Amendments to the Govenment Ordinance 6-Profit tax

The present norms regulate imported non-uniform treatments and non-uniform treatments of the hybrid elements that appear, both between the Member States and in relation to other third states, when at least one of the parties involved is:

  • a company, payable taxpayer, according to the national tax provisions;
  • a permanent establishment or items treated as permanent establishments of entities resident in third countries;
  • an entity considered transparent for fiscal purposes, according to the national tax provisions, established in Romania, in the case of hybrid elements.

Therefore, four categories of non-uniform treatments of hybrid elements are regulated:

  • treatments resulting from payments made under a financial instrument;
  • treatments that are the consequence of the differences in the allocation of payments made to a hybrid entity or to a permanent establishment, including as a result of payments to a permanent headquarters ignored;
  • treatments resulting from the payments made by a hybrid entity to its owner or from the expected payments between the headquarters and the permanent headquarters or between two or more permanent establishments;
  • double deduction cases arising from payments made by a hybrid entity or permanent establishment.

The scope of the norms concerns only those non-uniform treatments of the hybrid elements that appear between a taxpayer with profit tax and its associated companies or between the associated companies, between the registered office and a permanent office or between two or more permanent offices of the same entity, or resulting from a structured agreement involving a taxpayer.

For such cases, it is regulated that the associated company is owned by the taxpayer or another associated company, or be held by participation in the form of voting rights, property rights to the capital or rights to the distribution of the profit, by 50% or more.

Moreover, the property or rights of persons acting in solidarity must be aggregated for the purpose of applying this requirement.

With this in mind, the definition of “associated enterprise” has been supplemented with the situations that reflect the effective control/significant influence on/between associated companies, entities that belong to the same consolidated group for accounting purposes, enterprises in which the taxpayer has a significant influence on management and vice versa, as well as companies that have a significant influence on the taxpayer’s management.

As the non-uniform treatments of the hybrid elements can result in a double deduction or a non-inclusion deduction, it was necessary to establish national tax rules by which, Romania, as an involved Member State, would refuse the deduction of a payment/expenses/losses or, after in this case, to require the taxpayer to include the payment in the taxable income.

We mention that these rules only apply to deductible payments and do not affect the general characteristics of the national tax system.

Also, any adjustments to be made under these rules should, in principle, not affect the allocation of taxation rights established under a convention to avoid double taxation between Romania and another jurisdiction.

In the case of payments made under a financial instrument, an unequal treatment of the hybrid elements occurs when the deduction without inclusion can be accounted for by differences regarding the qualification of the instrument or the payments made under it. However, a payment made under a financial instrument should not be treated as giving rise to unequal treatment of hybrid elements if the tax advantages granted in the jurisdiction of the payment beneficiary are due exclusively to the fiscal status of the payment beneficiary or the fact that the instrument is held under the conditions of a special regime.

The norms also address cases of double deduction, whether they arise as a result of payments, expenses that are not treated as payments under national law or as a result of amortization or impairment losses.

However, as in the case of the expected payments and payments made by a hybrid entity, which are ignored by the payee, an uneven treatment of the hybrid elements should only occur to the extent that the payer’s jurisdiction allows its deduction, should be compensated by an amount that does not represent double inclusion revenues. This means that, if the payer’s jurisdiction allows the deduction to be carried over into a subsequent fiscal period, the requirement to make an adjustment under these rules is postponed until the deduction is effectively offset by revenues not subject to double inclusion in the payer’s jurisdiction.

Unequal treatments of hybrid elements regarding permanent establishments appear when the differences between the rules of the jurisdiction of the permanent establishment and the residence rules regarding the allocation of income and expenses between different parts of the same entity lead to an uneven treatment of the fiscal results and include those cases in which an uneven treatment is caused by the fact that a permanent establishment is ignored under the law of the branch. These non-uniform treatments can result in a double deduction or a non-inclusion deduction and should, therefore, be eliminated. At the same time, the rules also cover the non-uniform treatments of the hybrid elements that appear between two or more permanent establishments of the same entity.

To avoid undesirable results in the interaction between the norm regarding hybrid financial instruments and the requirements of loss absorption capacity imposed on banks and without prejudice to the state aid norms, Romania excluded from the scope of the regulated norms the instruments within the group that are issued for the sole purpose of meeting the requirements regarding the absorption capacity of the losses imposed on the issuer, and not for the purpose of avoiding the payment of taxes.

Hybrid transfers may result in a difference in tax treatment if, as a result of an agreement to transfer a financial instrument, the yield related to that instrument would be considered to have been obtained by more than one of the parties to the agreement. In these situations, the payment made within the hybrid transfer could lead to a deduction for the payer, while being treated by the payee as a return related to the support instrument.

The imported non-uniform treatments move the effect of a non-uniform treatment of the hybrid elements between parties located in third countries to the jurisdiction of a Member State by using a non-hybrid instrument, thus undermining the effectiveness of the rules that neutralize the non-uniform treatments of the hybrid elements.

A deductible payment in a Member State can be used to finance expenses that involve uneven treatment of hybrid elements.

In order to counteract such imported non-uniform treatments, these rules do not allow the deduction of payment if the corresponding revenues generated by the respective payment are compensated, directly or indirectly, with a deduction that appears in the context of a non-uniform treatment of the hybrid elements that results. a double deduction or a deduction without inclusion between third countries.

For the purposes presented, non-uniform treatment of hybrid elements represents a situation involving a taxpayer or an entity, in which case:

a) a payment under a financial instrument leads to a deduction without inclusion;

b) a payment to a hybrid entity leads to a deduction without inclusion and the uneven treatment is the result of differences regarding the allocation of the payments made to the hybrid entity under the jurisdiction law in which the hybrid entity is established or registered and the law of the jurisdiction of any person participating in the respective hybrid entity;

c) payment to an entity with one or more permanent establishments leads to a deduction without inclusion and the uneven treatment is the result of differences regarding the allocation of payments between the headquarters and the permanent headquarters or between two or more permanent establishments of the same entity under the legislation of the jurisdiction in which the respective entity operates;

d) a payment leads to a deduction without inclusion as a result of a payment to a permanently ignored office;   

e) payment by a hybrid entity leads to a deduction without inclusion, and the respective non-uniform treatment is the result of the payment being ignored under the legislation of the payment beneficiary’s jurisdiction;

f) payment by a hybrid entity leads to a deduction without inclusion and the respective non-uniform treatment is the result of the payment being ignored under the legislation of the payee’s jurisdiction;

g) there occurs a double deduction.

Depending on the situation from which the non-uniform treatment of some hybrid elements results, the Romanian taxpayer applies, as the case may be, one of the following adjustment norms:

  • it is required not to deduct a payment/expense, or
  • it is required to include the payments in its taxable income.

In addition, it is proposed to exclude from the category of non-uniform treatments of the hybrid elements covered by the proposed norms, subject to the fulfillment of certain requirements, such as the treatments resulting from an interest payment made to an associate, within a financial instrument, if the financial instrument was issued:

  • in connection with financial instruments with conversion, internal recapitalization or accounting value reduction characteristics, at the level of a parent company
  • at a level necessary to meet the applicable requirements regarding loss absorption capacity;
  • not as part of a structured agreement.