Overview of Romanian Personal Income Tax

By Claudia Sofianu

Individuals domiciled in Romania are considered to be tax residents and are taxed on their worldwide income (with certain exceptions). During the first three years of meeting certain residency criteria, individuals who are not domiciled in Romania are subject to tax on their Romanian-source income, regardless of where the income is earned. An individual who meets the tax residency criteria for three consecutive tax years or who carries out independent activities through a permanent establishment in Romania for a period of three consecutive tax years becomes subject to tax on worldwide income beginning with the fourth tax year.
Foreign individuals who are working in Romania are taxable from their first day of presence. However, if they are tax residents in another country and they meet the criteria from the applicable Double Tax Treaty, they may be exempt from Romanian tax liabilities, provided that a tax residency certificate is made available to the authorities within 15 days of the beginning of activities.

A. Rates

Most types of income are subject to tax at a flat rate of 16%, applied to salary income, income from freelance activities, rental income, pension income, prizes, investment income and other.
Special tax rates apply to income from gambling and transfer of property ownership. The taxation of various types of income is summarized below.
Employment income includes: salaries, benefits in cash or kind, salary premiums, other income received by an individual based on an employment agreement, fees and compensation paid to directors and managers of private enterprises and to members of the board of directors, general shareholders meeting, administration council and audit committee.
Income from independent activities includes income from commercial activities, freelance activities and transfer of intellectual property rights. The net taxable income from freelance activities is computed as gross income less specified deductible expenses. Individuals engaged in freelance activities must make advance tax payments on a quarterly basis by the 15th day of the last month of each quarter.

Taxpayers who earn income from independent activities from which a 10% advance income tax is withheld at source, can opt for a final withholding tax at a rate of 16%.
Taxable income from intellectual property rights is computed by deducting from gross income expenses representing 20% of gross income and compulsory social security contributions. A 10% advance income tax must be withheld at source by payers of income from intellectual property rights by the 25th day of the following month. Taxpayers who earn income from intellectual property rights can opt for a final withholding tax at a rate of 16%.

Rental income. Gross rental income consists of amounts stipulated in rental agreements, as well as certain expenses borne by the tenant that are the landlord’s liability according to the law. The rental income is taxable in the tax year to which the rent relates. It is reduced by a flat 25% and the difference is taxed by 16%. As an exception, taxpayers may opt for the determination of the net rental income based on single entry accounting.

Investment income includes: dividends, interests, gains from transfers of securities, etc.
Any amount paid in excess of the market price by a legal entity for goods or services provided by a shareholder is treated as a dividend if the beneficiary of such amount was not subject to income tax or profits tax on the amount. Amounts received from holding participation titles in closed investment funds are treated similarly to dividends. A 16% final withholding tax is imposed on dividends.

Taxable income from interest is considered to be any income in the form of interest other than state bonds.

A 16% final withholding tax is imposed on interest income as of 1 July 2010. The tax must be remitted by the 25th day of the following month. Capital gains are subject to a 16% final tax.
A 16% advance tax is imposed on gains derived from sale and purchase transactions in foreign currencies with subsequent term settlement, as well as similar operations.
Income whose source was not identified should be subject to 16% income tax applied to the taxable base adjusted according to the procedures and indirect methods of reconstitution of revenues or expenses. The income tax and late payment penalties will be calculated by the tax authorities.

B. Inheritance and gift taxes

No taxes are levied on inheritances or gifts, except for revenue subsequently derived from these items.

C. Social charges

Employees are required to make the following monthly contributions:

Employers are required to make the following monthly contributions:

For 2011, the average gross national salary earning is RON 2,022 / month and the minimum gross salary per economy is RON 670 / month.
Currently, foreign nationals working in Romania must pay a monthly health fund contribution of 5.5% of their taxable income. EU citizens may be exempt from social charges if relevant European certificates are obtained.

D. Tax filing and payment

Foreign nationals assigned to Romania must register for tax purposes within 15 days after beginning their activities and pay income tax on a monthly basis. If the individual is on a local payroll, the local employer must calculate, withhold and pay the income tax. Expatriates employed abroad but working in Romania must file monthly individual tax returns and pay monthly tax and, if applicable, social charges by the 25th day of the following month.

E. Double tax relief and tax treaties

Romania has entered into double tax treaties with several countries. In addition, the EU Savings Directive provides for citizens of EU member states an exemption from withholding tax on savings income received in Romania if a tax residency certificate is provided.

F. Totalization agreements

Romania has entered into Totalization Agreements with several countries for the purpose of avoiding double taxation of income with respect to social charges: