Constituting legal reserves. Micro-enterprise and profit tax paying companies

The distribution of the profit is regulated both legally (Law no.31/ 1990 with subsequent modifications), accounting (Accounting Law No. 82/1991 with subsequent modifications), and fiscally (Law No. 227//2015 with the subsequent amendments).

According to the provisions of art. 183, par. (1) of the Companies Law, the legal reserve shall be constituted on 31 December of the financial year by taking over from the company’s profit of at least 5% until it reaches at least the fifth part of the share capital

Constituting of the legal reserve is compulsory, including for companies with fiscal statute of  micro-enterprise. Not constituting of the legal reserve is considered an infringementaccording to the provisions of art. 272 item 6 of Law 31/1990, republished, with subsequent amendments.

From the accounting point of view, according to the provisions of item 420 and the provisions of the Regulation of the Ministry of Public Finance (OMFP) 1802/2014, with subsequent amendments, the final result of the financial exercise is set when it is closed and represents the final balance of the profit and loss account. Amounts representing reserves constituted from the profit of the current financial year, based on legal provisions, are registered at the accounting item 129 “Distribution of profit” = 106 “Reserves”.

The accounting profit remaining after this assignment is taken at the beginning of the financial year following that for which the annual financial statements are prepared at account 117 “The retained earnings”, from where it is to be distributed to the other destinations decided by the General Meeting of the Associates, with respect for the provisions.

Regarding the microenterprises, in respect of the distribution of profit for constituting the reserve, the legal provision refers to the minimum limit and does not impose any maximum limit. It may allocate any amount because the deductibility condition provided for corporation tax-paying companies does not interfere.

Regarding the profit tax paying companies, according to the provisions of art.26 of the Fiscal Code, with subsequent amendments, according to the provisions of art.26 of the Fiscal Code, with the subsequent modifications, the amount representing the legal reserve is deducted from the taxable profit base, within the limit of the 5% applied to the accounting profit (item 121) with the addition of tax expense (turnover 691) until it reaches the fifth of the subscribed and paid-up share capital (1012).

According to the provisions of art. 19, paragraph (1) of Government Decree (HG) no. 1/2016 regarding the methodological norms issued for the application of Law no. 227/2015, the legal reserve is calculated cumulatively from the beginning of the year and is deductible in the calculation of the quarterly or annual fiscal result, as the case may be. Reserves constituted this way, shall be increased or reduced depending on the level of accounting profit of the calculation period. The increasing or the reducing of reserves constituted this way is also made according to the subscribed share capital.

If the company closes the financial year with loss, it is no longer obliged to increase the previously created legal reserve because the respective amounts would not be deductible in the calculation of the corporation tax. At the same time, there wouldn’t be respected the provisions of the Companies Law that referring to the profit of the respective year.