Why you should rethink incorporating in Romania

Company incorporation legally creates a corporate entity separate from its owners. It offers benefits like limited liability, tax perks, and credibility. This article covers crucial insights and considerations, including why Romania might not be the best choice for incorporation.

Key takeaways

• Romania’s evolving tax regime and increasing compliance burdens make it a less favourable destination for company incorporation, particularly for startups and small businesses.
• Countries with low corporate tax rates, such as Malta, Cyprus, and the UAE, present more attractive options for businesses looking to minimise their tax liabilities and enhance profitability.
• Understanding the complexities of global corporate tax rates, including the impact of government budgets, tax incentives, and compliance requirements, is essential for companies when deciding on incorporation and financial planning.

Why Romania is not ideal for company incorporation

Romania, positioned strategically in Eastern Europe, might seem like a promising destination for incorporating a company. However, the reality is far more complex. The business environment in Romania faces several challenges that make it less than ideal for new enterprises. Over the past few years, the country has implemented tax regime changes that have increased rates and introduced complexities that could burden new and existing businesses alike.

Compliance requirements in Romania have become more stringent, posing significant hurdles for startups and small businesses. The increased administrative burden can be overwhelming, diverting valuable resources from growth and innovation to compliance and reporting. This is particularly problematic for smaller enterprises that lack the extensive administrative resources of larger corporations.

These unfavourable tax regime changes and increased compliance burdens make Romania less appealing for company incorporation. The rising corporate tax rates and the complexities of the tax system are significant deterrents, making it worthwhile to consider other jurisdictions that offer a more favourable business environment.

Changes in Romania’s tax regime starting 2025

Romania’s tax regime is undergoing significant changes starting in 2025, which will further complicate the business landscape. Entrepreneurs need to be aware of these changes to make informed decisions.

1. Increase in dividend tax: the dividend tax will rise from 8% to 10% for all taxpayers receiving income from dividends, including companies, individuals, and non-residents. This increased tax rate applies to dividends distributed starting from 1 January 2025.
2. Elimination of tax incentives: tax incentives, such as exemptions from income tax and reduced pension insurance contributions for salary incomes below RON 10,000 in sectors like IT, construction, agriculture, and the food industry, will be eliminated. Starting with salary income related to January 2025, these sectors will face regular (full) taxation.
3. Micro-enterprise tax adjustments:
   • The annual eligibility turnover threshold will be reduced from EUR 500,000 to EUR 250,000, and further to EUR 100,000 starting 1 January 2026.
   • The disqualifying condition of earning more than 20% of income from consultancy and management services will be removed.
   • Updates will be made to the NACE codes corresponding to activities for which the micro-enterprise tax is 3% instead of 1%.
   • Romanian legal entities, excluding public institutions, national research and development institutes, associations, foundations, and other “not-for-profit” entities.
   • Foreign legal entities operating through a permanent establishment in Romania.
   • Legal entities with their registered office in Romania, established according to European legislation.Reintroduction of construction tax: the construction tax, previously in force between 2014–2016, has been reintroduced. It is payable by:

In light of these developments, incorporating in Romania presents significant challenges that outweigh the potential benefits. The increasing corporate tax rates and the elimination of tax incentives create an environment that is less conducive to business growth. Coupled with the stringent compliance requirements, these factors make Romania an unattractive destination for company incorporation. Entrepreneurs and businesses should consider alternative jurisdictions with more favourable tax regimes and supportive business environments to ensure optimal profitability and sustainable growth.

Corporate income tax rates around the world

Corporate income tax rates vary significantly across the globe, with some countries offering more favorable conditions for businesses than others. Understanding these differences is crucial for companies looking to optimise their tax liabilities.

The average statutory corporate income tax rate worldwide is approximately 23.51%. However, this average masks significant variations. For instance, only three jurisdictions enforce corporate tax rates above 35%, with the highest recorded at 50%. On the other end of the spectrum, nine countries have statutory rates as low as 10% (if not more), making them attractive options for businesses looking to minimise tax burdens.

Recent years have seen several countries, including Barbados and Slovakia, increase their corporate tax rates, reflecting a global trend towards high corporate tax rates. Conversely, countries like Malta and Cyprus maintain some of the lowest effective corporate tax rates, at 5% and 12.5% respectively, offering strategic advantages for business incorporation.

The UAE stands out with its 0% corporate tax rate, providing a completely tax-free environment for companies.

Low corporate tax rate jurisdictions

Jurisdictions with low corporate tax rates are highly attractive for businesses looking to reduce operational costs and enhance profitability. Countries like Malta, Cyprus, the UAE, and Portugal are prime examples of such jurisdictions. These countries offer competitive corporate tax rates that provide businesses with a strategic advantage, allowing for greater reinvestment and growth opportunities.

For instance, Malta’s effective corporate tax rate is as low as 5%, while Cyprus offers a rate of 12.5%, making them favourable destinations for business incorporation.

How US corporate tax rates compare globally

The U.S. corporate tax landscape is complex, with both federal and state levels influencing overall tax liabilities. Before the 2017 Tax Cuts and Jobs Act, the U.S. corporate income tax rate was 35%. However, this has been reduced, making the U.S. more competitive globally.

Corporate tax rates in the U.S. vary significantly by state, ranging from 2% to 11.5%. Notably, South Dakota and Wyoming do not impose any corporate income tax, offering tax-free environments similar to some international jurisdictions. Despite these variations, the U.S. corporate tax system ranks 81st out of 225 jurisdictions globally, reflecting its relative competitiveness.

The federal and state-level tax rates collectively influence business decisions regarding incorporation, making it essential for companies to consider both when evaluating their overall tax strategy.

Understanding corporate income tax

Corporate income tax is a critical aspect of a company’s financial planning. It is levied on a company’s profits, which include income from sales, services, and investments. The calculation of corporate income tax involves determining the gross income, subtracting allowable deductions, and applying the relevant tax rates to the taxable income, including considerations for general corporate income tax, corporate taxes, and taxes on corporate income.

Historically, the average corporate tax rate has decreased significantly. Since 1980, it has dropped by 41%, from 40.18% to 23.51%. This decline reflects global efforts to create more business-friendly environments, though recent frameworks like the QDMTT have introduced an effective corporate tax rate of 15% for large companies in certain countries.

Tax incentives and reliefs for corporations

Tax incentives and reliefs play a crucial role in reducing corporate tax liabilities and encouraging business investment. The global minimum tax agreement aims to establish a unified corporate tax rate of at least 15% for large companies, ensuring a level playing field.

In Cyprus, the corporate tax rate is competitively set at 12.5%, offering a favourable environment for businesses aiming to minimise their tax liabilities. Cyprus provides numerous tax incentives, such as the Intellectual Property (IP) Box regime, which allows for a reduced tax rate on income to 2.5%!

Additionally, Cyprus offers a variety of deductions and allowances to help businesses lower their taxable income, encouraging reinvestment and growth. These advantages make Cyprus an attractive option for company incorporation, presenting a blend of tax efficiency and a supportive business climate.

The impact of VAT on businesses

Value-Added Tax (VAT) significantly impacts businesses, particularly in terms of cash flow management and pricing strategies. Businesses are required to collect and remit VAT, which can strain their cash flow, especially if profit margins are narrow. VAT also influences pricing strategies, as businesses need to adjust their prices to cover VAT costs while remaining competitive.

This balancing act can impact profit margins and overall demand, as consumers may become more price-sensitive. The administrative responsibilities associated with VAT, including registration, record-keeping, and regular returns, can be burdensome, particularly for smaller enterprises.

The competitive landscape is shaped by how well businesses manage and pass on VAT costs. Those that handle VAT efficiently may gain a competitive edge over others, helping them maintain market share and profitability.

Corporate tax avoidance strategies

Corporate tax avoidance involves legal strategies used by companies to minimise their tax liabilities. A common approach involves moving money to areas with better tax laws. Businesses also transfer units to these locations for the same reasons. This strategy is often employed to take advantage of lower tax rates and reduce overall tax burdens.

However, burdensome tax regulations can drive entrepreneurs to engage in such evasive behaviours, impacting compliance and potentially leading to corruption within the tax system. Some tax havens face international scrutiny, requiring proof of genuine economic activity to comply with regulations.

Non-resident companies and tax obligations

Non-resident companies have specific tax obligations depending on their activities within a country. In the UK, non-resident companies must pay tax only on profits attributed to UK activities, such as trading profits from a UK permanent establishment or profits from UK land trade or rental.

Non-UK incorporated companies engaging in certain activities must register for Corporation Tax, and failure to comply can result in financial penalties. The administrative burden of tax compliance can be significant, often deterring non-residents from forming companies in jurisdictions with stringent tax regulations.

Government budgets and corporate tax rates

Government budgets play a crucial role in determining corporate tax rates. Changes in corporate tax rates can significantly impact business investment decisions, particularly when budgets announce permanent tax adjustments. In the UK, for example, an increase in the corporation tax rate from 19% to 25% for larger firms was intended to reflect fiscal sustainability in government budgeting.

Permanent full expensing of qualifying investments is projected to increase the economy’s optimal capital stock in the long term, influencing future business operations. These changes reflect the fiscal priorities of governments and their impact on the business environment.

Summary

In conclusion, while incorporating in Romania might seem appealing at first glance, the realities of its tax regime and compliance burdens present significant challenges. The recent tax changes, including increased dividend taxes and new construction taxes, further complicate the business environment.

Comparing global corporate tax rates, it’s evident that other jurisdictions offer more favourable conditions for business incorporation. Understanding corporate income tax, tax incentives, and the impact of VAT can help businesses make informed decisions. Ultimately, choosing the right jurisdiction requires a careful evaluation of the tax landscape to optimise profitability and growth.

Frequently asked questions

Do you pay less tax if you set up a limited company?

Establishing a limited company can lead to lower overall tax and National Insurance costs compared to being a sole trader, primarily because income from dividends can be taxed more favourably than salaries and corporation tax rates are often lower than income tax rates. However, the specific tax benefits will depend on individual circumstances, including how you withdraw funds from the company.

Why is Romania not ideal for company incorporation?

Romania is not ideal for company incorporation due to its unfavourable tax regime, increased compliance burdens, and recent tax changes that deter new businesses. These factors collectively create a challenging environment for entrepreneurship.

What are the key changes in Romania’s tax regime starting 2025?

Starting in 2025, Romania will see an increase in the tax on dividends from 8% to 10%, a reduction in the micro-enterprise turnover threshold, and the introduction of a new construction tax. These changes will significantly impact businesses and individual taxpayers alike.

How do U.S. corporate tax rates compare globally?

U.S. corporate tax rates, influenced by varying state taxes from 2% to 11.5%, place the country 81st out of 225 jurisdictions globally. This ranking indicates that U.S. rates are relatively high compared to many other nations.