Preliminary assessment of the third payment request of Romania

at the total tax burden for microenterprises with total turnover below EUR 100 000 5  is comparable to that of entities with a much higher turnover, even if the net profit is significantly lower for the former group. This indicates that the current tax rate of 1% is appropriate and should not be increased. This assessment also confirms the rationale of the reform – entities with large turnover should be subject to regular corporate taxation, and not be eligible to the concessionary microenterprises tax regime. The new law shall amend the Fiscal Code with the aim of gradual reduction of the scope of the special tax regime for micro-enterprises As indicated above, the following articles amend the Fiscal Code with the aim of gradually reducing the scope of the special tax regime of micro-enterprises: • Articles 1 and 47 of Government Ordinance No. 16/2022; • Article LXIV of Government Emergency Ordinance No. 156/2024; • Article 47 (1) (h) Government Emergency Ordinance No. 115/2023; • Article LXIV of Government Emergency Ordinance No. 156/2024. The reduction of the special provisions shall start in Q1 2023 and be completed by Q4 2024. The Council Implementing Decision required the completion of the reduction of the special provisions by Q4 2024 as well as the implementation of the recommendations stemming from the thorough analysis provided by an independent institution to ensure that the tax system better promotes sustainable economic growth. The Romanian authorities adopted the necessary legislation to ensure a gradual reduction of the scope of the special tax regime for microenterprises. This progressive reduction is consistent with the World Bank’s recommendations with respect to the reduction of the turnover threshold for eligibility to the microenterprise regime to align it with the VAT registration threshold. In particular, Article 1 and Article 47 of Government Ordinance No. 16/2022 establishes that the reduction of the eligibility threshold to the special tax regime for microenterprises from EUR 1 000 000 to EUR 500 000 entered into force on 1 January 2023. Additionally, Article LXIV of Government Emergency Ordinance No. 156/2024, amending Articles 1 and 47 of Government Ordinance No. 16/2022, provides for the reduction of the eligibility threshold applicable to the special regime for microenterprises to EUR 100 000 as of 1 January 2026. This, however, leads to the completion of the reduction of the special provisions of the tax regime for microenterprises after Q4 2024. Whilst this constitutes a minimal temporal deviation from the requirement of the Council Implementing Decision, the delay between the adoption of the Government Emergency Ordinance and the entry into force of the provisions of Article LXIV of this Government Emergency Ordinance are considered both limited and proportional. In particular, the delay in application of the reduced eligibility threshold to 1 January 2026 allows for a gradual and predictable reduction of the scope of the special tax regime of micro-enterprises, in line with the World Bank's suggestion to implement the reduction in a staged manner. This approach, in turn, allows entities that will no longer be eligible for the special tax regime sufficient time to prepare for the change in their status and be ready to comply with the obligations of the Corporate Income Tax regime, which is substantially more complex. The complexity of the newly applicable tax regime, coupled with the large number of entities concerned by the reform (according to the World Bank report, 95% of legal entities fell under the microenterprise regime before the reform), necessitates and warrants a delayed application of the relevant legal provisions, allowing for sufficient time to adapt and ensure a smooth transition. This approach also mitigates the risks of disruptions and difficulties for the affected entities and avoids undermining the overall objective of the measure, which is to ensure that the tax system better promotes sustainable economic growth. On this basis, it is considered that this constitutive element of the milestone is satisfactorily fulfilled. 6 Furthermore, the threshold set out in Article LXIV of Government Emergency Ordinance No. 156/2024 demonstrates a concerted effort by the authorities to align the micro-enterprises regime with the World Bank's recommendations, specifically to reduce the turnover threshold for eligibility to this regime and bring it closer to the VAT registration threshold. The progressive reduction of the micro- enterprise threshold from EUR 1 000 000 to EUR 500 000 and now to EUR 100 000 showcases a substantial and continuous effort to align the micro-enterprises regime with the VAT registration threshold. As such, Romania has brought the thresholds into closer conformity over time, taking into account the specific economic context and the need for a phased implementation, as well as the fact that the VAT threshold has not been updated since 2018, despite high inflation over the period 2018- 2024. Commission Preliminary Assessment: Satisfactorily fulfilled 7