Thursday, February 27, 2014

Repatriation of Profits from Romania

Profit repatriation of non-resident companies conducting their activity in Romania is possible and the dominant regulation mostly establishing the legal framework is provided by the National Bank of Romania. We shall explain below all other important features related to this rather intricate topic.

Foreign investors in Romania do have the alternative of repatriation of profits and the transferred items must follow certain regulations related to exchange control. The authority which administers these types of directives is represented by the Romanian National Bank. Earnings, either from dividends or profits, can be transferred if the taxation obligations are being met according to stipulations. A 16% withholding tax is to be paid for dividends according to Romanian regulations but this rate can be modified as a consequence of a tax treaty or a directive of parent-subsidiary origins with EU implications. A Romanian company pays dividends to another legal entity, resident in another EU state, or to a permanent company representing a corporation located in another EU member state, following the 16%-tax regulations. These dividends may be subject to exemption if a resident company derives them either from another company in an EU member state or another legal entity being a resident, and if the case involves another company, non-EU one, that has participated together with Romania to a treaty convention, on the fundamental condition that the Romanian company owns the minimum of 10% of the distributing company shares for a continuous time frame of two years.  

The general rule states that non-resident entities must pay this 16% withholding tax on earnings obtained in Romania covering the following attributes: all profits obtained through services performed in here, including management, royalties, revenues determined through termination of a resident legal entity, and as mentioned above, dividends. So business activities performed by foreign investors in Romania generate profits which can be transferred in the country of origin. We shall take several examples in order to concisely illustrate several basic rules concerning the repatriation of profits. An EU-member-state company operates in Romania through an establishment which acts as a subsidiary. The object of activity concerns public constructions. In this case the parent company may receive profits from the subsidiary taken into account that there is a chance for exemption if the EU parent company holds at least 10% of the shares belonging to the subsidiary for two uninterrupted years.

If the supposed EU company decides to operate in Romania using a structure with branch functions then profits gained here can be distributed without paying any dividend taxes because earnings cannot be considered as dividends. This same scenario applies for an EU company operating directly in Romania. The withholding tax regime was amended starting with the 1st of January 2014 which means that exemptions applying to dividends are limited only to situations when these dividends are remunerated to affiliated legal entities incorporated in other EU states. Before these changes, the exemption regime could be considered as well for companies with an affiliation status originating from the European Free Trade Association perimeter. Understanding all legal aspects dictating these procedures directly contribute to optimal capital dynamism within a company’s natural development. Our team strongly encourages foreign investors to seek professional help, able to point out all possible vulnerabilities, unexpected alternatives and best options a company may have through its activities conducted in Romania. 

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