Dividends Distribution In Romania. Taxes And Procedure

In Romania, dividends are governed by Law 31/1990 regarding the commercial companies, and for issuers on the Stock Exchange the regulations are stipulated in the Law 297/2004 and the CNVM Regulation 1/2006.

Payment of dividends is made in Romania annually, and starting with 15.07.2018, an interim payment is also allowed, on quarterly bases. The distribution of quarterly dividends is optional, within the profit margin recorded in that quarter, under several conditions.

According to the Romanian Tax Code, there are several types of income that are assimilated to dividends, namely:

• the amount paid over the market price by a Romanian company for certain goods or services purchased from a shareholder / associate, if that amount was not subject to corporate tax or income tax;
• the amount paid by the company for services or goods provided in favor of a shareholder / associate, if the payment made was for his/her personal benefit.

Exceptions from framing certain transactions in the dividend’s category are as follows:

• distribution of new shares, or an increase in the nominal value of the existing shares, as a result of a share capital increase operation;
• distribution in cash or in kind that has been made in the event of company liquidation;
• distribution in cash or in kind occurred because of the share capital reduction constituted;
• distribution of premiums in proportion to the shares of each participant;
• the distribution made in the case of the acquisition or redemption of own shares by the company.

The dividends distribution is possible after fulfilling some declaratory obligations, respectively, after withholding and paying taxes to the state budget. We will detail below these requirements for different categories of shareholders.

INDIVIDUALS

According to art. 97 paragraph (7) of the Romanian Fiscal Code, income from dividends, including the gain earned as a result of holding shares, shall be taxed with 5% from the distributed amount. The 5% tax is considered as final tax.

The obligation to calculate and withhold the tax on income belongs to the companies registered in Romania. This obligation is honored with the payment of dividends / amounts representing the gain earned as a result of holding shares by the shareholders / associates / investors.

The tax transfer due date is until 25th of the month following the one in which the payment was made. According to art. 132 of the Romanian Fiscal Code, income taxpayers under the withholding tax regime, are obliged to calculate, withhold, pay and declare the tax withheld, up to the term of its payment inclusive.

Income tax payers also have the obligation to file a statement regarding the calculation and withholding of tax, for each income beneficiary, until the last day of February inclusive. In Romania, this is Form 205. So, if we take as example the dividends for 2019, the company will be required to submit the form by February 28, 2020.

The Romanian company will declare this distribution of dividends through form 100, quarterly.

Payment of health insurance contribution shall be due, only if the amount distributed, exceeds the annual threshold of at least 12 gross minimal national salaries in force at the submission deadline for the dividend statement.

According with the provisions of art. 170 paragraph (2) the annual minimum threshold of 12 minimum gross salaries in Romania, in force at the deadline for submitting the declaration provided in art. 120, shall be calculated by aggregation of the revenues provided under art. 155 par. (1) lit. b) -h), as follows:

1. the net / gross income from independent activities, established according to art. 68, 681 and 69;
2. the net income from intellectual property rights, established after the granting of the flat-rate share amount provided in art. 72 and 721, as well as the net income from intellectual property rights determined according to the provisions of art. 73;
3. the net income distributed from associations with legal entities, to individual taxpayers according to the provisions of Title II, Title III or Law no. 170/2016, determined under the provisions of art. 125 par. (8) and (9);
4. the net income from rental properties, established according to art. 84-87;
5. income and / or profit from investments, established according to art. 94-97. In the case of interest income, the amounts received are considered and, in the case of dividend income, the dividends distributed and received are considered as from 2018;
6. the net income for the incomes from agricultural activities, forestry and fish farming, established according to art. 104-106;
7. gross income and / or taxable income from other sources, established according to art. 114-116.

COMPANIES

In the case of dividends paid to Romanian companies, regardless of whether the entity paying the dividends applying the corporate income tax or the income tax of the micro-enterprises regime, the provisions of art. 43 of the Fiscal Code applies:

1. A Romanian company who pays dividends to another Romanian company has the obligation to withhold, declare and pay the dividend tax to the state budget, as provided in this article.

2. The dividend tax is established by applying a 5% tax rate on the gross dividend paid to a Romanian legal person. The dividend tax is declared and paid to the state budget until the 25th of the month following the one in which the dividend is paid.

3. By way of exception from the provisions of paragraph (1) and (2), if the distributed dividends have not been paid by the end of the year in which the annual financial statements were approved, the related dividend tax shall be paid, as appropriate, by January 25 of the next year, respectively until the 25th of the first month of the amended fiscal year, following the year in which the annual financial statements were approved.

These provisions do not apply to dividends distributed and unpaid by the end of the year in which the annual financial statements were approved, if on the last day of the calendar year or the last day of the amended fiscal year, as the case may be, the Romanian legal person receiving the dividends fulfills the conditions provided for in paragraph (4).

4. The provisions of this Article shall not apply to dividends paid by a Romanian company to another Romanian company if the Romanian company receiving the dividends holds, at the date of payment of the dividends, at least 10% of the shares, for a period of at least one year.

NON-RESIDENT COMPANIES OR INDIVIDUALS

In the case of dividends paid to a Romanian non-resident company or individual, the provisions of Title VI from the Romanian Tax Code or from the double tax avoidance conventions shall apply.

Dividends received by an individual or a non-resident company from a Romanian resident are taxable income derived from Romania in accordance with the provisions of art. 223 par. (1) lit. a) of the Fiscal Code.

The same Title VI of the Fiscal Code provides the exemption for this tax, namely: they are exempt from the tax on income obtained in Romania by non-residents, the dividends paid by a Romanian company or a legal person having its registered office in Romania to a company residing in a another Member State of the European Union or a permanent establishment of company from a Member State of the European Union located in another Member State of the European Union if:

1. the foreign legal beneficiary of the dividends fulfills cumulatively the following conditions:

1. is a resident of a Member State of the European Union and has one of the forms of organization listed in annex no. 1 in Title II of the Romanian Fiscal Code;
2. is deemed to be a resident of the Member State of the European Union in accordance with the tax laws of that State and, under a convention on the avoidance of double taxation with a third State, is not deemed to be resident for the purpose of charging The European Union;
3. pay, in accordance with the tax laws of a Member State, without the option or exemption, one of the taxes provided in Annex no. 2 to Title II or a similar corporate income tax under Title II;
4. owns at least 10% of the Romanian company’s registered capital for an uninterrupted period of at least one year, which ends on the date of payment of the dividend.

2. the beneficiary of the dividends is a permanent establishment of a company residing in a Member State of the European Union located in another Member State of the European Union and the foreign company for which the permanent establishment is carrying out its activity shall meet cumulatively the conditions stipulated in point 1, (i) to (iv) and profits generated by the permanent establishment are taxable in the Member State in which it is established under a double taxation convention or under the domestic law of that Member State;

3. the Romanian legal person paying the dividend must fulfill cumulatively the following conditions:

1. is a company established under Roman law and has one of the following forms of organization: joint-stock company, joint-stock company, limited liability company, limited liability company, limited liability company;
2. pays tax on profits, under the provisions of Title II, without the possibility of an option or exemption. In order to grant this exemption, the legal person having its registered office in Romania, established according to the European legislation, which pays the dividend, must pay a profit tax, according to the provisions of Title II, without the possibility of an option or exemption;

If these conditions for the exemption are not met, the tax payer proceeds as follows:

• if the beneficiary of the income obtained from Romania is a resident of a state with which Romania does not have a double tax avoidance convention or the recipient of the income obtained from Romania is a resident of a state with which Romania has a double taxation avoidance convention but does not present the certificate the tax payer or the tax owed by the non-resident is paid by the income payer, the provisions of Title VI of the Tax Code apply, respectively the income payer retains the tax by applying the 5% rate on the gross income.
• if the beneficiary of the income obtained from Romania is a resident of a state with which Romania has concluded a double taxation avoidance convention and presents the certificate of tax residence, the more favorable provisions between the domestic legislation and the convention apply. Attention, however, to the interpretation of the articles of the conventions for avoidance of double taxation, as the methodological norms for the application of the Fiscal Code stipulate that the provisions of para. 2 of art. ‘Dividends’ of double taxation conventions derogate from the provisions of paragraph 1 of these articles of those conventions.