On 5 January 2024, the legislation on the global minimum tax was transposed in the Romanian domestic tax legislation through Law no. 431/2023.
Liviu Gheorghiu Partner, Tax
Although the first filing deadline for multinational and domestic groups in scope is estimated for June 2026, entities should start gathering the significant amount of information necessary to determine the impact and reporting obligations at the group level and in Romania.
From 2024, multinational groups must pay a minimum rate of corporate tax of 15% in every jurisdiction in which they operate
Pillar 2 was designed by the OECD to discourage base erosion and profit shifting by ensuring that multinational groups pay a minimum rate of corporate tax of 15% in every jurisdiction in which operations are performed.
The new set of Pillar 2 rules, also referred to as GloBE rules, have the role of protecting the tax base of jurisdictions amid a volatile economic climate marked by uncertainty, supply chain disruptions, and increased pressure for states to control public spending.
To curb tax avoidance and aggressive tax planning, Pillar 2 has materialised into an EU directive which was adopted unanimously on 14 December 2022.
Directive (EU) 2022/2523, which was transposed in the Romanian legislation under Law no. 431/2023, sets forth rules and a framework for the implementation of a global minimum level of taxation for large multinational and domestic groups operating in the EU.
If the effective tax rate of a company is below 15%, it must pay an additional tax
The new rules apply to domestic and multinational groups with a consolidated turnover above €750m registered in at least two years during the period 2020 – 2023. Companies that carry out certain activities are excluded from the scope.
Provided that the constituent entity of the group is in the scope of the rules, an assessment on whether its effective tax rate is below 15% must be made on a jurisdictional basis. If this is the case, the multinational group must pay a top-up tax in the respective jurisdiction.
Adrian Mutea Senior Manager, Tax
The top-up tax may be collected under three types of rules which are centered around the computation of the effective tax rate:
1) Taxing rights are allocated to the local jurisdiction: The additional tax due or top-up tax would be collected through the Qualified Domestic Top-up Tax (QDMTT) which enables the Romanian authorities to collect the additional amount of tax up to the 15% minimum rate. Romania must notify the European Commission of the election of the QDMTT within four months following the adoption of Law no. 431/2023.
2) Taxing rights are allocated to the parent jurisdiction: In case the local jurisdiction does not have a QDMTT provision in place, the parent entity of the group will be required to compute and pay a top-up tax in its jurisdiction under the Income Inclusion Rule (IIR).
3) If IIR is not applicable, taxing rights are allocated to other jurisdictions via the Under Taxed Profits Rule (UTPR). In this instance, the top-up tax is collected by jurisdictions applying UTPR and is allocated on a jurisdictional level under a substance-based allocation key.
The computation of the effective tax rate is performed on a jurisdictional level for all local entities in scope.
Multinational groups in Romania will be subject to an additional tax, even if the standard national corporate tax rate is 16%
From a Romanian perspective, the impact of Pillar 2 means that the Romanian tax authorities will be entitled to collect an additional tax or top-up tax in cases where the effective tax rate of a multinational group operating in Romania is below the minimum 15% effective tax rate.
Although Romania applies a standard 16% corporate income tax rate, multinational groups should not automatically draw the conclusion that no top-up tax will be due in Romania as the computation of the effective tax rate, as detailed below, is different from the rules used for computing the tax base under the standard corporate income tax regime.
To calculate the effective tax rate, a series of steps[1] are necessary.
A. Assessment of whether the group and its constituent entities are in scope of the Pillar 2 rules
A.1. Determining whether a constituent entity is part of the group
A.2. Determining whether the group meets the revenue threshold test
A.3. Assessment of whether there are any excluded entities including de minimis exclusions
B. Assessment of whether safe harbours are applicable
C. Determination of the qualifying profit or loss
The qualifying income or loss of a constituent entity shall be computed by making a series of adjustments to the net profit or loss. Such adjustments are set out in articles 20-23.
D. Identification of covered taxes and computation of the adjusted covered taxes
Using covered taxes as a starting point, several adjustments have to be performed to compute Adjusted Covered Taxes.
E. Determination of the Effective Tax Rate
The effective tax rate of a multinational group or large-scale domestic group shall be computed, for each fiscal year and each jurisdiction provided that there is net qualifying income in the jurisdiction, in accordance with the following formula:
F. Computation of the top-up tax under QDMTT
In cases where the effective tax rate of a jurisdiction in which constituent entities are located is below the minimum tax rate of 15% for a fiscal year, the multinational group or a large-scale domestic group shall compute the top-up tax separately for each of its constituent entities that have qualifying income included in the computation of net qualifying income of that jurisdiction.
The top-up tax shall be computed on a jurisdictional basis.
F.1 Top-up tax percentage (%)
The top-up tax percentage for a jurisdiction for a fiscal year shall be the positive percentage point difference, if any, computed in accordance with the following formula:
Top-up tax percentage = minimum tax rate – effective tax rate
F.2 Jurisdictional top-up tax
= (Top-up tax percentage (%) x excess profit)
+ Additional top-up tax
- Domestic top-up tax
F.3 Excess profit
= Net qualifying profit
- Substance based income exclusion or SBIE
F.4 Computation of Substance based income exclusion (SBIE)
SBIE is an optional step under Pillar 2 rules which consists of a carve-out for eligible expenditure on payroll costs and tangible assets.
If a constituent entity applies SBIE, the net qualifying profit at the level of the jurisdiction shall be reduced, for the purposes of calculating the top-up tax, by the amount corresponding to the sum of payroll carve-out and the sum of tangible asset carve-out.
G. Filing and payment obligations
Based on the general rule, top-up tax return filing and payment will be performed no later than 15 months after the last day of the reporting fiscal year.
By way of transitional relief, for the first reporting year, top-up tax return filing and payment will be performed no later than 18 months after the last day of the reporting fiscal year.
The first reporting year is FY 2024 for the main rule whilst UTPR is applicable starting with FY 2025.
Given the complexity of the new legislation, it is advisable that domestic and multinational groups understand and assess how the rules work, and their impact, and start preparing the effective tax calculations as soon as possible.
[1] Steps are not exhaustive.
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