Romania: Romanian individual tax residency position
The enactment of the Romanian Fiscal Code in January 2016 brought significant changes to an individual's tax residency position. For the first ever time, the Romanian legal framework provides for a 'split year' residency.
More specifically, individuals can acquire/cease their Romanian tax residency at a certain moment during the fiscal year, when the relevant conditions are met. In the past (up to December 2015), a full year residency was in place and individuals could not split their position during the fiscal year.
In terms of tax liabilities, the new provisions target an individual's worldwide income at a more accelerated pace than before. Previously, income was not subject to Romanian taxation in the year the individual shifted their tax residency to Romania. So, it seems that the change intends to narrow the benefits granted to taxpayers when considering their tax residency.
Although the changes in the legislation are significant, the practice and procedures in respect of assessing an individual's tax residency position are mostly the same as before and could still lead to some odd situations.
As in the past, the Romanian tax residency position is assessed based on a tax residency questionnaire (TRQ) submitted on the individual's arrival to/departure from Romania.
The new rules in the Fiscal Code are the result of having the tax residency position determined based on domestic conditions (the "inglorious" 183-days rule and the individual's vital interests) rather than the applicable treaty for the avoidance of double taxation, if applicable. Thus, by not employing a tie-breaker rule, Romanian authorities may potentially keep the individuals as tax residents in Romania even years after they shift their tax residency position abroad.
In particular, this might be the case for Romanian citizens travelling abroad for more than 183 days, who are required to clarify their tax residency position upon leaving the Romanian territory. In such cases, the burden proof of deregistration stays with the individual who should produce a tax residency certificate from the other state. Still, more inconveniences could be encountered if the authorities decide that deregistration is applicable only upon receiving the tax residency certificate from the other state and not from the actual moment when the event triggering the tax residency shift occurred. The bottom line is that when handling the matter with the authorities, the individuals should consider proper supporting documentation for the TRQ and making the applications in advance, as it is common that the tax residency notifications are issued with significant delays.
Another important procedural aspect concerns the shift of an individual's centre of vital interest to Romania. They can have their tax residency position assessed by Romanian authorities only after the 183-days term is completed. However, if the authorities consider the social and economic ties as being the connecting factor to Romania (as the case may be), the individual could fail to observe their tax liabilities for the first year of residence. Therefore, the delays in the assessment of the individual's tax residency position could then trigger penalties for late tax reporting and payment.
To conclude, since tax residency is assessed by the tax office where the individual resides, most recent cases show that the authorities' approach on tax residency is not consistent and issues are only resolved on a case-by-case basis. Considering that the practice on a split tax residency is still in its infancy, those affected by the new rules should undertake the assessment of their tax residency even before the due date to ensure they have more opportunities to clarify, by means of the TRQ, their position before any tax liabilities arise.
Claudia Sofianu (firstname.lastname@example.org) and Inga Tigai (email@example.com)
EY, People Advisory Services