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Expenses from the P&L perspective, are an important topic to look at, but expenses under taxation it’s a burden subject. Not handling this correctly, can trigger tax liabilities, especially bearing in mind that the Romanian authorities are extra cautious with “supporting documents”.
Expenses fall into 3 categories – deductible expenses, limited deductibility expenses, and non-deductible expenses.
Under the current legislation, article 25 from the Romanian Fiscal code is governing the methodology in place for the treatment of different expenses.
An important change that occurred when article 25 entered into force, refers to the definition of the deductible expenses. In today’s form, are considered deductible, the expenses incurred for the purpose of conducting economic activity. This is a major benefit for the companies in Romania because the previous wording was the principal source of debates especially in VAT reimbursement processes.
Article 21, the predecessor of the actual legislative form, was worded in the following way – for the determination of taxable profit, are considered deductible expenses only the expenses incurred for the purpose of realizing taxable income.
Expenses particularly mentioned in the Romanian act include:
- Marketing and advertising expenses
- R&D expenses that are not recognised as intangible assets
- Expenses for environmental protection and resources conservation
- Expenses for continuous improvements – management, IT systems, QA systems, compliance
- Writing off client receivables under the restriction of meeting certain conditions
- Travel and accommodation expenses related to business
- Daily allowances
- Expenses for professional training
- Expenses incurred in connection with work safety, prevention of work accidents and insurance contributions
LIMITED DEDUCTIBILITY EXPENSES
The deductibility of the following expenses is limited:
- Interest expenses and foreign exchange losses under thin capitalisation – subject to additional analyse
- Provisions and reserves expenses
- Depreciation and reduction in value of assets under the fiscal depreciation rules
- Perishable goods and losses resulted from transport and storage
- Protocol expenses are deductible at up to 2% of the accounting profit, adjusted with protocol and tax expenses
- Social expenses are deductible at up to 5% from the salaries expenses and include, among others – maternity allowances, expenses for nursery tickets, gifts, medical services etc
- Expenses incurred with lunch vouchers and holiday vouchers
- Expenses regarding functioning, maintenance, and repairs corresponding to a personal property, used as well for individual purposes
- All direct expenses attributable to vehicle up to 9 seats that are not used exclusively for business purposes are 50% deductible
Expenses deemed non-deductible include, among other items, the following:
- The taxpayer’s own income tax expense, including those from previous years or from the current year, as well as all the taxes on profits or income paid abroad
- Expenses with the unrestricted withholding tax, regarding non-resident persons, for their income in Romania
- Expenses related to non-taxable revenues
- Interest fines and penalties due to Romanian or foreign authorities
- Expenses incurred for management, consultancy, assistance, or other supply of services performed by a non-resident located in a state that has no exchange of information agreement concluded with Romania
- Sponsorship and patronage expenses and private scholarships. Taxpayers are, however, granted a fiscal credit up to 0.5% of turnover or 20% of the corporate income tax, whichever is lower
- Expenses in favour of shareholders, other than those related to goods or services provided by the shareholders at market value
- Expenses incurred with insurance premiums unrelated to risk and assets of the taxpayer’s business
- Expenses registered in accounting recorded based on documents issued by an inactive taxpayer
- Expenses relating to missing or damaged non-imputable inventories
Indeed, in practice there will always exist a dose of bias when it comes to treating the expenses. What it’s very important is that this dose is based mainly on understanding the business on one side and on the professionalism of the tax inspector, on the other side.
For our tax practice, the situation in which a taxpayer has to justify some expenses incurred in his entrepreneurial activity is a common reality. In some situations, the entrepreneur’s vision of organizing his own business differs from the view of the tax inspector in this respect, and here our role is important as advisors for the taxpayer and mediators in case of fiscal inspections.