Situation:
A company ABC SRL (from Romania), a VAT payer, intends to purchase a building in Italy from a VAT paying company resident in Italy, which it then wants to rent as a hotel.
What are the tax implications of the purchase?
Does the company have to declare its place of business in Italy?
What other taxes are payable under the double taxation convention?
Solution:
First of all, we mention that the working point opened in Italy is a subunit without legal personality of the company in Romania.
According to article 43 of the Companies Act no. 31/1990, the other sub-offices – agencies, workplaces or other such offices – are dismemberments without legal personality of the companies and are mentioned only in the registration of the company in the commercial register of the main office.
MFP Order 1802/2014, with subsequent amendments and additions, stipulates in Article 3 that subunits without legal personality, which belong to legal entities with registered office in Romania, organize and conduct their own accounting register s, so that they can determine the information and obligations provided by law, and the legal entities to which they belong can prepare annual financial statements.
The activity carried out abroad by the subunits without legal personality, which belong to legal entities with registered office in Romania, is included in the financial statements of the Romanian legal entity and is reported on the Romanian territory, in compliance with the provisions of the Accounting Regulations on the individual annual financial statements and consolidated annual financial statements.
We point out that the company that has established a working point (permanent establishment) in another country has declarative obligations regarding the declaration of its establishment.
Thus, a first reporting obligation relates to the declaration within 30 days of the establishment of the place of business. Thus, the company in Romania is obliged to declare it to the tax authority where the company has its tax domicile, according to article 85 paragraph (2) and (6) of the Tax Procedure Code.
The declaration is accompanied by a copy of the tax registration certificate of the taxpayer/payer to which the secondary establishment or branch belongs, as well as copies of the documents proving the information entered therein.
Therefore, the parent company in Romania shall submit to the tax authority in whose district it has its tax domicile the declaration on secondary offices, form 061 Declaration on secondary offices (D700).
If the place of business meets the criteria to be considered a permanent establishment, the tax will be paid/declared in Italy and according to the Double Taxation Avoidance Convention. This tax will be deducted from the tax payable in Romania.
Regarding the expenses incurred with the purchased real estate, they can be deductible if it is used in the economic activity as provided for in Article 25, paragraph (1) of the Tax Code:
“(1) For the determination of the tax result, expenses incurred for the purpose of carrying out the economic activity, including those regulated by normative acts in force, as well as registration fees, dues and contributions due to chambers of commerce and industry, employers’ organizations and trade unions are considered deductible expenses.”
As regards VAT paid in Italy, in order to recover it, the Romanian company must register with the Italian VAT system and apply for a VAT refund. This involves submitting a VAT refund application to the Italian tax authorities in accordance with the applicable Italian tax legislation.
If the company in Romania will have a place of business in Italy, it may be necessary to register it in accordance with Italian tax regulations.
With regard to corporate income tax, the Romanian company may be subject to corporate income tax in Italy on income obtained from the rental of real estate located in Italy (provided that the company is required to declare a permanent establishment).
According to Article 7 of the double taxation agreement between Romania and Italy, corporate income tax paid in Italy can be offset or exempted in Romania under certain conditions:
- The profits of an enterprise of a Contracting State are taxable only in that State, unless the enterprise carries on business in the other Contracting State through a permanent establishment situated there. If the enterprise carries on business in this way, the profits of the enterprise may be taxed in the other State, but only that part of them which is attributable to that permanent establishment.
- Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall be attributed in each Contracting State to that permanent establishment the profits which it could have made if it had been a distinct and separate enterprise carrying on the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is the permanent establishment.
- In determining the profits of a permanent establishment, expenses incurred for the purposes of the permanent establishment, including management expenses and general administrative expenses incurred, whether incurred in the State in which the permanent establishment is situated or elsewhere, shall be deductible.
- To the extent that it is customary in a Contracting State for the profits attributable to a permanent establishment to be determined by apportioning the total profits of the enterprise to its various component parts, nothing in paragraph 2 shall prevent that Contracting State from determining the taxable profits in accordance with the usual apportionment; the method of apportionment adopted shall, however, be such that the result obtained is consistent with the principles set forth in this Article.
- No profits shall be attributed to a permanent establishment solely because that permanent establishment purchases products or goods for the enterprise.
- For the purpose of applying the provisions of the preceding paragraphs, the profit to be attributed to the permanent establishment shall be determined each year by the same method, unless there are good and sufficient reasons for doing otherwise.
- Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.
We mention the fact that, in case the company in Romania will have a working point in Italy, it is necessary to keep a separate accounting and tax register for this working point, in accordance with Italian tax regulations. It is important to comply with the Italian accounting and tax legislation regarding the accounting and reporting of transactions related to the Italian working point.
ABC SRL must register in its accounting register s the income and expenses related to its activity in Italy deriving from the rental of the building.
In the determination of the Italian corporate income tax, if any, the income and expenses related to the rental activity will be taken into account according to the rules there.
The profit tax paid in Italy is deducted from the profit tax paid in Romania (tax credit).
According to the Tax Code, the regulation on tax paid abroad is stipulated in Article 39.
In this article and in the related rules, besides information and examples on the determination and deduction of the corporate income tax paid abroad (in case of using the tax credit method), paragraph 6 states:
“(6) The credit granted for taxes paid to a foreign state in a taxable year may not exceed the corporate income tax calculated by applying the corporate income tax rate provided for in Article 17 to the taxable profit earned in the foreign state, determined in accordance with the rules provided for in this title, or to the income earned in the foreign state. The credit shall be granted from the income tax calculated for the year in which the tax was paid to the foreign state, if the appropriate documentation is presented, in accordance with legal provisions, certifying payment of the tax abroad.”
Article 7 point 19 defines the tax credit method as follows:
“19. tax credit method – a reduction of income tax or corporate tax by the amount of tax paid in another state, according to double taxation conventions;”
- Legal basis:
- Fiscal Code (approved by Law no. 227/2015, published in the Official Gazette no. 688 of 10.09.2015), as amended and supplemented;
- Tax Procedure Code (approved by Law no. 207/2015, published in the Official Gazette no. 547 of 23.07.2015), as amended and supplemented;
- Methodological Norms for the application of the Tax Code (approved by GD no.1/2016).
- Law no. 28/2016 of 17 March 2016 on the ratification of the Convention between Romania and the Italian Republic for the avoidance of double taxation with respect to taxes on income and the prevention of tax evasion and of the Additional Protocol to the Convention, signed in Riga on 25 April 2015;
- Law 82/1991 on Accounting , with subsequent amendments and additions;
- Law 31/1990 ^1) on companies – Revision, as amended and supplemented