Dividend tax - amount and method of calculation

Publication date: 18 November 2022

A common method to achieve this economic practice is the payment of dividends, which is used in both private businesses and majority or wholly state-owned firms. People who receive profits in the form of dividends must also know how these incomes are taxed in order to know as well as possible which tax debts are payable to the Romanian state.

In the article below you will find out what dividends are, how they are calculated and how they are taxed in Romania. You will also find out how taxes on dividends for 2022 and 2023 are calculated and discover some useful methods that company managers can apply to maximise the chances of profit and, therefore, the volume of dividends paid to shareholders.

Content:

1. Dividend tax - what are dividends

2. Dividend taxation

2.1. Legislative provisions on dividend taxation

2.2. Who must pay tax on dividends

2.3. Dividend tax calculation - how dividend tax is calculated and paid

3. Dividend tax - Methods of maximising a company's dividends

1. Dividend tax - what are dividends

Many private and public companies in Romania are not owned by a single owner, but by a variable number of investors, each of whom has a greater or lesser share of the total assets of that company. In this case, the question arises as to how profits are distributed to shareholders in the fairest way possible, without unfairness to anyone. The most useful option is to use the concept of dividends, which is common practice in economic systems around the world.

Definition of the term dividend

Dividend is defined as a method of distributing the net profit of a corporation. Such a company is owned by two or more persons through shares issued by it. The net profit recorded at the end of a tax period may be divided to the owners in proportion to the shares they own by means of dividends.

The distribution can be made in cash or in kind. The first option is the most common, with dividends distributed in cash to shareholders. The second option is most often represented by replacing the cash with a number of shares in the company (distributed in such a way as to cover the amount of cash due).

Both forms of distribution have advantages and disadvantages. In the first case, the main advantage is that the owners of the company directly share in the profits and can decide what to do with the money. The disadvantage is that dividends can reduce the value of the company. In the second case, the value of the company is preserved, but the beneficiary is left with shares that he cannot sell directly, but has to sell them on the stock market.

There should be no confusion between dividends and profits. Although both economic indicators show whether the company is successful or not, they are not the same thing. Profit is what is left after subtracting total receipts from total expenses. Dividends, however, are only part of the profit, which is distributed to the owners at the end of the financial year. More precisely, one can argue about the existence of profit but the absence of dividends, as the money earned is invested, but dividends cannot exist without profit.

How dividends are calculated

The way dividends are calculated is based on elementary mathematics and is easy to apply, especially when the number of shareholders is small. Companies that decide to pay dividends must go through the following steps outlined below:

• Determine at the end of the financial year whether or not there is a profit. If the profit is zero or negative, no dividends can be paid;
• If there is a profit, the General Meeting of Shareholders decides how much of the profit to divide among the shareholders (the percentage is variable, depending on decisions on reinvestment of capital and rewarding owners);
• The resulting amount is divided by the total number of shares, resulting in the dividend rate per share;
• Each share owner will receive an amount calculated by multiplying the dividend share by the number of shares.

For example, a company is owned by ten shareholders, each owning 10% of the shares. At the end of the financial year a profit of 4 million lei is recorded, of which the General Meeting decides that 50% should be distributed as a dividend. This means that 2 million lei will be distributed as dividends to the 10 shareholders, each receiving 200,000 lei. This calculation is done in the same way, even if the shareholders have different percentages and not equally, as in the example above.

Dividend taxation

Dividends are a way of earning an income, and the amounts can be significant, especially for large companies that run tens or even hundreds of millions of euros every year. This income must also be taxed like any other income from business activities. In this respect, the Romanian state applies special rules compared to other income, both in terms of the percentage due and certain exemptions that can be obtained.

The obligations with regard to the taxation of dividends are different for individuals and legal entities. As a main rule, tax legislation requires that tax on dividends is paid by the following types of companies:

• Companies distributing dividends to a Romanian legal person;
• Companies distributing dividends to a foreign legal person;
• Companies distributing dividends to a Romanian individual;
• Companies distributing dividends to a foreign natural person.

In the case of payments to foreign individuals or legal entities, there is the possibility of avoiding double taxation (payment of the same tax in two different countries) by presenting a tax residence certificate obtained from the competent authority of the country concerned.

2.1. Legislative provisions on dividend taxation

The legislative document governing the dividend tax situation is the tax code. More specifically, it is law number 227 / 2015 supplemented and amended by Government Ordinance number 16 on 2022. This provided that until the end of 2022 a 5% tax would be applied to dividend income distributed in the current tax year. The provision has been amended, stating that after 1 January 2023, the tax rate will increase to 8% of dividends.

Another amendment relates to the clarification of the conditions under which the dividend tax exemption applies, specifying which conditions the payer and the recipient of the dividend must fulfil. A final change is the removal of the tax exemption for dividends paid by pension funds operating in Romania.

2.2. Who must pay tax on dividends

Dividends are income that must be taxed, but in this case the regime is different, depending on the legal or natural person involved. Companies that decide to distribute dividends to shareholders are obliged to tax the value of dividends as from 1 January 2023 at 8% in the form of a dividend tax. This is done by filing the 100 declaration on tax paid and the D205 declaration on withholding tax.

For individuals, the obligations are different. If you want to know the amount of tax on dividends, you will find that the amount is also 8%, as in the case of legal persons. In addition to the dividend tax, they may also owe the state other contributions in the form of CAS (health insurance) and CASS (social security). These contributions are only payable if the total dividends received exceed 12 gross minimum wages. If this is the case, individuals are obliged to submit a single declaration by 25 May each tax year, so dividends must be declared in the single declaration.

Tax legislation provides that certain organisations are exempt from paying tax on dividends. This category includes charities working in various fields, trade unions and non-profit organisations operating in Romania. Another category of taxpayers, who are not liable to pay dividend tax, is represented by those entities which are active in the field of research and development.

2.3. Dividend tax calculation - how dividend tax is calculated and paid

The dividend tax calculation method is easy to apply. In the case of legal entities receiving such income, the calculation is not necessary, as it is withheld at source by the company distributing the dividends. Individuals can access online dividend tax calculators or consult tax consultancy firms, which are up to date with the latest provisions on the Romanian tax system, to ensure the best possible approach.

If you want to know when dividend tax is due, the deadline is the 25th of the month following the month in which the dividend is paid. If dividends are distributed but not paid, the deadline for paying tax is 25 January of the year following the distribution. One question many people ask is "into which account is the dividend tax paid", and the answer is that the Romanian state has made available to taxpayers a single account into which all types of tax liabilities are deposited, including the dividend tax. The money owed can be deposited directly in the treasury or can be transferred to ANAF bank accounts.

3. Dividend tax - Methods of maximising a company's dividends

Business owners are interested in making a profit and using it to satisfy their needs and wants. From this point of view, some owners would like all profits to be turned into dividends, but this practice can be detrimental to success by removing money from business development. Although it seems counterintuitive, one method of increasing dividends is to forgo some or all of the dividend for a period of time.

Money saved in this way can be turned into successful investments that lead to accelerated company growth. A good example of this is a well-known US car company that has decided that its shareholders will not receive dividends for a significant number of years, with all the money earned being invested in growth. This practice has made the small firm one of the most valuable companies in the world.

Another method is to use the latest management solutions based on artificial intelligence. In this respect, it is extremely useful to call on business consultancy firms using specialised software, which offers high chances of success. Services include consultancy in areas as diverse as finance, legal, tax, accounting and financial auditing that identify risk areas and offer solutions to address them.

Also important are modern technologies used in production, which offer clear competitive advantages. Automation and the use of robotics lead to more efficient production and lower costs. Modern and innovative technologies have always made the difference between mere survival and success. Business expansion can bring new profit opportunities. This can be done by opening new production or sales premises, as well as by diversifying the activities carried out. The key here is to carry out a thorough analysis to identify the chances of success. Otherwise, the money used for investment may be tied up in an unprofitable activity, which certainly reduces the chances of profit.

In conclusion, individuals and legal entities involved in calculating and paying dividends need to be aware of the new legislative provisions in this area in order to calculate correctly and pay tax debts to Romanian state institutions on time.

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.