Romania’s Business Environment
GLOBAL MARKET BRIEFINGS
Romania’s Business Environment Consultant editor: Adam Jolly Editor: Alica Henson Foreword from: Romanian Ambassador to the United Kingdom Dr. Ion Jinga
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This edition first published 2008 by GMB Publishing Ltd. © GMB Publishing Ltd. and contributors ISBN-13 978-1-84673-096-2 E-ISBN-13 978-84673-097-9 British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library Library of Congress Cataloguing-in Publication Data Typeset by David Lewis XML Associates Ltd.
Contents Foreword by Dr. Ion Jinga, Ambassador of Romania to the United Kingdom About the Contributors Introduction Adam Jolly, Consultant Editor
PART ONE: Background to the Market 1.1 1.2 1.3
1.4
Political Background Liz David-Barrett Economic Background Liz David-Barrett Macroeconomic Outlook Ionut Dumitru, PhD, Head of Research, Raiffeisen Bank Romania Business Environment Liz David-Barrett
PART TWO: Legal and Regulatory Framework 2.1
2.2
2.3
2.4
2.5
2.6
2.7
Administrative Barriers to Entry Roxana Ionescu, Associate, and Alexandru Lupu, Associate, Nestor Nestor Diculescu Kingston Petersen Business Structures Carmen Peli, Partner, and Georgeta Harapcea, Associate, Nestor Nestor Diculescu Kingston Petersen Corporate Governance Cristina Filip, Partner, and Georgeta Dinu, Associate, Nestor Nestor Diculescu Kingston Petersen Agency and Distribution Carmen Peli, Partner, and Georgeta Dinu, Associate, Nestor Nestor Diculescu Kingston Petersen Employment Law Luminita Dima, Associate, Nestor Nestor Diculescu Kingston Petersen Foreign Investment Protection Carmen Peli, Partner, and Georgeta Dinu, Associate, Nestor Nestor Diculescu Kingston Petersen Insolvency and Bankruptcy Madalin Niculeasa, Senior Associate, Nestor Nestor Diculescu Kingston Petersen
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Contents
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2.9
2.10
2.11
2.12
2.13
2.14
2.15
2.16
2.17
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Dispute Resolution Madalin Niculeasa, Senior Associate, Nestor Nestor Diculescu Kingston Petersen Financial Services Law Alina Radu, Partner, Corina Dumitru, Associate, Diana Precup, Associate, Nestor Nestor Diculescu Kingston Petersen Money Laundering Law Andreea Elefterescu, Associate, Nestor Nestor Diculescu Kingston Petersen Competition Law Carmen Peli, Partner, and Georgeta Dinu, Associate, Nestor Nestor Diculescu Kingston Petersen Import and Export Licensing Raluca Nechimis, Senior Associate, Nestor Nestor Diculescu Kingston Petersen Privatization Law Carmen Peli, Partner, and Georgeta Dinu, Associate, Nestor Nestor Diculescu Kingston Petersen Property and Real Estate Law Francisc Peli, Partner, Nestor Nestor Diculescu Kingston Petersen Intellectual Property Law Delia Belciu, Associate, Nestor Nestor Diculescu Kingston Petersen Insurance Law Costin Teodorovici, Associate, Nestor Nestor Diculescu Kingston Petersen Environmental Law Roxana Ionescu, Associate, Nestor Nestor Diculescu Kingston Petersen Natural Resources Law Adina Chilim, Partner, Nestor Nestor Diculescu Kingston Petersen
PART THREE: Finance Issues 3.1 3.2 3.3 3.4
Direct Taxation of Corporations Deloitte, Romania Indirect Corporation Taxes and Foreign Exchange Issues Deloitte, Romania Income Tax and Social Contributions Deloitte, Romania Accounting and Audit Deloitte, Romania
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Banking Sector Ionut Dumitru, PhD, Head of Research, Raiffeisen Bank Romania
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Appendix: Contributors’ Contact Details
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Index
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Foreword Dear Reader, I am delighted to provide this foreword to the 2008 edition of “Romania’s Business Environment,” which I hope you will find useful. Romania continues to build upon its achievements, which culminated in European Union (EU) accession in January 2007. The Romanian economy has been growing at an impressive rate of 6 per cent (on average) for the last five years. Inflation dropped from 40 per cent in 2000, to 6.5 per cent by 2007, with a target-inflation of 5.5 per cent for 2008. The World Bank report declared Romania “the most reforming country in the business field” in 2006. The Romanian currency had the highest appreciation rate against the euro compared to all other European currencies. The Romanian government has also taken steps to improve the business environment, including changes to the tax system. However, this is a work in progress, and the government is currently working on preparing a new investment law as well. But the challenges Romania faces did not end upon EU accession, which will only reinforce the country’s existing positive trends. Absorbing the significant allocations of European funds, delivering real improvements in infrastructure, and enhancing public administration are all long-term issues still being faced. For companies based in the EU member states, Romania is the place to be now. Small and medium-size enterprises, shy of venturing outside of the EU, can now easily and safely expand in the country. With its market of 22 million people, Romania offers easy access to neighbouring markets in South-Eastern Europe, as well as the larger Black Sea area. For non-EU countries, Romania is an attractive entry point into the European market. At the same time, the volume and attractiveness of Romanian exports has recorded a steady growth, and their destinations cover the globe. Romanian products, such as cars, trucks, airplanes, agricultural tractors, rolling stock, power generating equipment, furniture, textile and garments along with information and communication technology related products and services, modern parts for aviation and automotive industry, organic farming, wine, consulting, engineering and logistics services are increasingly sought after by international markets. As such, I consider this new book − “Romania’s Business Environment” − as being very well timed. Romania is a complex and sophisticated country, and the prospect of entering such a market may sometimes appear daunting. This book is a welcome guide to getting started with that process, giving prospective investors a detailed introduction to the structures and processes that exist in the country, and indicating some of the best practices in
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establishing a business presence in Romania. I would also like to suggest that you consider visiting Romania for yourself − a mere three hour flight from London. The Embassy of Romania in London acts as a facilitator for businesses interested in investing in Romania, and supports the promotion of Romanian exports, often in partnership with the British government and British and Romanian business organisations. We look forward to supporting British firms ready to expand their business to a new, attractive and businessfriendly environment that makes Romania a key location in which to conduct your business. Dr. Ion Jinga Ambassador of Romania to the United Kingdom
About the Contributors Deloitte Romania is one of the leading professional services organizations in the country, delivering world-class assurance and advisory, tax and legal, consulting and financial advisory services. With more than 350 people, the practice serves many of the country’s largest companies, public institutions, and successful, fast-growing companies. The Romanian firm is able to mobilize specialist support from regional technical centres, as well as from Deloitte Touche Tohmatsu member firms internationally. Ahmed Hassan is a Partner in the Audit & Advisory Department of Deloitte Romania. He is a qualified Chartered Accountant and a Member of the Institute of Chartered Accountants in England and Wales. Ahmed has valuable experience in providing audit and assurance services to both private and public organizations in various parts of Europe and Asia Pacific including Romania. He has extensive audit experience and related technical knowledge with multinationals as well as local companies currently adopting Romanian audit requirements, operating in a broad range of sectors with a focus on manufacturing, media, fast-moving consumer goods, and financial institutions. Rodica Segarceanu has been a Partner in the Tax & Legal Department of Deloitte Romania since 1998. She is a Member of the Association of Chartered Certified Accountants and has significant experience assisting multinational companies in developing tax strategies for operations in Romania. Rodica provides extensive International Assignment Services for expatriates and extensive advice to various local and foreign clients, on a wide range of tax matters, cross border transactions, inward and outward processing, customs clearance and VAT, in accordance with the current Romanian legislation. She has been involved in managing the preparation of the legal framework in indirect tax reform, being the leader of tax team in EU Accession projects. Liz David-Barrett is a freelance consultant who has lived, worked and travelled in Central and South-Eastern Europe for more than 10 years. She has written for a number of publications, including The Economist, Financial Times, Oxford Analytica, and Jane’s. Nestor Nestor Diculescu Kingston Petersen (NNDKP) is a leading Romanian law firm with offices in Bucharest, Timisoara and Brasov, offering
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a full range of legal services to local and international businesses with interests in Romania. The firm’s practice areas cover Corporate Law, Privatization, Mergers and Acquisitions, Competition, Banking and Finance, Securities and Capital Markets, Intellectual Property, Dispute Resolution, Real Estate, Public Procurement/PPP, Taxation, Environmental Law, Employment Law, Immigration, involving industries such as Energy, Infrastructure, Telecommunications and Media, Pharmaceuticals and Health Care, Consumer Products and Insurance. NNDKP is a founding member of the South East Europe Legal Group (SEE Legal), the sole law firm member for Romania of Lex Mundi, World Services Group (WSG) and Ius Laboris. Delia Belciu, Associate, is a member of the firm’s Intellectual Property Practice Group, where she advises clients in connection with intellectual property law matters. Ms Belciu graduated in 2005 the University of Bucharest Law Faculty and the Paris 1, Pantheon Sorbonne – Maıˆtrise European and International Law at Colle`ge Juridique Franco-Roumain d’Etudes Europe´ennes. In 2006, she graduated the Centre for International Industrial Property Studies in Strasbourg obtaining a Master’s Degree in Industrial Property, Contracts, Competition and an Eiffel Excellence Scholarship. She is fluent in English and French. Ms Belciu joined Nestor Nestor Diculescu Kingston Petersen in 2006 and is a member of the Bucharest Bar. Adina Chilim-Dumitriu, Partner, Head of Commercial Contracts Practice Group, focuses on project finance, mergers and acquisitions and telecommunications. She has assisted borrowers and lenders in connection with complex financing transactions in telecommunications and has developed particular expertise in the gas distribution field. After graduating from the University of Bucharest Law Faculty in 1997, she joined Nestor Nestor Diculescu Kingston Petersen. Luminita Dima, Associate, Head of Labour Practice Group, advises clients in connection with a wide variety of environmental projects in Romania. Ms Dima graduated from the University of Bucharest Law Faculty in 1997. She is also a Law Professor at the University of Bucharest. She is fluent in English and French. Ms Dima joined Nestor Nestor Diculescu Kingston Petersen in 2007 and is a member of the Bucharest Bar. Corina Dumitru, Associate, is a member of the firm’s Banking, Finance and Capital Markets Department, where she advises clients in connection with project finance and banking law matters. Mrs. Dumitru graduated from the University of Bucharest Law Faculty in 2002. In 2006, she also graduated the Academy of Economic Studies Bucharest, Finance, Banking, Insurance and Stock Exchanges Faculty. She is fluent in English, French
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and Spanish. Mrs. Dumitru joined Nestor Nestor Diculescu Kingston Petersen in 2007 and is a member of the Bucharest Bar. Andreea Elefterescu, Associate, is a member of the firm’s Banking, Finance and Capital Markets Department, where she advises clients in connection with project finance and banking law matters. Ms Elefterescu graduated in 2005 the University of Bucharest Law Faculty and the Paris 1, Pantheon Sorbonne obtaining a Master’s Degree in European and French law. In 2006, she also graduated the Robert Schuman University in Strasbourg, France obtaining a Master’s Degree in Banking and Finance law. She is fluent in English and French. Ms Elefterescu joined Nestor Nestor Diculescu Kingston Petersen in 2006 and is a member of the Bucharest Bar. Cristina Filip, Partner, Co-head of the M&A and Competition Practice Group, advises clients in connection with electricity and gas distribution and power generation, mergers and acquisitions and cross-border finance transactions. She assists investors and the government in connection with transactions in the fields of energy and natural resource development and has played an important role in the drafting of privatization legislation. After graduating from the University of Bucharest Law Faculty in 1998, she joined Nestor Nestor Diculescu Kingston Petersen. Georgeta Harapcea, Associate, is a member of the firm’s M&A and Competition Practice Group, where she advises clients in connection with competition law and commercial Law. Mrs. Harapcea graduated from the University of Bucharest Law Faculty and from College Juridique FrancoRoumain d’Etudes Europeennes, University of Bucharest - Paris I Pantheon Sorbonne University in 2004. She also holds an LL.M in International and European Business Law - Paris I Pantheon Sorbonne University and has a Postgraduate Diploma in EC Competition Law, King’s College, University of London. Roxana Ionescu, Associate, Head of Environment Practice Group, advises clients in connection with a wide variety of environmental projects, labour and energy law, data protection law, banking law, commercial and corporate law, civil law. Ms Ionescu graduated from the University of Bucharest Law Faculty in 2004. She has also graduated the Bucharest University Center for Euro-Atlantic Studies – European Integration course in 2004. She is fluent in English and French. Ms Ionescu joined Nestor Nestor Diculescu Kingston Petersen in 2005 and is a member of the Bucharest Bar. Alexandru Lupu, Associate, is a member of the firm’s Immigration Practice Group, where he advises clients in connection with a wide variety of corporate immigration services, citizenship law, security interest in personal property, labour law and real estate issues. Mr. Lupu graduated from
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Nicolae Titulescu University-Law Faculty in 2000. He is fluent in English. Mr. Lupu joined Nestor Nestor Diculescu Kingston Petersen in 2000 and is a member of the Bucharest Bar. Raluca Nechimis, Senior Associate, is a member of the firm’s Commercial Contracts Practice Group where she advises clients in connection with the negotiation, drafting and conclusion of commercial agreements both at local and international level, public procurement contracts, corporate matters. Ms Nechimis graduated from the University of Bucharest Law Faculty in 2000. In 2002, she earned an LLM in International Business Law from the Central European University. She joined Nestor Nestor Diculescu Kingston Petersen in 2002. Madalin Niculeasa, Senior Associate, is a member of the firm’s Litigation Department, where he represents clients in the areas of civil and commercial law, administrative and fiscal law. Mr. Niculeasa graduated from Titu Maiorescu Law Faculty in 2001 and from Administrative Sciences Faculty in 2003. He joined Nestor Nestor Diculescu Kingston Petersen in 2007. He is a frequent writer on administrative, public acquisitions and liberal professions issues. Carmen Peli, Partner, Co-head of the M&A and Competition Practice Group, advises clients in connection with mergers and acquisitions, crossborder commercial transactions and competition law. Mrs. Peli regularly counsels clients in connection with competition law matters including cartel investigations and Competition Council clearance. After graduating from the University of Bucharest Law Faculty in 1998, she received a University Degree in French and European Law from the French-Romanian Law College for European Studies, Pantheon Sorbonne University. Prior to joining Nestor Nestor Diculescu Kingston Petersen, she was a legal advisor for the Ministry of Public Finance. Francisc Peli, Partner, Head of Real Estate Department, advises clients in connection with real estate, mergers and acquisitions, and real property investment transactions. He assists developers, lenders, private equity funds and other investors in connection with the acquisition and development of large-scale residential and commercial real estate projects, municipal services and public-private partnership transactions. Mr. Peli graduated from the University of Bucharest Law Faculty in 1998 and worked with a major international law firm prior to joining Nestor Nestor Diculescu Kingston Petersen. Diana Precup, Associate, is a member of the firm’s Banking, Finance and Capital Markets Department, where she advises clients in connection with corporate, M&A, capital markets, privatization and arbitration matters. Ms Precup graduated from the University of Bucharest Law Faculty and the
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Paris 1 — Sorbonne University where she obtained a degree in European Union and French Law at the French-Romanian Law College, in 2004. In 2005, she also graduated the Paris 1 — Sorbonne University in Paris – Eiffel Excellence Scholarship where she obtained a Master’s Degree in International Economic Law. She is fluent in English and French. Ms Precup joined Nestor Nestor Diculescu Kingston Petersen in 2005 and is a member of the Bucharest Bar. Alina Radu, Partner, Deputy Head of Banking, Finance and Capital Markets Department, advises clients in connection with banking issues, project finance, mergers and acquisitions and real estate financing. She advises borrowers and lenders in a wide range of complex financing transactions. After graduating from the University of Bucharest Law Faculty in 1997, she joined Nestor Nestor Diculescu Kingston Petersen. Costin Teodorovici, Associate, is a member of the firm’s Banking, Finance and Capital Markets Department, where he advises clients in connection with project finance, banking law matters and commercial law. Mr. Teodorovici graduated from the University of Bucharest Law Faculty in 2004. He is fluent in English and French. Mr. Teodorovici joined Nestor Nestor Diculescu Kingston Petersen in 2004, and is a member of the Bucharest Bar. Raiffeisen Bank S.A. is the third largest universal bank on the Romanian market. The Bank provides the complete range of high quality products and services to private individuals, small and medium sized enterprises (SMEs) and large companies, via multiple distribution channels: banking outlets (almost 400 throughout the country), ATM and EPOS networks, phonebanking (Raiffeisen Direct), mobile-banking (myBanking) and internet banking (Raiffeisen Online). The Bank is a member of the Austrian RZB Group and subsidiary of Raiffeisen International Bank-Holding AG (Raiffeisen International). Raiffeisen Bank provides services on two major areas – retail and corporate – and also develops treasury-related products and services. It services over 2.2 million retail clients (out of which over 130,000 are SMEs) and almost 5,000 large and medium companies. Ionut Dumitru is the head of Research department (chief-economist) in Raiffeisen Bank Romania since 2005. He graduated the Academy of Economic Studies from Bucharest and has a PhD in Finance and a Master of Science in Finance and Banking in Doctoral School of Finance and Banking, European Centre of Excellence (DOFIN, www.dofin.ase.ro). At the same time, he is lecturer in the Academy of Economic Studies from Bucharest in banking and monetary policy related subjects.
Introduction: Romania’s business environment In Romania, tax planning is now as simple as anywhere in Europe. Since January 2005, a flat rate of 16 per cent is paid not just on incomes, but on profits as well. No other transition economy has attempted to introduce such a comprehensively low rate. Part of the calculation behind this radical move was that by easing collection and widening the tax base, the government could start to put its revenues on a sounder footing. But just as importantly, it signalled a determination to free up the economy and give enterprises an incentive to grow. In the last decade, a series of similarly minded legal and financial reforms have started to click into place. Restrictions on the right of foreign investors to buy land have been lifted. A labour code based on working practices in the European Union (EU) has been introduced. Foreign exchange controls have been almost completely abolished. Bankruptcy has become easier to instigate. Capital markets now follow EU norms. The prize for all this effort was membership of the EU in January 2007, a year earlier than originally expected. Unlike some of the first wave of members from the new Europe, strict criteria are going to remain in place to make sure that there is no lapse into old collectivist habits. On the back of all this reform, economic growth is now firmly established at 6–7 per cent a year and the private sector accounts for over 70 per cent of output. So it is little wonder that Romania has had the thumbs-up from the World Bank, who rate it as one of the most improved markets anywhere in the ease of doing business. Last year, it moved into the top 50 for the first time, comparing favourably to other reforming countries like Poland. It is a significant turnaround for a country that was amongst the most isolated and repressive of all of the former communist bloc and subsequently one of the most reluctant to move properly towards becoming a market economy. The corrupt grip of former communists was only shaken loose in a full blown banking crisis at the end of the 1990s. By then, GDP had declined by 15 per cent in a decade. But there was always significant underlying potential. Romania is a major European country and a self-standing market of 23 million consumers. It is a significant producer of primary goods: it has large reserves of oil and gas, it is a leading agricultural exporter and has a wealth of mineral resources. Industrially, its strength lies in small owner-managed manufacturers engaged in processing activities such as clothing and chemicals, but, on a
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larger scale, Romania has turned itself into one of Europe’s leading automotive producers. In the last two decades, these manufacturers have managed to switch their sales to the EU, which now accounts for over twothirds of exports. In strategic areas of the economy, the country’s banks are now almost entirely owned by international investors and the privatization of key sectors, such as energy and telecoms, is largely complete. The next wave of projects will lie in improving the infrastructure through public-private partnerships supported by the €50 billion in funding expected from the EU over the next five years. More diversification of economic activity can be expected as well. Romania might have established itself as the world’s third largest centre for IT outsourcing, but there is significant potential in building capital city Bucharest into a leading centre for financial services and in strengthening the appeal of tourism both on the Black Sea and in Transylvania. As the EU’s lowest cost centre, more investment in greenfield industrial projects is likely, particularly once transport links start to improve. The hope is that, like Ireland or Spain, Romania’s membership will put it on a growth trajectory that will bring it up to the EU’s general level of economic performance within a generation. It has certainly made a positive start. But there are risks. The government’s budget deficit is too high and reforms in public services, notably health, education and pensions, are going to have to be addressed. Membership of the EU and NATO might underpin Romania’s stability and security, but its politics can still be volatile. Whether the will can be summoned to address difficult social challenges remains open to doubt. In the short term, the main danger lies in the economy overheating. Inflation is well down, but the availability for the first time of freely available consumer credit has fuelled a spending spree and Romania’s trade deficit has grown significantly. It is not only newly liberated consumers who are sucking in international goods, but manufacturers upgrading their technology. Ideally, the outcome will be that consumer spending stabilizes and that manufacturers start to export more value-added goods. At any rate, these are the working assumptions that lie behind Romania’s plans for adopting the euro as its currency by 2014. For international investors, there are still going to be legal risks. The legislative framework is still evolving and can struggle to accommodate complex international corporate structures. As a system based on a civil code, rather than common law, the interpretation of the law can also be highly bureaucratic, particularly in the eyes of investors from the UK and North America. Unless expressly permitted by legislation, an activity may well be interpreted as being prohibited, even if it is common practice elsewhere.
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Where progress has undeniably been made is in rooting out corruption and in improving the performance of the judiciary. Such improvements in institutional capacity are going to put Romania in a much better position to absorb the forthcoming flows of EU funds and private investment. So when the history of Romania’s transition finally comes to be written, 2007, alongside 1989, is sure to be viewed as one of the decisive turning points. In 1989, Romania turned its back on its authoritarian past. In 2007, when it joined the EU, it finally embraced its future as a free market and an open society. Adam Jolly, March 2008
Part One
Background to the Market
1.1
Political Background Liz David-Barrett
History and nature of transition The transition from communism in Romania was the most bloody in Central and Eastern Europe. Dictator Nicolae Ceausescu, who became president in 1967, had operated a particularly harsh communist regime, inspired by the Chinese, North Korean and Vietnamese models. In the early 1970s, he launched a mini ‘cultural revolution’ in Romania, suppressing intellectuals and clamping down on ‘dissent’. He also embarked on a major industrialization programme, financed by credits from Western powers who sought to encourage his relative independence from the Soviet Union. The programme, however, ultimately failed to yield results, and the economy was then hit by rising oil prices in the 1970s. By 1981, Romania had accumulated foreign debts amounting to $10 billion and showed no signs of economic recovery, while the West was increasingly disenchanted. Ceausescu thus vowed to pay off the country’s debts entirely and imposed a very severe austerity package on the population to do so. Basic goods such as bread, sugar and milk were rationed, while restrictions were placed on heating and lighting. Ceausescu meanwhile completely fell out of favour with the West once Mikhail Gorbachev came to power in Moscow in 1985; by opposing Gorbachev’s reforms, Ceausescu condemned himself to isolation. The population was hit hard by the austerity measures and perceived them as all the more painful when compared to the relative prosperity of neighbouring Hungary, which was by then operating a very soft version of communism. The autumn of 1989 also saw the breach of the Berlin wall and the collapse of many communist regimes in Central and Eastern Europe, including that of Hungary. Indeed, it was among the ethnic Hungarian minority in Romania that the protests against Ceausescu began in November 1989. The Hungarian demonstrators were joined by ethnic Romanians and numbers soon mounted, with thousands of people soon chanting “Down with Ceausescu”. The dictator ordered the army and security police to fire on the demonstrators, which they at first refused to do, but later, on 17 December, complied. Ceausescu struggled on for several more days, attempting to give speeches to restore order, but was finally forced to flee Bucharest. On 25 December, he and his wife were captured, given a mock trial, and then executed by firing squad.
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Background to the Market
Ceausescu’s downfall was met by euphoria, but it hardly provided a good basis for a stable handover of power. A group of 145 individuals calling themselves the Council of the National Salvation Front (NSF) assumed power and appointed Ion Iliescu as interim president and Petre Roman as interim prime minister. They were mainly communists, although reformminded ones. Elections were held in May 1990 and delivered landslide victories for both Iliescu as president (85 per cent of the vote) and the NSF as government (67 per cent of the vote). The opposition claimed that the elections were fraudulent, but it is more than likely that Iliescu and the NSF were truly elected by a population which had no experience of electoral democracy and was possibly fearful of change, or of being seen to want change. Iliescu revealed his own authoritarian tendencies almost immediately. He ordered the police to clear protests held in Bucharest’s University Square in June 1990 and to arrest the demonstrators – mainly students and members of the opposition. When, later that day, demonstrators attacked the Romanian state television offices and the interior ministry, the police and army refused to intervene. Iliescu responded by appealing to miners to help protect the government, bringing them to Bucharest on special trains. For two days, 10,000 miners carrying iron bars terrorized the population of Bucharest, until Iliescu summoned them to a victory rally and thanked them for restoring calm. The miners thus gained a special place in Romanian politics, and when Prime Minister Petre Roman implemented an austerity package later that year, they again turned to violence and attempted to storm the government building. They were dispersed by police, but prompted Roman to resign and sent a clear message to his successors about the risks of pursuing reforms. The next few years were a battle for power among different factions within the former communists, while little effort was made to reform the economy.
Reforms begin, but progress is not smooth The first substantive political change came only in 1996, when Emil Constantinescu defeated Iliescu in presidential elections and the Democratic Convention of Romania (CDR), an alliance of opposition parties, won the parliamentary elections. The new government, under Prime Minister Victor Ciorbea, had a reformist agenda and proceeded to close down non-performing state companies and make efforts to attract foreign investment. However, the reforms were controversial and created tensions within the governing coalition, which included the CDR, the Democratic Party (PD) and an ethnicHungarian party, the Democratic Union of Hungarians in Romania (UDMR). There were also disagreements between the CDR and UDMR over the provision of Hungarian-language education. Ciorbea eventually resigned in 1998 and was succeeded by Radu Vasile, who pressed on with reforms – most controversially, with the closure of
Political Background
5
mines. The latter prompted miners to organize once again, this time led by the charismatic Miron Cozma, and in January 1999, 20,000 miners marched on Bucharest. They were joined by workers from other industries that faced the threat of closure. Vasile soon gave in to the miners, granted them a 30 per cent pay increase and re-opened two mines. From then on, Vasile’s efforts at economic reform were doomed, as he was constantly confronted with popular protests. Vasile was dismissed in December 1999 and replaced by former National Bank Governor Mugur Isarescu. However, faced with the immediate crisis of a cyanide leak into the river Tisza and with elections due in late 2000, Isarescu had little chance to achieve results. In the run-up to the 2000 elections, the right-wing parties disintegrated, leaving the way open for the return of the former communists. Iliescu was once again elected as president in 2000, while the Democratic Social Party (later changing its name to the Social Democratic Party, or PSD) of Romania formed a minority government led by Adrian Nastase, with the support of two small centre-right parties and the ethnic Hungarians. Nastase’s government started to see the benefits of the reforms that had been started in the late 1990s, and the Romanian economy began to grow. Moreover, the European Union (EU) issued a clear invitation to Romania to start accession talks, dramatically boosting confidence in the country’s future. Nastase continued the reforms, albeit in a halting manner and whilst failing to tackle a number of critical issues such as agricultural policy and social spending. Under his leadership, Romania also joined NATO (in 2002) and completed accession negotiations with the EU. Nastase ran for president in 2004, but was defeated by Traian Basescu of the centre-right Justice and Truth Alliance. The PSD was the largest party in the parliamentary elections, but it was a centre-right coalition that succeeded in forming a government, led by Prime Minister Calin PopescuTariceanu of the National Liberal Party (PNL). The relationship between Basescu and Tariceanu has been poor from the start, with Basescu repeatedly calling for early elections and accusing Tariceanu of corruption. Tariceanu has struggled on, eventually dismissing the PNL from his government in April 2007, and forming a minority government with the UDMR. Tariceanu’s government’s most notable achievement is the reform of the judiciary, for which the credit is due to former Justice Minister Monica Macovei, rather than to the prime minister. Indeed, Tariceanu is increasingly tainted and weak, whilst Basescu is tackling some important and difficult issues, such as reform of the security services and the fight against corruption. Elections are due at the end of 2008, but could well take place prior to that if Tariceanu’s government collapses.
The Hungarian minority Ethnic Hungarians represent 6.6 per cent of the population of Romania, according to the 2002 census, and are geographically concentrated in the
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Background to the Market
region of Transylvania, where they represent 20 per cent of the population. Many ethnic Hungarians, as well as Jews, played an important role in the early Communist Party in Romania, and a Hungarian Autonomous Province was established in 1952. However, once Ceausescu came to power, he took a more nationalist line, the autonomous province was dissolved, and a more assimilationist policy was adopted towards the Hungarian minority. Since transition, the Hungarians have been represented by their own political party, the UDMR, which has played an important role in several governments. The Hungarians have over time been granted a set of cultural and human rights – for example, regarding Hungarian-language education. Romania has thus not been particularly troubled by ethnic strife since transition, especially when compared to its Balkan neighbours. The worst incidence of violence came in March 1990, in the town of Targu Mures, where there were riots between ethnic Hungarians and ethnic Romanians, in which several people were killed and hundreds injured. The cause of the riots is unclear, with different versions of events offered by the two ethnic groups. However, it remained an isolated incident.
The far right The far right is represented by the Greater Romania Party (PRM), whose name refers to the idea of uniting all territories inhabited by Romanians into a single country. The party thus has traditionally had a nationalist, anti-Hungarian, anti-Semitic and anti-Roma agenda. The party won 5 per cent or less of the vote throughout the 1990s, although despite this it did enter government between 1993 and 1995 as a junior coalition partner. However, in 2000, party leader Corneliu Vadim Tudor won 33 per cent of the vote in presidential elections. The PRM also won 23 per cent of the vote in parliamentary elections, giving it 126 seats in the two chambers. The PRM has retained a significant position in Romanian politics since, winning 13 per cent of the vote in 2004. However, the party seems partly to attract protest votes from people who perceive themselves to be the losers of transition. Temporarily, and somewhat bizarrely, Tudor sought to adopt a more moderate image in 2003-2004. He announced that he would no longer deny the Holocaust and claimed that he had become a philo-Semite, erecting a statue of Yitzhak Rabin in Brasov. Yet PRM publications continued to take an anti-Semitic line and Tudor’s apparent change of heart has serious credibility problems.
EU accession At its Helsinki Summit in December 1999, the European Union invited Romania to formally begin accession negotiations, although it became clear fairly soon that the country’s progress would lag behind that of many of its
Political Background
7
Central European neighbours. Thus, in 2002, Romania, together with Bulgaria, was excluded from the first round of Central European enlargement to take place in 2004, and a target date of 2007 was set instead. Under pressure from some current members which were reluctant to admit Bulgaria and Romania, the European Commission also inserted a ‘safeguard clause’ such that accession could be further delayed, until 2008, if it regarded progress to be insufficient in some critical areas, most notably the fight against corruption and reform of the judiciary. Romania’s progress on these areas was slow and it looked highly probable that the safeguard clause would be invoked, until Monica Macovei was appointed as justice minister. Encouraged by Basescu and the EU, Macovei began a thorough reform of the judiciary aimed at making it less vulnerable to political influence, more professional and more independent. In addition, Macovei initiated a number of corruption charges against high-profile figures, not least former Prime Minister Adrian Nastase. Impressed by these efforts, the European Commission agreed that Romania could formally join the EU on 1 January, 2007.
1.2
Economic Background Liz David-Barrett
History and nature of transition Romania had one of the most closed and repressive regimes in Eastern Europe during the communist era, under dictator Nicolae Ceausescu. The immediate post-war period saw drastic purges of the country’s intellectuals and the rise of the Securitate security services, who would continue to play an important role well into transition. During the communist era, production was oriented towards the needs of the Soviet bloc and much of the population was involved in subsistence agriculture. There was a short period of relative economic well-being in the late 1960s and early 1970s, but Romania began to accumulate foreign debt at a rapid rate by the late 1980s, making the country increasingly dependent on international organizations such as the International Monetary Fund (IMF). Ceausescu was uneasy about this development and vowed to pay off all of Romania’s debts, imposing harsh austerity policies on the population and exhausting the economy in order to do so. Thus, by the time he was overthrown in December 1989, Romania was able to start the transition free from debts. Like other former Soviet-bloc countries, though, the industrial base was severely outdated and production was concentrated in sectors which would have no future in a market economy. Economic transformation was slow to start, even after the fall of Ceausescu. This partly reflected the country’s lack of experience with any kind of economic reform during the communist era, unlike neighbouring Hungary, which had taken several steps towards a market economy prior to 1989. In addition, Ceausescu was succeeded by Ion Iliescu, a former communist with little understanding of the market and, as would emerge, no political will to introduce reforms. In the first years of transition, Iliescu liberalized foreign trade and introduced a system of reform that would return land to the peasantry. Privatization of small businesses was pursued in a half-hearted manner, leaving a 70 per cent share of firms in state ownership, while most large companies were retained wholly in state hands. Market reforms did not start in earnest until early 1997, following the election of a centre-right government. Price and exchange rate liberalization were begun and some large state enterprises were finally restructured and privatized. This reduced the large burden on the state budget which these
10
Background to the Market
Table 1. Macroeconomic Data Real GDP (constant prices, % change) GDP per capita (current prices, US dollars) Inflation, consumer prices (annual % change) Current account balance (% of GDP)
2000 2.1
2001 5.7
2002 5.1
2003 5.2
2004 8.4
2005 4.1
2006 7.7
2007f 6.5
1,675
1,824
2,088
2,721
3,464
4,539
5,633
7,310
45.7
34.5
22.5
15.3
11.9
9.0
6.6
4.5
-3.7
-5.5
-3.3
-5.8
-8.4
-8.7
-10.3
-10.3
Source: IMF
loss-making and heavily-subsidized companies had become. Most controversially, the government closed down many of Romania’s coal mines, prompting mass protests from a well-organized labour movement. These belated efforts at reform and the impact of exposing the economy to competition initially made the macroeconomic picture look even worse. GDP declined by 6.6 per cent in 1997, by a further 7.3 per cent in 1998, and by 4.5 per cent in 1999. Meanwhile, inflation soared as a result of excessive government spending in the election year of 1996 and because of the price and exchange rate liberalization in 1997. The unemployment rate peaked at 11.5 per cent in 1999, although the actual figure was probably higher, since the official rate does not account for unregistered unemployment or underemployment, especially in the agricultural sector.
Recent macroeconomic performance and outlook By 2001, economic reforms had begun to yield positive results. GDP has grown on average 4-5 per cent per year since then and inflation has been brought under control, falling below 10 per cent in 2005. The economy grew by 7.7 per cent in 2006, and the IMF forecasts 6.5 per cent GDP growth for 2007, after strong performance in the first few months of the year. Industrial production expanded by 7.1 per cent year-on-year in 2006 and is set to perform strongly again in 2007, given above-expectations results in the first months of the year. This mostly reflects solid manufacturing growth, although the construction and retail sectors are also booming. The rosy picture is reflected in the unemployment rate, which was down to 5.4 per cent in 2006 and is set to fall further. Nevertheless, Romania is still a poor country, with GDP per capita at only €3,670 in 2005. The current growth is fuelled largely by buoyant domestic demand, which in turn reflects the expansion of credit to a population with enormous pentup demand for consumer goods. Consumer credit rose by 49.5 per cent year-
Economic Background
11
on-year in February 2007, leading to a surge in imports. This has contributed to a widening of the current account deficit, which now represents the main cause for concern in the macroeconomic picture, having exceeded 10 per cent of GDP in 2006 and forecast to widen further in 2007. The trade deficit partly reflects the import of machinery, as a result of increased foreign investment in manufacturing – clearly a positive development in the long run. Moreover, financing the deficit is not a problem since exports earnings and hard currency reserves are both rising. Even the expansion of credit to consumers is not too worrying, since it is a typical phenomenon of transition. Nevertheless, the size of the current account deficit does represent a threat to external credibility and a signal of possible inflationary pressures. The country’s external debt has dropped to 28.5 per cent of GDP and a high proportion of liabilities are owed to multilateral lenders such as the IMF, World Bank and European Bank for Reconstruction and Development (EBRD) and hence servicing costs are not too high. Romania is committed to introducing the euro and indeed could meet the Maastricht criteria as early as 2010 or 2011, since the budget deficit is relatively small and inflation is falling. However, the fiscal position is likely to worsen unless the country undertakes deeper structural reforms, especially in relation to the pensions, healthcare and education systems. Moreover, inflation could begin to climb again given rampant consumer spending and exchange rate depreciation.
Sectoral profile The profile of the economy demonstrates that structural reform has yet to be completed. National income remains heavily reliant on extracting and processing primary goods (timber, marble, rock), food processing, oil refining and chemical derivates, and to a lesser extent pharmaceuticals, heavy machinery and household electronics. Exports of textiles and leather represent more than one-third of total exports. The agricultural sector continues to be a major employer and a significant contributor to GDP, although the sector is highly fragmented, inefficient and dependent on European Union (EU) subsidies. Romania has succeeded in re-orienting its exports towards Western markets, with the EU accounting for 68 per cent of total exports and the export structure has begun to shift in recent years, from low value-added products towards high value-added items. Romania has begun to attract investment into manufacturing, particularly in car production. The tourism industry remains largely under-exploited and is unlikely to take off until there has been some significant investment in transport infrastructure and facilities. The pharmaceuticals sector was one of the first to undergo privatization, and leading companies Terapia and Sicomed successfully produce generic versions of patented drugs at a significant discount, marketing them in Western Europe once EU patents have expired.
12
Background to the Market
Table 2. Foreign Direct Investment Inflows by Year FDI inflows (net, USD billion)
2003 1.8
2004 6.4
2005 6.6
2006 11.4
2007f 8.7
Source: IMF
Some of the old staple industries continue to have potential – the coal sector, now that it has been largely restructured and massively scaled down, produces a surplus of high-quality lignite. Significant gold deposits are also being exploited. Romania has significant oil and gas reserves and substantial oil refining capacities, and earns revenues from transporting oil and gas along pipelines on its territory.
Foreign investment Foreign investors were by and large deterred from investing in Romania during the 1990s, given the lack of reforms, complex and uncertain regulatory framework and external risk factors, such as the series of wars in the nearby former-Yugoslav territories. From the late 1990s, macroeconomic stabilization and a more consistent reform record have helped to improve Romania’s image and foreign investment thus began to pick up. The real boost to this process came in November 2002, when the European Commission set 2007 as the target date for Romania’s entry to the EU. Romania also acceded to NATO in 2002, another positive signal for investors about the future security and orientation of the country. When in October 2003 restrictions on the right of foreign companies and private investors to buy land and property were finally lifted, FDI inflows really began to pick up pace. The government of Prime Minister Calin Popescu-Tariceanu has taken some steps to improve the overall business environment, including (partial) judicial reform and the introduction of a flat tax of 16 per cent on income and corporate gains. Moreover, Romania is one of the lowest-cost countries inside the EU, with average monthly labour costs at only €365, compared to an average €842 in the CEE-8 and €3,431 in the EU-15. Labour costs are rising and will continue to do so, especially now that Romania has joined the EU. However, labour productivity is also growing. The total FDI inflow for 2005 reached €4.5 billion (largely reflecting the sale of a 62 per cent stake in Banca Comercial Romana to Austria’s Erste Bank for around €3.75 billion). Inflows of €9.1 billion were realized in 2006, with the largest sale that of the government’s 46 per cent stake in Romtelecom. Romania is an attractive destination for Western companies moving eastwards in pursuit of cheaper labour, sometimes relocating operations in Central Europe which have become expensive in recent years. Since transition began, the largest cumulative stocks of foreign investment have
Economic Background
13
come from the Netherlands, Austria, Germany, France and Italy. However, recently some Asian companies have been attracted by the combination of cheap labour and access to EU markets. As such, the country has tended to attract foreign investment mainly into labour-intensive sectors such as textiles. Increasingly though, foreign investors are beginning to consider Romania a suitable location for higher-value-added production which is less cost-sensitive. Telecommunications and automobile manufacturing both offer many examples, some companies using production units in neighbouring Moldova and Ukraine for more labour-intensive roles. The Romanian market is itself becoming attractive too, with a population of 23 million which is set to become increasingly wealthy, creating opportunities in wholesale and retail, as well as financial services. With few privatizations left to be done, greenfield investment is likely to become more significant in 2007. This will be boosted by a number of large infrastructure projects intended to modernize the country’s transport network, most co-financed by the EU. The construction sector is likely to attract significant interest because of the infrastructure spending and spinoff projects to build production and retail units in out-of-town locations on motorway routes.
1.3
Macroeconomic Outlook Ionut Dumitru, PhD, Head of Research, Raiffeisen Bank Romania
EU accession – the main driver of reform On 1 January 2007, Romania joined the European Union (EU), after a long process of accession, the negotiations having commenced in February 2000. Nevertheless, the integration process will go on much longer and Romania needs to fulfill the convergence criteria, especially in terms of real convergence, as Romania’s GDP per capita in 2006 was only 36.4 per cent of the average level in the 25 pre-2007 EU member states (EU-25). Romania is a relatively a big country among the current 27 EU member states (EU-27) in terms of population (4.4 per cent in the total EU-27 population), but its contribution to the total GDP is rather small, only 0.72 per cent. Romania made huge progress over the last few years in terms of reforms and convergence on an economic, institutional, legislative, social level, but also on a political level (concerning respect of democracy, freedom, and civil rights), EU accession being the main driver of this, but there are many other further reforms needed in order to comply with EU member status. We think that for Romania, as well as for the other new member states, EU membership represents both a huge opportunity and a challenge at the same time. We see the EU as an anchor for the continuation of economic reforms and a guarantee for a more favourable business environment in Romania. What Romania needs is to consolidate its disinflation process, foster investments, especially in infrastructure, absorb new technologies, improve financial discipline and reform the economy on the whole so that it can compete in the EU market after accession.
Nominal convergence is not yet fulfilled … In terms of nominal convergence, the only problems Romania now faces are in the inflation field. Further efforts are necessary in terms of disinflation in order to comply with the Maastricht criteria. In addition, we think that some problems could arise in the next few years in the public finances field, as we expect the public deficit to create some concerns.
16
Background to the Market
Table 1. Maastricht Criteria (Nominal convergence indicators) Nominal convergence indicators
Maastricht criteria
Inflation rate (%, annual average)
<1.5 pp above the three best performing member States 2.8% <2 pp above the three best performing 7.23% member States in terms of inflation 6.2% +/-15% +10%/6.1% below 3% -1.9% below 60% 12%
Long term interest rate (%) Exchange rate (vs. euro, maximum percentage change vs. 2-years average) General Government deficit (% of GDP) Government debt (% of GDP)
Romania 2006 6.6%
Source: NIS, NBR, EUROSTAT, ECB
In the last few years, the disinflation performance has been positive, with the inflation rate decreasing continuously since 2000, from 54.8 per cent in December 1999, to 4.9 per cent at end-2006; 2004 being the first year in which Romania experienced a single digit inflation rate (9.3 per cent in December 2004). Apart from a restrictive monetary policy, the large decrease in the inflation rate over the past few years was also due, to a large extent, to the sharp exchange rate appreciation (the Romanian lei appreciated in 2004-2006, by more than 20 per cent in nominal terms) and due to other some other temporary favourable conditions. Nevertheless, the core measures of inflation, which are better correlated with the persistent inflationary pressures existing in the economy, show some signs of downward rigidity. Strong economic growth (above the GDP potential growth), large increases in real wages and rapidly expanding of non-government credit were the main factors that hampered a more rapid decline in core inflation, especially in 2006. We could expect the influence of these factors together with a loosening fiscal policy to continue to fuel inflationary pressures over the next few years. Moreover, due to the prolonged draught in summer 2007, food prices started to increase very sharply in the third quarter of 2007 and the National Bank of Romania could miss its inflation target for 2007, and the inflation rate could remain high in the first part of 2008. Consequently, we think that the fight with inflation is not over yet and disinflation should flatten in a few years making it very difficult to further decrease inflation. Although the fiscal policy in the last couple of years was very tight, with budget deficits and public debt well below Maastricht criteria, we think that some problems could crop up in the next few years if budget revenues do not increase substantially. The main problem in Romania’s public finance is low budget revenues as a percentage of GDP (the lowest level in the EU-27), and there is a real danger that under the pressure of unavoidable increase in expenditures in the next few years (co-financing of EU funds; the EU budget contribution; reform of the pension system, the contingent liabilities arising from the “Proprietatea Fund”, infrastructure, education, research and development, environment, etc.) Romania could face a “budget shock”, with
Macroeconomic Outlook
17
Source: NBR, Raiffeisen RESEARCH forecast
Figure 1. Inflation development and NBR target higher budget deficits. In addition to the long-term fiscal issues, such as reform of the health and pension systems, Romania will have to address the costs of EU accession. We think that in 2007, Romania could be a net contributor to the EU budget, unless the absorption of EU funds will not exceed 55 per cent in 2007, which will be very difficult, and there are some concerns that in 2008 Romania would also be net contributor due to a very low EU funds absorption capacity. In January 2005, Romania started fiscal policy reform, introducing a flat tax of 16 per cent on corporate tax (previously 25 per cent) and income tax
Source: EUROSTAT
Figure 2. Budget revenues (percentage of GDP) in 2006
18
Background to the Market
(previously progressive taxation between 18 per cent and 40 per cent). We think that in the medium and long term, the effect of this reform will be positive, simplifying the fiscal system, increasing the predictability and creating the stimulus for business and work. Nevertheless, it is hard to assess the short-term impact (after two years), although some positive effects on budget revenues are evident.
…but real convergence is the long-term challenge According to the convergence plan released by the Romanian government in January 2007, Romania intends to enter the euro zone not sooner than 2014, meaning that the entry to Exchange Rate Mechanism 2 (ERM2) is scheduled for not sooner than 2012. We think that this schedule is more realistic than the previous one (2012-2014 euro zone entry, and 2010-2012 ERM2 entry), as a country adopting the euro should fulfill the nominal convergence criteria (Maastricht criteria), but also the real convergence criteria, although there are no formal conditions for real convergence. We think that with some efforts, nominal convergence could be fulfilled in the medium term, but the strongest effort should be made in terms of real convergence and structural reforms in the economy. According to a simple calculus, if the Romania-EU economic growth differential will stay around 4 per cent per year, GDP per capita in Romania could exceed 50 per cent of the EU average in a decade and would reach the EU level in more than 30 years. Accordingly, more investments are needed in order to create a sustainable base for economic growth in the medium and long term. Romania had a good track record in terms of GDP growth in the last few years, with real growth above 6 per cent on average in the last five years. On top of this, GDP growth recorded 8.5 per cent in 2004, and 7.7 per cent in 2006. Volatility of economic growth has increased since 2003, mainly due to weather conditions and developments in agriculture. Accounting for a large share in total gross value-added in the economy (9.1 per cent in 2006), output in agriculture and its changes largely explain the record rate of GDP growth from 2004 (8.5 per cent), but also the poor one from 2005 (4.1 per cent). However, current real GDP growth is clearly above the economy’s potential. Our quantitative estimations place the potential GDP growth rate (the growth rate that could be obtained without generating current and future inflationary pressures) at around 6 per cent. The very fast increase in domestic aggregate demand (17.1 per cent year-on-year in 2006) is a clear sign of an overheating economy and it raises substantial concerns especially due to the ever-increasing current account deficit it fuels.
Macroeconomic Outlook
19
Source: EUROSTAT
Figure 3. Real convergence indicator in 2006 (GDP per capita at PPS, EU25=100)
Balance of payments – the biggest risk for the macroeconomic environment and a threat to the lei The current account (CA) deficit in Romania increased significantly in the last few years, reaching 10.3 per cent of GDP in 2006, and above 13 per cent of GDP in the first semester of 2007, a record-high level since the beginning of transition in Romania, and which is now the main macroeconomic concern for Romania. Among the new EU member states, only Bulgaria and the Baltic States have a higher external deficit compared with Romania. The main driver of the CA deficit in Romania is the development in trade balance deficit as an effect of a faster growth in imports than in exports. The good news is that the structure of imports and exports is improving. The structure of Romanian exports is changing in benefit of goods with higher value added, most likely reflecting important FDI inflows in recent years, as well as changes on the international market for textile products. On the import side, there is an increasing share of capital goods and the share of consumer goods has started to decrease. We think that sooner or later the high level of imports of capital goods and technologies in the last few years should reflect in an increasing export capacity in the future. We also think that the robust growth in exports despite the rapid appreciation of the exchange rate is remarkable and could be explained by the increase in productivity and the fact that the exports are conducted by the same agents which are importers at the same time. The increasing CA deficit could also be seen as reflecting the savingsinvestments gap in the economy. As a result of expanding economic growth
20
Background to the Market
Source: NIS, Raiffeisen RESEARCH
Figure 4. Current account deficit and financing and similar to some other countries in transition, Romania experienced in the last period a saving rate below its investments needs. Romania has one of the lowest levels of savings in the region (only 16 per cent of GDP, compared with 19.6 per cent in Central and East European (CEE) countries and 20.1 per cent in EU-25 in 2006) and at the same time has an increasing investments rate as a result of the need to develop the economy. In fact, we think that the high CA deficit in Romania is structural and persistent at its origin, as it reflects an increasing need for investments, both in the private and public sector, in order to sustain the catching-up process towards the EU development level, and a low level of income biased towards consumption behaviour and, to a less extent, towards savings. Our opinion is that in order to adjust the CA deficit, public policies should be oriented towards stimulating savings, otherwise the CA deficit remain high and possibly even continue to grow for a longer period of time. For the time being, the large CA deficit had good financing, being very well covered by FDI inflows (around 91 per cent in 2006). In 2006, inward FDI reached €9.1 billion, registering a 75 per cent increase against the same period last year (€5.2 billion), including €2.2 billion from the privatization of the largest commercial bank in Romania. It is important to note that on the financing side, over the past few years there has been an increasing tendency to borrow inflows from abroad, especially short-term borrowing, after capital account liberalization, and normally this should raise some concerns related to the sustainability of the external debt. Despite the fact that the total external debt (as a percentage
Macroeconomic Outlook
21
of GDP) is still lower than in CEE countries on average, coverage of the debt and debt service through exports and reserves is deteriorating sharply, being even worse than in CEE countries on average. With an anticipated decrease in the coverage of the CA deficit by FDI in the next years (due to the end of large privatization deals), we think that pressure on the exchange rate should increase, as the CA deficit could become unsustainable (given the already sharp deterioration of external debt indicators). We believe that the major rating agencies also see the CA deficit as the main obstacle to upgrading Romania’s country rating.
1.4
Business Environment Background Liz David-Barrett
Romania has recently made dramatic progress in improving its business environment, according to the World Bank’s Doing Business 2007 report, which names Romania as Number Two Top Reformer (second only to Georgia). This reflects major efforts to improve the administrative procedures and regulatory environment pertinent to business and investment. Romania’s regulation now compares well with that of other countries in the region. However, a lack of structural reform in the economy means that weaknesses remain in other areas, while prevalent corruption raises the risk that, even with a good legal framework, the business environment is prone to uncertainty.
Business regulation Commercial companies are regulated by the Commercial Companies Act of 1990, which was amended in April 2003. Following the amendments, nonresidents may hold the position of general manager or member of the executive board of a Romanian company, without any restrictions. Foreign companies may operate in Romania either through subsidiaries or by opening a branch or representative office; companies and branches must be entered in the Register of Firms, whilst representative offices must be registered with and approved by the Office of Foreign Trade Relations. The process of harmonizing Romania’s accounting and auditing law with international standards and European Union (EU) directives was begun in 1999. Romania ranks 49th out of 175 companies for ‘ease of doing business’, according to the World Bank’s Doing Business 2007 report, and made major progress in improving regulation during 2005-2006. It now takes 11 days to start a business in Romania, making the process faster than in the UK, while procedures for obtaining licenses and permits, particularly construction permits, have been simplified and located in a new one-stop shop. Romania is making efforts to reduce the tax burden and in 2005 introduced a flat tax at 16 per cent for personal income and corporate tax. Dividend tax
24
Background to the Market
is 10 per cent (or 0 per cent under certain conditions) on dividends paid to resident legal persons and 16 per cent on dividends paid to individuals. Micro companies will pay 2 per cent income tax on revenue in 2007, 2.5 per cent in 2008 and 3 per cent in 2009. Trading across borders has been facilitated by cutting down the time required for satisfying regulatory requirements, reducing the number of export documents needed, and the introduction of after-clearance audits, which allow customers to quickly release cargo to importers with the container contents being verified only when it reaches the warehouse. Romania ranks relatively high on investor protection (33rd out of 175, according to Doing Business 2007) and contract enforcement (45th). However, the body of corporate law is still evolving and is unable to deal efficiently with complex commercial cases. Moreover, the legislative framework in these areas is only one aspect of the issue. There are serious reasons to doubt that implementation of the law is up to standard, given the general environment of corruption and the lack of independence of the judiciary, despite recent reforms. Judgments are still often given for material gain rather than on grounds of justice. These factors mean that, where disputes arise, there is likely to be considerable uncertainty about the reality of investor protection and contract enforcement.
Workforce The Romanian workforce is somewhat more agriculturally-oriented than is typical in Central and Eastern Europe. No Romanian university succeeded in making the first 500 in the Academic Ranking of World Universities. However, average standards of education are still fairly good, reflecting the communists’ focus on this area, particularly in mathematics and engineering. The adult literacy rate is 97 per cent. There is some evidence of a recent labour shortage in Romania, reflecting a new wave of emigration since the country joined the EU in January 2007. In total, as many as 2 million people are thought to have left since 1989 and those who leave are often the better skilled, who can easily find jobs abroad. Wages in the EU are also very attractive for many Romanians, who could expect to earn an average of only €282 per month at home. The legal minimum wage is approximately €132 per month. Western companies operating in Romania would probably not find it difficult to recruit a workforce if they are willing to pay slightly higher wages and offer decent working conditions. However, the apparent shortage does mean that it is pertinent to research the local workforce before setting up a business. Working hours are regulated, such that full-time employees may work eight hours per day and 40 hours per week. Employees may work overtime, but Romanian law allows for a maximum of 48 hours total work per week. However, there is an option to set working hours at less or more than eight hours per day according to individual negotiations. Vacation time is set at
Business Environment Background
25
21 working days while maternity leave amounts to 63 calendar days prior to and 63 days following the birth of the child – short by CEE standards. Childrearing leave can be taken for a maximum period of two years. In terms of attitudes, Romanian workers tend to be flexible about working paid overtime and do not have high expectations about employment benefits. Moreover, the recent extension of term contracts to a maximum of six years lessens the burden of labour regulation and associated costs. Nevertheless, non-wage labour costs average around one-third of salary costs. Employer contributions are 7 per cent for the health fund, 20.5 per cent for pensions, 2.5 per cent for unemployment benefits and 0.5-4.0 per cent for occupational accident and sickness fund contribution (depending on the type of activity).
Marketing and advertising The marketing and advertising sector has been slow to develop, reflecting the late start to economic transition and low purchasing power of the population. However, healthier economic growth in the past five years together with the expansion of credit has fuelled consumption and created greater demand for marketing and advertising. As a result, there are now 25-30 agencies operating and the market is growing. All big international agencies are present, including Saatchi and Saatchi, Grey and Ogilvy. The sector is now highly competitive. The biggest advertising clients are currently banks and financial services, reflecting the current credit boom, as well as fast-moving consumer goods companies, beer and beverages and mobile operators. International firms engage in market research and are perhaps the biggest clients, but local firms are also becoming more aware of the benefits of advertising and engage in promotional campaigns and activities more often. Most of the population is still very price sensitive, though a small but significant elite of ‘new rich’ is attracted to luxury goods and top brands. The country has a very high cable penetration rate, at around 95 per cent, meaning that consumers have access to more than 50 channels. This, together with a declining television audience, makes it increasingly difficult to effectively advertise on television. Hence some agencies increasingly rely on other techniques, including in-store activities and promotions.
Business development support Foreign investors are supported with various consultancy services by the government’s one-stop shop, the Romanian Agency for Foreign Investment, known as ARIS. The agency provides its consultancy services free of charge and undertakes various services, including suggesting locations, providing information about the legal framework and identifying incentives applicable to the individual investor. ARIS deals with investments greater than €1
26
Background to the Market
billion. For investments below this amount, support is offered by the ministry for small and medium-sized companies. There is also a non-governmental Chamber of Commerce and Industry which will assist in relations between domestic and foreign firms. Foreign investors can also receive support from their own embassies and in some cases, dedicated institutions such as the American Chamber of Commerce, which has 250 members in Romania. A new investment law is currently being prepared and is expected to enter parliamentary debate in autumn 2007. Although the details are not yet final, it is likely to offer a range of incentives for investment in different regions, covering the whole territory of Romania. Incentives will be graded according to the level and type of investment and the location chosen. The energy and manufacturing sectors are likely to be priority areas. All incentives will of course comply with EU regulations on regional state aid. Romania is eligible for external financing in the form of both credits and aid from a number of sources, including the World Bank, European Bank for Reconstruction and Development (EBRD), European Investment Bank and the EU. The conditions relating to this vary and tend to be rather specific. However, these tend to be important sources for the construction and transport sectors, as well as for small and medium-sized enterprises (SMEs) in general. For example, in June 2006, the EBRD granted a €10 million loan to OTP Bank Romania, a subsidiary of the Hungarian OTP Bank, which it is to lend onwards to micro as well as small and mediumsized businesses. Micro business owners, employing up to 10 people, will be eligible for loans of up to €30,000, while SMEs employing up to 249 people will be eligible for loans of up to €125,000. A complementary grant of €1.5 million from the EU will help to implement the project and finance the training of SME loan officers.
Part Two
Legal and Regulatory Framework
2.1
Administrative Barriers to Entry Roxana Ionescu, Associate, and Alexandru Lupu, Associate, Nestor Nestor Diculescu Kingston Petersen
The Romanian legal environment represents a complex system, governed by the civil law principles set out in the Constitution, laws, and ordinances and secondary legislation. While Romanian governmental authorities are currently focused on creating a more attractive environment for investors, both local and foreign, including from a legal framework perspective, certain administrative barriers continue to apply with respect to accessing the Romanian market. Some barriers are similar to those existing within the other member states of the European Union (EU), while others reflect the local legal framework, as is currently in force.
Visas and residence permits Over the past several years, the legal framework governing visa and work permits has undergone extensive amendments as Romania prepared for EU accession. In June 2007, the Romanian government again amended the main legal frameworks governing both the regime of foreign citizens in Romania (establishing the rules on visa and residence permits) and the work permits regime. These changes ensure the implementation of the EU principle on free movement within the country, as well as enforce new bilateral agreements relating to the treatment of foreign citizens. Another purpose for the recent amendments was to establish the Romanian Office for Immigration (Oficiul Roman pentru Imigrari), a new centralized body that replaced the Authority for Foreign Citizens, the Romanian National Office for Refugees and the Office for Labour Force Migration. The role of the Romanian Office for Immigration is to ensure adequate infrastructure within the immigration sector, which, in turn, will allow the country to meet the obligations it assumed upon joining the EU on 1 January 2007. Government Emergency Ordinance No. 194/2002 on the regime of foreign citizens in Romania, as republished on 8 March 2004 and further amended,
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establishes the main conditions that must be met by foreign citizens in order to enter Romanian territory. The conditions vary depending on the citizenship of each individual, as well as on the purpose and duration of the visit. As a rule, foreign citizens may enter Romania with a visa issued by Romanian embassies or consulates. However, there are exceptions to this rule, such as that for other EU member states. In addition, visa procedures may vary depending on the type of activity to be carried out in the country. If a foreign citizen’s stay in Romania is prolonged, he/she may be required to obtain a residence permit, following a specific procedure detailed by law.
Work permits Government Emergency Ordinance No. 56/2007 (entered into force on 26 June 2007) details the new framework regulating the employment and secondment of foreign citizens to Romania. According to this enactment, as a rule, foreign citizens (ie. individuals who do not have Romanian citizenship or citizenship of another EU or European Economic Area – EEA – member state) are required to hold a work permit in order to be hired in or seconded to Romania. There is a quota on the number of work permits that can be issued each year by the government. Certain exceptions exist, for example with respect to foreign citizens who are appointed as heads of a Romanian branch or representative office, a subsidiary of a foreign company, or foreign citizens legally hired by an EU or EEA member state-based company and seconded to Romania, provided that the respective individual holds valid work/residency permits in the respective EU or EEA member state. Romania has also applied various EU directives regulating immigration issues, such as Directive 96/71/EC of the European Parliament and of the Council of 16 December 1996, concerning the posting of workers in the services provision framework.
Registration of enterprises Law No. 31/1990 on commercial companies, as republished on 20 November 2004 and further amended, sets out the various types of enterprises that may be established, including joint-stock companies, limited liability companies and various types of partnerships. In practice, investors prefer the first two types of legal entity, as the law provides limited shareholder and founder liability in their case. As of October 2006, the minimum share capital requirements amount to 90,000 Romanian Lei (RON) for joint-stock companies (approximately €28,000) and RON 200 for limited liability companies (approximately €62). There are no restrictions on foreign shareholders. Currently, in order to register an enterprise, the shareholders must conclude the company’s by-laws (a notarized form is requested in limited
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cases). An original copy of the by-laws, together with a completed registration application form, and other various documents, must be submitted to the local Trade Registry Office. Registration takes approximately five working days from the submission of the registration application accompanied by the complete documentation.
Land ownership Under the Romanian Constitution and subsequent pieces of legislation, foreigners and stateless persons may acquire ownership title over land in Romania only in accordance with special legal provisions which came into effect upon Romania joining the EU and with the provisions of other international treaties to which Romania is a signatory, on the basis of reciprocity, under the conditions set out by organic law, as well as through legal inheritance. This limitation does not apply with respect to the acquisition of buildings and other constructions that may be owned by foreign persons, both natural and legal.
Property registration In order to ensure the protection of rights in rem (eg. ownership rights, mortgage rights, lease rights exceeding three years), the beneficiary should register the respective right with the competent land book. Prior to the land book-based real estate publicity system being effectively implemented in most parts of Romania, including Bucharest, commencing 1999, it was the owner rather than the real estate property that was primarily registered in public records. Law No. 7/1996, regarding real estate publicity and cadastre, has been republished on 3 March 2006 and now represents the main enactment in the field. The cadastral procedure with respect to land that is now required under the new Law No. 7/1996, is part of the process of real estate record conversion to the new publicity system. It is expected to reduce, though not completely eliminate, the risks derived from failure to register or properly register with the former Transcription-Inscription Registry. The current system is based on the individual registration of each real estate (comprising land, possibly divided into several parcels and buildings erected) with the land book, showing the owner(s), as well as existing encumbrances and liens. Although not mandatory, registration of land/buildings with the land book is necessary in order to perform any real estate transaction (land book excerpts being compulsory items requested by the public notary authenticating the legal deeds concluded in respect of real estate properties).
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Infrastructure The general framework for ensuring the connection of users to power grids is set forth by Law No. 13/2007 on electricity, as amended, representing the application of EU directives in the field, and Government Decision No. 867/ 2003 on the approval of the Regulation for the interconnection of users to the power grids of public interest. According to the Electricity Law, power distribution, as well as power transmission and system activity, represent public services. The distribution and transmission and system operators have the general obligation to ensure access to the relevant grids for all users of the electricity distribution/ transmission grids, in non-discriminatory conditions, subject to the applicable regulations and norms. Users of the electricity networks (distribution and transmission) must obtain technical permission for interconnection to the power grid, prior to the execution/modification of an installation, from the relevant distribution or transmission and system operator. Interconnection permission is issued within 30-90 calendar days from the date of registration of the complete documentation, depending on the type of grid for which the interconnection is requested (eg. small, medium or high voltage, distribution or transmission). The Romanian telecommunication legal framework (in particular, Government Emergency Ordinance No. 79/2002 regarding the general regulation framework in communications, as amended, representing the application of the EU Authorization Directive 2002/20/EC and Framework Directive 2002/ 21/EC) establishes the general rule that providing electronic communication networks and services is free and may be performed subject to complying with the general authorization regime. Romanian law also provides rules with respect to the provision of the universal service to end users. The users of telecommunications services enjoy a number of rights, in particular the right to have a contract in which consumers subscribe to services providing connection and/or access to the public telephone network.
Hiring and firing employees Strict rules and regulations, including the Romanian Labour Code adopted in 2003, govern individual and collective employment relations in Romania. The Romanian legal framework is generally similar to the EU framework, as most directives in this field have already been applied and implemented in Romania. As a rule, there are no restrictions with respect to hiring individuals, except for the immigration-related requirements and possible requirements for specialized training in order to carry out specific activities.
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The law sets forth specific protections, for example, with respect to:
• the minimum monthly salary to be paid (currently amounting to RON 440 – approximately €137); • the minimum content of the employment agreement; • the maximum duration of work periods (eight hours per day and 40 hours per week); • the health and safety norms; and • the employees’ status in case of transfer of undertakings.
With respect to the latter, Law No. 67/2006 on the safeguarding of employees’ rights in the event of transfers of undertakings, businesses and parts of undertakings or businesses (applying EU Directive 2001/23/EC) sets forth the rules on the automatic transfer of employees. While the termination of a contract at the request of the employee or on mutual terms is not comprehensively regulated, strict rules (with respect to procedures to be followed) apply to the contractual termination on the employer’s initiative (dismissal). The employer may terminate an employment relationship for reasons imputable to the employee (such as gross misconduct or repeated misconduct, poor performance, physical inadequacy, etc.) or for reasons that are not based on the fault of the employee. In the latter case, the dismissal may be either individual or collective. The Labour Code provides that, in case of dismissal for reasons that are not based on the fault of the employee, severance payments may be provided to employees, in accordance with the individual employment contracts and/ or the applicable collective labour agreements. Currently, the collective labour agreement at national level (applicable to all employers in Romania) sets forth a minimum severance payment of one month’s salary.
Competition policy Romanian competition policy is generally based on principles similar to EU competition rules, including in respect of anti-trust, mergers and state aid matters. In particular, Law No. 21/1996 on competition, as republished on 16 August 2005, prohibits any express or tacit agreements or concerted practices undertaken with the goal of or resulting in the prevention, restriction or distortion of competition, as well as the abuses of a dominant position. Certain anti-trust practices are allowed, subject to them falling within the scope of block exemptions or having been approved by the Competition Council (the competent authority in the field).
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Business climate While Romania has made increased efforts to ensure an attractive business climate for investors, there are still some de facto restrictions on investments, such as legislative instability, inconsistent interpretation of legislation by an often unwieldy bureaucracy, a judicial system that can be unreliable, the existence of corruption in public sectors and infrastructure that is sometimes unfit for the implementation of a project. On the other hand, Romania’s continuing progress, including from a legislative standpoint, has increased the local market’s attractiveness for business investors, both foreign and Romanian.
2.2
Business Structures Carmen Peli, Partner, and Georgeta Dinu, Associate, Nestor Nestor Diculescu Kingston Petersen
The relevant Romanian legal framework regulating business structures is centred around the Company Law (No. 31/1990), as republished and subsequently amended. It is complemented by, among others, the Capital Markets Law (No. 297/2004), as amended, and the Trade Registry Law (No. 26/1990), as amended.
Types of business structures The Company Law recognizes the existence of five types of companies: • • • • •
joint-stock companies (societate pe actiuni, SA); limited liability companies (societate cu raspundere limitata, SRL); general partnerships (societate in nume colectiv, SNC); limited partnerships (societate in comandita simpla, SCS); and partnerships limited by shares (societate in comandita pe actiuni, SCA).
All company forms set forth under the Company Law have legal personality and the capacity to acquire rights and undertake obligations within the limits of their business type. All companies set up and registered in Romania are Romanian legal entities, irrespective of the nationality of their shareholders or founders, and thus subject to Romanian legislation. In addition, the legislation in force acknowledges the existence of sole traders acting either as natural persons or family associations. Also, natural or legal persons (sole traders or companies) may associate for the purpose of performing commercial activities and creating a commercial association (asociatie in participatiune), but such an entity does not have a legal personality distinct from that of its members.
Joint-stock companies A joint-stock company is a company whose obligations are guaranteed by its assets, the shareholders being liable to the limit of their registered capital contributions.
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In order to be incorporated as a joint-stock company, the commercial company must have a minimum of two shareholders and a minimum capital share of 90,000 Romanian Lei (RON, approximately €25,000). For the purpose of incorporating a joint-stock company, the paid-up capital must represent at least 30 per cent of the subscribed share capital. The rest must be paid within 12 months of incorporation, in case of shares issued in consideration of a cash contribution, or within a maximum of two years of incorporation, in case of shares issued in consideration for a contribution in kind. As a specific rule for joint-stock companies, and according to the provisions of the EU Second Company Directive (77/91/EEC), a company’s articles of association may authorize the board of directors or the directorate to increase the company’s share capital up to a predetermined value (authorized capital) within five years.
Limited liability companies A limited liability company is a company whose obligations are guaranteed by its assets and whose associates are liable only for the amount of their contribution. As opposed to a joint-stock company, a limited liability company is established based on the mutual trust of the associates. Consequently, the transfer of shares (called, in a limited liability company’s case, ‘social parts’) is subject to approval by three-quarters of the company’s associates. A limited liability company can have from one sole associate to a maximum of 50 associates and the minimum capital of RON 200 should be fully paid before incorporation. The registered capital of a limited liability company is divided into social parts of an equal nominal value that may not be lower than RON 10. The social parts may not be represented by negotiable instruments.
General partnerships A general partnership is a company whose obligations are guaranteed by its assets and by the unlimited and joint liability of the partners. The registered capital of a general partnership is divided into ‘parts of interests’ (parti de interes). The parts of interest cannot be represented by negotiable instruments.
Limited partnership A limited partnership is a company guaranteed by its assets and the joint and unlimited liability of the general partners. In addition to general
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partners, a limited liability partnership also has limited partners who are liable only up to the value of their contribution.
Partnership limited by shares A partnership limited by shares is a company whose obligations are guaranteed by its assets and by the unlimited and joint liability of the general partners. In addition to general partners, a limited liability partnership also has limited partners, who are liable only up to their registered capital contributions. The regulations regarding joint-stock companies apply also to partnerships limited by shares; however, the legal regime of the general and limited partners is ruled by the provisions set for partnerships.
Capital and management Under Romanian Law, registered capital for any kind of company may consist of: • contributions in cash, the existence of which is required upon establishment of any type of company; • in-kind contributions, which must be valued by an independent expert and, in the case of a joint-stock company, an authorized expert appointed by the Trade Registry judge; or • contributions in receivables, which must be valued by an independent expert and, in the case of a joint-stock company, by an authorized expert appointed by the Trade Registry judge. Such contributions are not allowed in the case of joint-stock companies established through public subscription, partnerships limited by shares or limited liability companies. With regards to the organization and management of the company types stipulated under Romanian law, partnerships are managed by the general meeting of partners and the directors (each director having the right to represent the company). The management of a partnership limited by shares is entrusted to one or more general partners. Joint-stock companies and partnerships limited by shares may be managed either under a one-tier system (by a board of directors and executive officers) or under a two-tier system (by a supervisory board and a directorate).
Company incorporation Each company must be registered with the Trade Registry before starting its business and will be granted with legal personality from the time it is registered with the Trade Registry.
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The articles of association submitted for registration must be drafted in accordance with the legal requirements applicable to each type of company. The authenticated form is required if a contribution of land to the company’s share capital is made, upon establishment of a partnership or limited partnership, or upon establishment of a joint-stock company by way of public subscription. The articles of association must include, regardless of the type of company: • identification data of the founders, including that of the general partners, if they exist; • type of company, commercial name and headquarters of the company; • the main scope of business of the company; • the amount of the subscribed, paid-up and, where applicable, authorized share capital; • the nature and value of any assets brought as contribution in kind, the type and number of shares allotted in exchange and the name of the person contributing them; • the number and nominal value of any issued shares and whether or not they are bearer shares or registered shares; • if there is more than one class of shares, the number of shares, their nominal value and the rights attached to each of those classes; • any restriction regarding the transfer of shares; • the identification data of the first members of the board of directors or the supervisory board or, if applicable, of the partners representing the company; • the powers granted to the members of the board of directors or the managers and the manner of exercising such powers; • the identification data of the first censors or of the financial auditor, as the case may be; • the duration of the company; • the branches, agencies, representation offices and other such units without legal personality; and • any provisions regarding the dissolution and liquidation of the company. Prior to the commencement of their activities, and no later than 15 days from the execution of the articles of association, all companies must submit an application for registration with the Trade Registry. The application must be submitted along with: • the articles of association; • documents proving the subscription and actual payment of the share capital, in accordance with the provisions of the articles of association; • evidence with regards to the company’s headquarters and the availability of the company’s name/logo; • insofar as there are any contributions in kind, documents regarding the
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ownership and, in case of real property, any encumbrance placed upon the property; • the company’s opening balance sheet, as approved by the shareholders/ partners; • a sworn statement of the founders, the first directors, and, if applicable, the first members of the directorate, the supervisory board and the censors, ascertaining their compliance with the applicable legal provisions; and • other acts or authorizations required by the law. Provided that all the requirements are complied with, the registration procedure should be accomplished within five business days from the submission of the documents. If the Trade Registry approves the incorporation of the company, it is published in the Official Gazette. The costs of incorporation of a company include: • • • • •
the registration fee due to the Trade Registry; the publication fee due to the Official Gazette of Romania; the fees for obtaining the fiscal record; notarization, translation and legalization fees, if applicable; and related stamp duties.
The founders, representatives and other persons that have undertaken various activities during the process of incorporation of the company are jointly liable towards third parties in relation to the agreements entered into, if the company, following its incorporation, fails to confirm them. If the company confirms that the agreements have been entered into for the purpose of its incorporation, the agreements are legally binding.
2.3
Corporate Governance Cristina Filip, Partner, and Georgeta Dinu, Associate Lawyer, Nestor Nestor Diculescu Kingston Petersen
Sources of law The legislation regulating corporate governance in Romania is centred around the Company Law (No. 31/1990), as republished and subsequently amended. It is complemented by, among others, the Capital Markets Law (No. 297/20040, as amended, the sections of the Commercial Code (Law No. 85/2006) which regulate insolvency procedures, the Accounting Law (No. 82/ 1991), as amended, the Ministry of Public Finance Order (No. 1752/2005) regarding the harmonization of Romanian accounting regulations with European Union (EU) Directives, and International Accounting Standards.
Management and supervision The reform of the Company Law in December 2006, followed by the amendments adopted in June 2007, mostly affected joint-stock companies and their management system. Mirroring the developments taking place in other EU member states, the new law offers shareholders, with respect to the management structure, a choice between two administrative systems: a two-tier system, comprising a directorate and a supervisory board, and a one-tier system, comprising a board of directors (and, in certain cases, with delegation of certain duties to the managers).
One-tier system Under a one-tier system, the management of a joint-stock company is based on a board of directors and the functions performed by its executive officers. Board members, who can be either natural or legal persons, are appointed and replaced by the general meeting, and the executive officers are appointed and replaced by the board. The number of board members must always be uneven. Should the company be subject to the legal obligation of auditing its financial statements, the board must number at least three members.
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Board members may be executive directors; however, the majority must be non-executive members if the company is under the obligation to have its financial statements audited, in which case the board must delegate most of its management duties to the executive officers. In the event of such delegation, the board of directors has exclusive competence to make a limited number of strategic decisions necessary to and required for achieving the scope of business stated in the articles of association. Such competence is established from the matters that, according to the law, come within the competence of the general meeting of shareholders. However, the vast majority of management decisions will be undertaken by the executive officers, with the board playing a supervisory role. The board of directors convenes meetings whenever necessary, but at least once every three months. The company is represented in court and in its relations with third parties by the president of the board or, where authority has been delegated to the executive officers, by the general manager. The president of the board has powers of representation in relation to the executive officers.
Two-tier system The two-tier system is based on a supervisory board and a directorate, with the members of the supervisory board being appointed and replaced by the general meeting, and the members of the directorate being appointed and replaced by the supervisory board. This system does not allow members of the supervisory board to be part of the directorate. The management of the company is delegated exclusively to the directorate, with the supervisory board supervising such activity. This entails: • exercising permanent control over the management performed by the directorate; • appointing and replacing members of the directorate; • verifying whether management decisions comply with the law, the articles of association and the decisions of the general meeting of shareholders; • providing the general meeting of shareholders with an annual report regarding the supervisory activity undertaken; and • requesting the directorate to provide any relevant information. Even if the supervisory board cannot undertake measures relating to the management of the company, the articles of association may grant it veto powers in respect of certain operations or types of operations. Where the supervisory board refuses to grant its approval, upon the request of the directorate, the general meeting of shareholders has the power to approve the respective operation.
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Under a two-tier system, the directorate represents the company in relation to third parties and in court and, unless otherwise stated in the articles of association, the members of the directorate can represent the company only acting unanimously. In the absence of any stipulation to the contrary, a member of the directorate can be empowered by the other members, acting unanimously, to represent the company in undertaking certain specific acts or certain types of acts. The name(s) of the persons empowered must be registered with the Trade Registry. The supervisory board represents the company in its relations with the directorate.
Liability All four categories (ie. board members, executive officers, members of the supervisory board and members of the directorate), collectively referred to here as ‘managers’, can act on a mandate granted by the company. The mandate should always be carried out keeping in mind the duty to act in good faith and in accordance with corporate purpose, the duties of care and skill, and the disclosure of conflicts of interests and confidentiality. The mandate should also be fulfilled in line with the business judgment rule, which defines the liability of managers for decisions taken on the basis of their business judgment. All managers may be removed without cause by the general meeting of shareholders, and are entitled to compensation but not to reinstatement. In contrast, an employment relationship can be terminated only through a complex procedure based on objective limited and regulated grounds and an abusive termination may result in the employee’s reinstatement. As a rule, each management body is liable for failure to fulfill the tasks entrusted to it by the superior corporate bodies or by operation of law. Regarding supervisory duty, the law states that the managers are liable, on behalf of the company, for losses caused by the actions of employees or officers of the company, if such actions could have been prevented by due and correct exercise of said duty. Taking into consideration the general principles of liability, and in the absence of provisions to the contrary, the liability of managers for the actions of the employees and officers of the company appears to be subsidiary. The section of the law regulating criminal and administrative offences has not been amended following the introduction of the two-tier system, which may create confusion and give rise to ambiguity in the application of certain legal provisions. The law enumerates the parties that may be held liable for criminal and administrative offences, identifying ‘founders, administrators, executive officers or legal representatives’, but does not mention members of the directorate or the supervisory board. As such, the courts may interpret the term ‘executive officer’ as any manager, even though such an interpretation might be considered inconsistent with the terminology used in the rest of the Company Law’s provisions.
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Internal and external audits Commercial companies subject to audit, either by obligation of the law or by voluntary application, shall organize the internal audit according to the regulations issued by the Romanian Chamber of Financial Auditors. The financial situation subject to audit will be investigated by financial auditors, natural or legal persons. All joint-stock companies that have chosen the two-tier management system are subject to auditing. Whether or not a company is subject to this legal obligation depends on its fulfilling the specific criteria set out in the Ministry of Public Finance Order (assets, turnover, number of employees). The choice between the two management systems gives a company, in principle, a certain flexibility to elect a more appropriate structure, considering the size of its business, the distribution and structure of its share capital and other practical needs.
Minority shareholders Minority shareholders have the right of access to documents/information/ reports (annual financial statements, the board of directors’ annual report and the censors’ reports, and the recommendation related to the distribution of dividends). Each shareholder has the right to address written questions to the board of directors in connection to the company’s activity, prior to the general meeting of shareholders convening date. One or more shareholders representing, individually or cumulatively, at least 10 per cent of the share capital may submit a request to the competent court of law to appoint one or more experts with a view to analysing certain operations performed by the company’s management. Any shareholder is entitled to notify the company’s censors or internal auditors about facts he deems as subject to their control. If the complaint was filed by shareholders representing, individually or cumulatively, at least 5 per cent of the share capital or a lower quota, to the extent that constituent documents provide accordingly, the internal auditors or the censors shall have the obligation to verify the claim. The board of directors is under an obligation to convene a shareholders’ meeting upon the request of the shareholders representing, individually or cumulatively, at least 5 per cent of the share capital of the company or less, to the extent that the constituent documents provide for such possibility, and only for items which fall under the competence of the general meeting of shareholders. Decisions made by a general meeting of shareholders breaching legal provisions or the provisions of the incorporation documents of the company can be challenged before competent courts within 15 days of the date they
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are published in the Official Gazette by minority shareholders that did not attend the general meeting of shareholders or voted against and requested that their opposition be mentioned in the minutes of such meeting. If the general meeting of shareholders does not initiate a claim for damages against the founders, directors, managers, censors or financial auditors in order to obtain indemnification for the damages incurred by the company due to the breach of their obligations, nor does it support such proposal put forward by one or more shareholders, the shareholders representing, individually or together, at least 5 per cent of the share capital may file a claim against the persons mentioned above, in their own name but on behalf of the company. In the event of a share capital increase, the shares issued for the increase of the share capital shall be offered for subscription first to the existing shareholders, pro rata with the number of shares held. For “grounded reasons”, the general meeting of shareholders can withdraw the right of the existing shareholders to subscribe shares in the share capital increase. The shareholders that have not voted in favour of a decision taken at a general meeting of shareholders shall have the right to withdraw from the company and to request the purchase of their shares to the extent that the decision taken refers to the change of: (a) (b) (c) (d)
the principal object of activity; the company’s headquarters abroad; the company’s type of business organization; or the merger and division of the company.
2.4
Agency and Distribution Carmen Peli, Partner, and Georgeta Dinu, Associate, Nestor Nestor Diculescu Kingston Petersen
Agency and distribution agreements are not specifically regulated under Romanian law, except from a competition perspective. A manufacturer of goods can sell its products in a number of different ways, including through an integrated sales unit, organization of a distribution network or appointment of a number of sales agents. Both agency and distribution agreements are vertical, ie. concluded between undertakings at different levels on the supply-distribution chain, and are thus regulated from a competition standpoint according to Article 5(2) of the Competition Law on vertical agreements, which provides both the conditions that an agreement must fulfill in order to qualify as an agency agreement, and the legal regime applicable to the two types of agreement. From a competition law perspective and acting as a supplier, having a network of agents is much more advantageous than having a network of distributors.
Agency agreements When establishing whether or not an agreement is an agency agreement, the deciding criterion is that an agent must not bear any significant financial or commercial risks in relation to the activity undertaken. The functions the agent performs are considered part of the suppliers’ activity and not an independent economic activity. More specifically, the following conditions must be met: (a) the supplier remains the owner of the products; (b) the property never passes to the agent; (c) the agent does not contribute to any costs in relation to the procurement of the products; (d) while the agent may provide the transportation means, the cost of transport is borne by the supplier; (e) the agent is not under any duty, direct or indirect, to contribute to any marketing/PR expenses of the supplier;
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(f) the agent must not maintain, on his own expense, and must not bear any risk in relation to, stocks of products that are the object of the agreement; and must be able to return the unsold products to the supplier, without paying any penalties; (g) the agent must not offer any post-sale services, such as repair or warranty services, unless the cost of these services is fully covered by the supplier; (h) the agent must not undertake market-specific investments in equipment, production facilities or personnel training; (i) the agent must not be liable for any losses caused by the product, unless he is proven to have been at fault; and (j) the agent must not bear the risk of the client’s default on the agreement, except to the extent of the commission, unless he is proved to have been at fault. All these conditions must be met if an agreement is to qualify as an agency agreement. If the agent bears one of the risks or assumes one of the obligations mentioned above, the agreement will not be considered an agency agreement.
Applicable legal regimes Article 5(2) of the Competition Law states that, as a general rule, agency agreements are exempt from the application of the Competition Law. As a practical consequence, in the case of an agency agreement, the supplier can impose certain conditions upon its network of agents, irrespective of the market share either of them enjoys. Such conditions include: (a) (b) (c) (d)
establishing the resale price; limiting the territory in which an agent operates; limiting the number of its agents; and imposing a non-compete clause upon its agents, irrespective of its duration and scope.
Distribution agreements According to Article 5(2) of the Competition Law, distribution agreements are only exempt from the application of the Competition Law if certain conditions regarding the market share of the supplier or, in some cases, the distributor, are met, and if the agreement does not include black-list clauses, which negatively affect competition. Black-list clauses are those clauses and agreements aimed at: • price fixing;
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• • • •
limiting or controlling output; allocating markets or clients; applying discriminatory terms for equivalent services; conditioning the conclusion of contracts on the acceptance of certain clauses stipulating additional services which, either by their nature or by commercial usage, do not relate to the object of such contracts; • participating, in a concerted manner, with rigged bids in auctions; or • eliminating competitors from the market; limiting or preventing access to the market and the free exercise of competition between other undertakings. Distribution agreements and their compatibility with a competitive environment are analysed in detail in the Competition Council’s Instructions relating to vertical agreements and the relevant Block Exemptions. The treatment applicable to the restrictions contained in vertical agreements varies upon the market share of the supplier. Certain restrictions do not have to be declared if the supplier has a market share of up to 30 per cent, but must be declared in order to be individually exempt by the Council if the supplier’s market share is higher. Some of the more commonly used restrictions will be analysed in the following sections.
Establishing the resale price of products Under a distribution agreement, the supplier cannot, irrespective of its market share, impose a fixed or minimum resale price. This is a rigid restriction and its breach could lead to a finding of cartel between the supplier and the distributors and result in a fine of up to 10 per cent of the previous year’s turnover. Recommended resale prices are permitted under the competition rules, as long as this does not amount to an actual fixation of the resale price. The recommended resale price is or may become, however, anti-competitive if the supplier is or becomes dominant on the market.
Limiting the number of distributors It is often the case that manufacturers want to deal only with specific distributors, in an attempt to protect their name, prevent excessive intrabrand competition, avoid free riders, ensure a high level of service for the customers or entice the distributors to invest in their dealerships. This can be achieved either by granting territorial protection to their distributors and appointing a sole distributor for a certain region – county, town, etc. – known as ‘exclusive distribution’, or by imposing a set of standards that must be met by any distributor – ‘selective distribution’.
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Exclusive distribution As a general rule, the prohibition referring to geographic allocation of the market is considered a rigid restriction and its breach could result in a finding of cartel, with the consequences mentioned above. However, there are certain exceptions to this rule. The Competition Council’s Instructions state that exclusive distribution in a territory can be compatible with the Competition Law provisions, insofar as it does not restrict competition and does not prevent passive, ie. unsolicited, sales in that territory by other distributors or by the supplier itself. If the supplier has a market share of more than 30 per cent, the Competition Council must be notified, with a view towards obtaining individual exemption. When assessing whether or not the agreement restricts competition, the Competition Council takes into account factors including, but not limited to: the market share of the supplier, the degree of concentration of the market, the countervailing buyer power, the market share of the main competitors and the maturity of the market.
Selective distribution Whether or not a particular supplier will be able to implement a system of selective distribution depends on the market share of the respective distributor and the nature of the criteria (qualitative or quantitative) used. A supplier that enjoys a market share of more than 30 per cent of the relevant market may resort to selective distribution only if the following conditions are met: (a) the nature of the product must require such a system of selective distribution; (b) the distributors must be selected based on qualitative criteria, applied in a non-discriminatory manner; (c) the qualitative criteria must not go beyond what is required by the very nature of the product; and (d) the criteria may incorporate quantitative restrictions, such as a minimum sales target, insofar as that target does not represent a significant percentage of the turnover of the distributor. It is clear that there are two main drawbacks in choosing this system, namely the limited criteria that can be used when choosing distributors and the fact that all distributors that meet the criteria must be approved, without any possibility of introducing a restriction relating to the maximum number. Furthermore, such a clause must be approved for individual exemption if the supplier has a market share of more than 30 per cent.
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Non-compete clauses A supplier will typically try to impose a non-compete obligation upon its distributors. Such an obligation, irrespective of the market share of the supplier, must be limited to five years. If the duration of the clause exceeds this amount of time or if the supplier has a market share of more than 30 per cent, it must file for individual exemption.
Procedural aspects There is no timeframe for the Competition Council where a request for individual exemption is concerned; consequently, the procedure can be time consuming. However, the undertaking that files the request is granted immunity starting on the filing date for the actions taken in pursuance of the notified clause, meaning that it can enforce the provisions of the respective clause.
Compensation Agency agreements, as opposed to distribution agreements, benefit from the protection conferred under the Permanent Commercial Agents Law (No. 509/ 2002,) implementing European Union (EU) Council Directive 86/653/ EEC of 18 December 1986, on the coordination of the laws of EU member states relating to self-employed commercial agents. Upon termination of the agency agreement, the agent is entitled to receive compensation. The amount of compensation depends on the number of new clients found or on whether the amount of commercial operations with the already existing clients has significantly increased. The principal still benefits from substantial gains from the operations with the clients. The agent is also entitled to compensation regarding overdue commissions, as well as the possible limitation of the agent’s professional activity, due to the existence of a non-competition clause in his or her contract. The value of the compensation cannot exceed an amount equivalent to an annual remuneration. It is calculated on the basis of the annual average remuneration paid to the agent during the last five years of the contract (or during the respective period, should the contract period be less than five years). The agent is not entitled to remuneration in the following cases: • the principal terminates the contract due to a breach by the agent of his obligations through gross negligence; • the agent unilaterally terminates the contract (except for justified reasons); • the contract is novated, by replacing the agent with a third party.
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No such protection is granted to the distributor. The latter must instead refer to the general civil law principles, which are neither as strong nor as well defined as those mentioned above.
2.5
Employment Law Luminita Dima, Associate, Nestor Nestor Diculescu Kingston Petersen
Romanian labour legislation is very protective as regards employee rights and interests. Although Romania has expended great effort over the past several years to bringing domestic legislation in line with European Union (EU) law, a large number of legislative provisions remain nevertheless more favourable toward employees than provided for in EU directives. At the same time, employment relationships have undergone a significant transformation with the introduction of the new Romanian Labour Code of 2003, which incorporates the principles of EU social law and recently adopted EU legislation. Current Romanian law has created new forms of employment, given new meaning to the concept of job security by regulating specific measures in case of collective dismissals, transfer of undertakings, employer insolvency, provided for detailed rules on non-discrimination in employment relationships, and recognized the increased role of information and consultation in both individual and collective relationships. Romanian legislation overall, and employment law in particular, continues to evolve, with the aim of adapting the law to the economic and social reality of Romania.
Main sources of employment law Romanian labour legislation is grounded in the principles of Romania’s Constitution which provides for the freedom to work, the right to measures of social protection, the freedom of association in trade unions and employers’ associations, the right to collective labour bargaining, the right to strike, etc. Generally, the labour relationship between employer and employee is governed by the Romanian Labour Code, the collective labour agreement and the individual employment contract. To ascertain the rights and obligations of employees, one must look at: 1. applicable legislation; 2. collective labour agreements, which are concluded at national level,
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industry level, group of companies level and company level and, usually, grant rights in addition to those stated by the law; and 3. individual employment contracts which specifically establish the position of the relevant employee.
Individual employment contracts Under Romanian law, the employment contract must be executed in writing by the employer, in the Romanian language. If the contract has not been executed in writing, the presumption is that it has been concluded for an indefinite term and the parties can establish the contract provisions and work performed using any elements of proof. Any employment contract must stipulate: the identity of the parties, the workplace, the employer’s place of business, the duties of the job, the typical risks of the job, the normal work period expressed in hours per day and hours per week, etc. According to the Labour Code, the parties may negotiate and include in the employment contract other specific clauses, such as noncompetition, mobility, confidentiality, etc. If an employee is hired for a probationary period, which can be a maximum of 30 days for non-management positions, and 90 days for management positions, the contract must expressly state this. The employer has a large number of other obligations related to the execution of the employment contract, including: • to inform the employee prior to commencing employment of the terms and conditions of the employment contract, in accordance with EU Directive 91/533/EEC. This obligation is deemed met upon both parties’ signatures on the employment contract. • to file the employment contract with the territorial labour inspectorate within 20 days from the execution date, as well as to keep a general registry of employees which includes records of the employment contracts according to the legal provisions. Failure by the employer to comply with these obligations qualifies as a minor offence carrying a fine. Over the past several years, striking a balance between flexibility of labour relations and protection of workers has been one of the key aspects to be taken into account in regulating the execution of an employment contract. It has been very difficult to reconcile protection of workers with the introduction of new legislation. As a rule, employment contracts should be for an indefinite period. Fixedterm employment contracts are possible in limited circumstances and as long as they meet the conditions set out in the Labour Code. Employment under fixed-term contracts cannot exceed 24 months, although within the 24-month period, up to a maximum of three separate and successive fixed-
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term contracts may be entered into. Fixed-term contracts concluded within three months after the termination of a previous fixed-term contract are considered successive. If a fixed-term employment contract does not comply with these rules, it will be considered an indefinite employment contract. However, the increased flexibility of employment relations has resulted in the creation of new forms of employment, including part-time and teleworkers, as well as in the possibility of negotiating a flexible work schedule with the employer. In addition, Romanian legislation has created the temporary agency worker who is employed (and paid) by a temporary labour agency, and placed at the disposal of a user for the duration necessary for carrying out certain precise and temporary duties. The Labour Code provides for mandatory rules regarding the work performed by temporary agency workers and the agreements which must be executed by the parties involved. Employee protection is also manifested in the mandatory legal provisions relating to wages (providing for a universal minimum wage), working hours (maximum duration of working time, including overtime, the necessity of an employee’s agreement to perform overtime labour, minimum duration of rest periods and holiday leave, specific rules on night work, etc.), health and safety at work (complying with the minimum requirements of EU legislation in this field). In addition, while the employment contract is in force, any change to the terms of the contract may only be effected with the agreement of both parties, unless the modification is required by law or, in some specific cases, the employer is permitted to temporarily amend the contract with the observance of a maximum term. Situations in which the employment contract can be suspended are also set out in the law.
Termination of employment The principle of job stability is reinforced by the regulation of termination of employment relations. Termination may occur only in the following circumstances: • de jure; • employee resignation; • mutual agreement, effective on the date mutually agreed on by the parties; or • dismissal.
De jure All situations where the employment contract is terminated by the effect of the law are expressly listed by the Labour Code.
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Resignation Resignation by the employee is also regulated. He/she may resign by giving written notification, although giving reasons for the resignation is not required. The employee’s only obligation in resigning is to observe a notice period of a maximum of 15 days for non-management positions, and 30 days for management positions.
Dismissal As distinct from the resignation, dismissals are strictly regulated by the Labour Code. There are only two grounds for dismissal: 1. for reasons related to the employee herself: (a) gross misconduct or repeated misconduct (disciplinary reasons); (b) if the employee is under preventive arrest for more than 30 days; (c) physical or psychological inability (only after a decision is issued by the competent medical authority determining such inability); (d) if the employee is not professionally fit to hold the position; (e) if the employee fulfils the standard age and contribution quota and has not requested the retirement in accordance with the law. 2. for reasons not related to the employee herself (ie. redundancy). In either case, to effect a dismissal, the employer must comply with strict procedural rules. In certain cases (employee’s dismissal for being professionally unfit, for physical or psychological inability, redundancy), the person dismissed benefits from the right to prior notice, which must be no less than 20 working days in accordance with the collective labour agreement at national level. According to the Labour Code, an employee cannot be dismissed because of their gender, sexual orientation, race, skin colour, or for exercising, under the terms of the law, their right to strike. In addition, in some cases dismissal is temporarily prohibited (eg. for the duration of maternity leave; a temporary working incapacity, medically certified; annual holiday leave; pregnancy, if the employer was aware of such condition prior to the issuance of the dismissal decision; holding an elected position in a trade union body). The decision to terminate an employment contract must be issued in writing and, to be valid, it must be grounded de facto and de jure and include all details expressly required by the Labour Code. If the employer fails to comply with any of the legal provisions and procedural rules when dismissing an employee, the employee may challenge the dismissal before the court and have it nullified. The employer will be liable to pay an indemnity equal to the wages and other entitlements the employee would have otherwise benefited from during the period between the termination of the labour contract and the court’s decision. The court’s
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decision is irrevocable and can, if the employee so requests, include an order to restore the parties to their status prior to the dismissal. The employee could also be entitled to be indemnified for moral damages.
Foreign employees Employment of foreign persons has been recently the subject of new legislation adopted following Romania’s accession to the EU in January 2007. In principle, any foreign person may be hired if they possess a work permit issued by the Romanian Office for Immigration. Under current legislation, a “foreign person” is interpreted to be any person who is not a Romanian citizen, a citizen of an EU member state or European Economic Area (EEA) member state. Thus, EU and EEA citizens do not require a work permit in order to enter into employment in Romania. All the other persons are required to obtain a work permit before being hired in or seconded to Romania. The requirements and procedure for obtaining a work permit are strictly regulated by Romanian legislation, as well as the exceptional situations when foreign persons do not need to obtain such permit to be hired in Romania. All foreign employees enjoy the same rights and must fulfill the same obligations as Romanian employees. Romanian legislation does not permit any discrimination on grounds of nationality.
2.6
Foreign Investment Protection Carmen Peli, Partner, and Georgeta Dinu, Associate, Nestor Nestor Diculescu Kingston Petersen
Sector potential FDI has thus far been mainly directed towards the following fields: telecommunication, services, trade, the machine construction industry, wood and paper, and energy. The tourism and agriculture sectors have received less attention, although these sectors have significant potential and could be of interest in the near future.
Sources of law The relevant Romanian legal framework regarding foreign investment is centred on the Government Emergency Ordinance No. 92/1997 on the promotion of direct investments, as amended, complemented among others by the Government Ordinance No. 66/1997 on the regime of foreign investments in Romania through the acquisition of state bonds. The legal framework also includes: • Law No. 332/ 2001 on the promotion of direct investments with a significant impact on the economy; • Law No. 31/1990 on commercial companies, as republished and amended; • Law No. 297/2004 on capital markets, as amended; and • Law No. 88/1997 on privatizations, complemented by Law No. 137/2002 on certain measures for furthering the privatization process.
Types of foreign investment An investor is any natural or legal person, resident or non-resident, with a permanent address or office in Romania or in a foreign country, performing investments in Romania.
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Under Government Emergency Ordinance No. 92/1997 on the promotion of foreign direct investment (FDI), FDI is defined as participation in the establishment or development of a company, in any of its legal forms, the acquisition of a company’s social parts or shares, except for portfolio investment, or the setting up or development of a branch in Romania by a foreign company, by way of the following: • contribution in cash, in national currency or in convertible foreign currency; • contribution in movable or immovable assets; or • any method of financial participation in the increase of the company’s assets. Portfolio investments are defined as the acquisition of securities on the organized capital market, which does not permit the direct participation of the company management. There are two methods of acquiring shares/social parts in a Romanian company: 1. purchase of shares; and 2. share capital increase. There are no restrictions on the acquisition of shares in a Romanian company listed on a regulated market, but a company not listed on a regulated market may have restrictions, specified in its articles of association. Under the Law No. 31/1990 on commercial companies, as amended, shares in a limited liability company are not freely transferable to third parties (a special quorum and a majority of votes at the general meeting of shareholders is required), while shares in a joint-stock company usually are. An interested party may purchase newly-issued shares of a company if the existing shareholders did not exercise their preference right or such right was revoked by a resolution of the shareholders’ meeting. Special rules apply to the sale or subscription of shares in a company listed on a stock exchange. Foreign investors may purchase shares of state-owned companies either directly or from the Authority for State Assets Recovery (AVAS). Most stateowned companies are sold by AVAS through direct methods, such as negotiation or tender. Smaller companies are usually sold through tenders, if they are included on privatization lists. The larger enterprises are sold by direct negotiation with potential investors. Romania’s economy is currently undergoing a significant economic shift, aimed at fulfilling the commitments undertaken as part of its accession to the European Union (EU).
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FDI incentives Over the years, various tax incentives aimed at promoting FDI have been provided by Romanian legislation. The most common incentive is the accelerated tax depreciation, still available for purchases of technological equipment, including computers and related accessories. Small businesses may take advantage of the tax regime for micro-enterprises, which enables such companies to pay either the corporate tax or a turnover tax of 2 per cent throughout 2007. To qualify for this fiscal regime, the company must be a Romanian private legal entity, have between one and nine employees and a turnover of no more than €100,000.
Guarantees and rights Romanian legislation grants certain guarantees and rights to foreign investors, who have the opportunity to invest in any area and in any legal forms established by Romanian law: • they enjoy equal treatment to Romanian investors; • they are protected against seizure, expropriation, or other similar measures; • they receive support in following procedures related to performing administrative formalities; and • dividends and amounts invested may be repatriated without restriction (a withholding tax may apply to dividends paid to a foreign investor). The legislation in force does not limit foreign participation in companies. A foreign investor may establish a wholly-owned company in Romania. Investments may not be nationalized, expropriated, confiscated, or subject to any other similar measures, except where it is determined to be in the public interest, and even in this case, only provided that appropriate compensation is granted. According to the provisions of the Government Emergency Ordinance No. 92/ 1997, the compensation should be prompt, adequate and effective. Romania has concluded a number of bilateral treaties on mutual guarantees and the attraction of investments. The provisions of these treaties will take precedence over Romanian legislation if they provide for a more favourable regime.
Foreign investment authority The governmental authority providing consultative services to foreign investors is the Romanian Agency for Foreign Investment (ARIS). ARIS
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promotes FDI in the Romanian economy, helping to create an attractive business environment for developing investment projects. In accordance with the provisions of Government Emergency Ordinance No. 194/2002 on the regime of foreigners in Romania, ARIS grants an endorsement to foreign citizens requesting long-term visas for the purpose of performing commercial activities in Romania. ARIS issues the endorsement within a maximum 30 days and free of charge. After the issuance of the endorsement, the visa is issued by Romanian diplomatic missions or consulates, with the approval of the Visa National Centre. In order to obtain the endorsement for a long-term visa for commercial activities, a foreign investor should submit the following documents: • documents that prove their capacity to be an associate or shareholder with management or administrative duties; • a business plan; • the latest balance sheet registered with the public finance territorial offices (in case the company is already established); • proof that the applicants possess the necessary funds to develop and operate a commercial activity – at least €100,000 if shareholders in a joint-stock company, and at least €70,000 if associates in a limited liability company (compliance with this condition must be demonstrated by the original copy of a nominal account statement issued by a Romanian bank); • an application to be submitted to ARIS; and • a copy of all relevant passports.
Concessions and free economic zones According to the Government Emergency Ordinance No. 54/2006, public property assets owned by the state or by territorial-administrative units can be subject to concessions. The lessor can be a ministry or other specialized central government or local authority institution depending on whether the asset is state- or city/county-owned. The position of lessee can be held by any Romanian or foreign natural or legal person qualified according to the provisions of the law. The concession contract is concluded for determined periods, up to 49 years. Free economic zones are designated areas for industrial or commercial operations or any other operations involved in economic growth and development. There are currently seven free zones in Romania: Sulina, Constanta Sud, Basarabi, Galati, Giurgiu, Braila and Curtici. These zones are established by government decision, at the proposal of the interested ministries and local public administrations. The free zones are locations that enjoy certain privileges (most often of a fiscal nature) and are exempt from paying VAT on the following:
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• imported goods that enter into the free zones for the sole purpose of being stored there; • exit of imported goods from the free zones; and • other services in connection with the aforementioned activities.
2.7
Insolvency and Bankruptcy Madalin Niculeasa, Senior Associate, Nestor Nestor Diculescu Kingston Petersen
A new law was enacted in Romania in 2006, concerning insolvency proceedings (Law No. 85/2006). Aimed at simplifying bankruptcy procedures, this law introduced a few innovations in this area: • a simplified procedure applicable to business agents in one of the situations restrictively prescribed under the law (for instance business agents owning no personal or professional/business assets); • summoning persons involved in the proceedings through the Insolvency Proceeding Bulletin; • establishment of the liquidation fund to cover the expenses incurred during the proceedings if the debtor has no personal or professional/ business assets; • terminology clarification of the main legal institutions involved in the proceedings (captive consumer, qualified financial contract, bilateral compensation), etc. The bodies enforcing insolvency proceedings are expressly and restrictively prescribed under the law: the court of law, the bankruptcy judge, the receiver and the liquidator. In addition to the bodies enforcing insolvency proceedings, the law also regulates a category of bodies involved in proceedings themselves, ie. the special receiver, the assembly of creditors, the creditors’ committee and the general meeting of the debtor’s associates/shareholders. For each of the bodies that either enforce insolvency proceedings or are involved in them, the law expressly establishes the appointment and dismissal procedures and the duties incumbent on each and every body. As for the jurisdiction of the courts over this matter, it is divided between the Court where the debtor’s domicile/registered office is located as the court of first instance and the Court of Appeals, as the court for filing second appeals. Furthermore, in order to avoid the practical difficulties and time constraints with respect to the summoning of the parties involved in the insolvency proceedings, the law established a special summoning procedure, in which the parties’ summons and any service of process, calls and notices are, as a rule, effected through the Insolvency Proceeding Bulletin.
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Judicial control over insolvency proceedings is carried out by the bankruptcy judge while management control over the proceedings is exercised by the receiver, the liquidator or, exceptionally, by the debtor him/ herself, if the latter has not lost the right to administer the estate. Management decisions related to whether the timing of any steps taken was appropriate may be made in consultation with the creditors through the creditors’ committee. The duties of the bankruptcy judge are limited to judicial control over the receiver and/or the liquidator’s activity and to the trials and judicial petitions related to the insolvency proceedings.
Initiating proceedings To initiate insolvency proceedings, a petition must be filed with the court by the debtor or the creditors, as well as by any other persons or institutions expressly provided under the law. The National Securities Commission may bring a motion against the entities it regulates and supervises which, according to the information available, meet the criteria prescribed under special laws for the opening of proceedings provided under this law. The insolvent debtor must file a motion with the court in order to become subject to the provisions of this law no more than 30 days from the occurrence of an insolvency situation. Any creditor entitled to request the opening of the proceedings provided under this law against a presumably insolvent debtor may bring a petition which shall specify: (a) the amount and the grounds of the debts; (b) the existence of a security interest created by the debtor or constituted under the law; (c) the existence of certain distress actions over the debtor’s assets; (d) a statement on the potential intent to participate in the debtor’s reorganization, in which case reference should be made, at least as a matter of principle, to how it intends to participate in the reorganization.
Effect of opening proceedings If the debtor’s petition complies with the legal conditions, the bankruptcy judge shall issue a decision to open the general proceedings; should the debtor confirm in its statement the intent to pursue the simplified procedure and not to file the documents referred to under the law, the judge shall issue a decision for opening the simplified proceedings. In its decision to open the proceedings, the bankruptcy judge shall order the receiver or liquidator, as the case may be, to notify the creditors in this respect. Within 48 hours of registration of the petition filed by an eligible creditor, the bankruptcy judge shall communicate the decision by copy, to the debtor.
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Within 10 days of receipt of the copy, the debtor must either appeal against or acknowledge the existence of insolvency. If the debtor appeals against the insolvency and the appeal fails, it shall lose the right to apply for judicial reorganization. At the debtor’s request, the bankruptcy judge may compel the creditors filing the motion to deposit with a bank, within 15 days, a surety amounting to up to 10 per cent of the value of the debts. The surety shall be returned to the creditors if their motion is admitted. If the motion is dismissed, the surety shall be used to cover the damages incurred by the debtors. If the surety is not deposited in due time, the introductory motion shall be dismissed. Based on the decision to open the general proceedings, the bankruptcy judge shall appoint a receiver and if simplified proceedings are opened, an interim liquidator shall be appointed. As of the opening of the proceedings, all judicial or extra-judicial actions to recover debts against the debtor or its assets are de jure suspended. The opening of the proceedings suspends any statutes of limitations applicable to these actions for recovery of debt. Any service provider in the field of electricity, natural gas, water, telephone or such other services is not entitled, during the observation and reorganization periods, to change, refuse or temporarily interrupt service to the debtor or its estate, if it qualifies as captive consumer under the law. No interest, increase or penalty of any nature whatsoever or expense, generally referred to as accessory, can be added to the debts accrued prior to the opening of the proceedings. Following the opening of the proceedings and confirmation of the reorganization plan, the shares of the issuers are suspended from trading as of the receipt of the communication by the National Securities Commission, as per the Capital Markets Law (No. 297/ 2004). The debtor is bound to make available to the receiver or liquidator all the information it requires, as well as all the information deemed necessary, on its activity and estate and the list of payments and transfers of personal property it carries out during the 120 days prior to the proceedings opening. The opening of the insolvency proceedings does not affect the creditor’s right to invoke the set-off of its debts against the debtor’s debts held against it, as long as the legal requirements in the field of legal compensation are met upon the opening of the proceedings. The assets divested by the receiver or the liquidator in the course of their work as regulated by this law are acquired free and clear of any encumbrances such as mortgages, security interests or any retention titles or distress actions.
Reorganization Pursuant to the confirmation of a reorganization plan, the debtor shall carry on its activity under the receiver’s supervision and in accordance with the confirmed plan until the bankruptcy judge orders, on a reasonable basis,
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either the close of the insolvency proceedings and the initiation of all actions for the debtor’s reinstatement into its business activity, or the cessation of the reorganization and the initiation of bankruptcy. Throughout the reorganization process, the debtor shall be managed by the special receiver, under the receiver’s supervision. Shareholders, associates and limited liability members are not entitled to interfere with the activity, management or administration of the debtor’s estate, save within the limits expressly and restrictively prescribed under the law and the reorganization plan.
Bankruptcy When the law expressly prescribes it, the bankruptcy judge may open general or simplified bankruptcy proceedings. In both cases, the liquidator must inform the creditors of the opening of the bankruptcy proceedings. The liquidation of assets pertaining to the debtor’s estate shall be carried out under the bankruptcy judge’s control. To maximize the value of the debtor’s estate, the liquidator shall undertake all efforts to display them on the market, in an appropriate form, the advertising expenditure for which being borne by the debtor’s estate.
Close of proceedings At any stage of the proceedings referred to under the law, if it is found that the debtor owns no assets or they are insufficient to cover the administrative expenses and no creditor offers to advance the corresponding monies, the bankruptcy judge may deliver a decision to close the proceedings, and order the removal of the debtor from the registry it was entered into.
Liability of the members of the management bodies At the receiver or liquidator’s request, the bankruptcy judge may order that part of the liabilities of the debtor, a legal entity, undergoing insolvency, be borne by the members of the supervisory bodies of the company or the management, as well as by any other person responsible for the debtor’s insolvency through one of the deeds expressly referred to under the law. The creditors’ committee may ask the bankruptcy judge to be authorized to file the action mentioned above, if the receiver or the liquidator fails to specify in its report on the causes of the insolvency and/or the persons guilty of the insolvency of the debtor-legal entity’s patrimony, or it fails to lodge the action and the liability of the person in question is about to be established.
2.8
Dispute Resolution Madalin Niculeasa, Senior Associate, Nestor Nestor Diculescu Kingston Petersen
In Romania, disputes may be resolved either by pursuing a claim in the courts or by alternative methods. It is impossible to predict which of the two procedures (court proceedings and arbitration), will be relatively shorter or more cost effective, as this determination is dependent upon the cause of action on which the dispute is predicated. Although there have been instances where the court proceeding proved to be faster and more cost effective, there have been cases where the opposite proved true. The domestic legislation applicable to dispute settlement is established by the Code of Civil Procedure.
Court proceedings The following courts have jurisdiction over disputes: the Ordinary Court, the Tribunal, the Court of Appeals and the High Court of Cassation and Justice. Different courts preside over disputes depending on the nature of the dispute (either civil or commercial), and on the value of the object of the dispute. If the law does not expressly stipulate which court is competent to settle a certain dispute, the dispute will be heard by the Ordinary Court. Generally, the court with jurisdiction over the dispute is the one where the defendant’s domicile is located. If the defendant’s domicile is not known or is not located in Romania, competency rests with the court that has jurisdiction over plaintiff’s registered office/domicile. Since Romania’s accession to the European Union (EU) in January 2007, Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial disputes is directly applicable. In order to relieve courts of the burden of hearing so many commercial disputes, the law now offers a pre-litigation procedure for dispute settlement: the direct conciliation procedure. In cases where the value of the claim can be financially assessed, it is mandatory for the plaintiff to follow this procedure prior to filing the statement of claim with the court. During the course of this procedure, the parties must meet certain conditions and observe specific procedural terms.
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In principle, the length of the litigation varies depending on whether it is civil or commercial in nature. Another factor that influences its duration is the evidence introduced during the litigation: for example, the introduction of expert evidence will lengthen the duration of the trial, while the introduction of authenticated written evidence will have the opposite effect on the length of the trial. With respect to the duration of the resolution of offensive tactics, one must distinguish between the first and the second appeal, as in the case of a first appeal the court may allow, by law, the re-submission of evidence presented in the original trial, including, if necessary, the expert evidence. In contrast, in the case of a second appeal, the court may only allow the submission of authenticated written evidence, which considerably shortens the length of the adjudication. In direct proportion with the duration of the proceedings, the law allows the plaintiff/creditor to request certain precautionary measures in order to safeguard its rights and to protect against a situation where the defendant/ debtor intentionally transfers or disposes of his assets. As such, the law has prescribed the following precautionary measures: • attachment of assets; • attachment by way of mortgage on real property, business assets and securities; and • judicial attachment (attachment by court receivership of contested property or assets until judgment is entered). For each of these measures, the law requires special admissibility requirements.
Arbitration Arbitration proceedings are governed by detailed regulations set out in the Code of Civil Procedure and the Arbitral Proceeding Rules of the International Court of Arbitration of the Chamber of Commerce and Industry of Romania, which makes arbitration highly predictable both economically (arbitration taxes) and legally (appointment of arbitrators, trial in equity, etc.). Briefly, an arbitration proceeding follows these stages: 1. The plaintiff lodges a request for arbitration with the Secretary’s Office of the Arbitration Court which sends a copy to the defendant(s) who must submit a defense within 20 days of receipt of the request. The defendant appoints the arbitrator and the deputy. 2. The establishment of the arbitral court consisting of one or three arbitrators, agreed upon by the parties in dispute. 3. The analysis and debate of the dispute in non-public sessions.
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4. The deliberation and deliverance of the arbitral award. 5. The appeal against the arbitral award before ordinary courts. Arbitration has, in principle, certain benefits over court proceedings: (a) While the court procedure requires that plaintiff fulfill the pre-litigation conciliation procedure if the claim can be financially assessed, the arbitral tribunal does not. In cases where the parties have entered into an agreement which expressly stipulates that the parties must use their best efforts to settle the dispute amicably before requesting arbitration, the parties must do so before the arbitration can proceed, but are not required to fulfill the pre-litigation conciliation procedure. (b) The arbitrators entrusted with the resolution of the dispute are highly qualified persons in the legal field and international economic relationships, which significantly impacts on the manner in which the arbitral award is substantiated. (c) An arbitral award may be challenged in court within one month of being handed down, but the challenge must be based on grounds expressly and restrictively provided by law. A court ruling canceling the arbitral award may be challenged by second appeal within 15 days of its issuance. In practice, reversing a ruling to nullify an arbitral award is very difficult, as the reviewing court only looks at matters of law and not to the merits of the case. An analysis of the jurisprudence of the International Court of Commercial Arbitration during 1994-2002 demonstrates that only 3 per cent (or 11 out of 292) of arbitral awards under dispute were reversed. Romania joined the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which allows the enforcement of an arbitral award delivered in Romania to be carried out on the territory of another country (one of the 140 some countries which are signatories to the UN Convention).
Alternatives to arbitration To keep pace with the rapid development of the business environment in Romania, the International Court of Arbitration of the Chamber of Commerce and Industry of Romania introduced new methods to settle commercial disputes: mediation and e-arbitration. The Centre for the Mediation of Commercial Disputes, a division of the Chamber of Commerce and Industry of Romania purports to offer entrepreneurs a means to amicably resolve the disputes between domestic or foreign enterprises, either through mediation or other alternative dispute resolution (ADR).
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Mediation Mediation is a voluntary and confidential process in which the parties entrust the resolution of their dispute to a neutral and impartial third party, referred to as a mediator. The mediator may be any natural person of Romanian nationality, with an unblemished reputation and extensive experience and qualifications in the business or legal field. To engage in mediation one of the following conditions must be met: (a) a mediation clause modeled on one established by the Centre for the Mediation of Commercial Disputes; (b) a previous agreement to undertake mediation; or (c) a request for mediation signed by both parties. The mediation procedure has the following advantages: • the business relationship between the two parties is preserved; • the dispute between the two parties is settled with celerity; • the mediator’s fee is one-half of the Arbitral Taxes or a value negotiated with the parties (arbitral taxes are not fixed amounts and are established through the value of the claim’s object); • trials before courts are avoided.
E-arbitration In an attempt to reduce the time it takes to recover debt owed, the International Court of Commercial Arbitration adopted the Accelerated Arbitral Proceeding which offers the following benefits: • expedited dispute settlement, as the period between registration of the arbitral request and the delivery of the arbitral award is about 21 days; • confidentiality of the dispute and the debates regarding the subject matter of the dispute, which allows commercial companies involved in the dispute to protect their economic information; • similar to arbitration, the arbitral award may be quashed only by way of an action for cancellation and for the reasons specified in Article 364 of the Code of Civil Procedure. Again, in keeping pace with technological developments, the Court of International Arbitration of the Chamber of Commerce and Industry of Romania introduced accelerated arbitration based on e-support, which allows business agents to initiate a swift and inexpensive procedure for the recovery of debt. In a user-friendly electronic environment, plaintiffs are given the opportunity to carry out service of process on-line, which reduces the time
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required to settle the disputes, the arbitral costs, as well as the practical difficulties triggered by handling files in physical form. These latter versions of arbitration have not yet been thoroughly investigated in practice and as such these undertakings operate for now at a highly theoretical level.
2.9
Financial Services Law Alina Radu, Partner, Corina Dumitru, Associate, and Diana Precup, Associate, Nestor Nestor Diculescu Kingston Petersen
Regulatory framework The financial services sector is subject to a large number of legal enactments, and has undergone important changes over the last few years order to harmonize Romanian law with European Union (EU) legislation. Although alignment with EU norms has been achieved in theory, certain difficulties may arise in practice when applying certain legal provisions, as some of the concepts are not yet customary for the Romanian market. Some of the key applicable legislation in this sector is listed below: • Emergency Ordinance No. 99/2006 on credit institutions and capital adequacy, as further amended (Banking Law); • Government Ordinance No. 28/2006 on regulation of certain financial and fiscal measures, as further amended (GO 28/2006) and its applicable norms; • Regulation No. 4/2005 on foreign exchange regime, as further amended; • Government Ordinance No. 51/1997 on leasing operations and leasing companies, as further amended; • Law No. 31/2006 on receivables securitization and applicable regulations; • Law No. 32/2006 on mortgage bonds and applicable regulations; and • Law No. 297/2004 on capital markets (Capital Markets Law).
Credit institutions and non-banking financial institutions As of 2006, non-banking financial institutions are regulated as players on the credit market in Romania, as well as credit institutions, and are under the supervision of the National Bank of Romania (NBR). Under the Banking Law and GO 28/2006, crediting on a professional basis is only allowed by credit institutions and non-banking financial institutions.
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In Romania, credit institutions may be set up as banks, credit co-operative organizations, savings banks for housing, mortgage loan banks and electronic money institutions.
Supervisory authority The NBR acts as the central state bank, having supervisory powers over commercial banks and non-banking financial institutions. Credit institutions and non-banking financial institutions established as Romanian entities or branches of non-EU credit institutions operate under the strict supervision of the NBR, being required, inter alia, to observe prudential requirements set forth by the NBR. These refer mainly to solvency, liquidity, currency risk, establishment and use of risk provisions, organization and internal control. For Romanian branches of non-banking financial institutions from an EU member state, the requirements related to their crediting activity, as well as to their monitoring and supervision, are to be established by cooperative agreements between the relevant supervisory authorities. Both credit institutions and non-banking financial institutions are monitored by the NBR, as part of the NBR’s mandate to ensure the proper functioning of the banking sector. As such, the NBR should approve certain changes in the status of credit or non-banking financial institutions, such as changes in business activity, appointment of new significant shareholders, directors, managers and auditors or opening of branches abroad. The NBR also approves business and lending terms of credit institutions.
Authorization process In order to perform banking activities in Romania, credit institutions organized as Romanian entities should first be registered with and operate under a license issued by the NBR. One of the pre-conditions of authorization as a Romanian credit institution is to have a minimum share capital representing a minimum of 37 million Romanian lei (RON, approximately €11.7 million) for banks; RON 25 million (approximately €7.9 million) for mortgage banks and saving banks for housing; RON 12 million (approximately €3.8 million) for electronic money institutions; and RON 200,000 (approximately €95,000) for co-operative organizations. Credit institutions from EU member states may operate in Romania by: • incorporating a Romanian legal entity as a subsidiary, which conducts its banking activity based on the license issued by the NBR, as mentioned in the paragraph above; • establishing a Romanian branch, based on a simple notification sent to the NBR by the competent supervisory authority from the origin country; or
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• directly conducting banking activities in Romania, based on a notification sent by the supervisory authority from the origin country to the NBR. EU credit institutions functioning in Romania either directly or through a branch should still observe certain Romanian banking law requirements. However, minimum capital requirements do not apply to branches of credit institutions from EU member states. A credit institution from a non-EU member state may perform banking activities in Romania by establishing a Romanian subsidiary or branch, subject to obtaining the relevant license from the NBR, and complying with all Romanian banking law requirements (including the minimum share capital). Foreign non-banking financial institutions may operate in Romania by establishing a Romanian subsidiary or branch, subject to the entity being registered with the NBR, following a complex and time-consuming procedure. The minimum share capital for non-banking financial institutions required by law is €200,000, if not otherwise specifically provided (for example, for non-banking financial institutions granting mortgage loans, the minimum level is RON 25 million – approximately €7.9 million).
Business activity Credit institutions may engage in the following activities in Romania, within the limit of their license: • receipt of deposits; • granting loans (eg. consumer credits, mortgage loans, factoring operations, financing commercial transactions); • financial leasing; • transfers of cash funds; • issuance and management of payment instruments, including issuance of electronic money; • issuance of guarantees and assuming commitments; • transactions on its own account and/or for the account of its clients, with negotiable instruments (cheques, bills, promissory notes, deposit certificates), futures and options, interest-rate instruments, transferable securities and other financial instruments; • participation in issuance of security; • offering consultancy on capital structure, business strategy and related issues; • portfolio management and related consultancy; • securities custody and administration; • intermediation on the inter-bank market; • providing information and references regarding credit activity; • safe custody services;
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• acquiring participation in the share capital of other entities; and • any other activities or services that are included in the financial area, in compliance with special laws regulating such activities. Non-banking financial institutions are allowed to carry out the following activities, if authorized as such: • granting loans, including but not limited to: ��� consumer loans; ��� mortgage loans; ��� real estate loans; ��� micro credits; ��� financing commercial transactions; ��� factoring operations; ��� discounting; ��� forfeiting; ��� financial leasing. • issuing of guarantees and undertaking commitments, including loan guarantees; • granting loans by receiving goods for bailment; • granting loans to members of non-profit entities (eg. associations, foundations, federations, unions), in order to sustain its members through financial loans; • granting loans by non-profit entities from public funds; and • other financing of a similar nature to the above. Non-banking financial institutions are not allowed to receive deposits or other reimbursable funds from the public and cannot issue bonds (except by public offer to qualified investors, in accordance with capital market regulations).
Bank Deposit Guarantee Fund The Bank Deposit Guarantee Fund is a public legal entity established with the purpose of securing repayment of deposits opened by individuals, legal entities and persons without legal personality, with credit institutions that are no longer able to reimburse their clients. The fund guarantees deposits held both by residents and non-residents, in domestic or foreign currency, and covers the total amount of the financial obligation of a bank toward its clients (including deposits and due and unpaid interest). In case of a bank’s insolvency, the fund guarantees the payment of all deposits, within a guarantee threshold established by law at the level of €20,000 per each guaranteed deposit holder. Financing resources of the fund are raised mainly through compulsory contributions from credit institutions.
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Payment Incident Bureau The Payment Incident Bureau is an intermediation centre managing information specific to payment incidents. These include overdrafts, cheques issued without the approval of the drawee, cheques bearing a false date, cheques issued by a drawer which is prohibited from performing banking operations, and bills of exchange discounted without a claim being assigned upon transfer. Data are sent to the Payment Incident Bureau through the Interbank Communication Network, which links the head office of the NBR to the head offices of all banks. The database is organized in two files: (i) Payment Incidents National File, and (ii) Risky Persons National File. Based on the information forwarded by reporting persons, the system forwards a report on the ban to issue cheques to all bank head offices and also forwards a report on loss/theft/destruction/cancellation of payment instruments to the remitting bank. This is to prevent settlement of such cheques, bills of exchange or promissory notes, should they be presented fraudulently. Before entering into a transaction, private persons may consult the Payment Incident Bureau’s database to verify if any payment incident with cheques, bills of exchange or promissory notes is registered in the name of a potential partner.
Credit Information Bureau The Credit Information Bureau is a system that specializes in the collection, storage and centralization of information on the exposure of all reporting entities in Romania (credit institutions, Romanian branches of foreign credit institutions, and leasing companies) to debtors. These entities have been granted loans and/or incurred commitments with a cumulated value higher than the reporting threshold (currently, RON 20,000 (approximately €6,630). The Bureau also deals with data on card frauds perpetrated by cardholders. Reporting entities provide the Credit Information Bureau with information regarding the financial conduct of their clients in view of the evaluation of the credit risk. Only reporting entities have access to the Credit Information Bureau’s database. The Bureau provides monthly reports to the entities comprising information on loans and commitments of debtors towards all credit institutions, as well as responses to online queries regarding the overall risk status of any debtor.
Foreign exchange markets As of 1 September 2006, the foreign currency market has been liberalized by the NBR and almost all restrictions on current transactions have been removed.
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NBR authorization is no longer necessary for current and capital foreign currency operations. Residents and non-residents may open and hold accounts in both foreign and domestic currency while non-residents are free to repatriate and transfer abroad financial assets held in Romania. The buying/selling of foreign currency by resident natural persons via exchange houses and credit institutions is also no longer limited. However, payments between Romanian residents related to the trading of goods and services must be made only in RON, except in certain cases expressly provided by law.
Reporting requirements For statistical purposes, residents performing currency exchange operations with non-residents are required to notify the NBR, if such operations are medium- or long-term private external debts. Reporting requirements refer mainly to credits and financial loans, with a maturity exceeding one year, received by residents from non-residents; international trade loans, with a term exceeding one year, received by residents from non-residents; and primary transactions of bonds and other financial instruments, with an initial payment term exceeding one year, issued by residents on a foreign capital market. Romanian residents should also notify the NBR, directly or through their credit institutions, with respect to economical and financial transactions with foreign institutions and transactions carried out through foreign bank accounts as well as for direct investments abroad.
Leasing operations The leasing market has developed significantly of late and financing through leasing operations has become a legitimate alternative to credit operations. Leasing regarding movable assets (especially vehicles) is currently the main activity, but immovable asset leasing is becoming more important within leasing operations.
Types of leasing operations There are two forms of leasing operations regulated under Romanian legislation – financial and operational leasing. Each type has a different fiscal and regulatory treatment. Financial leasing complies with at least one of the following requirements: • the risks and benefits of the ownership right over the leased asset are transferred to the lessee upon the leasing contract entering into force (usually on signing);
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• the leasing contract specifically provides for the transfer of the ownership right over the leased asset at the expiry date; • the lessee has the option to buy the leased asset at the expiry date and the residual value (as a percentage) is lower than or equal to the ratio between the maximum useful life less the leasing period, on one hand and the maximum useful life, on the other hand; • the leasing period exceeds 80 per cent of the maximum useful life of the leased asset; or • the total value of the leasing installments, less related expenses, is greater than or equal to the entry value of the leased asset. Operational leasing is defined as a leasing operation that does not comply with any of the five requirements presented above. Sale and lease-back operations and cross-border leasing are also allowed under Romanian law.
Leasing agreements A leasing contract may not be concluded for a period of less than one year and should include certain minimum terms and conditions required by law. Leasing agreements with immovable assets should be registered with the Land Book. The leasing agreements, together with any real or personal guarantee entered into in order to secure specific obligations, are considered writs of execution under Romanian law. In order to ensure priority with regard to the enforcement of a security interest related to a leasing agreement, the respective security interest agreement must be registered with the Electronic Archive for Movable Security Interests. If the leased asset is an immovable, the security agreement must be registered with the Land Book.
Leasing companies Financial leasing is treated under applicable Romanian law as a form of credit and, therefore, it may only be performed by non-banking financial institutions or by credit institutions that have included such activity within their business activity. Operational leasing is not considered a form of credit and may be performed by regular trade companies.
Securitization The legislation on securitization was enacted in Romania in 2006, creating the legal framework for securitization of receivables and issuance of mortgage bonds in Romania. Given the novelty of such provisions, there is little practice concerning securitization in Romania.
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Securitization of receivables Securitization of receivables is defined as the financial operation aimed at the realization of receivables, performed by a special purpose vehicle (SPV), which acquires, collects and uses the receivables as collateral for issuance of movable securities (securitized financial instruments). According to the securitization law, both present and future receivables may be securitized. This includes almost any predictable income deriving from a wide range of contracts, including mortgage loans, car loans, credit cards, leasing and consumer credits, sale contracts providing for deferred payment, equity or debt financial instruments and basically any title incorporating a receivable that can be assigned. In order to ensure comfort and protection to investors, the law imposes certain minimum requirements with respect to the quality of the receivables as underlying assets, which have to be originated in strict compliance with the law and should not be pledged or otherwise encumbered to third parties. The owner of the receivables must assign the receivables to the SPV for a certain price. Any assignment free of charge is void. The SPV may acquire the receivables exclusively for the purpose of securing the issuance of securitized financial instruments. The acquisition by the SPV of receivables for other purposes or the encumbering of the receivables for third parties’ benefit is void. In order for the assignment to be enforceable against the debtor, it must be registered with the Electronic Archive for Movable Security Interests. An SPV created for the purposes of acquiring assignable receivables and issuing securitized financial instruments may be set up as a securitization fund, on the basis of a civil partnership, or as a securitization company organized as a joint-stock company. The establishment of the SPV must be approved by the Romanian National Securities Commission (NSC) and its minimum initial share capital should be the RON equivalent of €25,000. If the SPV is set up as a securitization fund, it shall only be used for one securitization operation. Management of an SPV may be undertaken by a joint-stock company, authorized by NSC and complying with certain requirements, such as: • its minimum paid share capital is the RON equivalent of €125,000; • its sole scope of business is the management of SPVs; • at least two significant shareholders are financial and/or credit institutions; and • its board of directors consists of at least three members with good professional and moral reputation and complies with expertise requirements for financial and banking institutions, as established by the NSC. Securitized financial instruments are issued by way of public offering on the basis of an issuance prospectus approved by the NSC. They are sold on regulated markets or on alternative transaction systems.
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Mortgage bonds Mortgage bonds are movable securities in a dematerialized form, issued on the basis of a prospectus approved by the NSC. They are used by the issuer for refinancing its mortgage loan activity, the bonds being secured by a portfolio of mortgage loans over which the investor acquires a first-ranking security and a preference right. Mortgage bonds may only be issued by banks or mortgage banks that have been granted or assigned mortgage loans. The mortgage loans are grouped into portfolios, which secure the issuing of the mortgage bonds. Unlike the issuance of securitized financial instruments, performed by an SPV, there are no such vehicles involved in the mechanics regarding the issuance of mortgage bonds. Mortgage bonds may be issued through public offering, on the basis of a prospectus approved by the NSC. In order to be used as security for the issuance of mortgage bonds, mortgage loans should observe certain eligibility criteria: • they must be related to real estate financing in Romania or the EU/EEC; • their individual nominal value should not exceed 80 per cent of the reference value of the mortgaged property for residential loans, and 70 per cent for commercial loans; • the principal of the mortgage loan should be fully disbursed; and • a first mortgage in favour of the issuer should have been established.
Agent To ensure protection of investors, an agent should be appointed by the issuer of mortgage bonds (or, alternatively, by the issuer of asset-backed securities), as a representative of the holders, with clear responsibilities. These involve checking compliance with the law, performing relevant registration with the Electronic Archive for Movable Security Interests or representing the holders before the issuer, public authorities or any third party. The agent must be appointed through the issuance prospect, from among the agents authorized by the NBR and NSC.
Bankruptcy treatment In order for bond and securities holders to obtain bankruptcy, they must be clearly separated from other assets of the issuer and commencement of the insolvency procedure must not result in acceleration of the bond or security issue or liquidation of cover assets.
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Capital markets Capital markets legislation has recently undergone significant changes for the purpose of harmonizing with EU legislation on financial services. Consequently, at present, most of the relevant EU directives on financial services, including the Prospectus Directive, Transparency Directive, Market Abuse Directive and Markets in Financial Instruments Directive (MiFID) have been, to a large extent, implemented into Romanian capital markets law. The interest and increasing presence of important international players is a revealing sign of the constant development of the capital markets in Romania.
Supervisory authority The NSC is the main supervisory and regulatory authority of the capital and commodities markets. It is an autonomous administrative body with legal personality acting under the supervision of the Romanian parliament. The NSC has enforcement powers and may apply sanctions in case of breach of the Capital Markets Law or the regulations adopted for its implementation. The breach of any provision of the Capital Markets Law or related regulations issued by the NSC is deemed a minor offence, for which sanctions vary from warning or fines to withdrawal/suspension of authorization or temporary prohibition to carry out certain regulated capital markets activities. In its capacity as capital markets regulatory authority, the NSC has issued significant secondary legislation (mainly regulations and instructions), which plays a key role in the implementation of many financial services directives. Among the main secondary regulations issued by the NSC are: • Regulation No. 1/2006 on issuers and transactions in securities, as amended (implementing some core financial services EU directives such as Prospectus Directive, Market Abuse Directive, Transparency Directive); • Regulation No. 32/2006 on financial investment services (implementing MiFID); and • Regulation No. 15/2004 on the authorization and operation of investment management companies, collective investment undertakings and depositaries (implementing the EU UCITS Directive on investment funds).
Romanian regulated and over-the-counter (OTC) markets At the core of the capital markets stands the Bucharest Stock Exchange (BSE), which aims to become the highest performing Eastern European
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exchange, and the Sibiu Derivatives Exchange (Sibiu Monetary-Financial and Commodities Exchange, or BMFS). Established in 1995, the BSE is a self-regulated body operating the Romanian regulated market. In 2005, the BSE merged with RASDAQ (OTC market modeled on NASDAQ, where companies that were subject to the mass privatization programme were listed), resulting in a joint-stock company, the BSE, functioning under the supervision of the NSC. In Romania, equity and debt securities (municipal and corporate bonds) may be admitted to trading on the regulated market operated by the BSE, while derivatives (futures and options) are traded only on the BMFS. However, it is expected that derivatives (futures on Bucharest Exchange Trading indexes) shall be also traded on the BSE in the near future. The key regulations applicable to transactions with debt and equity securities and derivatives include: (i) the Bucharest Stock Exchange Code, approved by the NSC; and (ii) regulations issued by the BMFS and approved by the NSC.
Listing of securities The Capital Markets Law sets forth the main requirements a company must fulfill in order to be accepted to the official listing on a stock exchange. These include: • an equity capitalization of not less than €1 million, denominated in RON, or, to the extent the amount of the stock capitalization cannot be anticipated, registered capital representing the RON equivalent of at least €1 million; • a business track record of at least three years prior to the listing and published annual financial statements for the same period; and • shares representing at least 25 per cent of the subscribed share capital of the company subject to official listing distributed to the public. Any departure from these principles is permitted only with the NSC’s approval.
Public offerings The public sale offering of securities is governed by the Capital Markets Law and the NSC, which determine the conditions and rules of procedure for public offerings. A public sale offering of securities requires a personally addressed communication, made in any form and through any means, providing sufficient information regarding the terms of the offering enabling investors to make a decision regarding investment in the respective securities.
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A public sale offering may be primary or secondary, depending on its object. A primary public offering is offered by the issuer for subscription on the date of issue, for the purpose of being placed on the market. A secondary public offering is for stock already issued and offered for sale by its holder. A public sale offering, either primary or secondary, is an initial public offering if the respective securities are being distributed to the public for the first time. The public sale offering must comply with the provisions of the Capital Markets Law on the launch, conduct and closing of such an offer and with the regulations issued by the NSC in this respect. It should be authorized by the NSC before publication of an announcement and prospectus. The prospectus must contain all the essential elements of the transaction. EU regulations regarding the minimum contents of a prospectus are directly applicable to Romanian law. The public sale offering must be carried out exclusively on the regulated markets and through the agency of financial investment services companies or other authorized agents and in such conditions, ensuring equality of treatment for all investors. It should also be approved by the NSC. Following the implementation of the EU Prospectus Directive into Romanian law, the single passport principle is applicable with respect to prospectuses authorized by the relevant authority of the relevant EU member state.
Investors and investment services Investment service providers (financial investment service companies) are Romanian legal entities organized as joint-stock companies licensed by the NSC to carry out core and ancillary investment service activities in Romania. Credit institutions licensed by the NBR may also carry out financial investment services on their own account or on the account of third parties, provided they are registered with the NSC. Foreign investment service providers licensed in an EU member state may carry out activities in Romania under the single passport principle. They can do this directly or by establishing a Romanian branch within the limits of the authorization granted by the relevant EU member state, without obtaining a license from the NSC, under the principle of free movement of services and freedom of establishment. Investment service providers from non-EU member states may provide investment services in Romania by establishing a branch under a license issued by the NSC. According to the Capital Markets Law, the core investment service activities are: • purchasing or selling financial instruments on the account of clients; • purchasing or selling financial instruments on their own account;
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• execution of such orders in relation to one or more financial instruments other than on own account; • managing individual portfolio accounts belonging to clients in reliance on the mandate granted by such clients on a discretionary, client-by-client basis, when such portfolios include one or more financial instruments; and • underwriting financial instruments upon a firm engagement and/or placement of financial instruments. Non-core investment services include the following activities: • custody and administration of financial instruments; • renting safety deposit boxes; • granting loans in money or financial instruments to investors with a view to carrying out transactions with financial instruments in which the respective investment services provider is engaged; • consulting services in respect of acquisitions, corporate finance, economic strategy, financing and similar services; • services related to the underwriting of financial instruments upon a firm engagement; • consulting services in respect of financial instruments; and • foreign exchange activities related to financial services provided. Although MiFID core and ancillary investment services have been fully implemented, there is a level of uncertainty with respect to the manner and date when the conflict between primary and secondary legislation shall be solved, due to the failure to subsequently modify the Capital Markets Law.
Investor protection The Capital Markets Law and NSC secondary legislation form a comprehensive legal framework, setting forth the principle of equal treatment of all investors and containing a set of market transparency provisions, in line with EU Transparency Directive requirements. Examples of these include adequate and non-discriminatory information about investors, and current and periodic disclosure requirements applicable to issuers of securities.
Investors’ Compensation Fund Under the Capital Markets Law, intermediaries authorized to provide investment services and management companies, which manage individual investment portfolios, must become members of the Investors’ Compensation Fund. The purpose of the Investors’ Compensation Fund is to compensate retail investors if fund members fail to return the funds and/or the financial
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instruments owed by or belonging to investors, which have been held on their behalf for providing investment services or managing individual investment portfolios.
Market abuse and insider dealing Romanian capital markets legislation has substantially implemented the EU Market Abuse Directive (both Level 1 and Level 2), prohibiting manipulation of the market and concluding transactions with financial instruments, either directly or indirectly, by using inside information, under civil and/or criminal sanctions.
2.10
Money Laundering Law Andreea Elefterescu, Associate, Nestor Nestor Diculescu Kingston Petersen
(a) the conversion or transfer of property, knowing that such property derives from criminal activity, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in performing such activity to escape the legal consequences of his action; (b) the concealment or disguise of the true nature, location, disposition, movement or the ownership of the property or related rights, knowing that such property derives from criminal activity; or (c) the acquisition, possession or use of property, knowing that such property derives from criminal activity.
Regulatory framework The main piece of legislation regarding money laundering is Law No. 656/ 2002, governing the prevention of and sanction against money laundering and implementing measures for the prevention of and fighting against terrorism. European Union (EU) Directive 2005/60 on the prevention of the use of the financial system for the purpose of money laundering and terrorism financing should be incorporated into Romanian law by 15 December 2007.
Reporting persons The Money Laundering Law specifies the legal or natural entities which are required to take measures to detect and prevent money laundering. The main entities involved in the anti-money laundering process are: • Credit institutions and branches of foreign credit institutions; • Financial institutions, including investment funds, investment companies, pension funds;
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• Insurance and reinsurance companies and Romanian branches of foreign insurance and reinsurance companies; • Legal entities performing gambling activities, sale and purchase of works of art or precious metals, as well as dealers and services providers performing activities that require movement of valuables; • Notaries, lawyers and other individuals performing independent legal activities, when assisting in the planning or execution of transactions for their clients concerning the purchase and sale of real property or business entities, shares or inventory, when assisting in the managing of clients’ securities or property or organization of contributions necessary for the creation, operation or management of companies, or when acting on behalf of and for their clients in any financial or real estate transaction; • Real estate agents; • Auditors, external accountants and tax advisors; • State Treasury and customs authorities; • Post offices; • Persons involved in the privatization process; • Exchange houses; and • Other natural or legal entities. However, auditors, tax advisors, lawyers or other independent legal professionals are not obligated to report information received or obtained from their clients in the course of performing their tasks of defending or representing the client in judicial proceedings, including advice on instituting or avoiding proceedings, irrespective of whether such information is received or obtained before, during or after such proceedings. Legal entities falling under the Money Laundering Law are obligated to designate a person with specific responsibility of ensuring compliance with the obligations provided by Money Laundering Law and to establish adequate internal control and communication procedures in order to prevent money laundering operations. They should also take appropriate measures to enable their employees to recognize operations which may be related to money laundering.
Reporting obligations Reporting obligation in case of suspicious transactions A suspect transaction is defined as a transaction which, due to its nature or its unusual character as compared with the respective client’s usual activities, may raise suspicion that such transaction has money laundering or terrorism financing purposes.
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Pursuant to the Money Laundering Law, as soon as an employee of a legal entity suspects that a certain transaction to be performed may give rise to money laundering issues, it will inform the designated person within such legal entity, which will immediately inform the Office for the Prevention and Fighting Money Laundering. Individuals having suspicions shall directly inform the Office. If the Office considers it appropriate, it will suspend the performance of the suspicious transaction for a period of three business days. This term may be extended by a further three days by the Prosecutor Department within the High Court of Justice.
Reporting obligation in absence of any suspicious transaction Cash operations, in Romanian lei (RON) or in foreign currency, the equivalent of which exceeds €10,000, whether the transaction is carried out as a single operation or as several related operations, should be reported to the Office within 48 hours from the performance of the transaction. Crossborder bank transfers of amounts exceeding €10,000 should also be reported.
Reporting obligation in case of money laundering transactions Where a reporting person or a reporting person’s employee is confident that the transaction to be performed has money laundering purposes, such person may perform the transaction without informing the Office only if not carrying out the transaction would risk the chances of tracing the beneficiaries of the money laundering operations. The Office should be notified about such transactions within 24 hours.
Reporting obligation in case of unusual transactions If a person ascertains that one or more transactions performed on the account of a client appear(s) unusual compared to the respective client’s activity, and suspects that it may have money laundering purposes, it must report such transactions to the Office as soon as possible. This reporting obligation applies irrespective of the amount of the transaction. The reporting person is prohibited from disclosing to the relevant client or to any third party the fact that information has been transmitted to the authorities or that a money laundering investigation is being conducted.
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Client identification requirements The Money Laundering Law imposes upon the reporting persons the obligation to identify their clients when entering into business relations with them or offering them services. If any doubt exists in respect of the beneficial owner of a transaction, any reporting person should take reasonable measures to obtain information as to the real identity of the persons on whose behalf the customers are acting. Such due diligence also applies to any transaction involving a sum amounting to €10,000 or more, whether the transaction is carried out in a single operation or in several related operations. If the reporting person possesses any information that a certain transaction has money laundering purposes, he/she should proceed to identify the clients and the persons for whom they act, irrespective of the transaction value. There are certain exceptions to the identification requirements. For example, such requirements are not applicable to: • insurance companies with regard to life insurance policies in case the periodic insurance premium is less than or equal to €1,000 or, when a single premium is paid, is equal to or less than €2,500; and • payments made through banking transfer by debiting the client’s bank account opened with a credit institution in Romania or an EU member state or with a subsidiary establishment of a non-EU state located in the EU. When identification of clients is required, the following data will be requested: • for individuals: data provided in the identification documents; and • for legal entities: data provided in the legal entity’s documents of incorporation and evidence that the individuals performing the transaction are the representatives of the respective legal entity. Where identification of clients is required pursuant to the Money Laundering Law, copies of the identification documents will be preserved for five years.
Sanctions Money laundering operations trigger criminal liability, which may be punishable by imprisonment from three to 12 years and confiscation of the assets involved in the money laundering operations. Making clients aware of the Office being informed about any operations performed by the respective clients is punishable by imprisonment of between two and seven years.
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Failure to comply with the reporting obligations provided by the Money Laundering Law is considered a minor offence and sanctioned with fines amounting to RON 10,000-RON 50,000. Other sanctions may be applied in addition to the above, such as: seizure of the assets used, meant to be used or resulting from the minor offence, suspension of the authorization/license to perform business activity for a period of one to six months or withdrawal of the license or authorization for the business to conduct certain activities for a period of between one and six months or even for an indefinite period of time.
2.11
Competition Law Carmen Peli, Partner, and Georgeta Dinu, Associate, Nestor Nestor Diculescu Kingston Petersen
Competition is regulated in Romania under Competition Law No. 21/1996, as subsequently amended and republished, together with secondary and tertiary legislation in the form of guidelines and regulations issued by the Competition Council.
Competition authority The Competition Council was established in 1997, and is an autonomous administrative authority, independent from the Romanian government. Its aim is to protect and stimulate competition, in order to ensure a normal competitive environment and the promotion of consumer interests. The Competition Council is an investigative and decision-making body, competent in respect of issues relating to anti-competitive practices and economic concentrations. Following Romania’s accession to the European Union (EU), its competences in the field of state aid control have largely passed to the European Commission.
Cartels and restrictive agreements Legislative provisions Cartels and restrictive agreements between competitors are governed by the provisions of the Competition Law, which is supplemented by the regulations and guidelines issued by the Competition Council. According to Article 5(1) of the Competition Law, any express or tacit agreement between undertakings or associations of undertakings, decisions by associations of undertakings and any concerted practices restricting, preventing or distorting competition in the Romanian market are prohibited from participating in a concerted manner in auctions (with rigged bids),
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eliminating competitors from the market, limiting or preventing access to the market and the free exercise of competition between other undertakings. This regulation specifically applies to price fixing, limiting or controlling output, allocating markets or clients, applying discriminatory terms for equivalent services, and making the conclusion of contracts contingent upon the acceptance of certain clauses stipulating additional services which, either by their nature or by commercial usage, do not relate to the object of such contracts. Article 5(2) provides that a block exemption (with no necessity for notification or decision by the Competition Council) may be applicable to agreements falling under Article 5(1). In the case of agreements that do not qualify for block exemption, an application may be made to the Competition Council requesting an individual exemption.
Horizontal agreements According to the Competition Council’s Order No. 76/2004 (the Horizontal Agreements Guidelines), the following criteria are required when determining whether the prohibition applies: • the agreement’s objective or effect is the restriction, prevention or distortion of competition; • the nature of the agreement; and • the market share and the market structure. The following criteria are required when determining whether the exemption applies: • • • •
economic benefits; benefits for consumers; indispensability; and maintaining competition.
The Horizontal Agreements Guidelines provide detailed rules for the analysis of the following types of agreements and qualification for block exemption: • • • • • •
research and development agreements; production agreements (including specialization agreements); purchase agreements; commercialization agreements; agreements concerning standards; and environmental agreements.
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Vertical agreements Order No. 68/2004 of the Competition Council (the Vertical Block Exemption Regulation) and Order No. 77/2004 of the Competition Council (the Vertical Block Exemption Guidelines) set out the competition rules applicable to agreements concluded between undertakings acting at different market levels: • agreements that do not fall under the scope of Article 5(1): undertakings with a turnover and market share below certain thresholds; those concluded between undertakings in the same group; genuine agency agreements; • conditions that must be fulfilled to apply for block exemption and hardcore restrictions that exclude an agreement from block exemption; • the possibility of withdrawal of the block exemption (to the extent that parallel networks of similar vertical restrictions cover more than 50 per cent of the relevant market, even if each vertical restriction fulfils the block exemption conditions); and • procedural aspects (vertical agreements falling under the block exemptions do not need to be brought to the attention of and authorized by the Competition Council). Vertical agreements generally qualify for block exemption to the extent that the market share does not exceed 30 per cent (the supplier’s market share is generally taken into account, except when the agreement contains an exclusive sale obligation, in which case the buyer’s market share is taken into account). No hardcore restrictions are included. In addition to the general block exemption, other block exemption regulations have been adopted by the Competition Council, covering motor vehicles, specialization and technology transfer.
Exemptions The Competition Law provides for two types of exemptions: block exemptions and individual exemptions. According to Article 5(2) of the Competition Law, agreements, decisions by associations of undertakings or concerted practices may be exempt from the prohibition in Article 5(1), if the conditions listed in paragraphs (a)-(d) and one of the conditions listed in paragraph (e) are met cumulatively, as follows: (a) the positive effects prevail over the negative ones or are sufficient to compensate the competition restriction caused by the respective agreements;
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(b) beneficiaries or consumers are assured a benefit corresponding to the one obtained by the parties to the respective agreement; (c) the possible competition restrictions are indispensable for obtaining the expected advantages, and the respective agreement does not impose upon the parties restrictions that are not necessary to reach the objectives mentioned in (e) below; (d) the respective agreement does not allow the undertakings or the associations of undertakings to eliminate competition from a substantial part of the product or service market in question; and (e) the agreement contributes, or may contribute to: (a) improving the production or distribution of goods, work performance or services supply; (b) promoting technical or economic progress, improving the quality of goods or services; (c) consolidating the competitive position of the small and mediumsized undertakings on the domestic market; and (d) charging, in the long run, substantially lower prices to the consumers. Exemptions are established by regulations issued by the Competition Council (block exemptions) or granted by decision of the Competition Council for individual cases (individual exemptions). According to Article 8 of the Competition Law, a de minimis rule applies. Article 5(1) is applicable only to undertakings or groups of undertakings whose turnover for the fiscal year prior to the alleged anti-competitive behaviour exceeds the threshold set by the Competition Council (currently 4 million Romanian lei (RON)). This restriction also applies if the total market share of the undertakings involved in the agreement, decision or concerted practice exceeds 5 per cent on any of the relevant affected markets (for agreements concluded between competing undertakings). For agreements concluded between non-competing undertakings, the market share of each undertaking must not exceed 10 per cent. These thresholds are not applicable to hardcore restrictions (concerning prices, tariffs, market allocation or auctions).
Abuses of dominant position Legislative provisions The abuse of dominant positions is regulated mainly by articles 6 and 7 of the Competition Law. According to Article 6, the abuse of a dominant position held by one or several undertakings on the Romanian market, through anti-competitive practices that may affect the economic activity or damage consumers, is prohibited. A non-exhaustive list of such practices includes:
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• • • •
imposing sale or purchase prices; limiting production, distribution or technological development; applying unequal terms for equivalent services to trade partners; making the conclusion of contracts conditional upon the acceptance by the other partners of supplementary obligations that have no connection with the subject of these contracts; • charging excessive or predatory prices, below cost, with the aim of driving competitors out of the market; • selling exports below production costs and recovering the differences by imposing increased prices to domestic consumers; and • taking advantage of the state of economic dependence of another undertaking that does not have an alternative solution under equivalent conditions, as well as breaking contract relations for the sole reason that the partner is refusing to submit to certain unjustified commercial conditions. The Competition Law does not prohibit the existence of a dominant position per se, but the abusive use of such a position.
Assessing dominance Several criteria are used for the assessment of a dominant position, the most significant being the market share held by the undertaking. The existence of a dominant position is generally considered to be from a market share of 40-45 per cent upwards. If the undertaking has more than 90 per cent market share, a dominant position is certain. Other criteria for the assessment of a dominant position include: • market entry barriers; • the difference between the market share of the company and that of its main competitor; • the company’s profit rate (although the lack of profit does not necessarily indicate the absence of a dominant position); and • the capacity to influence the decisions of similarly situated undertakings from the same relevant market. In order to prove an infringement, the Competition Council must establish dominance and prove the abusive conduct on behalf of the dominant undertaking.
Penalties Both civil and criminal penalties may be imposed for infringements of the Competition Law.
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Under the Competition Law, any agreements, conventions or contractual clauses, either public or secret, which infringe articles 5 and 6 of the Competition Law, are null and void. Moreover, such infringements represent administrative offences and are sanctioned with a fine of up to 10 per cent of the turnover in the fiscal year prior to the alleged anti-competitive behaviour. The actual fine will take into account the gravity, duration and consequences of the breach. Under the Competition Law, participation of a natural person with fraudulent intent in the conception, organization or performance of the practices prohibited by articles 5 and 6 represents a criminal offence, and can lead to imprisonment for a minimum of six months and a maximum of four years, or a fine. The court may decide to publish the ruling in the press, at the guilty party’s expense.
Substantive law relating to mergers As a general rule, the Competition Law prohibits only those economic concentrations that – by assuming a dominant position – would restrict, eliminate or distort competition within the Romanian market. Thus, not all mergers will fall foul of the Competition Law.
Thresholds The Competition Law applies only when two cumulative conditions regarding the value of the turnover are met. Notification of a planned merger is necessary only when the aggregate worldwide turnover of the involved undertakings exceeds the RON equivalent of €10 million and when there are at least two undertakings involved in the operation that create a turnover exceeding the RON equivalent of €4 million.
Notification According to articles 14 and 15 of the Competition Law, economic concentrations exceeding the above thresholds must be declared and are subject to the control of the Competition Council. The economic concentrations achieved through the merger of two or more undertakings and which exceed the thresholds above, must be declared by each of the parties involved. In other cases of economic concentration, a declaration must be made by the natural or legal person(s) acquiring control over one or more legal entities. Finally, in the case of an economic concentration emerging as result of the creation of a joint venture (JV), the declaration must be submitted by its founders. The law prohibits any operation of the economic concentration until the Competition Council issues a decision.
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Substantive test Economic concentrations that, by way of creating or consolidating dominant positions, lead or are likely to lead to a restriction, elimination or significant distortion of competition on the Romanian market or on parts thereof, are generally prohibited. However, Article 12 of the Competition Law allows such restriction, elimination or significant distortion of competition on the domestic market in certain circumstances in which the parties can prove, cumulatively, that the operation will contribute to an increase in economic efficiency, an improvement in production, distribution or technical progress or to an increase in competitiveness for export, economic concentration. Authorization is also possible where it can be shown that the concentration’s beneficial effects outweigh the negative ones and that the advantages benefit consumers to a reasonable extent.
Timetable for notification Within seven days from the date of execution of the merger agreement, the parties involved must inform the Competition Council in writing. Within 30 days starting from the same date, the declaration must be submitted to the Competition Council, although this period may be extended by up to 15 days at the written request of the parties, provided that the request was made within the initial 30-day term. Within 20 days after the filing, the Competition Council may request additional information if the declaration is incomplete. The term for response depends on the nature of the information requested, but cannot exceed 15 days from the receipt of the request. The Council may request further data until it considers the declaration complete, and shall inform the parties with respect to the date when the declaration became effective. No later than 30 days from when the declaration becomes effective, the Competition Council must take one of the following decisions: • issue a negative clearance decision upon reaching the conclusion that the operation of economic concentration does not fall under the scope of the Competition Law; • issue a non-objection decision upon noting that there are no serious concerns regarding the compatibility of the operation within a normal competitive environment; • order the initiation of an investigation, if there are serious concerns regarding the compatibility of the operation with a normal competitive environment. In the latter case, no later than five months after the notification date becomes effective, the Competition Council will issue one of the following:
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• a refusal, if the concentration creates or consolidates a dominant position which leads or may lead to the restriction, elimination or distortion of competition; • an authorization of the operation of concentration; • a conditional authorization, if the operation is compatible with a normal competitive environment upon fulfillment of specified conditions. In case of failure by the Competition Council to take any of the above decisions within the established timeframe, the merged entity can stay in place.
Penalties for non-compliance A fine of up to 1 per cent of the aggregated turnover derived from the previous financial year shall be imposed if no declaration is made, or false or incomplete information is provided. A fine of up to 10 per cent of the aggregated turnover derived from the previous financial year shall be imposed if the merged entity undertakes any operations prior to or against a decision of the Competition Council.
Appeals against merger decisions According to the Competition Council’s Regulation for the approval of economic concentrations, the Council’s decisions may be challenged before the Bucharest Court of Appeals, within 30 days from the date of its communication to the interested parties. Upon request, the judge may order the suspension of the enforcement of the decision subjected to legal challenge.
2.12
Import and Export Licensing Raluca Nechimis, Senior Associate, Nestor Nestor Diculescu Kingston Petersen
Romania’s accession to the European Union (EU) has introduced the free movement of goods to and from other EU member states, as well as other World Trade Organization member states. As such, the Romanian Customs Code currently in force applies Council Regulation (EEC) No. 2913/92 of 12 October 1992 establishing the Community Customs Code. The Integrated Tariff of the European Community (TARIC), a useful tool for determining whether a license is required for a particular item, is also applicable in Romania. Despite the fact that most goods no longer require a license to enter the country, there are still a number of categories that are monitored, such as textiles, syderurgic (processed iron) products and agro-alimentary goods. In addition, Romania restricts the import and export of goods that are generally restricted at the international level, such as arms/ammunition, hazardous waste, materials for biological weapons, psychotropic products, nuclear products, etc.
Sources of law With respect to the licensing of import and export operations, the main governing law is the Romanian Customs Code (Law No. 86/2006), which is supported by a number of EU regulations, which have direct effect in Romania: • Commission Regulation No. 2454/93, laying down provisions for the implementation of Council Regulation No. 2913/92 establishing the Community Customs Code; • Council Regulation (EC) No. 3285/94 of 22 December 1994 on the common rules for imports; • Council Regulation (EC) No. 519/94 of 7 March 1994 on common rules for imports from certain third countries;
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• Council Regulation (EC) No 1013/2006 of the European Parliament and of the Council of 14 June 2006 on shipments of waste; and • Council Regulation (EC) No. 517/94 on common rules for imports of textile products from certain third countries not covered by bilateral agreements, protocols or other arrangements, or by other specific community import rules. Specific legislation exists to regulate the import and export of particular types of products, including: • Emergency Governmental Ordinance No. 129/2006 on the legal treatment of exports and imports of dual-use products and technologies, as subsequently amended (implementing the Council Regulation No. 1334/ 2000); • Emergency Governmental Ordinance No. 158/1999 on the regime of the export and import of strategic products, as subsequently amended; • Government Decision No. 594/1992 on the regime of import and export of items and technologies with a controlled final destination and the legal control for restriction of the proliferation of the nuclear, chemical and biological weapons and of the missiles carrying such weapons; • Law No. 56/1997 on the implementation of the 1993 Convention on the Prohibition of the Development, Production, Stockpiling and Use of Chemical Weapons and on Their Destruction, as republished; • Law No. 111/1996 on the safe performance, regulation, authorization and control of nuclear activity, as amended and republished; • Government Decision No. 788/2007 on the establishment of certain measures for the application of the Council Regulation (EC) No 1013/ 2006 of the European Parliament and of the Council of 14 June 2006 on shipments of waste; • Law No. 6/1991 on Romanian’s accession to the 1992 Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal; • Law No. 339/2005 on the legal regime of narcotic and psychotropic plants, substances and products; and • Law No. 300/2005 on the establishment of the import and export certificate system for agricultural products, as amended.
Licensing Generally, there are currently no licensing requirements for the import or export of the majority of products into or out of Romania. However, as mentioned above, for specific products, the control and monitoring of which is motivated by the need to protect the public interest, there are still applicable licensing, visa or certification requirements. Visa, certification and licensing requirements for the following are detailed below:
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• • • • • • • •
fabrics and textiles to the US and Canada; dual-use items and technology; strategic products; products and technologies with double use in the nuclear field; hazardous chemical products; hazardous and non-hazardous waste; narcotic and psychotropic plants, substances and products; and certain agricultural products.
Fabric and textile exports The export of Romanian fabrics and textiles to the US and Canada, albeit not subject to licensing per se, is subject to certain srequirements, which involve obtaining a textile visa for export to the US and a licensing certificate for export to Canada.
Dual-use items and technology The export and any transmission of dual-use products, including transmission of software or technology by electronic media, fax, or telephone is subject to licensing by the National Agency for Control of Exports (NACE). Upon submission of a complete application, NACE has up to 45 days to decide whether to grant a license and on what terms: • an individual license (granted to a sole exporter and a sole foreign partner, with respect to the dual-use products set forth in annexes I and IV of the Council Regulation No. 1334/2000); • a global license (granted to a sole exporter for the export of one or more of the dual-use products, set forth in Annex I of the Council Regulation No. 1334/2000, to one or several countries); • a national general license (granted to all the exporters for the export of one or several dual-use products and technologies to one or several countries).
Strategic products The import and export, including re-export, and any type of commercial use of strategic products (ie. armament, ammunition and other military products, items, technologies and services, regarding nuclear, chemical, biological arms, etc.) into or out of Romanian territory require authorization by NACE or another competent authority. NACE may grant:
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• an individual license, which may be granted to an authorized Romanian person for the performance of operations with one or several military products of the same category to or from a sole foreign partner; or • a global license, granted to an authorized Romanian person for one or several military products to or from more foreign partners. Upon submission of a complete application, NACE has a maximum of 60 days to decide whether to grant a license, and the license is usually valid for one year.
Products and technologies with double use in the nuclear field The import and export of products and technologies with double use in the nuclear field requires prior authorization. The authorization is two-fold, and both NACE must grant a license and the National Commission for Control of Nuclear Activity must provide authorization.
Hazardous chemical products The import and export of hazardous chemical products requires authorization from NACE. For such purpose, NACE must issue an export license at least 60 days prior to the relevant export operation.
Hazardous and non-hazardous waste The import of both hazardous and non-hazardous waste requires special control measures. Romania has signed and ratified the 1992 Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, including the recent amendments. The transport of non-hazardous wastes destined to be imported into or transited through Romania is subject to a special authorization from the ministry of environment and sustainable development and the national agency for environmental protection.
Narcotic and psychotropic plants, substances and products The import, export and transit of narcotic and psychotropic plants, substances and products are subject to authorization from the ministry of public health. Romania is a signatory to the 1961 Single Convention on Narcotic Drugs, the 1971 Convention on Psychotropic Substances and the
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1988 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances.
Agricultural products The import and export of certain agricultural products is subject to the issuance of import or export certificates by the Agency for Payments and Intervention for Agriculture, in line with provisions set out in Commission Regulation (EC) No. 1291/2000 of 9 June 2000. The Regulation sets out common detailed rules for the application of the system of import and export licenses and advance fixing certificates for agricultural products.
Sanctions If the licensing requirements for dual-use, strategic or hazardous products are not complied with, NACE is empowered to impose sanctions against the defaulting Romanian resident entity by levying fines and/or by revoking the import or export authorization or license. The fines may amount to 10,00025,000 Romanian lei (RON, approximately €3,000-€8,000). In certain cases, the import or export of the aforementioned products, especially of military products, in contravention of licensing requirements, may be considered a criminal offence and punishable by imprisonment ranging from three months to three years.
2.13
Privatization Law Carmen Peli, Partner, and Georgeta Dinu, Associate, Nestor Nestor Diculescu Kingston Petersen
History In Romania, the privatization process was initiated with the adoption of Law No. 15/1990, under which state enterprises were transformed into commercial companies and autonomous corporations (regie autonome) owned by the state. Law No. 58/1991 established the institution which had the authority over the privatization process: the State Ownership Fund (Fondul Proprietatii de Stat, or FPS). Since the introduction of this law, other state entities have been granted privatization powers (eg. the Office of State Ownership and Privatization in Industry (OPSPI), the ministry of finance, etc.). Currently, the Authority for State Assets Recovery (Autoritatea pentru Valorificarea Activelor Statului, or AVAS) holds the mandate for privatization of the main state-owned companies.
Legal framework The relevant Romanian legal framework governing privatization includes: • Government Ordinance No. 88/1997 on privatization; • Law No. 137/2002 on methods aimed at the acceleration of privatization; • Government Decision No. 577/2002 on approval of the Norms of Application for Government Emergency Ordinance No. 88/1997 and Law No. 137/2002; • Government Emergency Ordinance No. 26/2004 on certain measures for the finalization of privatization; • Government Ordinance No. 25/2002 on methods for post-privatization monitoring of sale-purchase contracts of state-owned shares; • Government Decision No. 489/2003 on the approval of the Norms of Application for Government Ordinance No. 25/2002; • Government Emergency Ordinance No. 23/2004 on the restructuring of the Authority for State Assets Recovery by merger through absorption of the Authority for Privatization and Administration of State Property; and
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• Government Emergency Ordinance No.101/2006 on restructuring the Authority for State Assets Recovery by merger by absorption of the Office of State Ownership and Privatization in Industry.
Competencies of the privatization agency The government approves the privatization strategy, in cooperation with a number of ministries, local public authorities and agencies coordinating and monitoring the process. AVAS, the major privatization authority, operating under the government’s authority, has recently merged with Office of State Ownership and Privatization in Industry (OPSPI), a public authority carrying out the privatization strategy and the restructuring of companies in the electricity, gas, oil and defense sectors. Government Emergency Ordinance No. 51/1998 sets forth the competencies of AVAS: • • • •
taking over, with or without payment, certain receivables; valorizing non-performing receivables; valorizing state-owned shares managed by AVAS, at market value; valorizing assets owned by the authorities and by companies in which the state is the controlling shareholder, through public auction; and • exercising all rights and fulfilling all obligations arising from the state’s role as shareholder. Other competencies of AVAS include: • application of the government’s post-privatization strategy; • management of the state’s equity interests, as a shareholder/equity investor in companies in its portfolio; • sale of state-owned shares in companies in its portfolio; • monitoring compliance with the privatization agreements.
Privatization principles Privatization legislation establishes the following principles: transparency, establishment of the price on the basis of demand and offer, equal treatment of the purchasers, reconsideration of the company’s debts with a view to increasing the attractiveness of the privatization offer.
Privatization methods Privatization legislation establishes the following privatization methods:
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(a) (b) (c) (d)
sale of shares; share capital increase; sale of assets; or a combination of the above mentioned.
Potential investors may address letters of intent to the privatization authority in connection with a state-owned company or assets. The privatization process commences following a Government Decision approving the strategy for privatization of a certain company or assets, and a public announcement made on AVAS’s website and in national or international newspapers. Once the privatization has commenced, prospective investors may be entitled to carry out due diligence prior submitting their binding or non-binding offers. AVAS is required to prepare a presentation file containing the relevant information regarding the company or assets under privatization.
Sale of shares The sale of shares is the most common privatization method and is usually effected through: • public sale offering; • sale methods specific to the capital market (sale against order, sale against purchase offer, electronic auction, or any combination of the above); • direct negotiation; where the authority addresses its offer to strategic investors, or an auction by sealed bids results in only one bid submitted, which obtains less than 50 per cent of the maximum score, the negotiation may be conducted on the basis of improved and irrevocable binding bids, or on the basis of preliminary non-binding bids, with selection based on technical offers; • auction (open public auction or with bids); • deposit certificates issued by investment banks on the international capital market; • any combination of the methods presented above. The minimum price should be at least equal to the nominal value of the shares.
Sale of assets State-owned companies may sell or lease assets to third parties, with the approval of the general meeting of shareholders. The assets are sold by open auction at the highest market price, keeping in mind the rights of the
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creditors whose debts are guaranteed by mortgage, pledge or preferential rights on the sold assets.
Share capital increase Following the decision of the relevant public institution, the share capital increase is achieved by launching a public offer for the increase of share capital of the company. The share capital increase will be made by cash contribution or by in-kind contribution, by attracting a new private shareholder or through the participation to the capital increase of an already existing shareholder.
Guarantees for the performance of the purchaser’s obligations The public institution involved may request the purchaser to provide certain guarantees, in order to secure the obligations in the privatization agreement (pledge over the shares, bank letter of guarantee, promissory note guaranteed by a commercial bank approved by the involved public institution, personal security of a guarantor).
Post-privatization monitoring During the post-privatization phase, the privatization authority monitors the performance of the obligations undertaken by the purchasers for the period of the performance of the privatization agreements: • The purchaser must report to the privatization authority within 30 days from the due date or from the authority’s request, unless otherwise stipulated in the privatization agreement, on its compliance with the provisions of the privatization agreement. The company’s management should allow the authority to verify the fulfillment of the obligations and the company’s financial status. • The purchaser will demonstrate investment performance with a certificate issued for this purpose by the censors or a specialized audit company, unless the privatization agreement provides otherwise. • In case of merger, spin-off, voluntary winding-up, dissolution, judicial reorganization or bankruptcy, the purchaser must inform the authority, within 10 days from the moment such events are known, unless the agreement provides otherwise. • Throughout the duration of the post-closing obligations, the purchaser must seek the authority’s written consent in case it intends to sell its shares to a third party, subject to cancellation of the sale.
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AVAS has the authority to amend privatization agreements in the following ways: (a) rescheduling the investment programme; (b) restructuring the investment undertaking; (c) modifying the environmental investment programme, in case that after the conclusion of the privatization agreement the purchaser presents a new compliance programme approved by the competent environmental authority; (d) reducing the value of the environmental investment; (e) rescheduling the payment dates if the agreement provides for payment by installments; (f) providing for novations or delegations; and (g) rescheduling other amounts owed to the authority.
State aid privatization strategy AVAS has created a state aid strategy in the context of privatization, including the following measures: (a) establishing fields which require special measures from the state; (b) accomplishing the privatization process for large enterprises in two stages: pre-privatization restructuring, if needed, and privatization through clear, competitive, unconditional and open methods; (c) sustaining the renewal of technological processes, research and development, improvement of product quality; (d) sustaining the viability of small and medium-sized enterprises; (e) sustaining mono-industrial areas; (f) maintaining and creating new work places; and (g) developing new investments for the creation of work places.
2.14
Property and Real Estate Law Francisc Eduard Peli, Partner, Nestor Nestor Diculescu Kingston Petersen
Introduction Although Romania has made and continues to make significant progress towards harmonizing its internal legislation with the European Union (EU) acquis communautaire, with few exceptions, Romania’s real estate legislation was affected to a lesser degree by the EU harmonization process. Real estate ownership and other real estate rights, as well as the manner in which such rights are acquired and/or transferred, are primarily regulated by Romania’s Civil Code of 1865, the post-revolution Constitution of 1991 and by various pieces of legislation (aiming to achieve a balance between restitution of nationalized properties and protection of various private persons who have acquired rights over such real estate during the communist regime or post-revolution).
Legal framework The relevant Romanian legal framework regarding ownership includes: • The core laws: ��� the Civil Code (inspired to some extent from the French/Napoleonic Civil Code) enacted in 1865; ��� the Constitution enacted in 1991, and substantially amended in 2003; • The land restitution laws: ��� Law on Public Property (No. 213/1998); ��� Land Law (No. 18/1991); ��� Law on Restitution of Property Confiscated by the State between 6 March 1945 and 22 December 1989 (No. 10/2001); • Law (No. 15/1990) on the Reorganization of State-owned Enterprises as Autonomous Regia and Commercial Companies (Law No. 15/1990), together with related secondary legislation covering the acquisition by
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newly-incorporated commercial companies of assets previously owned/ used by state enterprises; • Law on the Legal Status of Residential Real Estate Confiscated by the State (Law No. 112/1995), providing for the “settlement” of the relationship between former owners and tenants of state-owned dwelling real estate. Other legal provisions of relevance in the real estate field include: • • • •
Law on Cadastre and Real Estate Publicity (No. 7/1996); Law on Expropriation for Public Utility Causes (No. 33/1994); Law on Authorization of Construction Works (No. 50/1991); and Law on Development of Territory and Urban Planning (No. 350/2001).
Real estate rights and acquisition methods Although ownership rights are the cornerstone of real estate related rights, Romanian legislation contemplates other types of real estate rights, eg. superficies rights (in which the tenant of land has the right to own the buildings he/she constructs on it), concession rights, usus rights (right to use the resource), usufructus rights (right to derive income from the resource), etc. However, the main distinction to be made (with respective differences in legal regime) is between public property (of the state or local administrative units) and private property (of natural persons or legal entities, including the state). A non-exhaustive list of acquisition methods of ownership (or other real estate related rights) over real estate properties can be summarized as follows:
Acquisition through inter-vivos/classical legal deeds Acquisition through inter-vivos/classical legal deeds includes execution, between an owner of real estate property and relevant acquirer, of a transfer deed under the form of: (a) sale and purchase agreement between an owner/seller (or, in case of joint ownership, owners/sellers) and a buyer (or buyers acquiring under joint ownership); (b) donation agreement between an owner/donor and acquirer/beneficiary; (c) swap agreement between owners of real estate property (possibly accompanied by payment of a certain additional consideration, if the swapped properties are not equal in value).
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For a land transfer, the relevant transfer deed must be formally executed (ie. in front of a notary public) – this requirement is not however applicable in case of buildings transfer. Additionally, the acquisition through inter-vivos legal deeds may include: (a) allotment agreements – ie. an agreement between joint owners of a property (ie. where ownership over a specific portion of the jointly-held asset is undefined) regarding allotment of the relevant asset, following which specific portions of the asset are defined as under the exclusive ownership of one or more of the joint owners; (b) out-of-court settlements (ie. transactions) – interpreted broadly, an outof-court settlement/transaction may represent the ownership title of the person who, following the transaction, is recognized as the owner of a disputed asset or receives the asset as consideration under the settlement.
Acquisition following general transfer of patrimony The acquisition following general transfer of patrimony includes: (a) legal/testamentary inheritance (ie. transfer of real estate properties belonging to a deceased person in accordance with general legal provisions and/or in accordance with the last will thereof); (b) reorganization of enterprises (eg. mergers, de-mergers, spin-offs, liquidation of single members limited liability companies with transfer of patrimony to the sole shareholder).
Foreclosure/liquidation Foreclosure and liquidation includes: (a) enforcement foreclosures (public sale/direct sale under an enforcement procedure conducted by an enforcement officer, having as object the property of a debtor, started in order to recover debts listed in a court resolution or another document representing a writ of execution); (b) bankruptcy foreclosures (public sale/direct sale through the liquidator of a company in relation to the liquidation thereof following the opening of bankruptcy proceedings against the company and/or owner of the real estate).
Expropriation Expropriation refers exclusively to the possibility of the state (or local public authority) acquiring public property over privately-owned property exclusively:
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(a) for the performance of public interest works; and (b) under the condition of paying to the expropriated person (or a third party holding rights over the property) a prior and fair compensation.
Restitution of previously nationalized property Restitution of previously nationalized real estate under special laws includes: (a) in-kind restitution of property (land) under the provisions of the Land Law (as well as restitution of forestry land, based on related legislation); (b) in-kind restitution of property (land and/or structures erected thereupon) under the provisions of Law No. 10/2001; as well as (c) in-kind restitution of property to religious organizations or to the communities of national minorities.
Establishment of ownership rights in favour of certain persons/entities Establishment of an ownership right in favour of certain persons/entities includes: (a) establishment of an ownership right over land for certain categories of persons under the provisions of the Land Law; (b) ascertainment of an ownership right over lands in favour of companies incorporated following reorganization of former state enterprises.
Acquisition ascertained by a court of law Acquisition ascertained by court decision includes: (a) issuance of a court decision ascertaining ownership title in favour of one party (ie. claimant/plaintiff) under a real estate claim (actiune in revendicare); (b) issuance of a court decision attesting the transfer of ownership from a promissory-seller to a promissory-buyer (ie. specific performance under a pre-sale and purchase agreement/promise to sell); (c) issuance of a court decision attesting the acquisition by statute of limitation (ie. usucapio). In addition, the “common law” of acquiring ownership over buildings is “acquisition of ownership under construction rights” (ie. a person acquiring ownership over a newly constructed building, based on a building permit issued in accordance with the Construction Law).
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Taking into account the various real estate legal provisions (at times overlapping and/or conflicting), title due diligence is still one of the most complex and challenging legal activities in Romania. Additional limitations on the title due diligence are applicable owing to the fact that Romania has an “opposability only” real estate publicity system. Registration of ownership over a real estate with the relevant real estate publicity office does not guarantee per se full valid title and the “good faith acquirer system” is not commonly (and in any case not on a general basis) recognized as applicable, notwithstanding real estate registry entries.
Foreign ownership of real estate property Under the Constitution, non-Romanian entities may acquire and hold ownership over buildings under the same conditions (and limitations) as Romanian entities (eg. taking into account the specific nature of certain buildings). With respect to acquiring ownership over land surfaces and following amendments to the Constitution and the enactment of special legislation (due to Romania’s accession to the EU), the following rules apply: • Citizens and companies of EU member states can (as a general rule) acquire ownership over land in Romania under the same conditions as Romanian entities; • However, exceptions are applicable with respect to certain categories of land/activities – ie. (these exceptions have been negotiated as safeguard clauses in the EU Accession Treaty and are similar to those applicable in Bulgaria): ��� EU companies (or EU citizens or stateless persons residing in the EU) will only be allowed to purchase land in Romania for the purpose of creating a secondary establishment/secondary headquarters (although the concept is still to be fully defined, the secondary establishments include subsidiaries, branches, representations, agencies of companies by which commercial activities are implemented) five years after Romania’s accession to the EU (ie. 2012); and ��� EU companies (or EU citizens or stateless persons residing in the EU) will only be allowed to purchase agricultural and forestry land seven years after Romania’s accession to the EU (ie. 2014) (this limitation not being applicable however to EU farmers, ie. EU citizens or stateless persons residing in the EU, who establish their residence/domicile in Romania); • For non-EU entities, the right to acquire land in Romania will be determined by specific international treaties, based on reciprocity (and in any case cannot be more favourable than the conditions applicable to EU entities).
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Still, the following notes should be taken into account: • Since Romania only joined the EU on 1 January 2007, the provisions of this new law have not really been tested in practice; as such • In some cases, EU residents apparently still face issues in acquiring land in Romania (ie. apparently the notaries public, who are to authenticate any land transfer deed are refusing to do so where the buyer of land is a foreign citizen, regardless of the type of land which is targeted, since they do not have a coherent/common understanding/interpretation of the legal provisions); • The concept of “secondary residence” (especially for citizens) is not clearly regulated (and this is why certain notaries are apparently refusing to authenticate land transfer deeds for foreign citizens).
Construction land issues As a general rule, construction of buildings/structures is permitted only within the intramuros (inside the boundaries) of localities (with certain exceptions applicable, particularly for developments which cannot be located intramuros due to their environmental impact). Consequently, transforming land into a suitable development site may involve expanding the intramuros of a locality through amendments to urban planning documentation. Since, for the majority of cases, extramuros land is used for agricultural purposes, removal of the target site from the agricultural circuit through a special procedure (and payment of relevant taxes) is also required. All localities should have a general urban plan, which can be amended through zonal urban plans or detailed urban plans (depending on the type of amendments to be introduced) upon the initiative of local authorities or interested private persons (but in all cases subject to final approval by the local councils of relevant communities). In practice, developers often complain about the lengthy and nontransparent process of amending urban planning. However, securing the interest of the local community in a new project is key, as urban planning amendments are made as a result of a public consultation process.
Restitution issues As mentioned, various restitution laws have been enacted, with the goal of providing a solution to the mass nationalization process implemented by the communist regime. However, implementation of the restitution process has generated various controversies and conflicts. On the one hand, implementation of the Land Law was slow and subject in some cases to local interests. On the other hand, Law No. 10/2001 (which aimed to provide a general framework for
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administrative/amicable settlement of restitution claims against the state (or state-owned companies) and/or granting of compensations/indemnities) is still highly controversial. Law No. 10/2001 claims have been left unsettled for years, and in Bucharest alone there are apparently more than 40,000 unsettled restitution claims. In parallel, restitution claims based on the general provisions of the Civil Code are still brought before the courts by dissatisfied claimants under special restitution laws. The Law on Property and Judicial Reform (No. 247/2005), as well as other related measures brought amendments aiming to improve the restitution process. The legislation above created the Proprietatea Fund, a financial services company with a portfolio of various lucrative assets, the shares of which the Fund will distribute as compensation for claimants to whom ownership could not be granted in kind. The success of the Fund’s work is still unknown, as Romania is still facing litigations in the European Court of Human Rights for violation of ownership rights (primarily related to restitution issues).
Legal reform issues Harmonization and proper implementation of the various restitution laws for a coherent ownership regime (and mitigation/limitation of title risk) is a desideratum of both the legal and economic environment. However, it is questionable whether this can be achieved through the enactment of new legal provisions or simply through the natural passing of time and consolidation of current legislation.
2.15
Intellectual Property Law Delia Belciu, Associate, Nestor Nestor Diculescu Kingston Petersen
Introduction Romania joined the European Union (EU) on 1 January 2007, and as a member state applies all EU Regulations on intellectual property rights along with its national legislation in force, and in compliance with the provisions of the international conventions to which Romania is a signatory party.
Regulatory framework In Romania, intellectual property rights are regulated by the following laws: • Law on Patents (No. 64 of 11 October 1991), republished, as modified and completed by the Law No. 28 of 15 January 2007; ��� Government Decision No. 499 of 18 April 2003 for the approval of the Implementation Regulation of the Law No. 64/1991, as further modified; • State Office for Inventions and Trademarks Instructions on supplementary protection certificate (No. 146 of 28 December 2006); • Law on Trademarks and Geographical Indications (No. 84 of 15 April 1998), as further modified; ��� Government Decision No. 833 of 19 November 1998 for the approval of the Implementation Regulation of the Law No. 84/1998; • Law on Protection of Designs and Models (No. 129 of 29 December 1992), as republished, and further modified and amended; ��� Government Decision No. 1171 of 2 October 2003 for the approval of Implementation Regulation of the Law No. 129/1992 (“Implementation Regulation of the Law No. 129/1992”); • Law on Integrated Circuits Topographies (No. 16 of 6 March 1995), as republished; ��� Order No. 6 of 10 January 2007 on approval of the Implementation Norms of the Law No. 16/1995;
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• Law on New Varieties of Plants (No. 255 of 30 December 1998), as republished; ��� Government Decision No. 200 of 17 March 2000 on approval of the Implementation Regulation of the Law No. 255/1998; • Law on Copyrights and Neighbouring Rights (No. 8 of 14 March 1996); • Law on Certain Measures for Ensuring Respect for Intellectual Property Rights during Customs Actions (No. 344 of 29 November 2005); ��� Government Decision No. 88 of 19 January 2006 on approval of the Implementation Norms of the Law No. 344/2005. In addition, as well as enforcing EU legislation on intellectual property rights, Romania also observes the provisions of the international conventions to which it is a signatory party, namely: • • • • • • • • • •
Paris Convention (Stockholm text) Berne Convention (Paris text) Budapest Treaty Convention Establishing the World Intellectual Property Organization (WIPO) Singapore Treaty European Patent Convention Geneva Convention Hague Arrangement International Convention for the Protection of New Varieties of Plants (Geneva text) Locarno Arrangement
• • • • • • • • • •
Madrid Arrangement (Stockholm text) Madrid Protocol Nice Arrangement Vienna Arrangement Patent Cooperation Treaty Rome Convention Strasbourg Arrangement Marrakech Convention WIPO Treaty on Copyright and Related Rights Washington Treaty Regarding the Intellectual Property with Respect to Integrated Circuits
Patents In order to be patentable, an invention is a product or a process and should be: • novel; • involve an inventive step; and • be capable of industrial applicability. According to the provisions of the Law on Patents, the following can not be patentable: (a) inventions whose commercial exploitation is contrary to public order or morality, including those dangerous to the health and life of persons, animals or plants and which are of the nature of bringing serious damages to the environment, under the condition that this exclusion does not depend only on the fact that the exploitation is forbidden by a legal provision;
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(b) varieties of plants and animal breeds (but see plant breeder rights section below); (c) essentially biological processes for the creation of plants or animals; (d) inventions having as object the human body in its various stages of formation and development, and the mere discovery of one of its elements, including the sequence or partial sequence of a gene. The following are deemed not to be considered inventions: (a) discoveries, scientific theories and mathematical methods; (b) aesthetic creations; (c) plans, principles and methods for performing mental acts, playing games or doing business, as well as computer programs, and (d) presentations of information. An application for patent should be filed with the State Office for Inventions and Trademarks (SOIT). The applicant may be either the inventor or other person entitled to the issuance of the patent, but the inventor should always be identified. The patent application should refer solely to one invention or a connected group of inventions so that it will form a single general inventive concept. The application receives a “deposit date”, which is the filing date of the application, unless a foreign filing priority or an exposition priority applies. In these cases, the deposit date is the date the first application was filed, or the date the object of the invention was displayed for the first time in an official exhibition. The term of a patent is 20 years from the deposit date. The patent confers on its titleholder an exclusive right to exploit the invention during the entire period of protection. The rights to a patent may terminate by: (a) (b) (c) (d)
expiration of the term of protection; titleholder’s waiver to the patent; deprivation of the titleholder of the rights granted by patent; or cancellation of the patent.
Annuities must be paid in order to maintain the validity of the patent. The right to a patent, the right to the issuance of a patent and the rights deriving from a patent are transferable, either in part, or as a whole, by assignment, by exclusive or non-exclusive licenses or by legal or testamentary succession. Transfers are effective against third parties as from the date of publication in the Official Bulletin of Industrial Property of the notification of the transmission registered with SOIT. The fabrication, use, offer for sale, sale or import for use, offer for sale or sale in case the object of the patent is a product or the use of the procedure,
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as well as the use, offer for sale, sale or the import for these purposes of the product directly obtained through the patented procedure, in case the object of the patent is a procedure, without the consent of its titleholder represents a criminal offence, punishable by imprisonment or a fine.
Trademarks A trademark is registrable if it is distinctive with respect to the products or services it identifies. Trademarks may consist of words (including names), drawings, letters, figures, figurative elements, three-dimensional shapes (especially the shape of the product or of the wrapping/package), colour combinations, or other combinations thereof. Collective and certification trademarks are also registrable. Protection by registration is not granted for trademarks that: • are lacking distinctive character; • are composed exclusively of signs that have become usual in the current language or commercial practices; • are composed exclusively of signs and indications that serve to indicate the species, quality, quantity, destination, value, geographical origin or time of producing the good or providing the service, or other characteristics thereof; • consist exclusively of the shape of the product, if such is imposed by the nature of the product; • are susceptible to deceiving consumers with respect to the geographical origin, quality or nature of the product or service; • contain a geographical indication, for products not originating in the respective geographical area; • are contrary to public order or to public morality; • contain the name or image of a reputed person in Romania, without such person’s consent; • contain, without the consent of the competent authority, reproductions or imitations of official signs, flags, etc., of countries of the Paris Union (signatories of the Paris Convention for the Protection of Industrial Property) or inter-governmental international bodies, and that are subject to the provisions of Article 6 of the Paris Convention. Well-known trademarks are protected in Romania without registration. An application for a trademark should be filed with the State Office for Inventions and Trademarks (SOIT). The protection of a trademark is granted as of the date of the application (the date of National Regular Filing, ie. the date of filing with SOIT the application in the Romanian language, which fulfills legal requirements). Priority may be claimed by a foreign application filed within the six months before the filing of the Romanian application.
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Romanian law also acknowledges the six-month exhibition priority. Where a priority is claimed, the protection is granted as of the date of the priority. Protection for trademarks may be refused ex officio by SOIT, or based on the opposition filed by the titleholder of a senior or well-known trademark, or by another interested party. The opposition should be filed within three months from the date of the publication of the trademark within the Official Bulletin for Industrial Property – Trademarks Section. Registration is effective for 10 years from the date of filing (if the filing is complete), but can be renewed indefinitely, subject to payment of a renewal fee. The rights over a trademark may terminate by: (a) expiration of the term of protection; (b) titleholder’s waiver to the trademark; (c) deprivation of the titleholder of the rights granted by the trademark (one of the reasons for deprivation is non-use, ie., without justified reasons, the trademark has not been effectively used in Romania for an uninterrupted term of five years); or (d) cancellation of the registration. The titleholder of a senior trademark may be barred from filing a request for cancellation of a registered trademark, and may not oppose the use of the later trademark if it has failed to do so within five years from registration, except in the event that the later trademark has been registered in bad faith. The rights granted by a trademark may be assigned or licensed at any time during the term of protection. The assignment agreement is null and void unless it is in writing and signed by the parties. Both the assignment and the license agreement must be registered with the Trademark National Registry in order to be effective against third parties. Trademark infringement is a criminal offence, punishable by imprisonment or a fine.
Geographical indications Geographical indications of products are protected in Romania by registration with the State Office for Inventions and Trademarks in accordance with the relevant Romanian law or with the international conventions to which Romania is party, and may be used only by the persons who manufacture or sell the products for which they have been registered. However, geographical indications protected under bilateral or multilateral agreements concluded by Romania are not subject to registration. Geographical indications may not be registered if they: (a) are the generic name of goods;
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(b) are liable to mislead the public as to the nature, origin, manufacturing methods and quality of the goods; or (c) are contrary to public order or morality. Registration is valid for 10 years, starting on the date of the application filing. Upon the titleholder’s application, the registration may be renewed for additional 10-year terms, subject to payment of a renewal fee, if the conditions under which the right has been obtained remain applicable. Geographical indication infringement is a criminal offence, punishable by imprisonment or a fine.
Designs and models A design or model is registrable if it is new and has individual character. If the design or model is determined exclusively by technical necessity it may not be registered. Also, a design or model which must be reproduced in the exact shape or dimensions in order for the products in which it is incorporated or is applied to function cannot be registered. An application for a design or model is filed with the State Office for Inventions and Trademarks (SOIT). Protection for designs and models may be refused ex officio by SOIT, or based on the opposition filed by an interested party. The opposition should be filed within two months from the date the design or model is published in the Official Bulletin for Industrial Property – Designs and Models Section. The protection of the design or model is granted as of the date of the application. Priority may be claimed by a foreign application filed within the six months before the filing of the Romanian application. Romanian law also acknowledges the six-month exhibition priority. If priority is claimed, the protection is granted as of the date of the priority. The application may be filed in the name of the first owner or of subsequent owners. Registration is effective for 10 years from the date of the filing (if the filing is complete). Upon the titleholder’s application, the registration of the design or model may be renewed for three additional five-year terms, subject to payment of a renewal fee. The rights to a design or model may terminate by: (a) expiration of the term of protection; (b) titleholder’s waiver to the industrial design or model; (c) deprivation of the titleholder of the rights granted by design or model; or (d) cancellation of the registration certificate. The rights granted by a protected design or model may be assigned or licensed, or may be transferred by succession, at any time during the term of protection. Both the assignment and the license agreement, and the
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transfer by succession, become effective against third parties from the date the notification of transfer is published in the Official Bulletin of Inventions and Trademarks. Designs and models infringement represent criminal offences, punishable by imprisonment. Infringement comprises the reproduction, fabrication, commercialization or the offer for sale, placing on the market, import, export or the use of a product within which the design or the model is incorporated or to which is applied or the fact of stocking such a product for these purposes, after the registration of the design or model. Where these actions present a danger to consumer safety and health, the term of imprisonment is increased and restrictions on exercising certain rights may also be applied.
Copyrights Under Romanian law, copyright arises automatically upon the creation of the work, and there are no formalities required (including fixation or depositing copies) for protection. Copyright generally lasts for the entire duration of the author’s life, plus another 70 years. The economic rights of interpreting or executing artists are valid 50 years from the date of the interpretation or the execution. Copyright protection applies to original intellectual works within the literary, artistic or scientific domain, irrespective of the modality of creation, or of the way they are expressed, and independent of their destination or value. Romanian law provides an inexhaustive list of examples of works that may benefit from copyright protection. The law also provides for works that are expressly excluded from copyright protection. Romanian copyright law dedicates a special chapter to the protection of computer programs. According to the law, protection of software includes any expression of the software, application software and operating systems, whatever may be their expression, in any language, including manuals. Ideas, proceedings, functioning methods, mathematical concepts and principles that any element of the software is based on are not subject to copyright protection. Authorized users of a computer program are granted specific rights to make a back-up copy of the program.
Moral rights Romanian law gives to the author the following moral rights: • the right to control the public disclosure of his/her works (the right to decide whether, when and how his/her work shall be communicated to the public); • the right of authorship (the right to claim the status of author of a work);
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• the right to decide under which name the work shall be communicated to the public; • the right of respect (the right to object to the work being distorted or used in contexts that are prejudicial to the honour and literary and artistic reputation of the author); • the right to retract the work, even after public circulation, subject to payment of damages to the exploitation rights’ owners that might suffer damage by such retraction. Moral rights may not be waived or transferred. Moral rights are not limited in time. The exercise of the right of authorship and the right of respect are transferred to the heirs after the author’s death. Romanian law also provides for the protection of related rights (rights derived from a work protected by copyright). Such related rights are the rights of performing or executing artists (performers), the rights of producers of sound recordings, and the rights of broadcasting organizations. The copyright holder may assign only its economic rights. The assignment may be exclusive or non-exclusive or may be limited by geography or time. The assignment of all future works of the author is forbidden. The author may request the termination of the assignment contract of the patrimonial right, in the event that the assignee, without justification, does not exploit or does not sufficiently exploit the right, and by such non-use the interests of the author are affected. The request for cancellation may not be filed before a certain term has lapsed from the conclusion of the assignment agreement. Copyright and related rights’ holders may exercise their rights either personally, or, upon request, by collective administration bodies. The Romanian Office for Copyright, working under the Romanian government’s coordination, is the sole entity in charge of evidencing, observing and controlling the application of the legal provisions regarding copyright and related rights. Copyright infringement is a criminal offence, punishable by imprisonment or a fine.
Integrated circuits topographies Integrated circuits topographies are protected on the territory of Romania by registration with the State Office for Inventions and Trademarks (SOIT) under the provisions of Romanian law. Only original topographies are protected and beneficiaries enjoy protection offered by Romanian law if they are natural persons who are nationals of an EU or World Trade Organization (WTO) member state or have their usual residence on the territory of one of the member states, or the companies or
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other legal entities which carry on an industrial or commercial activity on Romanian territory or on the territory of another EU or WTO member state. The term of protection starts with the official registration date or with the date of the first commercial exploitation (whichever is earlier) and ends on the last day of the 10th calendar year following the year when the protection period actually commenced. No annuity has to be paid for maintaining the validity of the registration certificate. Where the topography has been exploited commercially, in Romania or abroad, it shall be protected only if the application for registration is filed at the SOIT within two years from the date of the first commercial exploitation. Where the topography has not been exploited commercially for 15 years since it was created or first coded: (a) if it was never registered, it is no longer eligible for registration; or (b) if it was registered, the rights over the topography are terminated. The right to protection is transferable, either in part, or as a whole, by assignment, or by legal or testamentary succession. Transfers are effective against third parties from the date of registration with SOIT. Infringement of integrated circuits topography represents a criminal offence, punishable by imprisonment or a fine.
Plant breeder’s rights Romania joined the International Union for the Protection of New Varieties of Plants in 2000. In order for a plant variety to be patentable (and therefore to be granted a variety patent by the State Office for Inventions and Trademarks), it should be: (a) (b) (c) (d) (e)
novel; distinctive; homogeneous; stable; and correctly generically denominated.
The protection of the plant variety is granted as of the date of granting the patent, but provisional protection is awarded as of the date the patent application is published in the Official Bulletin of Industrial Property (within three months from the date of filing). The patented variety is protected for a term of 25 years as of the date the variety patent was granted, and 30 years for new varieties of fruit trees, ornamental trees and vines. Variety patent infringement is a criminal offence.
2.16
Insurance Law Costin Teodorovici, Associate, Nestor Nestor Diculescu Kingston Petersen
Insurance activity can be carried on in Romania in compliance with the specific regulatory framework, by duly licensed entities, and under the supervision of the competent regulatory body. Over the past few years, the legal framework has been amended several times so that, presently, the Romanian insurance framework is generally in line with the law and market practice of the European Union (EU), which Romania joined on 1 January 2007.
Sources of law The main law governing the Romanian insurance field is Law No. 32/2000 on insurance activity and insurance supervision in Romania. Following several amendments, the law currently incorporates the main EU directives applicable to various aspects of insurance activity, such as life insurance (Directive 2002/83/CE), motor liability insurance (Directive 2002/26/CE), and the activity of insurance brokers (Directive 2002/92/CE). The Insurance Activity and Supervision Law sets out provisions with respect to the supervision of insurance companies, as well as the organization and competencies of the Insurance Supervisory Commission (ISC), licensing requirements and procedures applicable to Romanian and foreign insurers (either from EU member states or not), prudential rules, minor and criminal offences and applicable sanctions. The rules applicable to various types of insurance contracts and the general principles applicable to the relationship between insurance companies and their customers are comprised in a different enactment, Law No. 136/1995 on insurance and reinsurance in Romania. The Insurance and Reinsurance Law also contains provisions with respect to co-insurance and reinsurance and establishes an insolvency guarantee fund and a street victims’ protection fund. The legal regime applicable to the insolvency of insurance companies is regulated by Law No. 503/2004 on the financial reorganization and insolvency of insurance companies.
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The provisions of the aforementioned laws are further implemented through mandatory norms and regulations issued by the ISC.
Regulation of insurance activities The business of insurance, which the Insurance Activity and Supervision Law defines as
“an activity performed in or from Romania which mainly includes offering, intermediation, negotiation, entering into insurance and reinsurance agreements, cashing-in of insurance premiums, debt recovery, liquidation of damages, and placement of funds” may only be conducted by insurance companies or insurance intermediaries (as applicable), duly licensed by the ISC (or such other foreign regulatory body in case of insurers established in EU member states). The insurance market is supervised by the ISC, a specialized, autonomous regulatory body. It is composed of seven members who are directly appointed by the parliament. The competencies of the ISC mainly consist of preparing draft legislation related to insurance, authorizing insurance/reinsurance companies and insurance brokers, approving various corporate changes in, and ensuring the prudential supervision of the aforementioned entities, as well as ascertaining breaches of insurance law and applying sanctions against non-complying entities. Romanian companies, as well as foreign entities or branches of foreign entities, may be admitted to perform insurance activities in Romania, but licensing requirements may vary. While Romanian companies (irrespective of whether they are subsidiaries of foreign entities or not) and branches of foreign entities from third countries must undergo a licensing procedure with ISC, entities established in the EU, which are already licensed as insurers/insurance brokers in the member state of origin, can act on the Romanian market either based on the freedom of establishment or based on the free provision of services, subject to prior notification to the ISC. The setting up of a Romanian insurance company, or of a Romanian branch of a foreign entity (save for branches of duly licensed EU insurance companies, as mentioned above), must be authorized by the ISC, following a two-step procedure: 1. an application must be filed with the ISC, together with proper documentation, as detailed in the relevant ISC regulations (such as draft constitutive documents, evidence of paid-in share capital, CVs of directors and managers), in order for the ISC to approve the incorporation of the company/branch. Such approval must be issued by the ISC within a maximum of 60 days from the date of submission of the application.
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The minimum share capital is of 1.5 Romanian lei (RON, approximately €500,000) for general insurance, RON 3 million (approx. €1 million) for general insurance and mandatory insurance, and RON 2.1 million (approx. €700,000) for life insurance (or the aggregate of the corresponding thresholds in case both general and life insurance activities are to be performed); 2. following the incorporation of the company/branch, the company must file a second application with the ISC (together with extensive documentation evidencing its ability to conduct the insurance business), in order to obtain an operational license. The ISC must decide on the granting of the license within four months from the date of submission of the application. The issuance of such operational license is subject to the ISC being satisfied that a series of legal requirements are fulfilled by the company/branch. The ISC may withdraw the operational license in case the insurer does not begin performing insurance activities within 12 months of the date the license is issued, or if it ceases to conduct insurance activities for more than six months. The ISC may also withdraw the operational license as a penalty for breaching the regulatory framework. After the insurer is properly incorporated and has obtained the operational license, it may start to effectively perform insurance activities in Romania, subject to supervision by the ISC. This includes various reporting requirements and compliance with a set of financial indicators, such as the minimum solvency margin (to be determined on a case-by-case basis, according to the technical norms issued by the ISC, depending on the types of insurance performed by each insurance company). Also, depending on the types of insurance performed, insurers must comply with specific requirements with respect to the various reserve funds to be maintained (eg. premium reserves, liquidated damages reserves, catastrophic risks reserves), as well as with respect to the categories of assets in the ownership of the insurers and destined to cover the aforementioned reserve funds. Companies acting on the Romanian insurance market are expressly permitted to create professional associations, may enter into co-insurance agreements, and, generally, can set up any form of professional cooperation. The legal framework also contains specific regulations with respect to the insurance and reinsurance intermediation activity. With a few exceptions, insurance intermediaries are subject to licensing and/or registrations with the ISC (as the case may be). The intermediation activity can be carried on by both specialized companies and individuals.
Types of insurance According to the Insurance Activity and Supervision Law, there are two main classes of business in the field of insurance: general insurance and life
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insurance. Insurance companies may choose to perform either activity, as well as both general and life insurance. However, should an insurer choose to carry out both types of business (general and life insurance), it must ensure that each of the two activities is managed distinctly, as required by the specific provisions of Insurance Activity and Supervision Law. As a consequence, insurers carrying on both types of business must appoint separate managers to conduct the life insurance activity and the general insurance activity, to maintain different books and registries, as well as to determine and maintain different solvency margins for each type of activity. According to the list provided in an annex to the Insurance Activity and Supervision Law, the following types of life insurance are available: • • • • • • • • • • •
survival insurance; death insurance; mixed insurance (survival and death); life insurance with return of premiums; marriage insurance; birth insurance; bodily injury insurance; hospital and medical expenses insurance; serious illness insurance; unemployment insurance; and permanent health insurance.
The Insurance and Reinsurance Law includes an annex with a more extensive list of insurance products, such as: • • • • • • • •
work-related accidents and professional illness insurance; various motor vehicle insurance; fire and catastrophic insurance; property insurance; credit insurance; financial losses insurance; legal protection insurance; and civil liability insurance (including mandatory third-party motor liability insurance).
Under the Insurance and Reinsurance Law, mandatory insurance means not only that certain persons are compelled to enter into a specific insurance policy, but also that the relationship between the insurer and the insured person is strictly determined by the law, setting forth the rights and obligations to be included in the policy (to the extent that, in practice, such insurance is executed in a pre-approved standard form). Within the strict meaning of this law, as presented above, only third-party motor liability insurance is deemed mandatory insurance. However, in a larger sense, there are other insurances which are also compulsory as regards the obligation to
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conclude and hold such insurance, but the rights and obligations of the parties are not in a pre-approved standard form required by law. Such mandatory insurances include: • professional liability insurance for physicians, pharmacists and other persons in the field of medical assistance; • civil professional liability insurance for insurance agents; • insurance for coverage of nuclear hazard liability; • civil liability insurance for private property, movable and immovable assets part of the museum estate; • professional civil liability insurance for lawyers; • professional liability insurance for judicial insolvency receivers and liquidators; • professional civil liability insurance for financial auditors; • medical assistance insurance for the personnel of diplomatic offices, sent on a permanent mission abroad, as well as for the members of their family accompanying them; • hunting insurance for carrying out hunting activities in Romania; • insurance for storage facilities and staple seeds; • insurance for security of weaponry transport; • civil liability insurance for tanker owners for coverage of environmental hazard; • insurance covering assets entrusted to receivers on the basis of a consignment agreement; • mortgage loan insurance; and • professional liability insurance for members of the board of directors, members of the directorate or the supervisory council of a joint-stock company.
2.17
Environmental Law Roxana Ionescu, Associate, Nestor Nestor Diculescu Kingston Petersen
Romanian environmental law has been subject to extensive changes over the past several years, mostly due to Romania’s efforts to adapt its legislative framework to the requirements of membership in the European Union (EU). Current environmental protection legislation includes regulations of general application, as well as regulations applicable to particular areas of interest, such as waste management, water protection, soil protection, noise pollution, genetically modified organisms and environmental liability.
Sources of law Government Emergency Ordinance No. 195/2005 on environmental protection, as amended (GEO 195/2005) represents the general framework in the field of environmental protection. It contains the general rules applicable with respect to the performance of activities from an environmental perspective, as well as rules on the protection of various environmental factors, such as water and groundwater, soil and subsoil, atmosphere, flora and fauna, etc. GEO 195/2005 sets forth a series of internationally-recognized general principles, such as the precaution in decision-making, the “polluter pays” principle, the precautionary principle, the conservation of biodiversity and ecosystems specific to the natural bio-geographical structure, the principle of sustainable use of natural resources and the principle of public participation in the decision-making process. To put these principles into practice, Romanian law requires that all natural or legal persons carrying out activities having a potential significant impact on the environment obtain the relevant environmental permit, approval or authorization. These documents set forth the specific obligations to be complied with during the various phases of the respective activity (building, commissioning or changing). For certain specified activities, the law requires the issuance of an integrated environmental authorization. Government Emergency Ordinance No. 152/2005 on the integrated pollution prevention and control (applying EU Council Directive 96/61/EC of 24
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September 1996, concerning integrated pollution prevention and control) sets forth the categories of activities for which such an authorization is required, as well as the general procedure to be applied for its issuance. In implementing the “polluter pays” principle, the law regulates obligations to pay contributions to a special Environmental Fund when an activity involves, among other things, the discharge of emissions into the atmosphere, trading ferrous and non-ferrous waste and introducing packaging materials on the market without ensuring their collection and disposal. Government Emergency Ordinance No. 196/2005 on the Environmental Fund, as amended, strikes a balance between the requirement to pay such fees and the encouragement of entities in various fields to participate in recycling activities in order to meet applicable waste disposal and recovery targets. Various enactments supplement the general rules set forth by GEO 195/ 2005. Thus, Law No. 107/1996 on water protection, as amended (Law 107/ 1996), sets out the main obligations of natural and legal persons in connection with water resources existing in Romania. For example, Law 107/1996 regulates the right of use and the related obligations with respect to the protection and preservation of water resources, and also to construction works erected on water or which are connected to waters and causing temporary or permanent alterations to the quality of the waters. Government Emergency Ordinance No. 243/2000 regarding the protection of the atmosphere, as amended, sets forth the mechanisms for evaluating air quality based on generally accepted levels and alert levels, as further regulated under specific norms. Government Decision No. 699/2003 on the determination of measures for the reduction of emissions of volatile organic compounds (VOC), resulting from the use of organic solvents in certain activities and installations (applying EU Directive 1999/13/EC) sets forth specific rules with respect to installations causing VOC emissions. Government Emergency Ordinance No. 78/2000 on waste regime, as amended (GEO 78/2000) and Government Emergency Ordinance No. 16/ 2001 on the management of recyclable industrial waste, as republished and amended (GEO 16/2001), set forth the general framework in which legal entities should carry out their waste management obligations. Pursuant to GEO 78/2000 (applying EU Council Directive 75/442/EEC of 15 July 1975 on waste, EU Council Directive 91/689/EEC of 12 December 1991 on hazardous waste and EU Directive 2006/12/EC of the European Parliament and of the Council of 5 April 2006 on waste), legal entities must ensure appropriate management of waste generated from their activity through, among other things, organizing recycling activities or contracting such services from specialized third parties. Moreover, legal entities must comply with all measures imposed by the authorities in charge of verifying the entities’ compliance with waste management obligations. GEO 16/2001 sets forth the obligation to ensure the collection, sorting and temporary storage of waste resulting from legal entities’ activities, as well as reintroducing such waste in the manufacturing circuit, through methods provided by law. In addition, legal entities are required to ensure the
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selective collection and temporary storage of waste, and to maintain permanent records with respect to the waste management activities carried out at each of their locations. Romanian law provides additional rules with respect to specific categories of waste, such as electrical and electronic equipment, batteries and accumulators and end-of-life vehicles. All such rules represent the application domestically of various EU directives in the field. In addition to the enactments adopted at the national level, the Romanian legal framework also consists of EU Regulations that have become applicable starting from 1 January 2007, the date Romania entered the European Union. These include Council Regulation (EEC) No 259/93 of 1 February 1993 on the supervision and control of shipments of waste within, into and out of the European Community. Furthermore, Romania has signed up to various international treaties dealing with environmental protection, such as: • the Kyoto Protocol to the UN Framework Convention on Climate Change; • the 2001 Convention of Persistent Organic Pollutants; • the 1994 Convention on Cooperation for the Protection and Sustainable Use of the Danube River; • the 1992 Convention of the Protection and Use of Trans-boundary Watercourses and International Lakes; • the 1992 Convention on the Trans-border Effects of Industrial Accidents; • the 1992 Convention on Biological Diversity; • the Basel Convention on the Control of Trans-boundary Movements; • the 1985 Vienna Convention for the Protection of the Ozone Layer, and • the 1979 Convention on the Protection of European Wildlife and Natural Habitats.
Sanctions Romanian environmental law sets forth a detailed range of sanctions in case of an individual’s or an entity’s failure to comply with their environmental obligations. The sanctions include both administrative sanctions (fines amounting to up to 100,000 Romanian lei (RON) per breach) and criminal sanctions (either imprisonment or criminal fine). Furthermore, entities operating under environmental authorizations who fail to comply with their environmental obligations risk having their authorization suspended or withdrawn. In addition to the above-mentioned sanctions, Romanian law also contains clear provisions regarding the liability for environmental pollution. Thus, according to GEO 195/2005, the liability in respect of the damages caused by pollution shall be objective. In addition, in case there is more than one polluter, the liability shall be joint and several, meaning that the risk of insolvency of one polluter is borne by the other polluters, and not the victims
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of such pollution. As previously mentioned, GEO 195/2005 also provides that one of the guiding principles of Romanian legislation in this field is the “polluter pays” principle, which means that the person responsible for the pollution should be ultimately held accountable for the pollution it caused and the related damages. Also as an implementation of the “polluter pays” principle, Romania has very recently applied EU Directive 2004/35/CE of the European Parliament and of the Council of 21 April 2004 on environmental liability with regard to the prevention and remedying of environmental damage through Government Emergency Ordinance No. 68/2007 on environmental liability with regard to the prevention and remedying of environmental damage (GEO 68/2007). GEO 68/2007, which entered into force on 2 July 2007, applies with respect to environmental damage caused by certain activities (including activities falling under the scope of application of the law on integrated pollution prevention and control and waste management activities), as well as to environmental damage or the imminent threat thereof, caused by pollution of a diffuse character, where it is possible to establish a causal link between the damages and activities of the operators. Similar to the directive, GEO 68/2007 sets forth rules on preventive and remedial measures that need to be taken in case of occurrence of an event causing environmental damage. It also provides rules on those responsible for the costs related to the implementation of the preventive or remedial measures (as a rule, this will be the operator of the activity causing the damage). GEO 68/2007 provides that in case the operator that caused damage to the environment or an imminent threat of such damage is part of a consortium or a multinational company, the operator shall be held jointly and indivisibly liable with the consortium or multinational company for the coverage of preventive and remedial costs. No further clarifications are available to date in this respect.
Enforcements While in the past the implementation of the requirements of Romanian environmental law was sometimes lacking, nowadays increased attention is afforded to this matter. One of the stimulating factors for this situation is the fact that the European Commission and other authorities are paying increased attention to environmental protection and the adequate implementation of the framework adopted in this field. In Romania, three main authorities are in charge of implementing the environmental legal framework: • the ministry of environment and sustainable development, which is in charge of setting forth the general policies in the field;
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• the National Agency for Environmental Protection, which is in charge of implementing the requirements set forth by law; and • the National Environmental Guard, which is in charge of controlling the manner of compliance and imposing sanctions in case of failure. Non-profit organizations having a “green agenda” have started to play a more significant role in the decision-making process in environmental matters, which in turn is raising awareness among all interested parties concerning the manner in which Romanian environmental law is being implemented.
2.18
Natural Resources Law Adina Chilim, Partner, Nestor Nestor Diculescu Kingston Petersen
Introduction Romanian law defines natural resources as the ensemble of natural elements of the environment used in human activity, consisting mainly of: • non-renewable resources: ��� minerals; ��� fossil fuels; • renewable resources: ��� water; ��� air; ��� flora; ��� wild fauna; ��� inexhaustible resources: ■ solar; ■ wind power; ■ geothermal; ■ wave energy. The Romanian Constitution stipulates that natural resources are the exclusive public property of the Romanian State. This article focuses on key areas of interest in the natural resources sectors, ie. mineral resources, petroleum and gas.
Minerals Mineral resources include those located on the territory and in the subsoil of the country and of the continental plane of Romania’s economic area of the Black Sea. The mineral resources consist of coal, ferrous and non-ferrous ore, aluminum and aluminum rocks, noble metals, radioactive, rare and dispersed soils minerals, haloid salts, instrumental non-metallic substances, instrumental rocks, precious and semi-precious stones, peat coal, therapeutic silt and peat, bituminous rocks, non-combustible gases, geothermal waters and related gases, natural mineral waters, therapeutic mineral waters, etc.
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Petroleum Petroleum resources include those located in the subsoil of the country and of the Romanian continental plane of the Black Sea. Under Romanian legislation, petroleum is defined as mineral combustible substances comprised of miscellaneous natural hydrocarbons accumulated in the terrestrial shell which, under surface conditions, take either gaseous (natural gas) or liquid (crude oil) form. Petroleum in gaseous form can occur as free gas from gas subsoil deposits, gas dissolved in petroleum, gas from the gaseous cape associated with the petroleum subsoil deposit and gas resulting from liquid hydrocarbon extraction or separation.
Legal framework The authority regulating and supervising the Romanian mining and petroleum sectors is the National Agency for Mineral Resources (ANRM). Mining activity is mainly regulated by Mining Law No. 85/2003, as subsequently amended. Its implementation is regulated through the Norms of Application (approved through Government Decision No. 1208/2003), as well as by secondary legislation. Petroleum is regulated by Petroleum Law No. 238/2004, and the accompanying normative documents (approved through Government Decision No. 2075/2004), as well as by secondary legislation. The authority regulating and supervising the Romanian gas sector is the National Regulatory Authority in Energy Sector (ANRE). The legal framework regulating gas and gas related activities consists of Gas Law No. 351/2004 as subsequently amended, Government Decision No. 785/2000 (as republished) for the approval of the Regulation for granting licenses and authorizations in the gas sector, and secondary legislation.
State ownership rights All natural resources are the exclusive property of the state. In addition, the equipment and other physical assets necessary to the operations related to natural resources are regulated as state property, while related services are regulated as matters of national interest. Thus, the national network for the transport of natural gas (at pressures of six bars or higher) and petroleum, which includes pipelines, installations, and related equipment, is the property of the Romanian state. The transmission of gas and petroleum, as well as the distribution of gas, are public services of national interest.
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Concessions The benefits obtained from private investor funds as result of concessions for the operation of the national petroleum transmission system (such as development and modernization of the system) are state property. Funds obtained from investments made to public-private partnerships also become state property. The main consequence of this legal regime is that an investor in the petroleum field must hand over the assets which are the object of the investment to the competent authority upon the expiry of the concession period.
Right of use Mining The Mining Law provides that mineral resources may be explored/exploited through mining activities upon approval by ANRM of (i) concession agreements granted to Romanian or foreign legal entities; or (ii) grants of administration (public institutions only). The documents whereby ANRM grants the right to explore/exploit mining activities are generally called “licenses”. Depending on the operations to be executed, the license types comprise the following: • non-exclusive prospecting permits, granted for a maximum of three years, without prolongation possibility; • exclusive exploration concession licenses, granted for a maximum of five years, with prolongation possibility for a maximum of three years; • exclusive exploitation concession licenses, granted for a maximum of 20 years, with prolongation possibility for successive five-year periods; • exploitation permits; • ANRM agreements regarding the association of the license holder with other legal entities, in view of executing mining activities granted into concession; • ANRM approvals regarding the transfer to another legal entity of an exploration or exploitation concession license. The authority in charge of granting the above concessions is ANRM, which must do it by way of public tender. The request for an exploration or exploitation concession of mineral resources may be submitted by the interested Romanian or foreign legal entity or proposed by ANRM, which also establishes the terms and conditions for drafting the concession deeds, based on negotiations with the concessionaire.
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Foreign legal entities obtaining the right to carry on mining activities must, within 90 days from the day the license takes effect, set up a Romanian subsidiary and maintain it throughout the entire duration of the concession.
Petroleum The authority in charge of granting concessions for petroleum activities (such as exploration, development, exploitation, storage, transmission, transit, etc.) and public assets related thereto is ANRM. The concession is awarded by way of public tender, for a term of 30 years, with the possibility of extension for another 15 years. The concession takes the form of a petroleum agreement (acord pertrolier), concluded between ANRM and the Romanian or foreign legal entity which wins the public tender. The concession enters into force after specific governmental approval. A petroleum rent is payable by the titleholder of the concession for the entire duration of the concession. Foreign legal entities that are granted a concession must establish a subsidiary or a branch in Romania within 90 days from the date of governmental approval and maintain it for the entire term of the concession.
Gas In the gas field, the gas producer must hold a petroleum agreement (as regulated under the Petroleum Law). The state may grant concessions on gas transmission and storage systems, transmission, storage and distribution services and related public property assets through public tenders. In order to participate in a tender, the legal entity (either Romanian or foreign) must have previously obtained a temporary license for the concession activity (the final license will be granted after the tender is finally adjudicated).
Licensing/authorization regime Mining As mentioned above, the concession agreement is generally referred to as a license under the Mining Law. Environmental and work protection authorizations from the relevant environmental and labour authorities, such as the ministry of environment and water management, must be obtained in order to carry on mining activities.
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Petroleum Exploration activities in the petroleum sector can be developed only by investors who have first been awarded non-exclusive prospecting permits. ANRM grants such permits for three-year periods, without prolongation possibility.
Gas In the gas field, licenses are required for transmission, storage, transit, distribution and supply services. The licenses are awarded by ANRE to legal entities that have a registered office in Romania and comply with specific procedures. Where the applicant is a foreign entity, it may establish and maintain a secondary office in Romania for the entire period of the license. Gas licenses have different terms of validity: the supply and storage licenses may last a maximum of 30 years, distribution licenses may last up to 15 years, while transit licenses are valid until the parties’ agreement expires. Gas authorizations take three forms: 1. establishment authorization, covering the accomplishment of the supply capacity, the transmission, storage, transit and distribution of gas; 2. performance authorization, referring to supply, transmission, distribution and storage of gas systems; and 3. modification authorization regarding the supply, transmission, storage and distribution systems. Establishment and modification authorizations are valid during the period the work is executed, while the performance authorization may last up to 30 years.
Rights over related lands General The right to use land for mining, petroleum and gas activities may be obtained through: • • • • • •
sale-purchase agreements; exchange of lands; rental for determined periods; expropriation for public utility cause; granting of concessions; association between the owner of the land and the license holder, etc.
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Mining and petroleum The holders of mining licenses, as well as the petroleum concessionaires, shall acquire legal servitude in order to pass over the lands necessary for access into the exploitation or exploration perimeters or for other activities related thereto, against the payment of an annual rent to the owners of the affected lands.
Gas Special rights are established for the benefit of concessionaires in the gas sector over public or private lands and assets pertaining to legal or natural persons, as well as over the activities performed in the vicinity of gas capacities, for the entire duration of installation, rehabilitation, exploitation and maintaining works of gas capacities, as follows: • right of use for performing necessary works; • right of use for ensuring the normal operation of the respective gas capacity; • legal servitude of underground, surface or air pass for installing networks, pipelines, other equipments and for access to installation places; • right to obtain, restrain or terminate certain activities that might endanger persons or assets; • right of access to public utilities.
Part Three
Finance Issues
3.1
Direct Taxation of Corporations Deloitte, Romania
From 1 January 2004, Romania operates under a new Fiscal Code, which covers all taxes and charges apart from social contributions and customs duties. The Fiscal Code was designed to bring more stability to the Romanian fiscal regime, but a series of amendments have been made since then. The most recent changes involve the harmonization of the local tax rules with European Directives (ie. Parent Subsidiary Directive, Merger and Acquisition Directive, VAT Directive, Excise Duties Directive, etc.) and came into force on 1 January 2007.
Taxable entities and residency An entity is considered resident in Romania if it is incorporated in Romania or has the place of effective management in Romania. For associations between Romanian legal entities and foreign individuals or entities, which do not give rise to a legal entity, the tax is computed and paid by the Romanian legal entities on behalf of its partners. Resident entities are subject to tax on worldwide income. Non-resident companies are taxed only on their earnings from Romania (through branches, permanent establishments or associations/joint ventures that carry out activities in Romania).
Tax base Certain expenditure is recognized for tax purposes while other expenditure is not. Expenses are considered deductible only if incurred for the purpose of obtaining taxable income. Non-deductible expenses include: • Business entertainment and protocol expenses, which exceed the limit of 2 per cent applied to the difference between revenues and deductible expenses other than profit tax expenses and protocol expenses;
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• Fines or penalties payable to Romanian authorities or foreign authorities; • Expenses with luncheon vouchers over the limit established by the government (currently 7.56 Romanian lei (RON)/employee/day present at work); • Contributions to non-mandatory pension funds, as well as to voluntary health insurances, over certain legal limits (€200/employee/year); • Social expenses, which exceed the limit of 2 per cent of the salary fund realized; • Other expenses of a salary nature, which are not taxed by the company at the level of the individual. Interest expenses are deductible according to debt/equity ratio. Thus, if the debt/equity ratio is over three, the interest expenses and net losses from foreign exchange differences are non-deductible, but available to be carried forward in the following period until their full deductibility. However, these provisions are not applicable to banks, leasing and mortgage companies. The law limits the level of interest deductibility for loans obtained from companies, other than banks, their branches, credit cooperatives, leasing and mortgage companies, at: • the National Bank of Romania’s (NBR) reference interest rate for the last month of the trimester – for RON denominated loans; and • 7 per cent annual interest rate – for foreign currency denominated loans. Sponsorship expenses are not deductible, but they can be taken as a credit from the profit tax due provided that the following conditions are met: • they are within the limit of 3 per cent of the turnover; and • do not exceed 20 per cent of the profit tax due. Losses are available to be carried forward and offset against future profits within the next five consecutive years. Carry-backs are not allowed. • Inventory valuation: The cost of inventories shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. • Depreciation: It is possible to apply accelerated depreciation to certain items of inventory (machinery, tools and installations, computers and peripherals acquired or operational after 1 July 2002, as well as patents), without the authorization of the tax authorities. Goodwill is not tax depreciable. • Reserves and provisions: Any tax differential arising from corporate profit tax incentives is treated as a taxpayer’s reserves that cannot be used for share capital increases, offsetting losses incurred or distribution to shareholders.
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• Adjustments to revenue: The amount of revenue arising from a transaction is usually determined by an agreement between the entity and the buyer or user of the asset. It is measured at the fair value of the consideration received or receivable, taking into account the amount of any trade discounts and volume-rebates allowed by the entity.
Tax rates This section provides the tax rates for corporate income tax, corporate assessments and payments and capital gains and losses and wealth tax.
Corporate income tax Entities undertaking business in Romania are liable to pay corporate income tax (“profit tax”). The standard profit tax rate is 16 per cent (being reduced from 25 per cent as of 2004). Taxpayers deriving revenue from nightclubs, bars, casinos and betting activities should pay the higher between profit tax and 5 per cent applied on such revenues. There is a special taxation regime for micro-enterprises, that allows for companies to be taxed on the income obtained (instead of the profits), provided that certain conditions are simultaneously met as of the year-end of the previous year including, among others: • the company has between one and nine employees; • the revenues obtained do not exceed the equivalent of €100,000; • from 2007, the proportion of the income derived from sources other than consultancy and management services exceed 50 per cent of the total revenues of the respective company. The micro-enterprise tax rate is 2 per cent in 2007, 2.5 per cent in 2008, and 3 per cent in 2009.
Corporate assessments and payments The tax year is the calendar year. Pre-payments regarding the corporate income tax should be determined on actual amounts (not estimates of pre-assessments) and paid on a quarterly basis. These quarterly payments are due by the 25th of the month following the reporting quarter. Profit tax returns should also be submitted on quarterly basis, within the same deadline. The definitive annual tax return should be filed by 15 April of the year following the reporting year. Banks are liable to a quarterly profits tax compliance based on estimative figures. From 1 January 2008, all taxpayers will apply this estimative system.
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Taxpayers who manage to close the previous financial year by 15 February can pay the related profit tax and file the annual tax return by 15 February inclusive of the following year.
Capital gains and losses and wealth tax Capital gains are generally taxed as income. It applies only to individuals, not companies. Companies record capital gains in the profit and loss account, on which normal profit tax is payable. Foreign companies that sell their interest in Romanian companies may be taxed on the capital gain made. However, tax treaties which provide for the avoidance of double taxation may apply.
Tax incentives Over the years, various tax incentives aimed at fostering foreign investment have been provided by Romanian legislation. The foreign investment regime has been affected by continuously changing legislation, particularly in view of the country’s accession to the European Union (EU). Joining the EU has brought Romania many advantages, but also new challenges and constraints for investors. There were few fiscal incentives left after 1 January 2007. The most common quasi-incentive is the accelerated tax depreciation, still available for purchases of technological equipment, including computers and related accessories.
Tax credits Tax credits are available for Romanian companies with respect to taxes paid abroad, based on appropriate documentation. In addition, the Romanian tax authorities do issue, upon request, proof of taxes paid in Romania by foreign companies, to enable tax credit recognition in their country of residence.
Carry forward of losses Losses are available to be carried forward and offset against future profits within the next five consecutive years. Carry-backs are not allowed.
Exemptions Exemptions are available to non-profit organizations for specific income, private teaching institutions and foundations established upon a will.
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Group tax treatment • Consolidation: No consolidation is available for corporate income tax purposes. • Inter-company dividends: Please see withholding tax section below. Dividends received by a Romanian company from another Romanian company as well as any dividends received that qualify for the provisions of the Parent Subsidiary Directive1 , are non-taxable for corporate income tax purposes in Romania. • Thin capitalization: Romanian companies can generally deduct interest expense, subject to thin capitalization rules. The level of deductibility for loans obtained from companies, other than banks, their branches, credit co-operatives, leasing and mortgage companies is limited to: ��� the National Bank of Romania’s (NBR) reference interest rate – for loans denominated in Romanian currency (ie. RON); and ��� 7 per cent annual interest rate – for foreign currency denominated loans. The government can update this level periodically. In addition to the above capping rule, the expense may be restricted. Unlike the above-mentioned threshold regarding the interest rate, the non-deductibility of interest expenses is subject to limitations based on the computation of the debt/equity ratio. Interest expense is fully deductible where the debt/equity ratio is lower or equal to three. Otherwise, the deductible interest expense resulting from the debt/equity test can be carried forward to future periods, subject to the same thin capitalization test. • Transfer pricing: The Romanian Fiscal Code provides for transfer pricing rules and principles, in line with guidelines developed by the Organization for Economic Cooperation and Development (OECD). The law stipulates that transactions between related parties should be carried out at arm’s length prices. In determining the price, the following methods are accepted under the Romanian profit tax regime: ��� Comparable Uncontrolled Price Method (CUP); ��� Cost Plus Method (CPM); ��� Resale Price Method (RPM); and ��� Any other method accepted under the OECD guidelines.
1
The exemption is applied if the beneficiary has a holding of 15 per cent (10 per cent starting 2009) in the capital of the payer company and the holding is maintained for at least two years. In addition the recipient must have one of the legal forms provided for in the directive.
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Withholding taxes • Withholding tax of 16 per cent is levied on royalties, interest, services and commission payments paid to a non-resident, unless a reduction under a double tax treaty is available. • Dividends distributed to local companies are subject to a withholding tax of 10 per cent, while dividends distributed to foreign companies and/or non-resident individuals are subject to 16 per cent withholding tax, unless a reduction under a double tax treaty is available. • Dividends received from a Romanian company are not included in the taxable income of Romanian recipients. • From 1 January 2007, the Parent-Subsidiary Directive is directly effective in Romania. Dividends paid by a Romanian company to a company resident in the EU will be exempt if certain conditions are fulfilled. The exemption is applied if the beneficiary has a holding of 15 per cent (10 per cent from 2009) in the capital of the payer company and the holding is maintained for at least two years. • From 1 January 2007, the Interest and Royalties Directive also takes direct effect in Romania. During a transition period, Romania is allowed to withhold a tax of 10 per cent on the interest or royalties paid between associated enterprises resident in the EU until 31 December 2010, provided that certain requirements are met. No tax would be levied on qualifying payments after that date. In the meantime, companies have to meet the following requirements: ��� The company was formed in accordance with the laws of an EU member state and takes one of the forms provided for in the Fiscal Code; ��� The company is resident in an EU member state, in accordance with the laws of the respective member state, and is not considered a resident of another state outside the EU, within the meaning of a double tax treaty; ��� The company is subject to corporation tax, or to a tax that is identical or similar, taking one of the forms provided for in the Fiscal Code, without being exempt; ��� The company has a holding of at least 25 per cent in the capital of the other company; ��� The holding has to be maintained for at least two years when the payments are done.
Double taxation treaties Where double tax treaties provide for different withholding tax rates than domestic legislation, the most favourable rates shall apply, provided that the beneficiary of the income provides a valid certificate of tax residency, issued by the tax authorities from the country of residence, to the Romanian
-
10 per cent/ 0 per cent1 16 per cent / 0 per cent3
16 per cent / 10 per cent2 16 per cent / 10 per cent
Royalties
Dividends
Interest
16 per cent
-
Other income
1
The exemption is applied if the beneficiary has a holding of 15 per cent (10 per cent starting 2009) in the capital of the payer company and the holding is maintained for at least two years. 2 Under the Interest and Royalties Directive, until 31 December 2010, withholding tax on interest and royalty payments made abroad to EU associated enterprises. 3 Under the Parent-Subsidiary Directive.
Payments made by resident companies to: Resident Companies Non-resident Companies
Table 1. Withholding Taxes
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payer of income. Romania has signed over 70 double tax agreements, including but not limited to agreements with the following countries:
Table 2. Double Taxation Treaties Country Albania Algeria Armenia Austria Australia Azerbaijan Bangladesh Belgium Belarus Bosnia-Herzegovina Bulgaria Canada Costa Rica Croatia China Czech Republic Cyprus Denmark Ecuador Egypt Estonia Finland
Year of Effect 1996 1997 1998 1978 2002 2005 1989 1999 1999 1989 1996 1978 Not yet applicable 1997 1993 1995 1983 1974 1997 1982 Not yet applicable 2001
Country Lebanon Latvia Lithuania Luxembourg Macedonia Malaysia Malta Mexico Moldova Morocco Namibia Netherlands Nigeria Norway Pakistan Philippines Poland Portugal Qatar Russia Serbia Singapore
France Georgia Germany Greece Hungary India Indonesia Iran Israel Italy Ireland Japan Jordan Kazakhstan Kuwait South Korea North Korea
1975 2000 2004 1996 1996 1988 2000 Not yet applicable 1999 1979 2001 1978 1985 2001 1992 1995 2001
Slovakia Slovenia South Africa Spain Sri Lanka Sweden Switzerland Syria Thailand Tunisia Turkey UAE United Kingdom Ukraine United States Uzbekistan Vietnam Yugoslavia Zambia
Year of Effect 1998 2003 2003 1996 2003 1985 1997 2002 1997 1987 2000 2000 1994 1982 2002 1998 1996 2000 Not yet applicable 1996 1998 2003 in Romania /2004 in Singapore 1996 2004 1996 1980 1986 1978 1994 1992 1998 1990 1989 1997 1976 1998 1974 1998 1997 1998 1993
3.2
Indirect Corporation Taxes and Foreign Exchange Issues Deloitte, Romania
Indirect taxation Indirect taxes are regulated by the Fiscal Code and include: • • • • • • •
Customs duties; Other excise duties; Value-added tax (VAT)/sales tax; Service tax; Local authority taxes; Research and Development (R&D) levies; and Other levies.
Customs duties As of 1 January 2007, Romania became part of the European Union (EU) forming a single customs territory. Therefore, no customs barriers are applied to goods traded between EU member states. As of the accession date, the European customs legislation is directly effective in Romania. However, temporary customs regimes started before accession must remain in place for the periods foreseen in the Accession Act. This results, in some cases, in certain parts of pre-accession Romanian law continuing to be in force All treaties previously signed by Romania for customs purposes are no longer in force and the trade arrangements of the EU are now applied in Romania. The level of taxation is regulated by the Common Customs Tariff. Customs duties are payable at the time the goods are released for free circulation, or when they are removed from “bonded” premises. The goods must generally be classified according to the Combined Nomenclature (CN) as this determines which rate of customs duty applies and how the goods are treated
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for statistical purposes. The CN is also used in intra-Community trade statistics.
Other excise duties The Fiscal Code classifies excise duties in two separate categories: • Harmonized excise duties (in compliance with Directive 92/12/EEC): excisable products include alcohol and alcoholic beverages, tobacco products, energy products such mineral oils, and electricity; • National excise duties: coffee, jewellery, perfumes, etc. For these goods, excises are generally applied as a lump sum or as a percentage; However, there is also a special tax for motor vehicles. The amount payable is determined based on a formula that takes into account the cylindrical capacity, the pollution norm of the vehicle and the “age” of the vehicle.
VAT/sales tax Romanian value-added tax (VAT) legislation is harmonized with the 6th EC-Directive (Directive 77/388/EEC; Directive 2006/112/EEC). VAT is generally applied to transactions involving goods and services for which Romania is deemed to be the place of supply. The current VAT standard rate is 19 per cent. A reduced VAT rate of 9 per cent is applied to certain transactions (eg. entrance to museums and exhibits, drugs for human and animal use, accommodation in hotels, books, newspapers and magazines (other than those intended for advertising purposes)). Exports and inter-Community supplies of goods and other specific operations are VAT-exempted with deduction right, based on specified documentation, while inter alia financial services are generally VATexempted without the possibility to recover the input tax incurred. Financial services performed for non-EU beneficiaries are VAT-exempt with deduction right. A reverse-charge-mechanism may apply to certain transactions, eg. for the delivery of land, waste and raw secondary materials, for constructions and construction-assembly works. Goods imported into Romania are generally subject to import VAT at the moment in which they are put into free circulation. Simplification measures may apply. Romanian companies must register for VAT purposes if their annual turnover exceeds €35,000. Registration as a VAT payer where turnover is under this threshold is optional. Non-EU businesses must appoint a fiscal representative to fulfill their VAT obligations. EU businesses may appoint a fiscal representative or directly register in Romania.
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VAT compliance provides for monthly submission of VAT returns to the competent tax authority by the VAT-registered companies and monthly payment of VAT due by the 25th of the month following the reporting month. For small companies (defined by the law as having less than €100,000 in taxable revenues), VAT compliance must be performed quarterly by the 25th of the first month following the reporting quarter. Other VAT compliance must be observed in relation to intra-Community transactions with goods (eg. EC sale and purchase lists, Intrastat). From 1 January 2007, companies which are established outside Romania and not obliged to register for VAT purposes in Romania, in general, are entitled to apply for the refund of input VAT incurred in Romania within an 8th Directive refund claim (for companies established in other EU member states) or a 13th Directive refund claim (for companies established outside the EU). However, within the latter procedure the refund is granted on a reciprocal basis.
Service tax Service tax is not applicable in Romania.
Local authority taxes Under the Fiscal Code, local taxes are mainly levied on: • • • • •
land; buildings; vehicles; local advertising tax; and various fees for building permits, demolition, carrying out certain activities, etc.
The Fiscal Code generally sets the margins for the taxes that may be levied and it is up to the local councils to decide the exact percentage within those margins that they wish to apply. The tax on buildings payable by companies, for example, lies between 0.25 per cent and 1.5 per cent of the inventory value of the building, except for buildings that were not re-valued in the past three years (between 5 per cent and 10 per cent of the book value of the building). From 1 January 2007, for investments above €500,000, certain incentives for a period up to five years may be granted by local councils with respect to the tax on buildings and on land.
Research and development levies Research and development levies are not applicable in Romania.
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Other levies The Environment Fund is regulated by Government Ordinance No. 196/ 2005. Several types of contributions are payable, such as: • 3 per cent rate applied on the income from trading iron and non-iron waste by collectors or traders, individuals or entities, is withheld by the collectors/traders; • charges paid for polluting the environment; • taxes collected from businesses for the use of new land for storing recyclable waste; • 1 Romanian Leu (RON) per kilogram of packages introduced on the national market by manufacturers or importers of packaged goods or packaging materials. The fixed amount as established above is payable only if the annual recycling objectives are not fulfilled. The amount due is the difference between the annual objectives and the objectives achieved by the enterprise; • RON 1 per kilogram of new or old tires introduced onto the national market by legal entities; • 2 per cent of the value of hazardous chemical substances, traded by manufacturers and importers. However, chemical substances used for obtaining medicines are exempted, etc. In addition, depending on the specific nature of the activity, other special funds or taxes might be applicable.
Repatriation of foreign exchange issues This section includes discussion of • • • • • •
Dividends and royalty payments; Consultancy services; Import of goods; Repatriation of capital; Netting; and Other remittances.
Dividends and royalty payments From 1 January 2006, withholding tax on all types of income (royalties, dividends and interest) derived by non-residents from Romania is 16 per cent. Harmonized regulations with the Parent-Subsidiary Directive 90/435/ CEE, subsequently amended, are now applicable as Romania is part of the EU and no withholding tax is levied on qualifying payments.
Indirect Corporation Taxes and Foreign Exchange Issues 165
For the Interest and Royalty Directive 2003/49/CE, subsequently amended, Romania has obtained a transitory period until 31 December 2010, in which a rate of 10 per cent will be applied on qualifying payments under these directives. No tax will be withheld on such payments after that date.
Consultancy services In the absence of an applicable Convention for the avoidance of double taxation, Romanian entities are bound to withhold tax at source at a rate of 16 per cent in respect of any services performed in Romania. The Fiscal Code provides that management and consultancy services received by a Romanian entity are subject to withholding tax in Romania, irrespective where such services are performed.
Import of goods In the course of business, payments in connection with the import of goods and services are allowed and only require filing the required documents with an authorized dealer or banker.
Repatriation of capital Foreign capital invested in Romania can be repatriated, once the due payment of taxes on them is made. Repatriation of capital may be done through: • payout of dividends; • sale of shares to a third party; and • winding-up of a company in Romania.
Netting As long as taxes and fees are paid in Romania and local laws are complied with, netting (compensation of debts/receivables) is permitted.
Other remittances Inflows or outflows of funds for remittances are not restricted once the necessary requirements are fulfilled.
3.3
Income Tax and Social Contributions Deloitte, Romania
Romanian employers and employees are required to contribute to the social security system. The contributions due are as follows:
Table 1. Social Contributions Employees’ contributions (% of gross salary) Social security fund 9.5% Social security fund (capped at: 5 *MSE1*No. of employees) Health fund 6.5% Health fund Unemployment fund 1% Unemployment fund Contribution for medical leave Insurance for work-related injury Labor chamber commission Guarantee fund for salary debts Disabled person contribution4 Total
Approx. 17% Total
19.5% / 24.5% / 29.5%2 6% 2% 0.85% 0.4%-3.6%3 0.25%-0.75% 0.25% 4%*No. of employees*MSE Approx. 31.25%
MSE – medium salary per economy. In 2007, MSE is 1,270 Romanian lei (RON) (approx. €370). The higher rates apply depending on particular and special work conditions. 3 Depending on the classification of the activities from the national economy. 4 Payable by companies with more than 50 employees that do not hire disabled persons. Alternatively, the contribution equivalent can be used by companies to purchase goods from institutions where disabled people work. 1 2
Employees’ contributions are to be calculated, withheld and paid to the state budget by employers by 25th of the month following the reporting month. Where foreign individuals are employed by a Romanian entity, both income tax and social contributions are applicable. Income tax amounts to 16 per cent and is levied on the gross salary income (the higher rates apply depending on particular and special work conditions), including benefits in kind, less the employer’s mandatory social contributions mentioned above.
3.4
Accounting and Audit Deloitte, Romania
In the last few years, there have been many developments in the financial reporting framework for companies, which in turn influence the auditing profession. Until 2006, the reporting framework was in accordance with International Financial Reporting Standards and International Accounting Standards (IFRS/IAS) except for the application of IAS 29. Starting from 2006, the regulatory framework has been changed in order to comply with European directives. The IFRS is compulsory only for certain companies as established by order of the ministry of finance.
The Law on Accounting and Audit The Body of Expert and Licensed Accountants of Romania (CECCAR) is the organization representing the Romanian accountancy profession. It is autonomous, non-governmental, non-profit and works in the public interest. CECCAR is represented in all of Romania’s 42 counties, by its territorial branches, as well as on the national level. The audit profession in Romania is regulated by the Romanian Chamber of Financial Auditors (RCFA). Their mission is to build the identity and public recognition of the financial auditor in Romania. The principal aim is the continuous development and strengthening of the profession with audit standards as well as ethical and professional codes. This is also done by aligning the International Standards and the Ethics Code of the International Federation of Accountants (IFAC), which permits the members of RCFA to perform high-level professional financial audits in the public interest and for the business community. In Romania, the accounting and financial reporting environment is currently regulated by: • the Accounting Law 82/1991, republished in 2005 and updated by Law 259/2007; and • the Minister of Public Finance Order 1752/2005 (MOF 1752), modified by the Minister of Public Finance Order 2001/2006.
170 Finance Issues
The Accounting Law stipulates the requirements for the general accounting framework for Romanian entities, while MOF 1752 is aimed at covering financial reporting and related accounting requirements. MOF 1752, issued by the ministry of public finance, takes into account the approval of EEC Directives: • IVth for stand-alone financial statements; and • VIIth for consolidated financial statements. The IVth Directive was issued in 25 July 1978, and referred to annual accounts of certain types of companies; it was updated several times, most recently by Directive 51/2003 regarding annual accounts of certain types of companies, banks, financial institutions and insurance companies. The VIIth Directive, dated 13 June 1983, was issued to modify the IVth Directive with respect to consolidation of accounts. MOF 1752 is applicable to almost all entities: companies, national companies, autonomous corporations (regie autonome, RA), research institutes, co-operatives, permanent establishments of foreign entities. The text does not mention not-for-profit organizations. The ministry of public finance is the most important government institution regulating the economic, financial and fiscal structures in Romania. It implements the government programme and strategy for public finances, based on: • Law No. 90/2001, regarding the organization and operation of the Romanian government and its ministries; • Law No. 500/2002, regarding public finance; and • Government decisions regarding the organization and operation of the ministry of public finance.
Classification criteria MOF 1752 defines the same accounting framework for all types of companies. This accounting framework is based on the IVth revised EEC Directive. Presentation and disclosure requirements are different based on company size. Therefore, the companies are split into two categories based on factors, such as listing, total assets, net turnover, and average number of employees. The second category of small entities has been granted with simplified financial statements. MOF 1752 also defines the criteria by which a company should make consolidated financial statements. Companies are exempted from presenting consolidated financial statements if the entity together with the entities to be consolidated does not exceed the limits of two of the following three criteria:
Accounting and Audit 171
• Total assets: €17,520,000; • Net turnover: €35,040,000; and • Average number of employees: 250. The above exemption is not applicable if any of the entities to be consolidated is listed.
Application of IAS/IFRS standards Whilst formulating the accounting standards, the ministry of finance takes into consideration the applicable laws, customs, usages and business environments prevailing in Romania. As of 2006, companies in Romania must apply accounting regulations in compliance with European directives. CECCAR maintains the understanding and application of International Financial Reporting Standards (IFRS) in order to ensure that Romanian capital markets have high reporting standards. Romanian accounting standards, like IAS/IFRS, are principle-based standards. They describe the accounting principles and methods of applying these principles in the preparation and presentation of financial statements in order to give a true and fair view. They are mandatory in nature and any deviation from the accounting standards must be appropriately disclosed in the audit report. Considering the necessity of harmonizing Romanian accounting standards with EU regulations in Romania, there is a gradual implementation of the IFRS, especially for consolidated financial statements. From 2007, it is now mandatory for listed companies to apply IFRS when preparing consolidated financial statements. Credit institutions continue to apply IFRS in consolidated financial statements. Other public institutions, except those mentioned above, may prepare IFRS stand alone and/or consolidated financial statements for their own internal reporting needs. All entities that have applied IFRS must ensure the continuity of the application of these standards. All financial statements applying IFRS must be audited according to the law. All entities, including those who apply IFRS, must produce their annual financial statements in compliance with the European directives when submitting to state institutions.
Annual financial statements Legal entities that, as at the balance sheet date, exceed the limits of two of the following three criteria: total assets of €3.65 million, net turnover of €7.3 million, and average number of 50 employees during the financial year (hereinafter the size criteria), shall prepare financial statements including:
172 Finance Issues
• • • • •
balance sheet; statement of operations; statement of changes in shareholders’ equity; statement of cash flow; and explanatory notes to the annual financial statements.
Legal entities that, as at the balance sheet date, do not exceed the limits of two of the size criteria specified above, shall prepare simplified financial statements including: • simplified balance sheet; • statement of operations; and • explanatory notes to the simplified annual financial statements. Relevant legal entities have the option of preparing the statement of changes in shareholders’ equity and/or statement of cash flow. According to the accounting law, the annual financial statements must be accompanied by a written statement by the management of the legal entity who will assume responsibility for the preparation of the annual financial statements in accordance with the accounting regulations in compliance with IVth EEC Directive. The ministry of finance issues a chart of accounts, layouts for accounting books and annual accounts, common forms to be used in financial and accounting activities, as well as methodological norms for drafting and using such documents. For banks, such norms are issued by the National Bank of Romania and approved by the ministry of finance.
Submission of financial statements The accounting year may be different from the calendar year for Romanian subsidiaries of foreign companies, with some exceptions such as credit institutions, non-banking financial institutions, insurance companies, etc. Submission of accounts is due 150 days/120 days (depending on the size criteria) from the close of the accounting year.
Audit requirements Annual financial statements of the entities that meet the classification criteria of presenting a full set of financial statements, according to MOF 1752, and all public interest entities as according to the law, shall be audited by independent auditors which include authorized individuals, partnerships or legal entities (firms). The financial auditors should also express an opinion as to the level of consistency of the administrators’ report with the annual financial statements.
Accounting and Audit 173
Entities that may present simplified financial statements are not obliged to audit annual financial statements. The annual financial statements of these entities shall be verified according to the legal provisions in effect. There may be other specific situations when the audit of the annual financial statements is required. These situations are determined by order of the ministry of finance.
3.5
Banking Sector Ionut Dumitru, PhD, Head of Research, Raiffeisen Bank Romania
The Romanian banking system has at present a completely different face compared with the crisis years of 1998-2000. Now, the banking system is almost completely private-sector owned, with majority foreign capital, which has brought expertise and a totally different concept of making banking business. The financial soundness indicators are good, with an adequate capital level, being able, according with National Bank of Romania (NBR) stress test estimations, to resist to some severe exogenous shocks. The level of financial intermediation is quite low by any standard and the potential for growth is thus very high. In terms of retail lending, the increase in households’ disposable income (both present income, but also expected income) and the relatively low level of households’ indebtedness would continue to fuel short-term high rates of growth in consumer lending and in medium- and long-term mortgage lending. Corporate lending would also continue to grow rapidly as the share of bank financing in total financing of companies is low compared with other countries and there are a lot of profitable companies, especially small and medium-sized enterprises (SMEs) without any banking loans. One can argue that the Romanian banking system is still mainly focused on growth rather than efficiency, but sooner or later, due to the heating-up of the competition, the efficiency improvement would be a significant challenge. After integration into the European Union (EU), there is increasing competition also from abroad; as from 1 January 2007, 67 international credit institutions received authorization from the NBR to provide banking services directly on the territory of Romania. The return on equity is relatively low compared with other countries and an increase can be obtained through an improvement in cost to income ratio and a better capital allocation. The cost to income ratio in Romania is well above the best practice ratio for a bank in a mature banking environment and there is a lot of room for an enhanced capital allocation.
176 Finance Issues
Development and current situation Reform of the banking system in Romania started in 1990, with the establishment of a two-tier banking system, with the commercial operations performed previously by the NBR being separated and transferred to a newly-established commercial bank. At the same time, some privatelyowned banks were established and foreign bank branches entered the market and the number of banks operating in the market increased continually. At the end of 1990, there were 12 banks in Romania, consisting of seven Romanian banks and five branches of foreign banks. In 1995, the number of banks had increased to 31, and by 1998 to 45. Nevertheless, due to some side effects of the transition process (such as poor economic conditions and loss-making enterprises, weak corporate governance, political interference in lending decisions by the state-owned banks), the credit portfolio quality deteriorated rapidly. At end of 1998, past due and doubtful claims represented 254 per cent of own capital (tier one capital) and 15 per cent of total assets. Faced with a banking crisis, the NBR started a restructuring programme in 1998 aimed at avoiding systemic risk. Measures taken by the NBR include (a) improving regulation and supervision (the most important of which were: (a) the new Banking Law No. 58/1998; (b) the NBR Act No. 101/1998; and (c) the Banking Insolvency Law No. 83/1998); (b) resolving the problem of insolvent banks; (c) establishing the Authority for State Assets Recovery (AVAS) in order to take over non-performing loans from state-owned banks; and (d) creating institutions aimed at providing indirect support to the banking system, ie. the Credit Information Bureau, Payment Incident Bureau and Bank Deposit Guarantee Fund. Cleaning up the banking system ended with the liquidation of bankrupt banks or privatization. Thus, Bancorex, the largest state-owned bank was subject to a merger through absorption process with Romanian Commercial Bank (BCR), and the non-performing loans of Bancorex were transferred to AVAS, while performing assets were taken over by BCR, which became the largest bank in the banking system. Banca Agricola, an insolvent bank specializing in financing of agricultural and rural sector on behalf of the state was also restructured and eventually privatized. Some small privatelyowned banks were declared bankrupt and were closed. Substantial progress has also been made over the past few years in the field of banking regulation and supervision. The current regulation and supervision process in Romania is in line with EU directives and regulation. However, cleaning up the banking sector proved difficult and costly. The
Banking Sector 177
financial costs (budget cost) of restructuring the banking sector accounted for 10 per cent of GDP during the period 1990-2003, amounting to more than €5 billion. The privatization process in the banking system was launched in Romania later than in other countries in the Central and East European (CEE) region, but by the end of 2006, 95 per cent of bank assets were held by privately-owned banks and 89 per cent in banks with foreign majority capital. The beginning of privatization was marked by the sale of 51 per cent of Romanian Development Bank (BRD) to Socie´te´ Ge´ne´rale in 1999, and the sale of 45 per cent of Banc Post to GE Capital and Banco Portugueˆs do Investimento (BPI). Another top privatization was the sale of Banca Agricola to Raiffeisen Zentralbank in 2001. And in 2002, there was a further sale of a 17 per cent state holding in Banc Post to EFG Eurobank Ergasias. The privatization of the banking sector was almost completed in 2006, with the privatization of the Romanian Comercial Bank (BCR), the largest bank, with Erste Bank. Currently, only one bank in Romania, Romanian Saving Bank (CEC), remains to be privatized. At present, foreign private capital dominates the Romanian banking sector, with positive effects on external funding, risk management and banking sector stability. The main foreign investors in the banking system in Romania are Austria, Greece, the Netherlands, and Italy. Competition is increasing following Romania’s accession to the EU, as 67 international credit institutions received authorization from the NBR to provide services directly on Romania’s territory.
Growth potential and lending restrictions Over the past few years, the Romanian banking system has been experiencing very rapid growth, with lending growth at 50 per cent year-onyear (yoy) on average since 2000, and with banking volumes more than doubling during last two years. Among the most important factors contributing to this outstanding development are: • improving macroeconomic conditions, with very high GDP growth (above 6 per cent yoy in real terms on average in the last five years), falling inflation (from double digit levels to below 5 per cent in 2006), growing wages, large FDI inflows, exchange rate appreciation; • very low banking penetration, with very low non-governmental lending as a percentage of GDP; • restructuring of the banking sector, with successful privatizations and legal regulations in line with EU standards increasing the corporate governance (improving risk management, modern operational procedures). Nevertheless, despite the rapid growth in recent years, Romania’s banking sector lags far behind EU countries and CEE peers in terms of banking
1996 40 NA NA 19.1 11.2 NA 5.6 75.3 13.3 48.0 17.3 24.6 50.5 NA NA
1995 31 NA NA 15.7 8.5 NA NA NA 13.8 37.9 12.5 22.8 45.0 NA NA
NA NA
39.6
14.2
70.6 8.2 120.2 13.6 56.5 16.7
17.2
1997 43 NA NA 20.0
16 209
39.6
15.8
67.3 0.1 0.9 10.3 58.5 18.1
20.0
1998 45 3,504 55,306 24.7
Source: National Bank of Romania, National Institute of Statistics, Raiffeisen RESEARCH
Number of credit institutions Number of branches Number of employees Assets of banks with majority private capital/ Total Assets (%) Assets of banks with majority foreign capital/ Total Assets (%) Assets of top five banks/Total Assets (%) Return on assets (ROA, %) Return on equity (tier 1) (ROE, %) Capital adequacy ratio (%) Non-performing loans NPL (% of total loans) Interest rate spread (lending rate minus deposit rate, %) Financial intermediation (nongovernmental lending as % of GDP) Financial intermediation (Assets as % of GDP) Number of branches at 100,000 inhabitants Assets (in ’000 €) per employee 15 199
33.4
10.6
66.7 -1.5 -17.4 17.9 35.4 19.8
47.5
1999 41 3,275 49,913 53.2
Table 1. Structural Indicators of the Romanian Banking System
13 221
28.9
9.3
65.5 1.5 15.0 23.8 3.8 21.0
50.9
2000 41 2,897 43,682 53.9
12 296
30.2
10.1
66.1 3.1 24.2 28.8 2.5 18.8
55.2
2001 41 2,759 42,687 58.2
13 324
31.6
11.8
62.8 2.6 20.6 25.0 1.1 16.3
56.4
2002 39 2,831 42,275 59.6
13 348
31.2
15.3
63.9 2.2 20.1 21.1 3.4 14.6
58.2
2003 39 2,785 43,106 62.5
17 464
37.1
16.6
59.2 2.0 21.2 20.6 2.9 14.5
62.1
2004 40 3,775 49,702 93.1
20 677
45.2
20.8
58.8 1.6 16.6 21.1 2.6 13.2
62.2
2005 40 4,264 52,366 94.0
24 893
51.2
27.0
60.3 1.3 14.1 18.1 2.8 9.2
88.6
2006 39 5,149 58,090 94.5
178 Finance Issues
Banking Sector 179
intermediation, indicating significant potential for future growth. At end2006, non-governmental lending represented only 27 per cent of GDP, much lower compared with the euro area average of around 110 per cent of GDP and lower than in other CEE countries (Poland – 33 per cent, Czech Republic – 40 per cent, and Hungary – 54 per cent). The main driver of growth in the last years was retail lending, especially consumer lending, as a result of a private consumption boom in Romania since 2003. Total loans to households increased from a very low base (from only 0.5 per cent of GDP in 2000 – €0.2 billion, to 11.5 per cent of GDP in 2006 – €11.1 billion), but the main driver was consumer lending, mortgage lending being very low (only 2.3 per cent of GDP in 2006). The structure of household lending in Romania (only 20.4 per cent of total is mortgage lending and 79.6 per cent is consumer lending) is totally different compared with the structure in eurozone countries (70.8 per cent of total is mortgage lending), mortgage loans having the highest potential to grow. Retail lending is expected to continue to be the main driver of lending in the coming years and to increase its share of total lending to above 50 per cent (from a current 42.5 per cent). Nevertheless, corporate lending also has a lot of potential to grow as the share of bank financing in total financing of companies in Romania is below 10 per cent compared with more than 20 per cent in the euro zone. Also, the SME sector has huge growth potential, as there are more than 80 per cent of SMEs without any banking loans and the share of bank financing in total financing of SMEs is also below 10 per cent and mainly short term (below one year maturity). Beside the wealth effect on the lending growth, regulatory issues must also be considered. Over the past few years, there were some concerns from the NBR’s point of view regarding the very fast growth in lending, related to: • the fear that the very fast increase in lending is fuelling the excess demand in the economy with a negative effect on inflation and on the already unsustainable current account deficit; • the nature of the increase in lending – “boom & boost” or “financial deepening”; • the impact on asset prices and the “asset bubble” threat; • the problem of foreign currency lending (more than 50 per cent of total lending) on monetary policy efficiency. Given these concerns, the NBR introduced strong restrictions on lending growth. Up to end-2006, the NBR had aggressively increased the minimum reserve requirements for banks’ liabilities (currently at 40 per cent for foreign currency bonds (FCY) and 20 per cent for local currency bonds (LCY)). However, after Romania’s EU accession and given the full liberalization of the capital account, the efficiency of this instrument has decreased and many banks have partially sold their loan portfolios to foreign mother banks. The most recent comments coming from the NBR suggest that the
180 Finance Issues
chances for a decrease in minimum reserve requirements in the coming months remain low. Nevertheless, starting 1 January 2007, the NBR decided to remove the limit on the exposure of credit institutions to unhedged borrowers in terms of foreign-currency denominated credits (maximum 300 per cent of own funds of the banks). Moreover, the NBR decided in March 2007 to remove the repayment ceilings for individuals set at 30 per cent of monthly income for consumer loans, 35 per cent for mortgages, and 40 per cent on cumulative basis for all types of loans. The commercial banks will be allowed to set their own lending rules and to apply them after their validation by the NBR. Some commercial banks have already decided to adopt repayment ceilings higher than ones imposed previously by the NBR and compulsory down payment reduced or even eliminated, which might boost again the growth rate of non-government credit. The banks adopted such behaviour betting on the fact that Romania is the country with the lowest non-government credit to GDP ratio in the EU and the potential of credit growth remains high given the prospects of strong real convergence in the next years.
Profitability and efficiency The crisis years badly hit the profitability of banks, but after 2000, profitability rebounded as a result of progress made in restructuring and privatization and top international players entered the Romanian market. Nevertheless, the Romanian banking system in the last years was more focused on growth rather than efficiency. Most banks are investing in growth, in network expansion and the ATM and POS (point of sale) network, the figures for Romania (as a ratio to the population) being very low. The number of branches has increased quickly over the last three years, with more than 2,300 units (almost 100 per cent growth) and is expected to grow rapidly in the coming years. In the last few years, the growth in banks’ profits was mainly driven by growth in volumes, as interest rate margins decreased, although they are still higher than in other CEE countries. A further decrease in the rate of growth of profits is expected under the pressures of such factors as increase in competition, decrease in margins, and increase in expenses due to provisions (as a result of a high increase in lending), cost related to Basel II implementation and network expansion. Nevertheless, there are a lot of efficiency reserves left. The return can be improved by classical efficiency measures (improvement in cost to income ratio) and by a better capital allocation in order to improve ROE (return on equity). Significant efficiency reserves can be observed from the high cost to income ratio or from the assets per employee ratio. For instance, the ratio of assets per employee is more than three times lower in Romania compared with the Czech Republic and cost to income ratio is one of the highest in the EU.
Banking Sector 181
Source: central bank websites, Raiffeisen RESEARCH
Figure 1. Non-governmental Lending as a Percentage of GDP and GDP per Capita
Source: central bank websites, Raiffeisen RESEARCH
Figure 2. Number of Branches per 100,000 People
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Source: central bank websites, World Bank, Raiffeisen RESEARCH
Figure 3. Number of ATMs per 100,000 People
Table 2. Profitability and Efficiency Comparison (2006)
Bulgaria Czech Republic Croatia Hungary Poland Romania Slovenia Slovakia Euro area Spain Austria Portugal
ROA
ROE
2.2 1.2 1.8 2.2 1.7 1.3 1.3 1.3 0.5 1.0 0.5 1.2
24.4 22.5 15.7 22.3 20.8 14.1 15.1 18.8 19.6 19.6 9.5 18.9
Cost to income ratio 60.2 47.6 54.5 48.6 60.5 67.7 56.4 57.7 60.4 48.3 65.0 53.3
Source: Central Banks websites, Raiffeisen RESEARCH Note: ROA – return on assets; ROE – return on equity
Non-performing loans/total loans 2.2 3.6 3.5 2.7 5.3 2.8 2.5 3.7 2.8 0.7 2.6 1.5
Assets (in ‘000 €) per employee 807 2,766 2,000 995 893 2,563 1,834 11,861 8,506 9,568 6,672
Banking Sector 183
A decrease in interest rate margins is expected under the pressure of competition, but profitability is expected to continue to be supported by volumes, especially on the asset side. The growth rates on loans could slow down but should remain high (higher than in CEE peers), fuelled by Romania’s EU convergence story. The margins are still high compared with the CEE countries’ average and already show signs of stabilization. Profitability is supported by resilient margins and increasing non-interest income contribution. The NBR measures to slow down loan growth are expected to ease and eventually be phased out, which would have a positive impact on banks’ profit growth. Reduction of minimum reserve requirements, removal of the limit of FCY loan growth to 300 per cent of the banks’ equity (already removed from 1 January 2007), reduction of banks’ contributions to the Deposit Guarantee Fund should all free up resources with a positive impact on banks’ profitability. A significant negative effect on profitability from credit quality problems is unexpected. Credit quality has not deteriorated over the last few years and the level of non-performing loans is still quite low, but the loan portfolios are still young.
References “Financial Intermediation in Romania, 1990 - 2007” Dissertation by Mr. Mugur Isa˘rescu, http://www.bnro.ro/En/Prez/E20070823Guv.pdf; “CEE Banking Sector Report”, September 2006, RZB Group, www.rzb.at/ ceebankingreport2006; “EU banking structures”, October 2006, European Central Bank; “Banking structures in the new EU member states”, January 2005, European Central Bank; National Bank of Romania, www.bnro.ro.
APPENDIX
Contributors’ Contact List
Deloitte Romania 4-8 Nicolae Titulescu Road East Wing, the 3rd floor 1 District, 011141 Bucharest Romania Tel.: +40 21 222 1661 Fax: +40 21 222 1660 Email:
[email protected] Email:
[email protected] Website: www.deloitte.ro Nestor Nestor Diculescu Kingston Petersen Bucharest Business Park Entrance A, 4th Floor 1A Bucuresti-Ploiesti National Road 1st District, 013681, Bucharest Romania Tel.: +40 21 201 1200 Fax: +40 21 201 1210 Email:
[email protected] (marketing and communications, Ms Irina Melecciu) Email:
[email protected] (general) Website: www.nndkp.com Raiffeisen Bank S.A. Romania 15 Charles de Gaulle Square, 4th Floor Bucharest 1, 011857 Romania Tel.: +40 21 306 1269 Fax: +40 21 230 0684 Email:
[email protected] Website: www.raiffeisen.ro
Index abuse of dominant position, legislation on, 98–100 accounting and auditing regulations, 23, 169–73 accounting standards, 169 acquis communautaire, 115 advertising, 25 Agency for Foreign Investment (ARIS), 25, 61–2 agency agreements, 47–8 arrangements, 47–52 compensation under agreements, 51 definition of, 47–8 and issue of securities, 83 legislation on, 51 agency workers, 55 agriculture, xvii, 11, 59 and GDP growth rates, 18 import and export of products, 107 subsistence in communist era, 9 ANRE see National Regulatory Authority in the Energy Sector ANRM see National Agency for Mineral Resources anti-Semitism, 6 arbitration processes, 70–1 alternatives to, 71–2 benefits of, 71 articles of association, 38 ATMs, 182 audits after customs clearance, 24 internal/external, 44 see also acounting and auditing regulations austerity programmes, 3–4, 9 Authority for State Assets Recovery (AVAS), 60, 109–13, 176 automotive production, xvii, 11, 13
balance of payments, 19–21 Bank Deposit Guarantee Fund, 78, 176 bankruptcy, xvii, 65–8, 83, 117 of banks, 176 banks/banking, 175–83 crisis in late 1990s, xvii development of the system, 176–7 foreign in Romania, 77, 176 minimum reserve requirements, 179– 80 number of branches, 180, 181 number in Romania, 176, 178 ownership of, xviii, 12, 20 profitability and efficiency comparisons, 182 regulation, 75–88, 176 state see National Bank of Romania structural indicators, 178 barriers to entry, 29–34 Basel Convention (on Control of Transboundary Movements of Hazardous Wastes and Their Disposal), 106 Basescu, Traian, 5, 7 board, company, 39, 41–3 Body of Expert and Licensed Accountants of Romania (CECCAR), 169, 171 Bucharest, xviii Stock Exchange, 84–5 budget, national deficit, xviii, 15, 19–21 Bulgaria, 7, 19 business development support, 25–6 enterprise registration, 30–1 environment, 23–6 structures see company, types of see also company capital
190 Index adequacy ratio for banks, 178 gains tax, 156 markets, xvii, 84–8 registered for company, 36, 37, 85 repatriation of foreign, 165 requirements for insurance companies, 135 cartels, regulation to prevent, 95–6 CDR see Democratic Convention of Romania Ceausescu, Nicolae, 3, 9 CECCAR see Body of Expert and Licensed Accountants of Romania Central and Eastern Europe (CEE), 20– 1 Centre for the Mediation of Commercial Disputes, 71–2 Chamber of Commerce and Industry, 26, 70–1 chemicals, xvii, 11 hazardous, regulations regarding, 106, 164 Ciorbea, Victor, 4 client identification requirements, 92 clothing sector, xvii see also textiles collective labour agreements, 33, 53–4 commercial associations, 35 commodities markets, 84 communism, transition from, xvii, 3 Communist Party, 6 company foreign and Romanian subsidiaries, 148 formation/registration, 23, 30–1, 37– 9, 134–5 joint stock, 35–6 laws/regulation, 23–4, 35–9, 41–5 limited liability, 36 listing, 85 management and supervision, 41–3 types of, 30–1, 35 Competition Council, 50–1, 95–102 competition law/policy, 33, 47–50, 95– 102 exemptions, 97–8 penalties under, 99–100 concessions, 62, 147 Constantinescu, Emil, 4 Constitution of Romania, 53
construction land issues, 120 sector, 10, 13, 26 consultancy services, 77, 87 taxation of, 165 contract of employment, 25, 32–3, 54–5 law, 24 conventions, international, to which Romania is signatory, 106, 124, 141 convergence (with EU) Maastricht criteria see Maastricht criteria real criteria, 18–19 copyright, 129–30 and related rights, 130 corporate governance, 41–5 corruption, 23, 24 accusations of, 5, 7 reduction in, xvii, xix, 7 Cozma, Miron, 5 Credit Information Bureau, 79, 176 credit consumer, xviii, 10–11 growth rates, 175 institutions, regulation of, 75–7 institutions, activities of, 77–8, 86 see also loans customs duties, 161–2 cyanide leak, 5 debts, Romania’s foreign, 3, 9, 11, 20–1 Deloitte Romania, xi Democratic Convention of Romania (CDR), 4 Democratic Party (PD), 4 Democratic Union of Hungarians in Romania (UDMR), 4, 5, 6 demonstrations see riots and demonstrations depreciation, 154, 156 derivatives trading, 85 designs and models, registration of, 128–9 discrimination, laws against, 56 dispute resolution, 69–73 distribution, 47–52 limited/exclusive, 49–50 dividends, taxation of, 158, 165
Index 191 dominant position, abuse of, 98–100 e-arbitration, 71–2 economy background, 9–13 growth rates, ix, xvii, 10, 18 see also GDP, macroeconomic education, 24 Embassy of Romania, x emigration (from Romania), 24 employment contracts of, 25, 32–3, 54–5 flexible forms of, 55 of foreigners, 57 law, 53–7 protection legislation, 33, 55 termination of, 33, 55–7 energy infrastructure see infrastructure oil and gas see oil and gas renewable sources, 145 Environmental Fund, 140, 164 contributions payable, 164 environmental law, 139–43, 148 euro, Romania’s plans to adopt, xviii, 11 European Bank for Reconstruction and Development (EBRD), 11, 26 European Court of Human Rights, 121 European Investment Bank, 26 European Union budget, 16 convergence criteria see convergence, Maastricht criteria costs of accession, 17 entry to Romania for citizens of, 29– 30 funding to Romania, xviii, 11, 13, 26 legislation see legislation Romania’s accession, ix, xvii, xix, 5, 6–7, 15 trade with other countries of, xviii, 11 exchange see foreign exchange Exchange Rate Mechanism 2 (ERM2), 18 excise duties, 162 expenses, business and taxation, 153–4 exports, ix change in pattern, xviii, 11 main goods, ix, 11 regulations, 24, 103–7
and VAT, 162 expropriation, 117–18 financial services, xviii and money laundering law, 89–93 regulation and legislation, 75–88 and taxation, 162 see also banks/banking fiscal policy see tax food prices, 16 processing, 11 foreign direct investment, 19–20 incentives, 26, 61 inflows by year, 12, 20 main countries providing, 13, 177 regulation and protection, 59–63 sectors receiving, 59 foreign exchange controls, xvii, 75, 80 liberalization of, 10 markets, 79–80 rates, ix, 16 repatriation of, 164–5 transaction reporting requirements, 80 FPS see State Ownership Fund free economic zones, 62–3 GDP data, 10, 15 growth, 18, 277 in the 1990s, xvii per capita, 10, 15 general partnership, 36 geographical indications (of products), 127–8 Gorbachev, Mikhail, 3 Greater Romania Party (PRM), 6 health and safety issues, 33, 55 Hungary, 3, 9 ethnic Hungarians in Romania, 3, 5– 6 Iliescu, Ion, 4, 5, 9 IMF see International Monetary Fund imports, regulation of, 103–7, 165 and VAT, 162
192 Index industrialization, Ceausescu’s programme of, 3 inflation, ix, xviii, 10, 17 and EU convergence criteria, 15–16 information technology, outsourcing work to Romania, xviii infrastructure cost of improving, 16 improvement projects, xviii, 13 power grids, 32, 146 telecommunications see telecommunications insider dealing, 88 insolvency law, 65–8, 133 see also bankruptcy insurance companies, 92 law, 133–7 mandatory, 136–7 types of, 135–7 Insurance Supervisory Commission (ISC), 133–5 integrated circuits topographies, protection of, 130–1 intellectual property, 123–31 interest rate margins, 183 rates, 16 and taxation, 154, 157 International Accounting Standards (IAS), 169, 171 International Court of Arbitration, 70–2 International Federation of Accountants (IFAC), 169 International Financial Reporting Standards (IFRC), 169, 171 International Monetary Fund (IMF), 9, 10, 11 International Union for the Protection of New Varieties of Plants, 131 investment law, ix, 26, 86–8 service providers, 86–7 see also capital, foreign direct investment, loans, share investor protection, 24, 87–8 Investors’ Compensation Fund, 87–8 Isarescu, Mugur, 5 ISC see Insurance Supervisory Commission
Jewish population, 6 judiciary and insolvency, 65–6 lack of independence, 24 reform of, xix, 5, 7, 12 unwieldy system, 34 Justice and Truth Alliance, 5 labour code, xvii, 53–6 labour costs, 12, 16 non-wage costs, 25, 167 productivity, 12 shortages, 24 land acquisition methods, 116–17 law regarding, 115–21 ownership regulations, 31, 119 purchase by foreigners, xvii, 12, 119– 20 reform to return to peasants, 9 registration, 31 rights other than ownership, 116 use for mining etc., 149–50 law see legislation lawyers and money laundering requirements, 90 leasing operations, 80–1 leave maternity/childcare, 25 vacation, 24–5 legislation on accountancy and auditing, 169–73 on agency agreements, 51 Commercial Companies Act 1990, 23, 41 commercial and corporate, 23–4, 35– 9, 41–5 on competition, 33, 47–50, 95–102 and dispute resolution, 69–73 on employment, 53–7 enforcement of, 142–3 on the environment, 139–43 EU directives and regulations, 30, 32, 36, 54, 84, 86, 88, 103–4, 133, 139–42, 153, 158, 170 on financial services, 75–88, 176 on foreign investment, 59–63 framework of, xviii, 27–150 on insolvency and bankruptcy, 65–8
Index 193 on insurance, 133–7 on intellectual property, 123–31 on land and property, 31, 115–21 on money laundering, 89–93 on natural resources, 145–50 non-discrimination, 56 on privatization, 109–13 transfer of undertakings, 33 liability in corporate law, 36, 43 in case of insolvency, 68 of partnerships, 36–7 for pollution, 141–2 licences for imports and exports, 104–5 for insurers, 134 for mining, 147–8 limited partnership, 36–7 loans, 77–8 consumer, 179 corporate, 179, 26 non-governmental as percentage of GDP, 181 see also credit Maastricht criteria, 11, 15, 18 Macovei, Monica, 5, 7 macroeconomic data, 10 outlook, 15–21, 177 see also economy manufacturing sector, 10 foreign investment in, 11 marketing, 25 mediation, 71–2 mergers, law regarding, 100–2 micro-enterprises loans for, 26 taxation of, 155 see also small and medium-sized enterprises mineral sector, 11, 12, 145 closure of mines, 4–5, 10 mining laws, 147–8, 150 miners, role of, 4, 5 minimum wage, 33, 55 Ministry of Environment and Sustainable Development, 142 Ministry of Public Finance, 170 Moldova, 13
money laundering, 89–93 monitoring post-privatization, 112–13 moral rights (to authors), 129–30 mortgage bonds, 75, 83 mortgages, 179 motor vehicles, taxation of, 162 narcotics, 106–7 Nastase, Adrian, 5, 7 National Agency for Control of Exports (NACE), 105–6 National Agency for Environmental Protection, 143 National Agency for Mineral Resources (ANRM), 146, 147, 148 National Bank of Romania (NBR), 75–6, 154, 175, 176, 179 National Environmental Guard, 143 National Liberal Party (PNL), 5 National Regulatory Authority in the Energy Sector (ANRE), 146 National Salvation Front (NSF), 4 National Securities Commission (NSC), 66, 82–6 NBR see National Bank of Romania Nestor Nestor Diculescu Kingston Petersen (NNDKP), xi–xii non-compete clauses, 51 North Atlantic Treaty Organization (NATO), xviii, 5, 12 nuclear field, 106 Office of State Ownership and Privatization in Industry (OPSPI), 109, 110 oil and gas concessions, 148, 149 pipelines, 12, 146, 150 prices, 3 refining and processing, 11, 12 reserves, xvii, 146 sector privatization, 110 use of land for extraction, 149–50 packaging materials, 164 Paris Convention for the Protection of Industrial Property, 124, 126 partnerships, 36–7 patents, 124–6 Payment Incident Bureau, 79, 176
194 Index PD see Democratic Party pension funds, contributions to, 25, 154 system, reform of, 16 petroleum see oil and gas pharmaceuticals, 11 planning, land use, 120 plant breeder’s rights, 131 PNL see National Liberal Party political parties, 4–6 reforms, 3–4, 15 pollution charges for, 164 control of, 139–42 Popescu-Tariceanu, Calin, 5, 12 population ethnic make-up, 5–6 size, xvii, 13 power infrastructure, 32 precautionary principle, 139 price fixing, 49 of food, 16 sensitivity of population, 25 private sector, proportion of output, xvii, 9 privatization, xviii, 9, 59, 60 of banks, 20, 177 guarantee requirements, 112 methods, 110–12 principles, 110 regulations, 109–13 of Romtelecom, 12 of small businesses, 9 state aid strategy, 113 and stock exchange listings, 85, 111– 12 PRM see Greater Romania Party products, typical, ix property law on, 115–21 restitution of previously nationalized, 118, 120–1 see also intellectual property, land Proprietatea Fund, 16, 121 protests, political, 3–4 PSD see Social Democratic Party public offerings, 85–6 see also shares
public ownership of large enterprises, 9 of natural resources, 146 public–private partnerships, xviii, 147 public services, 32 reforms needed in, xviii Raiffeisen Bank, xv, 177 RASDAQ, 85 rating agencies, 21 RCFA see Romanian Chamber of Financial Auditors real estate see land regulation of businesses, 23–4, 146, 176 see also legislation, reporting reporting financial, 169–73 obligation on money laundering, 90–2 requirements for insurance companies, 135 VAT, 163 representative offices, 23 resources, natural, 145–50 see also minerals, mining, oil and gas, water restrictive agreements, 95–7 retail sector, 10, 13 riots and demonstrations, 3, 4, 6 risk factors, xviii, 19–21, 34 Roman, Petre, 4 Romanian Chamber of Financial Auditors (RCFA), 169 Romanian Office for Immigration, 29 royalties, tax treatment, 158, 164–5 savings rates, 19–20 secondary residence, 120 securitization, 75, 81–3 share acquisition, 60 capital increase, 45 capital increase on privatization, 112 capital requirements for credit institutions, 76 public offerings, 85–6 registration, 38 sale in privatizations, 111 see also under company shareholders minority, 44–5
Index 195 see also company formation, corporate governance Sibiu Derivatives Exchange, 85 small and medium-sized enterprises (SMEs), ix, xvii, 26, 175 banking needs, 179 privatization of, 9 reporting requirements, 170 see also micro-enterprises social contributions, payment of, 167 Social Democratic Party (PSD), 5 SOIT see State Office for Inventions and Trademarks sole traders, 35 State Office for Inventions and Trademarks (SOIT), 125, 126–7, 131 State Ownership Fund (FPS), 109 stock markets, 84–8 sustainability, 139 Targu Mures, 6 taxable entities, 153 taxation, ix, 1 credits, 156 direct of corporations, 153–60 double taxation treaties, 158–60 and free economic zones, 62–3 income tax, 167 indirect of corporations, 161–5 investment incentives, 61, 156 local authority, 163 payment arrangements, 155–6 planning, xvii rates of, 12, 17–18, 23–4, 155, 167 telecommunications, 12, 13, 32 television, 25 textiles, xvii, 13, 105 tourism, xviii, 11, 59 trade deficit, xviii, 11, 19
international regulations, 103–7 see also exports, imports Trade Registry, 37–8 trademarks, 126–7 transfer pricing, 157 transfer of undertakings, 33 transport infrastructure, 11, 13 Transylvania, 6 Tudor, Corneliu Vadim, 6 UDMR see Democratic Union of Hungarians in Romania Ukraine, 13 unemployment benefits, 25 fund, 167 rate, 10 universities, 24 vacation regulations, 24–5 value-added tax (VAT), 162–3 Vasile, Radu, 4–5 visas, 29–30, 62 long-term, 62 wages see labour costs waste handling, 106, 140–1 shipments, 141 specific categories, 141 and taxation, 164 water resources, 140 withholding taxes, 158–9, 164–5 work permits, 30, 57 working hours, 24–5, 33, 55 World Bank, xvii, 11, 26 Doing Business 2007 report, 23–4 World Trade Organization (WTO), 130– 1 Yugoslavia, former, 12
