Exploring Legal Structures in Romania for Freelancers and Small Business Owners

In today's dynamic business environment, freelancers and small business owners in Romania face the crucial task of choosing the right legal structure for their ventures. Selecting an appropriate legal structure is vital for ensuring legal compliance, protecting personal assets from liabilities, and optimizing taxation. This article aims to provide a comprehensive overview of the legal structures available in Romania and their suitability for freelancers and small business owners.

1. Sole Proprietorship (PFA):

Registering as a PFA

Step 1: Business Name Reservation: Choose a unique and suitable business name for your PFA. Check the availability of the name with the Romanian Trade Registry. If the name is available, you can reserve it to secure your preferred business identity.

According to the law, the name of a Sole Proprietorship (PFA) cannot be personalized and must consist of the individual's first and last name. The phrase "persoană fizică autorizată" (authorized natural person) is appended to the name and surname. In cases where there is already another trader with the same name and surname, differentiation is achieved by adding the initial of the father's first name. Form and details.

Step 2: Local Trade Registration: Visit the local Trade Registry office and submit the necessary documents for PFA registration. These documents include:

The registration application, form, details;

2. Annex for tax registration , form, form filling instructions;

3. Self-declaration form regarding the fulfillment of operating conditions/conduct of activities for the main office and/or secondary offices, or for third parties, form, details;

4. Proof of availability and reservation of the company name, in original, details;

5. Identification document of the PFA owner (certified copy by the owner attesting to conformity with the original);

6. Proof of right to use the professional office and, if applicable, documentation attesting to the right to use the workspace designated as a branch office, details;

7. Verification of the uniqueness of the authorized natural person/business owner/family business representative status, obtained through the care of the Trade Registry Office personnel;

8. Tax clearance certificate, in original, form, details;

9. If applicable:

Approval from the owners' association regarding the change of destination for collective residential buildings, as provided by Law no. 196/2018 (completed on a standard form - original)
Article 7 (1) of Government Emergency Ordinance no. 44/2008: Declaration fromthe natural person owner of the sole proprietorship stating that the spouse regularly participates in the activities of the authorized natural person, in original
Declaration of the own-liability regarding the dedicated assets, in original, details;
Certified copies of documents attesting to professional qualifications, if required by specific legal provisions, details;
Proof of authorization for the person designated to fulfill the legal formalities (original), details;

10. If the registration application is signed by an authorized representative, a private signed statement from the PFA owner must be provided, confirming compliance with the legal requirements for holding and exercising this status.

The commercial registry offices provide the following free assistance services:

Preliminary guidance regarding the legal procedures for the establishment and modification of companies' constitutive acts;
Guidance for correctly completing the registration application and specific standardized forms for commercial registration;
Drafting the statement of founders, administrators, branch representatives, and auditors, declaring that they meet the legal requirements.

More details here.

Accounting and Bookkeeping

According to current legislation, PFAs (Persoană Fizică Autorizată) maintain their accounting using single-entry bookkeeping. What does this mean?

Single-entry bookkeeping refers to the set of registers and financial-accounting documents that the individual authorized person (PFA) uses to keep track of all the business transactions within the PFA's activity. The purpose of maintaining accounting records is to determine the tax obligations, namely income tax and social contributions payable to the state each year. As a PFA is not required to prepare annual financial statements, this record-keeping can be done by you, as the owner of the PFA, without the need to hire an accountant.

If, however, the PFA has employees and is a VAT payer, things become more complicated, and it is necessary to have an accountant.

Maintaining accurate accounting records is a crucial aspect of running a sole proprietorship (PFA) in Romania. By keeping proper records, you can ensure compliance with legal requirements, have a clear overview of your financial transactions, and facilitate the calculation of taxes and contributions.

What documents are required for PFA accounting?

Collection and Payments Journal: The Collection and Payments Journal is an essential accounting register for recording all income and expenses related to your PFA's activities. Every transaction should be supported by a proper supporting document, such as a sales receipt or invoice. At the end of each month, it is important to record all the supporting documents in the Collection and Payments Journal for the respective month.

In the Collection and Payments Journal, you should record the following income:

Revenue generated from your business activities
Cash and bank deposits made at the beginning or during the course of your business
Loans or credit received
Compensation, sponsorships, donations
Non-refundable funds or subsidies
Other income, such as tax refunds or penalties

Additionally, you should record the following expenses:

Payments made for business purposes
Refunds of cash and bank deposits
Repayment of loans or credits
Other payments, including penalties or fines

2. Inventory Register: At the end of each financial year, it is necessary to conduct an inventory of your assets, inventory items, and outstanding receivables and payables. The Inventory Register serves as a record of your PFA's assets, and it includes items such as laptops, vehicles, phones, and equipment valued over 2,500 RON. Each asset and inventory item should be recorded at its initial value based on the supporting documents. For outstanding receivables and payables, they should be recorded at the remaining amount to be collected or paid.

3. Fiscal Record Register: The Fiscal Record Register is a mandatory register for PFAs in Romania. It is used to record information related to fiscal obligations, such as VAT registration details, invoicing details, and other relevant fiscal information.

In addition to the above registers, it is important to keep supporting documents such as invoices, receipts, and financial statements. These documents serve as evidence for your transactions and are necessary for tax reporting and compliance.

At the end of each financial year, based on the information recorded in the Collection and Payments Journal and the Inventory Register, you can calculate your PFA's Net Annual Income. This is done by subtracting the total deductible expenses from the total taxable income.

To fulfill your tax obligations, you will need to complete the Single Tax Return (Declarația Unică) by the deadline specified by law, which is typically May 25th of the following year. Based on your previous year's estimations, you may need to adjust your tax payments accordingly.

It is also important to estimate the taxable income and deductible expenses for the current year and determine the amount of social contributions payable by your PFA. The following year, you will follow the same process when completing the Single Tax Return.

The expensesincurred for the purpose of carrying out economic activities are considered deductible expenses and reduce the taxable income.

Invoicing

As a PFA, you are required to issue invoices for the goods or services you provide to your customers. Invoicing plays a crucial role in recording your sales, maintaining financial records, and complying with tax regulations. Here are the key points to consider regarding PFA invoicing in Romania:

Mandatory Information: Your invoices must contain certain mandatory information, including:

Your PFA's details: Name, address, and tax identification number (CUI/CIF).
Customer's details: Name, address, and tax identification number (if applicable).
Invoice number and date: Sequentially numbered invoices with a unique identifier and the date of issue.
Description of goods or services: A clear and concise description of what you provided to the customer.
Quantity and unit price: Specify the quantity of goods or services provided and the price per unit.
Total amount: Calculate and include the total amount payable by the customer, including any applicable taxes.
VAT details (if applicable): If you are a VAT-registered PFA, include the VAT rate and the amount of VAT charged separately.

2. VAT Requirements: As a PFA, you may be subject to Value-Added Tax (VAT) regulations depending on your annual revenue. If your annual revenue exceeds the threshold set by law (currently 300,000 RON), you are required to register for VAT and charge VAT on your invoices. In this case, your invoices should clearly state the VAT amount charged and the VAT rate applied.

3. Sequential Invoice Numbering: It is important to assign and use sequential invoice numbers for proper record-keeping and audit purposes. Each invoice should have a unique number, and you should maintain a consistent numbering system to ensure accuracy and avoid duplication.

4. Retention and Archiving: You must retain copies of all issued invoices for a period of 10 years, as they may be subject to tax inspections or audits. It is advisable to keep both electronic and physical copies of your invoices for easy retrieval and reference.

5. Language and Currency: Invoices should be issued in Romanian and in the national currency, which is the Romanian Leu (RON).

6. Timely Issuance: Invoices should be issued promptly after the completion of the transaction or delivery of goods/services. Prompt invoicing helps maintain accurate financial records and ensures timely payment from customers.

7. Electronic Invoicing: Electronic invoicing is allowed and increasingly popular in Romania. Electronic invoices should comply with the specific regulations regarding electronic format, authenticity, integrity, and archiving requirements.

The documents that form the basis of accounting records can acquire the status of supporting documents only if they provide all the information required by the current legal regulations.

VAT

As a PFA (Persoană Fizică Autorizată) in Romania, the VAT (Value Added Tax) regulations apply to your business depending on certain criteria. Here are some important points to consider regarding VAT for a PFA in Romania:

VAT Registration: If your annual turnover from taxable activities exceeds a certain threshold set by the authorities (in 2023 the current threshold is 300,000 RON), you are required to register for VAT. However, voluntary registration is also possible even if your turnover is below the threshold.
VAT Rates: Romania has multiple VAT rates depending on the type of goods or services provided. The standard VAT rate is 19%, but there are reduced rates of 9% and 5% for certain categories of goods and services.
VAT Collection and Payment: As a VAT-registered PFA, you are responsible for collecting VAT from your customers on the taxable supplies you make. This means you will add VAT to your invoices and collect it separately. Additionally, you are required to report and remit the collected VAT to the tax authorities within specific deadlines.
VAT Deductions: As a PFA, you are also entitled to deduct the VAT you have paid on your business-related purchases and expenses, known as input VAT. These deductions can be made against the VAT you have collected from your customers, resulting in the net VAT payable to the tax authorities.
VAT Returns and Reporting: VAT-registered PFAs need to submit periodic VAT returns to the tax authorities, reporting the VAT collected and paid during the reporting period. The VAT returns are typically submitted on a quarterly basis, although monthly reporting is required for certain businesses. The returns must be filed electronically within the specified deadlines.
Record Keeping: It is crucial to maintain accurate and organized records of your VAT-related transactions, including invoices, receipts, and other supporting documentation. These records should be kept for a minimum period specified by the tax authorities (generally 10 years) and be available for inspection upon request.

When conducting business within the EU (European Union), it is essential to understand the regulations and requirements that govern such transactions. Here are some key aspects to consider:

Value Added Tax (VAT): Intra-EU transactions are subject to specific VAT rules. The general principle is that goods and services supplied between EU member states are considered "zero-rated" for VAT purposes. This means that VAT is not charged by the supplier but is instead accounted for by the recipient using the reverse charge mechanism. The recipient accounts for VAT as if they made the supply themselves, typically following the rules of their respective country.
VAT Identification Numbers: Businesses engaged in intra-EU transactions are required to have a VAT identification number issued by their national tax authority. This number is used for identification and tracking purposes when conducting cross-border trade within the EU.
Harmonized Regulations: Intra-EU business relations benefit from the harmonization of regulations and standards within the EU. This includes the free movement of goods, services, capital, and labor, allowing for easier trade and collaboration across borders.

It is important to note that VAT regulations can be complex, and it is advisable to consult with a tax professional or accountant who can provide specific guidance tailored to your business circumstances. They can assist you with VAT registration, compliance, record keeping, and ensuring accurate reporting and payment of VAT obligations.

Taxation

Here are the taxes that PFAs (Persoană Fizică Autorizată) will have to pay in 2023:

Income tax (10%). The corresponding contribution will be calculated by applying a 10% rate to the income
CAS (Social Security Contribution)

Depending on the income earned, starting from 2023, the calculation base for the Social Security Contribution (CAS) will be as follows:

0 (no CAS owed) for incomes below 12 times the gross minimum wage in the country.
The level of 12 times the gross minimum wage in the country for incomes between 12 and 24 times the gross minimum wage.
Or the level of 24 times the gross minimum wage in the country for incomes above 24 times the gross minimum wage.

The corresponding contribution will be calculated by applying a 25% rate to the calculation base.

CASS (Health Insurance Contribution)

Starting from 2023, the annual calculation base for the Health Insurance Contribution (CASS) will be as follows:

0 (not obligated to pay CASS) if the income is below 6 times the gross minimum wage.
The level of 6 times the gross minimum wage in the country for incomes between 6 and 12 times the gross minimum wage.
The level of 12 times the gross minimum wage in the country for incomes between 12 and 24 times the gross minimum wage.
The level of 24 times the gross minimum wage in the country if the income earned in 2023 exceeds 24 times the gross minimum wage.

The corresponding contribution will be calculated by applying a 10% rate to the calculation base.

Client management and contracts

Client management and contracts are important aspects of running a PFA (Persoană Fizică Autorizată) in Romania. Here are some key considerations:

Client Acquisition: As a PFA, you will need to actively acquire clients for your products or services. This can be done through various means such as networking, referrals, marketing, and online platforms. It's important to identify your target audience and develop effective strategies to attract and retain clients.
Client Relationship Management: Building strong relationships with your clients is crucial for long-term success. Provide excellent customer service, promptly respond to inquiries and concerns, and strive to exceed client expectations. Regular communication and maintaining a professional approach will help foster trust and loyalty.
Contracts and Agreements: When engaging with clients, it's essential to have clear and well-drafted contracts or agreements in place. These documents outline the scope of work, deliverables, payment terms, project timelines, and any other relevant terms and conditions. Contracts can help protect both parties' interests and establish a foundation for a successful working relationship.
Legal Requirements: Ensure that your contracts comply with the legal requirements and regulations in Romania. Familiarize yourself with the legal framework governing contracts, consumer rights, data protection, and any specific industry regulations that may apply to your PFA.
Payment and Invoicing: Establish a reliable payment process for your clients. Issue invoices in compliance with Romanian invoicing regulations, including necessary details such as your PFA information, client details, description of services, and payment terms. Maintain accurate financial records and track payments to ensure timely and proper invoicing and cash flow management.
Client Confidentiality: Respect client confidentiality and handle sensitive information with care. Protect client data in accordance with data protection laws and regulations. Implement appropriate security measures to safeguard client information and maintain their trust.
Dispute Resolution: In the event of any disputes or disagreements with clients, try to resolve them amicably through open communication and negotiation. If necessary, seek legal advice to protect your rights and interests.

Remember, maintaining strong client relationships and handling contracts professionally are integral to the success and growth of your PFA.

Professional development and networking

Professional development and networking are crucial for the growth and success of PFA and freelancers in Romania. Here are some key aspects to consider:

Continuous Learning: Stay updated with the latest industry trends, technologies, and best practices by investing in continuous learning. Attend workshops, seminars, conferences, and webinars related to your field. Consider acquiring relevant certifications or pursuing advanced training programs to enhance your skills and knowledge.
Industry Associations and Organizations: Join industry associations and professional organizations relevant to your field. These associations often provide networking opportunities, educational resources, and access to industry events. Engaging with peers and experts in your industry can help you stay informed about market trends, share experiences, and foster collaborations.
Online Networking Platforms: Leverage online networking platforms and communities specific to your profession or industry. Participate in relevant forums, groups, and social media communities to connect with like-minded professionals, share insights, and build your professional network. Platforms like LinkedIn can be particularly valuable for expanding your connections and showcasing your expertise.
Local Business Events: Attend local business events, trade shows, and conferences in your area. These events provide opportunities to meet potential clients, partners, and industry experts. Engage in conversations, exchange business cards, and follow up with relevant contacts to establish mutually beneficial relationships.
Collaboration and Partnerships: Look for opportunities to collaborate with other freelancers or professionals in complementary fields. Partnering with others can expand your service offerings, attract new clients, and allow for shared resources and expertise. Networking events and industry associations are great places to find potential collaborators.
Mentoring and Coaching: Seek mentorship or coaching from experienced professionals in your industry. Their guidance and insights can help you navigate challenges, refine your business strategies, and accelerate your professional growth. Consider joining mentorship programs or reaching out to established professionals for advice.
Online Presence: Establish a strong online presence through a professional website, social media profiles, and online portfolios. Showcase your skills, expertise, and past work to attract potential clients and demonstrate your professionalism. Actively engage with your online community, share valuable content, and participate in relevant discussions to build your reputation.

Remember, professional development and networking require proactive effort and continuous engagement. By investing in your skills, expanding your network, and staying connected with industry developments, you can enhance your professional growth and open doors to new opportunities for your PFA or freelance career in Romania.

It is important for PFAs to stay updated with any changes in laws and regulations that may affect their business. Seeking professional advice from accountants, tax consultants, or legal experts can provide valuable insights and guidance tailored to their specific needs.

Remember, as a PFA or freelancer, you are not alone in your journey. Networking with fellow professionals, joining industry associations, and attending relevant events can offer opportunities for professional development, collaboration, and support.

By combining a strong legal structure, diligent accounting practices, effective invoicing procedures, and a commitment to ongoing professional development, PFAs can navigate the challenges of the business landscape in Romania and thrive in their entrepreneurial endeavors.