Equity related tax incentives for Romanian taxpayers

The Romanian authorities have approved certain tax reductions applicable for entities that have a positive value of their equity and increase the level of such equity on a yearly basis. The purpose of such measures is to reduce the number of entities that are undercapitalized and, thus, exposed to a higher risk of dissolution/ liquidation. The reductions cannot be claimed by entities that activate in the financial and insurance sectors – as such entities have to observe specific requirements in terms of equity level, as established by the National Bank of Romania and/ or the Financial Supervision Authority, as the case may be.

The incentives are applicable starting with 1 January 2021, for the period 2021–25 and are as follows:

1. 2% reduction of annual tax liability for entities that have (1) positive value of their equity and (2) equity value equal with at least half of the registered share capital
2. a reduction ranging between 5% - 10% of the annual tax liability for entities that increase their adjusted equity with 5% - 25% (and over) on an annual basis
3. 3% reduction of annual tax liability for entities that increase their adjusted equity with 5% - 20% (and over) as compared with the adjusted equity registered in 2020.

The reductions apply for all types of taxes due by Romanian taxpayers, namely: corporate income tax, microenterprise tax and tax specific for hospitality sector. The percentages above can be cumulated and the tax liability reduced accordingly if the conditions for each point are cumulatively met.

The equity considered for assessing the fulfilment of each conditions is the one reflected in the financial statements for each relevant period, namely:

• equity referred to at point a) above consists of: registered share capital, capital premiums, all types of reserves registered as per applicable provisions, retained earnings, accounting result of the period;
• adjusted equity referred to at points b) and c) above covers all equity items registered in the financial books, except revaluation reserves or similar items that are not registered from net profits as a result of the shareholders decision or as per the applicable legislation, as the case may be.

Specific provisions cover the applicability of the incentives to:

• local permanent establishments of foreign entities
• taxpayers that go through restructuring operations (e.g. mergers, spin-offs, transfer of assets/ business lines within spin-off procedures)
• taxpayers that have a fiscal year different than the calendar year.

New deadlines to submit tax returns related to final computation of the annual liability (depending on the type of tax payable by each entity) are applicable during the period 2021–25, aligned with the deadline for submitting the annual financial statements.

Considering these measures, Romanian taxpayers have the opportunity to reduce their tax liability provided that they fulfill all the conditions regarding the level of own equity. Such conditions can be met through a variety of actions, ranging from cash injections to conversions of shareholder loans into equity. The tax reductions can be applied by the taxpayers without requesting any approval from the authorities, as they are based on internal analysis of the taxpayers. However, relevant documentation should be available at the level of the Romanian entity and made available to the tax authorities in the event of a future audit – to sustain the fulfillment of the conditions related to each reduction claimed.