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Issue 34

Income tax exemption for software developers

Ioana Varga
Expert bookkeeper Managing Partner @ A&I Consulting



Ioana Costea
Expert bookkeeper Managing Partner @ A&I Consulting
OTHERS

In the case of small and medium-sized enterprises and particularly in the case of start-up companies, the accounting department or the accounting consultants serve as support for the economic and financial decision-making.

Therefore, the useful financial-accounting information herein provided will address the accounting issues faced by developers, designers and IT Companies from Cluj-Napoca and elsewhere.

For this issue of the magazine, we chose to offer some guidelines on how to access income tax exemptions for developers.

We believe that the procedure related to this tax exemption is not clear enough to enable a good implementation, mainly in terms of the time when a company can apply for this incentive.

Without getting into details, in accordance with the Order of the Minister of Public Finance no. 1479 of September 2nd, 2013, both the employer and the employee must meet several criteria.

The company requesting this income tax exemption (16% applied to the taxable amount) must conduct its activity in Romania and specialise in computer programming (NACE code 5821, 5829, 6201, 6202, 6209).

Furthermore, to qualify for this exemption, the company must have obtained $ 10,000 turnover in the previous fiscal year for each employee who will benefit from this exemption during the current fiscal year. This requirement is completely discriminating and unfair for start-up companies, since it involves waiting for the end of a fiscal year to demonstrate their ability to achieve the turnover threshold required for this exemption. Unfortunately, no provision of Order 1479 entitles a start-up company to apply this exemption. In this respect, we believe that the IT sector should suggest some amendments to the current text of the law.

For example, to qualify for the income tax exemption for 10 employees in 2016, a company should have achieved $ 100,000 turnover in 2015. The exemption may also be granted to employees who signed the employment agreement in the same year when the grant was accessed, as long as the turnover for the previous year covers the amount. The turnover does not necessarily have to be generated by the employees for whom the exemption is granted, but also by freelance collaborators, provided that it derives from the activities required by law, as listed above.

As regards the employee requirements, to qualify for the income tax exemption, an employee must have a Bachelor's Degree in IT (see picture below) and hold one of the following positions in the company: analyst, developer, software architect, database administrator, software engineer or project manager.

For this exemption to be applicable for the company, the position must be within a specialized computer science department and it must be listed in the organizational chart of the employer.

Accounting recommendations

By translating all these data into accounting, we intend to clarify, both for companies and for employees, certain basic facts which are strictly related to this tax exemption procedure.

The individual employment agreement stipulates the gross wage received by the employee for the work carried out. The company withholds the social contributions from the gross wage, and the resulting amount is the taxable income used for the calculation of the income tax payable by the employee. This results in the net income, namely the employee's wage entitlement.

As such, the income tax is withheld from the employee's taxable income. The resulting amount is the net income payable by the company to the employee.

The income tax exemption relates to amounts owed by the employee for salary income, and withheld by the employer from the taxable income. Starting with the 2nd fiscal year of the Company, if eligible for tax exemption, the income tax shall no longer be withheld from the taxable income. Therefore, the taxable income is equal to the net wage.

In other words, the wage payable by the company to the employee increases with the amount of tax exempted.

Given the above, to avoid unpleasant situations with employees who will benefit from tax exemption starting with the following fiscal year, we recommend one of the two approaches below, at the time of employment:

  1. This exemption can be used by the employer as a tool to increase the employee's income. For the beneficiaries of income tax exemption from the subsequent fiscal year, the surplus resulting from this exemption may represent an increase in the net income.

  2. Please note that the implementation of this exemption will generate an increased net wage. If the initial net wage negotiation with the employee included the benefits entailed by this income tax exemption, you have to bear in mind that it is prohibited to reduce the increased net salary in order to reach the initially negotiated salary, without the consent of the employee. In this case, we recommend informing the employee, at the time of employment, on the reduction of the gross wage during the fiscal year when the income tax exemption applies.

With this article, we aimed to assist IT entrepreneurs operating under the laws of Romania to better understand the requirements underlying this tax relief (tax exemption). As specified, we want to create an open communication channel, to address the most urgent topics. You can send us a message on your topics of interest.

We warmly welcome your suggestions at office@aiconsulting.ro, with the kind request to specify 'For Today Software Magazine' as subject.

The answers will be available in the next issue of the magazine.

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