As most companies are currently closing the financial year 2020, we present below the key aspects regarding the preparation of the annual financial statements, as well as the fiscal particularities regarding the finalization of the annual corporate tax.
The obligation to prepare annual financial statements
- Micro-entities (there is a different notion from the micro companies defined by the Fiscal Code):
- Total assets: below Lei 1.500.000;
- The turn over: below Lei 3.000.000;
- Average number of employees: below 10.
- Small companies:
- Total assets: between Lei 1.500.000 and Lei 17.500.000;
- The turnover: between Lei 3.000.000 and Lei 35.000.000;
- Average number of employees: between 10 and 50.
- Medium size companies, large companies and public companies:
- Total assets: over Lei 17.500.000;
- The turnover: over Lei 35.000.000;
- Average number of employees: over 50.
The terms for submitting the financial statements are the following:
- the companies and the branches of the non Romanian companies that had no activity since incorporation submitt a statement to this effect within 60 days after the end of the financial year (i.e. 01.03.2021);
- the commercial companies, the national companies, the state companies, the national institutes, the branches of the non-resident companies, except for the branches incorporated in Romania by companies from European Economic Area, which are required to submit accounting reportings within 150 days after the end of the financial year (i.e. 31.05.2021);
- companies in liquidation have the obligation to submit accounting reportings within 90 days from the end of the financial year (i.e. 30.04.2021);
- the rest of the companies have to submitt the financial statements in 120 days since the financial year is over (i.e. 31.03.2021);
- other companies, within 120 days after the end of the financial year (i.e. 30.04.2021).
The auditing of the financial statements
Based on the Accounting Law no. 82/1991, the following companies shall have their financial statements audited:
- public entities (as defined by art. 34 para. (2) from Law no. 82/1991);
- companies registered based on specific laws, if required by the applicable law;
- financial statements for mergers, spin-offs, liquidation, if the year end financial statements should had beed audited;
- large companies with turnover exceeding Lei 32.000.000, total assets exceeding Lei 16.000.000 and an average employees number over 50, if two of the three thresholds are exceeded in two consecutive years;
- interim financial statements prepared for the purpose of quarterly distribution of dividends.
The financial year different from the calendar year
Companies using a financial year different from the calendar one shall observe the same rules in preparing the financial statements as those ending the financial exercise as of 31.12.2020.
Moreover, the companies choosing a financial year different from the calendar one, shall prepare yearly accounting reportings as of 31.12.2020, in addition to the yearly financial statements prepared as of the chosen date.
The IFRS Reporting
The companies listed by art. 1 para. (2) of the Order no. 2844/2016 which aproved the accounting regulations compliant with the International Financial Reporting Standards shall prepare and submitt financial statements that include the specific elements established by International Financial Reporting Standards. The companies mentioned by art. 1 para. (2) of the Order no. 2844/2016 are the following:
- companies listed on a regulated financial market;
- companies provided by OMFP no. 666/2015 on the application of the accounting regulations compliant with the International Financial Reporting Standards by certain public owned companies;
- other companies required by law to apply the respective regulations;
- other entities mentioned in specific laws that have to report based on the IFRS standards
- other companies that have opted to apply the International Financial Reporting Standards, the conditions under which they may express such option being established by law.
An important aspect for the financial statements is represented by the finalization of the annual corporate tax. Although the deadline for submitting the annual tax returns is prior to the deadline for submitting the financial statements, following the financial closing, or following the audit adjustments often arise which may entail the need of rectifying tax returns to be submitted.
It is important to highlight that, during the last years, the tax authorities started making checks and requesting the taxpayers to provide information on potential inconsistencies between the numbers presented in the financial statements and those presented in the tax returns and, in some cases, such checks are followed by notices relating to the initiation of a tax audit.
We present below some of the most relevant aspects to be considered for the finalization of the annual corporate tax.
The interdependency between accounting and taxation
Given that the accounting is the main source of information for fiscal purposes, there is a close connection between the accounting and fiscal policies applied by a company. Starting with 2016, the Fiscal Code consolidates a stronger dependency on the accounting policies for determining the fiscal treatment applicable for certain operations, making direct reference in certain cases to amounts registered in accordance with the applicable accounting regulations. Few examples of accounting policies with significant impact on the fiscal treatment:
- Choosing the fixed assets depreciation methods;
- Registering, for the period in which tangible assets are being preserved, depreciation expenses;
- Choosing the method for evaluating the inventory.
Determination of the annual corporate income tax
Newly incorporated companies are required to pay microenterprises tax on revenues starting with the first fiscal year. They can opt for the payment of corporate income tax if they have a share capital of minimum Lei 45.000 and at least 2 employees. Otherwise, the transition to the fiscal regime of corporate income tax is made only after exceeding the threshold of Euro 1.000.000.
The tax rates on the revenues of microenterprises are 1% of turnover for microenterprises with one or more employees and 3% for those without employees.
Corporate income tax
The corporate income tax is determined by applying a 16% rate on the tax result, taking into consideration subsequently any potential fiscal credits in order to establish the final corporate income tax. The tax result is computed as the difference between income and expenses booked in accordance with the applicable accounting regulations, excepting non-taxable income and tax deductions and adding back non-deductible expenses.
Income tax specific to certain activities
The specific income tax is due by the companies that carry out activities related to the following NACE codes: 5510 – „Hotels and similar accommodation”, 5520 – „Holiday and other short-stay accommodation”, 5530 – „Camping grounds, recreational vehicle parks and trailer parks”, 5590 – „Other accommodation”, 5610 – „Restaurants and mobile food service activities”, 5621 – „Event catering activities”, 5629 – „Other food service activities”, 5630 – „Beverage serving activities”.
The amount due is determined in accordance with the provisions of Law no. 170/2016, based on a standard annual income tax and based on certain variables specific for the business sector. Note that during 2020, the taxpayers from the business sectors described above have been exempted from the payment of the specific income tax, given the activities’ restrictions in the context of Covid-19 pandemic.
Tax regulations on the correction of accounting errors
- Significant errors that are corrected according to the accounting regulation based on the retained earnings, are reflected, from a fiscal perspective, through the adjustment of the tax result for the year to which the errors are referring to, as well as through the submission of rectifying tax return for that year. It is important to highlight that the submission of a rectifying tax return triggers the reset of the statute of limitation, which will be recalculated starting with the date of the rectifying tax return;
- Insignificant errors that are corrected according to the accounting regulation based on the profit and loss accounts are taken into consideration for determining the tax result of the year for which the correction is made.
In terms of accounting regulations, an error is significant if it could influence the economic decisions of the users, which are taken based on the annual financial statements. The analysis to determine if an error is significant or not is performed in context, taking into consideration the nature or the individual or cumulative value of the elements.
Based on the accounting policies and the professional judgement, a threshold can be established which may represent a percentage of the turnover, of the profit or of the net or total assets.
- External fiscal credit – if a company which is a corporate income tax payer derives income from a foreign country through a permanent establishment or income subject to withholding tax and those amounts are taxable both in Romania and the other country, then the tax paid to the other country is deducted from the corporate tax income due in Romania. In the case of taxpayers subject to microenterprises tax, such income is non-taxable;
- Reinvested profit – the taxpayers subject to corporate income tax can benefit, in certain conditions, from tax exemptions related to the profit invested in technological equipment, computers and IT equipment, computer programs (including licenses), cash registers, control and billing equipment, as well as for the right to use computer programs. This tax facility is not applicable for taxpayers subject to microenterprises tax;
- Sponsorship and/or patronage expenses, as well as private scholarships – taxpayers can deduct from the corporate income tax due, the sponsorship and/or patronage expenses, as well as private scholarships within a limit of 0.75% of the turnover (maximum of 20% of the corporate income tax due). With respect to the sponsorship expenses, it is important to note that starting with 2019, the fiscal credit is applicable only if the beneficiaries are registered, at the date of the sponsorship agreement, within the Register of entities/cult units. For taxpayers subject to microenterprises tax, the limit is set to 20% of the tax due for the quarter in which the expenses incurred;
- Electronic cash registers – taxpayers (both corporate income tax payers and those subject to microenterprises tax) that acquire electronic cash registers can deduct the related costs from the corporate tax due. Note importantly that the deduction is applicable also for electronic cash registers acquired and installed during 2018, 2019 and those installed during 2020, before the publication of the Law no. 153/2020 which introduced this tax facility;
- Other exemptions and income tax reductions in accordance with the legal provisions.
Reporting of unused amounts
- Tax losses – taxpayers subject to corporate income tax may recover the tax losses from taxable profits obtained in the following 7 consecutive years;
- Sponsorship expenses – taxpayers subject to corporate income tax may carry forward all unused amounts for the following 7 consecutive years and the taxpayers subject to microenterprises tax may recover these amounts in 28 consecutive quarters;
- Interest expenses – amounts that cannot be deducted in the current fiscal period could be carried forward for an indefinite period of time. It is important to highlight that, if the taxpayer has changed the fiscal regime from corporate income tax to microenterprises tax, and returns later to corporate income tax regime, it can no longer use the interest expenses carried forward when the fiscal regime was changed;
- Costs with the acquisition of electronic cash registers – these are recovered from the taxable profits obtained in the following 7 consecutive years by taxpayers subject to corporate income tax and 28 consecutive quarters in case of taxpayers subject to microenterprises tax.