In a recent episode of The Transfer Pricing Method, host Adriaan van der Heijden spoke with Mihai Lupu (TPS Romania) and Rudolf Sinx (Quantera Global) about Romania’s newly adopted tax on affiliates. Their conversation unpacked the implications of this legislation for multinational groups and outlined practical steps to navigate the shifting regulatory landscape. Below are the key takeaways tailored for tax and finance leaders facing new compliance realities.
Understanding the Tax on Affiliates in Romania
Romania’s tax on affiliates imposes a strict limitation on the deductibility of expenses associated with intragroup transactions involving non-resident related parties. Specifically, it affects management and consultancy fees, as well as intellectual property royalties. These expenses can now only be deducted up to 1 percent of the company’s total expenses. This cap applies regardless of the actual amounts charged or whether those charges comply with the arm’s length principle.
This rule introduces a level of rigidity not typically found in other European jurisdictions. Companies will need to provide evidence that services were necessary, rendered, and supported with documentation to even qualify for the 1 percent deduction. This limitation disrupts established business models and introduces significant compliance burdens.
Why the New Rule Is a Game-Changer for Multinationals
Though 1 percent may seem like a modest cap, its implications are significant. The calculation is based on total expenses, not just the specific category of expense. For example, a royalty agreement based on 3 percent of turnover might now result in only a third of that amount being deductible, depending on the company’s total expense structure.
This discrepancy can result in distorted financial reporting and potential double taxation, particularly when headquarters or intellectual property are located outside Romania. It also puts additional pressure on multinational groups to revise service agreements and fee structures to avoid adverse tax consequences.
A Patchwork of Tax Measures: Is There a Bigger Picture?
Originally framed as a replacement for Romania’s minimum tax on turnover, the affiliate tax was expected to streamline corporate taxation. However, both systems now coexist. Large companies with over 50 million euros in turnover remain subject to the turnover tax, while smaller companies must deal with the new deduction cap.
This bifurcation has created confusion and, in some cases, frustration among the business community. It has also raised concerns about consistency and transparency in Romania’s tax policy. Businesses are left trying to comply with overlapping tax rules that can have conflicting outcomes.
Romanian Tax Authority’s Justification and the OECD Paradox
Romania’s Ministry of Finance claims that this new rule is aimed at curbing profit shifting and base erosion by multinational companies. Their internal analysis suggested that management fees, consultancy payments, and IP royalties were often used to reduce local tax obligations unfairly.
However, this broad approach conflicts with OECD transfer pricing standards, which emphasize the arm’s length principle and economic substance. The rigid deduction cap applies even in cases where transactions are well-documented, priced correctly, and reflect genuine business needs. This divergence from international norms could create compliance conflicts and trigger disputes.
Safe Harbors and Grey Areas: Is 1% the New Norm or a Trap?
While the law allows a 1 percent deduction, it is not an automatic entitlement. Companies must still demonstrate that the charges were incurred for actual, necessary services. This means preparing documentation, collecting evidence, and meeting strict local requirements.
Another challenge lies in the vague definition of what qualifies as “management and consultancy” services. Uncertainty remains around whether technical IT support, ERP consulting, or procurement coordination are subject to the cap. Without clear guidance, companies are left interpreting the law in real time, often under the watchful eye of auditors.
Advance Pricing Agreements (APAs): A Rare Silver Lining
Amid these regulatory constraints, there is one mechanism that offers protection. Existing APAs remain effective and are recognized by Romanian tax authorities. This means that companies with approved APAs covering affected transactions can continue to deduct full amounts without being subject to the new cap.
This recognition positions APAs as a valuable risk mitigation tool. However, obtaining one is not easy. The application process is lengthy and requires a robust level of documentation and foresight. Businesses that act now can use APAs to shield themselves from future challenges, but they must be prepared for a waiting period.
Proactive Transfer Pricing Strategy Is Crucial
Given the legal and financial risks, businesses must take immediate steps to reevaluate their transfer pricing frameworks. This includes:
- Reviewing intercompany service and royalty agreements
- Assessing potential double taxation exposure
- Preparing robust documentation aligned with the new regulations
- Exploring the feasibility of restructuring intragroup transactions
- Applying for APAs where appropriate
These actions are not just compliance measures. They are strategic moves to protect profitability and maintain control over the tax impact of cross-border operations.
Romania’s Tax Changes and the Broader EU Context
Unlike other EU countries, Romania’s rigid deduction cap stands apart. Most EU jurisdictions allow for tax authorities to challenge abusive practices but do not impose arbitrary percentage limits on deductibility. This approach creates a legal tension within the EU framework and raises concerns about future cross-border tax disputes.
If Romania’s policy becomes a model for others, we could see a wave of similarly strict measures across the region. Alternatively, the EU might step in to harmonize rules and ensure member states adhere to fair transfer pricing principles. Until then, businesses must navigate this unique regulatory environment carefully.
Impact on Investment and Future Tax Landscape
The tax on affiliates adds complexity to the investment landscape in Romania. Companies looking to expand or establish Romanian operations will have to weigh the potential tax risks against other economic incentives. Industries with centralized functions or IP-heavy business models may face more scrutiny and higher effective tax rates.
There is also concern about retrospective application. Some tax auditors are already re-evaluating past intragroup transactions through the lens of the new law, even though those charges were previously compliant. This retroactive approach can create legal uncertainty and discourage future investment.
Romania Transfer Pricing Reform
Romania’s affiliate tax reform is more than just a change in tax law. It reflects a shift in the government’s approach to multinational taxation. The rule imposes a hard cap that overrides conventional OECD guidelines, introduces compliance challenges, and risks creating double taxation scenarios.
For multinational companies, the message is clear. Now is the time to act. Whether through structural changes, enhanced documentation, or proactive APA filings, preparation is key. As the new rules take root, early movers will be better positioned to manage risk and maintain efficiency.
FAQs
What is Romania’s tax on affiliates?
It is a new rule that limits the deductibility of certain cross-border intragroup expenses, specifically targeting management fees, consultancy services, and IP royalties to 1 percent of total expenses.
Does this apply to all companies?
No. It primarily affects companies with turnover under 50 million euros. Larger companies remain subject to a different tax on turnover.
How does it align with OECD principles?
The rigid cap contradicts the OECD’s arm’s length principle, which bases deductibility on economic substance and fair market value.
Can companies still deduct more than 1 percent?
Not under the new rule. However, companies with APAs covering the transactions can deduct the full amount.
What steps should businesses take now?
They should review existing transfer pricing policies, enhance documentation, consider restructuring, and explore APA opportunities.
Are other expenses at risk of similar treatment?
Currently, the law targets only management, consultancy, and IP licensing. However, there is concern that other categories could be included in the future.
Conclusion
Romania’s new affiliate tax policy introduces a rigid and far-reaching restriction on transfer pricing deductions. While intended to limit base erosion, it may have unintended effects on investment, compliance, and financial planning. Still, with strategic foresight and the right documentation, companies can adapt and thrive in this new environment.