to the relevant authorities if they wish to apply for exemption of customs duties for imported raw materials to be used for the manufacture of food products;
•	Particular conditions exist for food processing businesses established in “D-zones”.

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Taxation of Individuals

The annual tax due on the income of the individual is levied at a flat tax rate of 16%. A monthly general deduction is granted for each Romanian citizen living in Romania, decreasing progressively as the income rises. Also, additional supplementary deductions are granted for family members, dependants of the taxpayer.

The 16% flat tax rate applies to the following sources of income:

•	Income from independent activities;
•	Income from dependent activities;
•	Rental income;
•	Pension income;
•	Agriculture income;
•	Prizes;
•	Other income.

Incomes from independent activities are:

•	Income earned by freelancers;
•	Trade income;
•	Intellectual property rights.

The fiscal year is the calendar year, and the annual tax is to be regularized before 15 May of the following year.

Most Romanian individuals are subject to withholding tax on their employment income (salaries/wages and other employment benefits) on a monthly basis without having to file annual individual tax returns.

Employee Taxation

Until 2004, the tax brackets for monthly income from salary were set between 18% and 40%. The tax rates were reduced significantly following introduction of the flat tax rate of 16% starting from 1 January 2005.

Individuals earning only salary income do not have to file a tax return. It is the employer who has to withhold and pay all salary taxes and social contributions to the state. Besides the monthly general deduction and the deductions according to the number of family dependants, trade union contributions, as well as the employee's contributions to optional occupational pension schemes up to an annual level of EUR 200, are also to be deducted.

Since 1 July 2001, salary income earned by employees whose activity consists of the creation of software is income tax exempt, subject to certain conditions stipulated by a Government Order.

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Taxation of Expatriates

Earnings of foreign individuals and employees of foreign companies, who perform professional activities in Romania over a period that exceeds an overall 183 days during any 12-month period, starting or ending in the calendar year in question, are considered as salary income subject to Romanian tax. Romania has concluded Double Taxation Treaties with more than 80 countries around the world. Most of these treaties are concluded in accordance with the OECD Model Tax Convention on Income and Capital. If an individual is qualified, under the criteria established by the domestic laws of two states, as a resident of one of the two states, the relevant treaty can be applied.

Foreign citizens earning salary income for activities carried out in Romania will need to register with the relevant authorities within 30 days of the date of earning their first income in Romania. The income tax is calculated monthly, based on the exchange rate in force on the last day of the month. Foreign individuals liable to income tax are obliged to submit monthly income tax returns and to pay tax by the 25th of the following month.

According to Romanian law, expatriates are liable to tax on salary for the amounts received as remuneration as well as for benefits in kind granted for their assignment in Romania. The top marginal rate of the tax on salary was, until 31 December 2004, 40% applied to the gross salary (as of 1 January 2005, the top marginal income tax rate has been reduced significantly, to 16%).

Romanian law provides that expatriates may conclude an employment contract with a Romanian legal entity only if they obtain a work permit from the Romanian authorities. The work permit is issued for a period of one year, and can be extended for additional one-year periods. The work permit allows expatriates to be employed by a physical or legal Romanian entity, or by the Romanian Representative Office of a foreign legal entity.

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Taxation of Other Income

Income from independent activities (including freelancers, copyright and similar) is subject to taxation through the application of certain rates and brackets. The taxable base is calculated differently, as specific deductions are applicable, depending on the source of income.

The following types of income are subject to withholding taxes:

•	dividends distributed to an individual are subject to a 10% tax at company level (up to 15% for non-Romanian individuals);
•	interest is subject to a 1% withholding tax to be withheld by the payer;
•	prize winnings exceeding ROL 8 million paid by the same entity in one day, are subject to a 16% rate;
•	gambling winnings are subject to a 20% tax rate applicable to the gross income;
•	sales of shares and other securities are subject to a 1% tax, calculated on the amount representing capital gain, as defined by the income tax law;
•	income from liquidation/dissolution without liquidation of a company (i.e. distributions in cash or in kind in excess of the contribution to the share capital) is subject to a 10% tax to be withheld by the legal entity distributing the income;
•	incomes from insurance premiums borne by an independent individual or entity in relation to an activity with which the beneficiary does not have an employment relationship, are subject to a 16% tax rate.

Other income not expressly mentioned in the law is subject to a 16% withholding tax.

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Local Taxes and Duties

Local taxes and duties are regulated by the Fiscal Code and its application Norms.

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Taxes on Buildings

Real estate owners pay an annual tax on buildings, irrespective of their location and use.

For buildings owned by individuals, the rate for computing the tax is 0.2% in urban areas and 0.1% in rural areas. The rate applies to the taxable base established by the law according to the type of building. As from 1 January 2003, the tax on buildings for taxpayers that own more than one building for residential purposes is increased, as follows:

•	by 15% for the first building, except for the one from the domicile's address;
•	by 50% for the second building;
•	by 75% for the third building;
•	by 100% for the fourth and for the following buildings.

For buildings owned by legal persons, a 0.5-1% rate applies to the gross book value of the building, restated according to the legislation in force.

As from 1 January 2005, for buildings which were not revalued during a period of three years prior to the year of taxation, the tax due amounts to 5% to 10% to the gross book value of the building until the end of the month when the next revaluation is made. Buildings falling under this rule but which were completely depreciated are subject to the 0.5%-1% tax rate.

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Taxes on Land

This tax is calculated annually per square meter. The tax varies in keeping with the location of the land.

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Tax on Vehicles

Owners, natural or legal persons, pay a tax on their own means of transport, calculated according to engine cylinder capacity.

Taxes on Advertising, Promotion and Display Facilities

Users of advertising and promotion and display facilities have to pay the following taxes, according to the size of the area covered:

•	taxes on promotion, display and advertising facilities (between 1% and 3% of the value of the contract, less VAT). Mass-media advertising is exempt from payment of this tax;
•	taxes on signs displayed at the taxpayer's headquarters;
•	taxes for the use of advertising by display, panels and other similar advertising means.

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Tax on Shows

Organizers of artistic events, sport competitions, artistic activities and entertaining activities, such as discotheques and videotheques, are liable to pay a tax on shows, determined as a percentage of the revenues from sale of tickets or subscriptions, or as a fixed amount per square meter.

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Hotel tax

A tax of between 0.5% - 5% of the hotel tariffs charged by accommodating units may be levied by the local councils.

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Other Taxes and Duties

Stamp duties (conformity marks)

Stamp duties are paid by natural or legal persons for transactions which must be certified by notaries public (normally for sale and purchase, exchange or donation of immovable property).

The stamp duties paid for transactions related to real estate are established according to the declared value of the transaction which should not be lower than the minimum value established by the tax authorities.

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Contributions to special funds

Special funds are established by laws stipulating fiscal obligations for particular taxpayers, such as:

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Contribution to the Special Fund for Power System Development - due by industrial consumers (home consumers are excepted);

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Contribution to the Special Fund for the Development and Improvement of the Customs Offices and Other Customs Units (commission for customs services) – 0.5% on the customs value due on import of goods;

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Contribution to the Special Fund of Civil Aviation - due by airline operators;

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Contribution to the National Cinema Fund - due by:

-	videotape retailers/rental companies (2% on the sale/rental price);
-	advertising companies (3% on the price of the minutes bought from television companies or barter exchanges, minutes included in the cinematographic productions – reduced to 1.5% for Romanian films);
-	cable companies (3% on advertising minutes);
-	distributors and viewers of movies in the cinema (8% of the income from the sale of tickets, 12% for adult content films);
-	companies which use cinematographs for other activities (3% of the gross profit);
-	copyrighter (25% on the net income from the assignment of transmission and exploitation of Romanian productions);
-	cable companies (1% of the subscription fees for access to programs with over 60% science-fiction programs;

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Contribution to the National Cultural Fund;

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Contribution to the Environment Fund, as follows:

-	3% of revenues obtained by companies which trade ferrous and non-ferrous scrap;
-	5,000 ROL/kg of the weight of the packaging materials introduced on the Romanian market by producers and importers of packed goods, with the exception of packaging materials used for drugs;
-	2% of the value of dangerous chemicals traded by producers and importers (specified in an Appendix to the Law), with the exception of chemicals used for production of drugs;
-	0.5% of the value of dangerous chemicals traded by producers and importers used in agriculture (specified in the Appendix to the Law);
-	3% of the acquisition price of raw wood acquired from forest owners (state owned or not), regardless of whether individuals or companies;
-	Fixed amounts charged for pollution emissions in the atmosphere, depending on the emanation type. Exemptions from payment of this amounts may apply for companies which recycle at least 50% of waste materials;
-	10,000 ROL/kg for new and/or used tires introduced on the national market, due by legal entities;
-	Fixed amounts charged for use of new land to deposit recyclable waste materials.

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Contribution to the Special Health Fund (12% of the earned incomes from advertising tobacco products, cigarettes and alcoholic beverages, 2% of the incomes earned from production of alcoholic beverages except from wines and beer, and 2% of the revenues or of the commercial margin from sales of such products);

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Contribution to the Special Fund for Protection of Insured Persons – due by insurance, reinsurance companies;

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Contribution to National Solidarity Fund due in respect of gambling activities, importation of new auto vehicles, casino gambling.

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Late payment penalties

The Romanian law provides for the following penalties for failure to pay within the legal due terms the tax liabilities:

•	0.06% per day;
•	0.5% per month or fraction of a month starting from the 1st of the month following the date when the tax liability was due.

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