TAX CONSOLIDATION: THE IMPLEMENTATION PROCEDURE

The Covid-19 pandemic has prompted the authorities to roll out a whole series of support measures for businesses. Among the measures enacted in 2020, tax consolidation, brought by the Law no. 296/2020, was one of the most important, as it allows offsetting the taxable profits of companies in a group against the tax losses of other jointly owned firms of the same Group.

Order no. 1.191 of July 26, 2021, published in the Official Gazette no. 766 of August 6, 2021, provides for the procedure for the setting up and administration of the tax group for profit tax related purposes.

This legislative initiative completes the lframework on the regulation of certain aspects related to the functioning of holding companies and aims to incentivize the setting up and development of such structures and foreign investment in Romania.

Eligible companies - prerequisites

To be eligible for the tax consolidation regime, the tax group must be made up of at least two of the following entities and meet certain conditions, as follows:

• Romanian legal persons and / or persons registered in Romania, set up according to the European legislation and one or more Romanian companies / persons registered in Romania, set up according to the European legislation / in some cases, a Romanian permanent establishment of a non-resident company.
• the direct / indirect holding of at least 75% of the value / number of shares/ voting rights in these entities by one of the above-mentioned companies, by a Romanian natural person or by a legal / natural person domiciled in State with which Romania has concluded a double taxation avoidance treaty, for an uninterrupted period of one year, before the commencement of the fiscal consolidation period;
• the members of the group are not pending dissolution / liquidation
• the members of the group are not part of another tax group for profit tax related purposes.
• the subsidiaries and the joining company must open and close their financial years on the same date;

Note that microenterprises cannot be part of the group, nor companies carrying out activities such as bars / nightclubs, casinos nor those which are simultaneously subject to income tax and specific tax.

System application term

This system - which is optional – can be applied for 5 fiscal years, after which the option may be renewed. The application should be submitted by the responsible legal person at least 60 days before the beginning of the period for which the tax consolidation is requested.

Setting up the tax group

The system applies from the tax year following the submission of the application. The application  (the template is provided for in the Order no. 1.191/2021) is to be filled electronically, alongside a certificate issued by the Trade Register and other supporting documents.

After assessment and approval of the file, the tax body shall convey to the legal person responsible for the group the decision approving the implementation of the tax group for profit tax related purposes.

Payment of tax

One of the group members should be designated as the responsible legal entity which will calculate, declare and pay corporate income tax for the group. The annual profit tax return is filed with the competent tax body, together with the annual profit tax return of each member, within the deadlines provided by law.

The responsible legal person also has the obligation to file the information declaration concerning the beneficiaries of the sponsorship / patronage / private scholarships granted by the members of the group.

The amount of the tax is determined by adding the individual amounts calculated by each member (therefore offsetting tax profits with tax losses among the members of the group is possible). Each member of the tax group who opts for consolidation will determine tax individually, while the consolidated tax of the group will be calculated quarterly / annually, cumulatively since the beginning of the financial year.

Tax losses incurred by a member of the group before application of the system cannot be compensated at the group level.

Each member of the group has the obligation to prepare the transfer pricing file, which will include both transactions carried out with members of the group and those carried out with affiliated entities that are not part of the tax group.

Each member of the group must go through the competent tax audit and is held separately, and jointly, for the payment of the income tax due by the tax group for the period during which it belongs to the tax group concerned.

The tax is not recalculated in the following situations: sale / assignment of shares to one of the members of the group if the participation falls below 25%; the dissolution of a member; the exit from the group of a member following a reorganization operation (merger, demerger, contribution of assets, exchange of shares). In the event of dissolution of the group after five years, the losses incurred and not recovered during the consolidation will be recovered by the responsible entity / individual.

If all the members of the tax group voluntarily request the dissolution of the group during a financial year, before the expiry of the 5-year period, the tax group is dissolved as of the following financial year.

The entry of a new member into the group is possible starting with the following financial year by means of an application submitted to the competent tax body by the legal representative of the responsible legal person, at least 60 days before the beginning of the fiscal year for which the entry of the new member is requested.

The exit of a member of the group is possible the quarter following the one in which the conditions for participation in the group are no longer met. Prior notification will be communicated to the competent tax body by the legal representative of the legal person responsible for the group. The communication deadline is 15 days from the end of the quarter during which the event that led to the exit of the group of the member concerned occurred.