A European holding company routes dividend income through a treaty-protected subsidiary into Romania, expecting the standard treaty rate to apply at source. The payment is made, the reduced rate is withheld – and eighteen months later the Romanian tax authority issues a reassessment, denying the treaty benefit in full and imposing interest and penalties on the difference. The structure was legally sound on paper. In practice, it collapsed at the point where substance and anti-abuse rules intersect.
Tax treaty benefits in Romania are governed by an interplay between Romania's extensive network of double taxation conventions, domestic tax legislation. Additionally. The OECD-aligned anti-abuse provisions that Romanian authorities have increasingly enforced since the transposition of EU anti-avoidance directives. Foreign companies may reduce or eliminate withholding tax on dividends, interest. Additionally. Royalties paid from Romania. provided they satisfy both formal procedural requirements and the substantive conditions now demanded by Romanian courts and the Agenția Națională de Administrare Fiscală (ANAF. National Agency for Fiscal Administration). Meeting the formal threshold alone is no longer sufficient.
This analysis examines the doctrinal foundations of treaty access in Romania, the growing gap between statutory text and administrative practice. The anti-abuse rules that now dominate enforcement. Additionally, the strategic steps that international groups should take to secure and defend their treaty positions.
Doctrinal foundations: how Romania's tax treaty network operates
Romania has concluded double taxation conventions with a substantial number of jurisdictions across Europe, Asia, and the Americas. Each convention follows, in broad terms, the OECD Model Convention structure. The conventions allocate taxing rights over income categories – dividends, interest, royalties, capital gains, and business profits – between the source state (Romania) and the residence state of the income recipient.
Under Romania's domestic tax legislation, a foreign company that receives Romanian-source income is subject to withholding tax at the statutory rate. The conventions reduce or eliminate that rate, subject to the recipient satisfying the treaty's residency and beneficial ownership conditions. The domestic fiscal code gives effect to the conventions by providing that where a convention offers a more favorable treatment than the domestic rate, the taxpayer may elect to apply the convention.
Tax residency is the gateway condition. A foreign entity must be a resident of the other contracting state for purposes of that state's tax legislation. This is determined by reference to the recipient's home jurisdiction – not Romania's. However, ANAF does not simply accept the foreign entity's self-classification. Practitioners in Romania note that the authority routinely scrutinises whether the claimed residence is substantive or merely a registration address in a low-tax jurisdiction.
Beneficial ownership is the second pillar. Romanian courts have confirmed that a recipient who acts as a conduit. passing income on to a third party under a prior contractual arrangement. Without meaningful discretion over its use. is not the beneficial owner and cannot access treaty benefits. This position aligns with the commentary to the OECD Model Convention and has been consistently applied by the Înalta Curte de Casație și Justiție (ICCJ. High Court of Cassation and Justice of Romania) in a series of rulings addressing back-to-back loan and dividend pass-through arrangements.
Corporate income tax interacts with treaty access in a specific way. Where a foreign entity has a permanent establishment in Romania. a fixed place of business through which it carries on business activities. the income attributable to that establishment is taxed at the full corporate income tax rate. Not the reduced treaty withholding rate. The permanent establishment concept is therefore both a source of exposure and, in some configurations, a planning variable. Groups that inadvertently create a permanent establishment through the activities of local agents or employees forfeit the treaty rate on income that would otherwise qualify.
The procedural gap: what the statute requires versus what ANAF demands
Formally, the procedure for claiming a treaty rate is straightforward. The foreign recipient provides a tax residency certificate to the Romanian payer. The payer applies the treaty rate at source. The certificate must cover the relevant tax year and must be issued by the competent authority of the foreign jurisdiction.
In practice, this formal mechanism has been supplemented – and in some cases effectively replaced – by a broader administrative scrutiny that goes well beyond document verification. ANAF has developed an audit approach that treats the residency certificate as a necessary but not sufficient condition. Auditors examine the underlying commercial substance of the foreign entity, its relationships with related parties, the flow of funds before and after the Romanian payment, and the contractual arrangements governing the use of the income.
Several practical gaps create exposure for international groups:
- Certificates issued for the wrong calendar year are rejected, even where the income clearly falls within the intended period.
- Certificates from jurisdictions with which Romania has no convention are treated as irrelevant, even where the recipient also holds residence in a treaty jurisdiction.
- Arrangements where the Romanian payer and the foreign recipient are related parties attract heightened scrutiny regardless of the validity of the certificate.
- The absence of a local director with genuine authority – rather than a nominee – is consistently cited by ANAF as evidence of a lack of substantive residence.
The consequence of a failed treaty claim is not merely the payment of the withheld difference. Under Romanian tax legislation, the payer bears the primary liability for incorrect withholding. Where the payer applied an incorrect reduced rate, it faces reassessment for the full statutory withholding tax, interest accruing from the original payment date, and administrative penalties. The recipient's ability to seek a refund through a mutual agreement procedure or domestic appeal does not extinguish the payer's liability in the interim.
For a detailed overview of the corporate tax obligations that frame this exposure, practitioners should review our analysis of tax law services in Romania, which covers the broader compliance environment within which treaty claims arise.
Anti-abuse rules: the principal purpose test and the ATAD dimension
The most significant development in Romanian treaty practice over the past several years is the entrenchment of anti-abuse rules derived from the OECD's Base Erosion and Profit Shifting (BEPS) project and the EU Anti-Tax Avoidance Directives (ATAD I and ATAD II). Romania transposed these directives into domestic tax legislation, and the consequences for treaty access are substantial.
The principal purpose test (PPT) is the central anti-abuse mechanism now embedded in a growing number of Romania's renegotiated conventions and applied by analogy in administrative practice. Under the PPT, treaty benefits may be denied where it is reasonable to conclude that one of the principal purposes of an arrangement or transaction was to obtain those benefits. The test is subjective in origin but increasingly applied through an objective lens: auditors assess whether the structure would have been adopted in the absence of the treaty benefit.
Romanian courts are divided on the precise application of the PPT in domestic law. Some administrative courts have required ANAF to demonstrate that the treaty benefit was the dominant purpose, not merely one among several purposes. The ICCJ has not yet issued a definitive ruling that resolves this divergence. Though the tendency of recent decisions favours a broader reading. one that allows denial where the treaty benefit was a material, rather than exclusive, motivation.
The limitation on benefits (LOB) provisions present in some of Romania's bilateral conventions operate differently. They deny benefits to entities that do not meet defined objective criteria – ownership tests, activity tests, publicly traded company status – regardless of the taxpayer's intent. Where a convention contains both a PPT and an LOB clause, practitioners in Romania treat the LOB as the primary filter and the PPT as a residual catch-all.
The ATAD-derived controlled foreign company (CFC) rules add a further layer. A Romanian-resident parent that controls a foreign entity paying artificially low tax may be required to include that entity's undistributed income in its own Romanian corporate income tax base. This operates in the opposite direction to the treaty withholding concern – it taxes outbound Romanian investment rather than inbound Romanian payments – but it constrains the structuring options available to Romanian-based international groups.
The general anti-avoidance rule (GAAR) under Romania's domestic fiscal code applies to artificial arrangements that have no commercial substance and are designed primarily to obtain a tax advantage. ANAF has used the GAAR to challenge treaty-based structures even in cases where the specific anti-abuse provisions of the relevant convention were not directly engaged. The scope of the GAAR is broad and its application unpredictable, which means that arrangements relying solely on technical compliance with the convention are increasingly vulnerable.
To discuss how anti-abuse rules under Romanian tax legislation apply to your cross-border structure, contact us at info@ferrazwhitmore.com.
Cross-border implications for European investors and the EU dimension
For European investors operating through Romanian subsidiaries or receiving Romanian-source income, the interaction between treaty rules and EU law creates both protections and complications. Romania is an EU member state, and the fundamental freedoms. particularly the free movement of capital and the freedom of establishment. impose limits on how Romania may treat intra-EU cross-border payments relative to domestic ones.
The EU Parent-Subsidiary Directive eliminates withholding tax on dividend distributions between qualifying parent and subsidiary companies across EU member states, subject to an anti-abuse clause that Romania has implemented through its domestic tax legislation. Where the directive applies, the question of treaty benefits becomes secondary. However, the directive's qualifying thresholds – minimum shareholding and holding period requirements – mean that a significant portion of intra-EU investment does not qualify and must rely on the relevant bilateral convention.
The EU Interest and Royalties Directive performs the same function for cross-border interest and royalty payments between associated companies. Again, the anti-abuse clause is material: Romanian authorities have denied directive benefits to arrangements where the Romanian payer and the EU recipient were associated but the payments were routed through the recipient to a third-country ultimate parent.
A non-obvious risk for EU groups is the interaction between state aid rules and tax arrangements. Where a Romanian tax authority grants a favourable ruling or interpretation that is specific to a particular taxpayer and cannot be justified by reference to the general tax system. That ruling may constitute state aid under EU law. The practical relevance of this risk is limited to large-scale rulings, but groups seeking advance pricing agreements or specific treaty interpretations from ANAF should be aware of the potential EU dimension.
For businesses operating across the Iberian and Central European corridor, the contrast between Romania's approach and that of other civil law systems is instructive. Our deep analysis of tax treaty benefits in Portugal illustrates how a comparable EU member state manages the same BEPS-derived obligations, with differences in administrative practice that matter for structuring decisions at the group level.
The permanent establishment risk is particularly acute for technology and services businesses. A Romanian client-facing operation managed by employees who have authority to conclude contracts on behalf of a foreign parent may constitute a dependent agent permanent establishment under the applicable convention. Post-BEPS treaty revisions have expanded the definition of dependent agent permanent establishment, and Romania's conventions renegotiated after 2017 reflect this broader scope. Groups that have not reviewed their Romanian operational structures against the revised definition face exposure that may not surface until a tax audit several years after the relevant activity commenced.
Strategic recommendations and the outlook for Romanian treaty practice
The enforcement environment in Romania rewards proactive substance management and penalises reactive compliance. Several strategic principles emerge from practice.
Substance before structure. Entities claiming treaty benefits in respect of Romanian-source income must be able to demonstrate genuine economic activity in their jurisdiction of residence. This means employees with relevant expertise, physical office space, board meetings conducted in the residence jurisdiction, and independent decision-making on the deployment of income received. Structures that fail this test on any of these dimensions are at risk even where the formal documentation is in order.
Advance clarity where possible. Romanian tax legislation provides mechanisms for advance tax rulings, though their scope is narrower than in some Western European jurisdictions. Where the treaty position is uncertain – particularly for novel structures or large transactions – seeking an advance ruling from ANAF reduces the risk of retrospective reassessment. The ruling process takes several months and does not guarantee a favourable outcome, but it creates a documented good-faith position that mitigates penalty exposure.
Documentation discipline. Every layer of the treaty claim must be documented contemporaneously. This includes the residency certificate, evidence of beneficial ownership, board resolutions demonstrating independent decision-making, and commercial rationale documentation supporting the structure. ANAF's audit timelines mean that documentation gaps identified years after the relevant payment was made are difficult to remedy retrospectively.
Monitoring renegotiated conventions. Romania is in the process of updating several of its bilateral conventions to incorporate the BEPS minimum standards. New or amended conventions may alter the applicable withholding rates, introduce or strengthen anti-abuse provisions, and modify the permanent establishment definition. Groups should monitor their treaty position against the current text of the applicable convention rather than relying on summaries prepared before renegotiation.
The corporate law dimension of Romanian-based investment structures intersects with the treaty analysis at the level of entity characterisation. How a Romanian entity is classified for corporate law purposes. as a subsidiary, a branch, a partnership, or a joint venture – affects both its treaty access and its exposure to Romanian corporate income tax. Our analysis of corporate law in Romania covers the entity selection considerations that underpin effective treaty planning.
Looking ahead, the Romanian tax authority's enforcement capacity has grown substantially. ANAF has adopted automated data-matching tools that cross-reference withholding tax filings, transfer pricing documentation, and financial account information received under the Common Reporting Standard. This means that discrepancies between the treaty rate applied at source and the substance profile of the recipient are identified more rapidly than in previous audit cycles. Groups that have historically relied on the relative infrequency of Romanian tax audits as an informal buffer should recalibrate that assumption.
The trajectory of Romanian court practice also points toward greater alignment with OECD and EU standards. Administrative courts at the appellate level are increasingly receptive to ANAF's substance-based arguments, and the ICCJ's emerging jurisprudence on beneficial ownership and the PPT is narrowing the space for purely formal treaty claims. At the same time, courts have shown a willingness to hold ANAF to procedural standards – requiring the authority to produce specific evidence of tax avoidance purpose rather than relying on generic assertions. Taxpayers with well-documented commercial rationale continue to succeed in appeal proceedings.
For a tailored strategy on treaty benefit protection and anti-abuse compliance in Romania, reach out to info@ferrazwhitmore.com.
Frequently asked questions
Q: What documentation does a foreign company need to claim tax treaty benefits in Romania?
A: A foreign company must provide a valid tax residency certificate issued by its home jurisdiction's tax authority. The certificate must be current for the relevant tax year. Romanian payers are required to obtain this document before applying a reduced withholding tax rate, and failure to do so exposes the payer to liability for the full statutory rate plus penalties.
Q: How does Romania's principal purpose test affect holding structures?
A: The principal purpose test allows Romanian tax authorities to deny treaty benefits where one of the main purposes of an arrangement was to obtain those benefits. Holding structures that lack genuine economic substance – such as entities with no employees, no physical presence, and no independent decision-making capacity – are the primary target. Restructuring to demonstrate commercial rationale and operational substance is the most effective mitigation strategy.
Q: What is the typical timeline for resolving a treaty benefit dispute in Romania?
A: Administrative proceedings before ANAF typically take between six months and one year to resolve at first instance. Appeals to the administrative courts can extend the timeline by a further one to two years. Engaging a lawyer in Romania with cross-border tax experience at the administrative stage significantly improves the prospects of early resolution.
About Ferraz & Whitmore
Ferraz & Whitmore is an international law firm based in Lisbon, advising business clients across 46 jurisdictions. Our tax practice covers cross-border treaty analysis, withholding tax compliance, transfer pricing, and anti-avoidance defence for international groups operating into and out of Romania and the broader Central and Eastern European region. As a law firm in Romania and across the EU, we combine Portuguese civil law expertise with English common law tradition to deliver advisory that is both technically precise and commercially grounded. Our attorneys have advised on tax treaty matters across both civil law and common law systems, and the firm participates in cross-border practice groups focused on EU tax harmonisation and BEPS implementation. Ferraz & Whitmore's Lisbon base provides direct access to EU regulatory developments, while our common law expertise supports enforcement and mutual agreement procedure strategies in English-speaking jurisdictions. To discuss your treaty position in Romania, contact us at info@ferrazwhitmore.com.
Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.