This is an essential expat tax guide which is very useful to those moving to Romania, and who need to demystify the tax reporting obligations applying for different types of income.
We know that moving to another country brings with it a multitude of adventures and challenges. One of them is for sure navigating the local tax system. For expatriates living in Romania, understanding and complying with tax reporting obligations is crucial to ensure a seamless stay.
Here, you can find a comprehensive overview of your Romanian tax obligations, opportunities for tax reliefs, and strategies to avoid double taxation, ensuring you’re well-informed and compliant. Whether you’re new to Romania or looking to optimize your current tax situation, this guide aims to simplify complex tax jargon into practical, actionable advice.
First, let’s delve into the specifics of Romanian tax residency and what it means for you as an expatriate.
In Romania, tax residency is determined by several factors. In general, as per the Romanian tax law, you’re considered a tax resident if you:
Understanding how these criteria work is crucial for expatriates to navigate their tax obligations effectively. Determining your tax residency status will influence your tax liabilities, including what income is reportable and taxable, and the taxes due.
In addition to the rules applicable through the Romanian domestic tax law, expatriates navigating the tax system in Romania must also consider other regulations. More exactly, understanding the nuances of tax residency becomes even more critical if you are potentially considered tax resident in another country as well. When Romania has a Double Tax Treaty (DTT) signed with another country of which you might also be a tax resident, specific rules outlined in the DTT will determine your residency status. Here’s a more detailed look at these considerations and the general rules applied under DTTs.
When conflicts of tax residency occur—that is, when you could be considered a tax resident in more than one country—the applicable DTT provides tie-breaker rules to establish in which country you will be treated as a resident for tax purposes. These rules aim to determine your country of tax residence in a way that avoids dual residency, thus preventing double taxation of your income. Here are the general tie-breaker rules commonly found in most of the DTTs:
According to the Romanian tax law, any non-resident individual who stays in Romania for at least 183 days within any given period of 12 consecutive months has the obligation to fulfill a tax residency assessment procedure. More exactly, they must determine their tax residency status in Romania by following a specific procedure with the Romanian tax authorities.
The process generally involves completing a standard questionnaire (i.e., “Questionnaire for determining the tax residency of individuals upon their arrival in Romania”) and preparation of certain documents and information related to their personal status. The questionnaire collects detailed information about the individual’s personal and economic ties to Romania. The supporting documentation must be submitted to the tax authorities along with the completed questionnaire, and any other relevant documents or information that can help determine the individual’s center of vital interests.
Following the tax residency file submission, the authorities will review the submitted documents and determine your tax residency status. They will consider factors such as those explained above – i.e., your permanent home, center of your vital interests, and habitual abode (period of stay in Romania).
For expatriates who have just moved to Romania, it is crucial to accurately apply the DTT tie-breaker rules to determine the correct tax residency status. Misinterpretation or incorrect application of the tax residency determination principles can lead to tax reporting errors or/and undue liabilities.
Simply said, being classified as a tax resident means that your worldwide income is subject to Romanian taxation. This includes earnings both from Romania and from abroad. On the other hand, non-residents are only taxed on their Romanian-sourced income. Correctly assessing and determining your tax residency status can further help you in your financial planning and correctly fulfilling your tax obligations.
This section of our expat tax guide emphasizes the importance of early assessment of your tax residency status upon moving to Romania. It’s advisable to consult with a tax professional who can provide guidance tailored to your specific situation. This can ensure that you’re both compliant with Romanian laws and are also making the most of any available tax relief measures.
For expatriates residing in Romania understanding their tax reporting obligations is vital for ensuring compliance and avoiding any erroneous reporting. This section of the expat tax guide aims to shed light on the types of taxable income, reporting deadlines, and consequences of non-compliance.
According to the main rule established through the Tax Code, in Romania, tax residents must report and pay taxes on their worldwide income, while non-residents are taxed only on their income from Romanian sources. Here’s what expatriates need to know about the types of taxable income:
This category of income includes salaries, wages, bonuses, commissions, any types of allowances, and other similar remuneration derived as result of an employment activity, irrespective of the payer of income, both within and outside Romania. Employment income is taxable in Romania as long as the income is paid by a Romanian employer and/or is related to activities carried out on the Romanian territory.
The reporting of the salary income must be fulfilled via monthly tax return filings. Expat salary reporting for work carried out in Romania must also be fulfilled through specific monthly tax declarations.
For 2024, taxes due on employment income are:
Income from freelance activities or any types of business operations, or professional services rendered by individuals (independently) is subject to taxation. Generally, individuals carrying out freelancing activities must be authorized by specific bodies (e.g., Romanian Registry of Commerce) for carrying out their business or professional activities in the specific field.
Self-employment income derived by tax resident individuals from any sources (from Romania or from abroad) is taxable in Romania and must be reported through the annual tax return.
For 2024, taxes due on self-employment income are:
Rental income is defined as income derived by individuals from the leasing or subleasing of any movable or immovable property (real estate). This can include any types of real estate, such as residential, commercial or industrial properties, including bare land, as well as movable assets such as machinery, any type of equipment or vehicles. Here are some more examples: apartments, houses, rooms, office space, retail space, warehouses, factories, industrial equipment, cars, etc.
For 2024, the income tax due for rental income is calculated as 10% of the income received, less a standard flat-rate deduction of 20% to cover expenses. This deduction is applied to account for costs such as maintenance, repairs, and other associated expenses.
For 2024, taxes due on rental income are:
As per the Romanian tax law, income from investments is categorized into various types, depending on the nature of the investment and the source of income. This category includes income derived from financial assets, such as interest, dividends, capital gains, and other similar sources. Below is a detailed explanation of the types of investment income, along with the applicable tax treatment.
Interest income: this can be income from deposits held in banks or other financial institutions, interest earned on bonds or other debt securities, or interest from loans granted to third parties.
For 2024, the income tax due on interest income is 10%, applicable on the value of the interest derived.
Dividend income: distribution of profit under the form of dividends, as result of shares held in Romanian or foreign companies.
For 2024, the income tax due on dividends is 8%, applicable on the gross dividend received.
Capital gains: gains realized from the sale of shares, bonds, or other financial instruments, such as options, futures, swaps, or other derivative instruments.
Gains from the sale of real estate properties do not fall into this category of income. This is classified under a different category of income, which is “Income from the sale of real estate”.
Income from investment funds: this is also classified under the capital gains category. It represents any distributions from investment mutual funds, exchange-traded funds (ETFs), or other collective investment vehicles, as result of redeeming the fund units or shares.
Income tax rules for capital gains derived during 2024 apply as follows:
Any capital gains derived from the types of transactions listed above that are done through Romanian resident investment intermediaries (brokers) are taxed through withholding at source, as follows:
Capital gains derived from transactions that are done through foreign brokers are subject to income tax of 10%. The obligation to declare the income tax stays with the individual.
In addition to the income tax, any investment income (income from dividends, interest, capital gains, etc.) is also subject to the health insurance contribution. The health insurance contribution is due at a rate of 10% of the following annual income thresholds, depending on where your total income stands: 19,800 RON, 39,600 RON or 79,200 RON; the health insurance contribution is due only if the annual income equals at least the first threshold of 19,800 RON.
Under the Romanian tax law, the category of income from pension can include various types of income received as a result of retirement. This includes statutory pensions (paid from the state pension funds), private pensions, and other similar types of retirement benefits.
Statutory (state) pensions are pensions provided by the state’s social security system, which are mostly based on mandatory contributions made during the individual’s working life. It includes old-age pensions, disability pensions, survivor’s pensions, and early retirement pensions.
Private pensions are those received from private pension funds (i.e., Pillar II and Pillar III), which are based on voluntary or mandatory contributions made by employees or their employers. It can also include pensions from occupational pension schemes.
Foreign pension schemes can include any types of state pensions received from other countries, or pensions from foreign private pension funds.
For 2024, in accordance with the provisions of articles 100 and 101 of the Tax Code, pensions are subject to income tax according to the following rules:
Staying ahead of tax reporting deadlines is crucial for avoiding any potential issues. In Romania, the deadline for filing the annual tax return is typically on the 25th of May of the following year, while filing of the expat monthly salary tax returns must be done until the 25th of each next month. However, it’s important to stay updated as deadlines may change.
Failing to comply with the tax reporting obligations can lead to fines or interest on unpaid taxes. The Romanian tax authorities may impose penalties ranging from minor fines for late submissions, to more severe consequences for underreporting income or tax evasion.
The immediate consequence for any individual submitting the annual tax declaration with delay is application of a late filing fine. Thus, failure to submit the declaration before the deadline is punishable with a fine ranging from 50 to 500 lei.
But this is only for not submitting the tax declaration on time.
For late payment of the taxes, there are interest and penalties applicable, calculated as percentage of the total amount of taxes due, as follows:
Apart from the late payment interest and penalties, the authorities can also impose a penalty for tax obligations that are undeclared or incorrectly declared and determined following a tax audit (i.e., the non-declaration penalty).
The non-declaration penalty is 0.08% of the total taxes due, per each day of delay. It is calculated starting from the day immediately following the payment deadline until the date of settlement of the amount. This penalty is calculated on the main tax obligations that are undeclared or incorrectly declared and established by the inspector through tax assessment decisions.
For many expats, navigating the tax reporting process and applying the double tax avoidance rules correctly in a new country can be overwhelming. However, leveraging this expat tax guide and seeking assistance from tax professionals can simplify the process.
From this perspective, we deeply encourage you to keep thorough records of your income and related tax documents. This not only helps you in keeping an accurate tax reporting, but also simplifies the process of claiming deductions or any foreign tax credits.
From our experience, a key concern for expats living in Romania is the potential for double taxation. This means paying taxes on the same income, for the same tax period, in both Romania and their home country. Fortunately, Romania has entered into Double Taxation Agreements (DTAs) with numerous countries to prevent this issue. At this moment, Romania applies approximately 89 DTAs which are signed with other countries.
This part of the expat tax guide focuses on how these agreements work and how you can benefit from them.
Romania’s DTAs are designed to protect against the risk of double taxation where the same type of income (e.g., dividend income) is taxable in two states, during the same tax period. These agreements typically specify:
Expatriates should review the specific articles regulating taxation avoidance for each type of income they generate to correctly understand and apply the rules. This information is crucial for accurate tax planning and reporting of the same income in both countries (source and tax residence country).
Here are explained below the relevant steps to apply DTA rules:
Understanding your tax residency status is crucial as it determines which country has the primary right to tax your income.
Here are briefly explained the steps you can take to determine your residency status:
John is considered a UK and Romanian resident as per the domestic tax laws of both countries:
John spends 200 days a year in Romania and 165 days in the UK. Both countries claim him as a tax resident for 2024, however, the DTA between the UK and Romania includes tie-breaker rules that consider the following criteria (in this exact following order) for establishing tax residency: permanent home, center of vital interests, and habitual abode.
John has a permanent home and close family members (i.e., children and spouse) in Romania for the entire year, while in the UK he has no close family members and no available home.
Given the above circumstances, under the DTA, he must be considered tax resident of Romania.
As mentioned above, DTAs allocate taxation rights for different types of income, such as employment income, dividends, interest, royalties, and capital gains, to a country or the other.
To determine how different types of income are treated and which country has the taxation rights over a specific type of income, you have to review the relevant article in the applicable DTA.
Steps to identify relevant income types:
Maria generates dividend income from Germany:
Maria, a Romanian resident, receives dividends from a German company. The Romania-Germany DTA states that dividends can be taxed in Germany, but the tax rate is limited to 15%.
This means that, as Romanian tax resident, Maria can also claim a foreign tax credit in Romania for the German tax paid, which will be limited to the value of the income tax due in Romania.
Depending on the type of income and the applicable DTA provisions, you can apply for relief at source to avoid withholding tax or to claim a refund for taxes already paid.
Suggestions for applying for relief or claim a refund:
Andrei’s interest income from the US:
Andrei, a Romanian resident, earns interest from US bonds. The US-Romania DTA allows for a reduced withholding tax rate of 10% on interest income. Andrei applies to the IRS for relief at source, submitting the required forms to ensure only 10% is withheld instead of the standard 30%.
In the same time, when declaring the interest income in Romania, he can also use a foreign tax credit in the amount of income tax withheld in the US to offset the Romanian income tax due on the interest income.
Implementing the tax planning tips in our expat tax guide can lead to a more efficient and less stressful tax experience in Romania. Being proactive and informed about your tax obligations and opportunities for relief is key to managing your expatriate finances effectively.
Founded in 2008 as TAX IQ, our company has gained extensive expertise over the years, allowing us to effectively utilize our experience to benefit our clients’ best interests. Over time, we have succeeded to build a solid reputation as trusted tax advisor for the entire community of Romanian expats.