SOFTWARE DEVELOPERS: LIMITATION OF THE EXEMPTION FROM INCOME TAX

The tax incentive introduced at the beginning of this year for software developers, enabling them to benefit from an exemption from income tax (16%), whatever the turnover per employee registered by the employer, was abolished as from 1 July 2017 by Order no. 409/4020/737/703 of 2017.

The new legal provision, published in Official Journal no. 468/22.06.2017, again limits the number of employers and software developers eligible for this tax exemption. From now on, only those who work for companies with a turnover obtained from software creation of at least 10,000 Euros per employee.

We hereby remind you that the condition of the minimum turnover per employee was already in the previous legislation, but it had been eliminated at the beginning of 2017, in the context of the great fiscal loosening announced by the Government.

However, this reversal will increase the tax burden for some employees in this sector, which is considered strategic in Romania, if one also takes into consideration the elimination of the threshold of 5 times the gross average wage gain applicable to the basis of calculation of social security contributions (CAS) and social health insurance contributions (CASS) due for wage and salary income - a measure that penalizes employees with a gross income above 5 times the ceiling, or more than 13,000 Lei per month.

CONDITIONS FOR RECEIVING THE EXEMPTION FROM INCOME TAX

The new Order no. 409/4020/737/703 of 2017 regarding the exemption from income tax for software developers hired through an individual employment contract introduces several changes. Such changes refer in particular to the definition of the software creation activity and the reintroduction of the minimum turnover condition for the employer.

Thus, software creation is defined as the actual provision of one of the software creation activities corresponding to the specific jobs mentioned in the appendix to the Order, namely a broader definition than the one provided by the previous legislation (Order no. 872/2016).

Furthermore, in order for employees to be eligible for this exemption, all of the following conditions must be met cumulatively:

The object of activity of the employer company must include software creation activities, provided one of the following codes provided in the Classification of Activities in the National Economy (“CAEN”): 5821, 5829, 6201, 6202, 6209;

The positions on which the persons concerned are hired must correspond to a list attached to the Order, namely: Database administrator; Analyst; Computer systems engineer; Software systems engineer; IT Project Manager; Software developer; Computer systems designer; Computer systems developer. Moreover, it is stipulated that the position must be part of a department specialized in computing, listed in the organization chart of the employer.

Employees must hold a diploma awarded after completion of a long-term higher education form or a diploma awarded after the completion of the first cycle of university studies, by an accredited higher education institution and they must in fact carry out one of the activities provided in the Annex;

The company must have carried out, during the previous fiscal year, and recorded separately in its analytical balance sheets a turnover obtained from software creation activities.

It should be noted that this condition does not apply to companies created during the year in question for the year of their creation and for the following year and to companies which were subject to a reorganization procedure during the previous year.

The employer must have earned, in the previous year, 10,000 Euros/each employee who benefits from the tax exemption. The turnover is calculated at the monthly average exchange rate communicated by the National Bank of Romania

Please also note that the Order expressly provides that citizens of the EU, EEC and the Swiss Confederation also benefit from the tax exemption, provided that their diplomas are validated by the Ministry of Education as equivalent to the diploma awarded after the completion of a long-term higher education form or to the diploma awarded after the completion of the first cycle of university studies.

Attention! If the event that the employee is a university graduate in fields other than IT (with fields of specialization not related to the position held by the employee - for example, the Faculty of foreign languages - there is a risk that the tax authorities may dispute the employer's option of hiring the employee in the software creation activity and therefore the tax exemption, arguing that the employee could not have held that position and deployed the software development activity since he did not have the necessary skills to carry out the activities described in the Annex.

It should also be pointed out that, as a general rule, hiring an employee on a particular position means that the employee has the necessary skills, which also result from higher education. Thus, if the tax authorities challenge the position on which the employee was hired, it will be necessary for the employer to prove that the employee has the necessary skills/qualifications hold the position (for example, through diplomas/certificates attesting that the employee has completed vocational training courses in the field, letters of recommendation from his/her previous employers, certifying that the employee has worked in the field for a significant period, that he/she has the necessary skills etc.).

As regards the documents to be kept in the file that the employer has to keep and to provide the tax authority with, if needed, the legalized copies of the individual employment contract and of the diplomas and the transcript of grades/diploma supplement are no longer necessary, simple copies are enough.