Non-resident income tax regime brought in line with European Union law

Starting with 1 June 2015, non-resident taxpayers earning interest income from Romania are allowed to apply the same tax treatment as resident taxpayers.

The change in the law results from a European Commission infringement procedure against Romania regarding the discriminatory treatment applied to non-resident legal entities compared to resident taxpayers. Under the prior law, interest income earned by non-resident legal entities was subject to withholding tax on the gross income earned, without any possibility to deduct the related costs despite procedures allowing resident taxpayers to deduct the expenses related to interest income.

Under the new law, non-resident taxpayers wishing to deduct expenses related to interest income can opt to register for profit tax purposes in Romania, either directly or through a tax agent. This will allow them to include any costs related to the interest income earned in the taxable base, thus resulting in only their net income being taxed. The amount of tax which has been already withheld at source will be deemed as advance payment for profit tax. This option is available to non-resident legal entities residing in European Union (EU) or European Economic Area (EEA) member states with which Romania has concluded Double Tax Treaties (DTTs) or with which Romania has concluded information exchange agreements (i.e. Guernsey).

Non-resident taxpayers should carefully consider the advantages and disadvantages to their overall tax burden of choosing to declare and pay profit tax in Romania. Circumstances resulting in a tax loss in the residence country, without the possibility to claim a withholding tax refund or tax exemptions to foreign interest income, may prove the application of this new provision beneficial.

Likewise, under the new law, individual residents of EU or EEA member states (with which Romania has concluded DTTs or other information exchange agreements) obtaining income from independent activities in Romania may also opt to settle the tax withheld at source by declaring and paying income tax according to the rules applicable to resident individuals. Similar to interest income, opting for taxation according to the Romanian rules will allow the non-resident to deduct expenses related to the income obtained from independent activities.

The above changes in the law result from the Romanian government’s adoption of Emergency Ordinance no. 6/2015.