article by Alexandru Ambrozie, Managing Partner and Razvan Ambrozie, Senior Tax Of Counsel Ambrozie | Legal & Strategic Counsel

A transfer pricing audit can become a criminal matter faster than expected. Where the authorities conclude that the issue is not the price charged for a genuine intra-group transaction, but whether the transaction had any factual reality at all, an administrative tax dispute may quickly move into the criminal sphere. This is not an arbitrary escalation, nor merely a change of view by the tax inspectors. It follows from a fundamental legal distinction that companies should address before the audit begins: the difference between an erroneous or improperly priced transaction and a transaction that never actually existed/or that cannot be proved. 

Not One, but Three Legal Frameworks

Romanian tax law treats improper intra-group transactions under three distinct legal frameworks, each governed by different legal instruments and producing different consequences. Any confusing between them can be a costly mistakes.

The first framework is that of transfer pricing adjustments. The transaction is real, the service was genuinely rendered, yet the pricing deviates from the arm’s length principle. In such cases, the tax authorities retrospectively recalculate the taxable base and impose interest and penalties. Regardless of the amount of prejudice assessed, the matter remains administrative and tax-related in nature.

The second framework concerns recharacterization through the substance-over-form principle. Here, the transaction is economically real, yet it has been artificially structured to obtain a tax advantage without sufficient economic substance to justify that legal form. The tax authorities disregard the fiscal effects of the legal structure selected by the taxpayer.

This falls within the doctrine of abuse of law, as developed in the jurisprudence of the Court of Justice of the European Union (CJEU), most notably in the Halifax judgment (Case C-255/02), which explicitly addresses genuine transactions structured exclusively for tax purposes rather than fictitious ones. The consequence is the reassessment of tax liabilities, not criminal prosecution.

Only the third framework enters the criminal sphere. In such cases, the transaction never actually occurred.

Article 2(f) of Law No. 241/2005 on the Prevention and Combating of Tax Evasion defines a fictitious transaction as the concealment of reality by creating the appearance of the existence of a transaction which, in fact, does not exist.

The criminal offence provided under Article 9(1)(c) requires, in addition to the objective element, namely recording expenses in accounting records without a factual basis, a specific subjective element: direct intent qualified by the purpose of evading tax obligations. In the absence of the evidence for such intent, however flawed or tax-inefficient a transaction may be, no criminal offence should exist.

The Framework Emerging in Criminal Practice

Romanian criminal case law and legal scholarship have developed a recurring analytical framework for assessing the genuine nature of an economic transaction. Although no formally codified legal test exists, the assessment of whether a transaction is fictitious generally revolves around four essential elements: the supplier/service provider, the beneficiary, the underlying goods/services, and the price.

The genuine nature of a transaction is assessed through a cumulative analysis of these elements. Where one element lacks economic credibility, it may undermine the reliability of the transaction as a whole.

The first element concerns the supplier or service provider. Did the supplier possess the actual capability to render the invoiced service or deliver the invoiced goods?

An affiliated entity, lacking personnel with the relevant expertise, operational infrastructure, or a genuine economic presence, may struggle to credibly support the claim that it rendered strategic consultancy or management services, regardless of the contractual wording employed.

The second element concerns the beneficiary. Did the recipient genuinely receive the service?

The relevant question is not whether a formal acceptance report was signed, but whether tangible deliverables, operational correspondence, decision-making processes, or other factual indicators demonstrate actual use of the allegedly rendered service. The absence of any verifiable trace of effective performance may constitute a strong indication of fictitiousness.

The third element concerns the underlying good or service itself. Does it exist as an identifiable economic performance, or is it merely a legal label reflected on an invoice?

Generic management fees, vaguely defined technical assistance, and undifferentiated intra-group services represent heightened areas of risk precisely because the underlying performance is difficult to objectify and comparatively easy to simulate through documentation alone.

The fourth element concerns pricing. Does the price reflect an economic reality, or has it been calibrated exclusively to achieve a tax outcome?

Deviation from the arm’s length principle will ordinarily trigger a transfer pricing dispute. However, a manifestly disproportionate, excessive price lacking economic rationale may, in context, function as an additional indicator of the absence of genuine economic substance.

Transfer pricing documentation, regardless of how sophisticated or methodologically robust, operates exclusively within the first framework. If a prosecutor concludes that the underlying service never existed, transfer pricing files do not constitute a defence.

Evidence of economic substance, deliverables, correspondence, and proof of actual business benefit are the only materials carrying probative value in criminal proceedings.

When an Intra-Group Transaction Becomes a Criminal Case

Recent practice of the Romanian General Anti-Fraud Directorate (DGAF) makes it possible to identify several recurring patterns which, when combined, shift a case from the sphere of tax audit into criminal prosecution.

The most frequently encountered pattern involves the use of “conduit companies” within the group structure.

Intermediary entities are introduced not to perform any genuine economic function, but rather to absorb tax liabilities which are subsequently neutralized through insolvency proceedings initiated before those liabilities become enforceable. In such situations, the architecture of the arrangement itself may demonstrate fraudulent intent without the need for additional evidentiary elements. This remains one of the most frequently prosecuted and severely sanctioned schemes in recent criminal practice.

A second recurring pattern involves circular transactions lacking genuine economic substance.

Goods or services move through multiple group entities only to return to the point of origin, generating deductible VAT or deductible expenses throughout the chain, without altering the group’s overall net economic position.

The test applied in practice is relatively straightforward: if the elimination of all intra-group transactions from the chain produces the same real economic outcome, the operations are likely fictitious.

Law No. 126/2024 introduced an additional criminal offence under Article 9(1)(h), specifically targeting the bad-faith use of the Romanian e-Invoicing system (RO e-Factura) to create an appearance of legality for fictitious transactions or to conceal the true transactional flow.

The practical implication is significant: reporting transactions through the e-Invoicing system no longer serves as a shield against a finding of fictitiousness. On the contrary, it may constitute an aggravating element if authorities establish that the system was deliberately used to camouflage the underlying economic reality.

The systematic and repetitive nature of the scheme constitutes a third filter.

Recent practice indicates that large, multi-year schemes increasingly attract the attention of specialized prosecutorial structures even where the estimated prejudice is comparatively moderate.

By contrast, an isolated transaction. however substantial in value, is more likely to remain within the administrative-tax sphere or the jurisdiction of local prosecutors.

The Critical Moment Companies Should Not Overlook

A critical point for companies is that Romanian tax authorities do not have discretion when indications of criminal conduct are identified during a tax audit.

Under Article 132 of the Romanian Fiscal Procedure Code, if during a tax audit the tax authority identifies indications of criminal conduct, it has a legal obligation to refer the matter to criminal investigative bodies.

Once the tax audit report records the conclusion that fictitious transactions have been identified, the company effectively loses control over the escalation process. There are no negotiation and no administrative resolution capable of preventing criminal referral.

Intervention by appropriate legal and tax counsel during or ideally before the tax audit, through a preventive review or pre-audit risk assessment, often represents the only meaningful window of influence.

Defence strategies constructed after criminal referral are significantly less effective and often more expensive.

The Ten-Year Limitation Period - An Overlooked Change

Law No. 126/2024 also restructured the statute of limitations framework through newly introduced Article 10¹ of Law No. 241/2005.

The limitation period for criminal liability now begins to run from the date on which the tax authority or prosecutor’s office is formally notified, but no later than ten years from the commission of the offence itself.

The implications are both concrete and immediate.

A scheme operating between 2015 and 2020 remains, in 2026, fully within the ten-year limitation period. Transactions for which the ordinary tax reassessment limitation period has already expired may nonetheless remain exposed to criminal liability.

The Risk Landscape Has Changed

Structures that once operated beneath the radar of the Romanian tax authorities are increasingly now detectable through algorithmic analysis.

The SAF-T reporting system (D406) enables automated cross-referencing between affiliated entities, making discrepancies between the purchase and sales ledgers of companies within the same group visible without human intervention.

The RO e-Factura system traces invoices throughout their entire lifecycle, from issuance to payment flagging circular invoicing chains, newly incorporated entities issuing unusually high invoice volumes immediately after registration, and transactional patterns inconsistent with ordinary business behavior.

Behavioral tax analytics further complements this framework: abrupt variations in VAT deductibility ratios, sudden increases in intra-group intangible service expenses in periods preceding tax audits, and anomalous transactional behavior increasingly form part of the authorities’ risk indicators.

The visibility of tax structures today is incomparably greater than it was merely five years ago.

Intra-group arrangements built upon formal documentation alone, without verifiable underlying economic substance, are no longer detectable solely following a whistleblower report or an audit triggered by third-party information.

They are detectable through data.

The European dimension of this risk has also been substantially reinforced. In May 2026, the EU Council provisionally agreed new rules amending Regulation 904/2010 on administrative cooperation in VAT matters, granting the European Public Prosecutor’s Office (EPPO) and the European Anti-Fraud Office (OLAF) direct access to VAT data on intra-community transactions, including information held by Eurofisc, the EU’s operational anti-VAT fraud network. Where previously these bodies depended on requests submitted to national authorities, the new framework removes that intermediary layer entirely. For groups operating cross-border, this means that transactional anomalies identified at the national level by SAF-T or e-Invoicing systems may now feed directly into European-level criminal investigations, without the delays that historically allowed exposure to remain unaddressed.

Final Thoughts on the Line Between Tax Exposure and Criminal Risk

The distinction between transfer pricing adjustments, tax recharacterization, and criminal tax evasion is not an academic subtlety. It determines the appropriate defence strategy, the timing of intervention, and perhaps, most importantly, the personal exposure of the persons involved.

An impeccable transfer pricing file is of little assistance before a prosecutor arguing that the underlying service never actually existed. The evidence that matters is fundamentally different: deliverables, operational correspondence, and proof of concrete economic benefit genuinely obtained by the Romanian entity.

Understanding this distinction before an audit begins, rather than after, may ultimately represent the difference between a manageable tax exposure and a criminal investigation.