Vol. XVI No.7
October 2011

HERZFELD & RUBIN, P.C. LAWYERS PROFESSIONAL CORPORATION
IN ASSOCIATION WITH
RUBIN MEYER DORU & TRANDAFIR

INSIDE:
Doing Business in Romania – An Up-to-date Mini-Guide

DOING BUSINESS IN ROMANIA – AN UP-TO-DATE MINI-GUIDE

Introduction
The severe consequences of the global financial crisis in Romania affected the nation’s economy in an abrupt way which left no room for delays or postponements in finding solutions to the grave situation that confronted the country. Romania was thumped by a significant decline in the real estate market, a high increase in unemployment, a precipitous drop in manufacturing, and an unexpectedly huge number of bankruptcies and reorganizations of commercial enterprises. Nevertheless, new areas of economic development such as green energy, environmental protection and infrastructure redevelopment became the stars of a struggling economy, and investments in those fields grew. Romania is again experiencing growth and is expected to recover faster than many of its western European neighbors with more mature economies.

The notion of presenting an updated mini-guide on doing business in Romania developed from the experience of recent investors determined to find a simple way through the abundant legislation and bureaucratic procedures that govern the formation of a business in the country. This article is obviously not an exhaustive tool covering all areas of business; it is a mini-guide to provide potential investors with the up-to-date basic information which they need in order to start a business in Romania.

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Corporate

The actual form which an investor should use to start a business in Romania will differ with the type of business intended to be developed, the scope of the activity envisioned and the nature of the collaboration and partnerships contemplated. Different forms of doing business have different requirements and are intended for differing purposes.

Legal Entities Set Up as per the Romanian Company Law
A foreign investor in Romania can enter the Romanian market through the various business entities permitted by Law no. 31/1990, as completed and republished (the “Romanian Company Law”). For instance, it may choose to establish a representative office (for non-transactional operations such as marketing), a branch office (a legal entity which does not have a Romanian legal character of its own), or a subsidiary (an autonomous Romanian legal entity which has its own legal character).

The most common types of companies which may be set up by foreign investors in Romania under the Romanian Company Law are limited liability companies (“SRL”) and joint-stock companies (“SA”). In both instances, in order to form the company, the shareholders need certain required documentation that must be submitted to the Trade Registry in the jurisdiction where the new company will be headquartered. Among these documents, special attention should be given to the articles of association of the new corporation since it establishes every aspect of the operation of the new entity, i.e. the object of activity, the contribution of shareholders, the management structure, liabilities etc. On the other hand, one of the main aspects which differentiate the two types of companies is the level of the minimum share capital to be set up for the creation of the new company. While the minimum share capital for limited liability companies is RON 200, the minimum share capital for joint-stock companies is RON 90,000. A joint-stock company can have an unlimited number of shareholders while a limited liability company cannot, and both have differing accounting, governance and reporting requirements. Furthermore, companies intending to be listed on the Bucharest Stock Exchange must also comply with the provisions of Law no. 297/2004 (i.e. the “Romanian Capital Market Law”) and the special regulations adopted by the National Securities Commission.

Joint-Ventures
Another possibility used by foreign investors to pursue business in the Romanian market is to create a joint-venture. This method of doing business does not necessarily result in the creation of a separate Romanian entity. It is based on a joint-venture agreement that sets forth the particular type of arrangement in which two or more individuals and/or legal entities, either Romanian or foreign, agree to contribute certain assets for the purposes of performing jointly in a pre-determined commercial activity so as to benefit from the profit obtained. For further details on this particular type of arrangement, please visit our Romanian Digest™ Archive at http://www.hr.ro/digest_archive.htm, the September 2009 article called “Joint Ventures under Romanian Law”.

Public-Private Partnerships (“PPPs”)
The PPP is another way in which a foreign investor may enter the Romanian market. PPPs are partnerships between public authorities and private businesses concluded for the purpose of accomplishing projects or performing services that are traditionally accomplished or performed by the public sector. Such a partnership acknowledges the fact that both sectors, public and private, are equally significant, and that both have certain advantages that must be exploited for the benefit of the public interest in an efficient economic manner. In Romania, PPPs are regulated by the Law no. 178/2010. Under the law, a PPP can have as its scope the design, financing, construction, refurbishment, rehabilitation, operation, maintenance, development and transfer of an asset or public service, as the case might be.

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Foreign Investment
Generally, there is no difference in the legal treatment between local and foreign investors in Romania. Foreign investors may own 100% of their Romanian legal entities and are not required to have Romanian nationals as shareholders or partners.

Potential foreign investors should be familiar with incentive laws designed to stimulate investments in order to benefit from the facilities granted for specific purposes. For example, Government Emergency Ordinance no. 85/2008 for stimulating investments expressly states that in order for a company to be able to benefit from the facilities granted by the Ordinance, the investments must be performed in certain specific areas of economy such as: production and supply of electricity and thermal energy; protection and improvement of environmental quality; distribution of water, waste management; informatics and communications; research, development and innovation activities, or development of new products and services regarding labor force. For more details on the provisions of this law, please see our September 2008 Romanian Digest™ article entitled “Romania’s Targeted and Non-Discriminatory Investment Law”.

Potential investors should also be aware of the provisions of Law no. 346/2004 for the establishment of small and medium size enterprises, defining SMEs and detailing the conditions in which such SMEs may benefit from investment facilities in Romania.

As regards restrictions applicable to foreign investors in Romania, a significant constraint is the limitation on foreign citizens and/or foreign legal entities to acquire land in Romania. The law governing these matters is Law no. 312/2005, which details the situations and conditions in which foreign citizens and legal entities, members or non-members of EU member states are allowed to acquire land in Romania. There are no limitations imposed upon a foreign investor’s wholly-owned Romanian corporation’s right to own land so long as that land is put to use in support of the stated purposes of the company. Also, a new and important restriction is found in Law no. 656/2002 regarding money laundering, which imposes certain limits on foreign currency money market transactions that are meant to deter money laundering operations.

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Employment
After forming a company in Romania, personnel hired by the new firm must be engaged based upon individual employment agreements regulated by the Romanian Labor Code. A new Labor Code became effective in May 2011, and employers must closely observe all of its provisions including executing individual employment agreements in writing, adhering to reporting obligations, respecting their responsibilities in the field of health and security in the workplace, and providing for the requisite termination procedures. Sanctions for infringing upon the applicable legal provisions are quite high. For more details, please see our May 2011 Romanian Digest™ article, named “Flexibility and Transparency in the New Labor Code”.

With respect to employment agreements where the employer is a foreign company or the employee is a foreign citizen, they may be governed by the law chosen by the parties so long as that law does not provide less protection to the employee than does Romanian law. This law may be either the law of the country where the employee regularly carries out his work, the place where the employer’s place of business is located, or the place to which the contract is more closely related.

Foreign investors who intend to become employers in Romania must take into consideration the specific tax and social contributions which must be paid by them as employers under Romanian law. It is not our purpose to name all of the contributions and detail their allocation, but just to point out the fact that pursuant to the Romanian Labor Code, it is the employer’s obligation to pay all of the contributions applicable both to the employer and to its employees. This means that besides the net salary given to its employees, an employer is also obligated to cover such expenses as health and social benefits payments that are applicable to its employees.

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Competition
The main law governing competition is Law no. 21/1996, as amended, according to which the following are prohibited: agreements, decisions or concerted practices having as their object or effect the prevention, restriction or distortion of competition on the Romanian market or a part thereof, especially those having as their purpose, among other things, price fixing, distribution control or market sharing, and abuses of a dominant position on the Romanian market or a substantial part of the market. Exclusivity clauses, non-compete clauses, exclusive purchasing and/or selling obligations and other similar contractual provisions may fall under the category of prohibited agreements between undertakings, so possible investors should closely assess all their agreements in this regard. Moreover, entities that envisage a merger should closely follow the provisions regarding merger control. For more details on the most recent activity of the Competition Council, which is the national authority that supervises the activity of entities in the competition field and to sanction the infringement of competition legislation, please see the Romanian Digest™ March 2011 article, entitled “The Competition Council’s Recent Impact on Business

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Intellectual property
Romania, like its fellow European Union member states, fully appreciates the necessity to have intellectual property rights that are well protected. Special laws ensure the protection of distinct intellectual property rights, such as copyright, patents or trademarks. For more details on the protection granted to such rights by Romanian law, please see the Romanian Digest™ March 2007 article, entitled “Intellectual Property Protections in Romania”.

In addition to the specific intellectual property rights whose protection is ensured by law, a contractual right may be created that protects confidential information, the significance of which is substantial to certain businesses where the infringement of such a right could be crucial to its survival. Companies that include this right in their agreements must specify the duration for which the right will exist and the sanctions applicable to the other party in case of a breach of the protection obligation for confidential information.

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Data protection
A potential investor in a business that entails the processing and/or transfer of personal data abroad must adhere to the legal provisions applicable to data protection set forth in Law no. 677/2001 on the protection of individuals in regard to the processing and free movement of personal data. Such businesses must file a notification with the National Authority for the Supervision of Personal Data Processing. Basically, personal data may be processed only if the individuals’ express and unequivocal consent has been obtained, in advance of transmission, except for specific situations set forth in Law no. 677/2001 as an exception to the rule.

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Environment
Romania’s accession to the European Union generated the adoption of the EU Directives on environmental protection into national legislation. The implementation of such newly adopted laws has forced businesses to become much more aware of the environmental impact of their activity as well as the potential sanctions applicable to them in case of their breach.

The governing principle in the field is the “polluter pays,” meaning that the entity harming the environment through its activity is the only one liable to repair such harm and to bear the costs of repair. There also are certain fields of activity where specific legislation for environmental protection has been adopted. For instance, projects that generate emission of greenhouse gases or noise. Furthermore, there are specific requirements applicable in case of water and waste management projects. For more details on such regulations, please see the Romanian Digest™ February 2011 article, named “Implementing Projects Having an Environmental Impact”.

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Tax
It is not the purpose of this article to fully identify the types of taxes to be paid by companies in Romania. However, as a rule, it is important to determine whether a company has been registered as a tax resident in the country. Basically, the following are deemed to be tax residents: any legal person incorporated in Romania; any foreign legal person with a place of effective management in Romania; and any legal person incorporated in accordance with European legislation and having its headquarters in Romania.

In case of activities performed by tax residents in Romania, the following taxes are primarily applicable: an income tax amounting to 16% from taxable profits; VAT amounting to 24% (with certain exceptions of lower rates for specific areas of activity); salary-related taxes and contributions applicable both for employers and for employees, as previously mentioned; and other specific taxes such as taxes on property.

As regards taxes applicable to non-residents earning income in Romania such as interest payments, dividends, or commissions, an income tax of 16% is generally applicable. As an exception, this percentage can be reduced or even eliminated by claiming the provisions of an existing treaty for the avoidance of double taxation provided that specific documents have been obtained from the country of origin and that such documents can be submitted to the competent Romanian fiscal authority.

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Conclusion
Investors in Romania today consider issues that were not even contemplated a few years ago. In addition to a basic understanding of corporate and employment matters that are required for any type of business, potential investors in modern Romania must pay particular attention to the laws and regulations that govern the specific type of activity in which they intend to engage including special environmental regulations and laws governing the use of unique technologies. Breaching the specific rules governing these activities can cause companies to incur major sanctions and severely and irrevocably damage to their image. Similarly, compliance with competition rules or intellectual property rights protection is now a crucial aspect in the life of a Romanian company. Avoid pitfalls and potential problems through the clever use of competent advisors – Romania is no longer the wild east of the 1990’s.

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Editors Note: It is our policy not to mention our clients by name in The Romanian Digest™ or discuss their business unless it is a matter of public record and our clients approve. The information herein is correct to the best of our knowledge and belief at press time. Specific advice should be sought from us, however, before investment or other decisions are made.

Copyright 2011 Rubin Meyer Doru & Trandafir, societate civila de avocati. All rights reserved. No part of The Romanian Digest™ may be reproduced, reused or redistributed in any form without prior written permission from the publisher.

 
RUBIN MEYER DORU & TRANDAFIR
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Str. Putul cu Plopi, Nr.7, Sector 1
Bucharest, Romania
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Fax: (40) (21) 311 14 65
E-Mail: office@hr.ro




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