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Developing

a Market Entry
Strategy for Romania
kpmg.ro

KPMG in Romania

2 | Developing a market entry strategy for Romania

CONTENTS

Introduction 3

Economic background 4

Opportunities and challenges on the Romanian market

Market entry 6

Developing a market entry strategy for Romania

Romania: Facts and figures

10

Brief overview of Romanias economic environment

11

Tax environment

14

VAT and customs

14

Excise Duties

16

Local taxes and fees

18

Income tax

19

Tax incentives

21

State aid in Romania 22

Section or Brochure name | 3

Its large domestic market, together with a skilled and relatively cheap labour force have stimulated
Romania to become one of the leading countries in Europe in terms of investment attractiveness.

Introduction

omania is one of the largest countries


among those which have joined the
European Union (EU) over the last
decade, with a population of around 19 million. EU
accession in January 2007 acted as a stimulus
to investment and the economy showed strong
growth before the recession hit. Since the second
half of 2008, investment has declined and the
effects of the recession have been felt, with
significant falls in consumer demand. Moreover
the government has implemented austerity
measures, as part of an agreement with the IMF.
Nevertheless, although Romania still faces severe
economic challenges it has so far avoided the
deep crises which have affected some eurozone
countries. There are some positive signs that
recovery has begun and that this will be more
sustainable than the boom-bust of 2007-9.

Romania continues to present many opportunities


for investors and several have concluded that this
is a good time to enter or reenter the Romanian
market. Nevertheless, Romania is the sort of
market where knowledge is critical to success.
The taxation system remains complicated and
bureaucratic, in spite of the low flat tax of 16%
on corporate and personal income. Moreover,

legislation on tax, employment and many other


issues which affect an investor can change
frequently, often at very short notice. The
possibilities and challenges of investment in
Romania can often vary significantly from one
sector to another.
KPMG in Romania has expert staff who can advise
investors on a wide range of issues. We can cut
through complexity to help you to steer through
the pitfalls and benefit from the opportunities
which can come from investing in this emerging
market. For example, our professionals can assist
with the tax and legal framework, helping you
comply with legislation and identifying ways you
might reduce costs and cut through red tape.
This publication presents a basic overview of
Romania and highlights ways in which KPMG
can assist investors with market entry. While this
publication addresses relevant areas, it does not
provide the in-depth information needed to make
investment decisions. As legislation in Romania
is still subject to frequent and rapid change, we
recommend that you obtain comprehensive
advice before taking any investment decision.

4 | Developing a market entry strategy for Romania

Economic background

ver the past two


decades, Romania
has received a steady
inflow of foreign capital, which
peaked around the time of
EU accession. Although the
subsequent recession has hit
Romania hard, in common with
other countries in the region, a
renewal of economic growth
has been under way, and
recently a World Bank report
suggested that the country
is expected to see growth of
2.2 percent in 2014, placing
Romania fourth for estimated
GDP growth in Central and
Eastern Europe. Investors
continue to be attracted by
Romanias skilled and relatively
cheap labour force.

Romania is not burdened by


excessive debt (the sovereign
debt level in 2012 as a proportion
of GDP stood at around 34
per cent compared to an EU
average of 85 percent and a
eurozone average of 90 percent,
according to the EU statistics
office Eurostat). Consumer
price inflation, at 3.4% in 2012,
is projected to remain high, at
around 4.3% in 2013 on average.
The Romanian banking system
proved relatively robust to the
global financial crisis, as it did
not have the same levels of
exposure to toxic assets as did
banks in the U.S. and Western
Europe. Moreover, Romanian
banks do not have significant
exposures to sovereign debt

in those eurozone countries


which have faced difficulties in
recent years. However, they are
relatively exposed to Romanian
sovereign debt, which could
present a problem if there were
to be contagion from any future
eurozone troubles, causing
the Romanian government
difficulties in meeting its
obligations. For the moment,
though, that prospect looks
unlikely.
Romanias infrastructure is
relatively undeveloped, with
significant improvements
needed in the road and rail
networks to bring them up to
European standards, and so
far modernization has been
slow. However, there are large
amounts available in EU funding
to support infrastructure
projects, and, with the right
approach by government,
a national infrastructure
development program could
bring opportunities for the
private sector.
Romania has a large domestic
market, which has grown in
recent years due to greater
affluence and the emergence of
a stronger middle class. While
domestic consumer demand fell
sharply when the recession hit,
it can be expected to improve
once the recovery takes hold
and confidence returns.

Section or Brochure name | 5

Romania is one of the largest countries in CEE, with over 21 million inhabitants. The work force is
considered relatively highly qualified, while labour markets are gaining flexibility.

Opportunities and challenges


on the Romanian market

any economic sectors are still relatively fragmented


and undergoing restructuring. In addition, the
government has recently shown interest in further
privatization, which could provide opportunities for investors.
Recently there have been changes to the Labour Code which
have brought greater flexibility to the labour market.

The government offers a number of investment incentives


to attract FDI, including real estate tax exemptions, as well
as preferential tax deductions for the purchase of new
technology and R&D centers. Grants are also available,
from both national and EU sources, which can support new
investments and job creation.

There are currently a substantial number of Business Process


Outsourcing and Shared Services Centres entities operating
in Romania, and there is still tremendous potential for growth
in this sector.

Nevertheless, investors need to be aware of a number of


challenges that are common to most transition economies
in the region, including Romania. Institutional risks still exist,
albeit mostly at the local level. Although EU membership is
slowly bringing stability, legislation is still changing relatively
rapidly, may at times be self-contradictory and is sometimes
inconsistently applied. Legal procedures can be inefficient
and the administrative requirements for setting up a business
remain complex. The distribution environment in Romania
typically poses challenges to foreign entrants.

Recently, SSCs and BPOs located in Romania set up a


professional association called the Association of Business
Service Leaders in Romania (ABSL). Core members of
ABSL are major service providers on the Romanian market:
Genpact, HP, Luxoft, Microsoft, Office Depot, Stefanini,
Wipro and WNS. KPMG is one of ABSLs strategic partners.
ABSL Romania defines its goal as being: to support the
long-term development and dynamic growth of the business
services sector and increase investment attractiveness
of Romania as a leading localization for outsourcing and
offshoring projects.(Source: http://www.absl.ro/absl/
about-absl.aspx) For 2013, ABSL estimated the Romanian
outsourcing market to be approximately EUR 500 mil.

A major share of retailing is still accounted for by a highly


fragmented and unsophisticated system of traditional trade,
and logistics can prove to be unreliable.

6 | Section or Brochure name

Market entry

omania presents
many possibilities for
investors and there is
still considerable untapped
potential. However, any
successful market entry
requires research and
planning. Whatever type
of investment you are
considering, you need to
understand clearly the
opportunities and the
potential risks. Knowing the
market, and especially what
any competitors are doing,
is also essential.
Romania is a market
where conditions can
change rapidly and where

Our approach to market entry


doing business can be
complicated. Moreover, it
can be hard to find accurate
financial, tax, commercial
and operational information
about target companies.
Market information and
competitive intelligence may
be inconsistent, inaccurate
out of date or simply
nonexistent. Investors often
underestimate the cost
of entry and the strain on
management resources.
The key to success is to
be well informed and well
prepared.

n Romania, KPMG aims


to assist international
and domestic
investors in developing
an understanding of what
it takes to succeed in a
market. We help define
your expansion strategy and
we study in-depth the
market size and growth
potential, key demand
drivers and relevant
trends, the regulatory and
competitive environment,
as well as the tax, legal and
labor aspects which could
be critical in the evaluation
of an industry. Using a
structured, quantitative
and practical approach, we
assess the attractiveness
of the industry and evaluate
whether the opportunity
is realistic, as the client
builds a strategy to enter or
expand into the market.

When carried out well, a


new market entry is often
the most controllable way
for managers to drive
corporate growth.
Whether choosing a
location, selecting a
company form, devising a
market entry strategy or
identifying specific risks,
the decisions you make
at the beginning can have
a decisive impact on your
future success. At
KPMG in Romania, we
have witnessed that
successful companies use
a methodical, factdriven
process for market entry.

Section or Brochure name | 7

Developing a Market Entry Strategy for Romania

n considering the first steps into a new market,


organizations have many issues to think about.
Our team helps investors to identify which steps
are the most critical, where the most significant
risks could be, and how to implement a plan to take
advantage of market opportunities while mitigating
potential risks. Prospective investors need to take
the following steps before going ahead with their
project:

Identify and assess the market: Which


markets, which segments, how should the
investor position itself, how should marketing
efforts be managed and implemented,
which entry method should be chosen
(through intermediaries or directly), and using
which information? What is the scale of the
opportunity?
Develop sourcing opportunities: Should
products be made or bought? Where can key
inputs be sourced?

Decide on the form of investment and control:


Joint venture, local partner, or acquisition?
Determine how to operate in Romania from a
tax perspective: What are the most efficient
legal structures, the key potential taxes, the
risks and opportunities involved, and the
existing benefits and incentives?

Identify and approach local partners: Which


companies can be approached, how attractive
and dependable are these partners, how
should you reach a deal with them?

Build or validate a business plan: How is the


business likely to perform in the forthcoming
years? How will the key commercial and
operational drivers, external and internal
factors impact the business?

Evaluate where to establish the business


(location assessment, site identification):
Which locations (regions, cities) are the most
attractive? Within the selected locations, what
are the sites (properties, land, buildings) that
best fit the businesss needs?

8 | Developing a market entry strategy for Romania

Our multidisciplinary team and


in-depth industry expertise

o answer these questions,


our team leverages a high
level of local expertise,
resources and networking
capabilities in Romania along
with a broad range of external
information resources to develop
a comprehensive market entry
plan.
Our talent pool of highly qualified
professionals has always been
our greatest strength. As a
multidisciplinary advisory firm,
instead of just being specialists in
one discipline, we encourage our
people to cross into other
functions to bring a more
rounded and comprehensive
approach to every assignment.
This means, for instance, that
our Market Entry teams not only
think about strategy and deal
resolution, but also about the
post-integration of systems and
cultures, tax, legal and labour
aspects. They consider how
an internal audit will operate
across a wider group; how risk
can be effectively managed
and reputations maintained and
enhanced.
Our teams have the know-how
and experience to consider
the big picture and, where
appropriate, to call in more

specialist expertise. KPMG


has industry specialists across
all industries and sectors. We
gather hard-to-find information
from primary and secondary
sources to present a fact-based
and independent view. Nothing
is considered in isolation but
in terms of how it will promote
overall corporate well-being.
For clients, this means that
KPMG staff give you the broad
picture. They take time to truly
understand your business and
are plugged into the issues that
matter.
Multidisciplinary by essence,
in the context of a market entry
exercise, KPMG can provide
market intelligence, feasibility
studies, due diligence assistance,
tax structuring, integration and
separation advice, M&A advisory,
business modelling, valuation
services and accounting advisory
services.
Clients using our full range of
advisory services benefit from
improved efficiency of data
gathering and communication
as well as cross-fertilisation
between the teams, which
allows us to offer you a better
deal in relation to cost.

Developing a market entry strategy for Romania | 9

factSheet

Romania:
Fact and Figures

Developing a market entry strategy for Romania | 11

A highly trained labour force, abundant natural resources, and geographical advantages are
among the attributes that attract investors to Romania.

Brief overview of Romanias economic environment

he recent development of the


Romanian economy has followed
the trend of the Central and East
European region, registering a 0.7%
increase in GDP in 2012, followed by
a 2.4% increase in 2013 and 2.8%
in 2014. the current account deficit
is estimated at 1.3% of GDP in
2013 and forecasted at -0.9 in 2014
(BMI report). Fiscal consolidation
measures have been introduced in
recent years in response to declining
budget revenue and in line with
Romanias agreements with the EU
and IMF. The most recent agreement,
signed in September 2013, provided
Romania with a EUR 4 billion loan, for
a two year period.

The macroeconomic environment


in Romania for 2014 is expected
to be more stable, while growth
perspectives are more promising
than for other countries in the region.
Robust exports and a moderate
recovery in private consumption

two year ago are considered to be


the main factors that will determine
economic recovery, along with the
expected improvement in absorption
of EU funds, which can be used to
finance eligible investment from the
state budget.
Exports grew 6.2% while imports
contracted by 2.4% in 2013. Inflation
is expected to increase compared
to the previous year, to reach 4.5%,
while gradually decreasing in 2014
and reaching the targeted value of
around 3.2% by the end of the year.
The main expected government
priorities for 2014-2015 are:

Promoting investment and


improvement of services
provided in the energy and
transportation sectors.

Launching of 5 IPOs for main


energy companies owned by the
state.

Providing assistance to help


young Romanian citizens access
the labor market more easily.

Introducing fiscal policies to


stimulate internal demand.

Romania is a member of major


international organizations: the
European Union, the United Nations,
the World Trade Organisation
(WTO), NATO, the Council of
Europe, the European Bank for
Reconstruction and Development
(EBRD), the International Monetary
Fund (IMF), the Organisation for
Security and Cooperation in Europe
(OSCE), the Central European Free
Trade Area (CEFTA), the United
Nations Conference on Trade and
Development (UNCTAD) etc.

12 | Developing a market entry strategy for Romania

Brief overview of Romanias economic environment

KEY INDICATORS

2010

2011

2012

2013
2014
(estimated) (forecast)

Nominal GDP (EUR m)

124.4

131.4

131.8

140.1

148.4

Real GDP Growth (%)

-1.1

2.2

0.7

2.4

2.8

Total public sector debt


(%GDP)

30.5

34.7

37.8

Government deficit (EUR m)

-37,889

-45,578

-49,868

Trade balance (EUR m)

-7,577

-7,407

-7,374

-8,065

-9,580

Inflation rate (%)

6.1

5.8

3.3

4.5

3.2

Unemployment rate (%)

7.3

7.4

6.9

6.7

Source: National Bank of Romania, The Economist Intelligence Unit, National Commission for Prognosis,
Ministry of Finance (www.mfinante.ro), IMF Stand-By Agreement September 2013, BMI Forecasts.

FDI and Key investors in Romania


Romania became a very popular FDI destination in the years immediately before and
after EU accession on 1 January 2007. This was the result of large-scale privatizations
and increased confidence, but there was also a large amount of speculative investment,
particularly in real estate, which dried up when the global economic downturn began
in the second half of 2008. FDI fell significantly in the period up to 2011, but increased
slightly in 2012 and 2013. The trend has been similar to that in other Central and Eastern
European countries, and there are signs that confidence is returning.
YEAR

2008

2009

2010

2011

2012

2013

FDI Value (EUR m)

9 496

3 488

2 596

1 815

2 138

2 710

Source: National Bank of Romania, The Economist Intelligence Unit.

The local currency has depreciated slightly since 2011, with an annual average of RON
4.46/ EUR in 2012, and an average of RON 4.42/EUR in 2013.

YEAR

2008

2009

2010

2011

2012

2013

2014
(est.)

Average F/X rate


(RON / EUR)

3.68

4.24

4.21

4.24

4.46

4.42

4.45

Source: National Bank of Romania, National Commission for Prognosis

Developing a market entry strategy for Romania | 13

FDI by field of activity (2012)

FDI by field of activity (2012)


0,6%
1,5%

0,4%

2,4%
4,8%

4,7%

9,2%

46,5%

11,4%

18,5%

Industry
Financial services
Trade
Real estate&construction
IT&C
Professional, scientific, technical, administrative and support services
Agriculture, forestry and fisheries
Transport
Hotels and restaurants
Other

10 FDI
in Romania
by ofcountry
of origin
(2012)
TheTop
top three
countries
of origin in terms
Foreign Direct
Investment*
are: the Netherlands, Austria and
Germany.

Top countries investing in Romania %

The top three countries of origin in terms


of Foreign Direct Investment* are: the
Netherlands, Austria and Germany.

1,70%
1,70%

1,60%

1,80%
2,30%

7,70%

1,80%

22,40%

3,10%
3,70%
4,30%
Top 10 FDI
in Romania by country of origin (2012)
4,50%

18,50%

5,00%
8,90%

The Nederlands
Italy
USA
Czech Republic

11,00%

Austria
Cyprus
Luxembourg
Great Britain

Germany
Greece
Spain
Hungary

France
Switzerland
Belgium
Other countries*

Source: National Bank of Romania

Source: National Bank of Romania

14 | Developing a market entry strategy for Romania

Tax environment
VAT and customs

The VAT law is harmonized with the EU VAT Directive.

Transfer of going concern

VAT basics

he Romanian general VAT rate


is 24%. The following types
of goods and services have a
reduced VAT rate of 9 percent:

Entrance fees for visits


to castles, museums,
memorial houses, historical
monuments, architectural and
archaeological monuments,
zoos, botanical gardens, fairs,
exhibitions, cultural events,
and cinemas.

Textbooks, books,
newspapers, and magazines,
except for those destined
exclusively or mostly for
advertising purposes.
Any type of prosthesis, except
for dental prostheses.

Orthopaedic products.

Medicines for human and


veterinarian use.

Accommodation in hotels or
similar facilities, including the
letting of sites for camping.

Bread, bakery products, wheat,


rye, and other similar products
(starting 1 September 2013).

A reduced VAT rate of 5%


is applicable, under certain
conditions, for the sale of
residential real estate.

The VAT law is harmonized with the


EU VAT Directive. The VAT reverse
charge mechanism is generally
recognized for B2B service
transactions and intra-Community
trade with goods.
Romanian entities carrying out
economic activities in excess of
the small undertakings threshold
of EUR 65,000 (RON 220,000)
per year are required to register
and account for Romanian VAT. If
the annual turnover is below EUR
65,000, the entity is not required to
register for VAT. However, a taxable
person may opt for the application
of the general VAT regime.
Any foreign entity that is neither
VAT established nor VAT registered
in Romania, and performs
operations giving rise to VAT
deduction right, except for certain
operations such as those when
the customer is liable to settle
the VAT liability, must register for
VAT purposes in Romania before
performing these operations. This
type of foreign entity may either
appoint a VAT representative with
joint and several liability to the tax
authorities (compulsory for non-EU
entities), or register directly with
the Romanian authorities (option
available only for entities from
other EU countries).

During downturn periods, companies


are looking to restructure their
businesses to reduce their costs.
Some companies may be considering
mergers, acquisitions or disposals of all
or part of their businesses. Romanian
VAT law provides for specific provisions
allowing for businesses to be
transferred as a going concern, which
could allow for a VAT free transfer
(under specific conditions).

Import VAT
Import VAT is payable by importers of
goods to the customs authorities upon
entry into the EU. However, there are
cases when no VAT needs be paid to the
customs authorities, subject to specific
conditions:

For goods imported into Romania


which are intended to be shipped
by the importer to a different EU
Member State.

For taxable persons performing


imports exceeding the threshold
of RON 100 million in the last 12
months or in the previous calendar
year and which have obtained a
certificate for the deferment of VAT
payment.

Entities (either established in


Romania or abroad) registered
for VAT purposes in Romania
and holding Auhorized Economic
Operator (ACO) authorization
or on site customs clearance
procedure authorization or on-site
customs clearance procedure
authorization.

Developing a market entry strategy for Romania | 15

Recovery of input VAT incurred


in other countries
Romanian businesses which incur VAT
in other EU Member States and several
third countries from outside the EU
may, under certain conditions, reclaim
that input VAT paid in those countries.
Evaluating and quantifying foreign VAT
incurred which may be claimed back
should be an integral part of the cash
flow management of companies.

Free trade zones


Romania has six free trade zones
located near the Danube, the Black Sea,
and in the west of the country, near rail,
air and road infrastructure which allows
easy connections with Western Europe
as well as the rest of the country. Free
trade zones offer multiple benefits such
as:
They allow payment of customs
duties and other import taxes (i.e.
excise duty, VAT) to be deferred
until goods are taken out of the
free trade zones.
They offer reduced administrative
costs for importers placing goods in
such areas, as compared to placing
them into a bonded warehouse.

Inward processing relief


customs regime, with customs
duties drawback or suspension
system
By applying this special customs
regime, companies which manufacture
goods in Romania which are shipped
outside the EU, can benefit from a
refund of customs duties (drawback
system), or from suspension of
payment of customs and import taxes
(suspension system) on imported
materials which are used in the
manufacturing process.

Romania has six free trade zones located near the Danube, the Black Sea, and in the west of
the country.

Transfer pricing and customs


Transfer pricing is a hot topic in Romania. The tax authorities have become
increasingly vigilant, as have most other tax authorities worldwide. The
core of a transfer pricing audit is to assess whether there is sufficient profit
taxable in that jurisdiction. From a transfer pricing perspective, the arms
length character is usually viewed in overall terms, per activity or for bunch
transactions. From a customs perspective, however, it is essential to focus on
the arms length character of each individual transaction. Specifically, there
may be many cases where no overall transfer pricing adjustment is needed, as
in terms of the totality of the business operations, the profitability is justifiable.
However, the customs authorities might question the correctness of the
transaction value on specific imports, arguing that it should suffer upward
adjustments. When upward adjustments of import prices occur due to
transfer pricing rules, the customs authorities usually require post-clearance
re-consideration of the customs
value of imported goods and
payment of additional import duties.
They can also impose late payment
penalties and interest.
Therefore, proper transfer pricing
documentation per se is not
necessarily sufficient to prevent
a customs audit imposing upward
adjustments. It is expected that
customs audits in Romania will
intensify in future, following the
general trend in European countries.

16 | Developing a market entry strategy for Romania

Excise Duties

roducts subject to excise duties: beer; wines;


fermented beverages other than beer and wines;
intermediate products; ethyl alcohol; tobacco
products; energy goods and electrical energy; green,
roasted and soluble coffee; luxury products (e.g. gold
and/or platinum jewellery, natural fur garments; cars of
3,000 cc or over; weapons and ammunition; yachts and
other pleasure craft, with or without an engine).
Exceptions and exemptions from excise duties are
available for specific excisable products intended for
particular usages, for instance: ethyl alcohol used for
production of vinegar; ethyl alcohol used for medical
purposes in hospitals and drug stores, and in the
production of medicines; electricity produced by
renewable energy sources; etc.

Transactions between Romanian entities and their related parties


must follow the arms length principle.

Corporate tax

Transfer pricing

enerally, companies resident in Romania, nonresident entities doing business in Romania


through a permanent establishment located in
the country and legal entities incorporated according
to European legislation, with a registered office in
Romania, are liable to corporate income tax in Romania.

Transactions between Romanian entities and their related


parties (both Romanian and non-resident) must follow the
arms length principle. Romanian transfer pricing rules follow
the OECD guidelines. Romanian companies are required to
maintain documentation to demonstrate that their transfer
pricing policy is arms length.

Romanian companies are taxed on their worldwide


income. Non-resident companies and individuals are
subject to Romanian taxation only for Romanian source
income.

Withholding tax (WHT)

The corporate income tax rate is 16%, which is levied


against the positive tax base calculated according to the
rules stipulated in the Romanian Fiscal Code. Romania
does not apply Controlled Foreign Corporation Rules.

Foreign entities are generally subject to withholding tax on


income tax derived from Romania. This tax applies for the
gross income obtained in Romania.
The following types of income/gains are generally subject to
16% Romanian withholding tax:

Interest

Royalties

Revenues from services performed in Romania

Dividends

Revenues obtained from management, consultancy and


professional services, irrespective of where the services
are performed

Transfer pricing

Commissions

Dividends received from foreign subsidiaries are


exempt if the conditions of the EU Parent Subsidiary
Directive are met (e.g. 10% shareholding for at least
2 years) until 31 December 2013. With effect from
1 January 2014, this rule has been amended. Thus,
dividends received from subsidiaries are non-taxable
revenues, if the subsidiary is subject to CIT or other
similar tax, is resident in Romania or in a DTT country
and a 10% shareholding has existed for at least one
year. Starting 2014, revenues derived from the sale
or transfer of shares and proceeds from liquidation
are also exempt, provided the subsidiary is located in
Romania or in a DTT country and a 10% shareholding
had been in existence for at least one year.

Revenues derived from liquidation of a Romanian legal


entity.

The taxable profit of a company is calculated as the


difference between income obtained from any source
and the expenses incurred in obtaining taxable income
throughout the fiscal year, adjusted for fiscal purposes
with non-taxable revenues and non-deductible
expenses.
Tax losses may be carried forward for seven years,
based on the FIFO method.

Companies declare corporate income tax on a quarterly basis

Thin capitalization
However, dividend payments made by a Romanian
legal entity are exempt if the beneficiary of the
dividends is a legal entity/PE of a legal entity which
is a resident of another EU Member State, holding
at least 10% of the share capital of the Romanian
entity paying the dividends, for an uninterrupted
period of at least 2 years, which ends when the
payment is realized, (one year starting 1 January
2014).
Payments of interest and royalties made by
Romanian companies to companies resident in an
EU or EFTA member state, which hold at least 25%
of the share capital of the Romanian company for
a continuous period of at least 2 years prior to the
date of payment of interest/ royalties, have also
been exempt from Romanian withholding tax since
1 January 2011.

Double taxation relief


Relief from double-taxation for resident taxpayers
may be provided by way of a tax treaty/EU Directive.
The withholding tax rates under the Double Tax
Treaties concluded between Romania and the
country of residence of the payment beneficiary
or under EU legislation may be applied if the
nonresident makes its tax residency certificate
available to the Romanian payer of income. To apply
EU legislation, the beneficiary has to additionally
provide an affidavit attesting that the conditions for
exemption have been fulfilled.
To benefit from treaty protection, the tax residency
certificate must be made available by the nonresident at the time of payment. Otherwise,
domestic withholding taxes apply upon payment of
the income and a refund can be requested if the tax
residence certificate is made available within the
five year statute of limitations period.
Romania has concluded Double Taxation Treaties
with more than 80 countries around the world. Most
of these treaties are based on the OECD Model Tax
Convention on Income and Capital. If an individual
qualifies as a resident of one of the two states, the
relevant treaty can be applied. The method provided
under domestic tax legislation for double taxation
avoidance is the tax credit.

The following rules apply to the deductibility of interest


expenses and net foreign exchange losses:

Interest expenses and net foreign exchange losses


recorded in relation to loans obtained from financial
institutions / non-banking financial institutions (e.g.
bank loans) are fully deductible.

Deductibility of interest expenses recorded in relation


to loans obtained from institutions other than the above
(e.g. shareholder loans) is subject to the following
limits:
i. i. Interest rate limitation: deductibility of interest
expenses may be claimed only up to a certain
threshold (6% for loans denominated in foreign
currency; National Bank of Romania reference
interest rate for RON denominated loans). Any
interest in excess of this threshold is permanently
non-deductible for CIT purposes.
ii. ii. Debt to equity limitation: if the companys
debt to equity ratio is negative or higher than 3:1,
interest expenses and net foreign exchange losses
can be carried forward until the ratio becomes
positive and lower than 3:1.

Reporting and payment


Companies declare corporate income tax on a quarterly
basis and in addition submit an annual corporate income
tax return. The annual tax return must be filed by 25
March of the following year, except for taxpayers in the
agriculture sector, which are required to submit their tax
return and pay tax by 25 February of the following year.
Since 1 January 2013, most taxpayers have been able to
opt for an advance payment system, i.e. paying corporate
tax advances on a quarterly basis, based on the previous
years results rather than current year results. For banks,
the advance payment system is compulsory.
As a general rule, refunds are available only to the extent
that no other tax may be offset against the amount of tax
paid in excess.

18 | Developing a market entry strategy for Romania

Local taxes and other corporate taxes and fees


Building tax
Building tax is due by every individual or legal entity owning buildings in
Romania unless specific exemptions apply.
The tax for legal entities can range between 0.25% and 1.5% of the book
value of the building and is set by the tax office in whose jurisdiction the
building is located. Individuals pay 0.1% of the taxable value or the building
as defined in law. Additional taxes are payable by those who own more than
one building for residential purposes, which are not rented to other people.
A higher rate, of between 10% and 20%, applies to buildings which have
not been revalued in the past three years prior to the fiscal year for which
the tax is due. This rises to between 30% and 40% for buildings which have
not been revalued in the past five years. For fully depreciated buildings the
taxable value for building tax purposes is reduced by 15%.

Land tax
This tax is due by every individual or legal entity which owns land in Romania
and is calculated per square meter. It varies depending on location, status
of the locality (urban, rural etc.) and the type of land (if it is designated for
construction or agricultural purposes). Land and building taxes are paid twice
a year in equal instalments (by 31 March and 30 September respectively).
However, if the tax due for the entire year is paid in advance no later than 31
March, a reduction of up to 10% by the local council may be granted.

Vehicles tax
The vehicle tax is calculated based on each vehicles cubic capacity by
multiplying each 200 cm3, or part thereof by the appropriate value from a
specific table. Here are two examples:

For cars with cubic capacity between 1601 cc and 2000 cc inclusive, the
tax is 18 RON/ 200 cc;

For cars with a cubic capacity of 3001 cc or over, the tax is 290 RON/cc

Transfer tax
Transfer tax is levied upon the transfer of real estate.
When the transfer is recorded in the Land Registry, it is taxed at 0.5% of the
value of the immovable property which has been transferred. In addition, notary
fees are payable, which are normally around 0.5%, depending on the notary
involved. Therefore, the total tax payable, including notary fees, is approximately
1% of the value of the property transferred.

Tax on constructions
Starting 1 January 2014, Romanian companies and foreign legal entities which
have a permanent establishment in Romania are liable to a tax on constructions
(other than those subject to building tax). The tax rate of 1.5% is applied to
the inventory value of buildings owned by taxpayers on 31 December of the
previous year. The tax is required to be calculated and declared no later than 25
May for the year to which it relates and must be paid in two equal instalments,
no later than 25 May and 25 September

Building tax is due by every individual or legal


entity owning buildings in Romania unless
specific exemptions apply.

Section or Brochure name | 19

Personal income tax


Tax residence
A tax resident of Romania is generally
defined as an individual who has domicile
in Romania, has his/her center of vital
interests in Romania, or who spends
more than 183 days in Romania during
any 12-month period ending in the fiscal
year concerned.
A non-resident of Romania is someone
who does not meet at least one of the
above conditions.
The general rule is that a person who
is a tax resident of Romania is taxable
on his or her worldwide income. Tax
non-residents are generally taxable
on income derived from sources in
Romania. An exception to the general
rule above is available for non-Romanian
nationals who are treated as Romanian
tax residents. During the first year of
being Romanian tax residents, these
individuals are liable to Romanian tax
only on Romanian-sourced income. Full
liability to tax on worldwide income may
occur from the second consecutive year.
Under Romanian domestic legislation,
non-resident individuals deriving income
from dependent activities in Romania are
liable to Romanian income tax as from
the first day of activity in the country.
However, to the extent that the individual
qualifies for relief in terms of the
dependent personal services article of an
applicable double tax treaty, there will be
no tax liability.
Net taxable income is taxed at a flat rate
of 16% for residents and non-residents.
A deduction is generally available for
compulsory employee social security
contributions.

Romania has multifaceted, challenging and complex immigration regulations. The procedures
and conditions vary depending on the nationality of the individual, duration of stay and reason
for stay in Romania as well as the type of activity performed

Immigration to Romania

rocedures for EU/EEA and


Swiss nationals are quite
straightforward. However, for
individuals who are not citizens of
EU/EEA countries or Switzerland,
completing immigration procedures
can be a very bureaucratic and timeconsuming process, which can take
from a few weeks to a few months.

Long-term visas are generally valid


for stays of up to 90 days within a
6-month period and can be used
to apply for Romanian residence
permits. Romanian residence
permits are generally issued for
1 year and can be extended for
successive 1-year periods. EU/
EEA/Swiss nationals are normally
issued with 5-year permits (called
certificates of registration).
Work authorizations are generally
required for non-Swiss and non-

EU/EEA individuals working in


Romania (either as secondees or
local employees). One of the most
important requirements is that the
company must show that it has
been unable to find appropriate
candidates who are Romanian
nationals.
Various conditions have to be met
by the foreign individual (such
as education requirements and
professional experience) as well
as by the Romanian entity where
the person performs work. NonSwiss and non- EU/EEA individuals
employed in positions which
require high qualifications may be
eligible to obtain an EU Blue Card,
which is a special type of residence
permit for employment purposes
issued to highly-skilled qualified
foreign workers.

20 | Developing a market entry strategy for Romania

Social contributions
The main Romanian social contributions are:
Contribution

Employer

Employee

20.80% (capped)

10.50% (capped)

Health Fund

5.20%

5.50%

Unemployment Fund

0.50%

0.50%

0.15%-0.85%

0.25%

0.85% (capped)

Social Security

Risk Fund
Salary guarantee fund
Medical leave and allowances

The base for applying the individual social security contribution (10.5%)
is capped at 5 times the average gross salary (estimated at RON 2,298
for 2014), while the base for applying the employer social security
contribution (20.8%) is capped at the lower base between the number
of insured persons multiplied by 5 times the average national salary
and the salary fund. The medical leave and allowances contribution
is capped at 12 times the minimum gross salary multiplied by the
number of insured persons. Generally, full social security contributions
(employee and employer) are due for foreign individuals who have
residence in Romania (who obtain a Romanian residence permit) and
perform activity in Romania. Exemptions from Romanian social security
contributions may be available where there is a totalization agreement
between Romania and the home country or where EC Regulation
883/04 is applicable.

Compliance obligations
Generally, annual tax returns are due by 25 May following the tax yearend, which is 31 December.
Employment income must be declared and income tax must be
paid on a monthly basis, by the 25th of each month for the previous
month. Where an individual is employed by a non-Romanian employer,
generally that employer has no personal tax withholding or reporting
obligations, as it is the employees responsibility to declare and pay
Romanian personal tax on a monthly basis. However, non-Romanian
employers can have certain obligations in terms of registering for
Romanian social security contributions.
The Romanian entity where the individual carries out activity has certain
reporting obligations to the local tax, labour and immigration authorities
at the commencement and at the end of the assignment / business trip.
Generally, annual personal income tax returns are due by
25 May following the tax year-end, which is 31 December

Developing a market entry strategy for Romania | 21

Tax incentives
Research and development
Romanian legislation provides for two main tax
incentives for research and development (R&D)
costs:

50% additional tax deduction for all


eligible R&D costs (e.g. salary expenses
in relation to staff involved in R&D activity,
depreciation of intangible assets used in
R&D activity, operating expenses (e.g. raw
materials, consumables, etc.) incurred in
R&D activity, etc.)

Accelerated depreciation for equipment


used in R&D activity.
For taxpayers to be able to take advantage
of these incentives, they must conduct R&D
activities which generate an outcome that can
be used by the taxpayer to increase revenues.

The ELI Nuclear Physics project, to be constructed in the Magurele area, will consist
of the most powerful laser beams and the most advanced gamma beams in the world

Employment incentives

Accelerated depreciation
According to Romanian fiscal legislation,
accelerated depreciation can be used by
companies for machinery and equipment,
computers and their peripherals.
Consequently, taxpayers may apply
accelerated depreciation to fixed assets
which fall within the above mentioned
categories, even if they do not qualify for the
fiscal incentive in relation to R&D costs.
Under this depreciation method, a maximum
of 50% of the assets fiscal value may be
deducted during the first year of usage,
while the rest of the assets value can be
depreciated using the linear method over the
remaining useful life.

Employers who hire recent


graduates may apply for a monthly
grant. This is calculated by
multiplying the reference social
indicator (currently RON 500) by
1.2 - 1.5 for each new graduate
(depending on the education level
of the employees), for a period of
12 months.
Additional incentives are granted
for the employment of recent
graduates with disabilities. In
this case, the monthly grants, as
well as the exemption from the
contribution to the unemployment
fund, are offered for 18 months.
In addition, companies hiring
scholars and students during
summer vacations, benefit from

a monthly incentive of 50% of the


reference social indicator for each
student/scholar. The incentive is
granted for a maximum of 60 days.
Employment incentives are also
granted to companies which hire
unemployed persons aged over
45, as well as for employment
of an individual who is the sole
supporter of his or her family. The
employers receive a monthly
grant equal to the reference social
indicator for each such person and
are also exempt from paying the
unemployment contribution due
for the amounts paid to them. The
employment relationship must be
maintained for at least 18 months.

22 | Developing a market entry strategy for Romania

Tax incentives for reinvested dividends

Local tax exemptions

Dividends reinvested for the purpose of


creating new work places or for the purpose
of developing the activities of Romanian
legal entities distributing their dividends, are
dividend tax exempt.
In addition, dividends reinvested in the share
capital of another Romanian legal entity, for the
same purposes as the above mentioned ones
are also dividend tax exempt.

Building land and land used within industrial


parks are exempt from building and land tax.
Local councils may grant building or local tax
exemptions to legal entities which benefit
from state aid schemes.

Other tax incentives


Other fiscal incentives are provided for
renewable energy producers, such as
exemption from excise duties for energy
produced from renewable sources.

State aid in Romania


State aid scheme for investments in high tech related fields
which create at least 200 new jobs
The government grant scheme has been
open during 2012-2013. It is expected to
continue also during the first half of 2014.
A company carrying out activity in a high tech
related field such as the processing industry,
IT&C, R&D or energy may benefit from state
aid for an investment project generating at
least 200 new jobs. There are no minimum
requirements concerning the amount of
investment.
The level of support is up to 50% of the
salary costs for the new employees for two years. The maximum level of the
grant is the RON equivalent of EUR 28.125 million (for investments outside
the Ilfov Bucharest region) or EUR 22.5 million (for investments in the
Bucharest Ilfov region).

State aid scheme for supporting economic growth


The main conditions upon which state aid is granted are:
Initial investment ranges (EUR million)

Number of new
jobs created

5-10

50

10-20

100

20-30

200

Over 30

300

The government grant scheme is available for five years (2009-2013) and
consists of grants of up to 50% of the eligible costs of the investment.
The scheme is also expected to continue during the first half of 2014.
The maximum level of the grant an economic operator can receive is the
RON equivalent of EUR 28.125 million (for investments outside the Ilfov
Bucharest region) or EUR 22.5 million (for investments in the Bucharest
Ilfov region).

State aid scheme supporting


investments over EUR 100 million
Large enterprises can be granted financial
support for initial investment exceeding
the RON equivalent of EUR 100 million,
with eligible costs of over EUR 50 million
(RON equivalent) if they create at least 500
new jobs.
All fields of activity are eligible, except the
primary production of agricultural products,
fisheries, the coal industry, the steel
industry, transport, maritime shipbuilding
and synthetic fibers.
The level of aid depends heavily on the
amount of the eligible expenses. For
instance, an investment of Euro 300
million may benefit from a grant of up to
23% of the project eligible costs, i.e. of
a maximum grant of Euro 71.5 million.
Smaller projects may benefit from aid of
up to 50% of the eligible investment costs.
The aid may be granted exclusively in
the form of part refund of the eligible
investment costs, exclusively in the
form of part refund of the salary costs
for new employees for two years or as a
combination of the two.

Section
SectionororBrochure
Brochure name
name | 23

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An estimated US$40 trillion of investment will
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Contact us
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Senior Partner
T: +40 (372) 377 800
E: stoader@kpmg.com
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Partner,
Deputy Head of Taxation Services
T: +40 (372) 377 795
E: rjurubita@kpmg.com
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Partner, Head of China Practice


T: +40 (372) 377 790
E: oefraim@kpmg.com
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Partner, Advisory, Head of Markets


T: +40 (372) 377 792
E: rperrin@kpmg.com
www.kpmg.ro

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