setting up a business in Europe

Romania – who can benefit from the lowest corporate tax in the EU?

Though the average corporate tax rate in the European Union is expected to reach 21.3% in 2020, there are many countries where global investors planning to set up a company in Europe can enjoy significantly lower corporate tax.

For instance:

  • Malta offers a 6/7 refund scheme where shareholders are entitled to a refund of 6/7 of the total tax paid, upon receipt of a dividend from their Malta Company.
  • Hungary, Bulgaria, and Ireland offer a low corporate tax of 9%, 10%, and 12.5% respectively.

Among these lucrative options, you might miss the real gem in the EU – Romania. In 2019, Romania was named among the top performers in the EU with a GDP growth of 4.11%.

Therefore, if you are also thinking of setting up a business in Europe, Romania can be the perfect business destination for you.

Micro-company formation in Romania to Benefit from Low Tax Rate

While the standard corporate tax in Romania is 16%, Romania’s Microenterprise Scheme provides tax benefits to SMEs with a turnover of less than 1,000,000 EUR in the previous year.

According to the scheme, such companies are required to pay only 3% corporate tax based on net sales, and when the company employs at least one Romanian citizen as a full-time employee, the tax is further reduced to 1%.

The important thing to note here is that the 1% rate applies to net sales. Thus, in some cases, it is more profitable to pay a higher net profit-based rate than a lower revenue-based rate. For instance, if a company earns 120,000 EUR and spends 115,000 EUR on salaries and other expenses, then it is much cheaper to pay 16% from the net profits (800 EUR) than 1% from the total turnover (1,200 EUR).

In case your business turnover exceeds the threshold of 1,000,000 EUR, the corporate tax rate will automatically raise to the 16% rate in the same quarter.

Apart from this, there are other ways to make the most of your company in Romania.

When another EU or Swiss company holds a minimum of 10% of the company’s shares, dividends can be easily distributed at the corporate level tax-free, according to the EU Parent-Subsidiary Directive.

What You Must Know before Setting up a Business in Romania

In order to set up a business in Romania, your company needs to have real substance value, including employees and/or physical office. You cannot open a Romanian company just to shell out money and avoid taxes. If there is a holding, its input to the company’s turnover should justify the revenue part attributed to the Romanian company.

To put it all in a few words, we would say in the end that the Microenterprise Scheme and talented low-cost labor makes Romania one of the best business destinations in the European world for business setup.

Experts at Compyco helps entrepreneurs and millennials determine which country is the most suitable business destination that aligns with their business goals and needs and assists with company registration not only in the European Union (EU) but also in the European Economic Area and Switzerland. So, if you are also thinking of setting up a business elsewhere, feel free to get in touch with us.