Under Article 7 of the Fiscal Code, a tax resident is defined as someone who resides in Romania (domicile is proved by an identity card for Romanian nationals or a permanent residence permit for non-Romanian nationals), or has their center of vital interests in the country, or who is present in Romania for more than 183 days during any 12-month period ending in the fiscal year concerned. The general rule is that tax residents are liable to tax in Romania on worldwide income, whereas tax non-residents are liable to tax only on income from Romanian sources.
Romanian nationals living in Romania are generally liable for Romanian tax on their worldwide income. However, Romanian nationals living outside Romania as well as non-Romanian nationals were liable to Romanian tax only on their income earned from Romanian sources up to January 1st 2007.
This is because the Fiscal Code states that Romanians residing outside Romania and non-Romanians who qualify as residents are liable to Romanian tax only on Romanian source income during their first three years of residence.
Since the three year exemption rule was introduced with effect from January 1st 2004, any person who has been present in Romania for at least 183 days per year since then is liable for taxation in Romania on their worldwide income from January 1st 2007.
The Romanian fiscal year runs from January 1st to 31st December, so if an individual first came to Romania in October, that calendar year would not count towards the three years of temporary residency, whereas if the residency began in March then it would do, provided that the total length of time spent in the country during that year was 183 days or more.
However, even for those who are liable to tax in Romania on their worldwide income, there are some exceptions. Employment income earned from non-Romanian employers in respect of work performed abroad is not taxable in Romania, so the numerous individuals who work temporarily in other countries will not have to pay Romanian tax on this income, although there could be tax liabilities in the country where the work is undertaken.
All other income from abroad is, however, taxable in Romania for those who are tax residents in the country.
So, for example, interest earned abroad on deposits with non-Romanian banks is taxable in Romania, as are dividends from companies located outside Romania.
Most types of income derived by individuals is subject to a 16 percent flat tax rate and this would be due also on interest, dividends or other income derived by tax resident individuals from non-Romanian sources.
However, in certain cases, the state where the income is obtained also has the right to tax it, which means that where an individual Romanian tax resident is subject to tax in another country, he or she will be eligible for protection from double taxation, via a foreign tax credit granted by Romania in respect of any foreign tax paid.
For example, assuming that a Romanian individual tax resident receives dividends from a foreign company and that company withholds 10 percent tax on dividends, then in Romania, that person can claim a credit in respect of the 10 percent foreign tax, and the effective Romanian tax is only 6 percent (16 percent Romanian tax less 10 percent foreign tax). If, for example, the foreign tax rate is 20 percent, the individual would not pay any Romanian tax, but the overall tax rate would be 20 percent, as no refund of additional tax would be made by the foreign state. Other non-salary income, such as that from rent earned abroad, is also taxable in Romania, and it is the taxpayer's responsibility to list this on his or her annual tax declaration which they present to the Romanian authorities.
Based upon the new rules, foreign individuals who have been in Romania for more than 3 years (between 2004 and 2007) should carefully analyze whether they are treated as Romanian tax residents during 2007 by virtue of Romanian domestic tax legislation. If this is the case, then they should check whether they are also treated as tax residents in another country with which Romania has concluded a tax treaty.
Where the person is not treated as tax resident in any other country or where Romania has the primary right to treat that person as Romanian tax resident by virtue of a double tax treaty, then the person should identify all sources of income received during 2007 and should declare such income for Romanian tax purposes before May 15 2008.
If by virtue of the treaty the person is treated as a tax resident in a country other than Romania, then a certificate of tax residence should be obtained from the tax authorities in that country (proving tax residence status there) and the person should take the necessary steps to fulfill his/her filing obligations in the other country in accordance with that country's domestic tax legislation.
By Madalina Racovitan, senior tax manager. KPMG Romania