INVESTMENT LEGAL FRAMEWORK

    By courtesy of the Romanian Agency for Foreign Investment (ARIS) and KPMG

Romania’s accelerated race towards EU Accession, the target of which is January 1^st, 2007, means that the Romanian investment environment is becoming more and more similar, in terms of investor rights and guarantees, to that of EU member states. This presents investors with a unique opportunity, combining EU levels of investor protection with investment return rates which remain, in certain fields of activity, significantly higher than those available on mature markets.

The main assets contributing to Romania’s increasing appeal to foreign investment are:

• its population of almost 22 million people, a large proportion of which is just beginning to get a taste of the western consumer society;

• a good geographical location, with access to sea transport;

• the existence of several natural resources with a remarkable growth potential, such as agricultural land, geothermal and mineral waters, etc;

• a legal and economical system converging towards EU standards.

   Investment Vehicles

Romanian law defines two main types of investment, i.e. direct investment – the participation to the setting up or expansion of an enterprise, purchase of shares in a company, except for portfolio investments (see below) or the setting up and expansion of a Romanian branch of a foreign company and portfolio investment – purchase of securities on the organized and regulated capital markets, which securities do not allow direct participation to the management of respective entity.

Direct investment can be effected through either cash (local or foreign currency) or in-kind contributions (any type of assets) as well as through any other financing methods leading to an increase of a company’s assets.

Portfolio investments include several types of securities, among which state bonds (bills, treasury notes, etc.) issued in local or foreign currency for various terms.

As long as one of the above methods is used, investor status is recognized to the respective individual / entity, regardless of its nationality, citizenship, domicile or permanent headquarters, etc.

   Investment Related Rights and Guarantees

Investments may not be nationalized, expropriated, confiscated, or be subject to any other similar measures, except in a situation of public interest, and, even in this case, only provided that appropriate compensation is granted. The compensation should be "prompt, adequate and effective."

The legislation in force does not generally stipulate any limit on foreign participation in companies. A foreign investor may establish a wholly owned enterprise in Romania. Furthermore, foreign investment in Romania has a privileged position since it benefits not only from the rights recognized to national investors but also from a wide range of “non-resident rights”, the most relevant of which being the right to freely repatriate hard currency amounts resulting directly or indirectly from an investment activity carried out in Romania (after payment of the taxes and duties imposed under Romanian law). This repatriation right covers:

• dividends or profits obtained by a Romanian company whose shareholder the foreign investor is, as well as income derived from partnership activities;

• amounts obtained from the sale of Romanian stock or as a result of liquidating a Romanian company (regardless if such liquidation occurs under bankruptcy provisions or is a voluntary liquidation, as provided under the Romanian Company Law rules);

• compensations received further to the enforcement of an expropriation procedure or of other similar measures, etc.

Furthermore, should an investment mutual protection treaty provide a more favourable treatment to a foreign investor than Romanian national law, provisions of the respective treaty take precedence over Romanian national law.

Finally, a foreign investor can, subject to certain terms and conditions, choose that potential disputes with the Romanian state with regard to investment related rights and obligations should be settled under:

• the applicable Romanian national law;

• the Washington convention regarding the settlement of investment related disputes between a certain state and the citizens of other states;

• the UNCITRAL / CNUDCI arbitration rules.

Additionally, pursuant to the non-discrimination and equality of treatment principle, foreign investors benefit from all the rights and guarantees applicable under the national standard of treatment, such as:

• freedom to invest in any field of activity and by any method stipulated under the law (cash or in kind contribution, services, intellectual property rights, etc.);

• guarantees against nationalization, expropriation or other similar measures;

• the right to benefit from customs and fiscal incentives;

• the right to obtain assistance inn dealing with administrative formalities;

• the right to convert the local currency amounts resulting from the investment into the hard currency in which the initial investment was made;

• the right to use accelerated depreciation rules;

• the right to carry forward losses;

• deductibility of advertising costs, etc.

Introduced under the 2003 amendment of the Romanian Constitution and applicable as of and under the terms and conditions resulting from Romania’s accession to the EU, the foreigners’ right to own land represents yet another important improvement in foreign investment regime.

   Investment Incentives

The main areas in which investment incentives are currently offered to investors in Romania are as follows:

• direct investments having a significant impact on the economy;

• small and medium sized enterprises;

• disadvantaged and free trade zones;

• industrial and technological parks.

The main common element applying to these incentives is the fact that Romania’s approaching EU Accession means that many of these incentives have to be reduced or even eliminated as a result of aligning to the European acquis. This marks the beginning of a new phase in the Romanian investment framework, where the emphasis is placed not so much on the direct incentives granted to foreign investors but on the opportunities and investment return factors characterizing a more mature but yet underdeveloped Romanian market.

    Direct investments having a significant impact on the economy

Under Law no. 332/2001 regarding the promotion of direct investments having a significant impact on the economy, Romanian authorities have attempted to stimulate large, strategic investments, aimed at the development and modernization of the Romanian economic infrastructure.

The main condition to be fulfilled by an investment having a significant impact on the economy is its value, which has to exceed 1 million USD in RON equivalent. Several other conditions apply, both in terms of duration of the investment (including an obligation to preserve the investment for a 10 year period) and in terms of the economic sectors in which the investments are to be made (the financial, banking, insurance – reinsurance sectors, as well as those sectors regulated under special laws being excluded from the application of the law). Also, investment incentives packages established under different law cannot be cumulated with respect to a specific investment. Thus, if a certain investment fulfils the conditions to benefit from several investment incentives packages, under different law, the respective investor has to explicitly choose for one of these packages.

With the continuous amendments brought to the Romanian Fiscal Code, the mainly fiscal incentives that direct investments having a significant impact on the economy benefited from suffered significant changes. Currently, the incentives include mainly custom duties exemptions for the technological equipment imported for the completion of the investment.

Additionally, current provisions of the Romanian Fiscal Code establish a transitional period, ending at 31 December 2006, during which certain supplementary incentives. Thus, direct investments having a significant impact on the economy made within the above-mentioned transitional period (i.e. until 31 December 2006) may benefit from:

• an additional deduction of 20% of the value of the investment;

• the possibility to carry forward fiscal losses over the following 5 years and offset them against income derived from similar operations;

• the possibility to use accelerated depreciation, with the exception of investments made in buildings.

Law No. 332/29.06.2001 Concerning the Promotion of Direct Investment with Significant Impact on the Economy

Note:

According to the article no 12, indent (1) from Law no 332/2001 regarding promotion of direct investments with significant impact over the economy, the technological equipments, the installations, the measure and control equipments, the automations and software products, bought from import, which accomplish the conditions stipulated in the indent no (3), necessary for investment realization, are excepted from paying the custom taxes, according with the approved list by common order of the development and forecast minister and public finances minister. We mention that, from the date of Romania's adhesion to European Union, the above foresights will be abrogated

   Small and medium sized enterprise

Another area in which the Romanian authorities have taken steps in order to ensure an “investor friendly” environment is that of small and medium sized enterprises (SMEs). SME development, so that a larger share of Romania’s GDP be created by such enterprises, is one of the major objectives of the Romanian Government.

For the achievement of this objective, Law no. 346/2004, as amended, provides certain incentives granted to small and medium sized enterprises. In order to benefit from the incentives granted under this law, a company has to meet several cumulative requirements:

• an average annual number of employees under 250;

• an annual turnover not exceeding the RON equivalent of EUR 50 million, or an annual balance sheet valuation showing a total asset value not exceeding the RON equivalent of EUR 43 million;

• compliance with certain independence criteria as defined by the Law.

Depending on the annual average number of employees, SMEs can be: a) “micro-enterprises” (up to 9 employees and annual turnover or total asset value not exceeding the RON equivalent of EUR 2 million); b) “small enterprises” (between 10 and 49 employees and annual turnover or total asset value not exceeding the RON equivalent of EUR 10 million) and c) “medium enterprises” (between 50 and 249 employees and annual turnover not exceeding the RON equivalent of EUR 50 million or total asset value not exceeding the RON equivalent of EUR 43 million).

Several measures are put into place in order to support the establishment and development of SMEs, such as:

• Simplified procedures (to be adopted by the central and local authorities) in order to allow for easier access to public utilities networks and services;

• SMEs’ access to certain assets, as defined by Law no. 346/2004, which belong to regies autonomes, national companies and state-owned companies.

This type of incentives may include

1. priority in renting, taking under concession or leasing the assets available, as well as in purchasing such assets (in which case the owners of such assets must first organise an auction for SMEs only);

2. possibility to purchase such assets, if used by SMEs use under a rental agreement, management under lease or partnership agreements;

3. possibility to request the conclusion of a real estate leasing agreement with an irrevocable sale-purchase clause with respect to assets used under a management under lease or a partnership agreement and possibility to transform a rental agreement in respect of available assets into a real estate leasing agreement with an irrevocable sale-purchase clause;

4. preference right to purchase the assets located in close vicinity to the assets already owned by an SME and

5. preferential payment term where the available assets are purchased by SMEs, as described above (payment can be made in installments over a minimum 3-year period with a maximum 20% down payment).

Less restrictive participation criteria for public procurement procedures, in order to allow for SMEs’ share in the total value of these agreements to reach a level comparable to their contribution to the gross domestic product (GDP). In this respect, SMEs benefit from a 50% cut in the criteria set for participation in public procurement, i.e., turnover, participation guarantee and performance guarantee.

Law no. 346/2004 also established a number of financial measures aimed at supporting the development of SMEs, such as:

• facilitating SME access to financing, by providing entrepreneurs with non-reimbursable funds to enable them to reach the necessary share capital for starting up their business and to support their investment in the production and services field;

• ensuring the financial means necessary to co-finance and efficiently use the financial aid granted by the European Union and by other internal or external donors;

• facilitating access to market information and to marketing, financial and information technology services;

• allocating annually 0.2% of the GDP to finance the programs meant to support the start-up and development of SMEs.

In terms of fiscal incentives, under the new Romanian Fiscal Code, as amended, companies which cumulatively meet the following conditions: (i) have between 1 and 9 employees; (ii) operate in the manufacturing of products, provision of services and/or trade; (iii) have an annual turnover of not more than EUR 100,000 and (iv) are owned by persons other than the State, local authorities and public institutions, may choose to be fiscally treated as micro-enterprises and benefit from a 3% income tax.

    Disadvantaged and free trade zones

Another set of incentives available to foreign investors refers to disadvantaged and free zones. Thus, Government Emergency Ordinance no. 24/1998, republished, as subsequently amended and completed, defines disadvantaged zones as strictly identified geographical areas meeting at least one of the following two conditions:

• high local unemployment rate (local unemployment level at least three times higher than the national level);

• isolation due to lack of communication means and poorly developed infrastructure.

Private companies having their registered office within the disadvantaged area and performing their activity therein benefit from an exemption from tax on profit corresponding to new investments, provided that the respective company has obtained the permanent certificate of investor in a disadvantaged area (issued by the regional development agency). This exemption remains applicable for the entire duration of existence of the respective disadvantaged zone.

Free trade zones represent geographical areas, which can be set up in sea or river ports, along the Danube – Black Sea Channel, along other navigational channel as well as in the territories close to state frontier crossing points, for the purpose of promoting international trade and attracting foreign capital, to which a special customs regime is applicable.

A free trade zone is typically set up under a Government Decision, which clearly establishes for each case the free trade zone’s geographical co-ordinates, appoints the Free Trade Zone Administration, and lists the activities that can be carried out and how they will be carried out within the free trade area. Currently, free trade zones are established in Sulina, Constanta-Sud, Galati, Braila, Giurgiu and Curtici-Arad.

Incentives granted to investments made in such zones include certain customs duty and VAT exemptions. Furthermore, until 31 December 2006, a special profit tax exemption applies to investors who carry out activities in free trade zones, on the basis of a license, and who have already invested, by 1^st July 2002, into free trade zones at least USD 1,000,000 into depreciable tangible assets for manufacturing activities.

    Industrial and technological parks

Another important element in the general foreign investment incentives system set up by the Romanian authorities is represented by incentives granted in respect of economic activities carried out in industrial or technological parks.

According to Government Ordinance no. 65/2001, as subsequently amended and completed, an industrial park is an identified area where economic, scientific research, production or service related activities, are carried out subject to a derogatory, more favourable legal regime, on the basis of a license granted by the Administration and Internal Affaires Ministry, in order to make the best possible use of the human and material potential of the respective area.

The setting up of industrial parks is based on a partnership between (i) central and local public authorities, (ii) companies, (iii) research and development institutes and (iv) other interested partners. Industrial parks are to be managed by a distinct company, whose shareholders may be the above mentioned members of the partnership.

The land corresponding to the industrial park, together with the buildings and utilities related infrastructure existing upon the setting up of the industrial park have to fulfill several cumulative conditions, as follows:

• the land must have a minimum surface of 10 ha, must have access to a national or European road and be connected to the public utilities infrastructure;

• the partnership applying for industrial park license must own the land or have a minimum 30 years long use right thereon;

• the land, buildings and utilities corresponding to the industrial park must be free from any encumbrances or pending litigation and must fulfil environment protection requirements.

Technological parks represent areas within which teaching and research activities are performed and where the results of such research activities is subject to a technological transfer in order to be used through economic activities.

As is the case with industrial parks, technological parks are set up on the basis of a partnership, to be concluded between (i) an authorized university and / or a research and development entity on one hand and (ii) companies, national companies, professional or employers’ associations, local public authorities, individuals, Romanian or foreign investors on the other hand.

Several conditions, in terms of the land and the other facilities corresponding to a technological park, must be met in order to obtain the technological park license, issued by Education and Research Ministry (e.g. the corresponding land must be free from any encumbrances or pending litigation).

Industrial and technological park related incentives can be granted mainly by local authorities (which explains their presence in the partnerships setting up the parks) and may include:

• exemption from local taxes for the immovable assets and the land corresponding to the parks;

• deferred VAT payment for certain materials, equipments, etc. (applicable to technological parks only);

• other facilities that, according to their competencies, local authorities may grant.

For more information: http://www.arisinvest.ro