Taxation in Romania: Uncovering Hidden Tax Benefits for Different Business Sectors in an EU Member State

Volodymyr Bezditnyi. 4b.ua

Romania, a member of the European Union since 2007, has increasingly positioned itself as a favorable environment for business, particularly due to its competitive tax regime. With a diverse set of incentives and preferential tax rates, Romania is becoming an attractive location for startups and established companies alike. This article explores Romania’s tax advantages across various business sectors and how they provide a strategic edge for firms operating within the European Union.

Romania’s taxation system is highly competitive, featuring one of the lowest corporate tax rates in the European Union. The country employs a flat-rate corporate income tax of 16%, which is significantly lower than the average corporate tax rates of Western European countries, which often exceed 25% (European Commission, 2018). This low flat tax rate applies universally to resident companies and branches of foreign entities operating in Romania, making it an attractive location for foreign direct investment (FDI).

Romania also imposes a value-added tax (VAT) at a standard rate of 19%, which is below the EU average of around 21-22%. This tax applies to most goods and services, but there are reduced VAT rates of 9% and 5% for certain products and services, particularly in sectors like healthcare, education, and tourism (PwC, 2020).

Let us consider tax incentives for different business sectors.

 IT and Software Development

One of Romania’s flagship sectors, the information technology (IT) industry, benefits from special tax exemptions aimed at fostering growth in this high-potential area. Romanian law provides a personal income tax exemption for software developers, a benefit that has contributed to the country’s booming IT industry. Employees in the software development field are exempt from the 10% personal income tax, reducing labor costs significantly and creating an appealing environment for both local and foreign companies looking to establish or expand tech operations (KPMG, 2019).

In addition to the income tax exemption for IT specialists, Romanian companies engaged in software production can take advantage of reduced social security contributions for qualified employees, significantly lowering operational costs. This makes Romania one of Europe’s most cost-effective IT and software outsourcing destinations.

Research and Development (R&D)

Romania also provides substantial incentives for companies engaged in research and development. Businesses can benefit from an additional deduction of 50% of eligible R&D expenses from their taxable income, a policy that mirrors those found in more developed markets like Germany and France (Deloitte, 2017). Furthermore, investments in R&D are fully deductible, and companies are allowed to apply accelerated depreciation for technological equipment used in R&D activities. These measures encourage innovation and help firms establish Romania as a base for cutting-edge research within the EU.

Manufacturing and Industrial Sectors

The manufacturing sector in Romania enjoys a range of tax benefits, particularly in relation to employment incentives. Employers hiring individuals from disadvantaged backgrounds or those with disabilities can benefit from tax deductions, while businesses operating in underdeveloped regions of the country may qualify for state aid schemes, offering partial tax exemptions and subsidies for job creation (European Investment Bank, 2019).

Moreover, companies that establish operations in Romania’s industrial parks can access several fiscal incentives. These include exemptions from land, building, and urbanism taxes, significantly lowering the cost of maintaining physical infrastructure (Ministry of Finance Romania, 2018). This is particularly advantageous for large-scale manufacturing firms and industrial operations, which benefit from reduced overheads.

Renewable Energy Sector

In response to EU regulations and the global push towards sustainability, Romania has introduced various tax incentives aimed at encouraging investment in renewable energy projects. Companies in this sector can benefit from exemptions from excise duties on energy produced from renewable sources, along with a reduced corporate tax rate for green energy projects (EY, 2020). In addition, subsidies and grant programs from both national and EU funds are available for companies involved in the development of renewable energy infrastructure, making Romania a strategic location for businesses focused on green energy solutions.

Comparative Advantage in the EU

Romania’s tax system provides several competitive advantages compared to other EU member states. While countries like France and Germany impose higher corporate tax rates and stricter regulations, Romania’s flexible and business-friendly tax policies make it an appealing alternative, especially for small and medium-sized enterprises (SMEs) (OECD, 2018). Additionally, Romania’s compliance with EU regulations allows businesses located in Romania to operate seamlessly across the EU’s single market, benefiting from free trade and the absence of tariffs within the region.

Furthermore, Romania’s strategic location on the edge of Central and Eastern Europe offers access to both EU markets and neighboring non-EU countries, such as Moldova and Ukraine. This positioning allows businesses to leverage Romania as a gateway for broader European operations while benefiting from its favorable tax regime.

The Future of Romanian Tax Policy

Romania continues to refine its tax policies to remain competitive within the EU. Recent reforms include digitalization efforts within the tax administration, aimed at streamlining tax filings and reducing the bureaucratic burden on businesses. As the global economy continues to evolve, Romania is likely to introduce new tax incentives targeted at emerging industries such as artificial intelligence, blockchain, and green technologies (World Bank, 2019).

One potential area for future reform is the simplification of VAT compliance for cross-border transactions, an issue that has been highlighted by various business associations operating in Romania. Addressing these challenges could further enhance Romania’s attractiveness as a destination for multinational corporations.

Conclusion

Romania’s tax policies offer a range of benefits for businesses across different sectors, making it an increasingly popular destination for companies looking to establish a presence within the European Union. From the IT sector’s tax exemptions to the robust incentives for R&D and renewable energy projects, Romania’s competitive tax regime is designed to foster growth, attract foreign investment, and stimulate economic development. As Romania continues to refine its tax policies and align with EU regulations, it will likely solidify its position as a leading business hub in Eastern Europe.