This content is from: Romania

Romania: Participation exemption regime applicable

Arcadie Parfenie
There are many business driven arguments and motives to set up a holding company within a group. Ideally the holding company would not tax dividend income or capital gains, would not apply withholding tax on dividends payments, interest or royalty outflows or it would provide easy access to the EC Directives and/or strong network of double tax treaties, thereby eliminating or reducing withholding taxes on dividend, interest and royalty flows. Also, the location of the holding company should be sound in standing in the international business community, politically and economically stable, tried and tested as a holding company location.

Although Romania was not included among these jurisdictions and it is difficult to pretend such status, it should be noted that a big step ahead was made recently in Romania. At the end of last year, a provision was enacted in the Romanian Fiscal Code which stipulates the exemption for capital gains realised from disposal of shares held either in Romanian entities or legal entities located in treaty countries and exemption of dividend income received from legal entities located in treaty countries. Typically, in most cases, primary holding company involves combining holding activity with financing and treasury activity, and/or IP activities. At this stage, there is no preferential tax treatment with respect to financing and IP holding activities in Romania, however, it should be considered that the new legislative provision would most likely boost the image and attractiveness of Romania as jurisdiction for establishing a holding company. Also, one can note that the requirements for exempting the capital gains are quite light compared with other jurisdictions well known as holding locations.

In particular, dividends received from foreign legal entities subject to corporate income tax or a similar tax, located in third countries with which Romania has concluded a double tax treaty and capital gains derived by Romanian legal entities from the sale of shares in Romanian legal entities or in legal entities from third countries with which Romania has concluded a double tax treaty are tax exempt in Romania under certain conditions. Basically, these provisions would apply if the taxpayer holds, for an uninterrupted period of at least one year, at least 10% of the share capital of (i) the legal entity paying the dividends or (ii) the legal entity in which the shares sold/assigned are held.

Separately, at this moment, Romania is one of few countries which still have an old type of double tax treaty with the US, that is without a limitation of benefits clause. Taking this into account, the treaty benefits may be secured in an easier manner for a reduction of withholding tax on interest payments from the US and further to the enactment of the new provision, for US exemption on capital gains for sale of shares, as well.

Arcadie Parfenie (
EY Romania
Tel: +4021 402 4000

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