Romanian Small Businesses To Go Bankrupt, Move Offshore Over Tax Raise

Mirela Serban, managing partner with R&M Audit, said in a press release small-scale businesses affected by the measure could seek to continue working as authorized individuals but warned the general attitude in the business environment is becoming more open to the idea of moving businesses offshore.

Finance Minister Sebastian Vladescu said mid-January microenterprises in Romania will no longer benefit from a different taxation system in 2010 and will have to pay a 16% profit tax or a lump-sum tax, just like any other company.

So far, microenterprises were subject to a special taxation system, allowing them opt between the payment of a profit tax or a tax on revenues, which progressively rose to 3%. With this option out of the way, the term microenterprise will disappear from the Tax Code altogether.

Serban said it is hard to believe the state would collect more revenues to the budget by leveling taxes for all businesses and companies are expected to seek fiscal alternatives.

In 2009, Romania registered 280,000 to 300,000 microenterprises, which are small-scale businesses with up to nine employees and annual revenues of maximum EUR100,000.

"For about 45- 50% of these businesses, this extra money they should pay to the state translates into bankruptcy in all likelihood, as they don't have high profit margins to cover this difference, especially during a rough year like 2010," Serban also said.

R&M Audit estimates about 15-20% of Romanian microenterprises would be changed into authorized individuals, while about 25% will pay the 16% profit tax and the rest of them will consider offshores.

Creating an offshore company whose activity and profits are generated exclusively on Romanian territory generally becomes profitable with a taxable profit of at least EUR20,000. It costs EUR1,000 to EUR4,000 per year to keep an offshore, depending on where it is located, its type of activity, legislation and international agreements and offshores can be taxed 0-5%.

"Romania can counter this rising phenomenon only if it introduces or keeps fiscal incentives for certain kinds of businesses.

Offshore companies are registered outside the jurisdiction of its primary operations, where fiscal legislation either doesn't levy any taxes or such taxes are very low.

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