Tax risks from reclassification of intra-group loans in Romania

Companies with cross-border intra-group financing arrangements should reassess their tax positions as Romanian tax authorities continue to scrutinise whether such loans reflect arm’s-length conditions, according to a new Deloitte Romania tax alert.

The alert focuses on situations where part of a loan granted by a non-resident affiliated company may be reclassified as an equity contribution for tax purposes. Such a reclassification can affect both the deductibility of interest expenses and the withholding tax (WHT) treatment of payments made to the foreign lender, potentially creating uncertainty and increasing the risk of additional tax liabilities.

According to Deloitte, tax authorities are increasingly assessing intra-group financing through transfer pricing and economic substance tests, using indicators such as leverage, debt capacity, interest-to-EBITDA and loan-to-asset ratios. If part of a financing arrangement is treated as equity rather than debt, differences may arise between the corporate income tax treatment of interest and the applicable withholding tax rules. The absence of explicit clarification in Romania’s Fiscal Code could also lead to inconsistent tax treatment, disputes over double tax treaty benefits and potential double taxation.

To reduce these risks, Deloitte recommends that companies review both existing and historical intra-group loans, assess the supporting transfer pricing documentation and verify the tax treatment applied to interest paid or capitalised in favour of non-resident affiliated entities. Companies should also evaluate how interest relating to any reclassified portion of financing would be treated for tax purposes and prepare a documented technical position before a tax audit or, where necessary, during administrative appeals or litigation.

The advisory notes that businesses already subject to tax audits or disputes involving interest deductibility, transfer pricing or withholding tax should carry out a dedicated analysis to support their position. Deloitte says this can help reduce the risk of significant tax adjustments, eliminate cases of double taxation arising from reclassification and improve the consistency of tax treatment across jurisdictions.

Source: Deloitte