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by World Bank Office Romania World Bank Romania World Bank support
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Source: Eurostat
At the end of Fiscal Year 2007 (FY 07), World Bank commitments for active projects amounted USD 1836.5 million. Total commitment of active portfolio by sector as of July 1st, 2007 (%). Total USD 1836.5 million
Private sector development Judicial reform Environment Education Emergency (avian flue) Health Social support and inclusion Rural sector and hazard mitigation
The World Bank Office Romania Strada Armand C`linescu Nr. 2-4 Millenium Business Center, Sector 2, Bucure[ti Tel.: +40 21 201 0311 Fax: +40 21 201 0338 www.worldbank.org.ro Contact: Alexandra Caracoti, External Affairs Officer E-mail: acaracoti@worldbank.org
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Taxation in Romania
by Ernst & Young Corporate taxes at a glance Taxes on corporate income and gains Withholding taxes Value added tax (VAT) Community customs legislation Local taxes Stamp duty Individual taxation Fiscal Procedure Code Fiscal sanctions Corporate taxes at a glance
Profits tax rate (%) 16(a) Capital gains tax rate (%) 16(a) Branch tax rate (%) 16(a) (b) Withholding tax (%) Dividends 0/10/16(c) Interest 0/10/16(d) Royalties 0/10/16(d) Services 16(e) Commissions 16 Entertainment and sports activities 16 Proceeds from liquidation 16(f) Branch remittance tax N/A Net operating losses (years) Carry-back N/A Carry-forward 5(g)
(a) See section on profits tax. (b) The withholding taxes referred to above are levied on income earned in Romania by non-resident individuals and legal entities (referred to below as non-residents), income that is not attributable to a Romanian permanent establishment of the non-resident income recipient. (c) See section on dividends. (d) See section on withholding tax. (e) Withholding tax generally applies to services rendered in Romania, except for international transport and services related to such transport. However, income from management and consultancy services is taxable regardless of whether these services are rendered in Romania or abroad, if such income is obtained from a resident or if it is a cost of a permanent establishment in Romania. (f) Withholding tax applies to the proceeds from liquidation or dissolution without liquidation of a Romanian legal entity.
Representative offices are taxed on a yearly basis at a lump sum of the RON equivalent of EUR 4,000, payable in two equal instalments. Capital gains tax No separate capital gains tax is payable by resident entities. Capital gains from sale of immovable property in Romania or from sale/transfer of shares held in a Romanian legal entity are taxed at the standard corporate tax rate of 16%. Dividends Under the EU Parent-Subsidiary Directive, dividends paid by resident legal entities to their shareholders (i.e. resident legal entities and EU resident legal entities) are exempt from withholding tax in Romania provided the shareholders own a minimum 15% (10% starting 1 January 2009) of the share capital of the Romanian legal entity for an uninterrupted two years period ending at the date of dividend payment. Unless the above conditions are met, a 10% tax rate applies to dividends paid by resident entities to other resident entities, while a 16% tax rate applies to dividends paid to any nonresident legal entities (or a tax rate available under a tax treaty, if favourable). If the condition of shareholding period is fulfilled at a later stage, the dividend beneficiary would be entitled to exemption at that moment and may request reimbursement of the withholding tax paid. Dividends paid by a Romanian entity to individual shareholders are subject to 16% withholding tax rate. Payments made by a Romanian legal entity to any of its shareholders for goods or services provided by the latter, in excess of the market value of the transaction, are assimilated to dividends from a tax point of view. The same tax treatment will apply to payments made for supply of goods/services to be used for personal purposes by the companys shareholders or associates. The dividend tax must be withheld and paid to the state budget by the 25th of the month following the payment of dividend. In case of dividends declared, which were not effectively paid by the end of the year, the dividend tax must be paid by 31 December of the respective year.
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Deductions As a rule, expenses related to earning taxable revenues including those regulated by legal norms are considered deductible. The Fiscal Code also provides for certain types of expenses that are specifically deductible such as: expenses incurred for labour protection, prevention of professional hazards and diseases and insurance premiums for professional risks; advertising and publicity expenses for the promotion of business, products and/or services, if properly documented, as well as expenses with other goods and services incurred to boost sales; transport and accommodation expenses of employees as well as other authorised persons, based on contractual clauses; subscription fees, dues and other contributions, as provided by legal norms; mandatory
contributions to the fund for the negotiation of the collective labour contract; expenses associated with professional training of employees; marketing expenses, market research and promotion expenses in existing or new markets, participations in fairs and exhibitions, business missions; 81
Sponsorship Taxpayers incurring sponsorship expenses in accordance with relevant legislation are entitled to a tax credit (i.e., deduction from the profits tax payable of an amount equal to the sponsorship expense) if the following conditions are cumulatively fulfilled: sponsorship expenses do not exceed 0.3% of turnover; and sponsorship expenses do not exceed 20% of profits tax liability. Provisions and reserves Under existing regulations, the following provisions and reserves are deductible for profits tax purposes: Contributions to the legal reserve fund, generally up to 5% of the adjusted annual accounting profits before tax, till the reserve fund reaches 20% of the share capital; bad debt provisions, if certain conditions are met; provisions for quality performance guarantees granted to clients; specific provisions created by credit institutions, nonbanking financial institutions registered in the NBRs General Register, as provided by the laws governing these entities, as well as specific provisions created by similar legal entities; technical reserves set by insurance and reinsurance companies, as provided by the relevant regulatory laws, except for the equalisation reserve; risk provisions for financial market operations, as provided by the regulations of the CNVM. Thin capitalisation rules Usually, interest expenses incurred by companies (other than credit institutions) are subject to the following limitations: Debt-equity ratio interest expenses are deductible if the debt-equity ratio is not higher than 3. In case such ratio is higher than the aforementioned limit, interest expenses are non-deductible for profits tax purposes and can be
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The difference between foreign exchange losses and foreign exchange revenues relating to long-term loans (over one year) is treated as interest expense and is subject to the debtequity ratio limitation (see above). Interest expenses as well as foreign exchange differences related to loans obtained from Romanian banks (including subsidiaries of foreign banks), leasing companies (for leasing operations) and other legal entities allowed to grant loans according to the law are not subject to the thin capitalisation rules. Deductibility of interest expenses incurred by financial institutions is not limited based on the above-mentioned rules. Tax depreciation Three alternative methods are available for the computation of tax depreciation, namely: straight-line depreciation; reducing balance depreciation; and accelerated depreciation (for equipment and patents).
These methods must be followed consistently. Buildings can be depreciated only on the straight-line method. Land is not a depreciable asset. From a tax perspective, the law prescribes the concept of useful lives, which are provided by Government Decision, as follows: Asset Buildings and constructions (e.g., roads and fences) Machinery and equipment Furniture, fittings and protection systems Vehicles Years 8 to 60 2 to 24 2 to 15 3 to 9
The useful life for each type of asset is provided as an interval. Upon commissioning, the taxpayer is allowed to choose a useful life within such interval. In case of improvements upon depreciable assets that are expected to result in future benefits, the useful life may be increased by 10%. Patents, licences, know-how, manufacturers brands, trademarks, as well as other similar industrial and commercial property rights, are depreciated over the period provided for their utilisation or the contractual period, as the case may be. Goodwill is not considered a depreciable asset for tax purposes. Any revaluation of fixed assets would be taken into account for fiscal purposes (except revaluations of entirely depreciated fixed assets made after 1 January 2004).
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Starting 1 January 2007, similar principles would apply to cross-border reorganisations, as a result of the implementation of the EU Merger Directive in the Romanian Fiscal Code. Under the Directive, cross-border business reorganisations (i.e., mergers, spin-offs, transfers of assets and exchange of shares) between different EU member states are tax neutral, subject to certain conditions. Transfer pricing According to the domestic fiscal legislation, transactions between related parties must be carried out in accordance with the arms length principle (i.e., transactions should be carried out at the same price as if concluded among nonrelated parties). The methods for the assessment of market value include: the Comparable Uncontrolled Price Method, the Cost Plus Method, the Resale Price Method and any other method recognised by the transfer pricing guidelines issued by the Organisation for Economic Cooperation and Development (OECD). 83
Under the EU Savings Directive, savings incomes paid to EU resident individuals are exempt from withholding tax in Romania. Incomes received by non-residents from consultancy and assistance services based on contracts financed by international financing bodies with which Romanian state authorities or Romanian legal entities have signed financing agreements are not subject to withholding tax if the interest rate charged for such financing is less than 3% per year. The qualifying entities are the European Bank for Reconstruction and Development, the International Bank for Reconstruction and Development, the International Finance Corporation and the Association for International Development, the International Monetary Fund, the European Investment Bank. The exemption applies also in case of non-resident entities earning income from consultancy services based on nonreimbursable financing agreements signed between the Romanian government and foreign governments or organisations. The withholding tax must be paid to the state budget by the 25th of the month following the one in which payment was made. Companies are required to file an annual withholding tax return till 28th (29th) February of the year following the relevant tax year. Romania has signed around 80 agreements since the 1970s for the avoidance of double taxation, which may reduce the applicable withholding tax rate. In order to apply the more beneficial provisions of a treaty, the income beneficiary has to provide a certificate of tax residence issued by the foreign tax authority. Domestic law
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Withholding taxes
Withholding tax is applicable on a number of payments made by Romanian tax residents to non-resident recipients. Types of payments which require withholding tax are presented in the table below. Type of payment Royalties (see explanations below) Interest (see explanations below) Commissions Dividends (see explanations below) Various services Gambling income Withholding tax rate (%) 0/10/16 0/10/16 16 0/10/16 16 20
Starting 1 January 2007, an exemption is available for dividends paid to companies incorporated in the EU countries, under certain conditions (see the Dividends section). Under the EU Interest & Royalties Directive implemented in the Fiscal Code, interest/royalty payments made by a resident legal entity to an EU resident entity are exempt from withholding tax in Romania if the beneficiary holds a minimum 25% of the share capital of the domestic legal entity for an uninterrupted two years at the date of the payment. The Directive was incorporated in the Fiscal Code with a transition period lasting till 31 December 2010 during which the 84
A taxable person established in the Community that is not registered or liable to register for VAT purposes in Romania may request a refund of VAT paid. A taxable person not established in the Community that is not registered or liable to register for VAT purposes in Romania may request the refund of the VAT paid if, under the laws of its country of establishment, a taxable person established in Romania has the same right in that country. Taxable persons established in or outside the EU can claim a VAT refund if the application refers to a period: less than a calendar year but not less than three months, the amount requested for reimbursement cannot be less than RON 200; equal to a calendar year or the remaining period of a calendar year, the amount requested for reimbursement cannot be less than RON 25. Payment and filing requirements Taxpayers must file VAT returns with the tax authorities and pay VAT on a monthly basis, specifying the taxable amount and the tax due. The tax return must be filed and the respective VAT paid by the 25th of the following month. In case of taxpayers whose annual turnover is less than EUR 100,000, the VAT returns should be filed with the tax authorities on a quarterly basis. A VAT recapitulative statement should be filed with the tax authorities on a quarterly basis. Such returns should comprise the following information: total amount of intraCommunity supplies exempt from VAT, total amount of intraCommunity acquisitions for which the beneficiary is obliged to pay VAT, and operations within the triangulation scheme. Companies registered for VAT purposes in Romania, having deliveries of goods to/arrivals of goods from other EU member states which exceed an annual RON 900,000/RON 300,000 are legally obliged to submit INTRASTAT declarations on a monthly basis.
The Fiscal Code provides specific rules on goods benefiting from special customs regimes. The following transactions are VAT exempt with credit for input tax: supply of goods placed under a bonded warehouse customs procedure; goods introduced in free trade zones; goods under an inward processing procedure, etc. Credit for input VAT General rule Carrying out taxable supplies allows offsetting output VAT against input VAT. Exempt supplies do not allow the recovery of input VAT, except in the case of VAT exempt supplies with credit, for which input VAT can be recovered. Companies performing a combination of taxable and exempt supplies generally have the right to recover the input VAT on a prorata basis. The unrecovered input VAT would generally represent a cost. Refund of VAT If the input VAT exceeds the output VAT, the recoverable balance VAT (defined as negative VAT balance) can be: 86
Customs duties are expressed as a percentage of the costinsurance-freight (CIF) value of goods. Other taxes, duties and levies may be required to be paid upon import in addition to customs duties, such as excise duty, etc. The CCC and its Implementing Regulations include new rules and provisions in respect of the status of the goods, customs valuation, amendment of customs declarations, binding origin information and binding tariff information, quota administration system, etc. Establishing the customs value of goods Where the goods to be imported into Romania as from the Accession date will be subject to a sale, the customs value should be based on the CIF price (cost, insurance, freight) increased with certain other costs that may have been incurred with purchasing the goods (e.g. commissions, royalty and licence fees, etc.). The cost of (i) transport and insurance of the imported goods, and (ii) loading and handling charges associated with the transport of the imported goods to the place of entering into the customs territory of the Community shall be added to the price actually paid or payable by the importer when declaring the customs value of the goods. Customs procedures As provided by the Community Customs regulations, the goods may be placed under one of the customs procedures, as follows: Release of goods for free circulation; Transit; Customs warehousing; Inward processing; Processing under customs control; Temporary admission; Outward processing; and Exportation.
Free warehouses are specifically regulated by the Community customs regulations, where Community goods are considered as not being on Community customs territory for the purpose of import duties and commercial policy import measures, and also where Community goods subject to export measures may be placed. The Inward Processing procedure provides non-Community goods intended for re-export from the territory of the Community in the form of compensating products, without application of import duties or commercial policy measures. This specific procedure is also applicable to goods released for free circulation with repayment or remission of import duties chargeable on such goods if they are exported from the territory of the Community as compensatory products. Processing under customs control procedure allows nonCommunity goods to be used in the territory of the Community in operations which alter their nature or state, without application of import duties or commercial policy measures, and shall allow the products resulting from such operations to be released for free circulation at the rate of import duty appropriate to them. The temporary admission procedure allows the use in the customs territory of the Community, with total or partial relief from import duties and without them being subject to commercial policy measures, of non-Community goods intended for re-export without having undergone any change except normal depreciation due to their use. The outward processing allows Community goods to be exported temporarily from the customs territory of the Community in order to undergo processing operations and the products resulting from those operations to be released for free circulation with total or partial relief from import duties. The export allows Community goods to leave the customs territory and entails the application of exit formalities including commercial policy measures. Customs regime for individuals Customs regulations provide for a specific customs duty treatment for the personal belongings of individuals establishing domicile or residence in Romania, goods introduced into Romania upon marriage, inherited goods and household goods used for furnishing a secondary residence in Romania, as well as goods shipped by individuals via parcels and postal services. A specific import duty exemption applies for goods in the personal luggage of travellers, brought into Romania without 87
The release for free circulation confers non-Community goods the status of Community goods. This means that the customs duties and charges have been paid and as a result, the goods may freely move within the territory of the European Community from a customs perspective.
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Local taxes
Local taxes in Romania are regulated by the Fiscal Code. Local taxes represent a distinct category of taxes set by the local administration, which are payable by both individuals as well as entities in Romania. These local taxes include: Building tax Building tax is payable by owners of buildings located in Romania, regardless of their residence. The tax rate is 0.1% for individuals and ranges between 0.25% and 1.5% for legal entities. For buildings not revaluated three years prior to the concerned year, the tax payable by legal entities may vary between 5% and 10% applied on the book value of the building. The tax is applied to the value of the building (minimum established values are provided) for individuals and to the book value of the building for legal entities. The tax must be paid annually, in two equal instalments by 31st of March and 30th of September. Land tax
Perfumes: 50 ml (eau de toilette: 250 ml); Medicines: quantity required to meet the needs of the traveller.
For travellers under the age of 15, the duty exemption can be granted up to a total value of EUR 90 per person. The duty exemption mentioned above for tobacco and alcoholic beverages does not apply for travellers under 18 years. Excise duty Excise duty is a consumption tax payable on certain categories of goods including alcoholic beverages, gasoline, tobacco products, cars, perfumes, electricity and certain other items. The tax is payable on import and sales of locally produced items on the domestic market and is set as fixed EUR amount per unit (specific excises) or as a percentage of a specified taxable base. The excise duties in respect to the main categories of goods are given in EUR in the table below: Category of products Alcoholic products Excise duty rates up to EUR 750 per hl EUR 16.28/1,000 cigarettes Cigarettes + 29% of the declared maximum retail price Coffee EUR 612-EUR 3,600 per ton Car fuel EUR 259.91-EUR 547 per ton Fur, jewels, crystal, perfumes, guns 10-100% Electricity EUR 0.26 or EUR 0.52/MWh The excise duty for cigarettes is computed as the sum of the specific and ad valorem tax, which may not be lower than EUR 30.83/1,000 cigarettes. Taxpayers are normally required to submit monthly tax returns and pay the excise duties for excisable goods from internal production by the 25th of the following month, with certain exceptions. In case of imported goods, the related excise duty (if applicable) should be paid at the time of making import declaration at customs. A special supervision and control system is provided for the production and distribution of alcoholic beverages and certain mineral oils. 88
Land tax is payable by owners of land. Generally, the tax is established as a fixed amount per hectare, depending on the location of the land within certain determined zones, towns or villages and depending on land use. The tax is payable annually, in two equal instalments, by 31 March and 30 September. Local councils may grant full or partial exemption to legal entities carrying out investments exceeding EUR 500,000 from the payment of building and land tax. Vehicle tax Vehicle tax is payable by owners of land/water vehicles, which should be registered in Romania. The tax depends on the engine capacity, and is computed as a fixed amount per 200 cubic centimetres. The tax is payable annually, in two equal instalments, by 31 March and 30 September. Tax for construction authorisations The tax is established as a percentage on the construction value and is payable upon obtaining the construction authorisation.
Romanian Business Digest 2007
worldwide income under certain circumstances (see the Taxpayers section below). Residence An individual is considered to be a Romanian tax resident if he/she fulfils at least one of the following conditions: a) individual has domicile in Romania; b) individuals centre of vital interest is located in Romania; c) individual is present in Romania for a period or periods exceeding 183 days during any 12-month period ending in the respective calendar year; or d) individual is a Romanian citizen working abroad as employee of the Romanian state.
Stamp duty
Stamp duty is payable on most judicial claims, issue of certificates and licences, and documentary transactions which require authentication. There are two types of stamp duty: judicial stamp duty; and extra-judicial stamp duty.
If a non-resident individual complies with one of the conditions mentioned in the Residence section above under b) or c) for a period of three consecutive years starting 1 January 2004, he/she becomes subject to taxation on worldwide income starting from the fourth year. Until the end of the three-year period, the respective individual is subject to Romanian income tax only for Romania-sourced income. Individuals who are tax residents in countries that have signed double tax treaty with Romania may benefit from a reduced tax rate or a tax exemption under the terms of the respective treaty. Individuals who are tax residents in countries that have not entered into a double tax treaty with Romania are subject to Romanian taxation from the first day of presence in Romania. Categories of income subject to taxation A flat income tax rate of 16% applies to the following categories of income: income from freelance activities; salary income; rental income; pension income; prizes; agricultural income; other income.
Judicial stamp duty is levied on claims and requests filed with courts and the Ministry of Justice, depending on the value of the claim. Quantifiable claims are taxed under the regressive tax mechanism. Non-quantifiable claims are taxed at fixed amount levels. A judicial stamp duty may also be levied at the transfer of real estate property under certain circumstances. Extra-judicial stamp duty is charged for the issue of various certifications such as identity cards, car registrations, etc.
Individual taxation
Romanian citizens domiciled in Romania are considered to be Romanian tax residents and are taxed in Romania on their worldwide income. Foreigners and Romanian individuals without a Romanian domicile, who become Romanian tax residents, may be subject to taxation in Romania on
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The Fiscal Code provides special tax rates in case of income obtained from investments, gambling and transfer of ownership rights over real estate. 89
Payers of intellectual property rights compensation are required to compute, withhold and pay a 10% advance income tax by the 25th of the following month. Income from other independent activities Income from the following sources is also taxed at 10% advance income tax: income from sale of goods on consignment; income from agent, commission or commercial mandate agreements; income from civil conventions based on the Civil Code; income from accounting, technical, judicial and extrajudicial expertise.
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The tax rate applicable to interest income is 16%, and is calculated, withheld and paid by the payer of interest on a monthly basis, by the 25th of the following month. The interest tax represents a final tax. The withholding tax applied to interest income earned by non-resident individuals as per the domestic legislation is 16% or a more favourable rate if a double tax treaty is applicable (see the Withholding taxes section). Gains from transfer of securities Capital gain represents the positive difference between the sale price and the purchase price of different types of securities, reduced by related costs, as the case may be. In case of transfer of shares in a limited liability company, the capital gain represents the difference between the sale price and the nominal value/purchase price of such shares. In case of redemption of investment titles held in open-ended investment funds, the capital gain is the positive difference between the redemption price and the purchase/subscription price. Capital gains on shares obtained as a result of a stock option plan is defined as the difference between the sale price and the preferential acquisition price. A concept of net capital gain has been introduced as representing the difference between gains and losses registered during one year (i.e., positive or negative differences between the sale and purchase price, less the related transfer costs). Starting 1 January 2007, the net capital gains from sale of shares in open companies and open investment funds are subject to: a 16% tax applied to the gains obtained from the sale of the shares sold within 365 days of acquisition; and 1% tax in case of shares held for a period exceeding 365 days.
Gains from transfer of shares and participation titles in closed companies are subject to 16% tax. Income from futures/forward transactions with foreign currencies and other similar operations Gains from sale-purchase transactions of foreign currencies with subsequent term settlement, as well as from any other similar operations, are taxable at the rate of 16%. The tax is computed and withheld by the intermediary of such transaction (e.g., a bank), upon finalisation of the operation. Subsequently, the tax is payable by the 25th of the following month. The tax is final (i.e., the gain is not subject to yearend adjustment). Income from pensions Income from pension comprises any amount received in form of pension from funds created from mandatory social contributions made to a social insurance system. Income
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which is capped at the level of five times the national average salary, multiplied by the average number of employees; Health fund 6% of total salary fund; Unemployment fund 2% of total salary fund; Contribution for medical leave and indemnity 0.85% of total salary fund, capped at 12 national minimum gross salaries multiplied with the number of insured persons; National insurance fund for work accidents and professional diseases the contribution ranges between 0.4% and 3.6% of total salary fund, depending on the risk category; Labour Chamber commission 0.25% or 0.75% of total salary fund, depending on whether the company or the Labour Chamber keeps the workbooks; and Contribution to the Guarantee Fund for payment of salary debts 0.25% of the total gross salary fund. Contribution to the health fund by foreign individuals According to existing regulations regarding the health fund, foreign individuals requesting the extension of their residence right in Romania are liable to pay a monthly health contribution of 6.5% calculated at the level of the taxable income obtained from Romania. In case no income is obtained from Romania, the above-mentioned foreign individuals are liable to pay a monthly 6.5% contribution calculated at the level of one national minimum gross salary. Citizens of European Union countries benefit from coverage of medical expenses incurred on Romanian territory, as well as exemption from the above mentioned contribution, according to the EU legislation on social security, based on certificates of coverage.
For gross monthly income higher than RON 3,000, the taxpayers right to deductions is withdrawn. Filing and payment requirements Taxpayers, with certain exceptions, have to file an annual income tax return as well as special declarations with the tax authorities by 15 May of the following year. The tax authorities compute the annual income tax on the basis of the information provided in the annual income tax return. The taxpayers are subsequently informed about the tax payable/reimbursable and the deadline for its payment. Taxpayers earning only salary income throughout the entire fiscal year fulfil their tax obligations through employer withholdings. Employers withhold the income tax on a monthly basis. Expatriates employed abroad but performing an activity in Romania should file monthly tax returns and pay monthly tax in Romania by the 25th of the following month. Social security Under Romanian employment regulations, both employer and employee are required to contribute to the social security system. Social security contributions at the individual level Social security contribution 9.5% on the gross salary, capped at the level of five times the national average salary (for the respective year); Health fund contribution 6.5% on the gross monthly income subject to income tax; and Unemployment fund contribution 1% on basic monthly salary. Social security contributions at the employer level Social security contribution between 19.5% and 29.5% (depending on working conditions) of the total salary fund,
The Fiscal Procedure Code constitutes the common law for administration of taxes and if silent on certain matters, provisions of the Civil Procedure Code are to be applied. General principles for administration of taxes Consistent application states the obligation of the fiscal authorities to apply in a consistent manner the provisions of fiscal legislation with a view to correctly assess taxes due by taxpayers. Right to be consulted according to this principle, the fiscal authorities are obliged to allow the taxpayer to express the position in respect to the deeds and circumstances relevant for decision-making prior to making a decision. The Fiscal
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Fiscal sanctions
Failure to submit tax returns and failure to pay taxes in due time entails penalties as follows: Failure to file tax returns Non-filing of tax returns by the respective deadline may attract the following fines: RON 50 to RON 1,500 for individuals and RON 10 to RON 100 for the income tax return of individuals; and RON 500 to RON 10,000 for legal entities. Taxpayers remain liable for the payment of fines for late filing of returns regardless of the payment of the tax due. Interest and penalties on delays in payment of tax due Failure to pay taxes at the prescribed date is penalised with late payment penalty, which is currently 0.1% for every day of delay. Additionally, for failure to withhold or failure to pay taxes withheld at source (taxes on salary type income, dividend income and non-residents income), a fine ranging between RON 500 and RON 10,000 and possible penal charges may be applied, depending on the fiscal obligations.
Ernst & Young Romania Strada Dr. N. Staicovici Nr. 75, Forum 2000, Etaj 8 Sector 5, 050557, Bucure[ti Tel.: +40 21 402 4000 Fax: +40 21 410 7052 Contact: Venkatesh Srinivasan, Partner - Head of Taxation Services E-mail: venkatesh.srinivasan@ro.ey.com
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Banking sector
The net flow of credits to the non-government sector reached a record EUR 1.7 bn in May amid a balanced mix of local and foreign currency lending, according to the central banks data. For the whole January-May period, the net credit flow increased by 33% y/y to EUR 5,236 mn. Out of this, forex lending tripled in y/y terms to EUR 2,701 mn in January-May. Local currency lending on the opposite shrunk 17% y/y to EUR 2,535 mn, out of which some EUR 500 mn was the effect of the local currencys strengthening alone. What is notable is that forex lending reverses its diminishing trend consolidated through last year. Data from the central bank show that households are mainly responsible for the aggressive forex borrowing recently. This comes to confirm central banks warning on households excessive forex indebtedness. The annualised growth in non-government credit eased to 49.1% y/y in May (or 44% y/y in real terms, from 47% y/y one month earlier). The total stock of bank loans reached RON 106.5 bn (EUR 32.5 bn) out of which slightly less than half (48%) is forex loans. The stock of loans to households accounts for 44% of the total, but they are increasing above average particularly when it comes to forex loans (81% up y/y as of May). Stock of non-government credit
end-Jan (RON mn) end-Feb (RON mn) end-Mar (RON mn) end-Apr (RON mn) end-May* end-May* (RON mn) (EUR mn) May ** Apr ** y/y (%) y/y (%)
TOTAL RON-denominated household credit corporate credit Forex-denominated household credit corporate credit
In its most recent overview of the local banking system, the Economist Intelligence Unit evaluates Romanian banks as sound and liquid. The EIU also says that the banks should be in a good position to meet the expected increase in corporate borrowing demand in 2007. The EIUs report also says that Romanias financial system is relatively robust, and stress tests indicate that the banking system would be resilient to the direct impact of interest rate and exchange-rate movements. However, there are also negative factors that impact the local banking system. The recent rapid growth in lending, mainly to households (which accounted for more than 40% of all lending to the non-government sector in 2006, up from just over 30% a year earlier) has raised concerns. Furthermore, the 47% share of foreign-currency lending in total lending to the private sector suggests a substantial exposure to indirect risk, as adverse currency movements in the future may have a negative impact on the ability of unhedged borrowers to meet their obligations. Despite the strong growth in the past several years, the banking system retains strong growth potential, reads a study of UniCredit Bank for the banking system in Central and Eastern Europe in 2006. Romania is reported as having the lowest banking intermediation in the region. The level of banking transactions reached only 58% of GDP in 2006, from a European 167
Insurance sector
Insurance market will grow by 30% y/y in RON terms this year or by 35% y/y in EUR terms, to reach EUR 2.2 bn, according to estimates of the industry association. Furthermore, if the insurance market keeps the 25-30% growth pace, it could exceed EUR 4 bn in 2010. As recalled, last year the value of the market was EUR 1.6 bn, out of which EUR 1.3 bn was revenues from general insurance and EUR 300 mn was revenues from life insurance. Despite its strong growth, the size of the market remains however very low, at EUR 75 per capita spending in 2007. This is three times lower compared to the Central Europe average, industry association president Cristian Constantinescu, concluded. Romanian insurance market
2,500 EUR mn 41% 33% 21% 1,220 716 0 2003 2004 Premiums (EUR mn) 2005 2006 2007f Growth rate 867 1,624 2,200 30% 35% 45%
1,250
18%
15%
0%
Life insurance
GPR* RON mn Market share
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1,028.7 Allianz-}iriac 511.9 Asirom 536.1 Omniasig 375.4 Asiban 0.0 ING Asigur`ri de Via]` 424.0 BCR Asigur`ri * 301.4 Astra 258.0 Generali 259.2 Unita 201.4 BT Asigur`ri 192.1 Ardaf 0.0 AIG Life 113.7 Carpatica Asig 84.5 Garanta 78.5 AIG Romania 4,364.9 Top 15 4,591.0 Total
22.4% 11.2% 11.7% 8.2% 0.0% 9.2% 6.6% 5.6% 5.6% 4.4% 4.2% 0.0% 2.5% 1.8% 1.7% 95.1% 100%
87.2 88.0 0.0 61.4 435.8 -2.6 1.6 40.8 0.0 9.6 4.4 138.2 0.0 7.0 0.0 873.9 1,138.3
7.7% 7.7% 0.0% 5.4% 38.3% -0.2% 0.1% 3.6% 0.0% 0.8% 0.4% 12.1% 0.0% 0.6% 0.0% 77% 100%
1,115.8 19.5% 600.0 10.5% 536.1 9.4% 436.8 7.6% 435.8 7.6% 424.0 7.4% 303.0 5.3% 298.7 5.2% 259.2 4.5% 211.0 3.7% 196.5 3.4% 138.2 2.4% 113.7 2.0% 91.5 1.6% 78.5 1.4% 5,238.8 91.4% 5,729.3 100%
* Gross Premium Revenues ** the negative life insurance GPR comes from life insurance portfolio transfer to BCR Asigur`ri de Via]` Source: CSA , Annual Report for 2006
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Private pensions
Compulsory private pensions (pillar 2) will be launched on September 17 and employees aged below 35 will have four months to choose a fund where to channel part of contributions owed to the state. Within 30 days after the four month period, those who made no option will be randomly assigned by a computer program to one of the funds. For employees aged between 35 and 45, joining a fund will be optional. Research shows about half of them will choose to contribute to a pillar 2 pension fund. Contribution collecting to pillar 2 will start in February or March. The private compulsory pensions system will start with a contribution of 2%, to be deducted from the 9.5% paid to the public pension system. This percentage will rise by a yearly 0.5%, reaching 6% in eight years. The assets of the compulsory pension funds could reach EUR 430 mn (RON 1.9 bn) by the end of 2010, reveals calculations on the development of private pension system commissioned by the government and conducted by National Forecast Commission CNP. The number of employees to join a compulsory pension fund is expected to reach 2.7 mn in 2008, before rising to 4.7 mn in 2020, when the capitalised value of assets raised by these pension funds is to hit EUR 24.4 bn (over RON 75.5 bn). The increase will be due to the rising number of employees to be included in the system and to the fact that transferred sums will go up by 0.5% per year, from 2% of the contribution owed to the state in 2008 to 6% in 2016. Judging by the experience of other countries where the private pension system is already operational, CNP estimates 70% of contributions by employees will be invested in T-bills, 15% in equity and 15% in deposits. The survey carried out by CNP also estimates that the return of a pension fund, after the payment of the total fee (management and operating fees) revolves around 8%, similar to the average profitability rate expected to be registered in the Romanian economy in the following years. Representatives of the financial industry are concerned about the impact the pension funds may have on the stock exchange. Aurelian Dochia, member on BRDs board says that pension funds will have available large amounts of money in a short period of time. The funds are allowed to invest up to 25% of revenues in equity listed on the stock exchange, and this excess liquidity on the market might put
Romanian Business Digest 2007
optional pension funds that have already started selling have their assets placed in the custody of BRD, the first credit institution receiving CSSPPs approval. Romania - Authorised depositories for optional pension funds, as of July 15, 2007 BRD - Groupe Socit Gnrale SA Banca Comercial` Romn` SA BancPost SA ING Bank N.V. Amsterdam Sucursala Bucure[ti
Source: CSSPP
No company has been licensed as a manager of compulsory private pensions, as of July 15, but as many as 12 companies have submitted authorization files. Compulsory private pension funds will be almost identical because of the limitations imposed by legislation, for which reasons the success of sales will depend on advertising campaigns and distribution channels, believes Adrian Allott, deputy general manager with Aviva. With a EUR 10 mn investment, Omniasig Private Pensions aims to become one of the main three companies on the market of private pensions and reach a market share of 10-12%. Manager Cristina Ni]escu estimates to be able to attract for the market of compulsory private pensions 350,000 customers, and for the facultative pensions 20-30,000 customers. The main goal of the funds investment policy will be a maximal yield of investments under conditions of medium risk. The new company Omniasig Private Pensions has as main shareholders TBI Holding and Omniasig, both of them members of Vienna Insurance Group. Interamerican Private Pensions estimates to reach a market share of 15% with the launching of a marketing campaign in which it is to invest more than EUR 1 mn, announced companys officials. The company will operate both on the segment of compulsory pensions and on the one of optional pensions. As for investment strategy, the company is in favor of a balanced approach, so that the investment portfolio would have a low risk degree. The funds placements will be 35% in government bonds, 20% on the capital market, 20% in corporate bonds, 15% in municipal bonds and 10% in Treasury bonds. Allianz-}iriac Pensii Private has been authorized 2 optional pension funds. The first one is AZT Moderato and has a medium risk profile (25% of funds to be invested in shares listed on the exchange, with the remaining assets being placed in fixed income instruments or monetary market instruments). The second one is AZT Vivace, with a high-risk profile (50% investments in listed shares). The company has also submitted an authorization request for compulsory pensions. Prima Pensie targets 10% market share and expects to attract 350,000 customers in its mandatory pension fund. Up until now, the Slovenian company is the only foreign company to voice an interest in the Romanian private pensions market and will operate only on the second pillar (the mandatory one) of the local private pension system. MKB Romexterra Bank and Delta Asigur`ri will jointly operate on the private pension market, through a new entity with 60% participation from MKB Romexterra Bank and 40% from Delta Asigur`ri. The new company will handle both compulsory and optional pension funds and will benefit from know how from MKB Bank Nyrt, which is the third player on 171
Six private optional pension funds have been authorized as of July 15: AZT Moderato and AZT Vivace (managed by Allianz-}iriac Private Pensions), ING Classic and ING Optim (under the trusteeship of ING Life Insurance), Pensia Mea (Aviva Romania) and BCR Prudent (BCR Life Insurance). AZT Moderato, ING Classic and Pensia Mea have an average risk degree, investing 25% of their assets in listed stock (this is the element that defines the funds risk category). BCR Prudent is a low risk fund, with only 10% investments in listed shares AZT Vivace has a high-risk profile (50% investments in listed shares). Romania - Authorised optional pension funds*, as of July 15, 2007 Name of Fund Administrator Fondul de Pensii Facultative ING CLASIC ING Asigur`ri de Via]` SA Fondul de Pensii Facultative ING OPTIM Fondul de Pensii Facultative ALLIANZ-}IRIAC AZT MODERATO Societate de Administrare Fondul de Pensii Facultative a Fondurilor AZT VIVACE de Pensii Facultative SA Fondul de Pensii Facultative PENSIA MEA AVIVA Asigur`ri de Via]` SA Fondul de Pensii Facultative BCR PRUDENT BCR Asigur`ri de Via]` SA
* all the funds have as depository BRD - Groupe Socit Gnrale SA Source: CSSPP
The regulator approved as depositories for assets of both compulsory and optional private pensions the following credit institutions: BCR, BRD, ING and Bancpost. The six
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Leasing sector
The value of assets financed by leasing contracts increased by 62% to EUR 3.26 bn last year, according to the data of the two industry associations ALB and ASLR. Market value in 2005 stood at EUR 2.01 bn. The increase exceeds industry expectations, As recalled, market participants previously expected the market to increase with a pace ranging between 15% and 45%. Leasing companies that are subsidiaries of banks continue to dominate the market with a 75% share of the total assets financed in 2006, while the independent companies account for 17.5%. Captive companies owned by automotive dealers and importers account for the remaining of 7.5%. The members of the two associations jointly financed assets worth EUR 3.12 bn, i.e. 96% of local leasing market. Autovehicles accounted for 75% of the value of assets purchased under contracts financed by members of ASLR and ALB. Industrial equipment leasing accounted for 20% of the market, against 15% in 2005. Real estate sector amounted to 5% of total market in 2005, double against the 2.4% share one year before. Financial leasing continues to dominate, with a 98% share of the total assets financed, while operational leasing accounted for 2% of the market in 2006. Leasing market in 2006 Market segmentation upon type of assets financed
Real estate 5% Equipment 20%
Romania - leasing market* (EUR bn) 2004 2005 Value Growth 1.34 45% 2.01 50%
Office 33%
Real estate leasing proved to be one of the most dynamic sectors in 2006, doubling share to almost 5%. Funding of the real estate sector is dominated by industrial and commercial properties, representing 52%, according to data from the 172
ALB estimates the market in 2007 at over EUR 4.3 bn, i.e. 32% y/y increase, at least. ALB also estimates that its members will capture 74% of the market in 2007, meaning financed assets worth EUR 3.2 bn. A more conservative forecast is given by BCR Leasing, whose representatives estimates domestic leasing market will rise by 10-15% in 2007. However, we should note that three of the most important players (BCR Leasing, UniCredit Leasing
Romanian Business Digest 2007
Intellinews ISI Emerging Markets Strada Daniel Barcianu Nr. 36, Etaj 1 Sector 3, 030901, Bucure[ti Tel.: + 40 21 326 1196/97/98 Fax: + 40 21 326 1199 www.securities.com Contact: Dana Diaconescu, Analyst, IntelliNews E-mail: DDiaconescu@securities.com
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173
As we mentioned in our previous issues, given the strong relationship between taxation and business, Governments plans for economic growth require not only an innovative but also a sound fiscal policy, having in view its highly complex character and its impact on the countrys economy. The fiscal policy has to support and maintain Governments tax position and, concurrently, provide for a climate which benefits business, where the economic strategy prevails over the fiscal strategy. The novelty of the 2005 tax legislation was the flat rate tax introduced by the new coalition which came victorious out of the elections held by the end of 2004. Ambitious and disputed alike, the flat rate tax project was to consume tremendous quantities of toner as it represented the current topic of numberless issues not only of the specialised literature but also of other publications, focussing the attention of the entire Romanian society for days on end. Considered an act of suicidal unawareness by some, while by others the only chance for the Dambovita cart to eventually catch up the high-speed train of the developed Europe, the flat rate tax has, however, succeeded for two years, without undergoing major changes, to strengthen the idea of legislative stability of the Romanian economic environment, despite the numerous obstacles which have had to be surmounted and the errors which have been made in its application. It has been said with good reason that no flat rate tax system has been operating in Romania, owing to the numerous exceptions from the 16% tax rate applicable particularly on the profit achieved by legal entities and on the income obtained by employees and part of freelancers. Such exceptions which refer to the 3% tax on the income obtained by micro-enterprises, the 1% tax on interest or the income obtained from the sale of securities, 10% tax on the income achieved from copyright, or the exemption (in a first stage) of natural entities from the payment of tax on the gains realised from the transfer of real property are as many arguments brought to the fore by the partisans of the real flat rate tax in the hope that said exceptions will be eliminated and a simple and efficient taxation system will be set up with a view to encouraging productive work and discouraging any initiative for tax evasion. In consideration of Romanias accession to the European Union, the occurrence of amendments to the Romanian tax legislation has been imminent. Consequently, for about one year (starting June 2005 until June 2006), numerous bills on the amendment of the Tax Code were prepared, of which some contained fiscal anomalies (can you remember the tax on non-current assets?), while others were more realistic and nearer to the expectations of the business circles in Romania. Relying on the unexpectedly good results of the flat rate tax system in 2005, the Ministry of Public Finance has not taken any step toward changing it only for the sake of making changes, has thoroughly examined available options, has reasonably consulted with representatives of the business circles and, moreover, has considered to bring amendments to the tax legislation by normal means, i.e. under a law passed by Parliament rather than under an emergency ordinance. Thus, in early summer 2006, the aforesaid Ministry submitted a bill on the amendment of the Tax Code to Parliament for approval, which seems to be more coherent, more realistic and closer to meet the current requirements of the Romanian economy. Nevertheless, as it has happened more than once for many to go out for wool and come home shorn, the Romanian parliamentarians have not agreed in full with the proposals advanced by the Ministry of Public Finance and modified pretty much the text of the aforesaid bill, which has 95
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ultimately led to maintaining the original flat rate tax; hence, certain categories of taxpayers will benefit from favourable tax treatment in comparison to their majority, a fact which will further generate fierce debates and commentaries. As expected, the approval in August 2006 of the Law amending the Tax Code has been yet a first step forward to implementing the new regulations. Throughout the period that followed, the Finance Ministry performed detailed analyses along this line and held talks with business circles with a view to elaborating the Rules for the application of the new Tax Code. Notwithstanding, although the intention existed for the soonest possible publication of a Government resolution amending the Rules for the application of the Tax Code, which should have allowed for the republication of both the Tax Code and the Rules for its application by the end of 2006, owing to the highly complex character of this project, such resolution was published only by the end of December. The publication of the amending resolution was paralleled by other legislative acts that corrected the errors occurred in the Law published in August. Eventually, this fiscal odyssey came to an end in due time, enabling the business circles in Romania to commence the new year 2007 by taking full cognisance of all available tax regulations. Certainly, in the first half of 2007, the Finance Ministry aims at republishing the Tax Code and the Rules for its application so as to ease the burden bearing down on the users of legislative instruments. The latest substantial amendment of the tax legislation refers to social security. Aiming at increasing pensioners income, the Executive have not kept their promise to cut down on the contributions to the social security fund. any case in which the total value of lease instalments (principal plus interest) exceeds the initial value of the leased asset shall also be viewed as a finance lease.
In this manner, from a tax perspective, the definition of finance lease is almost similar to the definition given thereto under the International Financial Reporting Standards, which simplifies the fiscal recording of contracts that, starting 2007, will no longer be classified as operating lease from a tax point of view, while from an accounting point of view as finance lease. Affiliated natural entities shall also include spouses (who are related by affinity), apart from relatives within the third degree (who are related by consanguinity). Any income achieved from the liquidation or dissolution of a Romanian legal entity shall be considered income obtained in Romania, while non-residents that realise such income shall be subject to taxation at a 16% rate. As regards the tax on profit, the following amendments have been introduced: transport and accommodation expenses incurred by employees or administrators shall be deductible, whether taxpayers record profit or loss; likewise, expenses on daily allowance for business travels, incurred by private firms, shall be deductible in an amount of up to 2.5 times the level set for public institutions, even if such taxpayers record losses; the value of tangible fixed assets and stocks which have been destroyed by natural disasters shall be taxdeductible; expenses on private scholarships granted by taxpayers shall be treated the same as expenses on sponsorship or Maecenas-like aid, and may be deemed tax credit up to an amount representing 0.3% of the their turnover or a maximum of 20% of the profit tax due; expenses on fees to non-government organisations and professional associations shall be deductible up to EUR 4,000 per annum; the provisions specific for non-banking financial institutions shall become tax-deductible expenses; the equalisation reserve created by insurance and reinsurance companies shall become non-taxdeductible expense; airline companies may deduct the provisions created for covering repair and maintenance operations by virtue of the standard rules approved by the Romanian Civil Aviation Authority; the limits established for tax-deductible interest expenses shall not be applicable to the interest on loans granted by non-banking financial institutions or on the loans obtained from the bonds allowed for transactions performed on a regulated market; the profit tax shall be paid annually by banking companies starting 2007 fiscal year, while by the other taxpayers starting 2008; however, taxpayers shall pay a quarterly pre-tax amounting to 1/4 of the tax owed in the past year, which will be adjusted to the inflation rate. No pre-tax shall be paid in the trimester in which a taxpayer has recorded tax loss. The tax due shall be computed and settled until 15th of April in the year to follow, when the profit tax return shall also be filed.
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MAZARS Hemmelrath
The tax on the dividends received by legal entities shall be 10%-rated, except for the case in which a legal entity holds, for at least two (2) years, more than 15% (10% starting 2009 fiscal year) of the share capital of the entity which pays the dividends; in such case, the tax is zero (0%)-rated. With reference to the taxation of natural entities, the following amendments have been made: the income realised from investment shall be subject to a 16% tax, just as most of the categories of income; expenses on private scholarships shall be treated the same as the expenses on sponsorship or Maecenaslike aid, and shall be jointly deductible in an amount of up to 5% of the taxable income of a freelancer; in the case of individuals who obtain income from salaries, private scholarships may be granted in an amount of up to 2% of the annual tax due, and so shall be the amounts supporting non-profit entities; nursery tickets shall not be deemed taxable income; the income obtained from a first transaction of shares issued by Proprietatea Fund performed by the individuals who received such shares under law shall be exempt from taxation; the income realised from investment, dividends, interest, transfer of securities, as well as from foreign exchange sale/purchase operations on term shall be subject to a 16% tax. i) in the case of real estate the value of which is lower than RON 200,000, a 3% tax shall be applied to the value of the transaction;
ii) in the case of real estate the value of which is higher than RON 200,000, a tax amounting to RON 6,000 plus 2% of any amount in excess of RON 200,000 shall be applied, provided that the real estate was acquired within a period of up to three (3) years, or 1% of any amount exceeding RON 200,000, if the real estate was acquired within a period that is longer than three (3) years. iii) the value of the transaction shall be the value provided under the contract, but it may not be lower than the value set in the experts report submitted to the notary public. iv) this tax shall be calculated and received by the notary public who has the obligation to pay it to the State Budget. Offices operating under the Real Estate Registry shall not record the transfer of ownership right unless they have been provided with evidence of payment of such tax. As far as micro-enterprises are concerned, in spite of the numerous debates regarding these entities, the Parliament has decided that they may continue operating but, in order to benefit from the taxation treatment envisaged for them, the total income achieved by these entities should represent, in a proportion of more than 50%, income obtained from activities other than advisory and management services. Every quarter of the year, controls shall be performed to identify whether this condition has been met; should a company fail to fulfil such provision, it shall pay tax on profit calculated from the beginning of the fiscal year. The tax on income which shall be paid by microenterprises shall stand at 2% in 2007, 2.5% in 2008 and 3% in 2009. Unlike the current system, micro-enterprises that will achieve an annual turnover exceeding EUR 100,000 shall have the obligation to pay tax on profit in consideration of the taxable income and deductible expenses provided under title II. The tax on buildings payable by natural entities has been slightly modified since it has been increased by 5% for each 50 square meters or fraction of such area in the case of buildings covering more than 150 square meters. In the case of legal entities, the maximum amount of the tax due has increased from 1% to 1.5%, which is rather significant if we consider that the annual depreciation rate of a building ranges between 1.6% and 2.5%. It means that the tax rate will be approximately equal to the annual depreciation rate and, hence, these entities will have to pay, throughout the useful life of the building, a tax the value of which will be nearly equal to the value of the building. The tax treatment of dividends shall modify as follows: the dividends received by a Romanian legal entity from a subsidiary established in a EU member state shall be subject to profit tax if the Romanian company holds at least 15% (10% starting 2009) in the foreign subsidiary during an uninterrupted period of two (2) years; and 97
Regarding the first mentioned two categories of income, the tax is retained and paid by the income payer, while i) in the case of the income achieved from the transfer of securities in closed-end companies, a 16% tax shall be levied upon registration of such transfer with the Trade Registry or in the Share Register; any loss recorded as an outcome of such operation shall be final and shall not be compensated for by other gains; and
ii) in the case of the income achieved from the transfer of other securities and from foreign exchange sale/purchase operations on term, a 1% pre-tax shall be paid, which is retained and paid by the agent that intermediates the transaction. If loss is recorded as an outcome of this transaction, such loss may be set off by the income obtained from a similar transaction effected during the same fiscal year. By the end of that year, the taxpayer shall file a declaration with the tax authority, regarding the value of all the transactions performed by such taxpayer and the pre-taxes it has paid. The tax authority shall make the final calculation by applying the 16% tax rate to the total net realised income, settling the tax amount by requesting payment of the difference, or by refunding the amount paid in addition. the income obtained from the sale of agricultural produce, obtained after cropping shall be subject to taxation from 1 January 2008; the tax applied in this case shall be 2% of the realised income; the income obtained from the transfer of real estate (land and buildings) shall be taxed as follows:
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MAZARS Hemmelrath
the dividends paid by a Romanian legal entity to a legal entity operating in a EU member state which has an interest equity in value of at least 15% (10% starting 2009) during an uninterrupted period of two (2) years shall be tax-exempt in Romania. Specific rules and procedures are also provided in this respect, including temporary rules concerning legal entities of certain member states. The value-added tax will be the most affected after Romanias admission to the European Union. Consequently, most of the amendments brought to the Tax Code refer to the value-added tax. Having in view that this represents a very large area of debate, which cannot be possibly covered by this Article, we are only mentioning that the greatest part of the amendments refer to intercommunity purchases and deliveries of goods and services, as well as to the VAT payers obligations after Romania becomes a EU member. Noteworthy is the fact that, once Romania joins the EU member states, it will have to give up the bureaucratic system of obtaining, preparing, issuing and accounting fiscal invoices. The manner in which invoices are to be issued will remain at the taxpayers discretion, but certain requirements for the content of these documents will have to be met. Excise duty is another area to which significant amendments will be brought in compliance with the EU relevant legislation. However, these amendments will not exert any direct fiscal impact on taxpayers, as they refer mainly to administrative changes.
In the case of reorganisation (merger, spin-off, split-off, split-up, transfer of shares, exchange of shares), specific rules shall be applied similar to those applicable under the EU tax legislation. The general rule in such case is that reorganisation operations shall not be taxable but, when the beneficiaries of the securities resulting from reorganisation transfer the right of property over such securities to third parties, the operation shall be taxable. The Law amending the Tax Code refers in detail to these operations, defining all terms and presenting the manner in which they are treated from a tax perspective.
The tax treatment of the income obtained from savings in Romania by natural entities residing in EU member states is described in a separate chapter. The basic idea of this chapter is that such savings shall be subject to taxation in Romania and the Romanian tax authorities shall have the obligation to exchange information with the relevant authorities in the natural entitys state of residence so that the manner in which such entity fulfils his/her payment obligations may be appropriately verified. In this case as well, the Law provides for numerous specific rules and aspects aiming at the correct application of the European legislation.
Tax treatment of royalties and interest paid to affiliated enterprises: on the strength of the new provisions, the amounts which are paid by Romanian legal entities to affiliated legal entities in EU member states shall be taxexempt in Romania.
In conclusion, since Romania has been admitted to the European Union in 2007, the Romanian taxation system has been undergoing radical changes and all entities dealing with it have to be well aware of its implications on their activity and, hence, have to thoroughly plan, in due time, any reforming process which they contemplate to implement. Moreover, from the very date of Romanias accession to the European Union, business circles in this country have to duly consider the European jurisprudence because any decision of the European Court of Justice on tax matters have to be observed and applied in the Romanian tax practice.
MAZARS Hemmelrath Strada Economu Cez`rescu Nr. 31B Sector 6, 060754, Bucure[ti Tel.: +40 21 569 7919 Fax: +40 21 569 7929 www.mazars.com, www.rsm-hemmelrath.com Contact: Hubertus Eichler, Managing Partner E-mail: Hubertus.Eichler@mazars.com Gabriel Sincu, Senior Manager, Head of the Tax Department E-mail: Gabriel.Sincu@mazars.ro Vasile Andrian, Senior Manager, Head of the Audit Department E-mail: Vasile.Andrian@mazars.ro Adriana Duncea, Senior Associate Lawyer, Head of the Legal Department E-mail: Adriana.Duncea@mazars.ro Valeriu Muntean, Senior Manager, Head of the Accounting & Payroll Department E-mail: Valeriu.Muntean@mazars.ro 98
Romanian Business Digest 2007
For a preview of the value of available financing and projects budgeting (including private contribution), the graph indicates the financial allocation for each year till 2013 (the end of budgeting period). 213
2007
This type of funding is a powerful instrument of financing, especially for public administration-driven projects. It is known that financing for public projects, especially for those that involve large budgets, was difficult to access. However, one should be aware that these funding instruments make the budgets available, but will not spare the efforts. The draft guides and procedures that are to be released already indicate necessity of consolidated strategies for development at local, regional and national level, and also of substantial efforts in preparing application documentation. Of course, the projects that will receive European funding will come on top of already existing projects in the private industry and in the public sector, and they will increase Information Society implementation at a national level. If all things go as planned and all available funding will be absorbed into projects, this can only mean that in 2013 the value of the market for the IT&C sector will have grown with more than EUR 550 mn. An ambitious goal by all standards, but the current development of the industry works in our favor.
C`lin Mirea summarizes these options: There are Romanian companies that have already developed solid competencies on specific niches. These are the first steps for them entering regional competition for high added value technologies. Although examples are still rare, we estimate that these are strategic options that more and more companies will embrace in the near future. Romanian IT industry is still considered an emerging one, because of still high growth rates of 15 to 25% per year on different niches. Chances are the drive of European IT spending, used in the right way, keeps growth rates high in the years to come and boosts the development of local market as well as of local players to an extent without precedent. Next reviews will show to which extent these favorable predictions have been consistent.
The Employers Association of the Software and Services Industry Bulevardul Unirii Nr. 64, Bl. K4, Scara 5, Etaj 4, Apt. 129 Sector 3, 030834, Bucure[ti Tel.: +40 21 327 6366 Fax: +40 21 327 1546 E-mail: office@anis.ro www.anis.ro; www.soft21.ro Contact: Valerica Dragomir, Executive Director E-mail: v.dragomir@anis.ro 214
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Larive Romania
The evolution of FDI in Romania between 2000-2006
10.000 9.000 8.000 7.000 6.000 5.000 4.000 3.000 2.000 1.000 0 EUR mn
9.082
5.183
5.213
A significant step forward taken for improving the relationship with the investors is the establishment of a governmental agency in charge with attracting and maintaining the contact with foreign investors in Romania. This is the Romanian Agency for Foreign Investment (ARIS), which has as main objectives to increase significantly the investment volume in Romania, to actively promote investment opportunities and to offer professional services for foreign investors, all along the investment cycle. The Fiscal Code, enforced starting 2004, maintained and reinforced the investment incentives introduced by this law, such as:
2000
2001
2002
2003
2004
2005
2006
For 2007, the estimations are also optimistic, at approximately EUR 10 billion, mainly due to the EU accession. The FDI increase will be determined by major players that were not until now present on the Romanian market, but decided to enter the ten countries that joined in 2004, immediately after the accession. The same strategy will most probably be applied in Romania also. Targeted segments will be the infrastructure, logistic, transport and energy, that still lags behind the West European countries and need significant investment.
Exemption from payment of custom duties for the machinery, installations, equipment, measuring and control devices, automation equipment and software products purchased from abroad (outside the EU), necessary for achieving the investment; Carrying forward the fiscal loss during the following 5 years from the taxable profit; Other incentives that may be granted by the local authorities (such as exoneration or reduction of local taxes, etc.).
Besides the law regarding the direct investments with significant impact on the economy, the other most significant legal incentive offered to direct investment in Romania is the new single tax reform, introduced by the Government at the beginning of 2005. This modification brought Romania among the most competitive investment destinations in the region. The country was known for its high level of income taxation: 25% for companies and 18% to 40% for individuals. Starting 2005, following a successful model already introduced by other countries in the region, corporate and individual incomes are levied with a single tax rate of 16%. This fiscal reform was coupled with a softening of the taxation principles on which all fiscal procedures will be based: transparency, simplicity, partnership with taxpayers, and prudence. Presently, the Romanian single tax rate is competitive compared to the other countries levels of taxation, an overview being given below: Taxation levels applicable in countries in SEE as of 1st of January 2006
60% 50% 40% 30% 20%
The Parliament has issued in 2001 the Law No. 332 regarding the promotion of direct investment with significant impact on the economy. Investment that qualify has a value higher than USD 1 million (or equivalent), is made in the forms and ways provided by the law and contributes to the development and modernization of the Romanian economic infrastructure, determining a positive spin-off effect in economy and creating new jobs. Direct investment with significant impact on economy, regulated by Law No. 332 are allowed in all economic sectors with the exception of financial, banking, insurance and re-insurance, as well as the sectors regulated by special laws. 56
10% 0%
Se ep. rbia donia mania ngary vakia oland lgaria roatia venia hR u P lo C lo c ce Ro Bu H S e S a M Cz
Corporate tax
Source: Central banks Note: Income tax at highest rate
Income tax
VAT
According to the experience of other countries, the accession to the European Union will increase Romanias competitive
Romanian Business Digest 2007
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advantage in attracting higher FDI, especially in export oriented, labor intensive and high value added industries. In spite of the advantages of the new single tax system, its downside appeared already after six months. In order to counter the lower taxes collected on corporate and individual income, the Government was forced to raise quotas for other taxes, such as: tax on dividends (from 5 to 10% for individuals, and subsequently to 16%), tax on capital gains (from 1 to 10%, and then 16%). The new fiscal strategy of the Government puts emphasis on indirect taxes, as compared to direct taxes (which are aligned at 16%, the same quota applicable for tax or income). Plus, Romania has revised its taxation system in order to bring it closer to the EU system and line it with the recommendations of the World Bank. Some other changes in the Fiscal Code may take place in accordance with the specific timetables agreed with the EU. Prospective investors should investigate the current status of the fiscal incentives and also consider some future changes that may occur as a result of the EU accession when drafting investment plans. The increase is mainly determined by the strong activity volume especially in the services sector, industry and constructions. Having in view that FDI in a country is facilitated, inter alia, by the development of the infrastructure, the efficiency of administration, and by an adequate legislative system, the international financial institutions are actively supporting Romania in its efforts to meet these criteria, and surpass the difficulties of the transition. The European Bank for Reconstruction and Development (EBRD) is the largest individual investor in Romania, country which is the third-largest recipient of EBRD funding. As at 1 January 2007, the European Bank for Reconstruction and Development (EBRD) had signed 175 projects in Romania, totaling over EUR 3.3 billion. This has helped to generate an additional EUR 6.2 billion from other sources. A total of 63% of investments are in the private sector. During 2006 only, EBRD signed 27 projects bringing the EBRDs cumulative business volume to over EUR 3.3 billion of which 18% are equity investments. Whenever possible, EBRD is encouraging the private financing of infrastructure through concessions and build, operate, transfer (BOT) schemes. The Bank is also actively supporting the development of the non-banking financial sector by promoting investment in leasing and insurance companies and in equity, mortgage and pension funds. The World Bank is Romanias largest institutional creditor and its assistance covers all areas of the economy. The World Bank has financed over 40 operations in the country for a total original commitment of almost USD 5 billion. In addition, rural development and poverty alleviation programs aim at improving rural infrastructure, including irrigation systems, social services and the rural finance system, through a participatory process. The rate of disbursement is one of the highest in the WB, demonstrating a substantial implementation capability and ability to successfully manage large capital inflows. In support of the country integration into the EU community, the EU Commission actively assisted Romania technically and financially. It is estimated that the non-reimbursable funds that were made available for Romania in the last couple of years were up to EUR 650 million annually. The funds were allocated for projects supporting convergence with the EU and focused on updating the legislation, aid to institutionalized children, supporting solutions to minorities issues, etc. The Government main tasks in the integration process were: to create the conditions for a functional market economy, to increase the financial discipline, to reduce inflation, and to stop injecting money into the big state-owned companies, and privatize them, in order to reduce losses. As part of the EU, Romania will benefit of structural, postaccession funds, as part of 7-year allocation plans, in amount of EUR 19.67 billion. The main recipients of these funds will be local and state administration, mainly for infrastructure projects. The amount of FDI in a country is dependent also upon the privatization strategy adopted by the Government. Until the end of 2005, the Romanian Government has privatized most of the sectors of the economy. The largest privatization deals concluded are: Banca Comercial` Romn` (sold to Erste Bank at the end of 2005), Petrom (the national oil company, sold to OMV in 2004), Agricultural Bank (sold to Raiffeisen 57
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Bank in 2001), Sidex - the giant steel mill (sold to LNM Ispat in 2000), Romanian Development Bank (sold to Socit Gnrale in 1998), and Dacia car manufacturer (sold to French Renault in 1997). The long expected privatization of CEC (Romanian Savings Bank) was for the moment postponed due to unsatisfactory financial offers received. Before concluding the privatization deal, a new profile for CEC is being designed together with its capitalization in order to increase the value of the transaction. Though, some other interesting privatization deals are expected in fields such as energy and auto industry. The privatization of the largest Romanian bank, Banca Comercial` Romn`, finalized at the end of 2005, is by far the largest ever realized in Romania. The amount obtained by the Romanian state, approximately EUR 3.75 billion for 61.88% of shares, is so large, that it is about equal to the value of all the other privatizations of the last 15 years. After the privatization process, BCRs customers (more than EUR 3 billion) will benefit from improved access to account information, better customers service and a larger and improved range of services & products. Another successful major privatization was done also with an Austrian investor Petrom, the national oil company. The deal was concluded in July 2004, when OMV acquired 33% of the company, for about USD 900 million, having the right to acquire the control package (51%), through a share capital increase. Petrom is the largest company in Romania, with a turnover of about USD 3 billion. Privatization of the main utilities was successfully concluded by the end of 2004. The privatization of the regional electricity distribution companies Electrica Banat and Electrica Dobrogea was done with the Italian company Enel in mid July 2004. The two gas distribution companies, Distrigaz Sud and Distrigaz Nord, were sold in October 2004 to European strategic investors. Gas de France has acquired Distrigaz Sud, paying EUR 128 million for 30% of its shares, and subsequently increasing the share capital by another EUR 183 million, thus gaining the company control. Distrigaz Nord was privatized with the German company Ruhrgas (part of E-ON Holding), which paid EUR 125 million for 30% stake and earmarked EUR 179 million for a share capital increase that will bring over the 51% control. Romania is actively integrated into the European economical environment, as reflected by the distribution of FDI per countries of origin. The top ten countries classification according to foreign capital registered as at 31 March 2007 is presented below: Distribution of FDI per countries of origin for companies with foreign ownership
No. Country Nr. of registered companies Value of the registered capital brought in foreign currency (million EUR)* % in total capital
1 The Netherlands 2,787 3,210 20.20% 2 Austria 4,357 2,182 13.74% 3 France 4,877 1,574 9.91% 4 Germany 14,569 1,561 9.83% 5 Italy 22,314 736 4.63% 6 USA 5,043 674 4.24% 7 United Kingdom 2,901 630 3.97% 8 Cyprus 2,693 617 3.88% 9 Greece 3,712 553 3.49% 10 Dutch Antilles 12 546 3.44% TOTAL registered capital in foreign currency for top 10 countries: 63,265 12,283 77.33% TOTAL registered capital in companies with foreign ownership: 135,883 15,888 100%
Source: Statistical bulletin of the National Trade Registry Office *as at 31 March 2007
The following investors accounted for the largest foreign equity investment as of second semester of 2006 (see table below). Dutch investment in Romania With over 20% of total foreign investment in Romania, The Netherlands occupies the first place in the top of foreign investors. More than 2,700 companies activating on the Romanian market have Dutch capital, high investment being made by Unilever, ING (ING Bank, ING Nederlanden, and ING Securities), ABN AMRO Bank, Frans Maas, Remco, Philips, Damen Shipyards Group, KPMG, Heineken, SPAR, Friesland,Verder Group, TNT, Golden Tulip Hotels, KLG (Kuijken Logistics Group), Centrum Transport, etc. The Dutch companies are mainly investing in production and logistic, IT, milk processing, banking, etc. Austrian investment in Romania Since 1990, Austria has constantly been among Romanias most important trade partners. Currently, Austria ranks
Largest foreign equity investors (Statistical data provided by the National Trade Registry Office, in the second semester of 2006) No. Investor Foreign investor Country of origin 1. Automobile Dacia SA Renault SA France 2. Mittal Steel Gala]i SA Mittal Steel Holding AG Switzerland 3. A&D Pharma Holdings SRL A&D Pharma Holdings NV Netherlands 4. Rompetrol Rafinare SA The Rompetrol Group NV Netherlands 5. Telemobil SA Inquam (Romania) SA British Virgin Islands 6. Cosmote Romanian Cosmote Mobile Greece Mobile Telecommunications SA Telecommunications SA 7. Hiproma SA Bearbull SAS France 8. Kaufland Romania SCS SC Kaufland Rumanien Germany Warenhandel GMBH 9. Raiffeisen Bank SA Raiffeisen International Bank Austria Holding AG 10. Mechel Cmpia Turzii SA Mechel International Holdings AG Switzerland
Source: Romanian Agency for Foreign Investment
Activities Automotive Steel production Pharmaceuticals Oil processing Telecommunications Telecommunications Retailing Retailing Banking Metallurgy
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second within the classification of foreign investors in Romania, the subscribed equity capital amounting to more than EUR 2.1 billion, with over 4,300 companies having Austrian capital, and over one hundred thousand employees in joint ventures. However the BCR transaction changes the position of Austria between foreign investors. Erste Bank considered coming to Romania after some very successful strategies already applied in the transition countries like Slovakia and the Czech Republic, BCR becoming the most important privatization deal ever concluded in Romania. The leading Austrian investors in Romania are, apart from the new entrant Erste Bank: OMV, Raiffeisen, Schweighofer, Strabag, Porsche Romania, Bramac Baumit Wienerberger, Volksbank, Vienna Insurance (owner of Omniasig and Unita). Many Austrian companies are interested in investing in real estate, in buying land in the vicinity of motorways and transport knots, in machine construction, metallurgy, measurement and equipment production, food industry, construction materials, etc. In the banking system, Raiffeisen Bank and Volksbank are already top players. French investment in Romania Over 4,800 French capital companies are registered with the Romanian Trade Registry, France occupying currently the third position in top of foreign investors in Romania. The major French investors are Orange, Socit Gnrale, Lafarge Romcim, Renault-Dacia, Vivendi Environment, Carrefour and Alcatel. French investors were mainly interested in companies being privatized, greenfield investments being less preferred. One exception is Alcatel that invested in Romania starting with 1991 and later France Telecom, that invested in Orange Romania. Retailer Auchan, after opening its first outlet in 2006, plans an investment of around EUR 40 million in its second outlet in Romania. German investment in Romania Germany is one of the most important commercial partners of Romania, occupying in March 2007 the fourth position after The Netherlands, Austria, and France, with a total value of registered capital brought in foreign currency of EUR 1.5 billion and over 14,500 companies registered and operating in Romania. The majority of German investments are in small businesses. More than 90% of these investments amount to less than EUR 40,000, still the Germanys contribution to the strength of the Romanian economy is substantial. However, the above mentioned figures do not take into account the fact that a number of major German companies have effected their investment in Romania through their branches in various European countries. Main investment sectors for the German companies are: automotive industry, metallurgy, wholesale trade, plastics industry, textile industry, retail trade, IT, financial services and main players are: Metro, Praktiker, Kaufland (part of Group Lidl & Schwarz), Selgros, Billa, Tengelmann (Plus), E.ON Ruhrgas, Steilmann, Linde, Heidelberger Cement (CarpatCement), Siemens, Dr. Oetker, etc. Latest major investment were made by Willy Kreutz (in Freidorf Industrial Park-Timi[oara) that invested over EUR 8 million for the production of fluorescent lamps and Marquardt Schaltsysteme that already invested over EUR 8 million in its production plant located in Sibiu and
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plans to invest other USD 15 million until 2008 for the production of car components. Italian investment in Romania Italy is presently one of the most important commercial partners of Romania ranking fifth in the top of foreign investors, with more than 22,000 Italian capital companies registered with the Romanian Trade Registry. Mainly Italian investment are focused on the so-called labor intensive projects, developing the lohn system with raw materials brought from Italy. The traditional sectors in which Italians have been investing so far are textiles, construction, trade, services and agriculture. The main Italian investors are Italstrade, Unicredito Italiano, Radicifibres, Butangas, Pirelli Telecom, Tenaris Dalmine, Radici, Natuzzi, Zoppas, Cefin. US investment in Romania American investors became key players within a series of strategic Romanian industries such as telecommunication, infrastructure, construction of large machines, finance, and agriculture. There are more than 5,000 companies with US participation registered by March 2007. In total, the American investment in Romania amounts to almost EUR 700 million, the main investors being Qualcomm, Philip Morris, General Electric, UPC, Citigroup, AIG, IBM, Procter&Gamble, Coca-Cola, Solectron, Timken, McDonalds, Trinity Industries, Kraft Foods, American Life Insurance Company, Precision Cast Parts Corporation, Sara Lee, Smithfield. UK investment in Romania UK is placed on the seventh position in the top of foreign investors in Romania, with over 2,900 companies registered by March 2007 and a subscribed equity capital of more than EUR 600 million. One of the most favorite investment field for UK investors is the real estate market, together with the construction field, railway, clothing & textiles, energy sector, agriculture. Major investors so far have been: GlaxoSmithKline, BPB Gypsum Ltd, Mivan-Kier, Coats, Aviva, Halewood, British Vita. Recently, PayPoint Group has paid EUR 15.5 million to take over mobile prepay service company Pay Store, part of Romanian based RTC Holding. Also, DIY retailer Brithouse plans to invest EUR 25 million in the next five years in Romania. Cyprus investment in Romania Cyprus is one of the top foreign investors in Romania, with almost 2,700 companies registered by March 2007 and a total value of registered capital brought in foreign currency of more than EUR 600 million. Main investment sectors for Cyprus companies are: telecommunications, trade, professional services, food industry, textile industry, etc. Most of Cyprus investment in Romania so far were made by off-shore companies headquartered in Cyprus but set up by investors from other countries (mainly Greece) and investment funds. Important investors so far have been Synek (clothing industry) and Chroma Holdings (painting industry). 59
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Greece investment in Romania Greece occupies the nine place in the top pf foreign investors in Romania with more than 3,700 companies having Greek capital and a subscribed equity capital amounting to more than EUR 550 million. Preferred fields for the Greek investors are: telecommunications, construction sector, IT, plastic industry, distribution, banking system. Main investors are: Romtelecom, Cosmote, Alpha Bank, Egnatia, Piraeus, Alexandrion, Loulis, Chipita, Diekat, Aegef, Terna, Techniki Olimpiaki, Arcon, Maillis, Altec, Alumil, Viohalco, Stirom, Marks&Spencer, Body Shop, Germanos, Elgeka, etc. Dutch Antilles investment in Romania The Dutch Antilles is placed between the top ten foreign investors in Romania with only 12 companies registered and operating but more than EUR 500 million in subscribed equity capital. Major Dutch Antilles investors in Romania are: Mittal Steel Holdings NV and LNM Holdings NV. The distribution of foreign investments stock per economic sectors reflects the development and the attractiveness of the industries for foreign investors, dependent also on the privatization strategy of the government. For the period 1991 March 2007 the breakdown of foreign investment per sectors can be presented as follows: Distribution per industries of share capital stock subscribed in foreign companies (as of 31 March, 2007)
Industry 17.3% Professional services 25.1%
The commitment of investment funds present in the country to develop their business and the association of the Government with international financial institutions, such as IMF, EBRD, World Bank, and the EU Commission; The high qualification of labor force and its low costs, below the levels of other countries in the CEE region; Existence of important natural resources and proximity to energy suppliers; As the market is growing, there are increasing business opportunities, while the entry barriers remain low.
Romania is ready to accommodate a higher inflow of FDI in sectors such as agriculture, construction materials, automotive industry, constructions and real estate, oil and gas, petrochemical, energy, metallurgy, telecommunications, transport, air transport, railways, shipping and shipbuilding, food industry, retail, tourism, IT, financial sector, and distribution. Among these, the most appealing for foreign investors are automotive, financial services, software, constructions and real estate, electronics, telecom, pharmaceutical, and chemical industries.
Investment funds
The foreign investment funds are among the most active players on the Romanian market. Their presence on the market was simultaneous with the consolidation of the private sector. The targeted companies were mainly those with an important growth potential, a steady market and a competitive management. The activity of the investment funds is regulated by the Regulation 5 issued by the National Commission for Securities in April 1998. The investment fund is defined as a venture capital association set-up as a closed investment fund or investment company, which manages the funds of private or corporate persons. Regional funds are becoming more active compared with country funds, particularly with respect to large deals. 2006 was considered by players the year of exists, considering the number of important exits concluded successfully by the major funds. Competition, not very intense until recently, is becoming stronger among the funds. Offering, besides financing option, know how, the funds are now of interest for investors, especially in lack of any serious competition coming from the banks. The banks, are not a threat for venture capital funds in the real economy, as they are not yet prepared to provide long-term development financing. This leads to relatively low entry valuations and may ensure significant returns. As the capital market is still not enough developed, the most probable exit route to be used by the funds active in Romania is via sales towards strategic investors. Some of the main investment funds acting on the Romanian market are presented next. The funds are listed in alphabetical order, and the information is supplied by fund managers. Advent Central and Eastern Europe III Advent Central and Eastern Europe III which manages EUR 330 million was established in 2005, after Advent Central and Eastern Europe II and Advent Private Equity Fund already managed USD 220 million and USD 78 million
Romanian Business Digest 2007
Among the factors that are deemed to support higher FDI in the future, the following are the most important: Romania is a politically and socially stable country, part of the European Union since 1st of January 2007; Romania has gained full membership of NATO; Pro-reformist Government, determined to continue privatization, restructuring, and administration reform; Romania represents the second largest market in the CEE region; The crucial geographical positioning of the country, a gateway between East and West of Europe;
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respectively in the region. Investors in the fund are EBRD, IFC, Teachers Private Capital, Alpinvest, other US and European pension funds and institutions. The management company is Advent International Corporation. Advents current Romanian investment is Dufa Deutek, one of the largest Romanian decorative paints producers acquired in 2005. Three portfolio companies were exited in 2004, 2005 and 2006: shares in mobile operator Mobifon (trading under the brand name Connex), acquired by TIW, a Canadian cellular operator with operations in Romania and the Czech Republic, Euromedia, Romanias largest outdoor advertising group, acquired by local media group, Plasty Prod and Terapia, a leading pharmaceuticals business acquired in 2003. Brewery Holdings, one of Advents first investments in the country, was successfully exited in 2000. Advents primary investment focus is on established companies that generate significant revenue and earnings, with growth opportunities and good management. The typical investment size is EUR 15-50 million, in majority or minority positions. Advent seeks representation on the companys board of directors as a way of actively supporting management with operational and strategic issues and will exit in 3-5 years, usually through sale to a strategic investor or IPO. Most industries exhibiting strong growth and exit potential are eligible for investments (in particular healthcare, media, business and financial services, FMCG, retail, construction materials, telecoms) but Advent does not invest in start-ups, real estate, tobacco, spirits and weaponry. DBG Eastern Europe DBG Eastern Europe is a private equity investor in the region of Central and Eastern Europe. The Fund operates from offices in Bucharest, Budapest, Prague and Warsaw and the investor base is comprised of blue-chip financial institutions. DBG will consider investment opportunities across the business spectrum. In general, it prefers to invest into established industries being also attracted to industries that are suitable for a consolidation strategy through acquisitions or sectors that have expansion potential. DBG will consider equity investments in a preferred range of EUR 3-15 million with total transaction sizes typically up to EUR 50 million. The financing structures are designed to meet the objectives of all parties. In particular, the fund seeks to tailor its solutions in order to satisfy the needs of business owners who may be approaching gradual/phased succession situations, to provide significant equity-linked incentives for dynamic managers (MBO/MBI situations); and to satisfy the objectives of sellers by completing transactions in an efficient, professional and timely manner. Enterprise Investors Since 1990 Enterprise Investors has been managing the largest group of private equity funds in Poland and the Central and Eastern European region, with capital exceeding EUR 1.6 billion. During its many years of activity, EI have made significant investments in more than 100 companies, have floated 24 firms and have sold holdings in close to 90 companies at attractive rates of return. The fund investments are ranging from EUR 20 million up to EUR 60 million, focusing on such sectors as: manufacturing, retail & consumer, business & financial services, media &
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telecoms, IT, pharmaceuticals and healthcare. EIs investment horizon is 3 to 7 years and concentrates on increasing the long-term value of each company. Funds under management EI currently manages six private equity funds: Polish Enterprise Fund VI, Polish Enterprise Fund V, Polish Enterprise Fund IV, the Polish Enterprise Fund, Polish Private Equity Funds I & II and the Polish-American Enterprise Fund. In 2006, Enterprise Investors closed Polish Enterprise Fund VI, its largest fund, at EUR 658 million. The fund is destined to be invested in Poland, Romania and other countries of Central and Eastern Europe. EI in Romania In October 2004, Enterprise Investors opened its representative office in Romania, because of the large market, rapid development and major investment opportunities in this country. As part of EIs commitment to Romania, four Romanian companies benefited of equity of EUR 80 million so far: Orange Romania, Artima, SIVECO Romania and Macon. In September 2006 PEF V, managed by EI, has purchased a 100% stake in Macon Deva (one of the main construction materials producers in Romania, in a EUR 35 million transaction). In March 2005, PEF V had acquired 100% of Artima, the largest independent retail chain in Romania, in a EUR 17 million transaction. In April 2005, Polish Enterprise Fund and Polish Enterprise Fund IV sold their stake in Orange Romania to France Telecom, yielding a 4x multiple of the initial capital. In July 2005, PEF V had acquired 22.5% of SIVECO Romania, the largest software provider in Romania in a buyout transaction, collaborating with Intel Capital, the investment division of Intel Corporation. GED Capital GED is an independent private equity group operating in the Iberian Peninsula and South-Eastern Europe. GED was incorporated in 1996 by professionals with wide-ranging experience and a proven business approach, who have been working in the industry since the mid-seventies. GED is a mid-market, LBO and Development Capital specialist. GED is positioned in the middle market with funds under management amounting over EUR 300 million through 3 private equity vehicles, GED Eastern Fund II, GED Iberian and GED Sur. GEDs professional Partners hold a majority stake in the fund management companies of the Group, together with International Financial Institutions such as CA-IB Bank Austria (Hypovereinsbankl), Caja Madrid, AXIS ICO, Banif Investimentos and Invercaria. GED Eastern Fund II raised EUR 150 million to be invested within the South East Europe region, with a focus on Romania and Bulgaria, where GED has local offices. The investors in GED EF II are financial institutions such as Caja Madrid, IFC, EBRD, AXA and other European financial groups. The targeted sectors are: healthcare, retail, logistics & distribution, construction materials, consumer products and services. GED Eastern Fund II invests in market leaders in high growth sectors, with regional expansion potential or seizing market consolidation opportunities, alongside strong management teams. The current portfolio of GED Eastern Fund II consists 61
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of companies such as ROSEGUR (security company), RED Management (real estate development) and Kahn Dasimpex (GSM retail chain). GED has already successfully divested its first fund focused on Romania (Romanian Post Privatization Fund GED Eastern Fund I), performing 4 exits only in 2006-2007, among which hotel chain Continental and gas distribution company Vital Gaz. The most successful operations of GED Eastern Fund I were pharmaceutical company Sicomed (sold to Zentiva), business park IRIDE (sold to Immoeast) and indirect holding in MobiFon (sold on Nasdaq). Gemisa Gemisa Investments Ltd. was set-up in 2004 as the only venture capital fund dedicated to start-ups and early stage companies in Romania. The initial capital of the Fund of EUR 6 million will be increased this year. The Fund has committed investments in a wide array of industries, and the current portfolio consists in 11 companies: Miniblu (the leading baby care retailer); Optical Network (top player in the glasses and eyewear market under Optiblu brand), Egibo (leading retailer in fishing and outdoor under Gipo brand); Fleet Management Services; Business Intelligence Alliance (executive search, human resources management); Oxigen Plus, Diagnosis (health services), Sport Distribution Group (exclusive distributor of global sports brands); Press Pro (publishing and event management in the medical and pharmaceutical industries); Geroaslan (cosmetics distribution) and Simplu Credit (financial services, i.e. lending). Gemisa Investments successfully exited Lauren Finance (consumer finance company in the pharmaceutical industry) in 2006 and Cristal Diagnostic (healthcare services provider) in 2007. The Fund invests in companies with outstanding growth potential, preferably operating in niche segments, irrespective of industry. Gemisa Investments prefers majority position and have no limitation as to the exit horizon. Apart direct equity investment, Gemisa offers sophisticated investment such as LBO, convertible loans to shareholders and buy-back options. Gemisa also contributes, besides the financial support to the companies where it invests, with legal, human resource, IT, accounting and functional support. Global Finance Global Finance is an independent investment firm. Founded in 1991, it pioneered private equity and venture capital in the region and has established an exceptional investment track record. Global Finances operations consist of private equity fund management and advisory services covering SouthEastern Europe. Global Finance manages a number of funds, each with a distinctive, clearly defined geographic and investment focus, supporting both the expansion of Greek businesses in Greece and abroad as well as the development of local businesses based in the Balkans and Eastern Europe. Global Finance places emphasis in the development of the management buy-out market. It takes a proactive role in backing dynamic companies with regional development plans (organic growth and buy-and-build strategies). In practice, Global Finance collects commitments mainly from institutional investors through fundraising, searches potential investment opportunities, participates actively in the portfolio 62 companies actions and exits from the investments, normally 3-6 years after the initial investment. The main investment activity of Global Finance comprises of direct investments in portfolio companies in South-Eastern Europe, operating in the manufacturing, information technology, specialty retail, media, telecommunications and services industries. The newly established real estate team aims to build a focused, well-balanced property portfolio mainly in Romania, Bulgaria and Serbia. Global Finance is one of the European industrys most experienced firms having completed more than 60 investments in 10 countries, with an aggregate acquisition value of more than USD 350 million in diverse economic and political environments. Representative companies in which Global Finance has invested in include: Goodys, Chipita, Germanos, Jumbo, Dodoni, Yioula, NetMed, Nikas, Eurodrip, CBL-Patras, United Milk Company (Bulgaria), Sicomed (Romania), Totalsoft (Romania), La Fourmi (Romania), Temenos (Switzerland), Corporation Dermoaesthetica (Spain), Mobiltel (Bulgaria) and Orange (Romania). In 2006 Global Finance completed the first closing of a new regional buyout fund, South Eastern Europe Fund at EUR 197 million which will focus on investments in Romania, Bulgaria and Greece. Global Finance is also present in Romania with a EUR 150 million real estate fund through which it has already started to develop several major projects in Bucharest in the residential, commercial and office building sectors. Global Finance has offices in Athens, Bucharest and Sofia. NCH (New Century Holdings) NCH (New Century Holdings) is widely recognized as one of the premier private investment management companies operating in Eastern Europe. Founded in 1993, NCH was one of the first Western investors in the region, and is strongly committed to its marketers over the long term. The investments made by NCH are above USD 3 billion, out of which over USD 300 million has been invested in Romania. In Romania, NCH invests mainly through three investment companies Broadhurst Investments, Lindsell Enterprises and Ivington Enterprises being involved in a number of important sectors of the Romanian economy: electrical engineering (Electroaparataj), bread industry (Vel Pitar), building materials industry (Elpreco), banking (Libra Bank), securities brokerage and real estate (WinMarkt, Romarta). NCHs mission is to generate medium to long-term yields through the appreciation of the invested capital, as a majority shareholder as well as a minority shareholder. The group is actively involved to sustain both financially and managementwise the growth of the companies where it owns shares, observing in the mean time the principles of corporate governance, ethics, transparency and business performance. Oresa Ventures Romania SRL It is a Swedish investment company that has been present in Romania since 1997 with a current net asset value of over EUR 100 million. Present investments in Romania: Fabryo Corporation SRL, Flamingo International SA, La Fntna SRL. Exited investments: Medicover, Motoractive, Brewery Holdings Ltd., Churchill Media SRL, Flanco International SRL and Credisson International.
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Business orientation: Consumer Goods, Healthcare, Financial Services. Type of investment: venture capital. Romanian American Enterprise Fund (RAEF) Romanian-American Enterprise Fund (RAEF) is a private corporation established in 1995. RAEF have led and participated in equity and quasi-equity transactions amounting to over USD 150 million. RAEFs activities are: private equity and venture capital, energy efficiency, investment banking/advisory services, asset management. RAEF offers support services to companies interested in investing in Romania. RAEF investments include: commercial banking, leasing, consumer finance, mortgage, micro-lending, manufacturing, retail, services, etc. Balkan Accession Fund (BAF) Balkan Accession Fund (BAF), is a private equity fund established in January 2005, which manages EUR 110 million. BAF is investing in mid-sized companies that are strategically positioned to capitalize on the economic growth of the second-wave EU accession countries in the Balkans. BAF is investing in Romania, Bulgaria and other countries in South-East Europe (Serbia, Montenegro, Albania, Macedonia, Bosnia and Herzegovina, Moldova, and Ukraine). The lead investors in the Fund are Romanian-American Enterprise Fund, European Bank for Reconstruction and Development (EBRD), Nederlandse FinancieringsMaatschappij Voor Ontwikkelingsland-En N.V (FMO), DEG-Deutsche Investitions- Und Entwicklungsgesel-Lschaft Mbh and Black Sea Trade and Development Bank. BAF invests in industry leaders active in double digit growth sectors and/or fragmented industries with consolidation potential, and having a clear domestic and/or regional expansion strategy through M&A/organic growth. The targeted sectors are: Financial Services, Retail, Logistics & Distribution, Consumer Products, Information Technology & Telecommunications, Healthcare, Selected Industrial, Media and other Consumer Related Services. SEAF Trans-Balkan Romania Fund The Fund entered the Romanian market in March 2001, by taking over the former K + Venture Partners Fund. The management of this USD 8.5 million Fund is ensured by Small Enterprise Assistance Funds LLC (SEAF), a global fund management company based in US, managing 17 funds covering 23 countries and specialized in investments in Small & Medium Sized Enterprises (SME). The major investors are International Finance Corporation, Black Sea Trade and Development Bank, FinnFund, Norfund, Governments of US and Switzerland. The average size of the investments made by the Fund is USD 600,000, but the amount may vary between USD 200,000 and USD 1,600,000. The Fund is interested in companies with growth potential irrespective of the sector, in which the minority position (25-49%) is preferred. Type of investments: venture capital/private equity combined with quasi-equity (convertible loans, high yield loans, etc.). Usual investment period is three to five years. Standard exit route is via selling the majority share package alongside with the initial owners to strategic or financial investors. Initial shareholders have preemption rights. Alternatively, in certain cases, non-convertible, high yield instruments may be preferred or buy-back schemes may be agreed with existing owners. TBRF involves itself only in the strategic and major operational decisions through its presence in the Board of Directors and the Shareholders General Assembly, leaving current management to the owner manager. The fund has invested in the software industry (TotalSoft), retail (ARTIMA, RomPhoto and GSM), distribution (TELEZIMEX, ILS Distribution), real-estate development (Casa Real Estate and Casa Real Estate Investment), energy services (ELCOMEX), car parts manufacturing (Interpart Production) and wine making. During 2005 and 2006, SEAF TBRF completed four successful exits (Artima, TotalSoft Telezimex and Casa Real Estate) from its investments. SigmaBleyzer Investment Group LLC SigmaBleyzer Investment Group LLC is an independent fund management company headquartered in Houston, USA. Its three previous funds under the Ukrainian Growth Funds nameplate invested USD 100 mn. The company has expanded its activities to the territory of Southeast Europe mainly Romania and Bulgaria. In December 2006, SigmaBleyzer closed its fourth fund, SigmaBleyzer Southeast European Fund IV (SBF IV) at EUR 250 million, the maximum allowed by its charter. Alongside EBRD a significant number of limited partners from the companys previous funds as well as new investors, large multi-national institutions, family offices and high net-worth individuals from around the world invested in SBF IV. The fund is now operational and actively reviewing investment opportunities in the region targeting mid-market buyouts in Romania, Bulgaria and Ukraine. SigmaBleyzer has offices in Bulgaria, The Netherlands, Romania, Ukraine and The United States.
Larive Romania IBD SRL Strada Clucerului Nr. 82 B1, Sector 1, Bucure[ti Tel.: +40 21 223 0014, 223 0015 Fax: +40 21 223 0019 E-mail: info@larive.ro www.larive.ro
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According to the latest amendments, the administrators, the members of the Directorate or of the Supervisory Board may not conclude a labor agreement with the company. A services provision agreement (management agreement) is required instead. 64
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c. Representative office usually set up by foreign companies in Romania to carry out non-commercial activities such as advertising and market research on behalf of the parent company. Representative offices cannot conduct commercial activities in Romania. In order to register a representative office, company officials should apply to the General Department of Commercial Policies in the Ministry of Economy and Trade and pay an annual fee of USD 1,200 for the license. d. Branch of foreign company does not have its own legal personality or share capital. Being a unit of the parent company, branch activities cannot exceed the scope of activity of the parent company. e. Consortium domestic legislation allows for the conclusion of a joint venture agreement (contract de asociere \n participa]iune). Under this agreement, parties act together for the accomplishment of a common business goal. This form of doing business in Romania does not create a legal entity. Generally, one party is in charge of the bookkeeping of the joint venture. Limited liability companies are the most popular vehicles among local and foreign investors for carrying out business activities in Romania because they have fewer administrative requirements and greater flexibility in operations than other types of companies. They also have a low initial capital requirement. However, the number of joint-stock companies in Romania is increasing because of their attractiveness to investors interested in equity investing. An SA must be set up whenever: the company wants to carry out certain types of activities (e.g. insurance, banking activities, etc.); the entrepreneurs foresee any advantage or necessity with respect to the acquisition of its own shares by the company (for instance, offering them to the managers); the entrepreneurs plan to list the company on a stock exchange or on the OTC market; the entrepreneurs contemplate financing the company through issue of bonds or other financial instruments; the entrepreneurs intend to allow receivables towards third parties to be subscribed as participation in the company. Romanian Companies Law regulates both merger by absorption (whereby one or more existing companies are absorbed by another existing company) and merger by fusion (whereby a new company is created by integrating two or more existing companies), as well as spin-offs. The merger/spin-off should be decided separately, by each participating company voting in the General Meeting of Shareholders. Following this, a merger/spin-off plan is prepared and registered with the Trade Registry in order to be examined by an expert and to get the approval of the delegated judge and published in the Official Gazette. Regarding the completion of the merger/spin-off operation two situations may arise: where pursuant to the merger/spin-off new companies resulted, the operation takes effect upon the incorporation date of the new company or the last of the new companies. for the other cases (e.g. merger by absorption, spin-offs where the transfer is made to already existing companies), the operation takes effect on the date when the resolution of the last company approving the operation is registered with the Trade Registry, save where the participating companies jointly agree on a different date. However, such date cannot be prior to the end of the last budgetary year of the company/companies that transfer its/their assets and liabilities and cannot be later than the end of the current budgetary year of the absorbing or the beneficiary companies.
With regard to acquisitions, Company Law regulates the acquisition of shares in a limited liability company or in a jointstock company. The acquisitions procedures are different as shares in a limited liability company are not freely transferable to third parties (a special quorum and a majority in the General Meeting of Shareholders are required), while shares in a joint-stock company are not subject to specific restrictions regarding their transferability to third parties, if not otherwise provided for. There are also some instances where companies involved in a merger or acquisition are subject to certain competition regulations. However, as a general rule there are no competition issues to be considered when companies participating in a merger and/or acquisition are part of the same group of companies. Mergers and acquisitions involving at least one public company must be done in accordance with Capital Market Law 297/2004 and by observing the regulations issued by the National Securities and Exchange Commission (CNVM).
The other forms of doing business are not common among foreign investors in Romania. However, foreign investors still use representative offices if their activity involves only promoting one of their group companies in Romania. Branches are mainly used in cases where foreign investors plan for a short presence in Romania or if the investors decide, for capitalization (in the case of banks) or commercial reasons, not to legally separate the Romanian entity from the parent company.
Real estate
Pursuant to Romanias joining the EU, as of 1 January 2007, foreign investors interested in real estate acquisitions should note that EU nationals and entities, as well as stateless persons domiciled in any EU state, can acquire land in Romania, under the same conditions as Romanians, provided they reside in Romania. The above terms do not apply to buildings, which may be owned by any individual or legal entity irrespective of nationality or residence status in Romania (such individual or entity will not, however, own the land on which the building is situated). Moreover, Law 312/2005, which regulates the conditions under which EU citizens and entities, stateless persons and other foreigners may acquire land in Romania, provides that EU persons that do not reside in Romania may acquire land here only after the expiration of a 5-year period after Romanias accession to EU. 65
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With respect to agricultural and forest land, there is a 7-year freeze during which no EU national (save for Romanians) or other foreigner may acquire such type of land. However, farmers carrying out independent activities and who are: (i) citizens of member states or stateless persons domiciled in a EU member state, who have established their residence in Romania, or (ii) stateless persons domiciled in Romania may acquire agricultural and forest land under the same conditions as any Romanian citizen commencing with 1 January 2007, without the possibility for such persons to change the specific purpose of such land. For foreign citizens, stateless persons and legal entities from non-EU states, ownership over land may be acquired in accordance with the provisions of international treaties, based on reciprocity terms. Micro enterprises The Fiscal Code establishes the taxation regime for micro enterprises. To qualify for this regime, the following conditions should be met by Romanian legal entities by 31 December of the previous year: over 50% of the total revenues obtained derive from other activities than consulting and management services; they have at least 1 (one) employee but not more than 9 (nine); their annual turnover does not exceed the equivalent to LEI of EUR 100,000; and the share capital of the micro enterprise is owned by natural persons or legal entities, other than the state, or local authorities and public institutions.
Investment incentives
Foreign and domestic investors are offered equal opportunities to invest in Romania. In general, incentives are intended to boost economic development of the country, particularly the acceleration of industrialisation in underprivileged zones, as well as the development of small and medium enterprises (SMEs), oil and gas sectors and micro enterprises. However, a foreign investor should be careful when planning business on the basis of the current incentives granted by Romanian legislation due to the frequent amendment of laws in this field during the recent past. Large investments with significant impact on the economy Law 332/2001 provides incentives for direct investment in the equity of a Romanian company exceeding USD 1 million (or the equivalent in LEI or other convertible currencies) and which contribute to the development and modernization of Romanias infrastructure, creating new employment. Under Law 332/2001, no customs duties are imposed on new goods (e.g. technology and automation equipment, installations, measuring and control devices, software products, etc.). In order to benefit from this incentive, these assets have to meet two requirements: (i) must have been manufactured a maximum one year before entry into Romania, and (ii) must not have been used before. Small and medium enterprises Law 346/2004 provides incentives for private investors who set up or run small and medium enterprises (SME). Domestic legislation defines an SME as a company that (i) has an annual average number of employees below 250 and (ii) whose net annual turnover does not exceed EUR 50 million, or whose value of the total held assets does not exceed EUR 43 million, according to the latest approved financial statements. Banking companies, insurance and reinsurance companies, companies managing investment funds, financial investments companies (i.e. security trading companies) and companies which have foreign trade as sole object of activity, cannot qualify as SMEs. Romanian legislation provides for certain financing incentives to SMEs such as state assistance and loans guaranteed by the state. 66
Micro enterprises are required to pay 2% tax on any income, except certain items of revenue specifically provided (e.g. income from stock variations, income from provisions, etc.). The tax is paid quarterly, by the 25th of the first month following the reporting quarter. Companies complying with the above conditions and taxed under the general profits tax legislation may opt for the 2% tax regime for the year 2007. In such cases, companies should submit a declaration exercising their option by 31 January. Newly set-up companies may indicate their option with respect to the applicable tax regime within the registration application lodged with the Trade Registry. Preferential economic zones According to Government Emergency Ordinance 24/1998 for setting up preferential economic zones in underprivileged areas, as further amended, these zones may be determined by Government Decision for a period of at least three years, but no more than 10 years. Law 507/2004 abolished the provision granting the possibility of extending the 10-year period. Currently, there are 28 underprivileged zones in Romania located mostly in the mining centers of the country. Investments in preferential economic zones benefit from tax exemption for profits on new investments, for the period during which the preferential economic zone status exists and only for legal entities that obtained the permanent certificate of investor in preferential economic zones before 1 July 2003. The incentives granted under this law are subject to the limitations imposed by state aid regulations. Industrial parks Industrial parks, regulated by Government Ordinance 65/2001, as further amended, are considered strictly delimited areas where economic, research and technological development activities are performed. An industrial park may be set up only by a joint venture (asociere \n participa]iune) between the public authorities, legal entities, research and development institutions and/or other interested partners, as applicable. The industrial park must be managed by a Romanian company established in accordance with the Company Law, and whose shareholders can be the abovementioned members of the partnership. The incentives granted to industrial parks have undergone cancellations and/or amendments during the recent past, and more recently through the Fiscal Code.
Romanian Business Digest 2007
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The following incentives currently apply to the establishment and development of an industrial park: exemption from taxes due on conversion of agricultural land to be used for industrial parks; decrease of taxes related to buildings, constructions and land located inside industrial parks; other incentives which may be granted in compliance with the law by the local administration. Free trade zones Law 84/1992, as further amended, regulates the free trade zones regime. Free trade zones are characterized by a specific customs regime: the customs supervision is limited to the borders of such areas. Means of transport, products and other goods are admitted into the free trade zones regardless of their country of origin or destination. However, import of goods subject to prohibition under domestic law or under international agreements to which Romania is a party, is forbidden. Mineral resources Romania is rich in natural resources, especially oil, gas, salt, gold and silver ore and non-ferrous metals. Recent geological and geophysical studies have shown there are many mineral deposits (gold, silver, lead, zinc, copper, iron and manganese) and oil reserves (both on land and offshore) with considerable potential for exploitation. These offer substantial opportunities for foreign investors interested in these sectors. Mining Law 85/2003, as further amended, regulates mining activities in Romania. Its defined scope is to ensure maximum transparency in mining activities and fair competition without discrimination between operators, depending on the property type and the origin of the capital. Subterranean and aboveground mineral resources located within Romanian territory, within the continental shelf and in Romanias Black Sea economic area are part of the states public property. Mining is carried out through a mining license granted by the National Agency for Mineral Resources for a maximum period of 20 years, and the right to extend it for successive five-year periods in exchange for an annual mining royalty and surface tax. Each mining license is established by Government Decision, and its provisions will remain valid throughout the license period, except when possible legal dispositions favorable to the license-holder might come into effect. Foreign operators should set up a permanent subsidiary in Romania within 90 days of obtaining the mining license to be maintained throughout the period of operation. Petroleum Law Petroleum Law 134/1995, regulating all operations involving oil and gas reserves within Romania, was abolished and replaced by Law 238/2004. Oil resources located on Romanian territory are exclusive public property of the Romanian state.
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The Romanian states interests in the mineral oil sector are represented by the National Agency for Mineral Resources. Through its representative authority, the state can grant a Romanian or foreign legal entity the right and the obligation to perform oil operations, based on an oil concession. The concession period may not exceed 30 years, with the possibility to extend said period with up to 15 years. The oil operations can be conducted through exploitation licenses or exploration permits only within some perimeters, as delimited by the NAMR. Titleholders of an oil license are liable to pay a petroleum royalty in accordance with the provisions of Petroleum Law 238/2004. Foreign operators should create a permanent establishment in Romania (i.e. a branch or company) within 90 days of obtaining the oil and gas license to be maintained throughout the period of activity. Unlike Law 134/1995, Law 238/2004 does not grant any incentives to the holders of an oil license.
Tax litigation
When doing business in Romania, investors may not only encounter investment incentives but also the disadvantages of tax payments and tax inspections. With a view to harmonizing legislation in the field, a Fiscal Procedure Code (further to the Fiscal Code) was enacted in December 2003 through Government Ordinance 92/2003 and has been subsequently amended several times. The Fiscal Procedure Code regulates, among other matters, the procedures for appealing against the action of the fiscal authorities. Such contestations may refer to the reduction and/or cancellation depending on the case not only of taxes, dues, customs debts, contributions to special funds, late payment increases, penalties, or other amounts recorded and imposed, but of any other actions of the fiscal authorities. The appeal must be filed with the fiscal authority issuing the respective action within 30 days from its communication to the petitioner. The competent fiscal authority rules over the appeal by issuing a decision. The decision has to be communicated to the petitioner through the means specified by the Fiscal Procedure Code. The petitioner may appeal such decision in the relevant court of law while observing all legal terms and formalities. After this, the judgment can be appealed at the superior law court. Another important aspect related to such a dispute is that beginning an appeal does not suspend the execution of the contested action issued by the fiscal authorities. Therefore, a separate appeal to suspend the execution of the action should be filed with the competent fiscal authority, which may suspend the execution on condition that the petitioner provides valid reasons.
PI Partners Strada Dr. N. Staicovici Nr. 75, Forum 2000, Etaj 5 Sector 5, 050557, Bucure[ti Tel.: +40 21 402 4100 Fax: +40 21 410 6987 Contact: Eirinikos Platis, Senior Manager E-mail: pipartners.ro@pipartners.eu 67
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global trends and evolutions, and new topics may be pushed on the Romanian market by the big international players that dominate the local scenery as well. As stated before, the application software products represent the main part of the Romanian software market. On one hand, Microsoft with its Office package cover more than 10% of the market, while business and industry specific applications stand for the great majority of the segment. For application software products, the market has been more open for Romanian software houses that have got a fairly good position on the ERP solutions market, mostly for small and medium companies. For the next two-three years, PAC sees a high point in the development of ASWP, with growth rates of around 25% - the business application segment will be the main contributor to this development. Further on, the expansion will calm down, but this segment will remain significantly important within total software and IT services, namely at around 25% by 2010. Together with its maturation, the ASWP market will see a deeper consolidation, and some local players may be forced to merge in order to remain on the market. PAC forecasts the weight of IT services (ITS) to go down to less than 50% of the total software and IT services market in Romania in 2007, with the great majority of project services as contributor. As the software segment is expected to record a slightly higher growth rate than the IT services one in 2007, the latter category will gain more ground only by 2008-2010, when large projects are anticipated in the public sector and, at the same time, the prices for services will increase by at least 10%. Considering both the share and the growth rates, project services has been the main driver of the Romanian software and IT services market, and this role will be maintained in the medium term as well. The scope of services mainly concerns implementation/ development of basic IT systems (e.g., ERP, custom development) and support (hardware maintenance, installations), while outsourcing is very small. Reflecting the structure of the ITS market, the major system integrators that provide both project services and hardware maintenance were the leading players, mainly subsidiaries of international groups (IBM, HP, S&T, Siemens). As the ITS market grows and gets more mature, its structure will change; together with the progress of outsourcing as well as of project services, the weight of hardware maintenance will decline. However, this topic plays an important role, and many large projects are infrastructure-oriented. At this time, the Romanian IT services market goes through the stage experienced about four or five years ago by other CEE countries such as Hungary or the Czech Republic. A general feature of the Romanian IT services market is the broad extension of sub-contracting - most leading international players use this method in order to remain profitable and compete against the local suppliers. Sometimes, even parts of the outsourcing contracts were sub-contracted to local partners with a better geographical coverage and lower costs. Step by step, the Romanian outsourcing market has shaped up, but the growth pace is, however, under expectations, as the customers are not considering this type of services yet; in many cases, even the signed contracts set going late. Taking into account the rather small volume of the market, a few large projects that are signed or canceled at a certain 217
Outsourcing 4%
It is worth to mention that the large IT investments carried out lately have included a great part of infrastructure that has boosted the system infrastructure software - operating systems and system management software, mainly. Application software products stood for half of the software market, while SIS and tools are expected to secure 31% and 18%, respectively. Most of the software vendors on the market have performed very well, some of them having growth rates up to 50%, especially those active in the business application segment, but not only. Nevertheless, a few niche players enjoyed the market dynamics and increased their software business significantly; however, in these cases, related revenues are not particularly big. The structure of the software market, the demand for such products and the drivers show the development level of the overall IT sector in Romania, which is still not very high. The big share of system infrastructure software, of which operating systems are the great majority, is such a sign of immaturity - as the Romanian market is still very much hardware-oriented, infrastructure software is needed. However, even in this area, the demand for sophisticated products (e.g., storage, network and system management, performance, change management) has only occurred. In the future, the accelerated growth in this sub-segment will drive the SIS market further, compensating for the slowdown in the operating systems area. Tools, the second segment of technology, is going to accelerate its development - mainly in the mid term - as demand evolves towards information access & decision tools, infrastructure & integration platforms. Still, the most consistent growth will come from databases, even more as several large projects, including basic infrastructure and implementations of complex applications, are already started or in the preparation phase. On the other hand, the two segments mentioned above are very much influenced by the
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Utilities 11%
Retail & Wholesale Services 27% 5% * Core SITS = Project Services, Outsourcing, Application SW Products
Risks
In manufacturing, the recent privatizations and foreign investments have increased the demand for professional IT solutions, applications and related services (integration, consulting, training and even outsourcing) - usually, the existing IT systems are upgraded, and standard solutions for the group or for a certain industry are adopted. Further on, numerous roll-outs are expected as a result of the new manufacturers on the Romanian market, while the Romanian subsidiaries of international IT suppliers are favoured to some extent as the large multinational prefer to work with the same suppliers if possible. The banking sector represents one of the main customers for software and IT services, their activity being very IT intensive; still, many Romanian banks do not have an integrated system for core banking, while increased competition and expansion of the retail segment (as volume and range of services) are forcing banks into implementing professional systems in order to manage their relations with the customers. Still, the customized development and the in-house implementations/operation of their IT systems are widely spread in banking; thus, their IT departments have numerous, well-trained IT specialists. In certain cases, banks ask for the support of external teams from IT services suppliers, and experienced foreign consultants are often involved. The Romanian telecom market is completely liberalized; however, not many alternative operators managed to enter
Romanian Business Digest 2007
Pierre Audoin Consultants (PAC) Strada Banul Antonache Nr. 63, Apt.10, Sector 1, 011663, Bucuresti Tel.: +40 21 230 1265 Fax: +40 21 230 1285 www.pac-online.com www.sitsi.com Contact: Eugen Schwab-Chesaru, Partner & Managing Director E-mail: e.schwab@pac-online.com Tel.: +40 21 230 0432 220
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subject to concession or leased for construction purposes through public tender, under the conditions set forth by the law and the urbanism documentation. Therefore, due to the time-consuming procedures, lack of coherence of practice related to such public tender and existence of possible competitors for acquiring such valuable real estate properties, the investors are seeking for low-cost alternatives on the market. Buying agricultural land still remains one of the most favourite approaches for the current investors who want to develop residential, retail or logistics centers with much lower costs of acquisition (e.g., purchase price, authentication costs). Still, with respect to agricultural land, the existent products on the market are still in the hands of the peasants who acquired them following reconstitution or constitution based on the Land Law, process that began in 1991 and still continues (!). More specifically, after the political changes occurred in 1989 individuals were allowed to claim back their land that was confiscated by the State during the communist regime. Under the Land Law the restitution claims could have been filed until a cut-off date that expired on 31 November 2005. In the absence of an international pressure and local expertise, in the first years after 1989 the legal measures implemented in respect of returning the properties confiscated by the communist regime to their owners were not coherent and created certain confusions in practice, leading to an inconsistent and sometimes, not legal or, at least at the border line to legality practice. In numerous cases the process of reconstitution of title was wrongly conducted and such mistakes could eventually impact on the title to such land. Although the process of reconstitution of title commenced in 1991, in some regions this process is still pending. In some particular cases the land was granted by way of constitution of title to individuals that were not the initial owners or the heirs of such owners. Whilst the land acquired by way of reconstitution of title can be freely transferred, the land acquired by way of constitution is subject to a 10-year interdiction to sell. Given the aforementioned delays, in certain cases the original owners obtained only ownership certificates (in Romanian adeverin]e de proprietate) and minutes for granting possession (in Romanian proces-verbal de punere \n posesie) and sold the land in the absence of an ownership title issued under the Land Law procedures. The purchasers who acquired the land under such circumstances became registered owners, since, at that time, the practice of the Land Book was to consider the ownership certificates together with the minutes for granting possession as valid substitutes of the ownership titles. This situation is very frequent in the case of the land located in the outskirts of Bucharest and is an example of how the mistakes occurred in the past could significantly impact on the actual and future status of the real estate properties. Hence, in a significant number of case law the Supreme Court of Justice considered that the ownership certificates together with the minutes for granting possession do not constitute a valid title, being merely preliminary documents issued in the initial stages of the restitution proceedings. In line with this approach, the Supreme Court of Justice considered that only the ownership titles issued upon the specific proceedings and in the specific form set out by the Land Law are valid titles and thus the persons who obtained 114 only ownership certificates and minutes for granting possession are not yet the holders of a valid ownership title. Therefore, a significant risk could arise with respect to the title of the purchaser of a land that was sold in the absence of an ownership title validly issued under the Land Law. The risk would be that any interested person, including persons claiming their capacity as rightful owners of the land sold, might challenge in court such transfers. As opposed to other real estate laws, whereby, as mentioned below, the absolute nullity of the ownership transfers is subject to a specific limitation period, the requests regarding the ascertaining of the absolute nullity brought under the Land Law are not timebarred. In 2005 the Romanian legislator tried to correct these mistakes but even the 2005 legislative measures left open various issues in connection with the restitution process. Starting August 2005 the sale of agricultural land is not subject to the preemption right anymore. Until August 2005 the law provided for a preemption right in favour of the coowners, the neighbors and the land lessees. Moreover, the 2005 legislative reform included specific regulations in connection with the acquisition of agricultural land by foreigners. As a general rule, foreign individuals and entities are not allowed to acquire directly agricultural land for a period of 7 years following Romanias accession to the EU. This period will expire in 2014. Nevertheless, investors interested in acquiring agricultural land could establish Romanian special purposes vehicles through which purchase of agricultural land to be allowed. As an exception to the aforementioned rule, foreign individuals (and not foreign entities) are allowed to acquire agricultural land directly, even from the date of Romanias accession to the EU, but only if such individuals: (i) are farmers registered and recognized as such in a EU Member State and (ii) establish their residence in Romania. To our knowledge these provisions are not yet tested in practice and it is not possible to figure out their interpretation by the Romanian authorities. Although the Land Law provides for a mechanism designated to limit the overlapping between the different parcels restituted to the original owners and, in this respect, sets out the obligation of the local authorities to determine precisely the location of each parcel restituted and include such parcels in plotting plans, in practice, in certain cases, the local authorities issued the ownership titles in the absence of such plotting plans. Such lack of procedure created confusion and left open the possibility to relocate the restituted land. We are aware of certain areas, which we may ironically call as black hole of Romania, where the cadastral overlapping is the most common issue faced by the investors. Each time an investor deals with a real property composed of land restituted under the Land Law, and more specifically, whenever a property is the result of an amalgamation of different parcels, it is advisable to conduct a cadastral survey focused on (a) determination and verification of the precise location of the parcels; (b) verification of the vicinities of each parcel and the correspondence between the de facto location and the location mentioned in the title documents; (c) the ascertaining of the sequential character of the amalgamated parcels and (d) the ascertaining that no overlapping exists between the real estate property analysed and other properties. In most cases, due to the lack of financial resources, the original owners did not register their title to the relevant Land
Romanian Business Digest 2007
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Registry; therefore, before buying such plots of land the investors have to perform cadastral surveys that allow such registration in the relevant Land Registry. In practice, the investors are concluding pre-sale-purchase agreements with such owners that are not registered in the Land Registry and do, by themselves, cadastral works, and, only after the title of the original owner is registered in the Land Registry, such investor may acquire such land. Due to the fact that the investors buying option, as well as the interdiction to sell is not registered, for opposability effects, in the Land Registry for a certain period of time, the investors are taking certain risks on board. Before development can commence it is necessary to apply for a Certificate of Urbanism. This is a certificate which lists the owner of the land as registered to the cadastral office, lists the economic characteristics of the site (possible functions), the technical characteristics of the site (the development parameters of the site, approved by the planning permissions like PUG, PUZ, PUD) and lists the approvals required from the various statutory bodies (electricity, gas, water, traffic etc) which the developer needs in order to get the Permit requested in the Certificate of Urbanism. Usually, in practice, in the agricultural area, new PUZ and PUG are required to be implemented by the local authorities in order to allow entry of significant investments. Also, the removal of the land from agricultural to construction purposes is much easier with a new relevant PUZ. In practice, such new PUG should provide a positive lead for development and help create certainty, both for developers and the local community. By identifying sites for development, an authority can demonstrate in a positive way how the vision and strategy in the PUG will be implemented in practical terms. However, a recent report made by foreign consultants identified a number of contradictions, conflicts and general vagueness in Romanias planning legislation. The Romanian government is committed to new planning legislation, but the time frame is unknown. However, both PUZ and PUD require the full-cooperation of the authorities as well as their awareness that their full involvement is essential for the future of this country. Also, certain mentalities and practices currently existent at the level of some local authorities should be subject to significant changes, so as to allow correctness, transparency and sustained and consistent implementation and development of the investments in the real estate market. An important commitment assumed by Romania is to considerably reduce the number of authorities fighting corruption in order to avoid overstepping of responsibilities. Internal and external reports show that anti-corruption activity is affected by overstepping and fragmentation. The coordination is even more difficult as it involves investigation activity and confidential data transfer. It is intended to clearly redefine the attributions of the relevant authorities involved in anti-corruption fight. Romania committed to ensure a swift and transparent procedure of investigating and prosecuting corruption acts. In addition to that, the level of responsibility, seconded by relevant sanctions, of the local authorities and public servants in the planning sector should be increased.
Salans Strada Gen. C. Budi[teanu 28-C, Sector 1, 010775, Bucure[ti Tel.: +40 21 312 4950 Fax: +40 21 312 4951 www.salans.com Contact: Obie L. Moore, Managing Partner E-mail: omoore@salans.com Perry V. Zizzi, Partner E-mail: pzizzi@salans.com Laura Purtan, Associate E-mail: lpurtan@salans.com
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The first half of 2007 has seen one of the most dynamic evolutions in the ever recorded history of the local two stock markets: BVB and Rasdaq. All indicators have seen impressive appreciations due mainly to the increase in the volumes and turnover. Consolidation of the listed companies materialized also through spectacular increases of the stock prices and hence of the market capitalization. The daily value of transaction on BVB regulated market (USD mn)
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The market composite index, BET-C, gained more than 30% at the end of the first six months. The index, which includes all the listed companies less the five investment funds coming from the privatization process (SIFs), has predicted its evolution since last year, when the stock prices boosted towards the end of the year. But this time, the constant rise of the indices was not affected by the regular seasonality noted in the previous years. BVB Indices (January 03-June 30, 2007)
% 120.00 100.00 80.00 60.00 40.00 20.00 -20.00 -40.00 BET BETC BETFI ROTX RASDAQ-C
Reasons for this positive evolution of the most stock prices, some of which were really stunning, can be found in THE major event of Romanias history: EU accession. 150
Agriculture, hunting and forestry Mining and quarring Hotels & Restaurants Electricity, gas and water supply Construction Manufacturing Financial Transport, storage and communication Wholesale and retail trade; repair of motor vehicles, motorcycles and personal and household goods
In the same time, the market capitalization rose steadily towards the EUR 30 bn, double than the level reached in 2005. The EUR 30 bn level was expected to be reached during the month of July, as the market tendency showed during the first months of the year and the 7% appreciation of the exchange rate. BVB regulated market concentration - Capitalization Company Symbol (%) of capitalization Petrom SNP 33.03 BRD BRD 20.69 Alro ALR 7.78 Banca Transilvania TLV 3.95 Oltchim OLT 3.75 Transelectrica TEL 3.61 SIF Transilvania SIF3 3.00 SIF Oltenia SIF5 2.76 Rompetrol RRC 2.32 SIF Banat Cri[ana SIF1 2.31 Total 83.20 A record number, of 13,351 trades, was also recorded in July. This represented a historical record for both Rasdaq and BVB markets, and is a confirmation of the performances of the in-house developed trading platform. The same platform is to be used for the derivative market, that will be launched soon. BVB received recently CNVMs official approval for the setting up of the Compensation House, created on the structure of the former depository.
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In Romania, the integration did not bring immediate increases in stock prices, although the turnover boosted compared to the end of the year. BET trend during these months is more than relevant. The index, which includes 7 companies from industrial field, 2 major banks and a real-estate developer, began 2007 with a little over 8,000 points. It needed 25 points to reach the 9,000 points ceiling in February. But it had to pass almost 4 months to strike the psychological ceiling of 10,000 points. This hystorical record hit at the end of July. Celebrating in September its 10th anniversary, BET index needed 8 years to grow from the basis level of 1,000 points in 1997 to 5,000 points in January 2005.
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Foreign investors also increased their presence during 2007 and their number exceeded during the month of June, for the first time in BVBs history, the number of the local investors. In June, the total turnover reached EUR 425 million, the biggest value recorded since BVBs set up in 1995. Due to a Cadbury deal transaction of EUR 220 million, by which the British manufacturer bought the local confectionery manufacturer KANDIA-Excelent from a non-resident investor, the level of the transactions made by the non-residents reached 60%. Although on an increasing trend, this figure does not go beyond 40%. The non-residents net investment hit almost 300 million in the H1, representing a 75% growth compared to the similar period of the last year. The total number of the accounts owned by residents is still higher than the ones owned by non-residents, but individual account value is much lower, showing a strong retail element. This is the moment of the market featured by entry of the foreign investment funds. The increased market liquidity in 151
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The likelihood of transfer of more than 100 companies, from the Rasdaq market on BVB, animated also the transactions on this market. Its composite index, Rasdaq-C, increased with almost 115% from the beginning of the year. Many of the companies traded on Rasdaq offered this year yields of more than 200%. These spectacular yields are due to valuable assets that they own or the industry fields they are active in. For example, in the absence of new issuers on the main BVB market, the construction segment, very well represented on the Rasdaq market, became increasingly attractive. The prospects of this sector are more than exciting, as the EU funds for local municipalities are expected to be released this year.
Bucharest Stock Exchange Bulevardul Carol I, Nr. 34-36, IBC Modern, Etaj 14, Sector 2, Bucure[ti Tel.: +40 21 307 9500 Fax: +40 21 307 9519 E-mail: bvb@bvb.ro www.bvb.ro Contact: George Vulc`nescu, CEO Councelor E-mail: george.vulcanescu@bvb.ro 152
Romanian Business Digest 2007
Statistical Indicators
by National Institute of Statistics
Evolution of the main macroeconomic indicators during 2000-2006 and the first quarter of 2007
- Percentage against the previous year -
M.U.
2000
Gross domestic RON mn 80,377.3 product (GDP) Growth of GDP - in % +2.1 real terms Growth of Gross Value Added (GVA) by resources Industry % +5.9 Agriculture, hunting, % -18.1 forestry, fishery and pisciculture Construction sector % +6.3 Services % % +5.5 +1.5 Final consumption out of which: Households actual individual final consumption Governments actual collective final consumption Gross fixed capital formation (GFCF) - Share of GFCF in GDP Exports Imports Net exports FOB/FOB Inflation rate December previous year =100 Monthly average Unemployment rate end of period Average number of employees
+0.2
+6.8
+4.8
+8.3
+12.8
+9.1
+12.6
+11.3
% % % % % EUR mn
% % % thou. pers. %
RON average
*)Semi-final data. **) Provisional data. 1) compared with Q 1st /2006 2) may 2007 3) Number of employees at 31.05.2007 Note: Monthly data regarding earning and number of employees are obtained from a selective statistical investigation. Since January 2006 the sample comprises 18700 economic and social units. Budgetary sector units (general government, education, health and social assistance) re exhaustively comprised into the survey. For economic sector, units of four employees and over were included in the survey, covering 71.9% of total employees in this sector. The number of employyes of the units excluded from survey (having 0-3 employees) represents about 8.3% of total employees per economic sectors.
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