Situation:
A company X, liable for corporate income tax, owns 100% of the share capital of company Y, liable for microenterprise income tax. Company X has owned 100% of the share capital of company Y for 2 years.
In 2023 company Y distributes dividends from the retained earnings of previous years to company X.
What are the dividend tax obligations of company Y?
Solution:
According to the Tax Code, the provisions of Article 43 (Declaration, withholding and payment of tax on dividends) 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 meets the following conditions:
- 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;
- the legal person paying the dividends:
(i) is constituted as a joint-stock company, limited partnership, limited liability company, general partnership, limited partnership or has the organizational form 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.
Thus, given that company X receiving the dividends has more than 1 completed year of holding shares in Y (2 years), then company Y will not withhold 8% withholding tax.
Note that it does not matter if the company paying the dividends is a microenterprise, as all the conditions mentioned above are cumulatively met.
We underline the fact that the legislator has explained the phrase any other tax that replaces corporate income tax in the explanatory note of Ordinance 16/2022 as follows:
“The exemption regime for dividends paid between Romanian legal entities also applies to persons paying income tax on microenterprises, as this tax is considered, according to national legislation, a tax that substitutes the corporate income tax.”
Thus, taking into account the above-mentioned aspects, company Y will not withhold tax on dividends paid to X.
Please note that dividend income is not taxable at X under Article 23(a) of the Tax Code.
Legal basis:
– Tax 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 MO no. 547 of 23.07.2015), as amended and supplemented;
– Methodological Norms for the application of the Tax Code (approved by GOVERNMENT DECISION no.1/2016).