Have you ever thought about setting up a business in Romania? Or even about moving there?
One of the keys to freeing yourself from the weight of the State is choosing the right place to live and the right place to set up your company. It´s interesting to see how the conditions for setting up a business and taxes in general change so rapidly in the States.
As certain organizations and countries push for increased control, regulations and taxes are increased and the different countries compete among themselves for our taxes and continue inventing new ways to attract certain people to the country, such as entrepreneurs, investors, retirees and, in general, people with money.
This is something that happens quite often in the European Union. On the one hand we have global projects that help close the certain channels that companies use when they want to optimize their taxes, such as BEPS (which tries to prevent companies from transferring their profits to countries with little or no taxation), however, countries can create appealing programmes to attract people or lower their taxes directly.
As you may have already guessed from the title of today’s article, Romania is another country that has decided to create an attractive programme for both residents and entrepreneurs.
However, certain changes in Romanian tax regulation introduced at the beginning of 2017 has put the country in the spotlight for us.
Living in Romania
Before we dive into the options you have as an entrepreneur in Romania, let’s talk very briefly about how to become a resident there and the advantages that this has.
If you are a citizen of a country in the European Union, you won´t have any problems obtaining residence in Romania. You just have to find a flat and rent it and then, along with the rental contract, register yourself in order to obtain your visa or residence permit.
You will also have to prove that you have the necessary funds to live in Romania (about 50 euros a month is more than enough, as living costs are quite cheap there). If you have a job or you are a business owner in Romania you probably wont need any other documents, however in some cases they may ask you to prove you have health insurance.
Depending on where you come from, if you register at the consulate they might be able to process your deregistration as a tax resident in your country, or at least certify that you live there in some way (if you have any doubts, read our article on the steps to deregister in your country).
Living in Romania has several advantages, one of which is that it doesn´t have CFC rules which means you can manage your companies abroad without any problem.
Another is that it has a flat tax rate of only 16%, higher than Bulgarias 10% but less than the one in many other countries.
However, other than taxes there are also many other reasons to live in Romania:
- Living in Romania will only cost you a fraction of what it does in other European countries like Ireland, France or the UK.
- If you want to subcontract or employ workers, you can do so at a very good price.
- The food is delicious.
- Internet is very cheap at around €10 euro a month with 1Gbit speed and €12 for 15Gb of mobile data.
- Rent is very cheap, you can find relatively large flats in the center of Bucarest for only 400 or 500 euros.
- Flights to Bucarest are extremely cheap.
- There are a lot of digital nomads and online entrepreneurs in Bucarest. If you are just starting out, its the perfect place to start setting up a network of contacts.
- Opening a bank account there is very easy, Romanian banks are very fast and modern.
- The majority of Romanians also speak English.
But of course, not everything is so lovely in Romania:
- Corruption is very common there.
- The infrastructures are generally quite bad, so its preferable to avoid the roads and take a plane. If you live in a city like Bucharest you will encounter 2 hours of traffic jams for a journey that would usually take you 15 minutes.
Setting up a company in Romania – the most generous regulation in Europe for small entrepreneurs
Seemingly, setting up a Romanian company doesn´t seem like a very good idea with its 16% corporation tax rate. Although this rate is lower than that of Western European countries, it is somewhat higher than that of other countries in Eastern Europe.
However, we must look deeper into to the specific details of coperation tax legistlation in each country.
In Romania, there was a special exception for small entrepreneurs a few years ago. According to this, you only had to pay 3% of taxes on a turnover of up to €100,000 (but this was with regards to the total volume of sales made and not profits).
In 2018 the amount was extended considerably making the programme even more attractive. The turnover limit to qualify for this programme is now €1,000,000 and makes Romania an attractive option, even for online entrepreneurs with a higher income.
Moreover, those that decide to hire a local Romanian worker can enjoy a 1 to 3% reduction.
Taking into account the low salary costs and the fact that many Romanians have a good knowledge of English, hiring some type of assistant (virtual or not) in Romania could be a good option, including for digital nomads or micro-entrepreneurs.
The fact that taxation depends on sales instead of being on the basis of profits (as is usually the case), also has its advantages, for example for the bookeeping of those who opt for a Romanian micro-company.
You will only have to submit four statements a year reporting the amount of sales you have made. Since there is no possibility of deducting expenses the accounting is extremely simple and can be (and should be) outsourced at a very cheap cost anyway.
Coperate tax and VAT regulations in Romania for small entrepreneurs
It´s important to bear in mind that the micro-entreprise programme only affects coperation taxes, and it doesn´t have any affect on the VAT that the business charges its customers.
In other countries like Ireland or Germany, there are regulations for small entrepreneurs that exempt them from charging VAT provided they do not exceed a certain volume of sales. In the case of Germany for example, the maximum invoice requiered in order to benefit from this programme is 17,500 euros and in Ireland its 37,5000 euros (if you offer services).
Romania also has a regulation that exempts small business owners from charging VAT on their invoices. While it´s true that the billing threshold doesn´t reach 85,000 pounds like in the United Kingdom, the countries almost €49,000 threshold is a much larger figure than what is offered in some other EU countries.
In accordance with the regulation for small entrepreneurs in Romania, up until said 49,000 euros you wont have to charge your customers VAT.
Of course, these regulations that exempt you from charging VAT also have disadvantages. If you adhere to these regulations for example, you will no longer be able to deduct VAT from your company’s purchases.
In any case, if you focus on offering your own services or digital products and you don´t need to make purchases (which is what happens when you sell products or subcontract services), this regulation will allow you to sell your products or services 19% cheaper than your competition in Romania.
If you have to make a lot of purchases and you would like to recover VAT, you can always set up a company in another country. For example, you could set up your company in the UK if you want simple administration processes, or in Bulgaria if you want to take advantage of the VAT MOOS and have a European tax identification number (in the long run, due to Brexit, surely English companies can no longer use the European tax identification number, although this remains to be seen).
Since Romania doesn´t have CFC rules, as we mentioned previously, you wont have any problems with the management of your foreign companies.
If you wish, it is also possible to obtain a community tax identification number without reaching the billing threshold but, in general, you would need to go in person and inquiere about it in advance with the relevant tax authorities. This is something that small business owners should keep in mind if they don´t want to travel to Romania.
The options of a micro-business in Romania
Small businesses can invoice without charging VAT as long as their monthly sales volume does not exceed €4,000 per month.
Only 3% of their sales volume every three months goes to corporate tax or only 1% if they hire a Romanian worker.
You can make use of this programme (i.e. pay 3 to 1% of taxes) if you have an annual billing volume of less then €1,000,000 (that is, €42,000 per month). Starting from half a million euros ordinary taxation of 16% on profits is applied.
Of course you have to take some details into account; for example the share capital must amount to at least 45,000 RON (about €10,000) for the company to have to pay 16% on profits. However, whenever the turnover falls below the threshold of €1,000,000, the micro-enterprise programme is automatically applied.
In the case of large companies there are many reasons to prefer being taxed according to profits, since there are then multiple possibilities to reduce them. Taxation on sales volume can be a big problem in larger companies (which usually have a lot more expenses).
Micro-companies in Romania, as we said, are a very good option for all online entrepreneurs, business or digital nomads whose activity does not allow the deduction of many expenses. In these cases, the difference between taxing the profit or the volume of sales is minimal.
Limitations of the micro-entreprise programme in Romania
Of course, if you are a consultant or business consultant, Romania may not be a very good option for you. In these cases Romania sets certain limits, since you only qualify for the status of a small entrepreneur if your income does not accrue to more than 20% of advice and business management. [since 2018 this limitation no longer applies]
Furthermore, micro-entreprises cannot develop their activity in the areas of banking, insurance, stock exchange, gambling, oil or gas. Therefore, this programme is not good for a trader, but it is good for a wide range of online businesses.
So, the smaller the margin between sales volume and profits, the more sense it will make to establish a Romanian micro-company.
How much does it cost to establish a Romanian company?
If you need to create a business substrate (i.e. an office and managers salary) to avoid possible CFC rules in your country, it probably wont cost you more than €800 a month in Romania.
Of course, if you are living in the right country this is something that you don´t have to worry you. You will simply have to set up your Romanian company, manage it and outsource the accouting work.
In order to establish a Romanian company you will have to pay around €700 and issue a share capital of €50. This way you will be able to set up your company from your country without having to go there.
If you decide to travel to Romania, you will probably discover ways of reducing the costs of incoperation. In any case, if you you wish to have a business account with a Romanian bank you must go in person. The deposit of the share capital in an account opened at the time of incorporation can also be done fiduciary.
Once your company has been set up and the initial procedures have been carried out, administration expenses for your head offices address and government fees amount to €350 per year.
The accounting of a micro-company is really simple as it can be outsourced for around 50 euros per month.
All in all, you have a company that you can manage with relatively little bureaucratic effort (you only have to issue and post your invoices) as well as also being ablt to pay a minimum amount of taxes. The maximum that you can pay in taxes while not surpassing the half million turnover is €15,000 (taxed at 3%, that is, without the reduction for employing Romanian workers).
For those who organise themselves more or less intelligently will probably never pay more than €5,000 in taxes in Romania. For small businesses with four-figure sales volumes for example, taxes will only amount to a few euros a month.
And they are also exempt from the tax imposed on sales volume.
As always, all that glitters is not gold. Romanian administration happens to be both slow and bureaucratic, and the country has a mafiosi reputation in some aspects. But unless you do business directly in Romania, this won´t affect you.
Both accounting and tax advice can be outsourced very inexpensively, allowing you to focus on the business side of things (rather than dealing with Public Administration).
The establishment of your business can be carried out completely remotely, provided that a Romanian bank account or a European tax identification number is not required.
Since you wont have any problems opening a business bank account for your Romanian Company in other European countries, the bank account should not be a problem.
Undoubtedly, the reasonable price of this option in Romania makes it a good alternative for many small entrepreneurs who may want to get rid of their LLC or who need a company with a good reputation for their business in the EU.
Of course, don´t forget that Romanian law doesn´t allow traders or business consultants to take part in this micro-entreprise programme.
In Tax Free Today we will be happy to help you set up a company in this country through our partner office in Romania (get in touch with us) or help advise you on your best option through our consultation service.