Romania: Tax Incentives for companies performing research and development activities
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Romania: Tax Incentives for companies performing research and development activities

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Gabriel Sincu

It is generally known that Romania is an important hub in the IT industry and Romanian IT specialists are appreciated worldwide. One of the reasons for this success is a tax incentive introduced by the Romanian authorities almost 15 years ago: employees involved in software programming in Romania are exempted from salary tax.

Triggered by this opportunity and building on the special skills of the local people (such creativity, attention to detail and the ability to think outside the box), an important Romanian IT industry has developed in the last decade, firstly in Bucharest, the capital of the country, and afterwards in several major cities like Cluj, Iasi and Timisoara, well-known as university centers. The success of the industry depends on pulling the brilliant brains in their areas, training and 'serving them on a plate' to companies eager to hire good people.

Beneficiaries of this development were mainly multinationals, able to find highly skilled personnel at an affordable cost, but also Romanian entrepreneurs who identified and exploited some niche areas in the IT market. For example, WikiLeaks revealed how a Romanian company producing one of the top worldwide antivirus software is giving headaches to some guys working for the US secret services!

In this context and in a desperate effort to stop the outflow of the most qualified people over the border, Romanian authorities started in the last period a strong campaign to encourage the development of high value-added industries in the country. And, of course, the tax incentives were again at the top of the list of measures considered by the Government. Therefore, starting in 2017, a set of three important facilities are available for companies performing R&D activities in Romania:

1) The same exemption from salary tax as in the case of IT programmers is now applicable to employees involved in R&D by Romanian entities. There are some conditions to be met in order to benefit from this tax incentive, e.g. a special department has to be set for R&D purposes, a separate budget has to be allocated and a cost centre to be created, the activities to comply with the international R&D definitions, etc.

2) An additional tax deduction from the taxable base representing 50% of the R&D expenses incurred, is available for companies involved in such activities. Expenses qualifying for this tax benefit are direct costs related to R&D activities like salaries, materials, depreciation of related tools and equipment, as well as overheads allocated to the R&D cost centre on a reasonable driver. In order to benefit from this incentive, the companies have to incur the R&D expenses with the purposes of obtaining taxable revenues (i.e. the 50% additional deduction is also available in case of R&D expenses which did not materialise in a products/services to be sold by a company). However, the incentive is not available for taxpayers who do not intend to keep the intellectual property (IP) right for the output of their R&D activities (i.e. the tax incentive is not available for a subcontractor in a large project who will only receive a one-off payment for his work from the leader of the project who is the IP right holder).

Worth mentioning is that in order to get the above mentioned tax benefits, a proper supporting documentation has to be prepared by the taxpayer to prove the R&D character of the expenses. It is very important that this formal aspects are observed as, otherwise, the benefits can be lost in case of a tax inspection and the additional taxes together with the related interest and penalties could be significant.

3) A 10-year exemption from corporate income tax is available for companies operating exclusively in the area of R&D. This is the newest facility introduced in the tax code and for the time being it is still not applicable, due to the fact that the implementation norms have not been issued yet by the Romanian authorities. We are waiting for proper clarifications in this respect and we are also keen to see how this incentive will become alive considering its implications in the area of state aid regulations. We look forward to seeing all these details settled.

As a conclusion, we can say that Romania's plans to continue to be an important player in the global IT industry and to become one in the high value added industries are well supported by the tax legislation. We hope for less bureaucratic pressure and for new investments in this area, to see help Romania develop to its full potential.

Gabriel Sincu (gabriel.sincu@ro.ey.com)

EY Romania

Tel: +40 21 402 4000

Website: www.ey.com/ro

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