Economic Overview
After the fall of the USSR and the announcement of autonomy on 27 August 1991, Moldova started a progress to a market economy and encountered a huge financial retreat.
The crisis in Moldova went on for a long time, from 1990 to 1999. Amid this period GDP diminished by very nearly three times.
From 2000 the circumstance has turned out to be more brilliant and investigators point to various more positive monetary propensities. Between 2000-2005, GDP in genuine terms expanded by 43% with relentless monetary development of 6% for each annum.
Starting 2006, development hindered once more, to 4%, a circumstance principally caused by an import ban in Russia on Moldovan wines and natural products. In 2009, Moldova’s monetary development shrunk by 6%, yet has since bounced back unobtrusively.
An essential piece of Moldova’s development since 2000 has been the expansive number of Moldovans working abroad, like Russia and Europe.
In 2016–2017, GDP growth resumed and reached 4.5% due to strong agricultural output and robust private consumption growth driven by remittances and public and private wage increases. Although export activities are supported by the good harvest of the past two years, imports increased also, leading to a negative contribution of net exports to growth (-2.7%).
On the production side, growth has been driven mainly by retail and wholesale trade (+1.3%), followed by growth in agriculture (+1%) and industry (+0.4%).
Key Sectors
- Agriculture and food processing represent two of the most important sectors in Moldova’s economy, representing around one quarter of the country’s GDP.
The country’s fertile soil allows the planting of wheat, corn, barley, tobacco, sugar beet, soybeans, sunflower seeds, walnuts, apples, and other fruits. - Meat and dairy cattle are also raised, and beekeeping is far reaching.
- Wine is Moldova’s best-known product, produced from grapes from vineyards that are concentrated in the central and southern part of the country. Moldova also produces sparkling wine and brandy.
- Light manufacturing, the production of clothing and textiles, footwear, leather goods, and carpets also represent important sectors in Moldavia, ranking second in terms of output and first in terms of exports. These industries benefit from low labor costs, preferential customs duties, and Moldova’s proximity to Europe.
- Trade and services, information technology, and transportation represent 25% of GDP.
Taxes in Moldova
Moldovan residents (both Moldovan citizens and foreigners) are subject to taxation for their income received during the fiscal period from any sources within the Republic of Moldova, as well as from sources outside the country for their work activity effectively performed in the Republic of Moldova (except income that is expressly tax exempt under the Moldovan law).
Income Tax
Taxable Persons
Article 13 of the Tax Code defines taxpayers as natural and legal persons, other than partnerships, who derive income in the fiscal year from Moldovan sources as well as legal persons gaining income from any foreign sources and individuals who derive investment or financial income from sources located outside of Moldova.
Taxable Base
The taxable base is generally the gross income (including tax benefits) derived by the taxpayer from all sources, reduced by deductions and excluding income exempt for tax purposes.
Tax Rates
Individuals, including peasant (farm) enterprises and sole proprietorships, are subject to income tax at the following rates:
- 10 percent of gross yearly taxable income between MDL 12,180 and MDL 16,200;
- 15 percent of gross yearly taxable income between MDL 16,201 and MDL 21,000; and
- 22 percent of gross taxable income that exceeds MDL 21,000
Legal persons pay income tax at the rate of 20 percent.
VAT
The VAT is a state tax and a form of collection to the budget of part of the value of delivered goods and provided services that are subject to taxation in Moldova, as well as part of taxable goods and services imported to Moldova.
Taxable Persons
Pursuant to the Tax Code, the following persons shall be subject to VAT:
– legal entities and individuals, which are registered or are subject to registration as a VAT payer;
– legal entities and individuals importing goods, except for individuals, who import goods for personal use or consumption, the value of which does not exceed the limits established by the current legislation;
– legal entities and individuals importing services considered as taxable deliveries carried out by such persons.
Taxable Objects
The taxable objects include:
– supply of goods and services by taxable persons as a result of their business activity in Moldova;
– import to Moldova of goods and services, except for goods imported by individuals for personal use or consumption, the value of which does not exceed the limits established by the current legislation.
Tax Rates
Article 96 of the Tax Code provides for the following VAT rates:
(a) standard rate in the amount of 20% of the taxable value of imported goods and services as well as supplies made in Moldova;
(b) reduced rates in the following amounts:
– 8% for bread and bakery products, milk and dairy products delivered in Moldova, except for food products destined for children and not subject to VAT;
– 5% for natural and liquefied gas, both imported to and delivered in Moldova;
(?) zero rate for certain eligible supplies of goods (services).
RENTAL INCOME
Nonresidents earning rental income in Moldova are liable to pay tax at a flat rate of 10%. The tax is levied on the gross amount, and withheld by the tenant.
CAPITAL GAINS
Capital gains from the sale of real estate property earned by a nonresident are taxed at a flat 10% withholding tax. The adjusted cost base of the property and related transaction costs are deductible when calculating the taxable capital gains.
CORPORATE TAXATION
Income Tax
Income and capital gains earned by companies are taxed at a flat rate of 12%. Taxable income is calculated by deducting income-generating expense from gross income. Taxable capital gains are calculated by acquisition costs and related expenses from of market value or selling price. For sale of capital assets that are not considered to be part of the company’s ordinary activities, only 50% of the net capital gains are taxable.
Investment
Strategic location bridging EU and CIS and Moldova’s EU integration efforts
Moldova is situated between Romania and Ukraine.
Most of Moldovan population speaks both Romanian and Russian languages, thus making economic connections with the neighboring countries easier due to low language barriers. Despite the communist party being at the power in Moldova, the government is pursuing the goal of eventually joining the EU. Reforms are being initiated and carried out to converge to the EU standards in the field of economic development, social guarantees and others.
Cheap and Qualified labor
The average wage rate is very low in Moldova. Almost 13% of Moldova’s population above the age of 20 has a university degree, while the literacy rate is close to 100%.
Attractive operating and living costs
With Moldova being a low-cost country, living costs are relatively low. Foreign experts can be deployed to Moldova for a fraction of costs typical for US or Western Europe. At the same time, supporting local personnel is even cheaper.
Access to the Black Sea through Giurgiulesti International Free Port
Giurgiulesti International Free Port is situated on the River Danube in the South of Moldova. The Port serves its client as:
– the only direct sea/river-borne transshipment and distribution point to and from the Republic of Moldova,
– a regional logistics hub on the border of the EU with access to road, rail, river, sea, and
– an excellent location for business development, because of its strategic location, tri-modal transport infrastructure, low cost environment and a unique customs and tax regime.
Moldova is party to international trade agreements and systems
Moldova is a member of WTO. Being a member of the CIS, Moldova also benefits from free trade agreements with the CIS countries. Moldova also benefits from the EU GSP Plus system (Source: Generalised System of Preferences Plus),and from the free trade agreements signed with the South-East European states. Moldova is also expected to join the CEFTA (Central European Free Trade Agreement) soon (source: Moldpres news agency).
Strong Points
Moldova’s main strong points are:
– A strategic location between Europe and Asia, an area that is booming;
– Cheap and skilled labor;
– Access to the black sea;
– A very low cost of living;
– Privatizations of a number of companies underway; and
– Investor-friendly taxes and duties.
Weak Points
Moldova still has to make significant progress to raise itself to the level of European economies. The main challenges that the country will have to take on are:
– The legacy of the communist era, namely red tape and corruption;
– Problems of respecting standards and intellectual property;
– A significant Russian influence;
– Infrastructures in bad shape; and
– The low purchasing power.
Government Measures to Motivate or Restrict FDI
The government established a number of measures in order to promote investments in the country. Companies investing USD 250,000 can benefit from tax deduction for the first 5 years. Income tax was also lowered. The government also promoted equality amongst international and local investors and the fact that there is no limit to capital invested. These factors demonstrate the economy’s liberalization.