Articles

Doing Business in Romania Handbook 2008: Q&A

Published in Doing Business in… 2008, by Practical Law Company (PLC) and Lex Mundi

Legal system

1. What is the legal system (civil law, common law or a mixture of both)?
Romania has a civil law system.

Foreign investment

2. Are there any restrictions on foreign investment (including authorisations required by central or local government)?
There are only a few restrictions on foreign investment. For example, foreign persons cannot acquire land, subject to a limited number of conditional exceptions.
3. Are there any exchange control or currency regulations?
There are certain limited exchange control and currency regulations with the purpose of deterring money laundering. In addition, certain reporting requirements apply to foreign currency money market transactions and to loans from foreign lenders to Romanian private borrowers.
4. What grants or incentives are available to investors? Are any of these aimed specifically at foreign investors?
Generally, there is no difference in the legal treatment of local and foreign investors.
Financial and/or tax incentives are provided for:
· Small and medium-sized enterprises.
· Investments with a significant impact on economy (over US$1 million (about EUR 725,000)).
· Certain activities (for example, the oil or mining industries, and investment in disadvantaged areas).

Business vehicles

5. What is the most common form of business vehicle used by foreign companies to conduct business in your jurisdiction?
In relation to this vehicle, please provide details on:
· Registration formalities (including timing).
· Minimum (and maximum) share capital.
· Whether shares can be issued for non-cash consideration, such as assets or services (and any formalities).
· Any restrictions on the rights that can attach to shares.
· Any restrictions on foreign shareholders.
· Management structure and any restrictions on foreign managers.
· Directors’ liability.
· Parent company liability.
· Reporting requirements (including filing of accounts) and cost of compliance.
The most common business vehicles are joint stock and limited liability companies. The following apply to both:
· Registration formalities. The shareholders must prepare the company’s bye-laws (in a notarised form in limited cases). An original copy of the bye-laws, together with a completed registration application form, and other various documents, must be submitted to the local Trade Registry Office. Registration takes about five working days from the submission of all required documents.
· Share capital. The minimum share capital for joint stock companies is RON90,000 (about US$ 40,000) and for limited liability companies is RON200 (about US$ 90). There are no maximum share capital requirements.
· Non-cash consideration. Cash consideration is mandatory when establishing any type of company. After the company is incorporated, shares can be issued for contributions in kind. Prohibited or restricted contributions include contributions of services or labour and contributions of accounts receivable.
· Rights attaching to shares. Voting, and dividend and distribution rights (under insolvency and tax laws) may be restricted, and agreements under which a shareholder undertakes to exercise voting rights in accordance with the instructions of the company may be considered null and void.
· Foreign shareholders. There are no restrictions on foreign shareholders.
· Management structure. Joint stock companies can adopt a one-tier (that is, board of directors) or a two-tier board (that is, directorate and supervisory board) management structure. Limited liability companies can be managed by a board of directors. There are no restrictions on foreign managers. Important decisions are made by the shareholders in their general meeting, which include:

• decisions relating to the change of company’s legal form;
• disposals of assets with value exceeding 50% of book value;
• changes of nominal shares into bearer shares;
• mergers;
• division;
• dissolutions.

· Director’s liability. Directors are jointly liable to the company for their mismanagement. They can be held criminally liable for embezzlement, forgery, use of forgery, bribery and fraudulent management.
· Shareholder liability in joint stock and limited liability companies is limited to their contribution to share capital. However, a shareholder may be held jointly liable for financial obligations of an insolvent company if certain conditions in the Fiscal Procedure Code are met.
· Parent company liability. Parent company is generally liable in relation to actions undertaken by its branch, while not for the actions undertaken by its subsidiary (unless insolvent under the Fiscal Procedure Code’s conditions), where the branch does not enjoy legal personality and the subsidiary does.
· Reporting requirements. A company must submit to the Trade Registry and/or to the tax authorities:

• its annual financial statement (bi-annual financial statements must be submitted to the tax authorities);
• details of its directors, financial auditors and censors/auditors;
• restated articles of incorporation after any amendment.

· Listed companies have stricter reporting requirements. Details of major transactions must be published in newspapers, the Official Gazette of Romania or the Bulletin of the National Commission of Securities. The cost of reporting depends on the number of pages to be published.

Employees

6. What are the main laws regulating employment relationships?
The main laws regulating the employment relationship are as follows:
· Labour Code (Law No. 53/2003).
· Law No. 319/2006 regarding work security and health.
· Emergency Government Ordinance No. 56/2007 regarding the employment and relocation of the foreigners in Romania.
Persons from Romania working abroad for a Romanian-based company are subject to Romanian employment laws to the extent the provisions of the country in which they work are less favourable. Foreign workers working in Romania are subject to Romanian employment laws to the extent such are more favourable. The mandatory employee protection provisions rules of the law applicable in the absence of an express choice of law (i.e. the law of the country in which the employee habitually carries out his work, the law of the country in which the place of business of the employer is situated or the law of the country to which the contract is more closely connected) are incident regardless of the choice of law.
7. Is a written contract of employment required? Are any agreements and/or implied terms likely to govern the employment relationship?
An employment contract must be in writing. The relationship between the employer and the employees is governed by:
· Employment legislation.
· Collective labour agreements.
· The internal regulations of the company.
8. Are employees entitled to management representation and/or to be consulted in relation to corporate transactions (such as redundancies and disposals)?
All employees are entitled to representation in relation to the management of the company in which they are employed. However, employee representatives are usually elected in companies with more than 20 employees. Employers must inform and consult trade unions or employees’ representatives in relation to:
· Any decision that could materially affect employees’ rights and interests.
· Collective redundancies.
· Transfer of undertakings.
· The company’s financial condition.
9. How is the termination of individual employment contracts regulated?
Dismissals made without satisfying the legal requirements are null and void. An unfairly dismissed employee is entitled to reinstatement and the payment of salary for the period of dismissal.
The following are considered fair grounds for dismissal:
· Gross or repeated misconduct.
· Professional or medical inadequacy.
· Detention in police custody for more than 30 days.
· Failure to ask for retirement if legal requirements are met.
· Reorganisation of the company affecting the respective employment position.
10. Are redundancies/mass layoffs regulated? If so, please give details.
In the case of collective redundancies, employers must:
· Notify the trade unions or employees’ representatives and perform consultations.
· Notify the local employment authority and workforce agency.
· Adopt fair selection criteria.
· Observe notice periods.
· Make redundancy payments.
· Give employees reasonable time off from work to search for a new job.
11. Do foreign employees require work permits and/or residency permits? If so, how long does it take to obtain them and how much do they cost?
Foreign employees from outside the European Economic Area require both work authorizations and residence permits. The cost of issuing a work authorizations or a residence permit is about EUR300 (about US$420). The time period for issuing a work authorizations varies and the residence permit is issued within 30 calendar days from filing the application.

Tax

12. In relation to employees, what constitutes tax residency in your jurisdiction?
Irrespective to a person’s quality as employee, such person is considered resident for tax purposes if:
· Is domiciled in Romania.
· Has his centre of vital interests in Romania.
· Is present in Romania for a period exceeding, in total, 183 days during any 12 consecutive months ending in the relevant year.
· Is a Romanian citizen working abroad employed by the Romanian state.
13. What income tax or social security contributions must the following pay:
· Tax resident employees.
· Non-tax resident employees.
· Employers, in relation to their employees.
Tax resident employees
The tax rates for tax resident employees are as follows:
· Income tax: 16%.
· Healthcare insurance: 6.5%.
· Retirement fund: 9.5%.
· Unemployment insurance: 1%.
Non-tax resident employees
Non-tax resident employees employed by a Romanian employer pay the same taxes and contributions as tax resident employees (see above, Tax resident employees). Employees seconded to only pay income tax of 16% and healthcare insurance of 6.5%.
Employers
Employers must make the following contributions:
· Healthcare insurance: 6%.
· Retirement fund: between 19.5% and 24.5%, depending on working conditions.
· Unemployment fund: 2%.
· Vacation and sick leave allowances: 0.85%.
· Disability fund: between 0.4% and 3.6%.
· Taxes for the state territorial labour departments: 0.25% or 0.75%.
· Fund for the guarantee of the payment of salary-related charges: 0.25%.
14. In relation to business vehicles, what constitutes tax residency in your jurisdiction?
A company is tax resident in Romania if it is incorporated in Romania.
15. Please give details of the main taxes that potentially apply to a tax resident business vehicle (including rates).
Business vehicles are taxed in Romania as regular companies. Romanian incorporated companies generally pay the following taxes in Romania:
· Corporate income tax: 16% of the company’s worldwide profits.
· VAT: 19% (or 9% for certain activities).
· Salary taxes and contributions.
· Various local taxes (for example, building, vehicle or advertising tax).
16. How are the activities of non-tax resident business vehicles taxed?
Romanian withholding taxes apply in relation to revenue generated in Romania by nonresidents, such as dividends, interest, royalties, commissions, services and capital gains. The domestic tax rates may be reduced or eliminated where a double tax treaty exists.
17. Please explain how each of the following is taxed:
· Dividends paid to foreign corporate shareholders.
· Dividends received from foreign companies.
· Interest paid to foreign corporate shareholders.
· Intellectual property (IP) royalties paid to foreign corporate shareholders.
· Dividends paid. These are generally subject to a tax of 16% unless either:

• a double tax treaty provides for a lower rate;
• the participation exemption applies (i.e. no tax applies if the recipient of dividends is a company established in EU, which holds at least 15% (10% from 2009) of the equity of the company distributing dividends, for a period of at least two years before the distribution).

· Dividends received. Companies are subject to a 16% tax. Dividends received from a subsidiary established in the EU are exempted from the 16% tax if certain conditions are met.
· Interest paid. Interest paid is subject to 16% tax, unless either:

• a double tax treaty provides for a lower rate;
• the recipient is a company established in the EU, which holds at least 25% of the payer’s equity for a period of at least two years before the payment date, in which case the rate is reduced to 10%.

· IP royalties paid. This is the same as for interest paid to foreign shareholders (see above, Interest paid).
18. Are there any thin capitalisation rules (restrictions on loans from foreign affiliates)? If so, please give details.
Interest expenses related to loans taken from non-banking entities are deductible to the extent that the debt-equity ratio does not exceed 3:1. Where the ratio is higher or has a negative value, interest expenses are non-deductible for corporate income tax purposes.
19. Must the profits of a foreign subsidiary be imputed to a parent company that is tax resident in your jurisdiction (controlled foreign company rules)?
There are no controlled foreign company rules.
20. Are there any transfer pricing rules? If so, please give details.
Transactions between related parties (i.e. an entity directly or indirectly controlling or being controlled or under common control by another entity, the relevant controlling percentage related to shares or voting rights being 25%) must be on an arm’s-length basis. Methods used to determine the market price for transactions between related parties include:
· The comparable price method.
· The cost plus method.
· The resale price method.
· Any other method recognised in the OECD Transfer Pricing Guidelines for
Multinational Enterprises and Tax Administrations 2001.
21. How are imports and exports taxed?
Imports and exports are taxed in accordance with EU custom regulations.
22. Is there a wide network of double tax treaties? If so, please give details.
Romania has an extensive network of double tax treaties (currently more than 75). For foreign investment purposes, the most favourable treaties are generally considered to be those concluded with The Netherlands and Cyprus.

Competition

23. Are restrictive agreements and practices regulated by competition law in your jurisdiction? If so, please give brief details.
Competition Law No. 21/1996 prohibits:
· Express or tacit agreements, or concerted practices having as their object or effect the prevention, restriction or distortion of competition.
· Abuses of a dominant position.
Certain anti-trust practices are allowed if they fall within the scope of block exemptions or have been approved by the Competition Council. As an EU member state Articles 81 and 82 of the EC Treaty apply in Romania.

Intellectual property

24. Please outline the main intellectual property rights that are capable of protection in your jurisdiction. In each case, please state:
· Nature of right.
· How protected.
· How enforced.
· Length of protection.
Patents
· Nature of right. The patent holder has an exclusive right to exploit an invention for the duration of the patent. Unauthorised production, use, marketing or sale of the patented product is prohibited.
· How protected. The patent is protected on registration with the Romanian State Office for Inventions and Trademarks (SOIT).
· How enforced. Infringing the rights triggers either civil or criminal liability.
· Length of protection. This is 20 years from the date of filing the application for patent registration.
Trade marks
· Nature of right. The trade mark holder has the right to:
– use the trade mark during the course of its business;
– prevent others from using the trade mark;
– prevent others from registering a similar or identical trade mark;
– sell or license the trade mark.
· How protected. The trade mark is protected on registration with SOIT.
· How enforced. Infringing the rights triggers either civil or criminal liability.
· Length of protection. This is indefinite, subject to renewal every ten years and payment of fees.
Registered designs
· Nature of right. The registered design holder has an exclusive right to exploit, sell and license the industrial design or model.
· How protected. Register designs are protected on registration with SOIT.
· How enforced. Infringing the rights triggers either civil or criminal liability.
· Length of protection. This is ten years, renewable for a maximum of three
successive periods of five years each.
Copyright
· Nature of right. The copyright holder has the right, in relation to the copyright work, to authorise or prohibit its:

• reproduction;
• distribution;
• marketing;
• renting;
• import in order to market;
• lending;
• public communication.

· How protected. The right is automatically protected on creation of the original work.
· How enforced. Infringing the rights triggers either civil or criminal liability.
· Length of protection. There is unlimited protection for moral rights. Economicrelated rights benefit from protection during the lifetime of the author and for 70 years after death.
Confidential information
· Nature of right. This is a contractual right.
· How protected. Its protection is agreed in the contract.
· How enforced. Its enforcement is agreed in the contract, either through the court or arbitration.
· Length of protection. The length of protection is agreed in the contract.
Geographical indications
· Nature of right. The right holder can use and prevent unauthorised use only in connection with the products for which the geographic indication is registered.
· How protected. The right is protected on registration with SOIT.
· How enforced. Infringing the rights triggers either civil or criminal liability.
· Length of protection. This is indefinite, subject to renewal every ten years and payment of fees.

Marketing agreements

25. Are marketing agreements regulated in your jurisdiction? If so, please give brief details in respect of the following arrangements:
· Agency.
· Distribution.
· Franchising.
· Agency. Agents can negotiate and conclude business arrangements for or in the name of another undertaking under the Permanent Commercial Agents Law No. 509/2002. Agents are entitled to minimum termination notice periods and compensation for termination of the agreement.
· Distribution. There are no specific rules on distribution, except for restrictions under competition regulations.
· Franchising. Franchise agreements are regulated under Government Ordinance No. 52/1997. The franchisor must provide potential franchisees with specific disclosures, while the franchisee must provide the franchisor with certain information regarding its financial situation.

E-commerce

26. Are there any laws regulating e-commerce (such as electronic signatures and distance selling)? If so, please give brief details.
Law No. 365/2002 on e-commerce sets out the legal framework for e-commerce. The law applies to service providers whose registered offices are located in Romania.
Electronic signatures
Law No. 455/2001 on electronic signature sets out the legal framework for:
· Electronic signatures.
· Documents in electronic format.
· Conditions for supplying electronic signature certification services.
Documents with an attached certified electronic signature have the same legal force as hand-signed documents.
Distance selling
Government Ordinance No. 130/2000 on the legal regime of distance contracts as approved and modified by Law no. 51/2003 sets out the legal framework for the protection of consumers concluding distance contracts. It imposes a number of mandatory obligations on the suppliers.

Data protection

27. Are there any data protection laws? If so, please give brief details.
Law No. 677/2001 regarding the protection of personal data regulates processing and conditions for collecting personal data. Processing personal data and transferring the data abroad must be notified in advance to the National Authority for Personal Data Processing. The express consent of the data subject must be obtained by any data controller before processing, except in the following cases:
· To protect the life, physical integrity or health of the data subject.
· To observe the data controller’s legal obligations.
· To meet a public interest.
· When the data is publicly accessible.
· When the data is to remain anonymous for the entire period of the processing.

Product liability

28. Are there any laws regulating product liability and product safety? If so, please give brief details.
Product liability is mainly regulated by:
· Government Emergency Ordinance No. 21/1992 regarding consumer protection.
· Law No. 449/2003 regarding the sale of goods and associated guarantees.
· Law No. 245/2004 regarding the general safety of products.
· Law No. 240/2004 regarding liability for defective products.
Under this legislation, manufacturers, importers and, under certain circumstances, distributors, are liable for defective products. Any contractual clause excluding or limiting manufacturer liability for damages caused to consumers by defective products is null and void. Special rules apply for certain categories of products.