Doing Business in Romania by Hammond Bogaru & Associates

By: Hammond Bogaru & Associates | Attorneys at Law 01 February 2012 | Bucharest, Romania

Romania is located at the crossroads of Central and South Eastern Europe, on the Lower Danube, within and outside the Carpathian arch, bordering on the Black Sea. With an area of 238,391 square kilometres, Romania has been a member of the European Union since 1st January 2007 and is the nineth largest country of the European Union by area. Romania is a Republic with a president and a bi-camera Parliament. Administratively, Romania is divided into 42 counties plus the municipality of Bucharest (the capital). The official language is Romanian, a romance language.

The current currency of Romania is the LEU. There are proposals to introduce the Euro as the currency of Romania after 2017.

February 1, 2012

Many Romanians are multilingual and highly educated, open to new experiences, innovative and future oriented after many years under communism. Romania's economy is a mixture of agriculture and industry. The main exports are automotive based (including cars), software and IT, clothing and textiles, industrial machinery, electrical and electronic equipment, metallurgic products, raw materials, military equipment, pharmaceuticals, and agricultural products (fruits, vegetables, and flowers).

Romania offers significant opportunities to international businesses for infrastructure projects, production, services, or technologies that meet the growing private demand and contribute to the country’s development priorities. According to the Romanian legislation all investors irrespective of whether they are Romanian or foreign citizens, resident or non-resident enjoy the same rights and incur the same obligations (other than ownership of land). The first step in developing a business in Romania is normally to incorporate a company. The process of company registration in Romania has been simplified. Investors only need to file all the company formation documents with one institution – the Office of the Trade Registry in the area where the headquarters of the company will be located. Certain types of companies such as banks and insurance companies require additional consents and licenses which must be obtained.

The normal business organizations are: 1. GENERAL PARTNERSHIP – the obligations of which are guaranteed by the partnerships assets and the unlimited and joint liability of the partners. 2. LIMITED PARTNERSHIP – whose obligations are guaranteed by the partnerships assets and the unlimited and joint liability of the general partners. The Limited partners are liable only up to the value of their contribution to the capital.

4. JOINT-STOCK COMPANY – whose obligations are guaranteed with the company’s assets. Shareholders are liable only up to the value of their shares. 5. LIMITED LIABILITY COMPANY – whose obligations are guaranteed with its assets. Social part holders are liable only for the payment of their contribution to the share capital.

February 1, 2012

3. PARTNERSHIP LIMITED BY SHARES – whose capital is divided into shares and whose obligations are guaranteed with the company’s assets and the unlimited and joint liability of the general partners. Limited partners are liable only up to the value of their contribution to the share capital.

Most foreign investments are carried out through joint stock companies and limited liability companies. According to Law no. 31/1990 on Trading Companies, a limited liability company (S.R.L.) may be set up one or more persons known as social part holders. The number cannot exceed fifty (50). An individual and or a legal entity cannot be a sole social part holder in more than one S.R.L. A S.R.L. with one social part holder cannot be the sole social part holder in another S.R.L. Under Romanian law unanimity of social part holders is required for certain decisions in a SRL. If there is a dispute in a SRL the minority can obtain a ransom or blackmail position against the majority. Choose your minority sole social part holder with care. The minimum share capital of a S.R.L. is RON 200 with each social part being at least RON 10. There is no maximum amount of capital requirement. A joint stock company must be set up by at least two persons. The share capital of the joint stock company cannot be less than RON 90,000, (equivalent to EUR 25,000) divided into shares. The minimum value of each share cannot be less than RON 0.1. All companies require at least one administrator. The administrator of a company may be a Romanian or a foreign citizen, resident or non-resident. An administrator cannot be the administrator in more than one company without the prior consent of the shareholders of the company.

Shares in Romanian companies can be owned by non-resident persons. There are no specific restrictions in the legislation regarding trading companies. The exception is for land ownership by foreigners in Romania. Foreign natural persons or companies cannot directly own land in Romania. If an investor owns a Romanian legal person that company being a Romanian legal entity, can

February 1, 2012

All companies have to comply with reporting requirements to the Trade Registry. These include annual and bi-annual financial statements, details of the directors, financial auditors and internal auditors. The articles of incorporation after amendment must also be lodged.

own land. There are no restrictions as to the ownership of the capital or the management of such a company. The Romanian 2003 Constitution contains provisions that will permit foreign persons in certain circumstances to own land. This where there is reciprocity, the terms of the treaty of accession to the European Union, a special laws and inheritance. The most common method to own agriculture lands in Romania is to own or set up a Romanian company, or to open a subsidiary. In Romania a subsidiary is considered Romanian companies. All contracts concerning the buying-selling of land must be executed in front of a notary public. Failure to do so causes the nullity of the contract. Since 1 st October 2011 the registration of the sale/purchase agreement with the local cadastral office is now the proof of ownership of land. The taxes for owning agricultural land depend upon its location. Land can be designated by the local authority outside the town boundaries or inside the town boundaries. This will affect the tax payable.

There are no exchange control regulations as such. Regulations are issued by the Romanian National Bank, which takes measures related to the monetary capital operations. In addition in certain circumstances there is an obligation to notify the Romanian National Bank before the conclusion of capital operations.

February 1, 2012

All payments between residents which concern the trading of goods and services, must be performed only in RON. According to Regulation no. 4/2005 regarding foreign exchange, several operations can also be performed in foreign currency by Romanians inside Romania. These are mainly for payment obligations outside Romania where foreign currency is required.

The main taxes applied in Romania are as follows: Profit tax; Income tax; tax on micro-enterprises; income in Romania of nonresidents; tax on representative offices; Value added tax; custom duties and excise and local taxes Corporate income tax is payable by Romanian companies, companies using a permanent establishment in Romania, companies and non resident individuals who are parties to a joint-ventures. Tax is also payable on profit from real estate transactions or from transactions with shares arising in Romania as well as on profit from joint-ventures derived in/or outside Romania.

The standard corporate income tax rate is 16%. Nightclubs and gambling operations, are liable to a corporate income tax rate no lower than 5% of the revenues obtained from such activities. There are companies which can apply for a special fiscal regime, with a tax rate of 3% on the total revenue earned. These are defined as micro-companies. Micro-companies are those companies which have an annual turnover less than EUR 100,000; more than 50% of their income is obtained from activities other than consultancy and management and with a between one (1) and nine (9) employees. Any foreign legal person who obtains an income from real estate located in Romania or from the sale of land and securities has the obligation to pay profit tax of 16% on the realised profit as well as submitting a profit tax statement.

following is a list that is not definitive of what the Romanian financial authorities consider income. Income from salaries and profit from professions; the use of goods; investment income, (i.e. dividends, and interest) as well as other income from sale/purchases of property and securities, pensions, agricultural activities, prizes and gambling, sale of properties, and from intellectual property rights. In certain circumstances the payer of sums of money is required to retain and pay the tax to the relevant authorities. The VAT regime in Romania is generally in line with the EU VAT Directive 2006/112/EC. VAT applies to the import, domestic supply of goods and services and transfer of real estate properties. The standard VAT rate is 24 %. There are two reduced rates of VAT, 9% for tourism, drugs and 5% for constructions, but under certain conditions. Romanian companies should register as VAT payers if their annual turnover exceeds EUR 35,000. Registration as a VAT payer where turnover is under this threshold is optional. Hammond Bogaru & Associates | Doing Business in Romania 2012 ÂŠ All rights reserved |

February 1, 2012

There is a flat rate tax for individuals of 16% on all their income. The

Over the years various tax incentives for fostering foreign investments have been provided by the Romanian legislation. The general framework was established by Government Ordinance no. 85/2008 regulating stimulation of investments, types of incentives and subsidies available, and general eligibility conditions. State aid can be granted to large, small and medium sized enterprises, depending on the type of investment, and the provisions of the applicable state aid scheme.

Types of incentives: - Loans with preferential interest (i.e. interest subsidized up to 30% by the state) - Loans guaranteed by the state (up to 80%) - Free access to utilities - Right to use properties from the private domain of the state or of the local authorities - Subsidies - Exemptions, reductions and postponement of local taxes - Other tax incentives such as offset of fiscal loss, accelerated depreciation for equipment/installations, exemption/reduction of VAT and corporate income tax, up to maximum amount of the state aid.

- Tax relief granted by local authorities for fixed assets and land to be employed by an industrial park, as well as other incentives which may be granted according to law, by the local public authority. - Development programs for infrastructure, investment and provision of equipment by the central and local public administration, and - Donations, concessions and structural funds.

February 1, 2012

The establishment and operation of scientific and technological parks, benefit from the following incentives:

In order to benefit from the above incentives, the investments must fulfil conditions about the amount, duration, objectives and eligibility criteria stipulated in the Investment Law. Incentives are not granted for investments made in the fields expressly excluded from the regulations issued by the Competition Council, irrespective of their value. Other incentives are provided by the Romanian Government through Government Decision no. 718/2008 approving horizontal state aid scheme for regional sustainable development and reduction of emissions; Order no. 479/2008 issued by the Minister of Economy and Finance approving state aid granting support for the consolidation and development of the Romanian productive sector through investments of big enterprises; Government Decision no. 1165/2007 on stimulating economic growth by supporting investments and Government Decision no. 1680/2008 implementing a state aid scheme for ensuring sustainable economic development as well as Government Decision no. 753/2008 regulating a state aid scheme on supporting regional development by stimulating investment.

Foreign individuals working in Romania can conclude local employment agreements with Romanian companies, or they can work in Romania on the basis of foreign employment agreements concluded with foreign employers (i.e. as a secondee).

Any contract must be concluded in a written form and be for a limited or unlimited period. A working week is normally of 8 hours per day/5 days a week with 2 free days, normally Saturdays and Sundays. The working time may be varied but the maximum number of hours cannot exceed 48 hours/week, including overtime. For some activities, the number of working hours can be variable. Legally, the employees have the right for breaks during the working day. The employees also have the right to legal holydays as follows, 1st and 2nd January; First and Second day of Easter; 1st May; First and second day of Whitsun; Attorneys at Law of December; First and second day of Christmas. The minimum number of paid days for vacation is 20 days/year. The employees are also entitled to receive, upon request, vacation time for training. Hammond Bogaru & Associates | Doing Business in Romania 2012 ÂŠ All rights reserved |

February 1, 2012

The conditions of employment are regulated by the Romanian labour law. The law is primarily contained in the Labour Code which provides for the minimum standards of protection of employeesâ&#x20AC;&#x2122; rights. The labour legislation as comprised in the labour Code is quite strict with limitations on working hours and overtime. The relationship between the employee and employer is dictated by the Individual labour contract which transposes the rules of the Code.

There is also a minimum wage guaranteed by the law. Employers are to calculate and withhold salary contributions of employees when paying salaries. The State budget contributions are payable by the 25th of the month following their payment. Withholding and no payment of the social contributions is a criminal offence and are sanctioned accordingly. The employeeâ&#x20AC;&#x2122;s social contributions are for Social security fund, Unemployment fund and Health fund. The employersâ&#x20AC;&#x2122; are also required to make contributions towards the social security fund, unemployment fund, redundancy fund contribution, health fund, work accidents insurance, labour office commission. The rates vary from time and care should be taken when hiring employees to ascertain the current per centages as they can add to the cost of employment.

The Romanian State Office for Inventions and Trademarks is the authority that ensures that intellectual property protection is complied with according to the legislation and international conventions and treaties to which Romania is a party. Its main purpose is to register and examine intellectual property applications and issue certificates granting the owner exclusivity on the Romanian territory. Intellectual property is protected in Romania by Law 8 /1996 and regulates two main components: industrial property and copyright and related rights.

In accordance with the obligations in the EU Accession treaty, Romania became a member of the European Patent Organization from 1 March 2003.

February 1, 2012

In 2001 Romania ratified the latest international regulations in the field of copyright and related rights in the digital environment, namely the WIPO Copyright Treaty and WIPO Performances and Phonograms Treaty signed in 1996 in Geneva.

The Romanian legal system is a Code based legal system. Romania has a developed court system as well as arbitration, mediation and conciliation procedures. All parties in commercial actions are required to try to reconcile their difference prior to the commencement of proceedings. All decisions of the court of first instance are appealable to the next higher court which acts as a court of appeal. This decision can then itself be appealed to the next higher court. Thus there are basically two appeals allowed on any court decision. Appeals are often appeals on both fact and law. Appeals from the Court of Appeal are to the Supreme Court on a point of law. Disputes in relation to the constitution are to the Constitutional Court whose decisions are final and binding. Arbitrations are usually before the court of the local Chamber of Commerce.

The adjudication deadline for a work authorization and residence permit is 30 calendar days from the registration date of the local employerâ&#x20AC;&#x2122;s application. The residence permit must be issued to the foreign employees based on the work authorization within the same deadline. European citizens only require the certificate of registration, which can be issued within a day. Before arriving in Romania, many foreign nationals need to apply for and obtain a visa that corresponds with the purpose of their intended trip to Romania (e.g. tourist, Hammond Bogaru & Associates | Doing Business in Romania 2012 ÂŠ All rights reserved |

February 1, 2012

Foreign individuals (depending on nationality/country of residence) may be restricted from entering Romania. Foreign individuals are non-EU and non-EEA (European Economic Area) country nationals. As a general rule, foreign employees require work visas, work authorizations and residence permits to enter, work and stay in Romania.

working, business, commercial activities visa, etc.). The visa can be obtained from the Romanian diplomatic missions in their home countries. Before departing on a trip to Romania enquires should be made to ensure that the relevant visa regime has been followed. Foreign individuals working in Romania maybe able to do so based on a foreign employment agreement; a foreign and a local employment agreement; or a local employment agreement As a general rule, foreign individuals working in Romania need to apply for a work authorization (before obtaining their residence here). There are certain exceptions to this rule, namely EU individuals working in Romania as local employees; EU and non-EU national seconded to Romania by companies located in EU/EEA member states but whose secondment notification should be undertaken with the immigration and labour authorities; EU individuals seconded to Romania by companies located in third party countries can perform their activities in Romania without any restriction as they obtain rights through being a citizen of an EU country. Following Romania’s accession to the EU in January 2007, provisions were implemented residence for EU/EEA nationals. The provisions for non-EU nationals remained broadly the same. EU nationals can legally stay in Romania for up to three months following their entry into Romania. In order to extend their stay over the 90 days an EU-national is required to obtain a certificate of registration. When the certificate of registration is issued, the individual is also allocated a personal numerical code that is required to enable them pay monthly taxes. Non-EU individuals whose stay in Romania exceeds 90 days within a six-month period need to apply for a temporary residency permit, unless a relevant international agreement or special laws stipulate otherwise. EU nationals should apply for a registration EU nationals should apply for a registration certificate from the Romanian Office for Immigration if they intend to stay in Romania for more than 90 days in a six-month period. The application process takes one – two days.

February 1, 2012

Non-EU nationals should apply for a residency permit if they intend to stay in Romania for more than 90 days in a six-month period. The application procedure depends on the expatriate’s purpose of stay in Romania and their nationality.

This Guide was brought to you by:

Nicholas Hammond Managing Partner Hammond Bogaru & Associates Attorneys at Law

For more information on investments in Romania please contact Mr Hammond at: E: nhammond@hbalaw.eu T: 0040 21 326 6053 F: 0040 21 326 6060

Thank you for taking an interest in Romania !

February 1, 2012

More details about the firm can be found here: www.hbalaw.eu