From August of this year, the corporate income tax system will come into force in Romania, following the procedure for establishing and managing such a system through Decree No. 1191 issued on August 6, 2021 by the National Financial Management Agency.
Tax consolidation for corporate tax purposes has been a constant focus on the corporate environment agenda in interactions with tax regulators in recent years. This option enables the losses of one company to be offset against the profits of another company that belongs to this tax unit.
The system was finally regulated in late December 2020, it went into effect in January 2021, but enforcement proceedings were pending. As soon as the procedure is in place, the facility can be applied from January 1, 2022 or from the beginning of the next financial year if this differs from the calendar year.
- Who can request it?
The tax group system for corporate income tax purposes (the “CIT group“) Can only be carried out between Romanian legal persons and / or legal persons established under European law with their seat in Romania and in certain cases may include the Romanian permanent establishment of a non-resident.
There is a ownership condition of at least 75 percent of the value / number of shares or voting rights in the respective legal entities. The condition of ownership must be in place for an uninterrupted period of at least one year prior to the beginning of the consolidation.
The implementation of the CIT group also requires the following prerequisites, which must be met cumulatively by its members:
- they are subject to corporation tax only, not micro-enterprise taxation, and use the same tax payment system;
- all have the same fiscal year;
- none of them belong to any other group of corporation taxpayers;
- they do not generate any income from night bars, clubs, discos or casino activities;
- they are not in the process of dissolution or liquidation.
Both the minimum participation requirement and the participation criteria of the CIT group must be met throughout the consolidation. Otherwise this will lead to the forced exit from the CIT group.
2. When can it be requested?
The application for approval of the implementation of the tax group by the competent tax authority must be submitted no later than 60 days before the start of the relevant tax year. If this is planned for 2022 and the financial year corresponds to the calendar year, the application and all required documents must be submitted by November 1, 2021.
As a precaution, an earlier submission should be considered in order to enable a speedy implementation of the facility, as the procedure is also new for the financial administration, which can lead to an extension of the deadline for processing the application.
3. How can it be requested?
The tax unit system is optional but must be maintained for 5 years once approved.
The option must be made by the group through a joint application by the member dedicated to administering the group’s corporate tax obligations. For this purpose, only a Romanian legal person or a legal person established under European law with its registered office in Romania can be named.
4. Can the CIT group be changed?
The CIT group can be supplemented by other members on the condition that all of the above criteria are met and resigned on a voluntary basis, whereby this option becomes effective by a member with effect from the following financial year.
Current legislation does not regulate the possibility of changing the designated body, which in practice can be done either because of the choice of members or because the body in question no longer meets the ownership or participation criteria. However, this is important as the designated company is entitled to carry forward the tax losses after consolidation that could not be offset during the CIT group.
5. What are the effects of the tax unit system?
The creation of the transfer pricing file is mandatory for every member of the CIT group and includes transactions within the group as well as transactions with other related parties.
Tax losses prior to consolidation are set off by the respective member exclusively against their own profits, while tax losses of the CIT group are taken into account for the consolidated result.
A forced exit or the early dissolution of the CIT group leads to an individual adjustment of the corporation tax, which can lead to tax additions being calculated for the period in which the company concerned was a member of the CIT group.
The forced or voluntary withdrawal from the tax group triggers the tax assessment by the responsible tax office.
While participating in the consolidation, each member of the CIT group is jointly and severally liable for the corporation tax owed by the group.
6. Closing remarks
In addition to existing tax relief such as the non-taxation of distributed dividends or capital gains as well as tax grouping for sales tax purposes, the newly introduced taxation system contributes to the fact that the Romanian tax sovereignty is becoming more and more attractive for investments and groups of companies with different stages of development and profitability, in particular due to the lower participation rate , which is required for the formation of the CIT group, compared to other tax jurisdictions that implement this.
Nonetheless, the possibility of forming or joining a CIT group should be carefully considered, taking into account the implications summarized above and the balance between the advantages and disadvantages of such a system.