Through these amendments, the Romanian authorities aim to apply a more favorable tax regime, and at the same time to simplify the tax reporting and payment for individuals earning gains from the sale of securities through Romanian intermediaries.
However, all these changes will be applied starting with capital gain income that individuals will realize as of 1 January 2023 onward.
More specifically, the law that brings the aforementioned amendments is Law no. 142/2022 published in the Official Gazette no. 502 of 23 May 2022, and according to it the individual investors will owe a lower tax on capital gains derived through Romanian investment intermediaries (i.e., investment and brokerage companies residents of Romania), while the Romanian investment intermediaries will have to deal directly with the tax declaration and payment of the income tax due for all their individual investors.
Thus, the new law modifies the Romanian Tax Code, introducing some fundamental changes as of January 1st 2023, in terms of taxation of capital gains derived by individuals from the transfer of securities and operations with derivative financial instruments.
Impact of the taxation of capital gains changes
In short, these changes are as follows:
- reduction of the income tax rate on capital gains from the transfer of securities and operations with derivative financial instruments made through Romanian intermediary entities from 10% to 1% or 3%, depending on the period for which the securities or derivatives were held by the taxpayer;
- introduction of the obligation to calculate, withhold at source and pay income tax by the Romanian entities that intermediate these transfers/operations;
- waiving the possibility to carrying forward or offset losses from the transfer of securities and operations with derivatives made through intermediary entities, these representing definitive losses of the taxpayer.
We detail below the changes brought by this law:
- This law modifies the definition of income sourced in Romania from operations with derivatives as being income obtained through an intermediary defined according to the relevant legislation, which is either a Romanian tax resident or a non-resident who has a permanent establishment in Romania that has the capacity of intermediary, with which the taxpayer has opened the account;
- Certain paragraphs are cancelled and article 961 is introduced, to establish the intermediaries’ obligations, defined according to the relevant legislation. The intermediaries can be investment management companies, self-managed investment companies, alternative investment funds administrators, Romanian tax residents or non-residents, having a permanent establishment in Romania and the quality of an intermediary. These entities have the following obligations:
- calculation of the capital gain/loss for each transfer/operation performed for the taxpayer;
- calculation, withholding and payment of the income tax, in accordance with new paragraphs introduced under art. 97;
- communication to each taxpayer of the information regarding the total capital gains/losses and the income tax calculated and withheld, in written statements or by electronic means. The deadline to communicate such information is the end of February of the current year for the previous year;
- annual filing of the return provided by the art. 132, para. (2).
- A paragraph is also inserted to establish the obligations of entities through which transfers of investment gold are made.
The income tax rates for capital gains from transfer of securities and operations with derivative financial instruments determined in accordance with the art. 94 and 95, for transfers/operations performed through intermediaries defined in accordance with the art. 961 para. (1) are modified. Such income is taxed at source, as per the following:
For securities:
- 1% from each gain from transfer of securities which were acquired and sold in a period of more than 365 days, inclusive, from the acquisition date;
- 3% from each gain from transfer of securities which were acquired and sold in a period of less than 365 days, inclusive, from the acquisition date.
For derivative financial instruments:
- 1% from each gain from operations with derivative financial instruments which were held for a period of more than 365 days, inclusive, from the acquisition date;
- 3% from each gain from operations with derivative financial instruments which were held for a period less than 365 days, inclusive, from the acquisition date.
For the determination of the period in which the securities were held, same order for acquisition/selling is considered, respectively First In-First Out method (also known as FIFO), on each position.
For the calculation of the gain from transfer of securities/operations with derivative financial instruments, the fiscal value is determined by applying the weighted average price method, comprising also costs for the transfer/the operation, on each symbol, regardless of the period in which the securities/instruments were held.
The income tax calculated and withheld is declared and wired to the State Budget by the entities mentioned at the art. 961 para. (1) by 25th of the following month and is final.
The losses arising from transfers of securities and transactions with derivatives performed through the intermediary entities mentioned at the art. 961 para. (1), are not carried forward and are not compensated, representing final losses of the taxpayer.
The law introduces rules to determine the income tax due for transfer of securities/derivative financial instruments for the current tax year (2022):
- for the gains/losses related to the period, the tax obligations are those in force at the moment of realizing the gains/losses;
- the net loss obtained from transfer of securities/operations with derivative financial instruments, which are not obtained through entities mentioned at the art. 961 para. (1), related to the fiscal year of 2022, is carried forward and compensated according to the reporting rules.
Rules were also introduced for determining the income tax due in the case of transfer of securities and transactions with derivatives, carried out through the entities referred to in Article 961 para. (1), acquired before January 1, 2023, as well as in the case of losses obtained and not offset until January 1, 2023.
The entities referred to in Article 961 para. (1) through which non-resident individuals derive income from the transfer of securities issued by Romanian residents are also required to calculate, withhold at source, report and pay income tax, according to the new paragraphs introduced in art. 97, for the non-resident individual who does not prove his residence in a state with which Romania has concluded a convention for the avoidance of double taxation.
All the above changes enter into force as of January 1st, 2023.