How to Avoid Double Taxation When Doing Business in Romania

If your business operates across borders, you may face the risk of being taxed twice on the same income. Romania has an extensive network of double taxation treaties designed to prevent this, making it easier for companies and individuals to work internationally. Understanding how these agreements work can save you money and administrative hassle.

What is double taxation?

Double taxation occurs when two countries both claim the right to tax the same income. For example, a Romanian company paying dividends to a shareholder in Germany might see the dividends taxed in Romania and again in Germany. Double taxation treaties allocate taxing rights between countries and provide mechanisms for relief.

Romania's treaty network

Romania has signed double taxation treaties with over 80 countries, including major trading partners such as the United Kingdom, the United States, Germany, France, Italy, and the Netherlands. These treaties are generally based on the OECD Model Tax Convention, which provides standard rules for different types of income, including business profits, dividends, interest, royalties, and employment income.

Each treaty is unique, so it is essential to check the specific agreement between Romania and the other country involved. The treaties set maximum withholding tax rates, define permanent establishment, and establish procedures for claiming relief.

How the treaties work in practice

When you earn income from another country, you may need to pay tax there. The treaty then allows you to either claim an exemption or a credit in your country of residence. For example, if a Romanian company receives royalties from a French company, the France–Romania treaty may reduce the French withholding tax from the standard rate to a lower treaty rate. The Romanian company can then claim a foreign tax credit for the tax paid in France against its Romanian corporate income tax.

To benefit from treaty provisions, you usually need to prove that you are a tax resident of one of the countries. This often involves obtaining a certificate of tax residence from your local tax authority. In Romania, this certificate is issued by the National Agency for Fiscal Administration (ANAF).

Practical steps to claim relief

• Identify the relevant treaty: Determine whether Romania has a double taxation treaty with the other country and review its provisions.
• Obtain a tax residence certificate: Apply to ANAF for a certificate confirming your Romanian tax residence. This is typically required by foreign tax authorities.
• Submit the necessary forms: Many countries require specific forms to claim treaty benefits, such as a reduction in withholding tax. Submit these before the income is paid.
• Claim a foreign tax credit: When filing your Romanian tax return, include the foreign tax paid as a credit against your Romanian tax liability.
• Keep records: Retain all documents proving the tax paid abroad, as ANAF may request them during an audit.

Common pitfalls to avoid

One common mistake is assuming that all income types are covered identically. For example, the treatment of capital gains may differ from dividends. Another issue is failing to obtain the tax residence certificate before the payment is made, which can lead to higher withholding tax that is difficult to reclaim later.

It is also important to understand the concept of permanent establishment. If your company has a fixed place of business in another country, such as an office or construction site, you may be taxed there on the profits attributable to that establishment, even without a treaty.

Conclusion

Double taxation treaties are powerful tools for reducing your tax burden and providing certainty when operating internationally. By understanding how they work and following the correct procedures, you can avoid paying more tax than necessary. Always consult a tax professional for advice tailored to your specific situation.