|Claudia Chiran||Alexandru Mandru|
Romania plans to introduce rules in the EU Anti-Tax Avoidance Directive (ATAD) two years before the EU's required effective date.
Draft legislation was submitted to the Romanian Chamber of Deputies, lower house of parliament, in October 2016 to transpose the ATAD into domestic law, which is proposed to be effective from January 1 2017.
The EU ATAD (2016/1164 of July 12 2016) establishes rules against tax avoidance practices that directly affect the functioning of the internal market. Most of the measures in the ATAD have to be transposed by the EU member states by December 31 2018 and apply from January 1 2019. Romania's potential adoption of the draft law would, in principle, lead to the transposition of the ATAD in Romania two years before the deadline mentioned by the EU law.
Although the early implementation of the ATAD through the draft law is only a mere possibility at this stage, it should be noted that the proposals do not appear to amend the Romanian Tax Code in the same way as previous tax-related EU Directives that have been transposed into the Romanian tax law. Instead, the proposals in the draft law would create a separate law that may need to be read in conjunction with the Romanian Tax Code. This, of course, may lead to various difficulties, both at the level of the Romanian taxpayers and of the Romanian tax authorities.
ATAD's impact on the Romanian tax environment
The transposition into domestic law of the five measures against tax avoidance laid down by the ATAD will have, to a higher or lower extent (as briefly touched upon in the following), an impact on the way Romanian tax is governed.
Probably the most significant change that the ATAD brings to the Romanian tax law is the interest limitation rule. In this respect, Romanian tax law already contains certain specific limitation rules for interest deductibility that are entirely different from the ones provided for by the ATAD. Since the domestic interest limitation rules are not based on the earnings before interest, tax, depreciation and amortisation (EBITDA) concept, as mentioned in the ATAD, it remains to be seen whether they will be abolished or whether they will continue to be applicable in parallel with the new interest limitation rules to be introduced as per the ATAD. It also remains to be seen whether these new rules would determine a major change in the financing of Romanian companies that are part of multinational groups, which heavily rely on intercompany financing.
As a side note, the application of the new interest limitation rules in the ATAD also raises questions at the level of the Romanian authorities that publicly said that additional clarifications and also numerical examples would be required in order to clearly indicate the computation mechanism to be used when applying this rule.
Furthermore, as regards the exit taxation rules provided in the ATAD, it is important to note that no such rules exist in Romanian tax legislation. At this stage, transfer pricing rules (in line with OECD guidelines) are to be considered for transfers between affiliates, including permanent establishments (PEs). Therefore, the exit taxation rules included in the ATAD would need to be transposed into the Romanian tax law. Such rules may be of a significant importance for domestic companies who, in the last period, expanded their business activities in other EU member states where they operate via PEs.
As for hybrid mismatches provisions included in the ATAD, these will also need to be transposed into the domestic law because the only rules mentioned in the Romanian tax legislation relate to the transposition of the EU Parent-Subsidiary Directive (i.e. the linking rule). However, considering the limited use of such types of arrangements in Romania, one would expect that these provisions would have a rather reduced impact.
Separately, considering that the Romanian tax law does not contain any controlled foreign company (CFC) rules, these provisions will need to be implemented in domestic legislation. However, it remains to be seen which form these may take since member states have several options on how the rules are applied. While Romania is mainly an inbound destination, the estimated impact of the CFC rules could be limited, but not negligible.
Finally, as regards the general anti-abuse rule (GAAR), the Romanian tax law already contains several general anti-abuse provisions. On a related note, Romanian legislators are expected to develop certain business purpose tests for the application of such rules, but it remains to be seen in which form and how these will be applied.
In conclusion, it is very important for taxpayers to consider the impact that the ATAD transposition may have on their Romanian business and at the same time to monitor the developments on the approval process of the draft law and any communications from the Romanian Ministry of Public Finance in this respect.