When talking about the tax treatment of the interest and exchange rate expenditures, companies have to pay attention to the conditions in which they can deduct these expenditures at the calculation of the tax result.

A tax treatment applied wrongly on these expenditures can lead to the establishment of a supplementary tax, as well as ancillary amount, in case of a tax audit.

Legal provisions

In the case of long-term loans (more than a year) obtained by companies from entities other than cinternational developing/guaranteed by the state banks and similar organizations, Romanian or foreign credit institutions, non-banking financial institutions, Law. 227/2015 regarding the Tax Code (“Tax Code”) provides the limitation of the deductibility right to the calculation of the tax result of interest and exchange rate expenditures.

Thus, in the case of certain loans such as the ones mentioned above, according to the art. 27 of the Tax Code, companies have to take into consideration the following aspects from the perspective of the deductibility of interest and exchange rate expenditures:

(i) in the situation in which the indebtedness degree is smaller or equal with three, interest expenditures are integrally deductible in the limit of 4% in the case of foreign currency loan, respectively within the limit of the level of the monetary interest rate policy of the National Bank of Romania, corresponding to the last trimester month, for the RON loans (meaning, 1,75% at this moment);

(ii) in the situation in which the indebtedness degree is higher than three or the equity capital is negative, the interest expenditures and net loss from the exchange rate differences are non-deductible with the possibility of reporting them in the following periods until the moment of meeting the conditions regarding the indebtedness degree, when these expenditures shall be deducted from the calculation of the tax result according to the rules regarding the interest rate presented above.

Practical aspects

In the following we shall present the most-frequently met mistakes, in practice, regarding the deductibility of interest and exchange rate expenditures at the calculation of the profit tax:

  • Companies do not re-qualify short-term loans in long-term loans

In practice, there are situation in which companies obtain loans with the initial term of reimbursement shorter than a year, but at the moment of fulfilling this term, the loan was not completely reimbursed.

In this case, companies shall re-qualify short-term loans into long-term loans and shall recalculate the profit tax or the period of reimbursement previous to the extension of the term, applying the criteria of the degree of indebtedness and the one of the levels of the interest rate presented above.

With that being said, among the mistakes met in practice there are:

(i) either the companies keep considering the loan as being on a short-term (on the ground that they would conclud addenda for the extension of the reimbursement periods with periods shorter than one year), by continuing to integrally deduct the interest and exchange rate expenditures;

(ii) or they take into consideration the limitation criteria of the interest and exchange rate expenditures from the moment of surpassing the one-year term, without recalculating the corporate tax from the previous periods (respectively, starting with the moment of contracting the loan).

  • Incorrect statement in the form 101 – “Statement regarding the corporate tax“

In the situations in which the companies do not fulfil the indebtedness degree criteria, they have to report in the 101 form the non-deductible expenditures as follows:

  • row 30 “Non-deductible interest expenditures, that are not reported for the following period” – expenditures that do not fall within the limits regarding the interest rates provided by the Tax Code;
  • row 31 “The interest and exchange rate expenditures reported for the following period” – expenditures that do not fall within the limits regarding the interest rates provided by the Tax Code and that can be deducted at the calculation of the tax result by the company at the moment of fulfilling the indebtedness degree criteria.

In practice, there were situations in which companies declared the entire amount representing the interest and exchange rate expenditures as non-deductible expenditure on the wrong row in the 101 form, such as, row 33 “Other non-deductible expenditures“.

In these situations, the company loses the right to report the interest and exchange rate expenditures in the following period until the integral deductibility of these under the conditions presented above.

  • Loans granted between affiliated companies

In the case of intra-group expenditures, the interest rate should be established at the level of the market, respectively, it should be comparable with an interest rate practised between independent companies.

Mostly, affiliated companies establish the interest rate for intra-group loans as being at the limit level of the interest rate provided by the Tax Code for the deductibility of the interest rate expenditures at the calculation of the tax result – meaning, 4% in the case of foreign currency loans, respectively 1.75% for loans in RON.

In these cases, there is the risk that, in the case of a tax audit, the authorities shall adjust the income or the expenditures of one of the affiliated persons, considering that the level of the income rate related to the intra-group loans it is not situated at the market level.

In conclusion, the companies shall pay attention to the deductibility conditions at the calculation of the tax result of the interest and currency expenditures, whereas applying a wrong tax treatment to these expenditures can lead to the establishing of a supplementary interest, as well as ancillary amount, in the case of a tax inspection.
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