$Unique_ID{bob00451} $Pretitle{} $Title{Romania Chapter 5. Investment} $Subtitle{} $Author{Donald E. deKieffer} $Affiliation{Embassy of Romania, Washington DC} $Subject{foreign company romania romanian profits capital currency companies contract established} $Date{1990} $Log{} Title: Romania Book: Doing Business with the New Romania Author: Donald E. deKieffer Affiliation: Embassy of Romania, Washington DC Date: 1990 Chapter 5. Investment FOREIGN INVESTMENT Hundreds of foreign firms have established branch offices or joint ventures in Romania. About half of the American companies doing business in Romania today do so through their European subsidiaries. Although the Romanian government does not keep accurate statistics on the dollar amount of foreign investment in that country, reasonable estimates range upward of $3 billion. A complete listing of foreign companies doing business in Romania can be obtained from PUBLICOM, 22 N. Balcescu Boulevard, Bucharest, Romania. Probably the largest single change in Romania caused by the revolution has been the wholesale revamping of laws related to investment by outsiders or by foreign firms. Previously, foreign investment was permitted only on a state-controlled basis. All business enterprise in Romania was subordinate to the "Five Year Plan" and the interests of the government. This structure, coupled with the intense suspicion of foreigners in general-and foreign capitalist in particular-discouraged investment in Romania for more than 30 years. For the size of its economy, Romania had some of the fewest outside companies of any country in Eastern Europe. The changes made by the new government have been radical both in approach and in effect. Foreign capital may now enter Romania almost unfettered. It must be remembered, however, that the new Romanian legal structure has yet to be tested. This chapter will discuss the new legal framework of the Romanian commercial sector and its practical effect in the fields in which foreign capital may be invested. Areas of Investment Foreign capital may be invested in industry, agriculture, construction, tourism, scientific and technological research, foreign trade, banking services and most other fields. Foreign firms may not invest in the munitions industry, narcotics, drugs or certain other activities. STRUCTURE AND OPERATION OF FOREIGN-OWNED COMPANIES Foreign companies may establish commercial enterprises in Romania either through joint ventures with local firms or with 100% foreign ownership. The terms of the venture, including its duration, are governed by a "Contract of Association" between the parties. This is the Romanian equivalent of Articles of Incorporation of a Western firm. Romanian law is written in such a way, however, as to imply that there will generally be a Romanian party in commercial enterprises and the Contract of Association represents the agreement between foreigners and local residents. Transfer of Profit Foreign firms may do business in Romania either as stock or as limited liability companies. The organization and operation of firms are generally specified in the Contract of Association and are subject to Romanian law. All profits made in Romania may be transferred abroad after payment of taxes, social insurance, and observance of other obligations of law and the provisions of the Contract of Association. Contract of Association A Contract of Association is applicable to joint ventures and those 100%- owned by foreigners. This contract must provide the following: - Name of corporation; - Object of the corporation; - Registered office; - Duration of the company; - Capital and means for subscription of shares and for transfer of shares or capital; - Number in value of the shares or capital; - Rights and obligations of the parties; - Other obligations mutually agreed by the parties. Statutes Under Romanian law. "Statutes" are the Romanian equivalent of Bylaws. These Statutes are an integral part of the Contract of Association. They generally include provisions regarding the organization and operation of the company, including: - General meeting; - Organization; - Exercise of voting rights; - Organization of the board of directors; - Method by which the board of directors adopts decisions (simple majority, super majority or unanimity); - The appointment of arbitrators; - Responsibilities of managing directors; - Methods for writing off the profit and loss accounts; - Calculation and distribution of profits; - Methods for settling disputes between partners and company; - Methods of winding up the company. Voting In a joint venture, the parties may agree to unanimous voting of the members present at a legally constituted general meeting of the partners with regard to matters concerning: - Business activities; - The approval of the balance sheet and of the profit and loss account; - Distribution of profits; - Appointment of executive bodies of the company; - The proportion in which the partners are to be represented in management bodies; - The appointment, remuneration and dismissal of executive bodies as well as any other matters expressly provided in the "Statutes." Contribution of Assets The assets brought by the parties to the company as well as those acquired later represent the company's property unless the parties provide differently in the Statutes. Contributions in kind made by a foreign party to the capital of the firm are exempt from customs duties. Transfer of Shares Shares or capital can be transferred only with the approval of a general meeting of the partners consistent with the provisions of the company's Contract and Statutes. Contributions Contributions of the parties to the subscribed capital of the firm may consist of a financial contribution, the contribution of goods required to carry out the investment and contributions of intellectual property rights and other rights. These contributions are generally established in the company's Contract and Statutes. The Romanian party to a joint venture may contribute the right to use land or buildings. Alternatively, rent paid for the use of buildings by the Romanian party may be included as its capital contribution. Currency of Contribution The contribution of the parties to the capital of the company is generally specified in the company's Contract and Statutes. The value of goods contributed by each party is also established, as is the currency and foreign trade value of cash contributions. Cash contributions are generally placed in an account with a Romanian banking institution in the name of the company. Registering a Company To form a company, the parties prepare a "Memorandum of Association" (in Romanian), a "Study of Technical and Economic Efficiency" outlining how the company intends to pursue its objectives, the Contract of Association and the Statutes. Government Approval Government approval is required for foreign firms to establish wholly-owned subsidiaries in Romania. Joint venture companies also need the nominal acquiescence of the Ministry coordinating the given field of activity, based upon advice from the Ministry of Foreign Trade and Ministry of Finance. Commercial companies in the production field also require the advice of the Ministry of National Economy. Registration Fees Upon filing the documents noted above, the newly-formed entity must pay a registration fee in lei equivalent to $500 (U.S.). Upon approval, the company's Contract of Association and Statutes are published in the Official Monitor of Romania. Changes Changes in the Contract of Association must be approved by the government of Romania. Raw Materials Commercial entities in Romania may acquire raw materials, supplies and other commodities. These can be either procured in Romania or imported. Prices (either in lei or foreign currency) can be negotiated through independently negotiated contracts. Sales of Goods A company may market merchandise abroad at prices which it establishes in foreign currency. Within Romania, the goods may be sold directly for lei or foreign currency at independently negotiated prices but are subject to a "goods circulation" tax. Accounting The accounting and capital of the firm may be expressed in either "hard" currency or in lei. If the parties agree to express the capital and accounting operations in lei, the conversion of other currency to lei must be made at the official conversion rate. Capital Reserve Reserve funds must be allocated from the profits of the company through terms established in the Contract of Association and the Statutes. Funds remaining after deductions of the reserve funds and taxes are distributed to the partners in proportion to their contributions to the subscribed capital. A part of these distributions must be set aside for future development of the company. Depreciation According to Romanian law, companies must include depreciation in their costs. Assets are considered "fixed funds" until their value is fully written off. The depreciation period(s) is generally established in the bylaws or at general meetings of the parties. Depreciation periods may not be longer than the standard operating lifetimes specified in the Romanian law. Destruction of fixed assets before the full annuity period must be included in the production and selling costs to the extent it is not covered by insurance. Banking Companies in Romania must open accounts with banks in which all funds (in foreign currency and lei) are collected and paid. Interest is payable on any sums on deposit. The foreign currency account of a corporation is calculated according to the parties' financial contributions, the company's foreign currency revenues and foreign currency borrowings. For foreign currency payments, profits due to foreign owners are made from the company's foreign currency account. The lei funds of the company are made up of the partners' capital shares and foreign currency receipts through the Romanian Bank of Foreign Trade at the official rate on the date of the exchange as well as from profits made from the selling of goods, the performance of works and services in the domestic market at lei prices and from lei credits. Reinvestments Profits (in foreign currency and lei) due to the foreign party can be used by it for making new investments in the same company or in other companies in Romania. Profits in lei can be used to purchase Romanian merchandise and services. Profits in Lei Of the annual profits in lei due to the foreign owner, a maximum of 8% of the foreign company's financial share of the capital can be transferred abroad in convertible currency through the Romanian Bank of the Foreign Trade. Wages and Salaries Wages of the company's Romanian and foreign personnel are established by the parties themselves. Taxes on wages and social security payments for Romanian personnel are paid in the currency established in the Contract of Association. Control of a Commercial Company Partners in joint ventures in Romania must be given, upon request, information concerning the company's activities, state of assets, profits and losses, etc. These rights are generally established in the Statutes. Government Control At least one delegate from the Ministry of Finance of Romania must belong to the organization within the company controlling its accounting activities. Foreign Personnel Rights and obligations of foreign personnel may be established by the board of directors or the management committee. Foreigners may be employed in management positions. Foreign personnel of a company may transfer their wages abroad through the Romanian Bank of Foreign Trade. A portion of wages to be transferred abroad may be established by the management of the company. Contributions to social insurance by a company for foreign personnel must be paid in foreign currency, the amount established by then prevailing law. For foreign personnel ordinarily resident in another country, companies deduct from the contribution for social insurance a quarterly payment which goes to the "super-annuation fund." Foreign personnel may, however, waive coverage under the Romanian social insurance services, in which case the company can avoid making social insurance payments. Dissolution Procedures for dissolution, including obligations and responsibilities of liquidators and distribution among partners of assets of a dissolving company, are generally established in the Statutes. A deed of dismemberment and liquidation of the company must be registered with the Ministry of Finance and is published in Romania's Official Monitor. Arbitration Litigation between companies or natural persons may be brought before Romanian courts. The parties may agree, however, that litigation arising from commercial relations between companies be resolved by arbitration (generally the Arbitration Commission of the Chamber of Commerce and Industry of Romania). TAXES Foreign companies doing business in Romania are subject to an annual tax of 30% of profits. Tax Basis for Computation Corporate taxes are computed on annual profits before distribution to the shareholders. The tax basis is generally the difference between the total amount of income collected, and the amount of expenses incurred. Reserve funds (mentioned previously) are used as deductions against computed profits but the contributions of the reserve funds are limited to 5 percent of the profits each year until the total reserve fund accounts for 5 percent of the invested capital. Tax Holiday Companies established with a foreign partner are exempt from tax for two years after taxable income is actually realized. The Ministry of Finance can approve a 50 percent reduction of tax on profits for yet another three years upon application. Tax on profits is automatically reduced by 50 percent if profits are reinvested by the foreign participant in the same company, or another company in Romania. In the event a company begins to make profits during the second half of a year, the tax exemption may also be granted for profits made in the first half of the following year. Taxation for a current fiscal year is computed by a company within five days following the closing of the balance sheet for the prior year. Final taxation for the prior year is established concurrently with the provisional taxation. Provisional Taxation Provisional taxes must be filed by a written statement together with a copy of the balance sheet with the financial department of the City Hall of Bucharest or of the district where the company has its registered office. The financial department of the district will check the tax computations and establish differences, which will be verified in the company within 15 days from the filing date. Provisional taxes for the current year will be paid in equal quarterly installments through the bank where the company keeps its account for the end of each quarter. Differences between estimated and final tax must be paid within 10 days from the date of receipt of the notification from the financial authorities. Funds paid above those due will be credited to the account for the current year or returned. Appeals Companies may appeal tax assessments within 20 days upon receipt of notification from the department. The appeals must be filed with the financial department which has established the difference. The department will notify the company of this decision within 30 days. Decisions of the financial department can be appealed to the Ministry of Finance. These will be resolved by a committee consisting of delegates of the Ministry of Finance and the Chamber of Commerce and Industry presided over by a judge of the Supreme Court. Tax Evasion Evading taxation is punishable by a fine of 25 percent of the evaded tax. Late payments are subject a fine of 0.05 percent per day but not more than double the tax due. Garnishment The Ministry of Finance and the financial departments of the districts have the power to garnish the company's funds held in banking institutions for unpaid taxes. Statute of Limitations The statue of limitations for corrections in taxes due is two years. Prosecution for unpaid taxes must be commenced within five years of the time final decision on taxes to be paid was due. Export Surtax Profits remaining after taxes are assessed a separate "surtax" of 10 percent if transferred abroad.