Situation: A company A (in Romania) is the sole shareholder of company B (in Romania) as of December 2021, both of which pay corporate income tax.
In June 2022 it is decided to distribute the profits of company B in the form of dividends to company A. Until the end of 2022 the dividends are not paid.
What are company B’s obligations with regard to dividend tax?
Solution: According to the Companies Law no.31/1990, with subsequent amendments and additions, article 67, the share of the profit to be paid to each associate constitutes dividends.
Dividends shall be distributed to the shareholders in proportion to their share in the paid-up share capital, optionally quarterly on the basis of the interim financial statements and annually, after adjustment by the annual financial statements, unless otherwise provided for in the articles of association. They may be paid optionally on a quarterly basis within the time limit set by the general meeting of shareholders or, as the case may be, by special laws, the adjustment of the differences resulting from the distribution of dividends during the year being made through the annual financial statements. The payment of the differences resulting from the regularization shall be made within 60 days from the date of approval of the annual financial statements for the past financial year.
Otherwise, the company shall owe, after this term, the penalty interest calculated according to article 3 of the Government Ordinance no.13/2011 on the legal remuneratory and penalty interest for money obligations, as well as for the regulation of some financial-fiscal measures in the banking sector, approved by the Law no.43/2012, with subsequent completions, if a higher interest rate has not been established by the articles of association or by the resolution of the general meeting of shareholders that approved the financial statements for the financial year just ended.
Dividends may only be distributed from profits determined in accordance with the law.
Dividends due after the date of transfer of the shares belong to the transferee, unless the parties have agreed otherwise.
According to article 43 of the Tax Code paragraph (4), the provisions of this article do not apply in the case of dividends paid by a Romanian legal person to another Romanian legal person, if, at the date of payment of the dividends, each of these persons cumulatively fulfils the following conditions:
- a) the legal person receiving the dividends:
(i) holds at least 10% of the equity securities of the Romanian legal entity paying the dividends, for a period of one year up to and including the date of their payment;
(ii) is constituted as a joint-stock company, a limited partnership, a limited liability company, a general partnership, a limited partnership or has the form of organization of another legal person under Romanian law;
(iii) pays, without the possibility of an option or exemption, corporate income tax or any other tax that replaces corporate income tax;
- b) the legal person paying the dividends:
(i) it is constituted as a joint stock company, limited partnership, limited liability company, general partnership, limited partnership or has the form of organization of another legal person under Romanian law;
(ii) pays, without the possibility of an option or exemption, corporate income tax or any other tax that substitutes corporate income tax.
(5) The provisions of paragraphs (2) and (3) shall also apply to dividends distributed/paid to privately managed pension funds and/or voluntary pension funds.
Thus, according to the Tax Code, in the case of Romanian legal entity shareholders (company B):
- no withholding tax is withheld if the Romanian legal entity receiving the dividends holds, at the date of payment of the dividends, at least 10% of the equity securities of the other legal entity, for a period of one year up to and including the date of their payment.
- If tax is withheld, then the tax is 5% and is withheld at source at the time of payment and reported by the 25th of the following month in the D100.
- if dividends have been distributed but not paid by the end of the year, the tax is calculated and paid and reported on the 100 return by 25 January 2023.
- on the D205 filed in 2023 (28 February 2023) report to whom and what tax has been withheld on the dividends.
Therefore, provided that the conditions required by law outlined above are cumulatively met, then company B will not withhold and pay tax on dividends.
If the company is a microenterprise, it would not meet the criteria set out in Article 43 paragraph (4) letter (b) point (ii) and will therefore calculate and withhold 5% dividend tax, given that the distribution took place in 2022.
Legal basis:
-Fiscal Code (approved by Law no.227/2015, published in MO no.688 of 10.09.2015), as amended and supplemented;
-Methodological Norms for the application of the Tax Code (approved by HG no.1/2016).
-Law 31/1990 ^1) on companies – republished, as amended and supplemented.