By definition, a self-employed individual is a business entity authorised to carry out any business activity permissible under the law, using mainly its own labour.
The business activities can cover all the fields, trades, occupations or professions which are not expressly forbidden under the law for self-employment. The business activities in which a self-employed person can engage as PFA are those listed in the NACE Code and not exclusively regulated by a specific law.
Any business activity conducted on a permanent, occasional or temporary basis in Romania by PFAs should be registered and licensed, according to the provisions of the Government Emergency Ordinance no. 44/2008. The operating licence does not exempt PFAs from the obligation to secure, prior to commencement of the activity, all the authorisations, permits, licenses, etc. stipulated by special laws for certain business activities.
For setup purposes, a PFA can register with the Trade Registry (in which case a Certificate of Registration is issued) or, in the case of liberal professions, with ANAF (National Agency for Fiscal Administration), (in which case a Certificate of Fiscal Registration is issued).
What taxes and contributions are payable by PFAs?
In terms of taxation, a self-employed individual can be taxed on net earnings basis or on fixed income basis.
Taxation on net earnings basis entails the application of the tax rates to the difference between receipts and payments.
Taxation on fixed income basis only applies to PFAs without employees and entails the application of the tax rates to a fixed amount, determined annually by ANAF – through its local Agencies, according to the type of activity and other certain criteria. Each county shall establish the NACE codes eligible for this type of taxation. According to the Fiscal Code, the pre-determined income amount cannot be lower than the applicable national minimum wage at the time of reference, multiplied by 12. Currently, the minimum wage is 975 RON, and will increase to 1,050 RON from July 1, 2015. Fixed income bases can vary greatly from one county to another.
For example, for a PFA conducting activities related to NACE code 6202 – Information technology consulting, who earns an average income of approximately 6,000 RON/month and resides in Cluj-Napoca, the regulated fixed income base for 2015 is of 36,270 RON per year.
If the individual in question is also employed under an employment contract, the taxes applicable to the fixed income base are the income tax of 16% and CASS (Health Insurance Contributions) of 5.5%. As such, the payments to the state budget and health insurance fund would amount to 7,798 RON per year, payable in 4 quarterly instalments.
If the same PFA were registered in Bistriţa, the fixed income base would be of 19,700 RON per year, resulting in total taxes of approximately 4,235 RON per year.
Sticking to the above example, on net earnings basis this PFA would owe annual taxes of 15,480 RON per year (assuming that no tax deductions apply).
In the event that the PFA works as a full-time employee under an employment contract, it would be entitled to request the local administration to reduce the fixed income base by 50%.
The trend created by the lawmaker in recent years was to reduce the number of NACE codes eligible for fixed income-based taxation and to increase such fixed income amount from one year to the other.
The taxpayers who in the previous financial year earned income from independent activities and were subjected to fixed income-based taxation have the opportunity to change the taxation classification and to shift to taxation on net earnings basis.
The shift from fixed income basis to net earnings basis taxation is compulsory if the gross income for the previous financial year exceeds the RON equivalent of Eur 100,000; the new system must be maintained for at least 2 consecutive years (the exchange rate used for equivalency purposes is the average annual exchange rate, as communicated by the National Bank of Romania at the end of the financial year).
If the PFA performs several activities for which the net income is determined on fixed income basis, the annual net income shall result from the addition of all the fixed income bases at the place where each activity is performed.
Is the retirement contribution compulsory or not?
Currently, besides the contributions specified as compulsory in the above example (income tax and CASS), if the respective PFA is not also an employee at the same time, it will owe retirement contributions (CAS). This contribution equates to 26.3% of the declared income, i.e. the income for which the respective individual wants to be insured. According to regulations, this income cannot be lower than 35% of the average gross salary income used for the preparation of the national social security budget, nor higher than the equivalent of 5 times the average gross salary income used for the preparation of the national social security budget.
For example, the average gross salary income in 2015 is of 2,415 RON, on the rise from 2,298 RON in 2014. Consequently, the CAS calculation basis cannot be lower than 845 RON or higher than 12,075 RON. Applying the 26.3% CAS rate to these amounts, a PFA will pay a retirement contribution ranging from a minimum of 222 RON (35% x 2,415 RON x 26,3%) to a maximum of 3,176 RON (5 x 2,415 RON x 26,3%) per month.
Is a self-employed individual entitled to unemployment or health benefits?
Besides the mandatory contributions listed above, voluntary contributions can be made to the unemployment insurance fund, the work-related accidents and occupational diseases insurance fund and to the fund for medical leave and health insurance benefits (FNUASS).
As such, although the unemployment insurance is not mandatory for a self-employed individual, it can be voluntarily contributed if the PFA in question wants to be eligible for unemployment benefits in case the PFA has no activity. The monthly unemployment contribution is of 0.5% of the insured income. Self-employed individuals may conclude an unemployment insurance contract with the Employment Agency with jurisdiction over their registered office.
The contributions for medical leave and health insurance benefits (FNUASS) are also voluntary, but a PFA may opt to pay them in order to benefit from medical leave benefits.
According to the Emergency Government Ordinance no. 158/2005 on medical leave and health insurance benefits, such contribution is of 0.85% of the taxable income.
Compulsory maintenance of books of accounts
Beside the taxation classification, the differences between the two taxation systems also relate to the account books which need to be maintained.
Self-employed individuals subject to taxation on fixed income basis apply the simplest accounting and ANAF reporting procedures, completing only that section of the General Ledger related to accounts receivables for the relevant activity. The goal of recording only accounts receivable transactions is to be able to track at which point the turnover limit above which the PFA will be treated as VAT payer is reached/exceeded (note that the income, not receivables, determines the turnover, which should be lower than 220,000 RON per year so that the PFA is not VAT payer).
As of March 1, 2015, single-entry bookkeeping, compulsory for PFAs subject to net earnings-based taxation, shall observe the provisions of the Order of the Ministry of Public Finance no. 170/2015. The main changes entailed by this Order are:
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The General Ledger and the Inventory Ledger no longer have to be initialled by ANAF;
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The self-employed individual willing to shift to double-entry bookkeeping may do so from the beginning of the financial year following the year in which the decision to change the bookkeeping system is made;
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PFAs set up after March 1, 2015 may opt for double-entry bookkeeping or single-entry bookkeeping from the very beginning. If the former option is made, all the regulations valid for economic operators shall apply, including the preparation of the trial balance, but excluding the annual financial statements.
In conclusion , we must consider the type of taxation in commercial activity as PFAs, and before starting the activity we must the require the permits and licenses provided in the law for the business.
For any specific questions about PFAs taxes and contributions, we are at your disposal.
A&I Consulting Team