No, thatâs not it. The tl;dr is that employees have the highest tax burden, while being a contractor or paying yourself dividends has low tax burden. So being reclassified as an employee just massively screws you over. And their tentative plan is for people to become employees via a global remote platform that specializes in dealing with the legislation of each country in part.
For the longer version, Iâll explain the three options you have when working for a foreign company while being a resident in Romania.
The first is to be that companyâs employee. This is hard on the foreign company because they have to be registered in Romania and ensure they are compliant with some amount of local legislation. The tax burden is very high. Itâs 10% income tax, 10% healthcare, 25% social security, 2.25% work security tax. These percentages donât just get summed up and applied, rather they apply in a certain order, so you get a total tax burden of 42.79%.
Please note that this is in a country where almost every sale is already VAT taxed at 19%.
The second option is to be a PFA (Persona Fizica Autorizata), âAuthorized Physical Personâ which means contractor basically. Thereâs a snag here. You can only be PFA if the work you do is âindependentâ. There are 7 legal criteria for independence. You need to meet at least 4 of them in order for your work to be independent. Except if the government comes after you, it can stop mattering what the letter of the law is very quickly. The criteria will suddenly become way more subjective and you find yourself in a terrible situation where you get reclassified as an employee and have to, at minimum, pay all the taxes you would have owed if you had been an employee for the entire duration.
The most common rule of thumb is that if youâve worked for the same company for over a year and received regular payment from them, even if you fulfill the letter of the law perfectly, youâre still at risk. Despite this risk many people chose the PFA route even in situations where their relationship is obviously dependent, including actual employees turning PFA just for tax optimization. The Romanian authorities enforce the law very selectively, possibly partly because they donât want to encourage brain drain.
The tax burden in the PFA route has two branches. One for being taxed in the ârealâ and ânominalâ system. Both pay 10% income tax, but the nominal system you only pay 10% of an arbitrarily established sum instead of your actual income. That sum differs per profession and iirc even per geographic location. Isnât that weird??
Anyway, once you pass a certain amount of income you have to also pay ~1550 USD to social security and ~620 USD to healthcare per year. These are fixed values derived from the minimum yearly wage. For example the healthcare value is derived as 10% of 12 minimum yearly wages.
Either way you look at it, PFA is a huge upgrade over being an employee.
Then thereâs the third rarer option and the one I chose. Which is make your own limited liability company. If you pay yourself a salary, you get ALL the downsides of being an employee, but if you take the money out as dividends you instead only get to pay 3% income tax, 5% dividend tax and the ~620 USD to healthcare per year. The services you sell are not VAT taxed provided the buyer is also in the EU, provided you get a special VAT code, which I did.
Of course, you also have to probably pay rent for company headquarters hosting, pay an accountant and still do part of the paperwork yourself. The other downside is that you can only distribute dividends once every 3 months. In exchange for all that, youâre tax optimal.
Oh also, you donât have to pay social security at all. Of course, you donât benefit from having a pension, but who cares. This is huge for me because I perceive the social security system in Romania to be very poorly managed and corrupt. I also donât plan to stay here, so all money that goes to the pension fund is money I wonât ever see that isnât even helping someone else. I would literally rather set fire to my money than send it the government managed pension fund.
The biggest upside of LLC for me wasnât that it was less taxed than PFA, but that I could work without the constant dread that I might get reclassified and have my life suddenly become centered around a legal conflict with the government.
Well, turns out that from the legal perspective of the company hiring me, Iâm still a contractor, purely because of the contract we signed. Whether the contract is signed with a person or with a company doesnât matter. So they face the same compliance issues as if I was a PFA. What I do in Romania doesnât even matter.
Iâm not sure if theyâre actually correct on this (at least for Romania), but they have claimed to be at risk of being taxed in the country they are hiring the contractor in, if that relationship is reclassified as being an employee relationship.
Since the contract type is the issue, I proposed the idea of changing it to a B2B contract. Basically a contract where my company sells them a service. But Iâm not sure if theyâll go with that.
So far theyâve been very reassuring and saying that theyâre trying to find some way to accommodate all of this without all of their contractors losing a sizable chunk of their income. Theyâve at least been transparent, as this is a pretty early moment in the whole process to bring all of this up.
At the moment, the most likely kind of scenario I feel would be them raise peopleâs salaries by 20% or something, which wonât really cover the whole amount for me, and then be more reticent to give any further raises that would have normally happened had this event not taken place.
The company has been quite good to me and really all its employees so far, so Iâm hoping for a decent resolution, but there are many easily possible bad scenarios.
I canât speak for the average company, but I can easily imagine other people who have faced worse situations where the company just said thereâs nothing they can do about it. So overall Iâm still fortunate, but man, I just want to be left alone to sell my programming services to this company without having to pay half of it to a corrupt government I have little other than disdain for.
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