Romania

Romania’s laws enter the European age

The age of overnight legislative changes has ended with Romania’s accession to the European Union. Romania’s legislative disorder will now have to become “harmonized” with European laws, say Angele Sighinreanu and Diana Gutu. And foreign investors are set to benefit.

A single passport scheme makes it easiser for banks to set up in Romania

The harmonization of Romania’s legislation with that of the European Union, a requirement that has become mandatory as of January 1st, 2007, seems to be giving Romanian entrepreneurs a major headache, as they find themselves obliged to invest increasingly more in their own companies. Whether this be in the form of logistics or workforce, any change, regardless of how small, requires supplementary investments. Managers of small and medium-sized companies are those hardest hit by such problems, and their businesses are threatened by such additional costs, not at all negligible. At the opposite pole are foreign entrepreneurs, who do not feel discouraged at all. “The adaptation of Romania’s legislation to that of Europe’s will mean greater safety for business people, as they hope for as few surprises and legislative changes as possible,” says Ray Breden, Director of Taxation Services of the international company, KPMG.

And where there is law there is no haggling, because “on the basis of the principle of the supremacy of European community law over internal law, from now on national judges will be obliged to resort to the application of community law over internal law. This is true also for other state institutions,” explains Cornel Popa, Associate with the law firm Tuca Zbarcea & Asociatii. However, the month of January will not necessarily mean an “avalanche” of legislative changes, because Romania took this matter into consideration some time ago, and many European standards have already been put into effect.

Banks in the frontline

The banking system is the area which was subject to the most legislative changes in January 2007. One of the most important is that of free entry of EU banks into Romania, or the appearance of a so-called “single passport”. “In other words, a banking institution may open a branch in Romania only with the approval of the central bank of its country of origin. Arguing that there was insufficient time to adopt a law in this respect [the New Basel II Capital Accord] and to ensure that Romania was not sanctioned by the European Commission for not incorporating the new regulations in the national legislation by January 1st, 2007, the government adopted in the last 100 meters OUG No99/2006, regarding crediting institutions and Aggregate Capital Adequacy Ratio,” said Monica Ratiu, Partner Coordinator of the law firm Ratiu & Ratiu S.C.A.

Flexible Employee Costs

Business people were not taken by surprise by legislative changes in the area of labor rights, because most of the new laws that came into effect with Romania’s accession to the EU were published as far back as mid-2006. “On the whole, these new laws do not involve a significant rise in labor force costs. For instance, the introduction of a contribution of 0.25% from the salary fund payable to the Guarantee Fund for the Payment of Salary Claims is compensated by a deduction of the same percentage from the contribution to the unemployment insurance budget,” says Radu Culic, Associate of Nestor Nestor Diculescu Kingston Petersen (NNDKP).

Investment laws had to be updated before Romania joined the EU

Taxation

For the transaction of equity investments, non-resident sellers are obliged to name a tax representative/assignee to be responsible to declare and pay all taxes. “The obligation exists even if the seller does not owe taxes in Romania, due to the fact that (s)he is a resident of a state with whom Romania has a double taxation convention, which allows the taxation of such income only in the state of residence,” says Carmen Peli, Partner, NNDKP. Concerning interest and royalties, Romania was granted a postponement until 2011 on withholding tax exemptions on such payments. “The withholding of tax on interest and royalties paid by affiliated companies resident in the European Union will be 10%, if the beneficiaries of payments hold at least 25% of the share capital of payees, for a period of at least two years prior to payment,” said Ana-Maria Miron, Senior Associate, NNDKP.

Safer Real Estate Transactions

In the area of real estate, which is governed by national legislation, a series of changes have come into effect that are principally intended to facilitate such transactions. “Even though there are no major legislative changes, real estate transactions will be greatly eased by the fact that foreign citizens and legal entities will be able to acquire land directly and through access to indirect protection means for real estate investments,” said Francisc Peli, Head of Real Estate Department, NNDKP.

EU citizens may purchase land under the same conditions as Romanian citizens, while companies may do so only if they have one secondary branch in Romania. The latter will be able to buy agricultural or wooded land or forest only as of 2014. Citizens and legal entities of non-EU member states may acquire land according to conditions defined by international treaties, on the basis of reciprocity. The uncertainty of the transfer of property titles obtained in good faith by the buyer has been diminished by new regulations, according to specialists in real estate law.

Discrimination Taxes

There are still restrictions on the purchase of farmland and forests

“Recent legislative changes reflect to a greater extent the immediate consequences of Romania’s integration into the Common Market, which implies, on the one hand, customs unification (the elimination of customs taxes and the adoption of a single customs duty in relation to third-party states) and, on the other hand, the existence of the four freedoms: free circulation of goods, persons, services and capital,” says Cornel Popa, Associate of the law firm Tuca Zbarcea & Asociatii. The level of customs duties is now set by the Common Customs. For example, in the case of imported cars from outside the EU space, Romania has now adopted the single customs tariff, which means the customs tariff is no longer 30% of the residual value, but 10% of the total value. One possible breach by Romania of community provisions regarding the prohibition of discriminatory internal taxation, to the detriment of imported products, may be the special tax on cars and vehicles, stipulated by the Fiscal Code, added Cornel Popa.

Beware of the Law!

Even though Romanian legislators made serious efforts in the past few years to harmonize internal legislation with EC legislation, it is possible that state institutions will be confronted with problems regarding the adaptation of new judicial and fiscal realities. The private sector will also be affected, as entrepreneurs will have to legally analyze all operations they undertake. “The success of their business will depend on their fully understanding this need,” added Nicoleta Ionascu, Associate, Danila, Petre & Asociatii.

Cornel Popa, Associate, Tuca Zbârcea & Asociatii

“One case of incompatibility with the principles of the Common Market (case Humblot vs. the French Taxation Authority) was solved by CEJ,” says Cornel Popa, Associate, Tuca Zbarcea & Asociatii. French law stipulates an annual tax for cars imposed on owners on the basis of cylindrical capacity of their respective cars. The tax for vehicles under 1.6 l. (much of the internal production) is five times less than that for cars over 1.6 l. (imported), and goes against Article 90 of the EC Treaty, which stipulates that “no Member State will impose, directly or indirectly on a product from another Member State any internal taxes except those directly or indirectly imposed on internal products”. And finally, the French authorities were obliged to modify the tax accordingly.

Carmen Peli, Partner, Nestor Nestor Diculescu Kingston Petersen

In the area of competition, EU regulations have priority over national judicial norms. Both the Competition Council and the European Commission may carry out investigations on the Romanian market. “Refusal to sell a product by a dominant Romanian company to a Bulgarian company can be sanctioned according to European legislation,” said Carmen Peli, Partner, NNDKP. Community-sized economic concentrations are exclusively part of the Commission’s jurisdiction. “For companies wishing to conclude such a transaction, it may be necessary for Brussels to be notified if parties are involved whose international cumulated turnover exceeds E2,500 million and/or if significant turnover is obtained in more than one member state,” mentioned the NNDKP expert.

Monica Ratiu, Partner Coordinator, Ratiu & Ratiu S.C.A.

“The revision of legislation on commercial companies has been a further priority of the reform strategy for the judicial system. This led in November 2006 to the adoption of a modification of Law 31/1990 concerning commercial companies (LSC). As such, article 137, line 3 of LSC stipulates that ‘for the duration of their mandate, administrators may not conclude a working contract with the company.’ In case the administrators have been designated as part of the employees of the company, the individual working contract is suspended for the duration of the mandate.”

Ray Breden, Director of the Taxation Department, KPMG

Breden sees the glass as only half full. He believes that many companies will be encouraged to invest in Romania merely because it has become a member of the EU. Furthermore, Romania will benefit from European funds to rebuild the infrastructure, which will be most welcome.The market will be more competitive, and efficient businesses will survive, while the others will close down, adds Breden. “This is not unique to Romania. But the competition will be fierce, and business people cannot afford to be neglectful.”

Crenguta Leaua, Associate Coordinator, Tanasescu, Leaua, Cadar & Asociatii

“Recent changes in Law 31/1990 for commercial companies introduce a new system of administration for commercial companies. The existing single system is coupled with a dualist/ corporatist governing system, according to which companies are administered by a Directorate and Supervisory Council. At present, the German-inspired dualist system is completely foreign to Romanian companies, and it is for this reason that it will likely be an awkward one for Romanian merchants for some time, and this is why it is chosen only by the branches of foreign companies, who are in turn structured this way.”

Nicoleta Ionascu, Associate Lawyer, Danila, Petre & Asociatii

“Unfortunately, many Romanian companies are not conscious of the impact which accession will have on them, and they see this only as meaning fiercer competition and a danger of losing their own sales market, if the products or services they offer do not meet European quality standards. They do not see accession as a moment in which they must submit to community norms, which they do not know at all or insufficiently. As a result, companies will need a considerable effort to adopt the new practices. I think that in order to become integrated in the EU market, they will need qualified assistance.”

 

This article first appeared in InvestRomania magazine

 

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