Romania’s Finances Hit Rock Bottom: Government Prepares New Taxes

Romania seems to have hit rock bottom. Apart from the massive lay-offs prepared in the public sector, Romania’s Government is preparing insane taxes for entrepreneurs starting January 2024. These taxes will hit the Romanian SMEs, leading to bankruptcies and unemployment. Also, this will lead to SMEs trying to find a friendlier destination which doesn’t tax in a socialist manner.

The socialists persuaded the liberals, who formed the ruling coalition, to accept the tax raise. The most unbelievable article in the draft project mentions a 16% profit tax for SMEs with more than 30% profit margin. Under the vision of the socialist government ruling Romania now, this equals “fiscal optimization,” and it must be taxed additionally.

In short, these will be the guidance lines for taxation in Romania:

• For SMEs with incomes of a maximum of 60,000 euros per year, 1% tax on income,
• For SMEs with incomes over 60,000 euros and up to 500,000 euros, 3% income tax.
• Regardless of these ceilings, micro-enterprises that have over 30% rate of return enter the 16% profit tax.

These measures are designed as a last line of defence before an IMF loan. As specialists mention, the last one is the ultimate solution to help Romania avoid a default.

In May 2023, Romania’s Chamber of Commerce President was the first to mention this possibility.

In the medium to long term, we will become insolvent. If, in the medium term, Romania does not organize itself administratively, to dramatically reduce the operating expenses of the administration, Romania will become insolvent. Insolvency also happened in G20 countries, Argentina, and Greece, a few years ago. It is worn. You can’t have one out of every five lei spent on a loan. You can’t do it like that. The loan covers all deficits. Everything is on loan. Until you believe. Until one day.

Mihai Daraban, Romania’s Chamber of Commerce President

As the voices mentioning Romania entering default kept getting louder, the so-called liberal minister of Finance entered the scene in August, and he was the first high official to mention this possibility.

I don’t think that there is a question of reforming the salary law; we have no way to carry it out from the point of view of the budget and the fiscal space. I explained to the Commission that this leads us into insolvency not to be able to apply it. The single wage law, the pension law, and the budget deficit reduction cannot be applied. All these things cannot be done. I say this with all responsibility.

Marcel Bolos, Romania’s Minister of Finance

A week later, he nuanced his affirmation under the pressure of his colleagues in the government.

Romania does not have the problem of inability to pay. The context of my affirmation was that we might have financial difficulties without the measures to combat tax evasion, without those regarding reducing public expenses, and with fiscal budgetary measures.

Marcel Bolos on September 5 on the risk of default

Will Romania enter default? One thing is clear: with all these socialist measures, Romanian entrepreneurs will face additional difficulties and either go bankrupt or go to “fiscal optimization” by choosing a foreign residency for their business, which might be countries like Bulgaria (with a unique profit tax of 10%), UAE (with zero tax per profit) or any other fiscal paradise. This will lead to less business and less money in the country, ultimately leading to the IMF loan everybody talks about in Romania.

The blow the Socialists and Liberals prepare for the Romanian SMEs is insane. While laying off thousands of employees in the public sector, the Government also doesn’t forget to hit the private sector. At the end of the day, Romania is divided into the public sector, where the hugely paid ministers also work, and the private sector, where the small and medium enterprises try to support the army of more than 1.2 million public employees. From 2024, this won’t be tolerable any longer, and we anticipate a migration of the Romanian SMEs to warmer countries.