Legal Framework: Romania, has established guidelines regarding transfer pricing to prevent tax evasion and ensure the integrity of the tax system. The foundation of transfer pricing regulations in Romania lies within the Romanian Tax Code, Art. 11, L. 227/2015 and Order nr. 442/2016.
Definition of Related Parties: Affiliation between individuals or entities is established under specific criteria, as outlined in the regulations updated in July 2021 in Romania. Firstly, individuals are deemed affiliated if they are spouses or relatives up to the third degree. Secondly, a natural person is affiliated with a legal entity if they hold at least 25% of the participation titles or voting rights, either directly or indirectly, or if they exercise effective control over the entity. Similarly, legal entities are considered affiliated if they meet the same ownership or control thresholds with another legal entity. Additionally, a legal entity is affiliated with another if a third legal entity holds at least 25% of the participation titles or voting rights in both, or effectively controls both entities.
Documentation Requirements: Large taxpayers engaged in transactions with related parties exceeding certain thresholds are required to prepare a transfer pricing file annually. These thresholds vary depending on the type of transaction, such as interest, services, or goods, with amounts ranging from EUR 200,000 to EUR 350,000.
For large taxpayers the deadline for preparing this transfer pricing file aligns with the deadline for submitting corporate income tax returns, typically June 25 of the following year. Taxpayers not meeting the specified thresholds must present the file within 10 calendar days upon request by tax authorities even not within the scope of a tax audit.
Large taxpayers, that do not fulfill the aforementioned thresholds as well as Medium-size and small taxpayers face similar obligations but with lower transaction thresholds ranging from EUR 50,000 to EUR 100,000 considering the type of transaction (financial, services, goods). Under that case the transfer pricing file should be available upon request and must be submitted within 30-60 days to the tax authorities, after its request during the tax audit. Those falling below any threshold are subject to scrutiny during tax audits.
In any case if the tax audit identifies deviations from the arm’s length principle in intra-group transactions, tax adjustments, penalties, and surcharges will be imposed.
Thin Capitalization Rules and Intragroup Financing Activities:
Interest expenses on inter-company loans are deductible, provided that the debt-to-equity ratio is lower than or equal to three. In case the debt-to-equity ratio is negative or higher than three, interest expenses are non-deductible in the current year and can be carried forward to subsequent years as soon as the debt-to-equity ratio is positive and below 3:1. Thin capitalization rule applies only in case of long-term loans.
In addition to the general transfer pricing regulations, specific safe harbor rules apply to intra-group loans. These rules govern the deductibility of interest expenses incurred on such loans. For loans denominated in hard currency (any currency other than the local currency), the deductible interest expenses are capped annually by government decision. Meanwhile, for loans in the local currency, the deductible interest is determined based on the reference interest rate of the National Bank of Romania.
However, it’s important to note that these ‘safe harbor’ rules do not absolve taxpayers from their documentation obligations. Even within these prescribed limits, taxpayers are still required to maintain proper documentation regarding their intra-group loan transactions. Any interest expenses exceeding these specified limits are deemed non-deductible and cannot be carried forward to subsequent tax years. It’s crucial for taxpayers to adhere to these limitations, as they are applied separately to each intra-group loan before considering any further thin capitalization regulations.
Country-by-Country Reporting (CbCR):
CbCR requirements are mandatory for taxpayers who are part of MNEs with a global consolidated turnover exceeding EUR 750 million in the previous year. Entities meeting this criterion must submit a CbC report either a simple CbC report notification, to the tax administration, depending on their role within the Group (UPE, surrogate, constituent, etc.).
Public CbC Reporting:
In September 2022, Romania made history as the first EU member state to enact legislation aligning with EU Public CbCR Directive 2021/2101. Opting for early implementation, Romania’s rules came into effect on January 1, 2023. This proactive move was facilitated by the issuance of Order no. 2048/2022 by the MF. Furthermore, to provide additional clarity and guidance, recent amendments have been introduced through Order 1730/2023.
The entities covered by this reporting requirement include:
– Romanian UPEs and standalone entities, demonstrating consolidated revenue exceeding 3,7 billion RON (approximately EUR 747,474,740) over the preceding two years,
– Large or medium-sized entities, part of groups with consolidated revenue exceeding 3,7 billion RON (approximately EUR 747,474,740) over the last two years, are now subject to this reporting requirement, provided that the group is headquartered outside the EU,
– Romanian branches established by non-EU companies are included if their net turnover exceeds the RON 3,7 billion threshold in each of the preceding two consecutive fiscal years.
This early adoption of the new reporting framework positions Romania as a focal point for attention, especially for MNEs operating within its borders. MNE groups with UPEs outside EU, with large or medium-sized local entities will be compelled to navigate their first EU Public CbCR through Romanian channels.
Under these regulations, eligible entities must publish their Public CbCR within 12 months from the end of the fiscal year under review. For instance, for the fiscal year spanning January 1, 2023, to December 31, 2023, the deadline for publishing the report is December 31, 2024. The publication can be made either on the company’s website or on the website of the respective Chamber of Commerce, without any charge.
A notable aspect of Romania’s implementation is the incorporation of a “safeguard clause.” This clause offers companies under the reporting scope an alternative route, allowing them to defer the disclosure of sensitive commercial information under specific circumstances. This provision underscores Romania’s commitment to fostering transparency while respecting the commercial interests of entities.
Compliance Procedures: Failure to provide meticulously prepared documentation may result in penalties for perceived negligence, emphasizing the importance of compliance in Romania.Failure to adhere to transfer pricing documentation requirements can lead to substantial penalties for taxpayers in Romania ranging between 12k RON (EUR 2,500) and 14k RON (EUR 3,000). Non-submission of Country-by-Country reports incurs fines ranging from 70k RON to 100k RON (EUR 14,500 to EUR 20,800) , while omissions, incomplete, or falsified data result in penalties between 30k RON to 50k RON (EUR 6,250 to EUR 10,500).
Ensuring timely provision of a solid transfer pricing documentation is essential to prevent potential penalties and serves as the strongest defense against challenges from tax authorities during audits.
For more information please contact our team at tp@privelpartners.gr
