CIBR Blog

Fiscal regime of the small enterprises starting with 1 January 2007
 
 

During 2006 there were ardent discussions on keeping the tax on small enterprises income or changing over to the profit tax of all economic agents, following Romania’s adhesion to the European Union. Even though, as a project, the law amending the Fiscal Code was stipulating exclusion of the income tax for the small enterprises (by generalizing the profit tax), following the debates it was decided this tax to be kept after adhesion. Due to the legislation amendments, the income tax for the small enterprises can reach the objectives for which it was instituted (helping the small enterprises to develop) and diminishes the possibility of using the small enterprises in order to avoid the payment of certain taxes (“hiring” of the employees within the small enterprises and avoidance of taxes and contributions related to the wage budget and wages, using the advisory/management contracts in order to reduce the taxable profit and the money will be subsequently taken off the small enterprise by paying a smaller tax etc.). Within this article we will present the small enterprises’ income tax as it will apply starting with 1 January 2007 as well as an algorithm that can lead to the substantiation of the option between small enterprises’ income tax and profit tax.

 
1. Fiscal categorization as a small enterprises
 
In order for a legal person to be categorized as a small enterprise, it has to meet the following conditions:
 
a) Produces incomes, other than out of consultancy and management, over 50% of the total incomes;
b) Has 1 up to 9 (inclusively) wage earners;
c) The incomes produced in the previous year did not exceed the equivalent in lei of 100,000 Euro;
d) Nominal capital of the legal person is held by persons, other than the state, local authorities and public institutions.
e) At the same time, when constituting a small enterprise, in order to meet the condition on the number of employees and choose from the first year the small enterprises’ income tax, it’s necessary to hire at least one wage earner within 60 days from the registration with the Trade Register;
f) Chosen for the fiscal regime of the micro enterprise when the is created;
 
Concerning the conditions to be met, we specify the following:
 

• insertion of the condition according to which the management an consultancy incomes are under 50% of the small enterprise’s income leads to the possibility of using the small enterprises for the legally avoiding certain taxes payment2. Thus, the legal persons focussing on manufacture, trade and services providing, other than consultancy and management, may keep their small enterprises status;  number of the wage earners represents the
• number of persons employed with individual labor contract according to the provisions of the Labor Code, irrespectively of the length of the working period, monthly registered with the payrolls and/or the general register for the record of the wage earners. When assessing the condition on the number of the wage earners, cases of ceasing the work following the retirement or cancellation of the individual labor contract following committing certain acts that are thus sanctioned in compliance with the law, are not taken into consideration. For the legal persons having just an employee quitting within a month, the condition concerning the number of employees is considered as being met if during the following month another employee is hired. At the same time, when constituting a small enterprise, in order to meet the condition on the number of employees and choose from the first year the small enterprises’ income tax, it’s necessary to hire at least one wage earner within 60 days from the registration with the Trade Register;
• in order for the taxable incomes not to exceed 100,000 Euro, the exchange rate communicated by BNR on the date when the financial year ended, will be considered. This exchange rate is the last exchange rate fixed by BNR within a calendar (fiscal) year.

 
At the same time, in order to be considered as small enterprises, considering the taxation, the legal persons do not:

• perform activities in the banking field;
• perform activities in the field of insurance and re-insurance, capital market, except for the legal persons performing brokerage activities in these fields;
• perform activities in the field of gambling, sport bets and casinos;
• hold the nominal capital that is held by a legal person share holder or associate having over 250 employees.

 
2. Option for the payment of small enterprises’ income taxes
 
The new established legal persons can choose, even from the instituting date, the payment of the small enterprises’ income taxes if they meet the conditions on the nominal capital and the number of the employees. The option will be registered in the registration application with the Trade Register and stays definitive for that year.
 
The legal persons that are profit tax payers may choose to pay the income tax starting with the following financial year if they meet the above conditions and if they were not small enterprises’ income tax payers before.
 
Once they change over to the fiscal regime for the small enterprises, the legal persons may change over to the payment of the profit tax again in the following cases:
 

• when within a financial year the conditions to be met in order for them to be considered as small enterprises are not being met any more;
• on request, starting with the following financial year, if the conditions according to which they are considered as small enterprises were met. In this case, the payment of the profit tax must be chosen until 31 January of the financial year following that when the fiscal regime applicable to the small enterprises was practised.  

 
When the changing over to the profit tax occurs due to the non-observance of the conditions for categorizing as a small enterprise, the procedure is as follows:
 

• the changing over to the profit tax takes place starting with the year following that when the conditions concerning the incomes structures, number of employees and nominal capital are not being met anymore; 
•  the changing over to the profit tax takes place starting with the quarter when the limit of 100,000 Euro in case of incomes is exceeded.

 
When the changing over to the profit tax takes place due to the exceeding of 100,000 Euro by the taxable incomes, the profit tax will be established starting with the quarter when this exceeding occurs, considering the incomes and expenditures at the beginning of the year. Practically, the small enterprise is in a situation of owing profit tax on the entire year. When establishing the profit tax to be paid out of the amount resulting as a profit tax, the small enterprises’ income tax owed within the year will be deducted. Even if the changing over to the profit taxation system takes place, considering the incomes and expenditures at the beginning of the year, delay increases for the profit tax that would have resulted to be paid (the profit tax that would have resulted for the periods of time before the financial year when the small enterprises’ income tax is established) will not be owed for the period when the small enterprises’ income tax applied.
 
3. Establishment and payment of the small enterprises’ income tax      
 
The small enterprises’ income tax is established by applying the taxation quota on the taxable incomes.
 
The taxation quota is 2% in 2007, 2,5% in 2008 and 3% starting with 2009.
 
The taxation basis is given by the incomes from any source, out of which the following will be deducted:
 

• incomes from the stocks’ variation;
• incomes from the tangible and non-tangible assets;
• incomes from exploitation, representing the quote from the government subsidies and other sources for financing the investments;
• incomes from commissions;
• incomes resulted from cancellation of debts and increases owed to the state budget that did not represent deductible costs when calculating the taxable income according to the law
• incomes from compensations, from the insurance companies, for the damages produced on the own tangible assets.

 
At the same time, when a small enterprise buys points of sale, their acquisition value is deducted out of the taxable basis, according to the justifying document, within the quarter when they were commissioned.
 
The calculation and payment of the small enterprises’ income tax is performed quarterly, until 25, inclusively, of the month following the quarter for which the tax is calculated. The small enterprises are obliged to submit the income tax declaration until the tax payment term.
 
4. Small enterprises’ income tax or profit tax?
 
Due to the fact that, when the conditions in order for a legal person to be considered as small enterprise concerning the taxation are met, a legal person may choose between income tax and profit tax, the question on how the judgement should be made in order for the option to lead to the minimisation of the payable tax arises. Consequently, if we wish to choose the minimum payable tax, we have to begin with an anticipation of the incomes and expenditures for the following year. We will establish the anticipated amount of the profit income and the anticipated amount of the income tax, choosing the option that would lead to the minimisation of the tax. On the general case we have the following situation:
 
IP = quota IP x (VT – CT + CN - Vneimpp) = Quota IP x (VimpIP – CD)
IM = quota IM x VimpIM
 
where:
 
- IP is the profit tax
- quota IP is the profit taxation quota
- VT represent the total incomes anticipated to be achieved
- CT represent the total expenditures anticipated to be effected
- CN represent the non-deductible expenditures anticipated to be effected
- Vneimpp represent the anticipated non-taxable incomes as regards the profit tax
- Vimpp represent the anticipated taxable incomes as regards the profit tax
- CD represent the deductible expenditures that are anticipated to be effected
- IM is the tax on the small enterprises’ income
- quota IM is the taxation quota for the small enterprises’ income
- VimpIM represent the taxable income as regards the tax on the small enterprises’ income.
 
 
Indifference situation is reached when the two taxes are equal. Thus, quota IP x (VimpIP – CD) = quota IM x VimpIM, resulting:
 
VimpIP – CD = (quotaIM / quotaIP) x VimpIM
 
The previous relation is equivalent to the following: CD = VimpIP - (quotaIM / quotaIP) x VimpIM
 
In this case, if, following the estimation, the deductible expenditures are higher than VimpIP - (quotaIM / quotaIP) x VimpIM, the profit tax will be chosen and if they are lower, the small enterprises’ income tax will be chosen.
 
If we consider VimpIP = VimpIM andtaking into account the profit taxation quota of 16% and the small enterprises’ income taxation quota of 2% as well as the fact that CD = VimpIP x a, we reach to the following conclusions:
 
- if CD > 87.5% x VimpIP, the option of profit tax is recommended;
- if CD = 87.5% x VimpIP, we will be owing the same tax, irrespectively of the option chosen – profit tax or small enterprises’ income tax;
- if CD < 87.5% x VimpIP, the option of small enterprises’ income tax is recommended.
 
5. Conclusions
 
The new regulations on the small enterprises’ income tax influence the prospective on the activities that will take place through the agency of the small enterprises, following the fact that the condition on the income structures was inserted. At the same time, in case of the small enterprises that exceed within the year 100,000 Euro through the incomes achieved, the advantage given by the reduced taxation quota will disappear, due to the fact that they will change over to the profit tax for the entire activity performed within that year. In this case, an advantage would be that, until changing over to the profit tax, where the income tax is lower that the profit tax that would have been owed, they would benefit from a delay in the payment of a part of the tax.
 
1 Law no 343/2006 amending and completing Law no 571/2003 on the profit tax (Official Gazette no 662/1 August 2006) and subsequently Rectification in the Official Gazette no 765/7 September 2006.
2 See the previous examples
3 We assume that a profit is made in the year before the anticipation year
 
Dipl. ir. Freddy M.E. Jacobs, president
Camera Imobiliar Belgia România
cibr@telenet.be
+32478/331.799
+40766/622873
 
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