Fiscal Code Loophole Could Tax Private Pensions at 15% or 20%

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The Association of Private Pension Fund Administrators (APAPR) publicly warned on Monday about a legislative ambiguity in the Fiscal Code that creates the conditions for the progressive taxation of capital gains from private pension funds (mandatory Pillar II and optional Pillar III), mistakenly equated with the non-contributory part of service pensions (publicly known as “special pensions”) starting from January 1, 2024. Instead of taxing payments from private pension funds at the normal rate of 10% (as currently and like pensions paid from the public system), from January 1, 2024, the fiscal regime risks becoming one with progressive rates of 15% or 20%, applicable to capital gains, the most unfavorable among all savings/investment products in Romania,” warns the association.

Specifically, APAPR warns about the legislative changes made to Articles 100 and 101 of the Fiscal Code by Law 309/2022 and, respectively, by the recent Law 282/2023 on the reform of service pensions, through which capital gains from private pension funds could be mistakenly equated with the non-contributory part, leading to a progressive taxation similar to service pensions.

“The application of these provisions would be unfairly penalizing for participants in private pension funds and payment beneficiaries, so APAPR has initiated institutional dialogue with the Financial Supervisory Authority (ASF) and the Ministry of Public Finance (MFP) to urgently clarify this legislative ambiguity. APAPR requests, even publicly, the modification by Emergency Government Ordinance of the Fiscal Code (Article 100 and Article 101) to accurately reflect the difference between the contributory principle that excellently governs private pensions and the non-contributory principle of special pensions. Essentially, APAPR requests the maintenance of the current tax rate of 10% instead of applying rates of 15% or 20%,” said the Association of Pension Fund Administrators.

The stakes of this necessary legislative clarification consist of payments of billions of lei annually to hundreds of thousands of Romanians, with the level of payments made by private pension funds experiencing exponential growth.

To date, all pension funds (Pillar II and Pillar III) have made total payments of over 2.36 billion lei to almost 210,000 beneficiaries.

Only in Pillar II, payments are estimated to reach 1 billion lei in 2023, almost as much as the amount of 1.1 billion lei paid in the 15 years from 2008 to 2022, and the exponential growth rate is expected to continue in the coming years.

Private pension funds in Romania are, after banks, the most important players in the financial sector, and the money managed by these funds represents the second most important financial asset of the population after bank deposits, stated Mugur Isărescu, the governor of the National Bank of Romania, earlier this month.

The private pension system through Pillar II (mandatory) and Pillar III (optional) has grown in the last 5 years by almost 2.5 times, from 10 billion euros in assets in 2018 to a record value this year of 24.5 billion euros, a historic high for the pension system, announced Dan Armeanu, the vice president of the Financial Supervisory Authority (ASF) earlier this month.

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