Romania\u2019s Parliament has recently adopted a draft law amending the Fiscal Code to introduce a new mechanism for rewarding employees through participation in the company\u2019s profits. The bill has already been passed by the Chamber of Deputies and is currently awaiting promulgation, with the potential to become one of the most attractive tax incentives made available to the private sector in recent years.<\/p>\n
Under the draft law, corporate income tax payers would be allowed to grant employees profit-sharing income of up to 15% of the gross profit recorded in the previous financial year. These amounts would also qualify as deductible expenses for corporate tax purposes, meaning that the benefit would not be limited to employees alone, but would also generate a tax advantage for the company making the payment.<\/p>\n
The most notable feature, however, is the tax treatment applicable to these amounts.<\/p>\n
Unlike traditional salary bonuses, which are subject to income tax and mandatory social contributions, profit-sharing income would be classified under the draft as income from other sources. As a result, it would be subject only to 10% income tax, without any obligation to pay pension contributions (CAS) or the labour insurance contribution (CAM).<\/p>\n
From the employee\u2019s perspective, the difference could be substantial. While a salary bonus currently carries an overall tax burden of around 45%, the new mechanism would allow additional amounts to be granted under a significantly lighter tax regime, in principle limited to the 10% income tax.<\/p>\n
That said, the draft introduces several conditions for accessing the incentive. The company must have recorded gross profit in the financial year for which the profit-sharing is granted and must not have any outstanding tax liabilities to the general consolidated budget. In addition, the employee must have at least 24 months of uninterrupted service with the same employer and must not have held the status of shareholder, partner or director during the five years preceding the financial year for which the benefit is granted.<\/p>\n
The intention is clearly to restrict the use of the mechanism to genuine employees and to prevent it from becoming an alternative route for remunerating individuals who control the company.<\/p>\n
At the same time, the total value of the amounts granted to all employees could not exceed 15% of the gross profit of the previous financial year. At an individual level, the amount granted to a single employee could not exceed the total net salary income received from the same employer during the 12 months preceding the payment. Any amount exceeding these statutory thresholds would be reclassified for tax purposes and treated as salary income, with the standard tax regime applying accordingly.<\/p>\n
The draft also includes explicit safeguards aimed at preventing salary replacement through profit-sharing. In particular, the incentive may only be granted if the employee\u2019s gross base salary is maintained throughout the period in which the underlying profit is generated, and the granting of these amounts may not subsequently be used to justify a salary reduction.<\/p>\n
Another important feature is the flexibility of the mechanism. The draft allows profit-sharing to be granted even during the financial year, based on interim financial statements evidencing gross profit, with a subsequent reconciliation to be made once the annual financial statements have been approved.<\/p>\n
One aspect that deserves particular attention is the treatment of these amounts from the perspective of the health insurance contribution (CASS).<\/p>\n
In the version adopted by Parliament, the draft goes beyond excluding this income from pension contributions (CAS) and also amends the rules applicable to CASS. More specifically, profit-sharing income is expressly excluded from the category of income falling within the scope of the health insurance contribution.<\/p>\n
This wording appears to reflect the legislator\u2019s intention to exclude such income entirely from CASS, including from the annual cap mechanism applicable to other categories of non-salary income. If this interpretation is confirmed, profit-sharing could benefit from a tax treatment even more favourable than dividends, which currently may trigger CASS liabilities once certain annual income thresholds are exceeded.<\/p>\n
That said, it should be kept in mind that the draft has not yet been promulgated and that no methodological rules have yet been issued to clarify how the new provisions would operate in practice. It therefore remains to be seen whether this express exemption from CASS will be preserved in the final law and whether the tax authorities will confirm that such income will also fall outside the annual cap mechanism applicable to individuals.<\/p>\n
The incentive would not be available to companies with majority state ownership, autonomous administrations, state agencies or public authorities, as the draft reserves this mechanism exclusively for private sector entities.<\/p>\n
If promulgated in its current form, the draft would give private companies a new tool for motivating and retaining employees, combining direct participation in business performance with a tax regime that is significantly more favourable than the one applicable to traditional salary remuneration.<\/p>\n
For employers, the incentive could offer an efficient way to reward key personnel and align their interests with the company\u2019s performance. For employees, it may provide access to additional income subject to reduced taxation and, at least based on the current wording of the draft, potentially even without mandatory social contribution liabilities.<\/p>\n
The final form of the law, together with any clarifications to be provided through future methodological rules, will need to be closely monitored. Even so, it is already clear that this legislative initiative has the potential to materially reshape how private companies design their remuneration and performance incentive policies.<\/p>\n
Article written by Radu Derscariu, Payroll Director<\/strong>– Nowium Tax&Finance<\/strong><\/p>\n