Global Tax Alert | 21 November 2013

Romania's full participation exemption regime becomes effective 1 January 2014

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Amendments to the Romanian Fiscal Code will enter into force on 1 January 2014. This Alert summarizes the most important direct tax amendments for multinational investors. By far the most important change is the introduction of a full participation exemption regime which makes Romania a suitable holding jurisdiction for international operations. The regime may be particularly attractive to foreign corporations with investments in the US who do not meet the usual Limitation on Benefits (LOB) provisions as the Romania-US treaty does not have LOB provisions and it is not being renegotiated at this time.

Corporate Income Tax

Full dividend and capital gain exemption on share investments

The amendment introduces participation exemption rules on dividends received from third countries, capital gains and proceeds from liquidations. In particular, the following categories of income are considered as non-taxable income:

  • Dividends received from foreign legal entities subject to corporate income tax or a similar tax, located in third countries with which Romania has concluded a double tax treaty;
  • Capital gains derived by Romanian legal entities from the sale/assignment of shares in Romanian legal entities or in legal entities from third countries with which Romania has concluded a double tax treaty; and
  • Income derived by Romanian legal entities from the liquidation of other Romanian legal entities or foreign legal entities located in countries with which Romania has concluded a double tax treaty.

These provisions apply if the taxpayer holds, for an uninterrupted period of at least one year, at least 10% of the share capital of (i) the legal entity paying the dividends, (ii) the legal entity in which the shares sold/assigned are held, or (iii) the legal entity which is subject to liquidation.

Holding period for dividend income exemption

The participation exemption rules with respect to EU Member States are also modified.

The uninterrupted holding period for the exemption of dividend income derived by Romanian legal entities/Romanian permanent establishments of EU Member States’ legal entities from their subsidiaries located in other EU Member States is reduced from two years to one year.

Dividend income derived by a Romanian legal entity from another Romanian legal entity is tax exempt if the recipient holds at least 10% of the share capital of the entity distributing the dividends for an uninterrupted period of at least one year (previously, there were no holding period requirements in this case).

Income of permanent establishments

Romanian permanent establishments of foreign entities resident in an EU Member State or a state of the European Economic Area (EEA), which receive an income from another EU Member State or from an EEA state, benefit under certain conditions of a fiscal credit for the tax paid in the state from which the income was received.

This provision does not apply to Romanian permanent establishments of foreign legal entities resident in a state of the EEA, other than an EU Member State, if Romania has not concluded with that state a legal instrument governing the information exchange.

Withholding tax

Dividend, interest and royalty payments will no longer be withholding tax exempt to the European Free Trade Association countries (Iceland, Liechtenstein and Norway).

Dividends paid by Romanian legal entities to foreign legal entities/permanent establishments from another EU Member State are tax exempt if the foreign entity holds at least 10% of the share capital of the Romanian legal entity for an uninterrupted period of at least one year at the date of the dividend payment (the previous holding period was two years).

For additional information with respect to this Alert, please contact the following:

Ernst & Young Romania SRL, Bucharest
  • Alexander Milcev
    +40 21 402 4083
    alexander.milcev@ro.ey.com
  • Arcadie Parfenie
    +40 21 402 4129
    arcadie.parfenie@ro.ey.com
Ernst & Young LLP, Eastern European Business Group, New York
  • Miklos Santa
    +1 212 773 1395
    miklos.santa@ey.com

EYG no. CM3980