Romania the best tax jurisdiction for companies in European Union

Mihai-Alexandru Cristea 07/12/2021 | 17:38

Romania, Hungary and Croatia rank as the best countries for running small and mid-size enterprises in Europe, according to the consulting firm Company Romania. The criteria used to put together the ranking accounts for various factors, which include tax rates, levels of bureaucracy, and corruption.

 

The ranking shows the most favorable countries in European Union to run a business in.

Final ranking Country CIT (lowest rate) Tax on dividends (lowest rate) Bureaucracy (least amount of time) Corruption (lowest level)
1 Romania 1 2 3 9
2 Hungary 2 1 6 8
3 Croatia 5 4 4 7
4 Bulgaria 4 3 10 10
5 Poland 3 8 9 5
6 Ireland 6 9 2 3
7 Estonia 10 5 1 2
8 Czech Republic 8 6 7 6
9 Germany 7 10 5 1
10 Slovenia 9 7 8 4

Source: Companyromania.com

Romania tops the ranking. Why? Is a good idea to form 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 mid-size enterprises in the European Union. This applies to businesses with an annual revenue of less than EUR 1 million (about RON 4.5 million). Companies with a turnover below this value pay tax based on turnover rather than profit.

To take advantage of the 1% revenue tax, a business must meet the following conditions:

  • be a Limited Liability Company (LLC) or Public Limited Company (PLC). Sales tax on micro enterprises. It applies to trade and services, excluding banking, gambling, energy and telecommunications markets;
  • needs to achieve an annual operating revenue of less than EUR 1 million;
  • needs to have at least one full-time employee (without employees, the revenue tax is 3%).

Companies that generate revenue of less than EUR 1 million, but meet a minimum share capital of RON 45,000 and have at least 2 employees can choose other tax scheme with CIT. The standard CIT rate is 16%.

Furthermore, setting up of an LLC company requires a capital of 200 RON ~50 euro.

Banking and financial institutions can enjoy the CIT rate between 0.5% and 2%. The energy sector businesses pay 2% tax rate. Any other company needs to pay 16% income tax.

5% tax on WHT dividends

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 prides itself with a 0% tax. In contrast, Poland ranks 8th.

What is withholding tax on dividends? It is a tax put on individuals and corporations. It is withheld by payers who have a residence, registered office or foreign permanent establishment in the country where the income arises. In the case of WHT, the taxpayer is the company that receives the dividend payment. The company that makes the payment is the payer. The taxpayer, therefore, receives net remuneration – less the amount of tax withheld in the payer’s country.

VAT in Romania

Currently, the standard VAT rate in Romania is 19%. Nevertheless, many goods and services have reduced rates and belongs to the lowest in whole EU.

VAT rates Scope
19% Base rate
9% the supply of dental and orthopaedic prostheses, the supply of medicines for human and animal use, the supply of certain foodstuffs and beverages (excluding alcohol), the supply of water for irrigation in agriculture, water supply and sewerage services
5% services related to enabling admission to cultural events, museums, zoological and botanical gardens, fairs, amusement parks, cinemas, sporting events, accommodation in the hotel sector or similar, restaurant and catering services, the right to use sporting facilities, transport by boat for tourism and recreation, supply of housing within the framework of social policy
0% hospitalization and medical services, sanitariums, treatment and emergency bases, health centers, clinics, dental services, educational activities, loan origination and negotiation

Bureaucracy in Romania

Bureaucracy can take up a significant amount of resources. As reported by Doing Business, Romania is the 3rd best country in terms of the amount of time it takes to resolve bureaucratic paperwork.

Romanian legislators have been pushing to simplify tax codes and reduce bureaucracy.

Country Annual time (h)
Estonia 50
Ireland 82
Romania 163
Croatia 206
Germany 218
Hungary 227
Czech Republic 230
Slovenia 233
Poland 334
Bulgaria 441

 

Poland ranks 9th – with 171 more days spent on bureaucracy each year. This is due to complex tax regulations.

With increasingly convenient tax arrangements and a reduction in the number of clerical jobs, Romania starts to stand out from other European countries.

Tax legislation in Romania

In addition to the favorable CIT, PIT and VAT rates, the Romanian tax system includes a number of other convenient solutions for entrepreneurs. Among several interesting proposals are the following:

  • Income tax exemption for software development employees (a huge benefit to the computer science sector);
  • Income tax exemption on profits from research and development activities and those related to information technology projects;
  • no inheritance and gift tax (similar to Slovakia)
  • 0% tax on contributed share capital;
  • no need to pay social security contributions for CEOs, board members and owners of the companies;
  • VAT and income tax are settled quarterly – by the 25th day of the month following the settlement month. Large companies may pay income tax once a year;
  • when buying a company car, it is possible to deduct 100% of VAT and 100% of tax costs. If a vehicle is used for mixed purposes (private and business), 50% of the costs of purchase, repairs or insurance may be deducted from income tax;
  • 10% capital gains tax;
  • no solidarity surcharge for the wealthiest;
  • exemption from taxation of profits intended for business development.

Level of corruption in Romania

Corruption can pose a significant burden to business activities in any country. Not only does it take up resources, but it exposes entrepreneurs to expected increases in costs.

The report on the level of corruption prepared by Transparency International gives a score for each country. The higher the score, the lower the level of corruption in a country.

Country Points (lowest level of corruption)
Germany 80
Estonia 75
Ireland 72
Slovenia 60
Poland 56
Czech Republic 54
Croatia 47
Hungary 44
Romania 44
Bulgaria 44

The three countries with the most favorable tax conditions appear at the bottom here. The relatively high threat of corruption is one of the biggest drawbacks of doing business in Romania. However, corruption occur in every country and cannot be completely eliminated.

It is worth mentioning that the fight against corruption in Romania has intensified significantly in recent years. The European Commission itself has highlighted the progress made by the country in terms of reducing the level of corruption. Additionally, the European Commission recognized the Romanian anti-corruption agency as one of the top five in the European Union.

Summary

Romania is one of the least developed countries in the European Union. Nevertheless, it has a number of beneficial solutions in its legal and tax regulations, which encourage entrepreneurs to establish and run a business there. Low labor costs and availability of qualified specialists attract numerous investors.

The decision on where to establish a business for increased profitability should depend on several factors. Romania seems to be the optimal place, both in terms of taxation and bureaucracy.

In summary, a Company Romania, an author of the ranking report outlines the most important advantages of starting a business in Romania:

  • low tax rates (income tax, dividend tax);
  • relatively low VAT rates (many categories have reduced VAT);
  • convenient tax solutions and clear legal regulations;
  • no solidarity contribution;
  • No tax on contributed capital to the company;
  • 10% capital gains tax.

 

All of these factors make many investors set up a new business in Romania.

A rather interesting factor is the aspect of Tax Freedom Day. The difference between Poland and Romania oscillates 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/

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