The Romanian IT Industry has considerably evolved over the last couple of years, becoming one of the fastest growing sectors in the country. With its excellent potential, solid business climate, and tax incentives for software developers, Romania has become an attractive destination for investors worldwide.
To accelerate the tech industry’s growth, the government introduced several tax incentives to boost innovation and investment in the IT sector.
One of those initiatives was the introduction of the salary tax exemption for the employees at Romanian companies operating within the IT field. In other words, this specific tax incentive is applicable to employees specialized in software development and can be implemented by companies whose business activities include the development and sale of software programs.
In this article, we’ll discuss the logic behind this tax incentive by covering the eligibility process, qualification standards, required documents, and key challenges that come with this type of government initiative.
How does the tax system in Romania work?
The income tax exemption for the IT sector is a specific tax exemption applicable to employees specialized in software development or Romanian companies operating within the IT industry which develop and sell software as part of their business.
More specifically, according to Romanian law (Order 1168/2017 regarding the tax exemption criteria applicable to the software development activities), the income tax exemption applies to employees at Romanian companies whose business activities include the creation/development of software programs. Other requirements also apply (e.g., the employee must hold a specific position at the company).
The employer can apply the tax exemption directly without confirmation or approval from the tax authorities.
However, as with any other tax laws, certain conditions need to be met both by the companies and their eligible employees to qualify for this tax incentive.
Qualification standards for tax incentives in Romania
The first requirement states that company applying for these fiscal advantages must be registered with one of the NACE codes as a business line (code 5821, 5829, 6201, 6202, 6203, 6209), clearly stating “computer software creation” in its Articles of Incorporation.
The second requirement that needs to be fulfilled in order to benefit from the aforementioned tax advantages is compliance with the main criteria of Order 1168/2017 regarding computer programming activities.
The main criteria include:
- For employees:
The employee must hold a title listed in the Order Annex
The employee must work in a specialized IT department in accordance with the internal organization of the company
The employee must have a diploma after the completion of short-term or long-term academic studies issued by an accredited higher education institution or hold a baccalaureate diploma while carrying out one of the activities mentioned in the Order Annex
- For companies:
The company must obtain income exclusively from the software development activities during the previous fiscal year.
*The company must generate a yearly income of at least 10,000 euros per employee within the IT department (tax-exempted employees).
*Exceptions for this condition:
- Newly established companies are exempted from fulfilling this condition for the first two years of activity (year of establishment and the following fiscal year)
- Companies that have gone through a reorganization are also exempted from this condition for the year in which the reorganization took place.
Required documents for tax exemption eligibility
The list of the supporting documents related to the classification of the persons to be exempted from income tax includes:
- The employer’s organizational chart
- In-depth job description
- A copy of the diploma awarded after the completion of the long-term academic studies (e.g., university), i.e., the copy with the mention “according to the original,” which acts as a certificate of equivalence or recognition of the diploma issued by the specialized structures of the European Economic Area and the Swiss Confederation, and the Ministry of National Education.
- In case if graduation diploma hasn’t yet been issued, the certificate of graduation of the university license is required
- A separate payroll report which mentions explicitly the employees benefiting from the income tax exemption (according to Art. 60 pt. 2 of the Law no. 227/2015 addressing the Fiscal Code)
- Supporting documents that explicitly indicate the revenue generated from the creation of computer programs
- The copy of the individual labor contract with the words “according to the original”
- The internal order, with the approval of the employer’s management that certifies the initiation to create computer programs
To stay up to date with the latest amendments on tax incentives for software developers in Romania, click here.
Key challenges associated with tax incentives in Romania
With the rapid growth of the Romanian IT industry, the government has shown significant support to local enterprises and employees. It not only provided financial help to support companies in high-volume hiring but also introduced tax incentives for the employees within the tech field.
The salary tax exemption for the IT workers was one of the initiatives taken by the state, which has proven to be an important factor considered during salary negotiations. It was appreciated by the employees and companies that used this tax incentive as a tool to attract new candidates and retain highly qualified employees.
However, over the years, tech companies have taken advantage of the salary tax exemption for the software development field, trying to name different kinds of jobs, such as janitors and accountants, as “IT employees.” It’s become harder to detect tax evasion at its early stages as employers can apply this exemption directly without approval from the tax authorities.
As was mentioned by Alexandru Lăpușan, an IT entrepreneur and founder of Zitec, for every two developers who pay labor taxes, there is one who works through a PFA/micro. According to the Romanian law on taxation, a single person can establish a micro-enterprise, which is taxed around 1%-3% depending on the number of employees. This allows companies to avoid paying the standard tax rate of 16%, which is considerably higher, making it a less attractive option.
As a result, tax evasion in IT sector becomes an important issue as these practices are carried out not only by start-ups but also by large corporations. This behavior has raised some discussions on how efficiently the government budget is used to support the growing industry, drawing attention to the lack of regulatory action from ANAF.
Considering the importance of the IT industry, continuous government support is essential
With the rapid pace of technological development, the government plays a crucial role in fueling the growth of the Romanian IT industry, expanding its horizons, and helping companies compete in the international arena.
Despite the challenges that come along with the tax incentives for software developers, it’s important for the government to continue to support the IT industry by maintaining current fiscal initiatives and making necessary amendments to address the concerns surrounding the exploitation of the state welfare.
However, industry growth comes with its necessary components. For the companies to grow, they need to build a strong and reliable team, but how do you do that amidst the current competition in the tech talent market?
From the company’s perspective, finding the potential candidates to join one’s team and catching their attention despite all the noise in the talent market is key. From the developer’s perspective, finding a workplace that shares similar values and offers the flexibility to work remotely plays a significant role in the selection of job opportunities they come across.
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