When you are a foreign entrepreneur who runs a business in Romania you should be aware of the Double Tax treaties signed by Romania with other countries in order to avoid paying taxes in both countries. For this, you need the advice provided by a Romanian Accountant who can guide you through the entire procedure. For best results in optimum time, work with our Romanian Accountants in order to apply for the benefits of the Double Tax Treaties and all the bureaucracy and other legal and accountant actions will come in our duty.
Romania has signed several Double Tax Treaties, with the main purpose of avoiding the double taxation on income both in Romania and in each country that has signed a bilateral agreement with Romania, meaning that by these treaties it is regulated the tax applied to the gains of a foreign company in Romania and also the taxes on the income realized by a Romanian legal entity in a foreign country.
In the Romanian legislation the unilateral approach can be seen in the drafting of the Government Ordinance no.7 of 2001 on income tax. These regulations constitutes the common law, defined by the concept of income earned in Romania, came from abroad, as well as elements of convergence between national law and international conventions for the avoidance of double taxation.
The internal remedies involve unilateral legislative measures through which tax relief is granted for a specific type of report or tax for certain categories of persons or incomes.
In applying the territoriality criteria, the taxes are levied on all the income obtained in a State (State of source), regardless of citizenship of the beneficiary or of the income or acquirer of the property, with the main condition of reciprocity
In principle, the international treaties use two basic methods of double taxation: the exemption method (exclusion from the calculation of taxable income of certain categories of income) and the credit method (use of foreign tax paid as a credit for the tax assessment in the origin country).
The Exemption Method
This method uses the hypothesis of the situation in which the state of residence of the recipient of income does not tax the income derived by it and taxed in the other State. The exemption may be a total one (the entire income from activities performed in a permanent establishment situated in the source State, but belonging to a trader resident in the other state), or a partial one (the mass total income taxable in the country of residence shall include income earned in another country, establishing the progressive share applied for that income).
The difference between full and partial exemption is that those revenues, though taxable, are taken into consideration in calculating the overall taxable income and will, ultimately, be applied a higher tax rate in the state of residence.
The Credit Method
This implies the deduction by the state of residence of the tax calculated on the bases of all taxable income earned (internal revenues and foreign income) for the tax paid abroad.
There are two situations: the partial credit method and the total credit method. The total credit involves the deduction of the tax in the state of residence for the total amount of tax paid abroad. The second situation, the partial credit, provides that the deduction of the tax in the state of residence for the tax paid abroad can be made only up only up to an amount corresponding to the tax that would be applicable in the state of residence for foreign income.
Romania has currently signed 84 bilateral agreements on avoidance of double taxation. In most cases, ordinary credit method is used in regulating the avoidance of the double taxation between the signatory states.
The states that have signed the Double Taxation Treaties with Romania are: South Africa, Albania, Algeria, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Belarus, Belgium, Bosnia-Herzegovina, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, North Korea, South Korea, Denmark, Ecuador, Egypt, Switzerland, UAE, Estonia, Ethiopia, Russia, Finland, Philippines, France, Georgia, Germany, Greece, India, Indonesia, Jordan, Iran, Ireland, Iceland, Israel, Italy, Japan, Kazakhstan, Kuwait, Latvia, Lebanon, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Great Britain, Mexico, Moldavia, Montenegro, Morocco, Namibia, Nigeria, Norway, Netherlands, Pakistan, Poland, Portugal, Qatar, U.S.A, San Marino, Serbia, Singapore, Slovakia, Slovenia, Spain, Sri Lanka, Sweden, Sudan, Syria, Thailand, Tunisia, Turkey, Turkmenistan, Ukraine, Hungary, Uzbekistan, Vietnam, Zambia.
The Double Tax Treaties have a long history, since the eighteen century when France and Italy signed the first regulation in this field, detected on the fees levied in these two countries.
The first attempts at fiscal policy solution are found only in the nineteenth century, when it began the first staging in the treatment of double taxation.
First concrete attempt to eliminate double taxation is seen in relations between the federal states of the same union (German Federal Law of 1870 and the Swiss Constitution of 1874). Then the semi - independent states within the British Empire concluded conventions or bilateral agreements on avoidance of double taxation. This is followed by the removal of double taxation between independent sovereign states and the first double taxation treaty signed in 1899 between Prussia and the Austro -Hungarian Empire.
In 1932, the League of Nations, the forerunner of today's United Nations, published an official report proposing concrete solutions to avoid double taxation:
- The State of residence allows from lower taxes paid by its taxpayers and the tax paid abroad.
- The State in which the income has its source exempts non - residents to pay taxes, as they will already be taxed only in the state of residence.
- The taxes are divided between the two states: one in which the taxpayer is resident and one where the income has its source.
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