One of the current most challenging issues on the incorporation of a company in Romania is the immediate tax impact on the company and its profitability.
The majority of Romanian companies were incorporated with the minimum capital of two hundred (200) RON. This means a minimum capital of approximately forty five (45) Euros. This is still the case.
As the capital of a limited liability company (SRL) has to be paid at the time of incorporation this small capital sounds a very attractive proposition to a “would be” investor. Whilst all parties accept that this will not be the actual working capital of the company, and that other monies will be provided, it is still often chosen.
From the taxation perspective Romania has two types of tax paying companies. Micro enterprises and ordinary companies. The relevance of these two companies from the taxation point of view is that the micro enterprise pays a tax of three per cent on its income and a normal company pays tax of 16% on its profit.
Whilst this sounds attractive for a start-up to pay on its income, consideration should be given as to the position of what will happen if the company initially makes a loss or moves quickly into profit. As a micro enterprise pays tax only on its income then theoretically there should not be a loss but this is sometimes is not the case.
Any loss in a micro company does not impact on the future taxation position as the tax of a micro company is on income; the losses incurred in one year cannot be carries forward into a succeeding tax year. This can have an impact on the tax for succeeding years. If there is to be a large capital investment at the start-up of a company is the designation as a micro company advantageous? Will depreciation also mean that there is a loss in the early years and that this should be carried forward into the succeeding years? Maybe the choice of a micro company is not the best choice in this case.
As one of the conditions to be and remain as a micro company is that the turnover should be less than the equivalent of one hundred thousand (100,000) Euros (art 47.c Romanian Fiscal Code) thought must be given as to the income of the company. If this threshold is exceeded during the financial year then from the date that the threshold is exceeded the company will have to pay tax as a normal company starting from the date when the one hundred thousand (100,000) Euros is exceeded. For a service company this could happen quite quickly in the company’s life especially if it has established clients.
If a company is incorporated with a registered capital which is equivalent to or exceeds one hundred thousand (100,000) RON (art 48.5 Romania Fiscal Code then it is immediately classified as a tax paying company. As a tax paying company it will pay tax on its profit, and if there are losses these can be carried forward into subsequent years and set against future profit. Whilst this amount of initial capital may seem large there are other benefits to having this amount of investment. Often companies with an initial capital of two hundred RON have raised monies by way of loans from its shareholders. These loans often exceed this amount. Would it be better to put in the money as capital rather than loans?
One of the major complaints that was raised in the past and still continues to be raised is the question of thin capitalisation rules for Romanian companies and the investments often made by parent companies. The 1:3 rule is not particularly generous but if capital is required for the initial development of the company then rather than obtaining the money from its investors as loan capital it might be better for it to be used to increase the capital to 25,000 Euro. This means that 75,000 Euro can be lento the company by the shareholders and the interest paid on this can be used as a deduction when calculating the profit. If the loan is from a shareholder the interest rate payable on the loan cannot currently exceed 4%.
Loans from third parties (not shareholders) are not affected by this rule except subject to the National Bank of Romania rules on rates of interest.
Incorporation of a company therefore requires many aspects to be considered and careful consideration needs to be given not only of legal aspects but also fiscal considerations.