Understanding Romania's Double Taxation Treaties: A Guide for International Business
Romania has signed double taxation treaties with dozens of countries to prevent income being taxed twice. Here is what businesses need to know about how these agreements work and how to claim relief.
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For any business engaged in cross-border activities with Romania, understanding the country's network of double taxation treaties is essential. These agreements, also known as double tax conventions, are designed to prevent the same income from being taxed twice: once in the country where it is earned and again in the country where the taxpayer is resident.
Romania has concluded double taxation treaties with more than 80 countries worldwide. They cover various types of income, including business profits, dividends, interest, royalties, capital gains and employment income. The treaties allocate taxing rights between Romania and the treaty partner, often reducing or eliminating withholding taxes.
How double taxation treaties work
In general, a double taxation treaty operates on the principle of residence. A company or individual that is resident in one country but earns income in another will first be taxable in the source country, subject to any limits imposed by the treaty. The resident country then provides relief by either exempting the income or granting a credit for the tax paid abroad.
For example, if a Romanian company receives dividends from a subsidiary in a country with which Romania has a treaty, the withholding tax on those dividends may be reduced below the domestic rate of that country. The Romanian company would then declare the dividends in Romania but could credit the foreign tax paid against its Romanian corporate income tax liability.
Key features of Romanian treaties
Romanian double taxation treaties follow, in most cases, the OECD Model Tax Convention. This means they typically include provisions on permanent establishment, business profits, associated enterprises, and the exchange of information between tax authorities.
Withholding tax rates on dividends, interest and royalties are often reduced or eliminated under the treaties. For instance, a treaty might reduce the standard domestic withholding tax of 10% on dividends to 5% or even 0%, depending on the ownership percentage and the specific agreement.
Romania also has treaties that include provisions for the avoidance of double taxation on income from international transport, pensions and government service.
Claiming treaty benefits
To claim the benefits of a double taxation treaty in Romania, the non-resident must usually provide proof of tax residence in the treaty country. This is done by submitting a certificate of tax residence issued by the tax authority of the other country. The certificate must be valid for the period in which the income is paid.
For Romanian residents earning income abroad, the process is reversed: they should obtain a Romanian tax residence certificate and present it to the foreign payer or tax authority to benefit from the treaty.
It is important to note that the application of a treaty is not automatic. The taxpayer must actively claim the relief and may need to submit an application to the Romanian tax authority (ANAF) or the payer of the income, depending on the type of income involved.
Why treaties matter for business
Double taxation treaties provide certainty and reduce the overall tax burden for companies operating internationally. They also include mechanisms for resolving disputes, such as the mutual agreement procedure, which allows competent authorities of the two countries to resolve cases of taxation not in accordance with the treaty.
Before structuring a cross-border investment or transaction, it is advisable to consult the specific treaty between Romania and the other country. The exact wording of each treaty can differ, and domestic tax laws are subject to change. Professional advice is recommended to ensure full compliance and optimal tax planning.
