Income tax - key insights for companies, entrepreneurs and decision-making employees

Publishing date: 4 November 2022

Discover in this article more information about this tax, how it is calculated and what are the payment options. 

Contents: 

1. Income tax - which are the taxpayers?

1.1. Income tax for micro-enterprises

1.2. Income tax for large companies 

2. Income tax in Romania - definition, calculation and payment options

2.1. Income tax definition

2.2. Income tax calculations

2.3. Payment options for income tax 

1. Income tax - which are the taxpayers?

Following the entrance in the European Union in 2007, Romania went through important reforms to comply with the EU requirements, including the adoption of EU tax legislation. The main aim in these steps is to provide more clarity to domestic taxation and to stimulate investment and economic growth. In order to effectively manage obligations in an evolving tax environment, legal entities can turn to tax advice in areas such as taxation in Romania and tax facilities. Thus, adequate support can be provided for monitoring corporate tax legislation or for obtaining potential incentives and tax credits.

Income tax for micro-enterprises

The new legislative changes that enter into force in 2023 bring a series of changes regarding micro-enterprises. In order to apply this regime, companies must meet a number of conditions. Among them is the setting of the income ceiling at 500,000 euros. The profit tax for micro-enterprises of 3% will be eliminated and only the 1% rate will remain for those with at least one employee. Micro-enterprises that have no employees will automatically switch to paying a 16% tax like other firms.

So, one of the challenges brought by the new changes in the Fiscal Code is the decision of those who own micro-enterprises whether to employ someone and stay at the micro tax type or switch to the 16%.

The legislative changes also have an impact on the exit rules for companies from the micro-enterprise category:

• If, during a fiscal year, a micro-enterprise achieves revenues that exceed this threshold, or if the share of revenues from consulting and/or management in total revenues exceeds 20% inclusive, it will pay profit tax starting from the quarter in which it exceeded one of these thresholds limits. Also, there will no longer be the possibility to opt for the micro system in the next period.
• If during a fiscal year, a micro-enterprise no longer fulfills the rule regarding having an employee, it will have to pay profit tax from the quarter in which this condition is no longer fulfilled.
• Micro-enterprises will owe profit tax if during a quarter they start carrying out some of the exempted activities.

Income tax for large companies 

Profit tax is an important part of the Romanian tax system, and its rates and scope are provided for in the Fiscal Code, which is periodically updated and revised. It states that any company, society or organization with the status of a legal person must pay the profit tax to the state budget. It is also specified that foreign legal entities conducting business in Romania must pay this tax.

This code provides for the categories of legal entities that must pay profit tax to the state.

Among them are:

• National companies and companies with Romanian capital;
• Autonomous regions;
• Companies, regardless of the form of organization, including agricultural companies or other forms of agricultural association;
• Cooperative societies other than agricultural;
• Financial and credit institutions;
• Other organizations or associations that have the status of a legal entity.

However, there are also legal entities that are not required to pay profit tax:

• Religious institutions and cults;
• State Treasury;
• The Romanian Academy and the foundations that belong to it;
• The National Bank of Romania;
• The private pension guarantee fund;
• Investor Compensation Fund;
• National Red Cross Society;
• Public institutions, less the economic activities they can perform.

Taxable profit is the difference between a company's income and total expenses, excluding deductibles. The profit tax in Romania is 16% of the total profit registered by a legal entity. The level falls within the average recorded by the European Union. However, there is also a tax rate of 5% in companies such as bars, discotheques, night clubs or casinos that make a profit of less than 5% of the revenues.

In order to calculate the income tax, the difference between the revenues and expenses recorded according to the accounting procedures is taken into account. Non-taxable income and tax deductions, if any, are deducted from this amount. Non-deductible expenses are also added to the final calculation.

Income tax in Romania - definition, calculation and payment options

The income tax is an important tool of the tax system, and its correct declaration and payment is an obligation of companies that carry out activities on the territory of Romania. That is why taxpayers must know how the profit tax is calculated and how it is paid.

Income tax definition

The income tax is paid by legal entities in Romania and abroad that carry out activities that generate income in the territory of the country, have a permanent headquarters and use the tax systems for sales and management. It actually represents a tax for carrying out certain activities covered by the law and is collected by the government, being a source of budget revenues used to finance public services.

Income tax calculation

In the calculation of the income tax, the result of the economic activity is taken into account from two different perspectives:

• as accounting result, which means the gross profit of the fiscal year before tax;
• as a tax result, which represents the taxable profit.

A positive tax result represents taxable profit, and a negative one is considered a tax loss. To determine the fiscal result, taxpayers are required to register the taxable income from a fiscal year and the expenses incurred to carry out their economic activity in the fiscal record register. It can be written or electronic and is drawn up in a single copy. Completing the data in the register is done in chronological order and must include, among other things, tax depreciation, the calculation of interest and deductible exchange rate differences, reductions and exemptions from profit tax.

Tax reporting is of reduced complexity in the case of micro-enterprises and the basis for calculating profit tax is income from any source from which certain elements are deducted, such as:

• revenues related to product stocks;
• revenue from subsidies;
• income from exchange rate differences;
• revenues from the production of tangible and intangible assets;
• the income obtained from insurance company compensations;
• revenues obtained from provisions, adjustments for depreciation or loss of value.

Firms that are larger and no longer qualify as micro-enterprises pay a 16% profit tax. For a company, the calculation base for profit tax is as follows:

Income - expenses + deductible expenses - non-taxable income - tax deductions

Tax reporting is more complex and involves more attention, especially to expenses, to determine whether they are deductible, partially deductible or non-deductible.

The corporate income tax formula is:

16%* (total income - Total expenses - non-taxable income - tax deductions + non-deductible expenses)

Even though the formula is fairly clear, difficulties can be encountered in correctly determining items like income and expenses and adding them into the calculation. Such omissions can result in large discrepancies.

Payment options for income tax 

The record of settlements with the state budget regarding income tax is kept with the help of account 441. Account 441 Profit/income tax is a liability account, in its credit recording:

• Amounts owed by the company to the state budget;
• Profit/income tax for previous financial years in case of correction of accounting errors.

The following is recorded in the debit of account 441:

• The amounts transferred to the state budget representing the profit/income tax;
• Amounts representing prescribed, exempted or canceled profit/income taxes.

Legal entities have the possibility to pay the income tax annually or quarterly, depending on the option of each one. Regardless of the method used, companies must submit declaration 100, respectively declaration 101, regarding payment obligations to the state budget. The income tax is paid at the ANAF Treasury where the company is registered.

Quarterly profit tax payment

The declaration and payment of the quarterly profit tax shall be made by the 25th inclusive of the month following the respective quarter:

• Quarter 1: the deadline is April 25.
• Quarter 2: the deadline is July 25.
• Quarter 3: the deadline is October 25.
• Quarter 4: finalization of the tax for the whole year is done by March 25, when the 101 return must be submitted and the remaining tax paid.

Payment of annual income tax

Legal entities in Romania can pay and declare the annual income tax, with advance payments made quarterly. This means that for quarters 1, 2 and 3 advance payments can be made from the income tax due from the previous year, updated with the consumer price index. Payment deadlines are April 25, July 25, October 25 and December 25. Until March 25, the 101 declaration is submitted annually, through which the income tax is finalized and the difference is regularized.

Companies that want to opt for the annual system of declaration and payment of income tax must do so at the beginning of the tax year for which they apply and the option remains mandatory for at least 2 consecutive years. There are also companies that are exempt from the possibility of choosing to pay annual income tax.

These include:

• Newly established legal entities;
• Taxpayers who have registered a tax loss;
• Companies that have been temporarily inactive;
• Those who did not owe annual income tax.
• An advantage of this payment system is the fact that the tax calculation procedure is simplified, being done once a year, not quarterly.

Some errors may appear in the income tax declaration, but they can be corrected by submitting a document with a rectification role called declaration 710. It is completed in two copies, one of which must be submitted to the ANAF headquarters to which the company belongs, and the other remains to the taxpayer.

The Fiscal Procedure Code also provides for late payment penalties and related interest for non-payment of profit tax on time. They are calculated for each day of delay, starting from the day following the due date, ending when the amount owed to the state budget is paid. Therefore, entrepreneurs and people with a decision-making role in a company must constantly follow the news and changes related to tax rules, so that they do not exceed the due date and face specific interests and penalties. A consulting service can be useful in order to monitor the legislation and fulfill the obligations related to the income tax.

In conclusion, corporate tax is a tax that taxpayers must declare correctly and then pay on time. In this way, they will avoid possible problems that may arise in the relationship with the authorities. In addition, this tax has a beneficial role in stimulating the state budget, directed to be used in various investments in Romania. Because the tax system is constantly evolving, a firm with expertise in tax matters is the ideal solution to effectively meet compliance obligations.

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.