Tax Guide for US Expats Living and Working in Romania
Who Is Liable For Income Taxes in Romania
Individuals domiciled in Romania are considered to be tax residents and are taxed on their worldwide income (with certain exceptions). During the first three years of meeting certain residency criteria, individuals who are not domiciled in Romania are subject to tax on their Romanian-source income, regardless of where the income is received. An individual who meets the tax residency criteria for three consecutive tax years or who carries out independent activities through a permanent establishment in Romania for a period of three consecutive tax years becomes subject to tax on worldwide income beginning with the fourth tax year.
Individuals in Romania who are also resident in a country that has entered into a double tax treaty with Romania may benefit from a reduced tax rate or a tax exemption under the terms of the relevant treaty. If a foreign individual spends less than 183 days in Romania and if the salary costs for the individual are not recharged to Romania, he or she may be exempt from Romanian tax liabilities, provided that a tax residency certificate is available and the tax exemption procedure is completed within 15 days of the beginning of activities. Individuals in Romania who are tax residents in countries that have not entered into a double tax treaty with Romania are subject to tax in Romania from their first day of presence in the country if the relevant conditions are met.
Income subject to tax. A flat tax rate of 16% applies to salary income, income from freelance activities, rental income, pension income, prizes, investment income, agricultural income and other types of income. Special tax rates apply to income from investments, gambling and transfer of property ownership. The taxation of various types of income is summarized below.
Employment income. Taxable compensation includes the following:
- Salaries
- Benefits in cash or kind (for example, allowances and perquisites)
- Wage premiums
- Rewards
- Temporary disability payments
- Paid holidays
- Other income received by an individual based on an employment agreement
- Fees and compensation paid to directors and managers of private enterprises and to members of the board of directors, general shareholders meeting, administration council and audit committee
The monthly tax on employment income is determined by deducting mandatory social security contributions, personal deductions, trade union contributions and contributions to the voluntary occupational pension scheme (up to the equivalent in Romanian currency of €400 per year per participant) from gross income.
Income from independent activities. Income from independent activities includes income from commercial activities, income from freelance activities and income from intellectual property rights. The net taxable income from freelance activities is computed as gross income less specified deductible expenses. Individuals engaged in freelance activities must make advance tax payments on a quarterly basis by the 15th day of the last month of each quarter. A 10% advance income tax, which is withheld at source, applies to the following types of income:
- Income from sales of goods on consignment
- Income from agent, commission or commercial mandate agreements
- Income from services contracts entered into based on the Civil Code
- Income from accounting, technical, judicial and extrajudicial expertise
Taxpayers who earn income from independent activities as mentioned above, from which a 10% advance income tax is withheld at source, can opt for a final withholding tax at a rate of 16%.
Taxable income from intellectual property rights is computed by deducting from gross income expenses representing 20% of gross income and compulsory social security contributions. A 10% advance income tax must be withheld at source by payers of income from intellectual property rights by the 25th day of the following month. Taxpayers who earn income from intellectual property rights can opt for a final withholding tax at a rate of 16%.
Rental income. Gross rental income consists of amounts in cash or kind that are stipulated in rental agreements, as well as certain expenses borne by the tenant that are the landlord’s liability according to the law. The rental income is taxable in the tax year to which the rent relates, regardless of when the rent is effectively received.
Taxable rental income is determined by subtracting from gross rental income a deduction equal to 25% of gross income. Tax on rental income is determined by applying a rate of 16% to the taxable amount. As an exception, taxpayers may opt for the determination of the net rental income based on single-entry accounting.
Investment income. Investment income includes the following:
- Dividend income
- Interest income
- Gains from transfers of securities
- Income from futures and forward transactions with foreign currencies and similar operations
- Income from dissolution of a legal entity
Any amount paid in excess of the market price by a legal entity for goods or services provided by a shareholder is treated as a dividend if the beneficiary of such amount was not subject to income tax or profits tax on the amount. Amounts received from holding participation titles in closed investment funds are treated similarly to dividends. A 16% final withholding tax is imposed on dividends.
Taxable income from interest is considered to be any income in the form of interest other than interest from municipal bonds.
A 16% final withholding tax is imposed on interest income, effective from 1 July 2010. The tax must be remitted by the 25th day of the following month.
Capital gains derived from sales of shares in publicly traded companies and open investment funds are subject to a 16% final tax, regardless of the holding period of the shares.
A 16% advance tax is imposed on gains derived from sale and purchase transactions in foreign currencies with subsequent term settlement, as well as similar operations. The advance tax must be paid by the 25th day of the following month. The final tax of 16% is assessed by the tax authorities based on the annual tax return.
Any loss incurred during the period of 1 January 2010 through 30 June 2010 can offset any gain realized during the period of 1 July 2010 through 31 December 2010. Any further losses can be carried forward to the 2011 fiscal year only.
Any loss incurred during the period of 1 July 2010 through 31 December 2010 must be recovered in the following seven consecutive fiscal years.
Income whose source is not identified. Any income whose source is not identified is subject to 16% income tax applied to the tax base adjusted according to the procedures and indirect methods for the reconstitution of revenues or expenses. The tax authorities compute the income tax and late payment penalties.
Deductions. Individuals domiciled in Romania and individuals meeting the residence criteria for three consecutive years are entitled to personal deductions, which vary according to gross monthly income and number of dependents of the individuals. For gross monthly income up to RON 1,000, the monthly deductions vary between RON 250 for individuals without dependents and RON 650 for individuals with four or more dependents. For gross monthly income between RON 1,000 and RON 3,000, the deductions are set by an order of the Ministry of Economy and Finance. No deduction is allowed for gross monthly income greater than RON 3,000.
Rates. As discussed in Income subject to tax, most types of income are subject to tax at a flat rate of 16%.
B. Inheritance and gift taxes
No taxes are levied on inheritances or gifts, except for revenue subsequently derived from these items.
C. Social security and healthcare contributions
Both employers and employees must contribute to the social security system. Employees are required to make the following monthly contributions.
Double tax relief and tax treaties
Romania has entered into double tax treaties with several countries. In addition, the EU Savings Directive provides for citizens of EU member states an exemption from withholding tax on savings income received in Romania if a tax residency certificate is provided. The following countries have entered into double tax treaties with Romania.
Albania
Indonesia
Russian Federation
Algeria
Iran
Armenia
Ireland
San Marino
Australia
Israel
Singapore
Austria
Italy
Slovak Republic
Azerbaijan
Japan
Slovenia
Bangladesh
Jordan
South Africa
Belarus
Kazakhstan
Spain
Belgium
Korea (North)
Sri Lanka
Bulgaria
Korea (South)
Sudan
Canada
Kuwait
Sweden
China
Latvia
Switzerland
Costa Rica
Lebanon
Syria
Croatia
Lithuania
Tajikistan
Cyprus
Luxembourg
Thailand
Czech Republic
Macedonia
Tunisia
Malaysia
Turkey
Denmark
Malta
Ukraine
Ecuador
Mexico
United Arab Emirates
Egypt
Moldova
Estonia
Morocco
United Kingdom
Ethiopia
Namibia
United States
Finland
Netherlands
Uzbekistan
France
Nigeria
Vietnam
Georgia
Norway
Yugoslavia
Germany
Pakistan
Greece
Philippines
Hungary
Poland
Yugoslavia
Iceland
Portugal
India
Qatar
Zambia
To learn more about the history, culture, economy and other information about Romania
We have been preparing US income tax returns for US Citizens and permanent residents living in Romania for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Romania and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Romania.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email