The project to amend the Fiscal Code - free for tax havens?
Mihaela Mitroi, Partner, Fiscal and Legal Assistance, EY Romania

Author: Mihaela Mitroi, Partner, Fiscal and Legal Assistance, EY Romania, leader of the fiscal and legal consultancy activity in the South cluster of the EY region Central and Southeast Europe and Central Asia (CESA)

Among the topics to which the recent project to amend the Fiscal Code aims to respond is a new definition of the place of effective management. A very interesting definition that comes with the legislator and here are the arguments.

First of all, what is the place of effective leadership? Very briefly, it represents the place where the management of the company makes the key decisions necessary for carrying out the activity (for example, financial, operational, commercial, etc.).

What is this concept for? According to the rules of international taxation, a company must pay tax on profit where it has the place of exercising effective management. When it is located in a state other than the one where the company is incorporated, it will pay tax only in the state where the place of effective management is located. In the current context, in which we see increasingly volatile business models and a great deal of flexibility as to where we operate, this concept is as real as possible. Thus, it was necessary to introduce in the Fiscal Code the definition of the place of effective management.

The surprise came, however, from the way in which this definition is formulated in the draft amendment to the Fiscal Code and the interpretations that may derive from it.

Without going into a detailed analysis of this definition, which should ask many questions to tax specialists, I would point out only two aspects:

First of all, it seems that the notion of place of effective management does not apply to companies located in countries with which Romania does not have a convention to avoid double taxation. For example, companies in Seychelles, the US and British Virgin Islands, the Marshall Islands and many other jurisdictions (some of which are even on the list of non-cooperative jurisdictions drawn up by the European Union) cannot have effective management in Romania. This means that, for companies registered in these countries, there would be no risk that the authorities would consider that they should pay corporate tax in Romania, even if, in fact, they are administered in Romania.

It is surprising, given the fact that in international practice this concept is often used precisely to respond to such situations. Of course, the general anti-abuse rules can still be invoked. However, the concept of place of effective leadership should have been the most useful tool in such situations.

Secondly, the notion of place of effective management does not concern the companies that have as object of activity "a simple administration of securities or other assets". This formulation leads us to the idea that holding companies or other companies that only do asset management (for example: companies that own and manage intangible assets - trademarks, patents, etc.) cannot have the place of effective management in Romania, even if the decisions are made. strategic regarding the administration of these companies are taken from Romania. Again, this interpretation surprises, considering that these situations, in international practice, were on the list of those captured by the concept of place of effective leadership.

Finally, I cannot help but notice that such an approach is divergent from the international project developed by the OECD at the request of G8 / G7 "Eroding the tax base and migration of profits" (the BEPS project), which is increasingly focusing on the substance of transactions and on the alignment between the place where the income is declared and taxed with the place where the activity is carried out.

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