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PART I. — GENERAL DESCRIPTION OF INCOME-TAX SYSTEM1

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The income-tax is made up of six schedular or “elementary” taxes, objective and proportional, to which must be added the “total” tax on the whole income, which is a personal and graduated tax (Law for Unification of Direct Contributions and Introduction of the Tax on Total Income, Official Monitor, No. 235, of February 23rd, 1923). The yield of these direct taxes represents a little more than one-quarter of budget revenue.2

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The schedular taxes are levied upon individuals and legal entities, irrespective of nationality or domicile.

Partnerships (sociétés en nom collectif and sociétés en commandite simple) are subject to each of the schedular taxes in the same way as individuals. But, for purposes of the tax on total income, the share of each partner (whether distributed or not) is taxed separately in the partner’s name.

Schedular taxes are objective in character but the law has provided for certain exceptions to this rule, either on the ground of domicile or of the personal circumstances of the taxpayer.

I. GRADUATED TAX ON TOTAL INCOME

The graduated tax on total income, which is levied upon individuals only, and not on companies and corporations, is payable by all persons habitually resident in Roumania, whatever their nationality. A foreigner is “habitually resident” in Roumania if he lives there for more than six months in all in a calendar year.

Roumanians domiciled abroad, however, have to pay the Roumanian tax on total income in respect of the whole of their income.

Foreigners not residing in Roumania are liable to the tax on total income on account of all the income, other than income from securities, they derive from the country. In that case the tax on total income consists in a surtax amounting to 50 per cent of the schedular taxes due on the taxable income. But the tax is not increased by additional centimes.

The tax is assessed upon a return which every taxpayer has to make during January of each year for each category of income he has enjoyed during the preceding year, except agricultural income, the return regarding which has to be made at the beginning of the general census period, and income from buildings, the return concerning which is made whenever there is a change in the income amounting to at least 25 per cent of the taxable income.

In addition, there exists a number of provisions, recently amended by the law published in the Official Monitor, No. 237 of October 10th, 1932, authorising the deduction from the amount, subject to the tax on total income, of certain expenses which are not allowed in connection with the elementary taxes, providing abatements on account of dependents and fixing the taxable minima. Further, the law provides for the determination of the taxable income by means of indices — i.e., the rental value of the house occupied by the taxpayer, the number of servants, the number of automobiles, and, also, for persons deriving an income exceeding 40,000 lei, the amount of their personal expenses.

II. TAX ON AGRICULTURAL INCOME

According to Articles 3 to 12 of the Law of February 23rd, 1923, income from agricultural landed property in Roumania or property assimilated thereto, such as arable land, pasturage, orchards, ponds, market and other gardens, is subject to the agricultural tax. The tax is paid annually by the owner,1 usufructuary or any other beneficiary of the income.

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When such property is worked by farmers, they are subject to the commercial and industrial tax, notwithstanding the fact that the owner remains subject to the agricultural tax.

Forests are subject to this tax only when income derived from them is other than income from felling. If they are felled either by the owner or some other person, they are liable to both agricultural tax and to commercial tax (Law of February 23rd, 1923, Articles 6 and 30).

Land leased for mining is only subject to this tax in respect of agricultural income derived from above ground, but taxation ceases directly when this income disappears by reason of the exploitation of the subsoil. The income of the conceding party is taxed as personal income, that of the concessionary as commercial income (Law of February 23rd, 1923, Article 7 and Article 23, paragraph 6).

The taxable income is the gross income as determined by census committees every five years.

The taxable income is ascertained by taking as a basis the average rental value in the commune according to the leases contracted during the four preceding years, the average production value per hectare for the same period or the average sale price of properties for the same four years. In this case, the income is estimated at 5 per cent of the average sale price. The owner is required to furnish the committee with a return and all necessary evidence.

Taxpayers whose total incomes are below the minimum exempted from the tax on total income and whose total agricultural income does not amount to 2,000 lei are granted a 25 per cent reduction. The tax may also be reduced by 10 to 20 per cent on account of dependents (Article 68 of the Law).

The tax is reduced by an amount corresponding to the tax levied on interest on any mortgage or preferred debts by which the property in question is encumbered. Deduction is also made in the event of a total loss of harvest, if not insured (Article 69).

Property recently planted with fruit-trees, as also property restored to cultivation after having been devastated during the war, is exempted during the five years following its replantation with fruit-trees (Article 8).

III. TAX ON INCOME FROM BUILDINGS

Under Articles 13 to 21 of the Law of February 23rd, 1923, income derived from houses and from properties assimilated thereto, such as waste land, yards, depots and other uncultivated land used commercially or industrially, playgrounds, ferries, bridges, canals, as well as railways and their appurtenances are subject to the tax on income from buildings. The owner, usufructuary or any other beneficiary of the income pays the tax each year direct to the Treasury.

Income derived from the hiring of furniture in furnished houses is separately taxed as income from non-commercial occupations, except when the owner makes a business of hiring of furniture or letting houses; in this case, the income from hiring furniture is taxed as commercial income.

Buildings belonging to persons domiciled abroad are taxed at a rate increased by 100 per cent. This applies also to buildings belonging to companies having their head office abroad, if they are used for any other purpose than that for which authorisation was granted them to do business in Roumania.

In every case the income is fixed by a census based upon the rental value as shown by the leases, if any; otherwise by a direct assessment — i.e., one based upon comparison with similar property in the same neighbourhood. As regards waste land, income may be determined on the basis of the average sale price, and in this case the rental value is considered to be 5 per cent.

To obtain the net taxable income, 20 per cent is deducted from the rental value, representing costs of administration, insurance, upkeep and depreciation (Article 16 of the Law).

As regards real estate assimilated to buildings, the rental value is the taxable net income (Article 16 of the Law).

The tax reductions are the same as for agricultural income, except that, instead of deducting the tax on interest on debts on the property, 20 per cent of the amount of this tax is first taken off, on account of the fact that the rental value has been reduced by 20 per cent before constituting a basis for taxation.

Exemption is granted in respect of public buildings or buildings allocated to some public service and producing no income, to peasants’ cottages with three or fewer habitable rooms and to buildings necessary for farm work (Article 17 of the Law). New buildings of any kind enjoy temporary exemption for ten years from the time when they are first ready for use, an exemption of 75 per cent for the next five years and of 50 per cent for the succeeding five years (Article 17, as amended by the Law of March 1933).

IV. TAX ON INCOME FROM PERSONAL PROPERTY

1. Taxpayers

The tax on income from personal property (Articles 22 to 29 of the Law) is levied upon all income of this class derived from Roumanian sources and on all income derived from foreign sources by persons resident in Roumania or by companies and partnerships having their head office in the country.

Sums accruing to the partners in a limited partnership from operations of the association are subject to this tax as against the individual partner and are also subject to the commercial tax as against the association.

For the purpose of assimilating them to Roumanian companies, foreign companies with branches in Roumania are liable to this tax in respect of that part of dividends paid abroad which represents profits earned in Roumania. No tax is due, however, if no dividend has been distributed (Article 23, ad paragraph 48, of Instructions by the Central Fiscal Committee published in Official Monitor, No. 79, of April 11th, 1929).

2. Taxable Income

Article 23 of the Law of 1923 on direct taxes gives a list, for purposes of illustration, but which does not profess to be exhaustive, of incomes subject to this tax. The list is necessary in order to explain the regime and the rate applicable to the different forms of income from personal property.

The tax is levied upon all income derived from Roumanian securities of any kind and on such income from abroad accruing to Roumanian inhabitants.

Income from the licensing of patents and from the cession of other intangible rights, as well as the royalties and interest accruing to the grantors of such rights, are subject to the tax on income from personal property, whether they are collected in kind or in cash.

Dividends, even in the form of issues of shares, and distributions of corporate reserves, are also taxable.

The interest on funds deposited in Roumanian banks by foreigners domiciled in another country are taxed at a reduced rate.

Income from invested capital (interest on bonds, mortgage, preferred, unsecured loans, etc.) accruing to banks, merchants and industrialists is not subject to the tax on income from personal property, being included among the profits of the enterprise and liable, along with other income, to the tax on commercial income.

Exemptions

The following classes of income are exempt:

3. Assessment of Tax

The rule is that the tax is directly applied to the gross income without any previous deduction. However, an exception is made to this rule in the case of income or royalties derived from the cession of patents, copyrights, trade marks and other incorporeal rights, as well as from mining and other concessions, when the owner of such rights has invested funds of his own in buildings or plant with a view to exploiting the ceded property and when such building and plant depreciate by use.

When these conditions coexist, it is permissible to deduct from the income an amount corresponding to the depreciation of the investments. The concessionary is also entitled to deduct annually from the profits derived by him from the exploitation of such property a certain sum for amortisation. In both cases, amortisation is reckoned by dividing the capital invested by the number of years the concession lasts.

The annual amount which may be allowed for the amortisation of capital invested by the grantor of the concession in plant which does not entirely cease to exist after expiry of the contract is determined by the Taxation Committee, but may not exceed 5 per cent of the said capital (Article 27 of the Law).

If, on the other hand, the concessionary is obliged under the contract to invest in personal or real property which, after the expiry of the concession, will remain the property of the conceding party, such investments will be assessed and added to the income from the concession and will thus be taxed.

4. Collection of Tax

In the case of Roumanian securities, the debtors are required to withhold the tax from the amount paid. If the income from foreign securities is collected through a bank in Roumania, the latter must deduct tax; otherwise the taxpayer domiciled in the country and in receipt of this income must declare it, and the tax is paid by him direct.

V. TAX ON COMMERCIAL AND INDUSTRIAL INCOME

1. Taxpayers

The tax on commercial and industrial income is levied upon the income of all individuals or corporations — irrespective of domicile or nationality — who do business constantly and habitually through a permanent establishment in Roumania (Articles 30 to 42 of the Law). The law does not require that the taxpayer shall be a merchant (commerçant) within the meaning of the Commercial Code.

In addition to the elementary tax, the law provides for a supplementary graduated tax.

Share companies, both Roumanian and foreign, are granted special treatment in regard to this tax (see No. 3 (b) below).

Roumanian branches of foreign enterprises, whose head office is in another country and which are not registered in Roumania in accordance with the Roumanian Commercial Code, pay this surtax at the maximum rate (Decision of the Central Fiscal Committee communicated by Order of the Ministry of Finance No. 138667 of May 30th, 1927).

2. Taxable Income

The tax is only levied upon net national incomes derived from an association of labour and capital, whether movable or immovable. If the acts which give rise to the income are not regular and continuous, the taxpayer does not come within this schedule. The following incomes are liable to this tax:

3. Assessment of Tax

(a) Computation of Taxable Income and Deductions

According to Articles 30 and 39 of the Law of February 23rd, 1923, the tax is calculated on net income which may be determined in two ways: (a) from the balance-sheet, (b) by presumption. The second method may only be employed when there is no balance-sheet or when the balance-sheet does not tally with the books.

Even when the books are properly kept, the Assessment Committee may refuse to include certain items of expenditure which it thinks excessive or unnecessary and which thereby unjustifiably reduce the net income (Bucharest Court of Appeal, Section IV, Decision No. 15 of January 28th, 1926, and Decision No. 174 of September 20th, 1928).

Net income is found by deducting the liabilities from the assets, that is, it is equal to the difference between gross income (assets) and the expenses recognised by the law (liabilities).

The assets include the following items amongst others:

Liabilities — that is, deductible expenses — are composed, amongst others, of the following items (it should be noted that only the expenses relating to the taxable period are deductible and that past losses may not be carried forward):

As regards enterprises other than share companies, only the above deductions are permitted. But, in the case of share companies, the following deductions may also be made:

(b) Computation of Tax and Abatements

This tax is made up of two separate taxes: an elementary tax and a graduated surtax, which is called “complementary tax”.

1. The normal rate of the elementary (or schedular) tax is 10 per cent. This is increased by 2 per cent for enterprises engaged in banking, discount or loan operations and reduced by 2 per cent for the income of enterprises exclusively concerned with industrial or transport business.

Building enterprises, and those assimilated to them are also entitled to this reduction.

Further, the tax is not levied upon exclusively industrial or mining enterprises during the first five years of their existence, unless the profits exceed 8 per cent of the capital plus reserves; if their profits are between 8 and 10 per cent, they enjoy a reduction of 50 per cent of the tax.

If their activities combine industry and commerce in a normal way and not accidentally, these enterprises cease to enjoy these advantages (Article 30, ad paragraph 73 of the Instructions). (Decision of the Central Fiscal Committee communicated by Order of the Minister of Finance No. 92700, dated April 2nd, 1928.)

In virtue of the Law of March 18th, 1933, the income subject to the elementary tax may not be inferior to a certain minimum. This minimum is determined in a different manner with regard to companies and with regard to individuals. The minimum taxable income of companies amounts to 2 per cent of their capital plus reserves for industrial companies and to 3 per cent for commercial companies, and this income is taxed at the same rate which would be applicable to the actual income, taking into account the nature of the enterprise. The tax on this minimum income may never be less than 100,000 lei if the company’s capital exceeds 600 million lei, but, while normally the complementary tax is assessed, as we shall see later, only on the fraction of the income which exceeds a certain percentage of the capital of the enterprise, in this case the total amount of the minimum income is taxable.

With regard to individuals, the minimum taxable income is arrived at by multiplying by 1.5 or 2.5 the rental value of the commercial or industrial premises, according to the nature of the enterprise. The minimum income of enterprises belonging to individuals which are exclusively of an industrial nature are valued at 2 per cent of the total amount of the capital invested in the business in the form of real or personal property. In no case may the minimum tax be inferior to 18,000 lei, or in excess of 75,000 lei. The provisions relating to the minimum income apply only to taxpayers who are annually assessed, but not to petty tradesmen, who are taxed at a fixed rate according to the category in which their income is included — which category is determined every three years.

2. The surtax is assessed as follows, on the same income as is liable to the elementary tax:

The rules applied in computing the income, with a view to determining the percentage of the capital which it represents for the purpose of the complementary tax, are different from those applied in connection with the elementary tax. While for the latter the following items are deducted from the gross income:

It is only permitted, in order to ascertain the net profits assessable to the complementary tax, to deduct from gross profits the sums included under Nos. 4 to 6 above.

The capital used as a basis for the determination of the percentage is the registered capital plus the statutory and special reserves, and the percentage is arrived at by comparing the net profit with the capital computed as above. Foreign companies which possess a branch in Roumania are taxed at the maximum rate (that is, the rate which corresponds to the maximum percentage of profits to capital), except where the capital employed by the Roumanian branch has been definitely fixed.

4. Collection of Tax

The taxpayer makes a return in January and pays the tax quarterly, the payments for the first two quarters being based upon the previous year’s tax. When the amount of tax is fixed by the authorities, compensation is made, if necessary.

VI. TAX ON SALARIES AND WAGES

The tax on salaries and wages is levied upon the remuneration of persons living in Roumania, even if it is received for services rendered abroad, and upon that earned in Roumania by persons living abroad (Law of February 23rd, 1923, Articles 43 to 47).

The taxable income includes all net income from wages paid by public bodies or private employers, emoluments, bonuses, allowances of all kinds, shares in profits (both of directors and employees), pensions and annuities, on condition that they are continuous and regular payments.

To arrive at the net income, all expenses incurred in its acquisition (travelling expenses, etc.) should be deducted from the gross income, and, in addition, certain personal deductions may be made, as follows:

For that part of the income which, after deduction of the principal items, does not exceed 4,000 lei per year the tax is reduced by one-half. If the taxpayer receives salaries or perquisites from more than one source, the deductions and abatements mentioned above are only made on one salary. Pensions received by men disabled in the war, by war widows and orphans are tax-free. The collection of the tax is effected by withholding at the source, except as regards the salaries received from another country, in which case a return should be made.

VII. TAX ON INCOME FROM PROFESSIONS AND OCCUPATIONS NOT SUBJECT TO OTHER TAXES

With regard to persons residing in Roumania, all income coming within the scope of the tax on income from professions and occupations not subject to other taxes is subject to this tax, even if such income is derived from abroad.

On the contrary, persons residing abroad are subject to this tax only on account of income comprised in this schedule which is derived from Roumania (Law of February 23rd, 1923, Articles 48 to 50).

This tax resembles the tax on salaries and wages, as it is levied on income derived from labour without the association of capital, but it differs therefrom in as far as the income on which it is levied is derived from services rendered without continuity, as is the case in the liberal professions.

The income from non-commercial occupations carried on in an independent manner, as well as incomes which have not been subject to one or other of the preceding taxes, are also included in this schedule. It should, however, be noted that fixed fees and attendance fees which are granted to directors of companies and other persons assimilated to them are considered as salaries and are therefore subject to the tax on salaries and wages.

The net taxable income is arrived at by deducting from the gross income the expenses which are strictly necessary for its acquisition. The law determines for each class of taxpayer subject to this tax the amount of deductions to which they are entitled on their gross income by reason of such expenses; for instance, as regards the liberal professions, the amount which may be deducted for professional expenses is one-third of the income. Moreover, in order to alleviate the fiscal burden falling on taxpayers entering a liberal profession, the tax is reduced by two-thirds for the first three years following their entry into such profession and by one-half for the two years which follow this period.

The tax is reduced in favour of taxpayers engaged in literary, artistic or scientific work (Article 48 of the Law). With regard to the liberal professions, a minimum basis of taxation is established by the law. This minimum is computed on the basis of the rental value of the premises used for the exercise of such professions or for the residence of the taxpayers, who are classified in these categories according to the importance of the community in which they reside, and the basis for taxation is obtained by applying to this rental value a coefficient fixed in accordance with the category under which the interested party comes.

The taxpayer must file a return in January of each year and the tax is paid quarterly. Payments for the first two quarters are made on the basis of the previous year’s tax. When the tax is fixed, provision is made for any necessary compensation.

Procedure and Appeals

As shown above, the assessment of the tax on agricultural income and on income from buildings is made by a census commission, while the assessment of the other schedular taxes and of the global tax is made by tax commissions of first instance. As regards taxes on commercial and industrial profits, on salaries and wages and on the income from non-commercial occupations or professions, a representative of each category of taxpayer is attached to this commission, to which he acts in the capacity of adviser. Taxpayers and the fiscal authorities may file an appeal against the decisions of these two commissions before the commissions of appeal, which are composed of a judge of the local court assisted by a representative of the taxpayers and a tax official. Appeal also lies against the decisions of this second jurisdiction, and in such a case the final decision is rendered either by the local civil court, if the income in litigation does not amount to 100,000 lei, or by the court of appeal if the case relates to income superior to that amount.

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