Given that this year the main focus of tax authorities with control attributions has been the identification of additional salary-related or similar income, we considered as appropriate to review the main expenditures of companies, apparently in the direct benefit of employees, which may be reinterpreted as a benefit in kind and thus are liable to taxation accordingly.
In terms of taxation, any good, service or amount of money offered to employees, unless it falls within one of the exceptions expressly highlighted by the legislation in force and for which no documents have been prepared in order to be classified in the relevant category, is considered to be wages paid in kind, for which all contributions and income tax must be withheld.
Likewise, in the case of partnership associates, the goods, services or amounts of money that do not fall within one of the exceptions provided by law or for which no documents have been prepared in order to be classified in the relevant category, will be considered dividends and the corresponding tax will be calculated. Furthermore, corporate tax is also due for the settlement of such personal expenses, because the amounts are non-deductible when calculating the corporate tax.
It is the allowance granted to the personnel and only to the personnel employed, for trips over distances greater than 5 km from the town in which the company has its permanent establishment.
Article 55(2)(i) of the Tax Code provides that up to 2.5 times the amount of the allowance determined for the public sector, no tax is due for statutory per diems granted to employees. Furthermore, Article 296^15 (g) of the Tax Code stipulates that, in the same amount, no social contributions are due.
The last version of the Tax Code does not mention these allowances among the deductible expenses, as the article was abrogated. However, in practice these are considered deductible, the most widely used article for justification being Article 21(1) of the Tax Code.
The difference in the amounts granted, which exceeds the ceiling of 2.5 times the allowance determined for staff in the public sector, will be considered benefit in kind, for which contributions will be calculated and the corresponding tax will be withheld.
The amount of the per diem for public sector personnel is defined by GD no. 1860/2006 regarding delegation and travel, as amended. The last amendment came into force on January 1, 2015 and raised the per diem to 17 Lei per day, which means that the deductible amount of the per diem is 42.5 Lei for the private sector. This amount applies to business trips within Romania. In the case of trips abroad, the per diem is determined individually for each country, in local currencies.
This means that per diems paid to employees, that exceed the aforementioned limits, are liable to taxes and fees similar to the ones payable for wages, i.e. approximately 52%.
It is to be mentioned that the law does not impose a minimum or maximum per diem; the amount is agreed between the employer and employee.
With respect to travel expenses, there are several possible cases, which will be discussed in what follows.
The settlement of travel expenses when the employee resides in a city different from the one of the operational working point
According to Article 55(4)(f) and Article 296^15(f) of the Tax Code, if no housing is provided or the rental expenses are not borne, these will not be treated as income from wages and no income tax or contributions will be withheld for the settlement of travel expenses to and from the workplace. The maximum limit is the equivalent of a monthly pass. For such expenses, the mandatory inclusion of certain provisions in the employment contract or collective labor agreement is not specified.
If the employee receives a company car by which he/she travels on the domicile-workplace distance, there are several fiscal situations that are to be discussed punctually, depending on the presence of public transportation and the overlapping between the public transportation and the work program. If public transportation is available, the VAT on fuel is not a fully deductible expenditure and will be recorded in the vehicle refueling expenses. In order to qualify for the full deductibility of fuel expenses, the preparation of vehicle log sheets is mandatory in order to demonstrate that the vehicle is used solely for company purposes.
In the absence of vehicle log sheets, the granting of 50% deductibility is presumed both for VAT and expenditures. Lately, the fiscal authorities treat the non-deductible 50% as benefits in kind.
Based on Article 55(4)(g) and Article 296^15(g) of the Tax Code, the coverage of travel expenses for delegations are not treated as income from wages, meaning that no taxes and contributions will be calculated in such cases.
The expense is deductible for corporate tax purposes, in accordance with Article 21(2) (e) of the Tax Code.
Travel expenses for employees residing in the same city as the company
According to Article 55(4)(a), Article 296^15(b) and Article 21(3)(c) of the Tax Code, if it is provided in the employment contract or collective labor agreement, the settlement of transport to and from the workplace will not be construed as benefit in kind and taxes and contributions will not be withheld for these costs.
The rules for Article 21 (1) of the Tax Code, also found in point 23(f) of GD no. 44/2004, with subsequent amendments, allow full deductibility.
It is necessary to specify in the collective agreement that these facilities may be granted.
According to Article 21. (2)(e) of the Tax Code, the expenses incurred for the transport of directors and of the persons assimilated thereto are deductible.
According to Article 145^1 (1) of the Tax Code, for vehicles that are not effectively used for business purposes, only 50% of the VAT on fuel used for cars that are not used exclusively for business purposes is reimbursed. The non-deductible VAT will be recorded as fuel expenditure.
According to Article 21 (4)(t) of the Tax Code, for vehicles that are not used exclusively for business purposes, 50% of the fuel expense (the registered non-deductible VAT will also be taken into consideration) will be considered non-deductible.
In terms of interpreting fuel as benefit in kind or anticipated dividend, the same rules apply as for the aforementioned travel expenses.
Under the rules of Article 55 of the Tax Code, also found in section 77 of GD no. 44/2004, the use of the company car for the fulfillment of business duties is not considered to be salary-related income. Due to this reason, taxes and compulsory contributions will not be withheld.
If the car is to be used for personal purposes, it will be considered a benefit in kind, therefore taxes and contributions will be calculated in the amount of 1.7% of its value for each month (in accordance with Article 55 (3) of the Tax Code, also found in section 75 of GD no. 44/2004).
In this case, if the VAT on car purchase has been deducted, a part of this amount is due to the budget and the company will lose the integrity of its right to deduct. There are two procedures for the calculation of the payable VAT, currently regulated by Article 148 and Article 149 of the Tax Code. The analyses must be developed on a specific case.
In this context, if the vehicle is only partially authorized for personal purposes and for a certain period, the benefit in kind is calculated by determining the share of kilometers traveled for personal purposes from the total number of kilometers traveled during the period in question.
The equivalent value of the expenses calculated as such percentage is considered to be a benefit in kind. By default, without being expressly mentioned, we understand the obligation to draw up vehicle log sheets even when using 50% deductibility in such cases, because otherwise we cannot determine the amount of the benefit in kind.
Based on Article 55 (4) ( g) and Article 296^15 ( g) of the Tax Code, the coverage of accommodation costs for delegations is not treated as a salary-related income, meaning that taxes and related contributions will not be calculated.
The expenditure is deductible for corporate tax purposes, in accordance with Article 21 (2)(e), as long as the purpose of the delegation is documented (for the benefit of the business activity): visits to customers and suppliers, participation in fairs, exhibitions and trainings with subjects related to the field of activity. This approach cannot be extended to any accommodation expenses incurred by managers or employees, unless it is confirmed in the documents attached to the accommodation invoice that the trip was made for business purposes. In this case, depending on the beneficiary of the accommodation services, the expenditure will be considered a dividend if the beneficiary is the associate of the company or a benefit in kind if the trip is made by an employee.
It sometimes occurs that the accommodation documents (especially the invoice) are issued in the name of the accommodated employee. In this case, the expenditure and VAT may be deductible if the trip is made for business purposes. The travel order is required to be attached to the accommodation documents according to the implementation rules for Article 146 of the Tax Code, also found in section 46 of GD no. 44/2004, with the subsequent modifications.
Health insurance and private pensions provided to employees are deductible from corporate tax, as long as the legal requirements are met, as follows: health insurance within a maximum amount of € 250/year/employee and pension benefits within a maximum amount of € 400/year/employee (Article 21 ( 3)( j) and (k)).
Health insurance should not be confused with service plans of private hospitals offering various types of packages. Health insurance must comply with the principles imposed by health law (95/2006). Also according to this law, Article 339 (i) stipulates that medical services provided as service plans are treated as prepaid medical services that are directly offered to subscribers by the suppliers rather than via insurers, outside the basic health care services package of the health insurance system. Thus, this service plan, different from the usual occupational medicine agreements binding by law, must be allocated to each employee and taxed as a benefit in kind. In the case of health insurance, the income tax will be withheld, but the social contributions will not be retained.
The current Tax Code does not provide the option in which the employee has his/her own insurance policy, which is then submitted to the employer for settlement, only the option in which the employer negotiates the insurance policy with the insurance company, offering it subsequently to the employee. In this case, the contract is concluded between the employer and the insurance company.
Private pensions must be approved by the Financial Supervisory Authority and must be regulated according to law no. 204/2006. This category includes the pillar 3 pensions. Variants of other types of insurance, which provide that the accumulated amounts are to be paid as pension at the end of the contract, are not approved under these regulations of the Tax Code. The policies can be contracted by the employer and offered to the employees or can be contracted by the employees and submitted to the employer for settlement. For such pensions, contributions are not payable within the € 400 limit and the amounts are deductible from the payroll taxes.
These are regulated by GEO no. 8/2009, with subsequent amendments. According to the Ordinance, holiday vouchers may be granted up to a maximum limit of 6 times the national minimum wage, for each employee per year.
These expenses are deductible within the aforementioned limit and no contributions are payable as per Article 296^15 (o), but income tax is due under the rules of Article 55 section 68. Whereas until July 2014 it was required of the legal entity to obtain profit in the previous year in order to grant them, the relevant paragraph was abrogated by law no. 94/2014. Holiday vouchers may only be used in facilities approved by the National Authority for Tourism.
These will have nominal values of 10, 20, 30, 40 and 50 Lei. Similarly to food vouchers and gift vouchers, no change may be granted in case of payment with vouchers.
The rules for implementing the law governing holiday vouchers should be published by the beginning of August and should bring more clarification on the requirements needed to be met, such as mentioning these facilities in the collective labor agreement, inclusion in social spending, etc.
Holiday voucher expenses are fully deductible from the corporate tax, without exceeding the annual sum of 6 x national minimum wage for each employee. Vouchers are subject to salary income tax for natural persons.
For companies there is no legal definition of the concept of entertainment, the only regulation explaining this expenditure is given in the regulations on the taxation of registered sole traders. According to this legal basis, entertainment expenses are the representation expenses incurred by the taxpayer.
In practice, in the bookkeeping of companies, this category includes water, coffee, milk, tea, fruits, sweets and other similar products with low unitary value, which are used for internal purposes.
Unfortunately, these expenses are the most reinterpreted during tax audits in 2015. The legal regulations are not specific enough to make a proper classification of such treats. Furthermore, the specifics of the company should also be taken into account, such as the field of activity, number of employees, etc. There have been cases when such treats within the activity were classified as benefits in kind for which tax and contributions were calculated, although there is no concrete practical possibility of allocating such costs for each employee, due to which this approach is absolutely subjective and inequitable. We believe that by drawing up lists on coffee, milk, sugar or candy consumption (the only way to properly deal with these "benefits"), the companies will depart significantly from the proposed business objectives (profit, turnover, efficiency, productivity) and will be loaded with administrative activities involving other unnecessary costs.
These types of purchases cannot be classified as entertainment expenses, as these are considered to be "entertainment expenses incurred by the granting of gifts, treats and meals to business partners, conducted for business purposes" and therefore, automatically, the relevant legislation does not apply.
Ever more in recent years, employee salaries and service packages offered by multinational corporations and IT companies include, in addition to the basic salary, a number of other extra "benefits", these being extremely important in attracting new employees or retaining existing teams. These benefits may include, but are not limited to: subscriptions to gyms, beauty centers, rental of sports fields, tickets to concerts, shows and other social events. Unfortunately, the provisions of the Tax Code are not quite clear about such other types of "remuneration in kind" and are considered salary-related benefits and are taxed as such (income tax and social contributions). The attempt of "pimping up" these expenses from personal practices, in the direct benefit of the employee, into deductible expenses, which help optimize results, has no stable legal basis and thus would not be accepted in the context of a tax audit covering the identification of benefits in kind.
In conclusion, if we also refer to the corporate tax, we consider that these are deductible in the amount of 2% from social expenditures, as long as these are generated by an individual employment contract, collective labor agreement, etc.
However, in the Tax Code (Article 21 (3(c)) there is a 2% limit of the total payroll of the company, within which companies have the right to incur certain expenses in the benefit of employees - without these being considered salary-related. For the purpose of tax optimization decisions, we recommend the detailed analysis of the possibilities offered by these provisions in order to exploit them in certain permissible situations. Thus, the category of social expenditure also includes gifts offered to underage children on the occasion of Easter, Christmas and June 1, within an upper limit of RON 150, as well as gifts offered to female employees on the occasion of March 8. Amounts falling within the aforementioned limit are tax deductible and no tax (Article 55 (4(a)) or social contributions (Article 296^15 (b)) are due. Amounts exceeding the RON 150 /person limit, as well as their granting on any other occasion than those prescribed by law are considered benefits in kind and will be taxed accordingly and the related contributions will be withheld.
These expenses are tax deductible on the basis of Article 21 (3(c), within an upper limit of 2% of the payroll.
If the offered gifts are below the RON 150 limit and if these are offered on other occasions than those mentioned or to persons other than those provided, these will be considered benefits in kind and will be taxable and social contributions will be withheld. Moreover, if the 2% payroll limit is exceeded, even if wage contributions and taxes are withheld, the expenditure will be non-deductible for the company.
Although the expression used by the law is "the granting of goods in cash or in kind", this category exempt from income tax does not include gift vouchers, which are subject to another tax treatment.
According to Article 2 of law no. 193/2006 regarding gift vouchers, gift vouchers may be granted internally as social expenditures.
Being listed in this category, gift voucher expenditures will be deductible from the corporate tax within an upper limit of 2% of the payroll. According to Article 55 (3)(h) of the Tax Code, an income tax rate of 16% is withheld for such vouchers, but, according to Article 296^15 (o) of the Tax Code, social contributions are not due. By interpreting this regulatory basis, namely social security exemption granted by law, we believe that no social contributions are due for gift vouchers, even if such expenses exceed the 2% limit for social expenses when calculating the corporate tax. In our argumentation we would like to underline that these gift vouchers are given according to the law regarding gift vouchers, which involves their purchase only from authorized facilities and these may only be used in predefined formats, with all requirements met. Social contributions would be due for these gift vouchers if these were purchased from unauthorized facilities or were granted to employees in a manner other than that provided for by the law.
The collective labor agreement should specify the conditions under which the vouchers can be offered to employees. It is indicated that the events on which these vouchers are granted have an occasional nature.
According to Article 55. (4)(a) and Article 296^15 (b), no taxes and contributions are withheld for such grants. If these fall into the 2% payroll limit, they are considered tax deductible. Otherwise, even if taxes and contributions were withheld, these will be recorded as non-deductible.
Depending on the purpose of such events, these can be classified in terms of deductibility or withholding.
Thus, if we are talking about an event that is aimed at employee training and improvement in relation to the activity performed, then the related costs will be deductible and no income tax or social contributions are to be withheld (Article 21 (2)(h), Article 55 (4)(n) and Article 296^15 (3)(k)). In order to be included in this category, documentation is to be submitted for supporting the purpose indicated. It is advisable to prepare a dossier on the team building activity, which needs to include the agenda of the event, the list of participants for each training or program activity. It would also be appropriate to have a holistic approach to the objectives pursued, i.e. management decision on the opportunity of incurring such expenses in the light of the results to be obtained. After the conclusion of the event or subsequently, after an estimated period, the results obtained can be evaluated via participants' feedback sheets and the factual findings of the persons responsible (Department of Human Resources, team managers, project managers, etc.). If vocational training is not the goal of such events, then these events will be considered benefits in kind, thus social contributions and tax aliquot is due for each participating employee. Fiscal risk reduction can be obtained by concretely indicating the participants to these events, existing clients or potential collaborators of the company (as far as possible) in terms of suppliers or possible beneficiaries.
by George Rus
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by Alin Luncan
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