Gov't approves Romania - UK Convention on double taxation elimination

The Executive approved on Wednesday a bill on the ratification of the Convention between Romania and the United Kingdom of Great Britain and Northern Ireland for the elimination of double taxation with respect to income and capital gain taxes and the prevention of tax evasion and avoidance, as well as of the Protocol annexed to the Convention signed in London on November 13, 2024.According to a government release, the text of the new Convention which replaces the one from 1975 is consistent with Romanian law, with the Organization for Economic Cooperation and Development's model of convention for the elimination of double taxation, with the plan to combat base erosion and profit shifting (BEPS plan) adopted by the OECD in 2016, and with the provisions of the Trade and Cooperation Agreement between the European Union and the United Kingdom of Great Britain and Northern Ireland."The new convention includes an anti-abuse provision in the preamble, according to which this legal instrument does not create opportunities for the benefit of third-country residents regarding non-taxation or the reduced taxation of their income as a result of tax evasion or tax avoidance, including through financial arrangements aimed at obtaining the benefits provided for in the convention," the release states.One of the novelties comes in the article regarding the "permanent establishment", with two new paragraphs being introduced to describe the circumstances in which a certain enterprise is closely linked to another, as well as a provision to prevent the fragmentation of a unitary economic operation into several small operations for which it could be argued that they each represent a preparatory or auxiliary activity, which would not generate a permanent establishment."Profits derived from a construction site or a construction or installation project shall be taxable in the state where the activity is carried out only if such activity spans a period longer than 12 months. Profits derived by a resident of a contracting state from the operation of ships or aircraft in international traffic shall be taxable only in the respective state. These profits also include those derived from the rental of a bareboat ship or aircraft, as well as those from the use, maintenance or rental of containers used for the transport of goods or merchandise, when such operations are carried out in connection with the operation of ships or aircraft in international traffic," the release shows.In the case of dividends, the tax rate provided for by the new convention is lowered to 5% from 10% before; in the case of interest, the tax rate is cut to 3% from 10%, and in the case of royalties, the tax rate is now 3% compared to 10%, the cited source specifies.The new convention also regulates the taxation of income in the form of salaries and pensions, income collected by members of boards of directors, public office employees, students, trainees, performing artists and athletes, as well as income obtained from capital gains.Also, the new convention regulates aspects related to the methods of eliminating double taxation, non-discrimination, the amicable agreement procedure, exchange of information, the entry into force of the new convention and the termination of the validity of the 1975 convention.The bill will be referred to Parliament for debate and adoption.