Exploring the Tax System in Moldova

Tax System - gitlanlaw.com

In this article, I will analyze the following topics related to the Tax System in the Republic of Moldova: 

I. General Tax System

II. Moldova IT Park

III. Free Economic Zones

IV. Fiscal Sanctions

I. General Tax System

The Republic of Moldova has a very attractive tax system compared to many European Union countries. The Tax Code of the Republic of Moldova provides that legal entities pay Corporate Income Tax in the amount of 12% of taxable income (General Tax System). In addition to the General Tax System, in the Republic of Moldova there are two preferential Tax Systems: 1. Moldova IT Park; and 2. Free Economic Zones.

II. Moldova IT Park

Moldova IT Park has many advantages. Law no. 77 of 21.04.2016 regarding information technology parks (hereinafter Law no. 77/2016) provides a special tax regime for the residents of information technology parks. According to art. 15 of Law no. 77/2016 and art. 370 of the Tax Code, residents of information technology parks must pay a single tax rate in the amount of 7% of the sales revenue.

According to Article 372 para. (1) of the Tax Code, the following taxes, fees, and contributions are included in the single tax: Corporate Income tax; Personal income tax on salary; Social security contributions from the employees and employers; Health insurance premiums from the employees and employers; Local taxes; Real estate tax; Road tolls for the use of motor vehicles registered in the Republic of Moldova. 

A resident of Moldova IT Park can be a legal or natural person, registered in the Republic of Moldova as a subject of entrepreneurial activity, which is included in the Record Register of park residents and that practices, as the main activity, one or more of the activities provided for in art. 8 of Law no. 77/2016, based on a contract concluded with the Park Administration.

III. Free Economic Zones

Free Economic Zones (hereinafter FEZ), according to Law no. 440 of July 27, 2001 regarding the FEZ (hereinafter Law no. 440/2001), are parts of the customs territory of the Republic of Moldova, economically separated, strictly delimited throughout their perimeter, in which are allowed, under preferential regime, according to the law, genres of entrepreneurial activity for domestic and foreign investors.

Free economic zones are created to accelerate the socio-economic development of certain territories and the country as a whole by: 

a. attracting domestic and foreign investments;

b. implementing modern technique and technologies;

c. developing export oriented production; 

d. applying advanced production and management experience; 

e. creating jobs. 

At the moment, seven zones are active in the Republic of Moldova. In order to achieve their objectives, free zones are given preferential regimes to stimulate entrepreneurial activity. Also, the free zone can be made up of several sub-zones. The Framework Law was adopted in 2001. Based on its provisions, local and foreign investors have obtained many facilities and opportunities. The basic condition for becoming a resident of a Free Zone is that the investor, either a natural or legal person, is registered as an entrepreneur. 

The investor is free to choose the Zone in which he wants to operate. After choosing it, the investor will apply for resident status. The selection of residents is made by the administration of the Free Zone through competition, based on several criteria, such as: the type of activity; the volume of investments; the availability of the Zone for new residents, the labour market, and the existing infrastructure. After selection, Free Zone’s administration will sign a contract with the resident. The contract shall be valid throughout the entire period of activity of the Free Zone. Each Free Zone is established based on a special law. The main provisions of these laws refer to the location of the Zone, its surface, and the term of activity. 

Incentives provided by the Law on Free Economic Zones

Free Economic Zones are clearly defined and fenced territories that ensure the security of residents’ assets. Free Zone’s administration provides residents with the necessary infrastructure for the activity and ensures its adjustment and/or development. This relieves the resident from bureaucracy and other organizational costs. Residents have the right to make mutual settlements in foreign currency. This reduces currency risks and costs related to banking operations. Each Zone has a dedicated customs point that operates around the clock. This facility provides increased comfort and safety for logistics operations. It saves a lot of time and effort for import and/or export operations. In addition to the operational advantage, a simplified procedure is also applied.

The goods and services within the zone shall have the status of free movement and may be transmitted from one resident to another without fulfilling the customs declaration. Foreign investors and residents’ employees are exempted from paying consular fees when issuing service visas and moreover to obtain a residence and work permit for a period of 5 years, all you need is a request from the Zone’s administrator. The law also provides state guarantees for the investments made in Free Zones. These involve maintaining the conditions of operations carried out at the time of conclusion of the contract with the Free Zones concerned. The guarantees provide for the right of residents to work for 10 years from the date of occurrence of legislative changes under the law until the amendment.

Incentives provided by the Fiscal Code

Article 49 of the Moldovan Fiscal Code provides the tax rates of residents of free economic zones:

a. 6% – Income tax obtained from the export outside the customs territory of the Republic of Moldova of goods (services) produced in the free economic zone or obtained from the delivery of goods (services) produced in the free economic zone to other residents of the free economic zones for the goods (services ) export-oriented.

b. 9% – Income tax from the activity of residents in the free economic zone, with the exception of activities for which 6% is provided.

c. Residents of Free Economic Zones who invest in fixed assets with a capital of at least one million US$ are exempted from paying income tax for a period of three years, and in the case of a similar investment of at least 5 million US$, they are exempted from paying income tax for a period of 5 years.

In addition, they are exempted from VAT for goods delivered and services rendered to other residents within the Free Zone, as well as in the case of export of goods and services outside the customs territory of the Republic of Moldova. Another relief relates to the exemption from excise duty on goods imported into Free Zones as well as in the case of deliveries of these goods between different zones and between residents.

Incentives provided by the Customs Code

The Customs Code provides for the exemption from import duties for the import of goods from the rest of Moldova’s customs territory as well as from abroad.

Thus, we can conclude that the resident status of the free economic zone offers the advantage of substantially reducing the costs related to an economic activity compared to the costs of a similar activity carried out on the customs territory of the Republic of Moldova and as well the possibility of the permanent increase of the production volume thanks to the export opportunities.

IV. Fiscal Sanctions

The State Fiscal Service, under the conditions provided by the fiscal legislation, applies sanctions to natural and legal persons who have committed fiscal violations. Article 235 of the Fiscal Code of the Republic of Moldova provides the purpose and form of fiscal sanctions. ”(1) The fiscal sanction is a punitive measure and is applied to prevent the commission of new violations by the delinquent or by other persons, in order to educate them in the spirit of respecting the law. (2) For the fiscal violation, the fiscal sanction may be applied in the form of a warning or a fine. The warning applies to the minor tax violation.”

The State Fiscal Service is the administrative authority that carries out its activity under the Ministry of Finance, being a separate organizational structure in the administrative system of this ministry, established for the provision of public administrative services to taxpayers, for the supervision, control in the fiscal field, the detection and prosecution of crimes in the cases provided for by the Code of Criminal Procedure, as well as for carrying out the special investigative activity in accordance with Law no. 59/2012 on the special investigative activity.

The State Fiscal Service ensures the prevention and combating of fiscal violations, including fiscal evasion. The State Fiscal Service ascertains the crimes provided for by art. 241 ”Illegal practice of entrepreneurial activity”; 241”Illegal practice of financial activity”; 242 ”The pseudo-activity of an entrepreneur”; 244 ”Tax evasion of companies, institutions and organizations”; 2441 ”Tax evasion of natural persons”; 250 ”Transporting, keeping or trading excise goods without marking them with control stamps or excise stamps; 252 ”Intentional insolvency” 253 ”Fictitious insolvency” and 3351 ” Falsification in accounting documents” of the Moldovan Criminal Code.

The criminal sanctions for the above crimes are:

a. for natural persons: 1. fine; 2. unpaid work for the benefit of the community; 3. prison.

b. for legal entities: 1. fine; 2. deprivation of the right to exercise a certain activity; 3. liquidation of the legal entity.

The fiscal official with special status is the fiscal official who exercises the duties of the State Fiscal Service in the field of detection of crimes, criminal prosecution and special investigative activity.

Local taxes are established by the local council within the town hall in each Moldovan locality. Example of local taxes established by the Chisinau municipality are: market fee, accommodation fee, parking fee etc.

To sum up, there is no license required for B2B activities such as software development, IT servers’ maintenance, and customer service/call centres, which means that a newly registered company in Moldova is free to organize these activities without any limitations, either under the general tax regime of 12% or by being a resident of the IT Park of Moldova and be subject to the single tax of 7% or by being a resident of the Free Economic Zones and be subject to the corporate income tax of 6%.

The experience of GITLAN & ASSOCIATES has demonstrated over time that the involvement of a mixed team of qualified tax and legal consultants, can contribute decisively to ensuring a fair tax treatment and preventing violations of the taxpayer’s rights.