In Romania, micro-companies continue to gain interest from potential foreign investors. This is due to the many tax benefits associated with establishing a micro-entity.
A micro company (or micro-entity) is a small, private limited company. In Romania, micro-companies continue to gain interest from potential foreign investors. This is due to the many tax benefits associated with establishing a micro-entity.
According to Romanian company legislation, micro-entities can be incorporated under the same laws and processes as with a Limited Liability Company ( SRL). However, tax structures may differ.
For companies qualified as micro-enterprises under Romanian Law, a different tax rate is applied other than the regular tax regime on the profit of a Romanian company.
What constitutes a microenterprise for taxation purposes?
In Romania, the fiscal year for microenterprises runs according to the calendar year, starting on 1st January and ending on 31st December. For a company to be taxed as a micro-entity, they will have to meet the following criteria, namely:
- The company must demonstrate an annual income (excluding VAT) that does not exceed one million euros (1.000.000). This is calculated within a 12-month period, up to 31 December of each fiscal year. The rate of exchange which will be applied will remain consistent with the relevant fiscal year.
- It is essential for the company’s social capital to be privately held.
- In order for companies to be classified as micro-entities, they must register their company within the tax year by 31 December.
- The company has not attempted to initiate termination procedures with the Trade Registry or with the Court.
Companies that engage in the following primary or secondary activities may qualify as a micro-entity:
- 5510 – Hotels and similar accommodation
- 5520 – Holiday and other short-stay accommodation
- 5530 – Camping grounds, recreational vehicle parks, and trailer parks
- 5590 – Other accommodation
- 5610 – Restaurants and mobile food services activities
- 5621 – Event catering activities
- 5629 – Other food services activities
- 5630 – Beverage serving activities
Tax structure for micro-entities
Micro companies are required to pay taxes, which are calculated as a percentage of their gross income. This percentage includes:
- Three per cent (3%) for companies that do not have any full-time employees.
- One per cent (1%) for companies that have at least one full-time employee.
For companies to benefit from lower tax rates, they are required to employ at least one full-time employee by the end of the tax period (31 December). This reduced tax rate will also apply if companies hire two or more part-time employees whose total working hours equate to that of one full-time employee.
To qualify for the tax benefits of a micro-entity by hiring at least one employee, the employment agreement must be valid for an unlimited period or for a minimum of twelve months.
Procedural aspects regarding the income tax
For newly established micro-entities or for micro-entities that have recently dissolved their company, the taxable period is calculated based on the number of months for which that entity was incorporated within the taxable period. This runs from 1 January to – 31st of December.
Romanian companies that are incorporated as micro-entities can benefit from the tax structures by ensuring that the state or any territorial administrative unit does not own their social capital. Companies are required to register their status as a micro-entity with the Fiscal Authorities.
Tax on dividends
The tax which will be due on company dividends is five per cent (5%). This tax must be calculated and withheld by the company at the time of payment. When a company’s dividends have been declared, they will be required to make required payments to shareholders by the 25th of January of the following year.
When the tax benefits of micro-entities may no longer apply
Suppose during any fiscal year, a micro-enterprise has an income more significant than one million (1.000.000) Euro. In that case, the company must pay tax on profit starting from the quarter when the limit has been exceeded.
The standard rate of tax on profit is sixteen per cent (16%). This will be calculated based on the actual accounting profit. Should the number of employees fall below the required minimum, then the rate of tax on income will change accordingly.
If a company at any point of the fiscal year decides to initiate procedures of termination or if the shares of the company are no longer privately held, it is required for these changes to be registered with the fiscal authorities by 31st March of the following year. If the company is to be dissolved, it is necessary to declare and pay any income tax applicable for the time it was operating.
In conclusion, Romanian companies that satisfy the necessary legal requirements to be incorporated as a micro-entity will be taxed accordingly, based on their income. Companies will pay a varying tax rate (between one (1%) or three (3%) per cent), depending on the number of individuals employed.
If the company does not meet the legal requirements to be taxed as a micro-entity, it must register the changes with the fiscal authorities and will be required to pay the standard tax rate on the profit of sixteen per cent (16%). The company can elect to be taxed as a normal corporate taxpayer and pay tax on profit if it has a social capital of more than forty-five thousand (45.000) Euro and at least two employees. In this case, the company may choose to be in this way only once.
These taxation options should be considered by any investor who wishes to incorporate a company in Romania. It is important for investors to understand these rules as there are tax benefits that may apply to them. If you have any questions or require advice, do not hesitate to contact us.
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