Romania, the best tax jurisdiction for companies in the European Union
Romania, Hungary and Croatia rank among the best countries for running small and medium-sized businesses in Europe, according to consulting firm Company Romania. The criteria used to establish the ranking take into account various factors, including tax rates, levels of bureaucracy and corruption.
The ranking shows the most favorable European Union countries for running a business.
|Final ranking||Country||CIT (lowest rate)||Dividend tax (lowest rate)||Bureaucracy (less time)||Corruption (lowest level)|
Romania leads the rankings. Why? Is it a good idea to start a company in Romania? Let’s explore further.
1% tax in Romania – what conditions must be met?
Romania offers the lowest CIT for small and medium-sized enterprises in the European Union. This applies to companies with an annual turnover of less than EUR 1 million (approximately RON 4.5 million). Companies with a turnover lower than this value pay a tax based on turnover rather than profit.
To benefit from the 1% income tax, a business must meet the following conditions:
- be a limited liability company (LLC) or a limited company (PLC). Sales tax on micro-enterprises. It applies to commerce and services, excluding banking, gambling, energy and telecommunications markets;
- must achieve annual operating income of less than â¬ 1 million;
- must have at least one full-time employee (without employees income tax is 3%).
Companies that generate income below 1 million euros, but have a minimum share capital of 45,000 RON and have at least 2 employees can choose another tax regime with CIT. The normal CIT rate is 16%.
In addition, the creation of an LLC requires a capital of 200 RON ~ 50 euros.
Banking and financial institutions can take advantage of the corporate tax rate of between 0.5% and 2%. Companies in the energy sector pay a tax rate of 2%. Any other business must pay 16% income tax.
5% WHT dividend tax
At 5%, Romania offers one of the lowest WHT (withholding tax) on dividends. Compared to other EU countries, Romania ranks second, just behind Hungary, which boasts a 0% tax. In contrast, Poland ranks 8e.
What is withholding tax on dividends? It is a tax imposed on individuals and companies. It is retained by payers who have a residence, head office or permanent establishment abroad in the country from which the income is derived. In the case of WHT, the taxpayer is the company that receives the dividend payment. The company making the payment is the payer. The taxpayer therefore receives a net remuneration – less the amount of tax withheld in the country of the payer.
VAT in Romania
Currently, the standard VAT rate in Romania is 19%. However, many goods and services have reduced rates and belong to the lowest in the whole of the EU.
|9%||the supply of dental and orthopedic prostheses, the supply of medicines for human and animal use, the supply of certain foodstuffs and drinks (excluding alcohol), the supply of water for irrigation in agriculture , water supply and sanitation services|
|5%||services related to access to cultural events, museums, zoological and botanical gardens, fairs, amusement parks, cinemas, sporting events, accommodation in the hotel sector or similar, catering and catering services, right to use sports facilities, boat transport for tourism and recreation, provision of housing within the framework of social policy|
|0%||hospitalization and medical services, sanatoriums, treatment and emergency bases, health centers, clinics, dental services, educational activities, loan origination and negotiation|
Bureaucracy in Romania
Bureaucracy can take a significant amount of resources. As Doing Business reports, Romania is the 3e best country in terms of the time it takes to solve the paperwork.
Romanian lawmakers lobbied to simplify tax codes and cut red tape.
|Country||Annual time (h)|
Poland ranks 9th, with 171 more days spent in bureaucracy each year. This is due to complex tax regulations.
With increasingly favorable tax provisions and a reduction in the number of office jobs, Romania is starting to stand out from other European countries.
Tax legislation in Romania
In addition to the favorable rates of CIT, PIT and VAT, the Romanian tax system includes a number of other practical solutions for entrepreneurs. Some interesting proposals include the following:
- Income tax exemption for software development employees (a huge benefit for the IT industry);
- Tax exemption on profits from research and development activities and those related to IT projects;
- no inheritance and gift tax (similar to Slovakia)
- 0% tax on the share capital contributed;
- no need to pay social security contributions for CEOs, board members and business owners;
- VAT and income tax are paid quarterly – no later than the 25th of the month following the settlement month. Large companies can pay income tax once a year;
- when buying a company car, it is possible to deduct 100% of the VAT and 100% of the tax charges. If a vehicle is used for mixed purposes (private and professional), 50% of the costs of purchase, repair or insurance can be deducted from income tax;
- 10% capital gains tax;
- no solidarity surcharge for the richest;
- tax exemption on profits intended for the development of the company.
Level of corruption in Romania
Corruption can take a heavy toll on business activities in any country. Not only does this consume resources, but it exposes contractors to expected cost increases.
The Corruption Level Report prepared by Transparency International assigns a score to each country. The higher the score, the lower the level of corruption in a country.
|Country||Points (lowest level of corruption)|
The three countries with the most favorable tax conditions appear here below. The relatively high threat of corruption is one of the main drawbacks of doing business in Romania. However, corruption exists in all countries and cannot be completely eliminated.
It should be mentioned that the fight against corruption in Romania has intensified considerably in recent years. The European Commission itself has highlighted the progress made by the country in terms of reducing the level of corruption. In addition, the European Commission has recognized the Romanian anti-corruption agency as one of the top five in the European Union.
Romania is one of the least developed countries in the European Union. Nevertheless, it has a number of advantageous solutions in its legal and tax regulations, which encourage entrepreneurs to set up and run a business there. Low labor costs and the availability of qualified specialists attract many investors.
The decision on where to establish a business for increased profitability should depend on several factors. Romania seems to be the optimal location, both in terms of taxation and bureaucracy.
In summary, a Romanian company, author of the classification report described the most important advantages of starting a business in Romania:
- low tax rate (income tax, dividend tax);
- relatively low VAT rate (many categories have reduced VAT);
- practical tax solutions and clear legal regulations;
- no solidarity contribution;
- No tax on the capital contributed to the company;
- 10% capital gains tax.
All these factors prompt many investors to start a new business in Romania.
A rather interesting factor is the aspect of Tax Freedom Day. The difference between Poland and Romania has hovered between 40 and 50 in recent years. This means that in Romania we work longer for ourselves and not for the state by this difference.
A full report is available at: https://companyromania.com/lowest-tax-eu-countries/