Situation:
A company ABC SRL, a micro-enterprise, based in Romania and established in 2018, has a legal entity based in Germany as sole shareholder. The non-resident legal entity owns 100% of the shares. ABC SRL intends to distribute dividends to the non-resident PJ.
What is the tax treatment of dividend distributions? Is the Romanian company exempt from dividend tax?
Solution:
According to article 223 paragraph (1) letter a) of the Tax Code, income of a dividend nature realized by a non-resident is subject to taxation in Romania and, according to article 224 paragraph (4) letter b), the applicable rate is 5%.
According to article 224 paragraph (5), the tax is calculated and withheld when the income is paid, declared and paid to the state budget by the 25th of the month following the month in which the income was paid. The tax is calculated, withheld, declared and paid in lei to the state budget at the exchange rate of the foreign exchange market communicated by the National Bank of Romania for the day on which the income is paid to non-residents.
Dividend tax is declared in D100 until the 25th of the month following the month in which it is withheld and in D207 until the last day of February of the current year for the expired year.
Taking into account that the non-resident company, as the beneficiary of the income from dividends enters into a legal fiscal relationship with the Romanian tax authorities, it must register for tax purposes in order to receive the tax identification code, according to article 82 paragraph (1) letter a) of the Tax Procedure Code:
“Article 82: Obligation to register for tax purposes
(1) Any person or entity that is subject to a tax legal relationship shall register for tax purposes by receiving a tax identification code. The tax identification code is:
(a) for legal persons, as well as for associations and other entities without legal personality, except those referred to in subparagraph (b), the tax registration code assigned by the tax authority;
(3) By exception to the provisions of Article 18 paragraph (1), for natural persons referred to in paragraph (1) letter e), as well as for non-resident legal persons, who only earn income subject to the rules of taxation at source, and the tax withheld is final, the tax identification code may be assigned by the tax authority, at the request of the income payer.”
We mention that the tax registration and the assignment of the tax identification code can be done at the request of the Romanian company as a payer of income according to article 82 paragraph (3) of the Tax Procedure Code.
In this case, the Romanian company will submit for the tax registration of the non-resident company the form 015 Tax Registration Declaration/Declaration of Withholdings/Declaration of Cancellation for non-resident taxpayers who do not have a permanent establishment in Romania.
Please note that, according to the Double Taxation Convention concluded with Germany, the tax on dividends is 5%, so the company does not need to present the tax residence certificate, since the same tax rate applies as in the Romanian legislation.
Please note that under certain conditions, as listed in Article 229 c) of the Tax Code, tax exemption may apply to dividends received by non-resident legal entities.
However, in the case of ABC SRL, the tax exemption cannot be applied, since the conditions that must be fulfilled by the resident paying the dividends specified in Article 229 c) point 3 are:
- the resident paying the dividend shall cumulatively fulfil the following conditions:
(i) it has one of the following forms of organisation: a company limited by shares, a partnership limited by shares, a limited liability company, a general partnership, a limited partnership, or is listed in Annex No 1 to Title II and, by virtue of a double taxation convention concluded with a third State, is not considered to be resident for taxation purposes outside the European Union;
(ii) pays corporation tax, as provided for in Title II, without the possibility of an option or exemption, or other tax in lieu of corporation tax, in accordance with national law;
Therefore, since ABC SRL is a microenterprise income tax payer, it cannot apply the exemption provided for in Article 229 of the Tax Code.
Legal basis:
– Fiscal Code (approved by Law no. 227/2015, published in the Official Gazette no. 688 of 10.09.2015), with subsequent amendments and completions;
– Fiscal Procedure Code (approved by Law no. 207/2015, published in the Official Gazette no. 547 of 23.07.2015), with subsequent amendments and completions;
– Methodological Norms for the application of the Fiscal Code (approved by Government Decision no. 1/2016).