After approving Emergency Ordinance no. 153/2020 (the “EO”) “establishing incentives for companies to increase their equity” on August 14, 2020, the Romanian Government published it on 4 September 2020.
Because analysis of taxpayers’ 2018 financial statements identified a large number of taxpayers, i.e. over 250,000, with negative equity, the Romanian Government has proposed measures to encourage taxpayers to increase their equity.
Capitalizing companies would have a positive effect on the economy’s development process by ensuring financial stability.
We highlight the fact that Law no. 31/1990 (“Law 31”), which establishes the general regulatory framework for companies, contains provisions on requirements related to amounts of share capital and legal reserves, as well as provisions for their maintenance. It also stipulates an obligation to maintain equity equal to at least one-half of the value of a company’s subscribed share capital. Failure to meet this threshold entitles any interested party (including the tax authority) to demand that the company be dissolved unless its management takes measures to remedy the situation within a given timeframe.
In the past, several attempts were made to ensure that companies comply with the abovementioned regulations, including audits by tax authorities which were meant to encourage the companies to take the necessary measures to meet the requirements of Law 31 and to avoid the negative consequences.
With the EO, the Romanian Government wishes to make it more attractive for companies to increase their equity by granting several incentives, as opposed to requiring taxpayers to comply on pain of negative consequences.
The incentive measures are applicable starting 1 January 2021 and will be in effect until 2025.
The incentive measures are granted in the form of specific reductions in profit tax, microenterprise tax and tax on certain activities (under Law no. 170/2016) if the taxpayer maintains a positive equity amount, and even increases its equity from one year to another.
Taxpayers under the profit tax system, including those who have a fiscal year different than the calendar year and/or permanent establishments, microenterprise tax or a specific tax system, may benefit from the following tax reductions:
- 2% if the equity is positive and they fulfil the requirement of Law 31 of having equity equal to at least one-half of the value of the subscribed share capital;
- if they register an annual increase in the adjusted equity and simultaneously fulfil the condition from point 1) above, the reduction has the following values:
- 5%, if the annual capital growth of adjusted equity is up to and including 5%;
- 6%, if the annual capital growth of adjusted equity is between 5% and 10%;
- 7%, if the annual capital growth of adjusted equity is between 10% and 15%;
- 8%, if the annual capital growth of adjusted equity is between 15% and 20%;
- 9%, if the annual capital growth of adjusted equity is between 20% and 25%;
- 10%, if the annual capital growth of adjusted equity is over 25%;
- 3%, starting with 2022, if they register an increase in the adjusted equity compared to the adjusted equity of 2020 above the levels mentioned below, while continuing to meet the condition from point 1) above:
- 5% annual capital growth of adjusted equity in 2022;
- 10% annual capital growth of adjusted equity in 2023;
- 15% annual capital growth of adjusted equity in 2024;
- 20% annual capital growth of adjusted equity in 2025;
A company will be able to benefit from one, two or even all three of the above incentives. The reduction percentages will be added together, and the resulting percentage will be deducted from the tax that is due.
According to the EO, adjusted equity includes the following elements, as presented in the annual financial statements:
- subscribed share capital / endowment capital (in case of permanent establishments);
- patrimony (autonomous companies);
- public patrimony;
- private patrimony;
- patrimony of national research-and-development institutes;
- share premiums;
- legal, statutory or contractual and other reserves constituted from the net profit following the decision of the shareholders or according to the legal provisions;
- net result carried forward - credit balance, representing the positive difference between credit and debit balances.
To enable companies to benefit from these incentives, the Government has postponed the deadlines for declaring / paying profit tax until after the date of submission of the financial statements, i.e. until 25 June of the following year, with specific provisions for companies that have a fiscal year different than the calendar year.
The EO also clarifies the procedure for receiving the tax reduction in case of business restructuring, such as a merger or acquisition.
By Carmen Mazilu, Associate, Noerr