Personal income tax
By Claudia Sofianu
Individuals domiciled in Romania are considered tax residents and are taxed on their worldwide income (with certain exceptions). During the first year of meeting certain residency criteria, individuals who are not domiciled in Romania are subject to tax on their Romanian-source income, regardless of where the income is earned. In the absence of a tax residency certificate issued by another state based on a double tax treaty, a foreign individual or someone who carries out independent activities through a permanent establishment in Romania becomes subject to tax on worldwide income starting with January 1 of the year following the one year when the tax residency criteria were met. Foreign individuals who are working in Romania are taxable from their first day of presence. However, if they are tax residents in another country and they meet the criteria from the applicable Double Tax Treaty, they may be exempt from Romanian tax liabilities, provided that a tax residency certificate is made available to the authorities within 15 days of the beginning of activities.
RATES
Most types of income are subject to tax at a flat rate of 16 percent, applied to salary income, income from freelance activities, rental income, pension income, prizes, investment income and other sources. Special tax rates apply to income from gambling and transfer of property ownership. The taxation of various types of income is summarized below.
Employment income includes: salaries, benefits in cash or kind, salary premiums, other income received by an individual based on an employment agreement, fees and compensation paid to directors and managers of private enterprises and to members of the board of directors, general shareholders, administration council and audit committee.
Income from independent activities includes income from commercial activities, freelance activities and transfer of intellectual property rights. The net taxable income from freelance activities is computed as gross income less specified deductible expenses. Individuals engaged in freelance activities must make advance tax payments on a quarterly basis by the 25th day of the last month of each quarter.
Taxpayers who earn income from independent activities from which a 10 percent advance income tax is withheld at source, can opt for a final withholding tax at a rate of 16 percent.
Taxable income from intellectual property rights is computed by deducting from gross income expenses representing 20 percent of gross income and compulsory social charges. A 10 percent advance income tax must be withheld at source by payers of income from intellectual property rights by the 25th day of the following month. Taxpayers who earn income from intellectual property rights can opt for a final withholding tax at a rate of 16 percent.
Rental income. Gross rental income consists of amounts stipulated in rental agreements, as well as certain expenses borne by the tenant that are the landlord’s liability according to the law. It is also assessed as rental income, the income derived by owners from rental of rooms located in their own homes, with a capacity of tourist accommodation ranging from 1 to 5 rooms inclusively. The rental income is taxable in the tax year to which the rent relates. It is reduced by a flat 25 percent and the difference is taxed by 16 percent. As an exception, taxpayers may opt for the determination of the net rental income based on single entry accounting.
Investment income includes: dividends, interests, gains from transfers of securities, etc. Any amount paid in excess of the market price by a legal entity for goods or services provided by a shareholder is treated as a dividend if the beneficiary of such amount was not subject to income tax or profits tax on the amount. Amounts received from holding participation titles in closed investment funds are treated similarly to dividends. A 16 percent final withholding tax is imposed on dividends.
Taxable income from interest is considered to be any income in the form of interest other than state bonds.
A 16 percent final withholding tax is imposed on interest income. The tax must be remitted by the 25th day of the following month. Capital gains are subject to a 16 percent final tax. A 16 percent advance tax is imposed on gains derived from sale and purchase transactions in foreign currencies with subsequent term settlement, as well as similar operations.
Income whose source was not identified should be subject to 16 percent income tax applied to the taxable base adjusted according to the procedures and indirect methods of the reconstitution of the revenues or expenses. The income tax and late payment penalties will be calculated by the tax authorities.
INHERITANCE AND GIFT TAXES
No taxes are levied on inheritances or gifts, except for revenue subsequently derived from these items.
Social charges
Employees are required to make the following monthly contributions:
Type/Contribution — Amount (monthly gross salary earnings)
• Social security — 10.5% (taxable base is capped at 5 times national average gross salary earnings)
• Health — 5.5%
• Unemployment — 0.5%
Employers are required to make the following monthly contributions:
Type/Contribution — Amount (normal work conditions, of the total gross salary earnings)
• Social security — 20.8% (taxable base is capped at 5 times national average gross earnings multiplied by the number of employees)
• Health — 5.2%
• Unemployment — 0.5%
• Insurance against work accidents and work related sickness — 0.15% to 0.85%
• Medical leave — 0.85% (taxable base is capped at 12 times national minimum gross salary earnings multiplied by the number of insured persons)
• Salary Guarantee Fund — 0.25%
For 2013, the average gross national salary earning is RON 2,223 per month and the minimum gross salary was RON 700 per month during January 2013, RON 750 per month up to June 2013 and RON 800 staring at the start of with July 2013. Foreign nationals working in Romania fall under the Romanian social security system and are liable to pay social security charges due as per Romanian regulations. EU citizens may be exempt from social charges if relevant European certificates are obtained.
TAX FILING AND PAYMENT
Foreign nationals assigned to Romania must register for tax purposes within 15 days after beginning their activities and pay income tax on a monthly basis. If the individual is on a local payroll, the local employer must calculate, withhold, declare and pay the income tax. Expatriates employed abroad but working in Romania must file monthly individual tax returns and pay monthly tax and, if applicable, social charges, by the 25th day of the following month.
DOUBLE TAX RELIEF AND TAX TREATIES
Romania has entered into double tax treaties with several countries.
TOTALIZATION AGREEMENTS
Romania has entered into Totalization Agreements with several countries for the purpose of avoiding double taxation of income with respect to social charges:
Non-EU Member States Status
• Albania In force
• Algeria In force
• Armenia In force
• Canada In force
• South Korea In force
• Libya In force
• Macedonia In force
• Moldavia In force
• Peru In force
• Russian Federation In force
• Turkey In force
• Canada In force
• Israel In Force
Claudia Sofianu is the leader of the Human Capital team of EY Romania and senior tax manager. She has an extensive experience in expatriate services, covering individual taxation, domestic and international social security, immigration formalities, individual tax planning and compensation structuring.