GEO 19/2019 represents a significant improvement as compared to the provisions of GEO 114/2018. The reduction of the effective tax rate, the application of different tax rates depending on the market share of the bank, the diminution of the calculation basis, as it no longer takes into account non-performing financial assets and out of which certain types of financial assets are deducted, as well as the possibilities to reduce the tax to zero if certain criteria are met, represent important changes which answer, to a certain extent, the concerns raised by much of the business community with respect to the initial provisions of this Ordinance.
The negative impact of the tax on the stability of the banking system has also been addressed by limiting the amount of tax effectively paid up to the level of the accounting profit registered by the credit institutions.
In addition, it should be mentioned that guidelines and norms for the application of this Ordinance are expected to be published by the Government after consulting the National Bank of Romania, within 45 days of the date when the Ordinance enters into force. These norms should clarify all aspects of the calculation mechanism. KPMG will promptly communicate all additional clarifications published by the authorities.

The applicability method and calculation of the tax has been significantly amended, as follows:

• The tax rate is no longer linked to the ROBOR index and it is determined based on the market share of each credit institution as follows:

Market share	Tax rate
< 1%	0,2% per year
>=1%	0,4% per year

• The tax rate  applies to the balance of net financial assets  of the credit institution at the end of a 6 month period/year for which the tax is due, out of which the net value of the following financial assets will be excluded:
  • Cash.
  • Cash balances at central banks.
  • Debt instruments issued by public administrations.
  • Loans and advances granted to public administrations.
  • Loans and advances granted to the non-governmental sector which are guaranteed by the central public administration.
  • Loans granted to credit institutions, deposits to credit institutions, accrued interest and deferred amounts, nostro accounts and accrued interest; reverse repo transactions and securities borrowed.
  • Non-performing exposures of the credit institution.
    

The net financial assets, the assets excluded from the tax base and the method for calculating and publishing the indicators needed for calculating the tax on financial assets will be defined by application norms which will be issued within 45 days of the date the Ordinance enters into force.

Considering the structure of the financial assets in the Romanian banking sector, it may be concluded that a significant percentage of the tax base will be comprised of the balance of performing loans booked by credit institutions granted to the private sector and to individuals.

Furthermore, the new Ordinance introduces mechanisms diminishing the tax on financial assets calculated and due at the end of a year, which could provide a reduction of up to 100% of the tax, depending on the annual growth of the credit balance for loans granted to non-financial companies and to individuals and on the annual reduction of the interest margin. As such, for the first year when the tax is applied, credit institutions may obtain a 100% reduction of the tax due if the following conditions are met cumulatively:

• The balance of loans granted is increased by at least 8% as compared with the level existing at the end of 2018; and
• An interest margin below 4% is set, or there is a diminishing of the interest margin by at least 8%, as compared to the end of 2018.
  

Cumulative reductions lower than 100% may be obtained if the criteria mentioned are partially met. In these cases, the reduction percentage will be determined proportionally.

The tax on financial assets is calculated bi-annually and the payment deadline is determined as follows:

• The tax due for the first six months of the year is payable by 25 August of the year for which the tax is calculated;

• The tax due for the entire year (including positive or negative differences from the tax paid for the first six months) should be paid by 25 August of the year following that for which the tax is calculated.

For example, for 2019, the tax calculated for the first six months must be paid by 25 August 2019 and, subsequently, by 25 August 2020 any positive/negative difference resulting from the tax calculated for the entire year must be paid. The tax for the first six months of 2020 must also be paid by 25 August 2020.

If the tax on financial assets exceeds the accounting profit of the credit institution calculated before the tax on financial assets for the period, the level of the tax will be limited to the level of the accounting profit. The tax will not be payable if the credit institution is in a loss position before the calculation of the tax on financial assets at the end of the six months/year.

GEO 19/2019, amending GEO 114/2018 provides for the deductibility of the expense booked for the tax on financial assets when calculating the fiscal result for the corporate income tax.
The new GEO was published in the Official Journal of Romania no. 245/29 March 2019, and will enter into force from that date.

Amendments made to OUG 50/2010

The new Ordinance also changes the mechanism for calculating the interest rate for loans in Romanian currency granted to consumers, as follows:

• For loans granted in Romanian currency, the interest will comprise a reference index rate calculated based on inter-bank transactions during a certain period, to which a fixed interest margin should be added for the entire period of the contract. The new reference index rate will be published daily on the website of the NBR.

• The reference index rate is calculated at the end of each quarter and it should be applied by each credit institution starting from the following quarter.

Amendments to GEO 52/2016

GEO 19/2019 sets a new mechanism for calculating the interest for real estate loans granted to consumers, denominated in Romanian currency, which is similar to the mechanism mentioned within the amendments for GEO 50/2010. For real estate loans granted to consumers in Romanian currency:

• The interest will comprise a reference index rate calculated based on inter-bank transactions during a certain period, to which a fixed interest margin should be added for the entire period of the contract. The new reference index rate will be published daily on the website of the NBR.

• The reference index rate is calculated at the end of each quarter and should be applied by each credit institution starting from the following quarter.

The Ordinance states that the amendments to GEO 50/2010 and GEO 52/2016 will enter into force starting from 2 May 2019. The new provisions will be applicable for loans agreed after this date, as well as for refinancing existing loans, only if the refinancing is agreed after the date of entry into force of the Ordinance.

The changes to GEO 50/2010 and GEO 52/2016 may also be applicable to the ongoing loan agreements, but only based on mutual consent and by the conclusion of an appendix to the loan agreement. Banking institutions will be required to answer all refinancing/amendment requests from consumers within 60 days of the date when these requests are filed.