Romania: Changes to income tax on salaries – maximum benefit at minimum cost

Analysis by Noerr experts – Theodor Artenie (Head of Tax) and Simona Bica (Tax Advisor)

According to the latest figures from the National Institute for Statistics and other public information, the annual inflation rate has continued to rise and, at 15.32% in August, reached its highest rate in 20 years. Inflation has been rising at a galloping rate over the past year, both globally and nationally.

Although Christmas is just around the corner, Romanian businesses do not seem to have any faith in a seasonal miracle and, most likely, 2022 will end with even higher inflation.

The why
High(er) inflation usually means a higher cost of living, which places pressure on consumers to increase their income – at least to cover the impacts of inflation. A natural move will be for employees to transfer some of this pressure to their employers by asking for a raise. In turn, this will increase employers’ costs and thus affect their overall profitability. How does one escape this dilemma? How can employers maintain the balance between cost optimisation and employee satisfaction?

The answer is likely to be different for everybody… However…

The how
Recently, the Romanian government enacted a set of changes to Romanian tax law, which although restrictive at first glance, may create an unexpected opportunity for Romanian companies to redefine their remuneration policies and work towards the elusive goal of securing the maximum benefit for their employees at the minimum cost to themselves.

As from 1 January 2023, employers will be able to offer non-taxable benefits within an aggregate limit of 33% of gross wages for qualifying employees. The pool of benefits subject to this limitation will comprise benefits already existing in the tax legislation as well as new benefits, as follows: (i) remuneration received based on mobility clauses (with some exceptions); (ii) food allowances within certain limits and subject to certain conditions; (iii) voluntary health insurance premiums or healthcare subscriptions; (iv) private pension contributions; (v) reimbursement of the costs with tourist and/or treatment services, including transport, during the holiday period, for the employees and their family members under certain conditions; (vi) certain accommodation allowances.

In this context, the scope of application of the benefits package opens up and employers can rethink their Ben&Comp policies to offer their employees higher net salaries.

Good numbers speak louder than words
For illustrative purposes, we can consider a gross salary of RON 6,000, which, assuming no personal deductions apply, would correspond to a net salary of about RON 3,510 (after social contributions and tax).

As from 1 January 2023, the net salary based on a gross salary of RON 6,000 would remain unchanged. However, what if the gross salary were redistributed as follows: (i) RON 4,515 gross base pay; (ii) RON 600 monthly food allowance; (iii) RON 600 mobility clause remuneration; (iii) RON 285 monthly holiday allowance?

This redistribution would result in an overall net wage (without considering any personal deductions) of RON 4,126, which would provide employees with a 17.5% increase in their net salary in a scenario in which the employer does not have to increase its salary costs at all. Sweet! ¹

Too good to be true?
Real-life application will reveal the answer. Any re-shuffling of salary packages will need to be made in accordance with the requirements of the relevant labour legislation, which may give rise to various complications.

Furthermore, employers should not lose sight of the fact that the above tax rules may yet be subject to changes/refinements, and implementing instructions could still be issued to make the real-life application of the “non-taxable benefits” rule more cumbersome.

Even so we believe it is definitely worth some brainstorming if there is even the slightest chance of giving people more money without actually spending more.

(P)