European-Style Taxation: Moldova Changes the Rules for International Business

European-Style Taxation: Moldova Changes the Rules for International Business

The Republic of Moldova has begun transposing European rules on direct taxation into its national legislation. On 22 September, the Government approved the relevant draft law. For most entrepreneurs, its provisions may still seem somewhat distant: some are due to take effect in 2027–2028, while others will apply only after the country joins the European Union. However, for companies with foreign shareholders, subsidiaries, loans or intellectual property, the changes may have very practical implications.

The main idea behind the reform is relatively simple: the flow of funds within an international group of companies should become less restricted where the corporate structure is backed by genuine economic activity. At the same time, the state will gain additional tools to counter arrangements in which a foreign company exists primarily to obtain tax advantages.

In practice, this means new rules for dividends, interest and royalties, the introduction of a comprehensive controlled foreign company (CFC) regime into Moldovan legislation, and a new mechanism for resolving double taxation disputes.

Dividends Without Additional Taxation

One of the most significant changes for businesses concerns dividends paid between companies in the Republic of Moldova and the European Union.

Once the relevant provisions enter into force, dividends paid by a Moldovan company to its EU parent company may, subject to certain conditions, be exempt from withholding tax.

The key threshold is that the European company must hold at least 10% of the capital of the Moldovan company for a minimum period of 12 months.

A similar approach is envisaged in the opposite direction, where a Moldovan company receives dividends from an EU subsidiary.

For international businesses, this represents an important change. The taxation of profit transfers between companies within the same group often influences where a holding company is established, through which jurisdiction investments are made, and how owners structure their asset holdings.

Moldova is therefore beginning to incorporate into its legislation a model that has long operated within the EU: where profits move within a genuine corporate group, repeated taxation should not create unnecessary barriers.

But the key word here is “genuine.”

Simply Setting Up a Company in the EU Will No Longer Be Enough

Alongside the tax benefits, the Tax Code will introduce safeguards against abuse.

A tax benefit should not apply to an arrangement whose main purpose, or one of whose main purposes, is to obtain a tax advantage where that arrangement lacks genuine economic justification.

For businesses, this provision may prove even more important than the tax benefit itself.

The traditional idea of “setting up a company in the EU and routing payments through it” is gradually losing its relevance unless there are convincing answers to more difficult questions.

What does the company actually do? Where are decisions made? What functions does it perform? Does it have employees and assets? What risks does it assume? Why does this particular company earn the profit?

In other words, tax authorities will look not only at contracts and certificates of incorporation, but also at the economic reality of the transaction.

This reflects the broader direction of European tax regulation: legal form remains important, but legal form alone no longer guarantees the desired tax outcome.

Interest and Royalties Will Also Be Subject to New Rules

Another important set of changes concerns payments between associated companies.

The draft law provides for the possibility of exempting certain interest and royalty payments made from Moldova to an associated company in an EU Member State from withholding tax.

Here, the ownership threshold is higher — 25%.

Companies may qualify as associated where one directly holds at least 25% of the other, or through a third company that directly holds at least 25% of both companies. The relevant holding must be maintained for at least 12 months.

For Moldovan businesses, these provisions are particularly relevant in two areas: intra-group financing and intellectual property.

If a European company finances its Moldovan subsidiary, interest income arises. If one company within the group owns a trademark, software, patent or another intellectual property asset, another company may pay royalties for its use.

Following Moldova's accession to the EU, the tax cost of such intra-group payments could decrease, provided that the statutory requirements are met.

There is, however, an important limitation: the recipient must be the beneficial owner of the relevant income rather than merely an intermediary.

This means that a structure in which funds are received by a company in one country and then almost automatically transferred elsewhere will require considerably stronger justification.

Particular Attention to IT and Intellectual Property

The clarification of the concept of royalties is also relevant to the IT sector.

The draft law includes payments for the use, or the right to use, certain intellectual property rights, including software.

At the same time, not every purchase of a software product automatically constitutes a royalty payment.

The draft separately addresses cases in which software is acquired for operational use, including installation, implementation, storage, customisation or updating.

The distinction is fundamental. Purchasing software for one's own use and acquiring the right to commercially exploit or transfer intellectual property are different transactions from both a legal and a tax perspective.

For businesses, this is another reason to pay close attention to the substance of IT contracts. The description of a payment in an invoice or contract does not, by itself, determine its tax treatment.

A Foreign Company Will No Longer Automatically Mean “Foreign” Profits

The most significant change for owners of structures outside Moldova is expected from 2028.

Moldovan legislation is set to introduce a fully operational controlled foreign company, or CFC, regime.

The basic principle is that, in certain circumstances, the profits of a foreign company may be taken into account when taxing the Moldovan company that controls it, even if those profits have not yet been distributed as dividends.

To qualify a foreign company as controlled, the draft law establishes, among other criteria, a threshold of more than 50% of voting rights, capital or entitlement to profits, held either individually or together with associated persons. An additional test relating to the level of taxation of the foreign company also applies.

Particular attention is given to so-called passive income.

This includes interest, royalties, dividends, income from the disposal of shareholdings, financial leasing, insurance, banking and other financial activities, as well as certain transactions between associated persons.

The logic is clear: simply registering a company abroad and retaining profits within it will no longer always be sufficient to keep those profits automatically outside the Moldovan tax system.

Groups holding intellectual property, financial assets or investment companies abroad should therefore pay particular attention to the new rules.

A Foreign Structure Will Need Its Own Business Rationale

In practical terms, the new rules will require business owners to be able to explain the architecture of their corporate groups.

Why is the intellectual property held in one country, the operating company located in another, financing provided from a third jurisdiction, and profits accumulated in a fourth?

The existence of an international structure does not, of course, constitute a violation in itself.

A business may have numerous perfectly legitimate reasons for operating across several jurisdictions: access to markets, investors, bank financing, intellectual property protection, access to specialists, client requirements or regulatory considerations.

The problem arises when the only convincing explanation for the structure is tax savings.

This is why, alongside tax planning, the economic substance of a company — the genuine content of its activities — will become increasingly important.

For a business owner, the shift can be described quite simply: it will no longer be enough to show the documents; it will also be necessary to show the business behind them.

CFCs Will Also Bring New Reporting Requirements

The controlled foreign company regime will introduce additional reporting obligations.

Moldovan companies will be required to provide information on the foreign entities they control by 30 June of the year following the relevant reporting period.

The draft law also provides for specific penalties.

Late submission of information may result in a fine ranging from MDL 10,000 to MDL 30,000. Submission of inaccurate information may result in a fine ranging from MDL 50,000 to MDL 70,000, while failure to submit the required information may lead to a fine ranging from MDL 70,000 to MDL 100,000.

Foreign corporate structures will therefore also become a separate area of tax compliance.

Disputes Between Two Tax Systems Will Have Their Own Procedure

Another part of the reform is expected to take effect earlier, on 1 January 2027.

It concerns a mechanism for resolving international tax disputes.

The problem is familiar to international businesses: two countries may classify the same transaction differently or both claim the right to tax the same income.

As a result, a company may find itself facing double taxation.

The new mechanism will allow taxpayers to initiate a special procedure to resolve such disputes. The draft law establishes a three-year period for submitting a complaint, calculated from the first notification of the action that has resulted, or may result, in the dispute.

For Moldova, this represents another element of the tax infrastructure required by a country whose economy is becoming increasingly integrated with the European market.

The Reform Will Not Take Effect Overnight

Businesses should not confuse the approval of the draft law with the immediate application of all the new rules.

The reform is divided into several stages.

The tax dispute resolution mechanism is expected to become operational on 1 January 2027.

The controlled foreign company rules are due to apply from 1 January 2028.

The provisions governing dividends, interest and royalties between Moldovan and EU companies, meanwhile, are linked to the entry into force of the Treaty of Accession of the Republic of Moldova to the European Union.

Restructuring corporate groups today solely in anticipation of future tax benefits would therefore be premature.

Reviewing existing structures, however, already makes sense.

What Does This Mean for Business?

The significance of the reform lies primarily not in tax rates, but in the fact that it changes the approach to international business structuring itself.

On the one hand, Moldova is preparing to remove some of the tax barriers between companies within the same group in the future common European economic space. This could make the country more attractive for holding structures, investment and international corporate groups.

On the other hand, rules are being introduced simultaneously to prevent the artificial shifting of profits to other jurisdictions.

As a result, tax planning is gradually becoming less about simply “finding the country with the lower tax rate.”

For businesses, the actual location of a company's activities, its functions, assets, employees, risks, intellectual property and the place where decisions are genuinely made will become increasingly important.

For this reason, in the coming years the main question concerning an international corporate structure will no longer simply be:

“How much does this structure allow us to save?”

A more important question will be:

“Why does the business need this structure, and can we demonstrate it?”

For Moldovan companies holding assets abroad, the answer to that question may soon have a very tangible financial value.