“It is to be seen whether novelties are
still to be brought by the end of this year,” is how I signed off my column in the
December issue of .At that
time, the second round of presidential
elections was yet to come, so we had no
way of knowing whether the new year
would bring any new regulations to
Romania. But only one day after being
approved by the recently elected
Parliament, the Government, dominated
by the Liberals and the Democrats,
implemented a couple of extraordinary
measures to reform the tax system: to
reduce the profit tax rate even further
than had been announced by the previous
Government to 16 per cent instead of 19
per cent and introducing a flat 16 per cent
income tax for most of Romanian
people's wages.
Besides reducing the tax rate, an
Emergency Ordinance (No. 138/2004)
published on 30 December 2004 did not
amend the profit tax regulations. Thus, all
the good and the bad (not so many) things
I described in my previous article remain
unchanged. The most important
difference is to the income tax
regulations and the entire section on
'Income tax', in which I described the
transformation of the existing
progressive tax schedule from five bands
to three. This now needs to be rewritten.
The Government was very carefully
ensuring that the adoption of the flat tax
would not cause some categories of
employees to pay more tax than before,
so it introduced a system of decreasing
deductions. Thus, for incomes up to ten
million ROL, there is a personal
deduction of between 2.5 and 6.5 million
ROL(depending on the number of people
in the care of the individual). For salaries
between ten and 30 million ROL the
personal deduction will decrease
progressively to become zero for salaries
higher than 30 million ROL. No other
deductions will be allowed except due to
an individual taxpayer's compulsory
social contributions, fees paid to the
union and a maximum 200 Euro per year
contribution to private pension schemes.
This system of deductions will only be
available to employees of a company orinstitution and not to the other categories
of tax payers, such as freelancers.
It is possible to calculate some of the
taxable incomes in order to deduce a
percentage from the gross income. So, for
example, this is 40 per cent in the case of
incomes from intellectual property
rights, down from 60 per cent as it was
before. In the case of incomes obtained
from monumental art, this is 50 per cent,
down from 70 per cent before. And in the
case of revenues from rents, this is 25 per
cent, down from 30 per cent for movable
and 50 per cent for immovable property,
as previously established.
Although the deductions are lower than
before, the effective tax rate will also be
lower due to the very acceptable 16 per
cent flat tax.
The only increase in taxation refers to
micro-companies (those with a turnover
of less than 100,000 Euro and between
one and nine employees). The 1.5 per
cent revenue tax has now been increased
to three per cent. However, these companies will have an option to switch
to the flat profit tax regime by 31 January 2005.
By introducing this reform, Romania
follows the general trend of developing
countries which are reducing their direct
taxation. The flat tax of 16 per cent,
combined with the fact that this new
government, formed mainly of young
professionals and entrepreneurs, appears
to be very determined in creating a
competitive business climate, makes
Romania a prime target for attracting
significant direct investments in the close
future.
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Who benefits from the flat tax? |
The following incomes now have a
16 per cent flat tax:
- independent activities, such as the
income from intellectual property
rights or that obtained by lawyers,
public notaries and other reelancers
salaries
- pensions, exceeding nine million
ROL
- rent from movable or immovable
property
- income obtained from agriculture
- income from 'other sources'
- income from prizes exceeding eight
million ROL, with the exception of
gambling (which will be subject to a
20 per cent tax). |
What about incomes from
investments? |
This will continue to have a different
tax treatment
- incomes from dividends now have a
ten per cent tax.
- capital gains from selling shares now
have a one per cent tax
- incomes from interest on deposits
are now taxed by one per cent |
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