20 Nov 2024

Romania and Great Britain have updated their convention for the elimination of double taxation, the changes being necessary for Romania’s candidacy to join the OECD, as well as following the entry into force of some provisions of the Trade and Cooperation Agreement between the European Union and the United Kingdom.

Some of the most relevant provisions of the new Convention:

• The new convention provided for distinct regulations regarding the income obtained in whole or in part by fiscally transparent entities, in accordance with the provisions of the 2nd action of the BEPS plan regarding the neutralization of the effects of hybrid arrangements;
• In the article referring to the permanent establishment, as a result of the provisions contained in the 7th BEPS action to combat the phenomenon of fragmentation of the activity of an enterprise or a group of enterprises closely related by carrying out activities that do not generate permanent establishments, introduced two new paragraphs describing the circumstances in which one enterprise is closely related to another and a provision to prevent the fragmentation of a single economic operation into several small operations, in order to then claim that each of these constitutes a activity of a preparatory or auxiliary nature, which would not generate a permanent establishment;
• Profits from a construction site or a construction or installation project will be taxed in the state where the activity is carried out only if that activity is carried on for a period of more than 12 months;
• The introduction of article 7 “Profits from business activity” of the OECD Convention model, as a result of the changes introduced in the domestic legislation in 2023, regarding the method of establishing the profits obtained by the permanent establishments of non-resident persons, in accordance with the provisions of the 2010 Report on the allocation of profits to permanent establishments, issued by the OECD;
• In order to promote and stimulate investment and financing between the two states, the tax rates for withholding income regulated by the new convention, respectively for income in the form of dividends, interest and royalties, are lower than those in the 1975 convention , following the trend of decreasing tax rates provided by the national legislation of both states. Thus, in the case of dividends, the tax rate provided for by the new convention decreased to 5% compared to 10%, in the case of interest, the tax rate decreased to 3% compared to 10%, and in the case of royalties, the tax rate decreased to 3% compared to 10% and 15%, respectively, as provided for in the 1975 convention. In the case of dividends, both parties will apply provisions similar to those contained in the Directive 2011/96/EU of the Council of November 30, 2011 on the common tax regime, which applies to parent companies and their subsidiaries from different member states, with the subsequent amendments, as they are transposed into the internal legislation of the two states, in the sense that the state from which the dividends are paid will exempt these dividends from tax, when they are received by legal entities resident in the other state and the beneficiaries of these dividends directly or indirectly own at least 10% of the share capital of the company paying dividends, for an uninterrupted period of at least one year. The exemption from tax in the source state of dividends also applies to dividends received by a recognized pension fund that meets the condition of holding the capital of the company paying the dividends for an uninterrupted period of at least one year.