Be Aware of Romanian Fiscal Risks When Performing Cross-Border Activities

Based on the COVID pandemic many companies have considered to establish a company in a tax-attractive country like Romania, but perform the activities remotely. Such decisions are not risk-free and imply fiscal challenges to be taken into consideration beforehand:

Permanent Establishments (“PE“)

According to the definition of a PE, this is a place from which the activity of a non-resident person is carried out in full or in part (i) directly or (ii) through a subordinate representative. These conditions are met when a number of employees are active in a fixed place located in another country (construction site or project), but also in case of a home-office, a server, a building or an installation firmly anchored in the ground. A fixed place can also be confirmed in cases when sales agents represent a company abroad (having the right to sign, negotiate, take decisions) or a managing director performs his activities remotely.

PEs need to be registered with the Romanian Financial Administration, keep Romanian records and pay the Romanian corporate income tax.

Fiscal residence

The fiscal residence of a legal person is determined based on the headquarters and the place of the actual management.

Relevant criteria for natural person are next to domicile/ residence also the center of vital interests, and, of course, the duration of stay on Romania territory.

In practice, situations occur when persons are considered taxable residents in two different countries leading to the risk of double taxation. This applies especially then when Romanian companies formally locate their headquarters in Romania, but the managing directors take all the strategical decision from abroad. Based on the principle of place of management, the country where the managing director is located in may consider itself competent for tax returns and payments.

Similarly, Romanian tax authorities may consider companies from abroad lead by managing directors located in Romania liable for taxation here.

In order to avoid complications, we recommend applying for an official determination of the fiscal residence in Romania beforehand.

Practical relevance

The relocation of one´s personal or professional fiscal residence into countries with attractive tax rates is not risk-free. Tax authorities usually check thoroughly and apply substantial sanctions for so-called “artificial arrangements“ meant to benefit from fiscal advantages under the above circumstances.

Please find more detailed information under: https://stalfort.ro/wp-content/uploads/2022/01/20220107_AZ_Fiscal_risks_implied_by_a_cross-border_activity.pdf