The income obtained from the distribution of dividends has been subjected to many changes over time, which were brought by different Romanian governments to the Romanian Tax Code. The most important of these was the decrease of the tax rate from 16% to 5%. Find out all the necessary information about Romanian taxes on dividends due in 2019, the obligations you have regarding tax reporting of dividend income, both as a company and as individual shareholder, all of them in the article below.
In short, explaining what dividends are
According to Romanian companies law (Law no. 31/1990), any individual or legal person may benefit from the payment of dividends when he/she owns shares in a company, whether it is a limited liability company, or a joint stock company.
Specifically, dividends constitute part of the profit that a company makes during a financial period (e.g., during a year) and which can be distributed to each shareholder or associate in that company, in proportion to the number of shares which the shareholder owns in that company.
Therefore, according to the same law, companies that can pay dividends are only those that registered a profit at the end of the financial year, and which generally have a long-term development strategy and have a stable evolution in time. On the other hand, even if they make a profit, not all companies pay dividends. Among those who do not rush to pay dividends are small companies, which are at the beginning of the business development, and those that reinvest the profit in their business, in order to develop at a more rapid pace.
Basic rules for Romanian taxes on dividends in 2019
- According to the Romanian tax legislation in force, dividends received by individuals (natural persons) represent taxable income, so for any payment of dividend there is an obligation to declare them for tax purposes. In the case of dividends paid by Romanian companies, however, the obligation to declare and pay the income tax rests with the company that pays the dividend, and not with the income beneficiary. Thus, the income tax of 5% due on the gross dividend must be withheld and paid to the state budget by the paying company of that dividend.
- The deadline, both for the declaration and the payment of the income tax due (5%), is the 25th of the month following the one in which the dividends were paid to the individual shareholder.
- In addition to the income tax, following the legislative changes that took place as of January 1, 2018, any Romanian tax resident individual who earns dividend income is required to pay also the health insurance contribution (CASS) for this type of income, which must be calculated at a rate of 10%.
- The good part is that this health insurance contribution is due only if the total income obtained from sources other than the salary, altogether (i.e., dividends, income from the transfer of shares, income from rents, etc.) reaches the ceiling of 12 gross minimum wages established at the level of the economy during a tax year. For example, for 2019 this ceiling is set at the level of 24,960 LEI (i.e., 12 x 2,080 LEI, the amount of 2,080 LEI being the minimum monthly wage established by the government at national level for year 2019).
- If the total income obtained from sources of income other than the salary does not reach this ceiling during a tax year (which in Romania is the calendar year), the health insurance contribution is not due.
- And more importantly, when the contribution is due, it is calculated on the taxable base capped at 12 minimum wages, and not on the actual income derived. More exactly, even if during a tax year someone derives income that far exceeds the ceiling of 12 gross minimum wages, that person will pay the health insurance contribution (CASS) on the basis of 12 minimum wages and not on the income realized. So for year 2019 the contribution will be capped at the amount of 2,496 LEI.
- The tax reporting for the purpose of the CASS payment must be done by the individual beneficiary of the income through the annual tax return; also, through the same annual tax return must be declared the estimated income to be realized during the current year (the year in which the declaration is filed), if the beneficiary estimates that he/she will be deriving income subject to taxation during that year.
Changes in dividend taxation and expectations for the future
As mentioned above, during the past years the changes in Romanian tax legislation have also affected the dividend income. Romanian taxes on dividends have changed substantially since 2018, the most important change being the fact that individuals have also an obligation to pay the health insurance contribution on dividend income. As explained above, this contribution must be reported with the Romanian tax authorities through the annual tax return, to be submitted by the income beneficiary, after the end of the fiscal year in which the dividends were derived. The current deadline for submitting the annual tax return is 15 March of the following calendar year.
Unlike the period before January 1, 2018, the health insurance contribution (CASS) is due by the beneficiary even if he/she also has the employee status on which he already pays this contribution.
Although there have been discussions during the past few years over eliminating the low income tax rate of 5% for dividend income, through 2019 the tax rate still remained at the level of 5%. This level of taxation is a very competitive one among the countries in the region, and represents an attraction for investors.
Romanian taxes on dividends paid from abroad
An important aspect in the case of dividends paid from abroad is the correct application of the conventions for avoidance of double taxation that Romania has signed with other states. Generally, in all situations where, according to the applicable convention, the dividend income is taxed in the source state, Romania, as the state of residence of the beneficiary individual, has the obligation to recognize the tax already withheld by the other state and to deduct it from the amount of tax due in Romania.
Dividends paid from abroad are subject to the same tax treatment (5% income tax, plus CASS 10% due on the annual capped basis), the difference being the application of the convention for avoiding double taxation, where the case, and also the method of declaring the income. More specifically, in the case of dividends paid from abroad, given that the company who distributes the dividends is not resident in Romania, the obligation to withhold, declare and pay at source the income tax does not apply. As a consequence, the obligation to declare and pay the income tax rests entirely with the beneficiary of income. Therefore, the individuals deriving such income have the obligation to declare and pay both the income tax (5%), as well as the health insurance contribution (CASS). The declaration and payment of taxes for the dividends received from abroad must be done also through the annual tax return.
Until the time of the introduction of the new annual tax return (i.e., “the single tax declaration”), this was accomplished by filing the form 201; at present it is made through “the single tax declaration”, which the taxpayer must submit by March 15 of each year.
Other important aspects
As a basic rule, according to the Companies Law currently in force (Law no. 31/1990 republished and updated) the dividends are distributed only to the individuals or legal entities who have the status of associate or shareholder within a company, and can be both under the form of cash, shares, or under the form of goods (although very rarely).
The distribution of dividends is not mandatory, and this represents the decision of the board of directors or the general meeting of the associates of the respective company, as the case may be.
It is also important to know that in the past companies were allowed to distribute dividends only at the end of the financial year. But starting with July 15, 2018, when the government amended the Companies Law, the dividend payment can also be done quarterly. Therefore, shareholders no longer have to wait until the end of the year to collect the share of the company’s profit, but they can do so after the end of each quarter.
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Other resources on tax guiding:
- How to obtain a Romanian tax identification number
- How to determine the obligation to file a tax return in Romania
- Annual tax return deadline in 2019
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