2007 Fiscal Changes Kpmg

8/3/2019 2007 Fiscal Changes Kpmg

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Bucharest

24 November 2006

Fiscal Changes and Fiscal

Implications of EU Accession

Dan MarinescuTax Manager


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Agenda

A. Direct Taxes after EU accessionProfit tax;

Income tax (individual and micro-enterprises);

Withholding tax on income derived by non-residents;

Local taxes.

B. EU Directives on Direct TaxesParent Subsidiary Directive;

Merger Directive;

Interest and Royalty Directive;

Savings Directive.


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P

rofit Tax

Fiscal Changes and Fiscal Implications of EU Accession


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Amendments in definitions

New conditions for a financial lease:

he user has the option to acquire the leased good upon the expirydate of the leasing agreement and the residual value is equal to orlower than the ratio between the maximum useful life less the leaseterm, on one hand, and the maximum useful life on the other hand;

the lease term exceeds 80% (as opposed to 75% currentlyprovided) of the maximum useful life of the asset;the total amount of leasing instalments, less accessory expenses,is higher or equal to the entry value of the good;

An operating lease is now defined as any leasing agreement that

transfers to the lessee the risks and benefits related to the propertyright over the good, except for the residual value risk and does not fulfilany of the other conditions of a financial lease;

Related parties now include also spouses of individuals.


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Deductibility of expenses (1)

New deductibility rules for:

Expenses with the residual non-depreciated value of fixed assetssold no longer required to be sold through specialized units or

auctions;

Travel and accommodation expenses incurred for businesspurposes no longer linked to the companys accounting result;

Business trip allowance granted to employees within the limit of 2.5times the level established for public institutions no longer linkedto the companys accounting result.


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Deductibility of expenses (2)

Other tax deductions:

Expenses for inventory & depreciable fixed assets destroyed due tonatural disasters or other force majeure events no insurancecontract required;

Expenses with taxes and contributions to NGOs and professionalassociations limited to EUR 4,000 p.a.;

Interest and FX expenses related to loans granted by non-bank

financial institutions or to bonds traded on regulated markets(irrespective of the debt-to-equity ratio);

Expenses with private scholarships assimilated to sponsorshipexpenses.


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Reserves & provisions

Bad debt provisions set-up after 1 January 2007 100%deductible subject to certain conditions;

Reserves and provisions no longer deductible for profit tax

purposes:

Reserves set-up by banks (e.g. general reserve for credit risk),other authorized credit institutions and mortgage banks;

Equalization reserves set-up by insurance and reinsurancecompanies;

Provisions created by guarantee funds.


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Tax recognition of revaluations

Under the amendments to the Fiscal Code, it appears thatrevaluations carried out as of 1 January 2007 will be takeninto account for determining the remaining fiscal value ofland, as well as the remaining non-depreciated value offixed assets used for tax purposes;

The draft Norms to the Fiscal Code provides further detailsregarding the recognition of downward revaluations madeduring the period 2004-2006.


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New profit tax payment system

Advance payments on a quarterly basis for:

2007 Romanian banks and branches of foreign banks;

2008 the other profit tax payers (with certain exceptions);

Temporary exception taxpayers who incur an accounting loss atthe end of the quarter;

The deadline for filing the annual return is 31 March of thefollowing year for banks and 15 April for other taxpayers.


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Income Tax



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Changes of tax treatment

Gift vouchers distributed after 1 January 2007 will betaxable at employee/individual level;

As of 1st January 2007, income derived from interest oncurrent accounts/ deposits is tax free, irrespective of theinterest rate;

Taxpayers may opt that income derived from activities

performed under civil contracts is taxed either as:

income from independent activities orIncome from other sources subject to 16% income tax.


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Deductible expenses

Expenses incurred in connection with the collectivesavings system for mortgage loans developed by buildingsocieties:

deductible from taxable income earned under the mainemployment relationship;

deductibility limited at RON 300;

Taxable income from pensions shall be calculated by

deducting:

a monthly non-taxable amount of RON 900;

any mandatory social contributions calculated, withheldand borne by the individual.


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Investment income (1)

Capital gains from transactions in foreign currencies on a specificfuture date carried out on contractual bases:

1% income tax paid in advance;

the annual income tax 16% x net income;

Capital gain from transfers of shares of unlisted companies and sharesin limited liabilities companies:

calculated after each transaction and deemed final;

16% income tax;

Capital gain from all other securities:

1% income tax paid in advance;

the annual income tax is:16% for securities owned less than 365 days;

1% for securities owned for more than 365 days.


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Investment income (2)

Income from liquidations/dissolutions without liquidation of legalentities by the individual shareholders:

taxed at 16% income tax;

the income tax is withheld by the liquidated/dissolute legal entity

when the income is paid to the individuals and is due to the StateBudget by the date of filing the final financial statement with theTrade Registry;

Interest income derived from term deposits, savings instruments andcivil contracts concluded/acquired after 1 January 2007:

calculated when the interest is paid/credited to the beneficiary'saccount or upon redemption of the savings instruments;

16% income tax.


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Real estate ownership transfers

For real estate owned less than 3 years :up to RON 200,000 3% income tax;over RON 200,000 2% income tax of the exceeding amount +RON 6,000;

For real estate owned more than 3 years:

up to RON 200,000 2% income tax;over RON 200,000 1% income tax of the exceeding amount +RON 4,000;

Exemptions: under special rules, for donation deeds between relatives(third degree, spouses) and inheritance, provided that the procedure isfinalized within 2 years (otherwise a 1% income tax is due on theestate);

Payment deadlines: tax is withheld by the public notary beforenotarizing the agreement and is due to the State Budget by the 25th ofthe following month.


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Micro-enterprises regime

After Romanias accession to the EU the taxation system for micro-companies will change;

New requirement to derive more than 50% of its income from otheractivities than consultancy and management (applicable as of 1January 2008 according to the Draft Norms to the Fiscal Code);

If turnover exceeds the EUR 100,000 threshold during the year, thecompany becomes a corporate tax payer and corporate tax iscalculated on the income and expenses recorded from the beginning ofthe year, while the income tax already paid is deducted from the totalamount due;

The income derived by micro-companies will be taxed as follows:2% starting from 2007;2.5% as of 2008;3% as of 2009.


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Withholding tax (WHT)



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New taxable income

New category of taxable income subject to 16% WHT income derived by non-residents from:

liquidation of a Romanian legal entity;

dissolution without liquidation of a Romanian legal entity;

Taxable income is defined as the amount of cash or in-kinddistributions exceeding the initial share capital contribution.


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Interest and royalties income

Interest on demand deposits/current accounts tax exempt,regardless of the level of interest rate;

Interest on term deposits, certificates of deposit and other savinginstruments opened with/purchased from banks and other creditinstitutions after 1 January 2007 taxable with 16% WHT;

Payments of interest and royalties to the EU tax exempt under theInterest and Royalty Directive:

Romania has been granted a transitional period until 1 January 2011

10% WHT;

Romanian law contains a 2-year holding period of minimum 25% of theshare capital of the Romanian income payer (according to draft Norms, ifthe condition is fulfilled after the payment has been made, tax paid inexcess can be reclaimed).


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Dividend income

WHT on dividends distributed but not paid due to theState Budget by 31 December of that year;

Dividends paid by a Romanian legal entity to a legal entityresident in the EU tax exempt under the Parent

Subsidiary Directive subject to:

a minimum participation in the equity of the Romanian legalentity:

15% as of 1st January 2007;

10% starting from 2009;

an uninterrupted 2-year holding period condition (accordingto draft Norms, if the condition is fulfilled after the paymenthas been made, tax paid in excess can be reclaimed).


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Tax residence certificate

It is now clearly stated that, in order to apply the DTT, thetax residence certificate must be submitted by the non-resident when the income is realized (otherwise the 16%domestic WHT rate will apply);

Extension of validity of the certificate - the first 60 days ofthe year following the one during which the paymentssubject to WHT were made.


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Local Taxes



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Tax on buildings and land

Tax on buildings between 0.25% and 1.5% of bookvalue;

Payment in 2 equal installments (31 March and 30September);

New fiscal incentives to companies undertakinginvestments in excess of Euro 500,000 :

Exemption for maximum 5 years;

Reduction of the tax on buildings to 0.25% for up to 3years.


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EU Direct Tax Law

- Adopted directives -



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EU Tax Law

Direct taxes:

No provision in the EC Treaty, only general provision on

EU competence to issue unanimously directives for theapproximation of national laws;

Remains within the national competence;

Have to comply with the four freedoms (establishment,goods, services and capital).


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Adopted Directives

Parent Subsidiary Directive (90/435/EEC)

Merger Directive (90/434/EEC)

Interest and Royalty Directive (2003/49/EC)

Savings Directive (2003/48/EC)


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Other Direct Tax Measures

Code of Conduct for Business Taxation

Arbitration Convention

European Company Regulation (2157/2001)


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EU Code of Conduct

The Code of Conduct is not a legally binding instrument but it clearlyhas political force;

Aimed at more effective and uniform application of the ArbitrationConvention for the elimination of double taxation in transfer pricing

cases between EU Member States and of the mutual agreementprocedures in Member States double tax treaties;

By adopting this code, the member states have undertaken to:

Roll back existing tax measures that could constitute harmful tax

competition;Refrain from introducing any such measures in the future(standstill).


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Societas Europaea (SE)

New type of European Company established according tolegislative framework of EU - European CompanyRegulation (2157/2001);

Can convert Romanian SA into SE;

Can move seat of SE out of Romania;

Can then merge SE with non-Romanian company.


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Parent Subsidiary Directive

Tax exempt treatment of dividends paid from Romaniancompany to EU parent if it has held qualifying participationin Romanian company for at least two years;

Similar tax exempt treatment applicable in respect ofdividends earned by Romanian company from qualifyingparticipation in EU subsidiaries;

Minimum qualifying percentage is 15% as from 1 January2007 and 10% as from 1 January 2009.


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Merger Directive

Merger of Romanian company with EU company should in principlebe tax neutral in the same way as merger between 2 Romaniancompanies;

Example bank established as SA in Romania, subsidiary of EUparent bank;

If bank merged with parent, and if the Romanian business continued tooperate as a permanent establishment of the EU parent, then thismerger would in principle be tax neutral;

However, it is not easy to merge Romanian company with non-Romanian company.


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Interest and Royalty Directive

0% WHT on payments of interest or royalties from aRomanian company to an associated EU company;

Associated company means at least 25% directownership links, i.e. recipient must be either directsubsidiary or direct parent, or owned by common directparent;

Not effective in Romanian law until 2011 however areduced WHT rate of 10% has been agreed as of 1January 2007.


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Savings Directive

Effective taxation of interest income derived by individualsresident in a Member State from a paying agentestablished in another Member State;

No withholding tax levied in the source Member State

Except for: Austria, Luxembourg and Belgium;

Method: exchange of information between tax authorities inMember States.


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ECJ case law

Harmonization of direct tax legislation in EU MemberStatespushed forward by ECJ case law;

Role to interpret EU legislation, incl. fundamental freedoms:

art. 23 EC Treaty: free movement of goods;art. 39 EC Treaty: free movement of workers;

art. 43 EC Treaty: freedom of establishment;

art. 49 EC Treaty: free movement of services;

art. 56 EC Treaty: free movement of capital;

Objective: realization of an internal market where cross-bordertransactions are not hampered by discriminatory or restrictivedistinctions;

Priority of ECJ case law over national legislation.


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The information contained herein is of a general nature and is not intended to address the circumstances of anyparticular individual or entity. Although weendeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it wil lcontinueto be accurate in thefuture.No oneshould acton suchinformationwithout appropriate professional adviceaftera thorough examination of theparticularsituation.

2006 KPMG Romania, the Romanian member firm of KPMG International, a Swiss cooperative. All rights reserved. Printed in Romania.

Presenters contact detailsPresenters contact details

Dan MarinescuDan Marinescu

KP

MGR

omaniaKP

MGR

omania07473331750747333175

[email protected]@kpmg.com

www.kpmg.comwww.kpmg.com

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2007 Fiscal Changes Kpmg