Dateline: Bucharest, Romania
I can still remember the “a ha moment” that I had on my first visit to Bucharest years ago.
I was sitting with a young woman at a cafe discussing her role in managing a digital marketing agency. She was confident, well-spoken, and – as I recall – a bit intense. Her English was not only flawless, but she had quite the American accent.
As she went to extinguish her cigarette, my companion bragged about her salary: $1,000 per month.
Even considering that salaries in Romania – and many other European countries – are quoted net, not gross, the US company this girl worked for was getting a go-getter for quite a deal.
And considering that every other well-spoken person I met then found the idea of $1,000 a month to be an too-good-to-be-true old wives’ tale, I realized Romania had something to offer.
Today, Romania is a bit more expensive, but still a bargain.
And for certain businesses, tax rates in Romania can be reduced to as little as 1%. That’s just about as good as paying zero tax, all onshore and within the European Union.
Why I Like Doing Business in Romania
Let’s not be under any illusions: Romania is far from a perfect example of transparency. Corruption here remains an issue and development remains low.
Add to that the fact that Bucharest lacks the beauty of nearby eastern European capitals like Budapest, and the fun charm of others like my beloved Belgrade.
However, Romania has several things going for it.
There’s a Sense of Freedom
For one, the fact that my companion for drinks smoked like a chimney may be frustrating for those of us who don’t smoke, but the indifference to something so politically incorrect endears me to Romania. Even Georgia, where cigarettes are practically free, has strictly banned smoking much to my dismay.
On top of that, the internet is lightning fast – perhaps the fastest in Europe – and access to the outside world is open.
Affordable, High-Quality Workforce
For doing business, Romania is home to one of the world’s best workforces for everything from virtual assistants to editors to web developers. People here are smart, but the level of English spoken is excellent.
The only way your customers would tell that their customer service email was handled by a non-American is the classic eastern European curtness practiced here.
I believe in putting my money where my mouth is, and I can tell you that when Nomad Capitalist recently needed help with some web design issues, we ended up hiring a Romanian guy. The attitude coupled with real language skills – not Filipino or Indian English, but westernized English – made it a no-brainer.
Membership in the European Union
Having a company in the EU may or may not be a benefit. For my particular situation, having an EU company would only mean more paperwork, more bureaucracy, and higher tax – even given Romania’s relatively moderate taxation.
However, there are plenty of situations where having an EU company would make things easier.
For example, those taking advantage of Portugal’s tax exemption program are forbidden to receive income from blacklisted companies… and what better company structure to use than one within the same European Union?
Being able to demonstrate that you’re actually paying tax is a great way to avoid… being accused of not paying tax. Countries like Romania use legal loopholes to charge ultra-low tax rates while taking advantage of the system in a way true offshore companies like Seychelles or Belize can’t.
Starting a Business in Romania
Most Romanian corporations pay tax on the basis of corporate profits, just like most onshore corporations anywhere else in the world. Run income from anywhere in the world through a Romanian company and pay a flat tax rate of 16% on the net profits.
While 16% certainly lower than the EU and OECD averages, it’s what I would call “moderate”; not zero, and not low.
The key to tax reduction with a Romanian company is using a “micro company”. This can be done with the Trade Registry in Bucharest; the process isn’t that straightforward for non-residents, as one of the steps is indicating you’re not in “fiscal debt” in Romania.
Basically, you are forming a Romanian SRL and opting for a special tax regime based on being a small business. Minimum capital is about 50 euros, but you may have more flexibility with greater paid-up capital.
Romania’s Low Corporate Tax Rate
Once you have your new Romanian company, you will be eligible to take advantage of near-zero corporate tax rates.
So what qualifies as a “micro business?” The criteria is rather simple: turnover of 1,000,000 euros or less in the preceding tax year.
Up until recently, this was capped at a far lower 100,000 euros, basically reserving the low-tax, micro business regime for truly small businesses and not location independent entrepreneurs running serious international businesses.
However, that has changed as Romania seeks to attract business and spur job growth.
The end result for you is that if your gross sales – not profits – are below 1,000,000 euros, you can enjoy greatly reduced taxation as a micro-enterprise, with tax rates ranging from 1% to 3%:
- 1% if you formally employ at least one Romanian employee, including proper payment of social taxes
- 3% if you don’t employ anyone (this requirement used to be stricter, but was eased; some blogs and forums haven’t updated this)
You’ll also pay a small dividend tax of 5%.
In some ways, Romania’s low-tax company regime resembles that of Labuan in Malaysia, where businesses have access to dual tax treaties, and can choose to be audited and pay a low profits tax or pay a rather low flat tax and be left alone.
That makes Romania far more attractive in my mind than the much-ballyhooed Estonia, where businesses pay zero tax only until they distribute the money, and then pay 14% to 20%.
While the two systems don’t come out entirely the same, I’d still rather pay 1-3% now than 20% later, all things considered, and seeing that both Estonia and Romania have EU-style paperwork, even more so.
Because Romania’s micro-business tax scheme is based on turnover, you’ll need to file one tax return each quarter declaring your revenues, but that’s about it. You can base things on turnover, or involve tax deductions.
The laws have continually been evolving, largely in the favor of the business owner, so do consult with us before putting this structure into place.
Limitations on Your Tax Exemption
There are two big exceptions that limit the use of Romanian companies with low tax rates:
- No more than 20% of the annual turnover can come from management or consulting income. This means you can’t do a bunch of service work for another company.
- You can’t be involved in the banking, reassurance, capital markets, gambling, or oil and gas businesses. I doubt many of our readers are reinsurers, but I figured it’s worth a mention.
In my mind, the best type of business to use this structure is a products business with healthy margins and a desire to hire someone in Romania.
The Missing Piece: VAT
The one frustrating part of doing business in Europe – including Romania – is VAT. If you’re not European, you are likely confounded at how value added tax works.
Sadly, the European Union has worked hard to ensure that businesses selling online, particularly those selling digital products, are collecting and remitting VAT.
Romania’s VAT threshold – the level at which you must collect VAT – is 49,000 euros; not remarkably low, and in line with countries like Georgia.
Since VAT is another subject entirely, we won’t discuss it in great detail here, but do be aware that proper VAT planning is needed with a structure like this.
Second Residency and Living in Romania
You may be wondering: can you get second residency, or even a second passport, by forming a business in Romania?
Many European countries will gladly offer you residence for incorporating there and hiring their people, and Romania is no exception.
If you’re an EU citizen, this is easy. If you’re from the US, Canada, or another western country, it will take more work, but it is rather straightforward. In fact, I strongly considered getting Romanian residency myself in 2015.
You’ll need to invest 150,000 euros into the company, and have some employees before applying. Neighboring Bulgaria offers residence with a lower capital requirement but does require ten employees, so you’ll have to decide which is more important to you.
Romanian citizenship is possible with actual time on the ground. It’s important to understand that Romania isn’t part of the Schengen Area yet, so being a Romanian resident won’t give you full-time, visa-free access to Europe if you don’t have it, nor can you pretend to be living there while really being in France.
If you decide to make Romania your home, you’ll need to consider the ramifications of being tax resident. Personal income tax rates were recently lowered to 10%, making the country very tax-friendly to individuals as well as businesses seeking an offshore company alternative.
However, living in Romania will subject your worldwide income to Romanian tax, subject to their network of tax treaties.
However, if you’re a tax resident (in addition to simply being a resident), Romania will tax you on any foreign companies you own under what are called CFC rules. Don’t believe bloggers who claim that Romania is somehow a personal tax haven for your offshore companies.
Should Your Business Incorporate in Romania?
Like any offshore business solution, it’s important to consider your needs.
I’ve been a big advocate of countries like Romania (and Bulgaria, Serbia, and Armenia) for hiring for years, and I strongly advise you to consider outsourcing there.
I’ve also said before that “onshore is the new offshore”, and setting up your company in the European Union with its perceived high taxes and transparency is a great step toward keeping the tax monkey off your back.
However, I see a few challenges with Romania’s tax benefits:
- You can’t grow your company beyond 1 million euros without dealing with 16% profits tax, which is a substantial tax difference. If you have large revenues, you may want to look elsewhere.
- There is paperwork associated with it; I’m not against paperwork and generally avoid the zero-reporting jurisdictions like Seychelles, but be prepared for some monthly and quarterly accounting.
- You should, in my opinion, want to hire a Romanian employee, particularly if you want residency.
Your mileage may vary. If you can handle hiring someone and don’t mind the paperwork burden, Romania is worth considering.
That said, my approach to going offshore involves a thorough diagnostic process where we analyze all of your needs. I’ve heard from too many people who said “I set up in _______ because of you, Andrew”, when in reality all I did was suggest that you have someone consider all of the options for you before you get started.