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How can we use the tax exemption for the reinvested profit?

In the Romanian Official Gazette No.761 of November 9, 2009 was published the Law nr.329 of 05.11.2009 amending the Tax Code with an new Article, namely Article 19.2 paragraph (1) which states a tax exemption on the reinvested profit.

Thus, by law, the profit invested in the production and/or acquisition of equipment (machinery, equipment and work facilities), as stated in subgroup 2.1 of the “Catalogue on classification and normal periods of operating fixed assets, used in order to obtain taxable income” is exempt from tax.

The exemption from tax applies only to assets considered new, by this understanding that they were not used before the publication of these provisions.

Profit invested under Law 329 of November 9, 2009, represents the balance of the profit and loss account, representing the cumulative accounting profit from the beginning of the year and is used within the year when the investment is made.

Tax exemption shall be granted within the limits of the income tax due for the period. In accordance with Law 329 of November 9, 2009, for the period October 1 to December 31, 2009, in order to implement this facility will be considered the accounting profit recorded since the date of October 1, 2009 and invested in mentioned assets, produced and/so acquired after this date.

The accounting profit for this period will be determined by subtracting from the accounting profit of the whole year the accounting profit recorded between January 1, 2009 to September 30, 2009. The tax value, respectively the entry value of the assets for which there was the benefit of exemption from tax, will be determined by subtracting from the value of production and/or acquisition the sum for which the facility was applied under this law.

If the accounting profit fully covers the purchasing value of the equipment for which the exemption from tax is applied, its tax value will be equal to "zero".

In this case the fixed asset depreciation expense will not be deductible for tax purposes at the calculation of the income tax (it will be taxed at a rate of 16%).

If the accounting profit does not cover the full amount of the equipment, the income tax exemption will apply only to part of the purchase price of the fixed asset that is covered by the accounting profit and in this case its tax value will be equal only to the part of the value of the fixed asset for which has been granted no tax exemption.

In this case the fixed asset depreciation expense will have a deductible part in terms of taxation, corresponding to the value of the fixed asset for which no income tax exemption was applied and a part not deductible for tax purposes (which is taxed on a rate of 16%), which corresponds to the part of the fixed asset value for which it was applied the exemption from income tax.

For taxpayers who are required to pay income tax quarterly, in the situation where investments are made in the previous quarters, from the cumulative accounting profit since the beginning of the year, it will be subtracted the amount of the profit invested previously for which it was applied the facility.

In the case of taxpayers who have been payers of income tax and who become payers of profit tax during the year, for the implementation of the facility it will be taken into consideration the accounting profit cumulated from the beginning of the year, invested in the above-mentioned assets produced and/or bought beginning with the quarter in which they have become profit taxpayers.

For these taxpayers as well, for the year 2009 the accounting profit to be considered for the application of the facility will be the one registered after the date of October 1, 2009.

Exemption from income tax will be calculated quarterly or annually, as applicable, and the amount of profit which benefited from tax relief will be allocated with priority for the establishment of reserves, up to the level of the accounting profit registered at the end of the financial year.

If a financial year ends in accounting loss, no adjustment will be made on the invested profit, the taxpayer not being obliged to distribute the amount of the invested profits for the establishment of reserves.

At the end of the financial year, the taxpayer will not be able to distribute as dividends the part from the profits made for which the exemption from profit tax was applied, being forced to set aside a reserve from fiscal facilities equal in value to the amount of the profit made for which the exemption from profit tax was applied.

For assets that are realized over several consecutive years, the facility is granted for work actually carried out, based on certain partial works situations, for the investments put to work partly in that year.

Taxpayers who benefit from these facilities have an obligation to retain in their patrimony the assets in question at least a period equal to half the duration of their normal functioning, established according to the Catalog on the classification and normal functioning times of fixed assets.

In case of breach of these conditions, for the respective amounts shall be recalculated the profit tax and shall be settled increases for the delay, from the date of application of the facility, according to the law.

Not covered by these provisions are the assets transferred in the course of reorganization operations, in the case where the recipient company takes over the reserve corresponding to the exempted profit, thereby assuming the rights and obligations of the transferring company, as well as the assets alienated in the process of liquidation / bankruptcy, according to the law.

If, as a consequence of applying such facility, income tax is below the minimum tax, taxpayers will be forced to pay the minimum tax in accordance with Art. 18 paragraph (2) of the Tax Code.

Also, taxpayers who apply the provisions of this Article shall not be eligible for reimbursement of profits reinvested stated by art. 261 of Law no. 346/2004 on stimulating the creation and development of small and medium enterprises, as amended and supplemented.

This taxation facility may be applied until December 31, 2010, inclusive.

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