Navigating the New Landscape: Income Tax Changes for Microenterprises in 2024

Ioana Cretu -

For nearly two decades, the simplified tax regime for microenterprises in Romania has provided a stable platform for businesses. Since its inception in 2001, with occasional adjustments, it has fostered a conducive environment. However, significant modifications are on the horizon, particularly effective from January 1, 2024, bringing both challenges and opportunities for freelancers and small business owners.

Evolution of the Microenterprise Tax Regime

The first seismic shift occurred in 2006 when companies predominantly involved in consultancy and management were disqualified from the simplified tax scheme. This prompted many to restructure their operations, often adopting the form of individual businesses (PFA). The consequence? A notable surge in income tax revenues, paving the way for a period of stability marked by a fixed tax rate of 16%.

The system functioned smoothly until 2017 when governmental decisions propelled the revenue threshold from 100,000 Euros to 500,000 Euros, escalating further to 1,000,000 Euros in 2018. Simultaneously, the restrictions on consultancy and management activities were lifted.

Redefining Microenterprises in 2024

In 2024, OUG 115/2023(Emergency Ordinance) brings about several changes to the definition of a microenterprise. To be eligible, a Romanian legal entity must fulfill the following criteria as of December 31 of the previous fiscal year:

  1. Revenue Cap: Generated revenues not exceeding the equivalent in lei of 500,000 euros.

A new concept has been introduced: when calculating the limit of 500,000 Euros, the turnover of related companies will be considered. Taxpayers will need to carefully analyze the definition of related enterprises, where the conditions differ from those previously applied.

  1. Ownership Structure: Its share capital is owned by individuals other than the state and local administrative-territorial units.
  2. Operational Status: The entity must not be in dissolution, liquidation, or face legal issues as per trade register or judiciary records.
  3. Revenue Composition: Achieved revenues, other than those from consultancy and/or management, in a proportion of more than 80% of the total revenues. Revenues from tax consultancy, corresponding to the CAEN code: 6920 - Accounting and financial audit activities; tax consultancy, are admissible for calculating the threshold for qualifying for the microenterprise regime.
  4. Employment: The entity must have at least one employee.
  5. Ownership Limits: If a person is a partner in multiple companies and holds more than 25% of each, and one or more of them qualify as a microenterprise, then that person should choose to apply the microenterprise tax system only for one company.
  6. Financial Reporting: The entity must file annual financial statements by the legal deadline, a new condition introduced by OUG 115/2023. For the fiscal year 2024, compliance is achieved if the annual financial statements are submitted by March 31, 2024, compared to the general deadline of May 29, 2024.

Tax Rate Transformation

A notable change in 2024 is the introduction of a new tax rate – 3%, applicable to certain microenterprises. Effective January 1, 2024, the tax rates are as follows:

  • 1% for Microenterprises: Revenues not exceeding 60,000 euros inclusively and NOT involved in specified activities outlined in the CAEN codes below:

• 5821 – Activities of editing computer games

• 5829 – Activities of editing other software products

• 6201 – Software development activities (client-oriented software)

• 6209 – Other information technology services

• 5510 – Hotels and other similar accommodation facilities

• 5520 – Holiday accommodation facilities and short-stay accommodation

• 5530 – Caravan parks, camping grounds and holiday camps

• 5590 – Other accommodation services

• 5610 – Restaurants

• 5621 – Catering activities for events

• 5629 – Other food services (not elsewhere classified)

• 5630 – Bars and other beverage-serving activities

• 6910 – Legal activities – only for legal entities that are not fiscally transparent entities, established by lawyers in accordance with the law

• 8621 – General medical care activities

• 8622 – Specialized medical care activities

• 8623 – Dental care activities

• 8690 – Other human health activities

  • 3% for Microenterprises: Those generating revenues over 60,000 euros or engaging in specific activities corresponding to CAEN codes listed above (that are not included in 1% rate).

The applicability of these rates shifts dynamically based on the enterprise's activities during the fiscal year. If revenues exceed 60,000 euros or the enterprise begins listed activities, the 3% rate is triggered.

End of Sponsorship Flexibility

A notable change is the elimination of the option for microenterprises to make sponsorships up to 20% of the income tax due. This reduction in flexibility may impact businesses accustomed to utilizing this avenue for corporate social responsibility or community engagement.

Declaration Deadlines

Businesses intending to utilize the microenterprise income tax system must communicate this to tax authorities by March 31 of the relevant fiscal year. If, during the fiscal year, conditions related to capital ownership and operational status change, the microenterprise must inform tax authorities of its exit from the system by March 31 of the following fiscal year.

A critical change starting from January 1, 2024, is the introduction of a provision requiring microenterprises transitioning to corporate income tax status to notify tax authorities of their exit from the microenterprise income tax system by March 31 of the subsequent fiscal year.

Conclusion: Adapting to the Fiscal Landscape

As freelancers and small business owners navigate these changes, a proactive approach to understanding the evolving regulations is crucial. Analyzing related enterprise definitions, meeting new financial reporting requirements, and staying informed about the nuanced conditions for tax rates are essential steps. Embracing these adjustments strategically can position microenterprises to not only comply with the altered fiscal landscape but also capitalize on new opportunities that may arise. Remember, informed decisions today pave the way for a resilient and sustainable financial future.