Understanding the Microenterprise Regime and Taxation in Romania

Microenterprise represents a fiscal concept in Romania. The status of a microenterprise is granted after meeting certain cumulative conditions specified in the Fiscal Code. As a result, these firms pay income tax as microenterprises.

Unlike Individual Entrepreneurs (PFA), microenterprises have a different legal regime, representing a fiscal concept.

Microenterprises always register under one of the forms provided for companies by Law no. 31/1990 on commercial companies, and the microenterprise status is granted considering a specific taxation system regulated by the Fiscal Code.

According to the Fiscal Code, a company becomes a microenterprise if it cumulatively meets the following conditions, as of December 31 of the previous fiscal year:

• It has generated revenues that do not exceed the equivalent of 500,000 eur in lei.
• Its share capital is held by individuals other than the state and local administrative units.
• It has shareholders who hold more than 25% of the value/number of participation titles or voting rights in at most three Romanian legal entities that apply the microenterprise income tax system.
• It is not in the process of dissolution, liquidation, or registered as such in the Trade Registry or courts, according to the law.
• It has generated revenues other than those from consultancy and/or management, amounting to over 80% of total revenues.

Regarding taxes, a microenterprise operates similar to a legal entity, i.e., a commercial company. The difference lies in the fact that a microenterprise does not pay the standard 16% corporate income tax; instead, it pays a reduced tax rate of 1% on gross income.

In the case of a microenterprise, expenses related to revenues are not taken into account to determine net profit for taxation. Therefore, this status is more suitable for activities with insignificant expenses.

As for contributions, a microenterprise is only liable for contributions if it has employees or pays income to individuals for which contributions are due and withheld at source.

If a microenterprise's turnover exceeds 500,000 eur, it will transition to the regular corporate income tax system, similar to a standard company.

Rules for applying the microenterprise regime:

1. The income tax for microenterprises is optional (subject to proof of meeting the conditions).
2. Companies can opt for the micro regime if they meet the conditions only at the beginning of the fiscal year and not during it, and if they have not been a microenterprise after January 1, 2023.
3. Microenterprises cannot opt for corporate income tax during the fiscal year; the option can be exercised starting from the next fiscal year. This applies to companies that meet the conditions but no longer wish to apply the micro regime because it is no longer advantageous.
4. Newly established companies can opt for the micro regime if they meet the conditions at the time of incorporation and if they hire one employee within the first 30 days. Pay close attention to this deadline, as it can be easily exceeded.
5. If the employment contract of the employee is suspended, the condition for the micro regime is considered fulfilled only if the suspension does not exceed 30 days and occurs only once in the respective fiscal year. Otherwise, the company will transition to corporate income tax. So, be cautious about cases of suspending employment contracts, such as child care leave, study leave, unpaid leave, etc., reported in Revisal.

Tax rates and taxable base:

1. The income tax rate for microenterprises is 1%.
2. The taxable base includes income from any source, from which certain elements are deducted, such as production costs, income from services in progress, income from fixed assets production, subsidies, provisions, depreciation adjustments, compensation income, exchange rate differences, dividends received from a Romanian legal entity, etc.
3. The taxable base also includes post-billing trade discounts, certain reserves, etc.

Rules for exiting the micro regime during the fiscal year:

1. If a company exceeds the 500,000 eur threshold or the consultancy income proportion of 20%/80% during the fiscal year, it will transition to corporate income tax starting from the quarter in which either condition is exceeded, and it can no longer opt for the micro tax.
2. The same applies if the employment contract of the employee is terminated. If the company enters into another employment contract within 30 days from the end of the labor relationship, the condition for the micro regime is considered fulfilled, provided that the new contract is for an indefinite period or a fixed term of at least 12 months.
3. Companies that start carrying out activities excluded from the micro regime will transition to corporate income tax starting from the respective quarter.
4. The entry or exit from the system must be communicated by March 31, 2023, and this deadline is also valid for the following years.

In conclusion, the microenterprise regime offers a unique taxation system for small businesses in Romania, providing certain advantages and exemptions that can be beneficial for eligible companies. By meeting the specific criteria outlined in the Fiscal Code, businesses can enjoy the reduced tax rate and simplified reporting requirements.

As with any fiscal concept, it's essential for entrepreneurs to stay informed about the latest regulations and requirements related to microenterprises. Consulting with a tax professional or seeking guidance from the competent authorities can be immensely helpful in ensuring compliance with the microenterprise regime and making informed financial decisions.