According to the Romanian Tax Code, companies in Romania may benefit from a corporate income tax exemption on reinvested profit, a tax incentive that applies to certain categories of assets, such as warehouses and industrial halls. We will look at the conditions under which a company can benefit from this tax exemption and the complete list of assets covered by the legislation.
What does the reinvested profit tax exemption mean?
The reinvested profit tax exemption is a tax incentive granted to companies that choose to reinvest the profit generated from their business activities rather than distribute it as dividends to shareholders or owners. The measure aims to stimulate investment and economic growth by encouraging companies to allocate financial resources to business development.
Thus, instead of paying corporate income tax on the amount reinvested, companies can benefit from a reduction or elimination of the corporate income tax applicable to that amount. This means that part or all of the reinvested profit will not be subject to taxation at the time of reinvestment.
Reinvested profit represents the balance of the profit and loss account, namely the gross accounting profit accumulated from the beginning of the year up to the quarter or year in which the assets are put into operation. The corporate income tax exemption applicable to investments made is granted within the limit of the corporate income tax due for the respective period.
Usually, the tax exemption for reinvested profit is subject to certain criteria. For example, investments must be made in certain types of assets, such as new tangible or intangible assets. It is important to comply with the conditions established by law in order to benefit from this incentive.
The measure is intended to encourage companies to invest in business expansion, equipment modernization, innovation and other initiatives that contribute to the country’s economic development. The incentive is regulated by Law no. 227/2015 on the Tax Code and Order no. 3691/2015 of the Ministry of Public Finance.
According to the Tax Code, profit invested in technological equipment, electronic computers and peripheral equipment, cash registers, control and invoicing equipment, software, as well as the right to use software, produced and/or acquired, including under financial leasing agreements, and put into operation and used for the purpose of carrying out economic activities, is exempt from corporate income tax.
Reinvested profit in industrial buildings is exempt from corporate income tax
Through Government Ordinance no. 16/2022 amending and supplementing Law no. 227/2015 on the Tax Code, repealing certain normative acts and introducing other fiscal and financial measures, the incentive regarding the exemption from corporate income tax on reinvested profit was extended to investments in assets used in production and processing activities and in assets representing technological upgrading, with the assets being established by order of the Minister of Finance.
The order provides that, starting from January 1, 2023, profit reinvested in industrial buildings and lightweight constructions with metal structures (production halls, assembly halls, etc.) will be exempt from corporate income tax.
Taxpayers benefiting from this incentive are required to keep the respective assets in their patrimony for at least a period equal to half of their economic useful life, established according to the applicable accounting regulations, but not more than 5 years. If this condition is not met, the corporate income tax is recalculated for the respective amounts and ancillary tax liabilities are imposed in accordance with the Tax Procedure Code, starting from the date on which the incentive was applied, according to the law. In this case, the taxpayer is required to submit an amended tax return.
The following assets are not subject to these provisions:
- assets transferred as part of reorganization operations carried out in accordance with the law;
- assets disposed of as part of liquidation/bankruptcy proceedings, in accordance with the law;
- assets that are destroyed, lost, stolen or defective and replaced, provided that these circumstances are duly demonstrated or confirmed by the taxpayer. In the case of stolen assets, the taxpayer must prove the theft based on supporting documents issued by the judicial authorities;
- assets removed from the company’s patrimony as a result of fulfilling obligations provided by law.
Other categories of assets eligible for the incentive
Profit invested in technological equipment, assets used in production and processing activities, assets representing technological upgrading, electronic computers and peripheral equipment, cash registers, control and invoicing equipment, software, as well as the right to use software, produced and/or acquired, including under financial leasing agreements, and put into operation and used for the purpose of carrying out economic activities, is exempt from corporate income tax.
The categories of assets that may benefit from this incentive include:
- Hydroelectric power plants, transformer stations and substations, connection stations;
- Thermal-electric and nuclear-electric power plants;
- Agricultural and livestock buildings;
- Light agricultural constructions (barracks, storage sheds, shelters, cabins);
- Mineral or natural fertilizer storage facilities (composting facilities);
- Feed silos;
- Grain storage and preservation silos;
- Buildings for raising animals and birds, livestock pens;
- Fish ponds, ponds and basins; locks and elevators; dams; channels, etc. for aquaculture;
- Terraces on arable land, orchards and vineyards;
- Greenhouses, polytunnels, seedbeds and mushroom farms;
- Animals and plantations.
