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Taxation

Tax Incentives for Businesses

Introduction

Tax incentives serve as a strategic tool for governments to stimulate economic activity. In Romania, these incentives are designed to foster a business-friendly environment, drive job creation, and spur innovation. This article explores these tax incentives in-depth, offering key insights for businesses in or considering the Romanian market.

Income Tax Incentives

In the realm of income tax, Romania offers several lucrative benefits:

  • The 1% Income Tax for Microenterprises: For eligible businesses, this entails a mere 1% tax on their revenue. This benefit applies to companies with an annual income not exceeding €500.000 and with a workforce of no more than ten employees. However, at least one of these employees must be under a full-time employment contract.
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This incentive has far-reaching implications for small businesses and can be a HUGE tax relief for startups with high profit margins (Technology, Consulting, etc)
  • Corporate Income Tax Benefits: There are unique benefits specifically geared towards corporate entities. These include an additional deduction of 50% of eligible R&D expenses for companies undertaking research and development activities. IT companies may also qualify for tax exemptions if they meet certain conditions. Such incentives stimulate innovation and growth in key sectors of the Romanian economy.

    If you like researching, you can use this tax benefit to be able to tinker around with competitors, look into products that are available on the market, and do all forms of R&D required to run a successful business, while also benefiting from lower tax footprints.
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For E-Commerce companies, this can mean buying sample products that might be harder to justify on the business model, and for technology and consultancy, buying books, testing competitors' programs, or various technology, might be all covered :)

VAT Incentives

Romania's VAT policies further showcase its commitment to stimulating business growth and simplifying administrative procedures. Consider the following incentives:

  • VAT Exemption for Small Businesses: Small businesses that do not exceed a certain threshold (€300,000 as of 2021) are exempt from VAT registration. This means they won't have to charge VAT on their sales, nor will they have to file regular VAT returns. This simplifies their administrative tasks and provides better control over cash flow.
  • Reverse Charge Mechanism: For certain goods and services, a reverse charge mechanism applies. Here, instead of the seller being responsible for charging and remitting VAT, the responsibility shifts to the buyer. This can help businesses better manage cash flow and reduce the risk of VAT fraud.
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You also don't owe VAT in Romania for payments coming from outside the EEA: The United States, CIS, or Middle East, most of which have exemptions that mean you won't pay any sales tax until you grow up!

Tax Incentives on Bonds

The Romanian government also provides tax incentives on bonds (obligations), which can be beneficial for Joint Stock Companies (S.A.) looking for alternative ways to distribute profits to shareholders:

  • 1% and 3% Tax on Bonds: Bonds issued by Joint Stock Companies are taxed at a reduced rate of 1% for holding for over 1 year, or 3% depending.

    This incentive is particularly advantageous for companies opting to replace dividends with bond payments for shareholder profits. It encourages companies to retain earnings, invest in their operations, and reward shareholders with bond payments instead of dividends, while also ensuring the shareholders are in the end left with more.
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For startups planning to list themselves on the stock market, this can be a huge incentive, with dividends being now 5% to 8% more profitable, due to the bond system.

Research and Development (R&D) Incentives

Businesses in Romania can also benefit from several incentives for their involvement in Research and Development activities:

  • Super-deduction for R&D Expenses: Businesses can deduct an extra 50% of the eligible expenses (in addition to the full 100% deduction) made for R&D activities. This provides a significant reduction in the overall taxable income, thus reducing the corporate tax.
  • Exemption from Income Tax for IT Employees: If companies have employees who are involved in software development, they can benefit from an income tax exemption. This supports the IT sector, promoting innovation and job creation.
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This also means that if you are a foreign IT Worker, you can use this to qualify for micro-company tax while paying little to no tax.

Social Responsibility Incentives

Romania also encourages businesses to take part in activities that benefit society. Tax incentives for this category include:

  • Sponsorship Tax Credit: Companies can benefit from tax credits for sponsorship activities. The amount that can be credited is up to 0.75% of the company's turnover. This encourages businesses to contribute to the welfare of society while also enjoying a reduction in their tax liability.
  • Training Tax Credit: Romania encourages businesses to invest in their employees' development. Companies can claim tax credits for the costs of training and improving their employees' skills, promoting continuous learning and development.

Conclusion

Understanding and taking advantage of tax incentives can play a critical role in the financial health and growth of businesses operating in Romania. These incentives, varying from corporate tax exemptions to sponsorships and training credits, are designed to encourage businesses to invest, innovate, and contribute to society.

  • Benefits Across Sectors: The variety of incentives available provide benefits for different sectors, be it IT, R&D, or social enterprises. This varied approach ensures a broader range of businesses can leverage these opportunities for growth.
  • Focus on Innovation and Social Responsibility: The Romanian government places emphasis on promoting innovation, research, and development, as well as encouraging businesses to contribute towards societal welfare. These incentives can create a win-win situation for both businesses and society at large.
  • Exploring the Opportunities: While this guide provides an overview, it's essential for businesses to seek expert advice to fully understand and maximize these tax benefits. Regulations may change, and every business's circumstances are unique. Therefore, thorough analysis and strategic planning are key.

This insight into Romania's tax incentives is intended to guide businesses in their financial planning and decision-making. By making the most of these incentives, businesses can effectively manage their financial resources, fostering growth, innovation, and positive societal impact in Romania.