Personal Income Tax

Last Update: May, 2010

by PricewaterhouseCoopers

General principles

• Romanians domiciled in Romania are subject to taxation on their worldwide income (except for salaries received from abroad for activities performed abroad).
• Romanians not domiciled in Romania and foreign individuals, regardless of their domicile, are generally subject to Romanian taxation only for income sourced in Romania, although if certain criteria are met they may also be subject to tax on their worldwide income.
• The tax rate is a flat rate of 16% for most types of income earned by an individual. 
• The fiscal year is the calendar year.

Tax residence

Romanian tax residents

• Individuals are generally considered to be Romanian tax residents if they:
  - are domiciled in Romania, or
  - have their centre of vital interests in Romania, or
  - are physically present in Romania for more than 183 days in 12 consecutive months ending in the calendar year concerned*
  "non-domiciled individuals resident (under the second and third criteria above) for three consecutive years are taxable on worldwide income as of their fourth year of stay.

Non-residents

• Non-residents are only subject to Romanian taxation on their income sourced in Romania. This includes, among others, the following types of income:
  - Income derived from conducting independent activities through a permanent establishment in Romania.
  - Income derived from conducting dependent activities in Romania.
  - Some other specified types of income derived in Romania.

Taxable Income

• The following categories of individual income are subject to taxation under the Romanian Fiscal Code:
  - Salary income
  - Income from independent activities
  - Income from granting the use of goods (rent)
  - Pension income over RON 1,000 per month
  - Income from agricultural activities
  - Income from prizes and gambling
  - Income from investments
  - Income from real estate transactions
  - Other income

Types of income and the corresponding tax rates

Salary Income

• Salary is defined as income in cash and / or in kind received by individuals based on employment agreements, and is taxed at a flat rate of 16%.
• Income relating to salaries includes remuneration paid according to non-competition clauses and taxable benefits expressly stipulated by the relevant Romanian legislation. Taxable benefits include private use of company cars and telephones. Moreover, directors' fees received by members of the General Meeting of Shareholders and of the Board of Directors are treated as salaries.
• The following individuals are considered taxpayers:
  - Employees (and Directors remunerated based on mandate agreements) of Romanian companies, branches and representative offices of foreign companies; employers are liable to calculate, withhold and transfer salary taxes on a monthly basis.
  - Foreign individuals performing activities in Romania based only on foreign employment agreements are liable to submit a monthly income statement and pay monthly income tax based on salary sourced in Romania.

Income from Independent Activities

• Income from independent activities is taxed at a flat rate of 16% (mandatory social charges are deductible) and includes, among others:
  a. income from freelance activities (authorisation needed);
  b. income from intellectual property rights;
  c. income from commercial mandates and commission agreements.

a. Freelance Activities

• Income from freelance activities is assessed on the basis of entries in the single entry bookkeeping ledgers that providers of independent activities are obliged to keep. Net income is calculated as gross income minus deductible expenses.
• For freelancers, the following are non-deductible: fines, late-payment penalties (other than contractual penalties), donations; private scholarships, sponsorship and protocol expenses in excess of the upper limits set by law; per diem and other expenses exceeding limits provided by current law.
• Alternatively, specific categories of freelancers are taxed on the basis of a fixed income annual quota, as communicated yearly by the local tax authorities.
• Freelancers earning income from independent activities have to make equal quarterly advance tax payments for the tax due during the fiscal year.

b. Intellectual Property Rights

• Payers of royalties must calculate, withhold and pay 10% advance tax. Receivers include the income in the annual tax return on the basis of which the tax authority sets the amount of the final tax (the final tax rate is 16%).
• The taxable basis for the income earned from intellectual property rights can be calculated as gross income minus a lump sum equal to 40% of the gross income less any mandatory social charges paid.

c. Commercial Mandates and Commission Agreements

• A withholding tax of 10% also applies for commercial mandates or commission agreements as advance tax payment. Receivers include the income in annual tax returns on the basis of which the tax authority sets the amount of the final tax (the final tax rate is 16%).

Rental Income

Income from Pensions

• Pensions are taxable at a flat tax rate of 16% for the amount in excess of RON 1,000 per month. The mandatory social contributions (i.e. health fund contribution of 5.5%) are deductible for Romanian tax purposes.

Income from Agricultural Activities

• The following activities are considered agricultural activities:
  - farming, in greenhouses and / or in irrigated systems, and selling flowers and vegetables
  - farming and selling shrubs, decorative plants and mushrooms
  - vineyard farming
  - the sale of unprocessed agricultural products to specialist units
• Income from agricultural activities is determined either on a fixed income quota basis, or by single entry accounting, by applying a flat rate of 16% to the taxable income.
• The tax due for income earned by taxpayers from agricultural activities from selling their products to certain designated collection units is calculated and withheld at source at a 2% (flat rate) of the value of the products sold. The tax withheld is final.

Income from Prizes
  Tax on income from prizes is withheld at source and determined by levying 16% on the amount exceeding RON 600 paid for each prize.

Income from Investments

a. Dividends

• Dividends are taxed at a 16% flat tax rate.

b. Interest

• Interest income earned from deposits in Romanian banks or other savings instruments is tax free as of January 2009

c. Capital gain

• Capital gain is taxed as follows:
  - The income tax rate for capital gains derived from transfers of shares of unlisted companies and limited liability companies is 16%; the income tax is calculated after each transaction and deemed final;
  - The obligation to calculate, withhold and remit the income tax (based on the agreement between parties) lies with the domestic purchaser at the time of the transaction.
  - For income derived from futures transactions in foreign currencies, 1% is paid as an advance on income tax. The annual income tax is established by the tax authorities by levying a 16% rate on the net income;
  - For income derived from transfers of securities, others than those mentioned above, 1% is paid as an advance on income tax. The annual income tax is established by the tax authorities as follows:
                                - 16% for securities owned for less than 365 days;
                                - 1 % for securities owned for more than 365 days.

• The obligation to calculate, withhold and remit the advance income tax lies with the intermediaries (or other income tax payers) following each transaction. Losses incurred from the sale of such securities held in listed companies are to be offset against gains of the same category derived during the same year.
  - For 2009, capital gains derived from transfer of listed shares were tax free. This was a
  temporary measure, and such gains are again taxable from 2010.
  Starting with losses incurred during the 2010 fiscal year, the loss resulting from offset can be carried forward for the following year (since corresponding gains were exempt, losses incurred during the 2009 fiscal year are not to be carried forward).
  For income derived from liquidation of companies, the shareholders are taxed at a 16% rate. The obligation to calculate, withhold and remit the tax lies with the company.
  Under domestic tax law, non-resident individuals obtaining capital gains in Romania are subject to the same tax treatment as that for revenues derived by Romanian individuals. However, based on the fiscal residence of the individual, treaty relief may be available. Depending on the details of the transaction, the buyer/the Intermediary of shares has the obligation to compute, withhold and pay the capital gain tax from sale of shares. To fulfil this requirement, non-residents may appoint a Romanian fiscal representative or a tax agent.
  

Income from real estate transactions

• Income from the transfer of real estate is taxed as follows:
  For real estate owned for less than three years:
  - for values up to (and including) RON 200,000, the income tax is 3%;
  - for values exceeding RON 200,000, the income tax is RON 6,000 + 2% of the amount exceeding RON 200,000.
  For real estate owned for more than three years:
  - for values up to RON 200,000, the income tax is 2%;
  - for values exceeding RON 200,000, the income tax is RON 4,000 + 1% of the amount exceeding RON 200,000.
• No income tax is due for ownership of estates acquired under special laws, for donation deeds between relatives up to the third degree, between spouses and in cases of inheritance, provided the procedure is finalised within two years (an income tax of 1% is levied if the procedure is not completed within those two years).
• Income tax due for transfer of ownership is withheld by the public notary and calculated at the value declared by the parties in the transfer documents. If the value declared by the parties is lower than the estimated value established by the expert appraisal conducted by the Chamber of Notaries Public, the income tax is calculated at the reference value. The tax is to be remitted by the twenty-fifth of the month following that when the income was withheld.

Income from Gambling

• Tax on income from gambling is determined by levying the tax rate on the net income, as follows:
  - at 20% for amounts up to RON 10,000 (about EUR 2,325)
  - at 25% for amounts exceeding RON 10,000.
• The tax calculated and withheld upon disbursement is final. The net income is the amount exceeding RON 600 paid for each game or contest, per day.

Other Income Subject to 16% Flat Tax Rate

The following types of taxable income are included in this category (NB. The list is not exhaustive):

• insurance premiums incurred by a company for the benefit of individuals with whom they have no employment relationship
  
• gains on depreciation drawings, received from insurance companies as a result of insurance contracts concluded between the parties
• income granted to retired former employees, in the form of discounts for goods, services and other entitlements, according to clauses in employment agreements or under special laws
• income derived by individual taxpayers in the form of fees from commercial arbitration income from gift tickets granted to parties other than employees of the disburser
• income from activities rendered based on contracts / civil conventions concluded as per the Romanian Civil Code. The beneficiary of the income may choose to have the tax due withheld at source by the payer of the income, by expressing this option in writing when concluding each contract. From 1 January 2010, this applies also to income derived from intellectual property rights, income from commission agreements or income from commercial mandates.

Tax-exempt Income

The main categories of tax-exempt income are:

• Allowance for maternity leave, maternity risk and for child care leave (up to two years) paid from the health fund
• Incentives granted as aid to families for child care leave
• Salaries obtained by seriously disabled individuals (from their basic activity)
• Meal tickets
• Salary income obtained from certain employment activities rendered abroad, irrespective of the tax treatment of the income in that foreign country
• Stock option plan advantages, at the moment of being granted and exercised
• Amounts received for transport and accommodation expenses incurred during delegation/secondment
• Salary income related to the design and creation of software (some criteria need to be observed) 
• Sponsorship and donations
• Inheritance
• Income from the sale of movable assets (with the exception of shares described as "capital gains"), if not received on a regular basis
• Nursery tickets distributed as per law
• Holiday tickets granted under the law.

Deductions from Income Tax

• For the primary job, the following amounts are to be deducted from the gross income when calculating the taxable income from salary:
  - mandatory state social security contributions;
  - personal and family related deductions calculated in accordance with the relevant laws;
  - contributions to facultative pension funds, up to the RON equivalent of EUR 400 annually;
  - trade union membership fees;
• For each secondary job, taxable income is assessed as the difference between the gross income and the social security obligations.
• Taxpayers may give up to 2% of the annual income tax due to charitable purposes (sponsorship).

Taxation of Non-Residents

• Income earned by non-resident individuals from activities performed in Romania is also subject to taxation in Romania. A16% withholding tax rate is applicable on the following types of income:
  a) income and fees representing remuneration received by administrators or members of the Board of Directors, in a Romanian company;
  b) dividend income paid by Romanian companies;
  c) interest income paid by residents (interest payments received from Romania by individuals resident in EU Member States are exempt from withholding tax); starting 2009 interest income is tax free in Romania;
  d) interest income paid by non-residents, if they have permanent establishments in Romania and the interest is a deductible expense for that permanent establishment;
  e) royalties derived from residents;
  f) royalties paid by non-residents, if they have permanent establishments in Romania and the payment is a deductible expense for those permanent establishments;
  g) income from commissions paid by residents;
  h)     income from commissions paid by non-residents, if they have permanent establishments in Romania and the payments are expenses for those permanent establishments;
  i) income derived from sports and entertainment activities performed in Romania;
  j) income obtained from liquidation of Romanian companies;
  k) income from management and consultancy activities;
  I) income from independent activities;
  m)   gambling income obtained in Romania;
  n)    income from prizes received in Romania.
  
• Income from gambling, real estate transactions and income derived from transactions in listed shares is taxed at specific rates, according to the income category.
• Where foreigners can claim treaty protection, the more favourable rates under the relevant tax treaty can immediately be applied by Romanian disbursers of income, if the beneficiaries have produced the required tax residency certificate.