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Issue 35

All about the taxation of PFAs in 2015

Ioana Varga
Expert bookkeeper Managing Partner @ A&I Consulting



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

By definition, a self-employed individual is a business entity authorised to carry out any business activity permissible under the law, using mainly its own labour. The business activities can cover all the fields, trades, occupations or professions which are not expressly forbidden under the law for self-employment. The business activities in which a self-employed person can engage as PFA are those listed in the NACE Code and not exclusively regulated by a specific law.

Any business activity conducted on a permanent, occasional or temporary basis in Romania by PFAs should be registered and licensed, according to the provisions of the Government Emergency Ordinance no. 44/2008. The operating licence does not exempt PFAs from the obligation to secure, prior to commencement of the activity, all the authorisations, permits, licenses, etc. stipulated by special laws for certain business activities.

For setup purposes, a PFA can register with the Trade Registry (in which case a Certificate of Registration is issued) or, in the case of liberal professions, with ANAF (National Agency for Fiscal Administration), (in which case a Certificate of Fiscal Registration is issued).

What taxes and contributions are payable by PFAs?

In terms of taxation, a self-employed individual can be taxed on net earnings basis or on fixed income basis.

Taxation on net earnings basis entails the application of the tax rates to the difference between receipts and payments.

Taxation on fixed income basis only applies to PFAs without employees and entails the application of the tax rates to a fixed amount, determined annually by ANAF – through its local Agencies, according to the type of activity and other certain criteria. Each county shall establish the NACE codes eligible for this type of taxation. According to the Fiscal Code, the pre-determined income amount cannot be lower than the applicable national minimum wage at the time of reference, multiplied by 12. Currently, the minimum wage is 975 RON, and will increase to 1,050 RON from July 1, 2015. Fixed income bases can vary greatly from one county to another.

For example, for a PFA conducting activities related to NACE code 6202 – Information technology consulting, who earns an average income of approximately 6,000 RON/month and resides in Cluj-Napoca, the regulated fixed income base for 2015 is of 36,270 RON per year.

If the individual in question is also employed under an employment contract, the taxes applicable to the fixed income base are the income tax of 16% and CASS (Health Insurance Contributions) of 5.5%. As such, the payments to the state budget and health insurance fund would amount to 7,798 RON per year, payable in 4 quarterly instalments.

If the same PFA were registered in Bistriţa, the fixed income base would be of 19,700 RON per year, resulting in total taxes of approximately 4,235 RON per year.

Sticking to the above example, on net earnings basis this PFA would owe annual taxes of 15,480 RON per year (assuming that no tax deductions apply).

In the event that the PFA works as a full-time employee under an employment contract, it would be entitled to request the local administration to reduce the fixed income base by 50%.

The trend created by the lawmaker in recent years was to reduce the number of NACE codes eligible for fixed income-based taxation and to increase such fixed income amount from one year to the other.

The taxpayers who in the previous financial year earned income from independent activities and were subjected to fixed income-based taxation have the opportunity to change the taxation classification and to shift to taxation on net earnings basis.

The shift from fixed income basis to net earnings basis taxation is compulsory if the gross income for the previous financial year exceeds the RON equivalent of Eur 100,000; the new system must be maintained for at least 2 consecutive years (the exchange rate used for equivalency purposes is the average annual exchange rate, as communicated by the National Bank of Romania at the end of the financial year).

If the PFA performs several activities for which the net income is determined on fixed income basis, the annual net income shall result from the addition of all the fixed income bases at the place where each activity is performed.

Is the retirement contribution compulsory or not?

Currently, besides the contributions specified as compulsory in the above example (income tax and CASS), if the respective PFA is not also an employee at the same time, it will owe retirement contributions (CAS). This contribution equates to 26.3% of the declared income, i.e. the income for which the respective individual wants to be insured. According to regulations, this income cannot be lower than 35% of the average gross salary income used for the preparation of the national social security budget, nor higher than the equivalent of 5 times the average gross salary income used for the preparation of the national social security budget.

For example, the average gross salary income in 2015 is of 2,415 RON, on the rise from 2,298 RON in 2014. Consequently, the CAS calculation basis cannot be lower than 845 RON or higher than 12,075 RON. Applying the 26.3% CAS rate to these amounts, a PFA will pay a retirement contribution ranging from a minimum of 222 RON (35% x 2,415 RON x 26,3%) to a maximum of 3,176 RON (5 x 2,415 RON x 26,3%) per month.

Is a self-employed individual entitled to unemployment or health benefits?

Besides the mandatory contributions listed above, voluntary contributions can be made to the unemployment insurance fund, the work-related accidents and occupational diseases insurance fund and to the fund for medical leave and health insurance benefits (FNUASS).

As such, although the unemployment insurance is not mandatory for a self-employed individual, it can be voluntarily contributed if the PFA in question wants to be eligible for unemployment benefits in case the PFA has no activity. The monthly unemployment contribution is of 0.5% of the insured income. Self-employed individuals may conclude an unemployment insurance contract with the Employment Agency with jurisdiction over their registered office.

The contributions for medical leave and health insurance benefits (FNUASS) are also voluntary, but a PFA may opt to pay them in order to benefit from medical leave benefits.

According to the Emergency Government Ordinance no. 158/2005 on medical leave and health insurance benefits, such contribution is of 0.85% of the taxable income.

Compulsory maintenance of books of accounts

Beside the taxation classification, the differences between the two taxation systems also relate to the account books which need to be maintained.

Self-employed individuals subject to taxation on fixed income basis apply the simplest accounting and ANAF reporting procedures, completing only that section of the General Ledger related to accounts receivables for the relevant activity. The goal of recording only accounts receivable transactions is to be able to track at which point the turnover limit above which the PFA will be treated as VAT payer is reached/exceeded (note that the income, not receivables, determines the turnover, which should be lower than 220,000 RON per year so that the PFA is not VAT payer).

As of March 1, 2015, single-entry bookkeeping, compulsory for PFAs subject to net earnings-based taxation, shall observe the provisions of the Order of the Ministry of Public Finance no. 170/2015. The main changes entailed by this Order are:

What does dependent activity mean?

Regardless of the taxation classification, a possible risk incurred by self-employed activities is the re-interpretation by ANAF as activity dependent on the payer of salary income, if the PFA is also an employee under an ongoing employment contract.

This year, the spot-check audits and extended fiscal audits conducted by ANAF (in companies specialising in IT and other lines of business) have focused mainly on salary income, performing detailed verifications of all the expenses incurred by a company, whether with the provision of services by PFAs or other expenses likely to be considered employee benefits in kind. By analyzing the relationship between the company and the PFA, cross-audits may identify the nature of this relationship - dependent or independent.

The consequence of re-classifying the self-employed activity as dependent is that the mandatory income tax and social contributions shall be recalculated similarly to employee salary contributions and payable jointly by the employer and the employee. The word jointly refers to the possibility of the fiscal agent to address either the income payer (employer), or the work provider (employee).

In art. 7, paragraph (1), point 2.1, the Fiscal Code defines the criteria that should be met by an activity in order to be considered dependent:

  1. The income beneficiary is in a subordinate relationship with the income payer, respectively the management of the income payer and observes the work conditions prescribed by the latter, such as: job duties and performance thereof, place of work, working hours.
  2. In performing the work, the income beneficiary uses exclusively the income payer’s facilities, respectively properly-equipped spaces, special or safety work equipment, work supplies, etc. and contributes his/her physical or intellectual work, not capital.
  3. For business purposes, the income payer bears the income beneficiary’s travelling expenses, such as delegation-assignment allowances within the country and abroad, as well as other similar expenses.
  4. The income payer bears the annual leave entitlement and the allowance for temporary work incapacity on behalf of the income beneficiary.

If any of the 4 criteria above occurs in the relationship between the company and the PFA, the activity can be re-classified as dependent.

When deciding to start a business activity as PFA, consideration should be also given to the fact that the individual’s liability for the obligations assumed in relation to the activity covers the entire personal property. As a trader, the self-employed individual can be subject to the insolvency procedure.

What legislative changes are in store for 2016?

Although it should be the simplest form of conducting business, the legislation underwent continuous changes for this segment.

Currently, there is a draft Fiscal Code pending approval, which also targets changes in the taxation of the income obtained from independent activities, some favourable, some less favourable.

Below are the main changes proposed in the draft of the new Fiscal Code:

In light of the above, in conducting business activities as PFA consideration should be given to the taxation system, on fixed income basis or net earnings basis. Also, to avoid any legal problems, it is important that the PFA should not be beneficiary-dependent.

The fiscal agenda for 2016 features some favourable, as well as unfavourable changes. Our recommendation is to weigh these changes when preparing the financial planning, in order to make the best possible decisions.

Good luck!

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