| C o n t e n t |

| § 1. Introduction |

| § 1.2. Subjects |

| § 1.1. Basics of 16 % Profit Tax |

| § 2. Revenues |

| § 2.1. Taxable Revenues |

| § 2.2. Non-taxable Revenues |

| § 3. Expenses |

| § 3.1. Deductible Expenses |

| § 3.2. Expenses with Limited Deductibility |

| § 3.3. Non-deductible Expenses |

| § 3.4. Expensed Interest - Undercapitalization Rules |

| § 4. Tax Deductions |

| § 4.1. Legal Reserve |

| § 4.2. Fiscal Depreciation |

| § 4.3. Tax Provisions |

| § 4.4. Tax Loss Carryforward |

| § 4.5. Incentives |

| § 5. Additional Profit Tax |

| § 6. Tax Payment |

| § 5.1. Tax prepayments |

| § 5.2. Final payment |

| § 1. Introduction |

| § 1.1. Subjects |

  ҈  The following entities are subject to the 16 % profit tax:

- corporations (joint stock companies, limited partnerships, limited liability companies, European companies) which either don’t qualify or don’t opt for microenterprise tax regime;

- permanent establishments of foreign corporations;

- NGOs (e.g. associations and foundations).

| § 1.2. Basics of 16 % Profit Tax |

  ҈  According to the Title II of the Tax Code, the Romanian entities not classified as microenterprises are subject to the 16 % profit tax. The tax year is the calendar year, unless another 12-month period period is notified to the tax authority.

  ҈  The taxable profit is the taxable revenues less the deductible expenses, non expensed deductions and carried forward tax losses. The Romanian Tax Code excludes the deduction of certain expenses or restrict their deduction. Amounts not booked as but equivalent to revenues and expenses may affect the tax base.

  ҈  The taxable profits are taxed at a rate of 16 %, regardless of whether the profit is distributed or retained.

| § 2. Revenues |

| § 2.1. Taxable Revenues |

  ҈  All operating, financial and extraordinary revenues are taxable, unless stipulated as non-taxable in the Tax Code.   Due to the fact that the Romanian accounting is based on the accrual principle, a revenue should be considered as taxable regardless of its collection; similarly, the expense deduction is not conditioned by the payment.

  ҈  The offsetting revenue items, such as revenues from own work capitalized as well as from inventory changes to semi-finished and finished goods are taxable, whereas the incurred costs are deductible.

| § 2.2. Non-taxable Revenues |

  ҈  The following revenues are not taxable:

- dividends resulting from a participation in a Romanian capital company;

- revenue from the reversal of non-deductible expenses, including non-deductible expensed provisions;

- revenues considered as non-period revenue.

| § 3. Expenses |

| § 3.1. Deductible Expenses |

  ҈  The expenses are deductible if incurred for the purpose of earning revenue. The Tax Code provides for some other deductible expenses, namely:

- the packaging costs;

- the discounts, discounts, sales bonuses and rebates on the remuneration for supplies and services;

- expenses for occupational safety, health protection, and prevention of accidents and occupational diseases;

- expenses with compulsory occupational disease and accident insurance, as well as professional indemnity insurance;

- the advertising costs, including advertising materials, goods that are granted as samples or testers, or for sales’ promotions;

- accommodation and travel expenses for business travels made inside and outside Romania;

- training costs;

- marketing costs, as well as expenses with market research and trade fair participation;

- research and development expenses, if not capitalized as intangible assets;

- the expenses aimed at optimizing the management and the management of quality;

- costs for environment;

- membership fees to the Chamber of Commerce, workers 'and employers' organizations;

- the contractual fines and late payment penalties, charged by entitities other than state authorities;

- the cost of transporting employees between home and workplace;

- the technological losses, within the technilogical norms.

| § 3.2. Expenses with Limited Deductibility |

  ҈  The Tax Code limits the deduction of certain expenses, such as:

- representation expenses - deductible up to 2 % of the profit before tax calculated without deducting the representation expenses;

- the meal allowance for business travel is deductible provided the daily allowance does not exceed 2.5 times the allowance officialy established for the employees of public institutions;

- - the voluntary social expenditure in favor of the employees, together with the amounts spent for private scholarships, are deductible up to the 5 % of the total gross salaries;

- the meal vouchers granted to employees, in value of maximum 40.00 Lei per working day;

- membership fees to professional organizations are deductible up to a maximum of EUR 4,000 per year;

- expenses for health and safety in the workplaces;

- expenses borne by the employer in relation to telework activity;

- the contributions to occupational pension funds in favor of the employees are deductible up to a maximum of EUR 400 per employee and year;

- contributions for private health insurance in favor of the employee are deductible up to a maximum of EUR 400 per employee and year;

- the expenses for a service residence;

- 50 % of the costs incurred for a company car; if the car is fully used for business purposes, the costs may be deducted, provided the use is propper documented;

- 50% of the the operating, maintenance and repair as well as the depreciation expenses related to a registered office purchased by the taxpayer in a residential building which is not used exclusively the business. If the registered office is also used by the shareholders, the respective expenses are considered non-deductible and incurred in their favor.

| § 3.3. Non-deductible Expenses |

  ҈  The following expenses are deemed as non-deductible:

- the expenses with the Romanian profit tax and similar foreign corporate taxes are not deducted but used as tax credit;

- fines, including default interest, charged by domestic or foreign authorities;

- expenditure, including the incurred VAT, related to missing or damaged, non-insured inventories, property, plant and equipment, unless justfied by force majeure;

- the VAT on benefits in kind for employees, if not handled as taxable income;

- expenses not properly booked or not fully documented;

- expenses related to non-taxable or end-taxed income;

- not documented consulting and management costs;

- insurance of assets not belonging to the taxpayer, with the exception of leased goods, as well as goods used for securing a bank loan;

- losses on receivables for which no provision has been previously built up;

- expenses for sponsoring, which are not deductible but used as tax credit;

- impairments of assets recognized at inventory or revaluation.

| § 3.4. Expensed Interest - Undercapitalization rules |

  ҈  Is considered as excess borrowing cost the amount by which interest expense exceeds interest revenues. By way of exception, if the corporation is an independent entity, in the sense that:

a. is not part of a consolidated group for financial accounting purposes, and

b. has neither associated enterprises nor permanent establishments abroad,

it fully deducts the excess borrowing costs in the tax period in which they are incurred.

  ҈  The corporations have the right to deduct, in a fiscal period, the excess borrowing costs up to the ceiling of 1,000,000 euros. The excess costs of indebtedness resulting from transactions/operations that do not finance the acquisition/production of fixed assets and which are carried out with affiliated persons are deducted, in a fiscal period, up to the ceiling of 500,000 euros. The total excess costs of indebtedness resulting from transactions/operations carried out both with the affiliated persons and with non-affiliated persons, which can be deducted in a fiscal period, cannot exceed the deductible ceiling represented by the equivalent in lei of the amount of 1,000,000 euros.

   ҈  The corporations other than independent entities described above may deduct in a tax period excess borrowing costs up to the Lei equivalent of EUR 1,000,000 plus 30% of EBIDTA, if positive.

In this context, EBIDTA is calculated as the difference between revenues and expenses booked according to the accounting regulations in the reference tax period, with the exception of non-taxable income, corporate tax, excess borrowing costs and tax depreciation.

If EBITDA is negative or zero, the cost of borrowing exceeding EUR 1,000,000 is fully non-deductible in the reference tax period and is carried forward with no time limit under the same deduction conditions.

 The law does not provide a threshold for the interest rate, which can be freely agreed by the parties.

|

§ 4. Deductions |

| § 4.1. Legal Reserve |

  ҈  The corporations are required to build up a legal reserve; this tax-exempt reserve increases by 5% of the annual profit until it reaches 20% of the share capital.

  ҈  The reduction or dissolution of the reserve through distribution, liquidation, apportionment or merger is taxable.

| § 4.2. Fiscal Depreciation |

  ҈  According to the Tax Code, the assets with an entry value above 2,500 Lei and expected to be used for more than a year are considered depreciable, provided they are used for the purpose of production, services, lease or administration. The depreciation is expensed from the 1st of the month following the operational readiness.

  ҈  Property, plant and equipment (machinery, tools, equipment, computers) used in manufacturing or services may be depreciated using the accelerated depreciation method, namely 50 % of the asset value until the end of the year of acquistion and the rest of 50 % during the remaining useful life.

| § 4.3. Fiscal Provisions |

  ҈  The following provisions are considered tax-deductible:

- provisions formed in accordance with the contractual guarantee and warranty obligations;

- provisions equal to 30 % of doubtful / uncollectible accounts receivables whose due date has been exceeded by more than 270 days, provided that the creditor and the debtor are non-related persons and the receivables are not insured;

- provisions amounting to 100 % of the claims for which the the opening of insolvency proceedings was decided by court, provided the creditors and debtors are non-related persons and the receivables are not insured.

| § 4.4. Tax Loss Carryforward |

  ҈  Starting from 2024, the tax losses stated in the annual profit tax returns are recovered from the taxable profits, up to 70% of these taxable profits, during the next 5 consecutive years. The recovery of losses will be carried out on a FIFO basis, at each profit tax payment term.

  ҈  The annual tax losses stated in the profit tax returns, not recovered until December 31, 2023, are recovered from the future taxable profits, up to the 70% of these taxable profits, over a period of 7 consecutive years  following the year yj which the respective losses have been stated.

| § 4.5. Fiscal Incentives |

  ҈  Investments in machinery and equipment for occupational health can be deducted in full in the month of acquisition.

  ҈  The sponsorship made for tax-privileged purposes is not deductible, but may be used as tax credit, up to the 0. 75% of the annual turnover but no more than 20 % of the precalculated profit tax.

  ҈  Companies can benefit from an additional deduction of 50 % of the eligible expenses related to their R&D activities. The eligible R&D activities must be in the fields of applicative research and/or technological development relevant to the taxpayer’s activity and must be performed in Romania or in the EU/EEA member states. The property, plant and equipment used in R&D activities can be depreciated using the accelerated method, namely 50 % of the asset value until the end of the year of commissioning and the rest of 50 % within the remaining useful life.

  ҈  The reinvested profit may be used as tax credit, if used for the investments in technological assets, computers and peripherials. The technological assets must be used in the production, processing and refurbishment activities. The incentive is calculated as the minimum between the following:

- 16 % of the investment value

- profit before taxation

- precalculated profit tax (i.e. without the incentive).

  ҈  Corporation that maintain / increase the value of their own capital are granted the following tax credits:

a) 2%, if the own capital presented in the annual financial statements is positive and at least equal to half of the subscribed share capital;

b) if the positive value of the own capital, adjusted by eliminating the result of the current year, exceeds the value registered in the previous year, the tax credits are applied as follows: 

 Tax credit [%]                          Annual growth of the adjusted own capital [%]

 5% up to and including 5%

 6%                                                over 5% and up to and including 10%

7%                                                 over 10% and up to and including 15%

8%                                                 over 15% and up to including 20%

9%                                                 over 20% and up to including 25%

10%                                               over 25%

c) 3%, if the increase of adjusted own capital as compared to the year 2020 is above the minimum levels shown in the table below, provided the own capital is positive:

Reporting year Minimum growth [%]

2023                                              10%

2024                                              15%

2025                                              20%

Microenterprises shall apply the tax credits in the following order:

a) tax credits related to the sponsorships, including carried forward amounts;

b) tax credits related to purchase of the electronic fiscal devices, including carried forward amounts;

c) tax credits related to the own capital.

| § 5. Additional Profit Tax |

  ҈  Companies taxed on profit that made in the previous year a turnover of over 50,000,000 euros may pay an additional profit tax, if they are stating tax losses or the profit tax calculated according to the standard procedure is under 1 % of the adjusted turnover. The exchange rate for determining the euro equivalent of the turnover is the one valid at the end of the financial year.

The adjusted turnover is calculated as total revenues less following deductions:

- revenues exempted from profit tax;

- offsetting revenue items, such as revenues from own work capitalized as well as from inventory changes to semi-finished and finished goods;

- subventions;

- compensations paid by insurance / reinsurance companies, for damages caused to inventory or fixed assets;

- value of fixed assets in progress caused, either acquired or produced, recorded in the accounting starting with the date of January 1, 2024;

- accounting depreciation at the level of the historical cost related to the fixed assets acquired / produced starting with January 1, 2024, except for the accounting depreciation of the assets in progress mentioned above;

If the adjusted turnover is negative, no additional profit tax should be paid.

  ҈    The profit tax to be compared with 1 % of the adjusted turnover is the profit tax precalculated before the tax credits related to the corporation tax paid abroad, to the reinvested profit and to the exemptions granted to agricultural cooperatives.

| § 6. Tax Payment |

| § 6.1. Profit Tax Prepayments |

  ҈  Taxpayers make prepayments on the annual profit tax by 25th April, 25th July and 25th October respectively. The prepaid tax must be calculated by the taxpayer and will be considered tax credit against the annual tax. The loss carryforward shall apply also in case of the prepaid tax.

  ҈  Taxpayers who have opted for a tax year other than the calendar year shall defer the tax prepayments accordingly.

| § 6.2. Final Profit Tax Payment |

   ҈  The corporations should file the annual tax return and pay the difference up to the annual tax no later than 25th June of the following year.

Drafted by

Tax Advisor Dorin Stefanescu