Tax Regulations
Recent amendments to the Romanian Fiscal Code, specifically to Article 31 regulating the tax losses are applicable starting with 2024 (or the modified fiscal year beginning in 2024, as applicable).
Under these changes, annual tax losses as declared through the corporate income tax return can be offset against taxable profits earned in the subsequent 5 consecutive years, up to a limit of 70% of the taxable profit.
Impact of the tax update for the companies
This new amendment may have a significant impact on companies with tax losses considering that prior tax regulations, applicable before 2024, allowed companies to carry forward their tax losses in full, over a longer period, specifically 7 consecutive years.
The text of the law also specifies that the recovery of losses must be carried out in the order in which they were recorded, at each corporate income tax payment deadline.
This legislative change reflects a trend toward tightening the conditions for carrying forward tax losses, aiming to accelerate their recovery over a shorter period compared to the previous timeframe.
Reducing the carry forward period from 7 years to 5 years can be interpreted as a measure to accelerate companies’ return to profitability or as a catalysator for optimizing and organizing economic activities more efficiently, reducing reliance on long-term accumulated tax losses.
The introduction of the 70% limit on annual taxable profit adds an additional layer of restriction. In practice, even if a company achieves substantial profits in a given year, it will not be able to fully utilize its prior tax losses to reduce the tax due, but only up to 70% of that profit. This could particularly impact companies with significant losses accumulated by 2024, forcing them to more carefully plan their cash flows and medium-term tax strategies.
On the other hand, maintaining the 7-year regime for losses recorded prior to 2024 ensures a gradual transition between the two systems. However, this creates additional complexity for taxpayers, requiring them to maintain separate records for losses subject to the previous tax regime and those under the current one, applying different tax rules depending on the year the losses were recorded.
Impact on companies’ financial planning
The taxpayers will need to adapt quickly to these rules, optimizing their strategies to minimize tax losses and maximize profitability in a shorter time frame. Over time, the real impact of these changes will depend on how companies manage to organize themselves, manage their activity as efficiently as possible, and navigate this new legislative framework.
