December. The perfect month for “presents”. A walkthrough the tax aspects of sponsorship

Cristina Băluță
Cristina Băluță

Considering that the deadline for submitting form 177 “Request for redirection of corporate income tax/microenterprise income tax” is approaching, we will outline herein the legislative updates introduced by Law 322/2021 and Order 1679/2022 along with old provisions of the Tax Code in respect of the sponsorship acts.

The purpose of this article is twofold:

(i) to remind companies that they can provide help to needy or support activities they are interested in, by entering in a sponsoring act and/or act of patronage and/or awarding of private scholarships under the law (hereinafter referred to as “sponsorship”);

(ii) to highlight that the sponsoring act does not trigger any financial loss for a company, if performed under the conditions presented below. On the contrary, it has a positive impact from ESG perspective.

1. First and foremost, companies (“the Company”) should bear in mind that starting with FY2022, new alternatives to grant sponsorship are available. Thus, the Company may grant sponsorship:

(i)  during the year by offering financial or in-kind support (cash/goods) to the entities sponsored based on a sponsorship agreement. Similar to prior years, in case of corporate income taxpayers, sponsorship expenses are non-deductible, but tax credits are applied. Specifically, the tax paid quarterly is reduced with the value of the sponsorship within the limit to which the Company is entitled (presented on point 3 below). Due to variations of the profit amounts, there may be cases when the sponsored amount is fully deducted from the corporate income tax in one trimester, but in the following ones it may exceed the threshold on point 3. Hence, at the level of a whole year, part of the sponsorship expenditure may not be deducted as a tax credit.

Based on the rational that companies are reluctant to enter in a sponsoring act during the year due to such potential variations of the profit, new laws have been released which allows them to perform sponsorship after the closure of the tax year.

(ii) by redirecting the corporate income tax (“CIT or “profit tax”) or microenterprise income tax (“income tax”). As such, the Company pays the CIT/income tax due, and after submitting the annual CIT return (D101) or the micro-enterprise return for Q4 (D100), it may redirect the tax towards one or more beneficiaries, within the limits of the tax credit computed on point 3 (out of which sponsorship expenses carried forward from previous years have been deducted).

2022 is the first year when the Company has this option. Specifically, it may redirect the profit/income tax for FY 2021 by 25 December 2022. We bring into your attention that a sponsorship contract that is required to be concluded.

(iii) mixed ways. The Company may (i) grant sponsorships during the year and also (ii) if the threshold on point 3 is not reached, it may redirect the tax unused.

2. Beneficiaries of the sponsorship, as listed by the legislation in force in order to benefit from a tax credit or to redirect the tax (“eligible beneficiaries”)

Both the CIT taxpayers and microenterprise income taxpayers may benefit from tax credit or may redirect the tax under the following condition: the beneficiaries are non-profit legal entities and units of worship enrolled in the Register of Non-profit Organisations. The Register is available on the A.N.A.F. website.

Moreover, are also eligible recipients of the sponsorship which are not enrolled: i.e., beneficiaries set out by Law no. 32/1994 on sponsorship, Library Law no. 334/2002, Law of National education no. 1/2011 etc. In this respect, depending on the tax system (CIT/micro), the Company should analyse art. 25 align (4) let. i) or art. 56 align (15) of the Tax Code. In case of redirection, it should analyse Order 1679/2022.

Irrespective of the tax system or sponsorship alternative, OUG 20/2022 introduced as eligible beneficiary also the United Nations International Children’s Emergency Fund – UNICEF, as well as any international organization that carries out its activity according to the provisions of special agreements to which Romania is a party.

Same Ordinance includes provisions regarding the donation campaign held between March 8, 2022 and December 31, 2022 in the benefit of the Ukrainian citizens and stateless persons from the Ukrainian war zone, donations out of which companies may benefit from tax incentives in form of profit/income tax deductions.

3. Value of the sponsored amount in order to benefit from tax credit or to redirect the tax

In case of CIT taxpayers, it is the minimum value of the following: 75% of the turnover; 20% of the corporate income tax due. In case of microenterprise income taxpayers, the value that can be deducted as a tax credit is 20% applied to the microenterprise income tax due for the quarter to which the sponsorship expenditure relates.

4. Sponsorship expenses carried forward from previous years and their settlement

Up to FY2021, the sponsorship expenses that exceeded the limits allowed for tax credit in the reference year, have been carried forward over the next 7 years. Thus, the amounts carried forward from the past (FY2015-2021) can be used by 2028. These amounts will be recovered in the order of their registration, at each tax payment deadline.

5. Sponsorship expenses incurred from FY2022 onwards

Regarding the expenses incurred as of 1 January 2022, or as of the start date of the tax year 2022–2023, in for legal entities with a tax year other than the calendar one, the carry forward of the amounts is no longer allowed. Therefore, if the Company grants sponsorships during the year above the value computed on point 3, those expenses can no longer be deducted from the profit tax/income tax in the following years.

6. Redirection of the corporate income tax/microenterprise tax

If the value set according to point 3, reduced by the sponsorship expenses incurred during the year and by the expenses carried forward from the past (FY2015-2021), is a positive value, the Company may dispose the redirection of the CIT/microenterprise tax for the remainder of the tax credit. For instance, in case of a CIT taxpayer, if the value established according to the provisions of point 3 is RON 5,000, sponsorship granted during the year RON 3,000, expenses carried forward RON 1,000  the Company may redirect RON 1,000 (5k-3k-1k) towards the beneficiaries referred on point 2. The payment obligation of the amounts redirected stays with the competent fiscal body.

Recently published OUG 168/2022 clarifies the approach in the event of filing a rectifying CIT return.

7. Deadlines and procedure of redirection

The redirection can be disposed towards one or more beneficiaries, within six months as of the date of filing the annual CIT return (D101) or Q4 income tax return (D100). Within this time frame, the Company may submit, using the virtual private space, one or more forms 177 “Request for the redirection of corporate income tax/microenterprise income tax”. For corporate tax group members, only the responsible legal entity can order such redirection.

At their turn, Romanian Tax Authorities have available 45 days in order to solve the above-mentioned requests, calculated starting with the submission date of the form. In case of the taxpayers who show unpaid income tax, the 45-day period begins to run from the date of settling the debt. Order no. 1679/2022 provides the procedure of managing the tax redirection requests, as well as the template and instructions for filling the related forms.

8. Informative Return to be submitted (D107)

Similar to prior years, taxpayers who grant sponsorships are required to file the informative return regarding the beneficiaries of the sponsorships/patronage/private scholarships by the same deadline of filing the CIT return or Q4 micro-enterprise tax return.

As a conclusion, by the new sponsorship alternative – redirection of the profit/income tax, Authorities encourage the companies to leverage the tax incentives they benefit from when granting sponsorship. On their side, companies should use this opportunity to enhance their public image.

Accountant Cristina Băluță, tax consultant

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