Business Guide to Romania* 2007 Edition

*connectedthinking1 PricewaterhouseCoopers - Business Guide to Romania 2007 PwC Contents

Chapter Page

1 Romania: a Profile 7 1.1 Physical Characteristics: Geography and Climate 7 1.2 Political Structure 7 Government 7 Presidential Election 8 Parliamentary Election 8 1.3 Population and Urbanisation 8 1.4 Language 8 1.5 Education 8 1.6 The Economy 8 1.7 Transport and Communications 9 Transport 9 Communications 10 1.8 Suggestions for Business Visitors 11 Visas 11 Currency 11 Business and Social Etiquette 11 Public Holidays 11 1.9 Living Conditions 11

2 Business Environment 13 2.1 Business Climate 13 2.2 The Aims of Government 13 2.3 Financial Services 14 2.4 International Agreements 15 2.5 NATO Accession 15 2.6 Real Estate 15 2.7 The Property Market 16 2.8 Business Lobby Groups 17

3 Romania and the European Union 18 3.1 Major milestones of Romania’s accession process 18 3.2 EU financial assistance for Romania 18 Pre-accession funds 18 Post-accession funds 18

4 Foreign Investment, Privatisation and Foreign Trade 20 4.1 Foreign Investment 20 Regulatory Legislation 20 Restrictions on Foreign Investment 20 Investment Incentives 20 Guarantees and Rights 20 4.2 Privatisation 20 Regulatory Climate 20 Privatisation Background 20 Privatisation in 2005 21 Privatisation Calendar 21 4.3 Trade 21 Regulatory Climate 21 Regulatory Authority 21

2 PricewaterhouseCoopers - Business Guide to Romania 2007 5 Banking, Finance and Insurance 22 5.1 Banking and Other Lending Institutions 22 The National Bank of Romania 22 The Foreign Currency Market and Foreign Currency Rules 23 Commercial Banks 23 Non-banking financial institutions 24 Securitisation 24 Money Laundering 25 Foreign Investments 25 Financial Reporting 25 Credit Unions 25 Building Societies 25 Institutions issuing Means of Performing 25 5.2 Leasing 25 5.3 Capital Markets 26 Bucharest Stock Exchange 26 5.4 Insurance 26 5.5 Private pensions and pension funds 27

6 Corporate and Business Law 28 6.1 Legal Framework 28 Company Law 28 Commercial Register Law 28 Competition Law 28 Direct Investment Legislation 28 6.2 Forms of Business Organisation 28 Registration Procedure 29 Capital and Shares 29 Directors (Administrators) 30 Censors 30 General Meeting of Shareholders 30 6.3 Branches 30 6.4 Representative Offices 30

7 Labour Relations and Social Security 31 7.1 Labour Relations and the Labour Code 31 Availability of Labour 31 Employer / Employee Relations 31 Fund to Guarantee Outstanding Salary Payments 31 Unions 32 7.2 Working Conditions 32 Salaries and Wages 32 Working Hours 32 Paid Holidays 32 Equal Opportunities 32 Health and Safety 33 Protection of employees in case of the transfer of an undertaking 33 Posting workers in the framework of providing transnational services 33 Termination of Employment 33 7.3 The Social Security System 33 Coverage 33 Contributions 33 Employees' Contributions 34 Employers' Contributions 34 7.4 Foreign Personnel 34 Fiscal Registration Number 34 Work Permit 34 Work Permit for Employment Purposes (type A) 34 Work Permit for Secondment Purposes (type B) 34 Residence Permit 35

3 PricewaterhouseCoopers - Business Guide to Romania 2007 8 Accounting and Audit Requirements and Registration 36 8.1 Accounting 36 General Accounting Framework 36 Individual Annual Financial Statements 36 Consolidation 37 Application of IFRS 37 8.2 Audit requirements 37 General Legal Framework 37 Auditing Standards 37

9 Taxation of Corporations 39 9.1 Corporate Income Tax 39 Taxpayers 39 Territoriality 39 Corporate Income Tax Rate 39 Micro – companies 39 Representative Offices 39 Computation of Taxable Profits 40 Accounting period 40 Business profits 40 Non-taxable revenues 40 Deductibility of expenses 40 Provisions and reserves 41 Accounting and fiscal depreciation 42 Thin capitalisation rules 42 Transfer pricing 43 Fiscal relief 43 Fiscal losses 43 Reporting and Payment Requirements 43 General aspects 43 Consolidation 43 Administration of taxes 44 Advance Tax Ruling 44 9.2 Capital Gains 44 9.3 Divided Tax 44 9.4 Withholding Tax 44 9.5 Tax Incentives 45 Direct investments 45 Investment law project 45 Disadvantaged areas 46 Industrial parks 46 Oil and gas incentives 46 9.6 Local Taxes and Other Taxes 46 Building Tax 46 Land Tax 46 Local Taxes Incentives 47 Health Tax 47

10 Taxation of Individuals 48 10.1 Individual Income Taxpayers 48 10.2 Taxable Income and Method of Taxation 48 Salary Income 48 Income from Independent Activities 49 Rental Income 49 Income from Pensions 49 Income from Agricultural Activities 49 Income from Prizes 49 Income from Investments 49 Income from Real Estate Transactions 50 Income from Gambling 50 Other Income Subject to 16% Flat Tax Rate 50 10.3 Tax-exempt Income 50

4 PricewaterhouseCoopers - Business Guide to Romania 2007 10.4 Deductions from Income Tax 51 10.5 Taxation of Non-residents 51

11 Indirect Taxation 52 11.1 Value Added Tax (VAT) 52 Scope of VAT 52 Outside VAT Scope 53 Territoriality Rules 53 VAT Chargeability 54 Taxable Amount 54 Taxable Regimes 54 VAT Deduction 54 VAT Registration Threshold 55 VAT Registration 55 VAT Consolidation 55 Simplification Measures 55 VAT Compliance 55 VAT Refund 56 11.2 Customs and International Trade 56 Customs Value 56 Customs Duties 56 Binding Origin Information (BOI) / Binding Tariff Information (BTI) 57 Temporary Import Relief 57 Trade Measures 57 11.3 Other Indirect Taxes 57 Excise Tax 57 Harmonised Excisable Products 57 Other Excisable Products 58 Car Registration Tax 58 Environmental Fund Contribution 58

12 Fiscal Procedure 60 12.1 General Principles 60 Liability of Other Persons 60 Rules Governing Evidence 60 Fiscal Administrative Acts 60 Fiscal Domicile 61 Tax Jurisdiction 61 Other Rules 61 12.2 Specific Tax Procedures 61 Tax Registration 61 Tax Returns and Tax Assessment 61 Tax Audit 61 Collection of Budgetary Receivables 61

13 PricewaterhouseCoopers in Romania 62 Assurance Services 62 Advisory Services 63 Tax and Legal Services 64

Appendices 65 Appendix I Government Ministries - contact details 66 Appendix II Operational Programmes Management Bodies 2007-2013 67 Appendix III Major Banks - contact details 68 Appendix IV Hotels and Restaurants 69 Appendix V Accountants and Law Firms 71 Appendix VI (a) Double Taxation Agreements 72 Appendix VI (b) Withholding Tax Rates of Some Major DTAs 73 Appendix VII Individual Income Tax Calculation 74 Appendix VIII Customs Duties Rates 75 Appendix IX Excise Tax for Domestic and Imported Products 76

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Romania (by county)

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Chapter 1

Romania: a Profile

ƒ Romania's population accounts for 21.6 million ƒ 6 GDP grew 4.1% in 2005 as against 2004 and 7.4% y/y in H1 2006

1.1 Physical Characteristics: The President nominates the Prime Minister. Cabinet ministers, selected by the Prime Minister, Geography and Climate have to be approved by Parliament before taking up office. Romania is situated in southeastern Europe, just north of the Balkan Peninsula. With an area of The latest elections took place in November- 238,391 square kilometres (91,780 square miles), December 2004. The current President is Traian Romania is the second largest country in Central Basescu, who was Mayor of Bucharest from 2000 and Eastern Europe. to 2004.

Romania borders on Ukraine and the Republic of In the current cabinet, Calin Popescu-Tariceanu is Moldova to the north and northeast, on Bulgaria to Prime Minister. The cabinet comprises 15 the south, on Serbia to the southwest, and on ministers, three vice-premiers and five ministers- Hungary to the northwest. The Black Sea coast is delegate, 23 members in all. The ministers are: its eastern border. The Danube River runs along Romania's southern border for 1,075 km, and Cãlin Constantin Anton Prime Minister eventually forms the Danube Delta before flowing Popescu – Tãriceanu into the Black Sea. Mihai Razvan Ungureanu Foreign Affairs Anca Daniela Boagiu European Romania has a varied terrain and large areas of Integration the country are mountainous. It has a variety of Sebastian Vladescu Public Finance natural resources, amongst which oil, natural gas, Monica Luisa Macovei Justice coal, iron ore, non-ferrous ore (copper, lead, and Sorin Frunzaverde National Defence zinc), gold and silver ore, sulphur, and salt. Vasile Blaga Administration and Interior The climate is temperate-continental with hot Gheorghe Barbu Labour, Social summers, long cold winters, and short springs and Solidarity and autumns. The average temperature in summer is Family 23° Celsius (72° Fahrenheit), although on some Ioan-Codrut Seres Economy and days it may exceed 40° C (102° F). In winter, the Commerce weather is usually frosty, with considerable Gheorghe Fluture Agriculture, snowfall. The temperature averages -3° C (27° F), Forestry and but it may occasionally fall below -25° C (-13° F). Rural Development Sulfina Barbu Environment and Waters 1.2 Political Structure Management Radu Mircea Berceanu Transport, Government Constructions and Tourism The Constitution, dated 21 November 1991, Mihail Hardau Education and proclaims Romania a republic and a parliamentary Research democracy. The President is elected for five-year Adrian Iorgulescu Culture and terms (since 2003), while the bicameral Religious Affairs Parliament is elected for four-year terms. The Eugen Nicolaescu Health bicameral parliament is composed of the Senate Zsolt Nagy Communications (137 seats) and the Chamber of Deputies (332 and Information seats). Technology

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Contact details for all government ministries are 1.4 Language listed in Appendix I.

The territory of Romania is subdivided into 41 The official language of the country is Romanian. counties (judete) plus Bucharest; these are the The language uses the Latin alphabet and is part administrative units of local government. of the Romance language family. In some parts of Bucharest and its surrounding area form a unitary Transylvania, Hungarian is spoken alongside district with county status. Local councils and Romanian, while in other parts of Transylvania mayors are directly elected. The government and in Western Romania German is also spoken. appoints its representatives (prefects) to each county. In addition, many Romanians speak English and/or French, and business is often conducted in one of these two languages. Presidential Elections

Traian Basescu, the candidate of the centre-right coalition (DA) , which is formed by the Liberal and 1.5 Education Democratic Parties (PNL-PD), won the second round of Romania’s presidential election on 12 Education is mandatory from the ages of six to December 2004, defeating Adrian Nastase of the fifteen. The Romanian state education system Social Democratic Party/Humanist Party alliance includes primary, secondary, and higher (PSD-PUR). education institutions. The higher education sector consists of academic universities and polytechnic Parliamentary Election institutes. Like many post-communist countries, Romania has always had a reputation for strength Romania’s parliamentary election on 28 in scientific fields. Recent years have seen an November 2004 resulted in a near-tie between the increase in the number of secondary and post- Social Democratic Party/Humanist Alliance, which secondary establishments and private education won 36.6% of seats in the Chamber of Deputies has become more popular. For the academic year and 37.1% in the Senate, and the centre-right 2004-2005, 24% of the total number of students coalition (DA) which won 31.3% of seats in the enrolled in higher education attended private Chamber of Deputies and 31.8% in the Senate. institutions. Business administration and Further, the Greater Romania Party holds 12.9% management studies have been introduced in of seats in the Chamber and 13.6% in the Senate, cooperation with the US, UK, France and Canada. and the Party of Ethnic Hungarians 6.2% in the Chamber and 6.2% in the Senate. 1.6 The Economy

1.3 Population and Urbanisation Romania’s recent economic and political achievements have prompted all international rating agencies to upgrade the country’s ratings. Romania’s population stands at about 21.6 In September 2005, Standard & Poor’s raised million, according to the latest statistical Romania’s long-term foreign currency rating to information (July 2006). Ethnic Romanians make investment grade at BBB– (‘BBB minus’) with up about 89% of the population. The main stable outlook. At the end of 2005, Fitch affirmed minority groups are Hungarians (7%), followed by the country’s long-term foreign currency at BBB– a large community of Rroma, and smaller (‘BBB minus’). Also, the US financial rating numbers of Germans, Russians, and Serbs. More agency Moody’s upgraded the Romanian than half of the population (55%) lives in urban government long-term and short-term foreign and areas. local currency ratings to Baa3 in October 2006. These changes contributed to improving The population of Romania is predominantly Romania’s position on foreign capital markets. Christian of different denominations: Orthodox (87%), Roman Catholic (4.7%), Reformed (3.2%), The economy, continued to grow, but at a slower Greek Catholic (1%), Pentecostal (1.5 %). pace than in 2004, with an increase in GDP of Romania also has small Jewish and Muslim 4.1% in 2005. The slow down of the economic communities. growth was due mainly to the floods affecting the agricultural output and the outbreak of bird which impacted the poultry industry. The latest data on GDP growth indicates a 7.4% increase for the first semester of 2006 as opposed to the same period in 2005. Government expectes a GDP growth of around 6.7% for 2006.

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2005, up 16% compared to 2004, according to the The inflation target was slightly missed in 2005 National Trade Register Office. The number of reaching 8.6% at year-end (the initial estimate for new companies established by foreign investors 2005 being 7%) and is forecasted to be 6.1% by exceeded 11,700 in 2005. the end of 2006. The unemployment rate continued to drop, falling to 5.9% in 2005 against The trade deficit reached EUR 10.3 billion in 6.2% at the end of 2004. 2005, 40.4% above the level reported for 2004, according to the National Statistics Institute. Foreign direct investment (FDI) stood at around Imports amounted to EUR 32.5 billion in 2005, a EUR 5.2 billion, similar to the level registered in 24% increase on 2004, while exports rose by 2004, according to preliminary data from the 17.5% in 2005 to EUR 22.2 billion. National Bank of Romania. The large Romania’s industrial output rose by 2.0% in 2005 privatizations that took place in 2005 (e.g. the sale from 2004, according to the National Statistics of two major electricity distribution companies: Institute. Labour productivity in the industrial Electrica Oltenia and Electrica Moldova to Ceske sector was 5.2% higher year-on-year, data Energeticke Zavody (CEZ), and E.ON AG), the showed. introduction of the new Fiscal Code and also the country’s EU accession process, positively Meanwhile, the National Bank of Romania (BNR) influenced the level of FDI . Moreover, FDI is hard currency reserves, excluding some 104.8 expected to further increase in light of the EU tonnes of gold, rose to EUR 16.7 billion at the end membership, set for 1 January 2007. of December 2005 from EUR 10.8 billion the previous year. At the end of September 2006 total The share capital subscribed by foreign investors reserves were around EUR 20 billion. in Romanian companies was of EUR 2.6 billion in

Major Cities City Population Industries Bucharest 1,930,390 Capital; business and manufacturing centre Constanta 306,200 Shipping and tourism Iasi 306,000 Manufacturing and transportation Timisoara 303,200 Business, manufacturing and agriculture Cluj-Napoca 297,600 Business and manufacturing Craiova 299,200 Manufacturing and transportation

According to the National Insitute of Statistics, as of January 1st, 2006

1.7 Transport and Communications for dry bulk and 250,000 DWT for liquid bulk cargo can anchor. The Danube is now connected to the North Sea by the Danube-Main-Rhine waterway. Transport Air: In Romania there are currently 17 airports Rail: Romania has a railway network of 10,948 open to commercial air traffic, the most important kilometres, of which electrified track accounts for being Bucharest (Henri Coanda), Timisoara 3,942 kilometres. International express trains (Traian Vuia) and Cluj-Napoca (Someseni). Of the connect the main central European capitals with 17 airports, 11 are located on the Trans-European Bucharest, the Black Sea coast and main cities. Network – Transport (TEN-T). The main Romania is a member of the International Railway Romanian providers of scheduled passenger air Tariff System RIT and Inter Rail. transportation are: Tarom, the Romanian flag carrier based in Bucharest Henri Coanda and Roads : The total length of public roads in Carpatair, a private Romanian-Swiss regional Romania reaches 79,904 km, of which national airline based in the Timisoara International Airport roads account for 14,685 km. Highways have a and which operates international flights to total length of around 228 km. Major east-west Germany and Italy. Also many international highway projects are in different stages of airlines serve Romania and there are daily flights development. to most European capitals. Romania’s upcoming EU accession has opened the air market for Waterways: Romania has access to both the competition thus, several low-cost airlines started Black Sea and the Danube River. In Constanta, operations in Romania: Volare (2003), Blue Air the Black Sea’s largest commercial port, vessels (2004), WizzAir and Sky Europe (2006). with a maximum displacement of 165,000 DWT

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Air freight is handled almost exclusively in Bucharest.

Key economic indicators (drawn from official statistics)

Indicator 2002 2003 2004 2005 GDP (EUR billion) 48.4 50.3 58.9 78.1 GDP (% change against previous year) 4.9 4.9 8,3 4.1 GDP per capita (EUR) 2,230 2,318 2,714 3,600 Inflation % (year-end) 17.9 14.1 9,3 8.6 Unemployment % (year-end) 8.1 7.2 6.2 5.9 EUR/RON exchange rate (average) 3.12 3.75 4.05 3.62 Foreign direct investment (EUR billion) 1.1 1.9 5.2 5.2* External debt (EUR billion) 14.6 15.24 17.5 23.4 Exports FOB (EUR billion) 14.7 15.6 18.9 22.2 Imports CIF (EUR billion) 18.8 21.2 26.3 32.5 Credit Rating Standard & Poor’s B+ BB BB+ BBB- Moody’s B1 Ba3 Ba3 Ba1 Fitch BB- BB BBB- BBB- Foreign Exchange Reserves 5.895 6.399 10.839 16.794 (EUR billion)

*preliminary data Source: EIU Country Reports, National Institute of Statistics, National Bank of Romania

Communications Television: Television is the most widely used advertising medium in Romania today and the one Telephone networks: The incumbent fixed-line with the greatest impact. Public television consists operator Romtelecom, owned by OTE of Greece, of four national networks, TVR 1 and TVR 2 has upgraded service considerably in recent (local) and two international (TVR Cultural and years. Romtelecom has introduced new digital TVR International). There are at least seven major exchanges, optic fibre overlay networks, and private television stations including Pro TV, expanded international dialing and ISDN services. Antena 1, and Prima TV. There are over 3.3 After the market’s liberalisation in January 2003, million subscribers to the cable TV networks, more telecom operators have entered the market, providing access to a wide range of international competing with Romtelecom on international, long and local channels. Programmes are shown in the distance and more recently on local calls. original language with Romanian subtitles. Following liberalisation, tariffs for international calls decreased by 60%, due to competition using Radio: State-owned Radio Romania operates two VoIP. Seventy-four alternative fixed telephony national FM networks, one national AM network operators were active in Romania at the end of and one network for regional and local AM and 2005, having around 9.9% market share while FM stations. There are also several private FM Romtelecom still enjoys 90.1% of the market. networks, including three with extensive national range (Kiss FM, Radio 21 and Pro FM) and two At end-2005 there were 17.74 million subscribers with national coverage (Europa FM, Info Pro). to Romanian fixed and mobile telephone services with the mobile sector enjoying a major boost, up Newspapers and Periodicals: Romania has a 17% y/y, according to the Communications multitude of daily newspapers written for diverse Regulatory Authority. Of these subscribers, audiences. There are also more than 200 weekly 27.74% signed up to fixed telephony and 75.25% papers as well as a growing number of to mobile operators. magazines, many of which are produced under license from a foreign copyright owner. The mobile telephony represents the main driver Distribution is made through the national press of the telecom sector in the recent years, distribution company Rodipet. acquiring a number of 13.35 million subscribers since the launch of the GSM in 1997. The main Research, Advertising, and Media Buying: The mobile operators are: Orange, Vodafone Romania growth of the consumer society has stimulated the (former Mobifon),Zapp and Cosmote Romania. emergence of research organisations (e.g. CSOP Gallup, IRSOP and IMAS), and marketing research consultants (e.g. Mercury Marketing &

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Research and AMER Nielsen). There are a The exchange rates at 1 November 2006 were: number of agencies in the advertising sector, 1 EUR = 3.5145 RON; most with international affiliations (e.g. McCann 1 USD = 2.7558 RON. Erickson, Leo Burnett & Target, Saatchi & Saatchi, D’Arcy, Grey, Lowe & Partners, Ogilvy & Cash, traveller’s cheques and credit cards may be Mather, Graffiti BBDO and Young & Rubicam). used in Romania, but cash remains the preferred method of payment. The use of credit cards has Internet: There were around 4.7 million Internet significantly grown in popularity in recent years, users at the end of 2005. The number of Internet and automatic teller machines are more connections in Romania doubled in 2005 y/y to numerous. Euros and dollars can be exchanged 1.8 million, according to the National Regulatory at official exchange offices. Authority for Communications (ANRC). Also, the number of Internet providers in Romania rose to Business and Social Etiquette 980 in 2005 from 515 the previous year while the total number of PCs (desktop computers, laptops Romanian business customs tend to be formal. and servers) sold in 2005 on the Romanian Introductions are respectful, business cards are market grew by 38.5% against 2004, to some exchanged and suits are worn. The handshake is 500,000 units. used both on meeting and taking leave. Dealing with public and state officials can sometimes be time-consuming and requires perseverance. 1.8 Suggestions for Business Visitors Romanians are often very proud of their national heritage, and tend to be sensitive about cultural and political matters that concern their country. Visas Public Holidays As is the case with any business trip, when visiting Romania some advance preparation is essential. Useful information for visitors is outlined Romania has the following public holidays: below. ƒ New Year (1 and 2 January); ƒ Orthodox Easter Sunday and Monday; All visitors to Romania require passports, ƒ Labour Day (1 May); preferably with a validity of more than six months. ƒ National Day (1 December); Visitors from a number of countries such as the ƒ Christmas (25 and 26 December). EU member states, EU accession countries, Switzerland, the USA and Canada do need to Additionally, little business takes place between obtain a visa before arrival in Romania (for stays Christmas and New Year. During the summer, up to 90 days). some companies, government agencies, and the courts are closed for August or operate with Also, one must declare cash amounts that exceed reduced hours and staff. EUR 10,000 at customs upon arrival or departure.

Currency 1.9 Living Conditions

As of 1 July 2005, the Romanian Leu (ROL), was Bucharest and large Romanian cities like subject to denomination so that 10,000 old lei Constanta, Iasi, Timisoara, Cluj Napoca or Brasov (ROL), in circulation on that date, was exchanged offer reasonable living conditions for expatriates. for 1 new leu (RON). Old lei banknotes and coins While normal precautions against petty theft and lost legal tender status at end-December 2006 car crime should be taken, Bucharest and other and were replaced by the new banknotes and cities do not have a high crime rate and are safer coins. Starting 1 January 2007, the exchange is than many other international capitals. made only at the NBR branches carrying out payments and at the offices of the credit Bucharest has numerous restaurants and cafes, institutions authorised by the NBR Governor’s including a steadily increasing number of order to perform the exchange. There is no time restaurants serving international cuisine. limit for exchanging ROL notes and coins for RON notes and coins. Appendix IV presents a list of contact numbers for hotels and restaurants in Bucharest. There are Transactions between residents must be in RON. also a variety of theatres, concert halls, libraries, Starting 1 July 2006, all prices have been posted cinemas, bars, nightclubs, and casinos. only in RON.

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Bucharest is the least expensive European city in terms of cost of living, being in the 114th place The standard of housing varies widely in worldwide from 144 cities across six continents, Romania. The existing residential market offers a according to a survey made by Mercer Human wide range of choices, from modern flats and Resource Consulting in June 2006. The survey villas to refurbished old villas located in covers and measures the comparative cost of picturesque neighbourhoods. The new supply is over 200 items in each location, including more adequate to international standards and housing, transport, food, clothing, household quality is improving every year. The northern area goods and entertainment. of the city is the most popular among expats.

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Chapter 2

Business Environment

st ƒ New Fiscal Code comes into force starting 1 January 2007 ƒ EC Monitoring Report on Romania (September 2006) acknowledges progress made towards EU accession ƒ Rating agencies improved outlook

2.1 Business Climate 2.2 The Aims of the Government The Government's main objective is to continue The Monitoring Report of the European reforms in all areas so that Romania may fulfil all Commission released in September 2006 her obligations pledged during the EU accession acknowledged progress made by Romania with process and to take full advantage of EU regard to macroeconomic stabilization and membership. Among the main government economic reform. Further progress has been priorities stated in the Government Programme for acknowledged in reforming the justice system as the period of 2005-2008 there are: development of well as in the fight against corruption. Romania's infrastructure, economic performance achievements have also been recognised by the improvement, agriculture and rural development rating agencies with Moody’s upgrading and public administration reform. Romania’s long-term and short-term foreign and local currency ratings to Baa3 with a stable As regards transport infrastructure, the outlook in October 2006 while one year ago, S&P government is focusing on the Pan European raised Romania's long-term foreign currency Corridor IV, on the works at Bucharest-Constanta credit rating to investment grade at 'BBB-', with highway and on financing the works on the stable outlook. Transylvania Highway. In order to improve economic performance, the Government is The new government moved fast in modifying the targeting the creation of better paid jobs, the fight fiscal code with the aim to bring it in line with EU against tax evasion, and the creation of conditions requirements and to provide stability and for a business environment favourable to predictability for the business atmosphere in investments. Romania. The new code that came into force on 1 January 2007 maintains the single flat tax rate of In the agricultural field, the focus will be on 16% and VAT remains at 19%. The code also supporting priority programmes such as the “Life stipulates that microcompanies will pay a 2% tax rent” programme aimed at the fusion of lands for on revenues earned in 2007, 2.5% on revenues creating of competitive farms and the “ European for 2008 and 3% on revenues for 2009. Capital Funds for agriculture” programme in order to help gain for sale of shares is taxed at 1% tax for long farmers access European funds. term holdings (more than one year) and 16% for short term holdings (less than one year). For reforming the public sector, the Government’s main goals are to improve basic public services The privatisation process continues with large- and public utilities of local interest, to consolidate scale sell-offs slated to take place in the financial the process of fiscal and administrative sector (i.e. the National Savings Bank-CEC), in decentralisation and strengthen the institutional the energy sector (i.e. the National Gas Company capacity of structures within local and central -Romgaz, three power complexes and three public administrations. electricity distributors), in post and radiocommunications (i.e. the Romanian Post, the

National Radiocommunications Company), in the pharmaceutical sector (i.e. Antibiotice Iasi), and in the transport sector (i.e. the Romanian Freight Railway Transport-CFR Marfa).

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2.3 Financial Services Dezvoltare (BRD) and Banca Transilvania. Financial investment companies (SIFs) are also highly sought-after stock. The financial system is characterised as strong and healthy in spite of some small and The capital market regulator is the National imbalanced aspects according to the Report on Securities Commission, which intends to bring Financial Stability released by the National Bank more transparency and trust to the Romanian of Romania in July 2006. The report goes on to market through its regulations. say that no imminent risks are expected for Romania’s financial stability given that the credit In the insurance sector, 37 insurance companies risk has been kept under control by the National have been active as of March 2006, offering an Bank of Romania and better risk management is increased range of insurance services. A large provided by the commercial banks. Most number of these companies are members of Romanian banks are now in private hands, among UNSAR (National Union of Insurance and the top ones being BRD, Raiffeisen, ING and Reinsurance Companies) and this group HVB. comprises around 90% of capital and premiums in the industry. Large international insurers have The most important event in the banking sector in established domestic operations and sales forces. 2005 was the privatisation of the largest There is also a significant number of insurance Romanian commercial bank. In terms of total brokers authorised by the market regulator. assets, the Romanian Commercial Bank (BCR) holds the first position with 25.9% market share The insurance industry regulator is the Insurance and has a network of 440 subsidiaries and Surveillance Commission (CSA). During the first agencies nationwide. The new owner of BCR is quarter of 2006, CSA announced it withdrew the Erste Bank of Austria which acquired a 61.88% operating licenses of several insurance stake for USD 4.5 billion in December 2005. companies as they did not increase their share Among other bidders were large foreign banks capital to a minimum threshold stipulated under a such as Millenium PCB, Deutsche Bank, Dexia, new CSA regulation. Five foreign insurance BNP Paribas, and the National Bank of Greece. At companies are ready to enter the local market, the beginning of August 2006, the Competition according to CSA. Council gave the green light for Erste Bank's takeover of BCR, and in October 2006 the Although most of the large insurance companies privatization process of BCR was completed. operating in the Romanian market offer various life insurance services, sometimes associated The privatisation for the last remaining state- with private pension plans, life insurance has a owned bank, the Savings Bank CEC is expected reduced share in the overall insurance activity. to be completed during the end of 2006 or The Romanian market is dominated by non-life beginning 2007. CEC is ranked fifth with assets insurance. Government and World Bank experts totalling EUR 1.7 billion as of Q1, 2006. CEC has are working on a draft law stipulating that starting the largest network of about 1,400 branches and next year home insurance policies against natural offices. The government announced that OTP disasters will be compulsory. (Hungary) and National Bank of Greece are short- listed to participate in the final bid for the The government is moving forward in reforming acquisition of 69% stake in the bank. Raiffeisen the pension system and in June 2006 it made (Austria) and EFG Eurobank (Greece) did not changes to the pension law. The new law manage to get to the final round while Dexia stipulates that people up to 35 years old, and who (Belgium) withdrew from the race. are insured in the public pensions system, are required to join a privately managed pension fund. Most banks have set up investment arms; the Big This is optional for people between 35 and 45 and 4 audit firms have also established a significant who are already insured and contribute to the presence in the country. public system of pensions.

The capital market saw record upswings in 2005. For more details on Financial Services in Market capitalisation for the two regulated capital Romania, please refer to Chapter 5. markets, the Bucharest Stock Exchange (BVB) and the over-the-counter RASDAQ market was around EUR 18 billion in June 2006 as compared to EUR 12 billion in June 2005. The total value traded on BVB in 2005 was EUR 2.16 billion and RASDAQ posted EUR 296.92 million. Investors mainly focused on the market's blue chips, which include Petrom, Rompetrol Rafinare (Petromidia) and banking operators Banca Romana pentru

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2.4 International Agreements 2.6 Real Estate

Romania has diplomatic relations with 179 out of Prior to 1990, most land in Romania was owned 192 UN member states and also with the Holy by the state, by state-owned entities or by so- See, the Sovereign Military Order of Malta and the called "agricultural cooperatives". Individuals Palestinian National Authority. This has enabled owned only a limited amount of farmland and the country to join important organisations and be residential land. party to key agreements including the following: After 1990, specific regulations were passed ƒ Membership: governing the retrocession of property taken over − United Nations by the state either legally or abusively during the − World Bank socialist regime back to their former owners. The − International Monetary Fund main regulations are Land Law no. 18/1991, Law − World Trade Organisation no. 1/2000 on the Retrocession of Agricultural and − European Bank for Reconstruction and Forestry Land, Law no. 10/2001 on the Legal Development Regime of Immovable Properties Abusively Taken − Bank for International Settlements from their Legal Owners between 6 March 1945 − Council of Europe and December 1989 and Law no. 247/2005 on the Reform in Property and Justice Domains and − Organisation for Security and Co- Certain Adjacent Measurements, as subsequently operation in Europe amended. − International Organisation of La

Francophonie Romanian individuals and legal entities

(regardless of the citizenship or nationality of their ƒ Agreements and treaties: shareholders) are free to acquire ownership title to − Accesion Treaty to the European Union the land. − Central European Free Trade Agreement (CEFTA) Romanian legislation currently in force prescribes − Most Favoured Nation (MFN) status with a specific legal status for the acquisition of real United States estate properties by foreign nationals (individuals − NATO Member and/or legal entities). As regards the acquisition of − Preferential Arrangements with EFTA title to land, as a rule, European nationals (which countries (Switzerland, Iceland. Norway), includes residents of the European Union and of Macedonia, Croatia, mediterranean the European Economic Area) are able to acquire countries (e.g. Israel, Egypt), ACP ownership under the same terms as Romanian countries (Africa, the Caribbean and the citizens and entities, as from Romania's Pacific), South Africa, Mexico, Chile accession to the EU. − Autonomous preferential arrangements with Overseas countries and territories, European nationals will be allowed to acquire title Generalised Sistem of Preferences (e.g. to agricultural lands, forests and forestry lands China, Brasil), Albania, Bosnia and within seven years as of Romania's accession to Herzegovina the EU (except for European farmers having Romanian residency, who are allowed to acquire In addition, Romania has concluded a number of ownership of this category of land as of bilateral agreements concerning trade, avoidance Romania's accession to the EU). Likewise, of double taxation, and mutual guarantees of European non-residents in Romania will be investments. allowed to acquire land ownership for establishing a secondary residence or a secondary office, within five years from Romania's accession to the 2.5 NATO Accession EU.

Romania officially joined the Alliance at the end of Foreign nationals from outside the EU and March 2004, some 55 years after NATO had been European Economic Area are allowed to acquire established. land ownership under the terms of international treaties and based on reciprocity By no means may the rules applicable to non-European nationals be more favourable than those established for European nationals.

Authentication by a notary public is compulsory for the land transfer to be valid. Validity of transfer of

title to the land against third parties is to be

15 PricewaterhouseCoopers - Business Guide to Romania 2007 ensured by recording the title with the relevant mortgage already registered with the Land Land Registry. When purchasing real estate Registry. The record of the intent to mortgage properties, one should take into account that there expires two months after its registration in the are certain regions in Romania where the Land Registry. registration of ownership in the Land Registry has been implemented only recently, and therefore a In order to enforce the mortgage, the mortgager proper review of ownership when purchasing real (e.g. a bank) must resort to an enforcement agent estate property may be quite difficult to assess. It to start the enforcement procedures. is therefore advisable to conduct legal title checks Commencement of this procedure is registered in for any property, before acquiring it. the Land Registry. Objections can be filed against the enforcement procedure before a competent Furthermore, the National Cadastre and Land court, which could suspend such procedure based Registration Agency has recently been on a specific request to this effect. In case of established (through the reorganisation of the bankruptcy, the mortgager submits its claim with former National Cadastre Office), with its remit to the liquidator and has priority in the sale proceeds include real estate property registration in of the asset mortgaged, over any other Romania, a role taken over from the Ministry of receivables, except for the taxes , stamp duties Justice. This Agency also coordinates and and liquidation costs relating to the sale of the oversees the performance of cadastral work at the asset. national level.

Under the new legal provisions, ownership right 2.7 The Property Market and other in rem rights on immovable properties are to be recorded with the real estate information The market for office buildings in Bucharest is register (i.e. Land Registry) solely on the basis of growing while the availability of quality offices is transfer deeds, which must be concluded in insufficient as compared to the growing demand. authentic (notarised) form. Upon authentication of For this reason, the trend in 2005 was for an instrument establishing, modifying or companies to turn to experienced developers for cancelling a legally enforceable right in property, pre-lease contracts, according to the latest CB the notary public should request a Land Registry Richard Ellis study. Industrial, retail and abstract for authentication or, as the case may be, residential property sectors are reporting strong a certificate of charges. During the term of validity growth. The northern area of Bucharest was the of the abstract for authentication, the Land most targeted for office building construction in Registry may only register the transaction for 2005, given its access to the city centre, airport, which the abstract was issued After the public access to public transportation and its proximity to notary has prepared the deed of conveyance, the residential districts. The sale prices for office which alters, establishes or cancels a legally premises vary between EUR 1,000 and 1,500 per enforceable right interest in real estate, the public square metre (sqm) for vacant buildings and up to notary must by law send the relevant documents EUR 2,000-2,200 per sqm for property obtained to the Land Registry Office, applying for the by investors, according to the same study. registration with the Land Registry of such deeds. A recently enacted regulation also requires the Bucharest-based modern office buildings total existence of a fiscal certificate assessing the around 830,000 sqm of which 33% is considered payment of taxes over the real estate property for A-class. Rent prices for offices in Bucharest are a valid transfer of ownership. around EUR 18.50-19.00 per sqm, according to the study. Mortgages are created under authentic deeds and in order to have effect towards third parties they Monthly rent for retail space in shopping malls is must be recorded in the Land Registry. Mortgages between EUR 60 and 120 per sqm per month and are created either over land/buildings as a whole between EUR 20 and 40 per sqm per month for or over the ownership of shares of the co-owners. shopping galleries within hypermarkets. The most The creation of mortgages over a future asset is expensive rents for retail space are Magheru subject to compliance with specific regulations Boulevard and Calea Victoriei. Apartment rents regarding the mortgage credit for real estate vary from EUR 300 to EUR 5,000 per month, investments, based on the prior registration with depending on location, size and furnishings. the Land Registry of the building permit and the Rental costs for villas in some residential areas, partial delivery and acceptance minutes. especially in the northern part of Bucharest, may range from EUR 2,500 to EUR 9,000. Also the intent to create a mortgage for land/building can be recorded in the Land Registry. Further to the intent being registered, if effectively created, the mortgage will have the ranking corresponding to the intent of creating the

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2.8 Business Lobby Groups

Amoung the groups that lobby Government ministries on policy issues are: Foreign Investors Council (FIC) (tel. + 40 21 222 19 31, www.fic.ro) the American Chamber of Commerce (AMCHAM) (tel. + 40 21 315 86 94, www.amcham.ro) and the Businessmen's Association of Romania (AOAR) (tel.: +40 21 319 01 43, www.aoar.ro).

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Chapter 3

Romania and the European Union

ƒ Romania became EU member at 1 January 2007

3.1 Major Milestones of Romania’s funding. These instruments were replaced after 2007 by the post accession funds. Accession Process Romania may also participate in a number of Romania was the first country of Central and community programmes such as: The Sixth Eastern Europe to have official relations with the Framework Programme for research and European Community. The relations between the development, Leonardo da Vinci and Socrates in two parties were initiated at the end of the 60s, in the field of education and training, and multi- the form of bilateral trade agreements (they were country programmes: Small and Medium-Sized suspended in the 80s). Romania was included in Enterprises Facility, Nuclear Safety Programme, the Community's Generalised System of etc. Preferences in 1974. Post-accession Funds After 1989, European Union membership has been the main goal of every Romanian As an EU member, Romania will benefit from post Government. Romania signed its Association accession funds, which are significantly larger Agreement with the European Union in 1993 and then the pre-accession funds. The total amount submitted its official application for EU allocated for Romania for the period 2007-2013 membership in June 1995, after Hungary and for Structural and Cohesion Funds is Euro 17.317 Poland. February 2000 marked the official start of billion, out of which: these negotiations. ƒ Euro 5.769 billion - Cohesion Fund The accession negotiations were closed on 14 ƒ Euro 11.143 billion - European Regional December 2004. The Accession Treaty was Development Fund and European Social subsequently signed in Luxembourg on 25 April Fund within Convergence Objective 2005. ƒ Euro 404 million - European Regional Development Fund within European Territorial Romania became a full member of the EU starting Cooperation Objective. with 1 January 2007. Romania’s accession was confirmed by the EU Monitoring Report released Allocations for agriculture, rural development and by the EU Commission on 26 September 2006. fisheries for 2007-2013 are estimated at Euro 7.1 billion from European Agricultural Fund for Rural Development and Euro 0.2 billion from European 4.2 EU Financial Assistance for Fund for Fisheries. Romania The main post-accession funds available starting with January 2007, include: Pre-accession Funds ƒ European Regional Development Fund (ERDF), which promotes economic and social Romania has received substantial financial cohesion through the reduction of imbalances assistance from the European Union since 2000 between regions or social groups; to support its efforts in preparing for accession. ƒ European Social Fund (ESF), which improves The funds allocated reached around Euro 960 the employment opportunities for unemployed million in 2005 and will exceed one billion in 2006. and disadvantaged groups; ƒ Cohesion Fund (CF), a special fund that finances projects in the transport and environment sector; ƒ European Agricultural Fund for Rural PHARE, ISPA and SAPARD are the main three Development (EAFRD) and the European instruments through which Romania receives the

18 PricewaterhouseCoopers - Business Guide to Romania 2007

Fund for Fisheries (EFF) to support the Once a project is selected, its implementation Common Agricultural Policy and the Common becomes the responsibility of the beneficiary. This Fisheries Policy. organisation has to provide the co-financing for the project, to meet the project objectives, to The funds are meant to increase economic deliver the outputs, to report and document the competitiveness, improve transport and expenses and deliverables and to observe the environmental infrastructure, develop and programme’s rules and constraints (which will be strengthen regional development, improve human detailed in the relevant Applicant Guide). resources development and strengthen administrative capacity, in order to speed up the The beneficiaries of the CF are public authorities, economic convergence in the EU. NGOs, businesses (companies, professional associations, chambers of commerce), research The use of structural instruments (ERDF, ESF institutes, universities for ERDF and ESF, and the and CF) is based on programmes. Potential Romanian National Company of Motorways and beneficiaries can propose projects and apply for National Roads, the National Railway Company, funding through Operational Programmes (OPs) - etc. see Annex II. Each OP gives orientation about the type of projects it will finance. Hence, potential Parallel, but not part of the Structural Funds are beneficiaries need to identify the OPs which would the European Agricultural Fund for Rural best fit their projects. Development and the European Fund for Fisheries. Romania has already set up the administrative structures for accessing the Structural Funds and The document that will clearly indicate the way distributing these to the beneficiaries. For each these funds will finance investments in Romania is OP the managing authorities and intermediate the National Programme for Rural Development bodies have been set up –see Annex II. The (NPRD) for 2007-2013 and the Operational selection of projects is carried out by the Programme for Fisheries. competent national or regional authorities (Intermediate Bodies or Managing Authorities) for each OP.

An important document for helping potential beneficiaries in designing the projects is the Applicant Guide – at least one for each OP. The release of the Applicant Guides was expected in late 2006.

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Chapter 4

Foreign Investment, Privatisation and Foreign Trade

ƒ Foreign and domestic investments enjoy equal treatment ƒ Foreign direct investments in 2005 account for around EUR 5.2 billion ƒ Large privatisations took place in the energy and financial sector

4.1 Foreign Investment Investment Incentives

Regulatory Legislation Most incentives ceased on 31 December 2006 , but new incentives were introduced based on a The following major pieces of legislation (in specific investment Law. Further details are addition to taxation law) regulate foreign provided in Chapter 9. investment in Romania: 1. Commercial Code Guarantees and Rights 2. Company Law 3. Competition Law Foreign investments are not to be subject to 4. Law on Direct Investment* nationalisation, expropriation, requisition, or any 5. Law regarding the promotion of other measure of similar effect, except when this direct investments is in the public interest and even then only after 6. Law on Banking Activities 'appropriate and prior compensation'. Romania is 7. Securities Law party to a number of bilateral investment 8. Commercial Companies guarantees and is a member of the Multilateral Privatisation Law Investment Guarantee Agency (MIGA). There are, 9. Trade Register Law. however, no government guarantees available to compensate for inconvertibility. * - at the date when our Business Guide was prepared the Law was not in force being in a draft phase subject to public debate. 4.2 Privatisation

Restrictions on Foreign Investment Regulatory Climate

No restrictions are imposed on foreign ownership Investors can either acquire the state's shares in a or participation in joint ventures and in Romanian fully or partially state-owned joint stock company companies. It is possible for a foreign individual or from the Authority for State Assets Recovery entity to own 100% of any type (SA, SRL) of a (AVAS) or the responsible ministers. Romanian-registered company. Privatisation includes a wide array of methods, Currently, the main industrial sectors in which including open and closed tenders, local stock additional governmental approval is necessary for auctions and direct sale. In certain cases, foreign investors are: investment banks act as intermediaries. ƒ Defence; ƒ State Monopolies; ƒ National Security. Privatisation Background

Resident and non-resident companies are allowed The privatisation process commenced in 1990 to acquire and hold rights over movable assets in with the creation of joint stock companies out of Romania. approximately 6,200 state-owned entities. Of the shares in these companies, 70% were allocated to the State Ownership Fund (SOF) and 30% to one of the five Private Ownership Funds (POFs).

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Following Emergency Ordinance No to start in late 2006, according to government 296/December 2000, the State Ownership Fund officials. became the Authority for Privatisation and Management of State Ownership (APAPS) - a In the financial sector, the privatisation of CEC public institution that operated under the authority savings bank is well under way with Hungary’s of the Romanian Government. In 2004 the Bank OTP and National Bank of Greece advancing to Asset Recovery Agency has merged through the final round of the process. The privatisation absorption with the Authority for Privatisation and committee will negotiate the contract with the two Management of State Ownership resulting in the selected companies, who will submit improved Authority for State Assets Recovery. bids.

Privatisation in 2005 As regards the telecommunication sector, the Romanian state expects to obtain USD 1 billion 2005 was characterised by two major trends in from the listing of 46% of the shares of privatisation. The first one followed a similar path Romtelecom (fix line operator) on the stock to that undertaken in 2004, namely privatisations exchange. The privatisation process for the in the energy sector. The second concerned the Radio-communication National Company is privatisation of the financial sector, generated by expected to start by early 2007, while for the launch of the sell-off process for the Romanian Post Office is schedule to start in 2007 Romanian Commercial Bank (BCR) and the and to be completed by the beginning of 2008. National Savings Bank (CEC), the two remaining state-owned banks. At the beginning of 2006, the Government has approved the privatisation plan for 2006-2007 The privatisation of BCR is viewed as the most which includes 186 companies to be put for important privatisation deal in Romania together privatization during the mentioned period, out of with the privatisation of Petrom, the Romanian which 120 in the Authority for State Assets national integrated oil company. In terms of total Recovery (AVAS) portfolio and the rest pertaining assets, BCR holds the first position in the banking to ministries. sector with 25.9% market share and a network of 440 subsidiaries and agencies nationwide. The privatisation contract for BCR has been signed in 4.3 Trade December 2005 with Erste Bank, which acquired a 61.88% stake for EUR 3.75 billion. Erste Bank's Foreign trade regulations have been gradually takeover of BCR was finalized in October 2006. liberalised since 1990 and now broadly follow the guidelines set by the EU. Other large privatisation deals in 2005 included the sale of the two major electricity distribution Regulatory Climate companies, Electrica Oltenia and Electrica Moldova (Electrica Oltenia and Electrica Moldova A specific license is generally not required for the (Ceske Energeticke Zavody and E.ON AG import and export of commodities into and out of acquiring majority ownership, respectively, for a Romania. Exceptions are those commodities total of EUR 272 million). subject to quota as stipulated by international trade agreements signed by Romania and those Privatisation Calendar considered as potentially dangerous for human health or the environment. Other non-tariff barriers In June 2006, the Government privatised the also apply upon the import or export of certain country’s largest regional electricity distributor, goods, such as goods susceptible for dual use Electrica Muntenia Sud. The buyer, Enel is to pay (both civilian and military) or goods falling under EUR 820 million for 67.5% of the shares in the CITES Convention. Electrica Muntenia Sud. Enel will directly take over 50% of the company’s shares and operate a Regulatory Authority capital increase which will raise its stake to 67.5%. The Licence Department of the Ministry of Economy and Trade is in charge of issuing trade The privatisation process for the last three state- licences. owned power distributors Electrica Muntenia Nord, Electrica Transilvania Nord and Electrica Other public entities also issue approvals for the Transilvania Sud has started and is expected to import or export of goods that are subject to other be completed in 2007. Furthermore, the non-tariff barriers, e.g. ANCEX (The National privatisation process of Turceni, Rovinari and Agency for Controlling Exports of Strategic Craiova energy holdings, which include mining Products). units and power generation facilities, is expected

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Chapter 5

Banking, Finance and Insurance

ƒ Harmonisation of banking legislation with EU Directives and implementation of the Basel II

requirements continues

ƒ A new banking law is expected to be published at the beginning of 2007

ƒ New NBR Regulation as regard payments by electronic payment means

ƒ Banks continue to expand retail activities

ƒ NBR renounces to limit the FX lending exposure starting with the beginning of the next year

ƒ New legislation governing non-banking financial institutions

ƒ New securitisation legislation is introduced

ƒ Leasing market continues to consolidate, develop

ƒ Insurance market continues to develop and to increase its weight in GDP

ƒ The privatisation for the last remaining state-owned bank, the Savings Bank CEC is expected to be

completed late 2006 or beginning 2007.

ƒ Harmonization of capital markets with EU Directives still continues

ƒ New legislation on private pensions - Pillar III to be implemented beginning next year

5.1 Banking and Other Lending The prime functions of the NBR are: ƒ To define and implement the monetary policy Institutions and the exchange rate policy; ƒ To issue and control the supply of banknotes Romania has a two-tier banking system. The and coins; National Bank of Romania (NBR) is Romania's ƒ To license, regulate and supervise all credit central bank and is under the Parliament’s control. institutions in Romania and to promote and Credit institutions operate under the authorisation monitor the good functioning of the payment and strict supervision of the NBR. In addition, as systems; of February 2006, non-banking financial ƒ To establish and manage the state's foreign institutions are regulated in Romania, being exchange policy; subject to registration with and supervision by the ƒ To establish and manage credit policy; NBR. ƒ To manage the official reserves of Romania.; ƒ To align Romania's banking sector and The privatisation of the largest Romanian bank, monetary system to EU norms and standards. the Romanian Commercial Bank was finalized. CEC (The Romanian Savings Bank) is expected NBR has its own Supervision Division conducting to be privatised soon, with the improved offers on-site evaluation of all credit institutions from the two finalists to be submitted during the operating in Romania (i.e. commercial banks, last weeks of November 2006.. credit unions, building societies and companies issuing e-money). This process generally takes The National Bank of Romania place on an annual basis.

A Board of Directors, consisting of nine members There is ongoing co-operation between the NBR appointed by the Parliament, heads the National and international banking institutions, including Bank of Romania (NBR). The term of office is the IMF and the World Bank, as well as with other usually five years. The Board of Directors includes European central banks. the governor of the NBR, three vice-governors (of which one is first vice-governor), and other five NBR also collaborates on the domestic financial ordinary members. The governor and the three market with the Insurance Supervisory vice-governors ensure the executive management Commission and National Securities Commission with the beginning of the next year. It is the for exchange of information and to maintain an responsibility of the Board of Directors to issue adequate surveillance over the financial market in NBR policy guidelines. general.

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NBR publishes on a monthly basis the reference pace, most of them by acquiring existing banks; interest rate used as benchmark interest rate for however, recently foreign banks are interested in domestic currency denominated loans. starting green field projects in Romania. Currently there are 35 commercial banks and 2 banks Large-scale changes have been brought to the granting only mortgage loans with majority private banking legislation in order to harmonise it with capital authorised to operate in Romania. Several EU legislation in the past couple of years. new banks are expected to be established in the Moreover, significant changes are due to be coming year, as NBR seems willing to grant new brought in the future, as the NBR is preparing a banking licences. new banking law and new secondary legislation. Consumer and mortgage loans registered The Foreign Currency Market and significant increases but still consumer loans have Foreign Currency Rules the most important place. This trend is expected to continue in the coming years. The banks have The Romanian currency is the leu (plural lei), also started to offer more sophisticated products abbreviated as RON. The inter-bank foreign as derivatives, structured products, cash pooling exchange market was established in 1994. arrangements, but still there is not a real market Foreign currency can be bought or sold at spot or for such products. forward rates. Intermediaries authorised by the NBR freely set the exchange rate. The NBR also Similarly the banks diversified their offer for publishes daily official reference exchange rates. services by implementing e-banking, internet On 1 November 2006, the reference exchange banking, “franchise systems” etc. rates published by the National Bank of Romania were USD 1 = RON 2.7558 and EUR 1 = RON Commercial banks in Romania must be registered 3.5145. with and operate under a license issued by the NBR. Among the following activities banks may Exchange offices provide exchange facilities to engage in there are: private individuals (residents and non-residents). ƒ Taking deposits; ƒ Granting loans; As of 1 September 2006, the NBR liberalised the ƒ Issuing guarantees and letters of credit; foreign currency transactions, so that NBR ƒ Issuing and trading securities; authorisation is no longer necessary for current ƒ Owning and administering movable and and capital foreign currency operations. However immovable assets for own activity and bank's payments related to trading in goods and services staff use, lending operations with movable between residents must be made in RON. and immovable assets up to 5% of own funds; Nonetheless, investment in government securities ƒ Leasing through a subsidiary only until EU is no longer restricted for non-residents, which accession; after accession, direct financial can invest in such instruments under the issuance leasing will be allowed. prospectus. Commercial banks may also participate in The NBR is also entitled to apply certain currency auctions provided they have broker or safeguard measures in case the related capital dealer licenses. inflows generate strong fluctuations in the market. Among the main regulations issued by the NBR For statistical purposes, notification/reporting to for banks, there are: the NBR must be made for operations generating ƒ Minimum share capital and own funds of RON long and medium-term private foreign debt, for 37,000,000 = approx. EUR 10,500,000 (only non-monetary operations between residents and cash capital infusions are accepted); non-residents (offset, clearing, barter, etc) and for ƒ Legal reserve: 5% of gross profit until the residents to participate in more than 10% of the legal reserve represents a fifth of the share share capital of a foreign company. The NBR has capital (deductible for tax purposes); also passed new norms for reporting data for ƒ General banking risks fund of 1% of the drawing up the monetary balance sheet. balance of assets bearing risks specific to banking operations (deductible for profit tax purposes). Commercial Banks ƒ Setting up of specific credit risk provisions for principal and interest related to loans granted The banking market has witnessed significant (deductible for profit tax purposes); changes in recent years following the ƒ Minimum reserve requirements of 20% development of domestic banks and the influx of (deposited with the NBR) for ROL and 40% foreign banks into Romania. All domestic banks in for foreign currency; Romania are now private (except for the Savings ƒ Capital Adequacy Ratios of 12% (own Bank), and foreign banks are investing at a fast funds/net exposure) and 8% (own capital/net

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exposure); also special capital adequacy The Law sets out a number of specific requirements will be fully applicable starting requirements to be satisfied by NBFI (e.g. not less from 2006 in relation to the trading book than EUR 200,000 in share capital, statements of activities; objects including only crediting activities, internal ƒ Lending limit of 10% of own funds to any regulations, financial statements audited by client; independent auditors, reporting to NBR the ƒ Total long term investments in non-financial structure of the credit portfolio, etc.). These companies and non-lending institutions (20% requirements are not targeted at pawnshops and of non-financial company's share capital and mutual savings banks; 15% of bank's own funds), but total amount cannot be more than 60% of bank's own NBFI meeting additional criteria set by NBR (e.g. funds; turnover, volume of credits, etc.) are to be entered ƒ Financial statements need to be approved by in NBR’s Special Register (in Romanian, external independent auditors; “Registrul special”) and are supervised by NBR ; ƒ Detailed operational reports to the NBR in standardised format and specific frequency. Mutual savings banks and pawnshops are recorded in NBR’s Recording Register (in Thin capitalisation rules, limiting in general the tax Romanian, “Registrul de evidenta al BNR”); deduction of interest expenses, are not applicable to credit institutions. NBFI creates, adjusts and uses specific credit risk provisions deductible for profit tax purposes; As a general trend, the supervision of banking activity has tightened with respect to significant According to this legislation, financial leasing shareholders, top management and directors, companies are not allowed to perform operating internal audit, money laundering, customer leasing activities, and therefore existing leasing identification procedures, solvency and activities companies had to separate their investment portfolio risks. operations.

A legislative framework has been created for In November 2006, in the NBR General Register derivatives, but as it is relatively new, only few there were registered: 46 NBFI’s granting credits banks considered implementing such instruments. or providing factoring services, 278 NBFI’s Also, the tax legislation has not been updated to providing financial leasing activities; also, there include specific provisions regarding the tax are 2 NBFI’s registered with the special Registry. treatment of derivatives. Securitisation Non-banking Financial Institutions Early spring 2006 the Parliament has passed a In the first half of 2006, the government passed an set of new laws aimed at establishing the legal Ordinance regulating, among others, the lending framework for the securitisation of receivables and activity of non-banking financial institutions mortgage bonds issuance in Romania. (“NBFI”) – ordinance subsequently approved by Law no. 266/2006 (“the Law”). Securitisation is defined as the financial operation for the realisation of receivables by a special Under this legislation, crediting on a professional purpose vehicle (“SPV”) that acquires, collects basis is allowed to be conducted only by credit and uses such receivable to secure issuance of institutions established in pursuance of Banking securities. Law and by NBFI duly registered with the National Bank of Romania (“NBR”), upon the terms Receivables deriving from the following types of prescribed by the Law. agreements can be securitised: ƒ Loan agreements, including mortgage loans, NBFI are entities engaged in crediting (consumer loans for the acquisition of cars, credit card credits, mortgage credits, financial leasing, etc.) or agreements; in activities specific of pawnshops or mutual ƒ Leasing agreements; savings banks. ƒ Sale-purchase agreements when the price is paid at a term in the future, including sale- NBFI are recorded in the NBR General Ledger (in purchase agreements in instalments; Romanian, “Registrul general”) based on a ƒ Financial instruments such as bonds or other notification delivered by NBR within 30 days of instruments of a participative nature; registration with the Trade Registry and proof of ƒ Any assignable receivables. compliance with the requirements laid down by The law lays down provisions in respect of the the Law. NBFI may not commence business assignment of receivables, regulating, among before registration. others:

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ƒ conditions in respect of the receivables to be Credit Unions assigned; ƒ conditions of assignment; Although credit unions have been operating for ƒ effects of the assignment; some time in Romania, under a more restrictive ƒ registration of the assignment. legislative framework introduced during 2001 and 2002, they are now assimilated with lending The laws also regulate the set-up and institutions, as are banks. organisation of the SPV’s, as well as the rights and obligations of securities holders. Credit unions must obtain a license from the NBR in order to operate. Although their activity is not A separate law establishes the legal framework regulated by the Banking Law, but under a for the issuance of mortgage bonds and regulates separate legal framework, their activity is subject the rights and obligations of the mortgage to similar requirements as those applicable to bondholders. Under the law, mortgage bonds can banks. be issued on basis of a prospectus approved by the NSC, in accordance with the capital market The same accounting treatment for banks applies regulations. Mortgage bonds can only be issued to credit unions as well. by banks and/or mortgage banks. Building Societies With a view to ensure protection of the bondholders, the law regulates the appointment of The general legal framework for building societies authorised agents to represent them, pending has been in place since 2002, but there is only bondholders’ approval. Specific entities, such as one building society currently operating on the credit institutions, audit companies, securities Romanian market. Similar regulations for banks intermediaries, offices of attorneys-at-law or currently apply to building societies, but notaries can act as agents, subject to prior adjustments are expected. authorisation by the National Securities Commission. Institutions Issuing E-money

Money Laundering The new Banking Law has introduced the possibility that an institution, other than a bank, Special legislation against money laundering has may issue e-money. The minimum share capital been in place since December 2002. Generally, for such institutions is RON 12 million. transactions above EUR 10,000 could be investigated. The new EU Directive on money NBR has just issued a new Regulation regarding laundering must be implemented by 15 December payments with electronic payment means. 2007.

Foreign Investments 5.2 Leasing In the last few years there has been an increase in the number of foreign banks operating in Government Ordinance no. 51/1997, revised at Romania, either through branches or subsidiaries the beginning of 2000, further amended in (requiring a minimum of five shareholders) December 2004, was amended in July 2006 by Law no. 287/2006. Appendix III includes a non-exhaustive list of foreign banks operating in Romania as of 21 Recently enacted legislation on non-banking September 2006. financial institutions treats financial leasing as crediting activity, requiring providers of such services to register with the NBR. On the other Financial Reporting hand, operating leasing does not qualify as crediting, therefore it does not fall under the According to the Order 5 / December 2005 issued supervision of the NBR. As such, leasing by NBR, starting 1 January 2006. Banks have to companies have started segregating their financial prepare a set of financial statements in leasing activities from operational leasing accordance with EU Directives for stand alone activities. and consolidated accounts. The regulations also include the requirements of Rule 1606/2002 of Minimum share capital for an operating leasing European Parliament and EC regarding the company is the RON equivalent of EUR 200,000. application of International Financial Reporting Standards (‘IFRS’). As of 1 January 2007, the amendments to the Fiscal Code brought a new definition of a financial lease, which is recognised for tax purposes. A

25 PricewaterhouseCoopers - Business Guide to Romania 2007 financial lease is a leasing activity that fulfils at At the beginning of this year NSC issued least one of the following conditions: secondary legislation allowing listed companies to become closed-end companies, based on the 1. the risks and benefits related to the ownership GMS resolution, provided that certain conditions over the leased asset are transferred to the are met. lessee from the signing date of the contract; 2. the user has the option to buy the leased The Romanian capital market has grown in good upon the expiry date of the contract and general, witnessing in August-September 2006 the ratio between the residual value and the the first supranational issue of RON-denominated principal is lower than or equal to the ratio bonds by an international borrower, the between the maximum useful life less the International Bank for Reconstruction and leasing period, on one hand, and the Development – the World Bank. Likewise, the maximum useful life on the other hand; largest Romanian bank – the Romanian 3. the lease agreement clearly states that at the Commercial Bank acquired by Erste Bank – has end of the lease period the ownership over recently issued bonds, while the Romanian the leased asset will be transferred to the Ministry of Public Finance envisages reinitiating lessee; government securities offerings. Also, it is 4. the leasing period exceeds 80% of the asset's envisaged that major state-owned companies will useful life; have their shares traded on the capital markets. 5. the total amount of the leasing instalments, less accessory expenses, is higher or equal to Bucharest Stock Exchange the entry value of the good. The first Bucharest Stock Exchange (BSE) Thin capitalisation rules are not applicable to opened in 1882, although in subsequent years leasing companies for leasing operations. For most securities trading took place outside the accounting purposes, the definition provided by market. The existing Stock Exchange opened in IAS needs to be observed by companies applying July 1995 with Canadian and British technical IAS rules. assistance. Currently 72 brokers are active members of the BSE. BSE is open for trading As of 1 January 2007 banks are allowed to during each working day. Trading is stopped on include financial leasing within their scope of Easter and between 22nd December and the first activity. working day of the following year. The exchange's trading system encompasses both order-driven Details of customs and VAT implications of and block trade markets and is fully automated, leasing are included in Chapter 11 - Indirect with all transactions matched and reported Taxation. immediately. The BSE lists 65 companies divided into two categories (21 being listed in the first tier and 43 in the second). There are also 14 bonds 5.3 Capital Markets listed on the BSE (11 issued by municipal entities and 3 by corporate entities). Certain criteria need At the end of 2005, the Bucharest Stock to be fulfilled in order for a company to be listed Exchange and the Electronic Stock Exchange on the BSE (transparency included). Also, there RASDAQ merged, following approval from the are certain restrictions for trading and price National Securities Commission (“NSC”). fluctuation. Currently the Bucharest Stock Exchange (SA) is functioning as a market operator and intends to The BET (Bucharest Exchange Trading), the authorise an alternative trading company where a official index, measures BSE performance. It is a significant part of companies that were listed on synthetic indicator based on the 10 most liquid Rasdaq in the past would be traded. shares traded on the BSE.

The supervisory body of the capital market in Romania is the NSC (which also regulates, 5.4 Insurance supervises and controls the over-the-counter market and institutional investors). The Insurance Supervisory Commission (ISC) regulates and controls the activity of insurance Further to the consolidated capital market companies and insurance brokers. legislation in line with EU Directives being approved in 2004, NSC is still implementing A council formed by a president, two vice- regulations to maintain the secondary legislation presidents and four members nominated by the in line with the EU legal provisions. Parliament heads the ISC.

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The prime functions of the ISC are: especially in the life insurance business (i.e. AIG, ƒ to supervise insurance companies' financial ING Nederlanden, Generali, Allianz-Tiriac, standing in order to protect the insured Interamerican, Grawe, Aviva, etc). persons' interest; ƒ to ensure that insurance companies observe The insurance market continued to grow in 2005 prudential norms specific to insurance activity; as well, reaching a volume of gross underwritten ƒ to issue norms for enforcement of Insurance premiums of EUR 1.2 to 1.26 billion (RON Law 32/2000, to help elaborate the chart of 4,417,165,819) according to ISC data, 17% more accounts, accounting norms and procedures than in 2004. The gross written premiums specific to insurance activity; represented 1.54% of GDP in 2005. ƒ to authorise insurance companies and insurance brokers and to apply penalties for Currently, non-life insurance represents 76.5% of non-compliance. insurance activity in Romania, of which compulsory third-party liability car insurance has The ISC has been accepted as a member of the the main share. The life insurance market, despite International Association of Insurance Supervisors its significant increase during previous years, is as of September 2001. still undeveloped compared to the CEE region. In 2006 the Parliament approved the law on The insurance legislation has continuously been facultative pensions, and the Romanian improved. Numerous amendments to the existing Government issued an ordinance regarding the regulations have been issued to fill in the set up and organisation of the Private Pensions legislative gap and to harmonise the domestic Supervisory Commission. insurance legislation with EU Directives. The main rules refer to classes of insurance, insurers and According to Order 3129 / December 2005 issued insurance broker authorisation procedure, by the ISC, insurance companies and brokers minimum solvency margins, insurers' insolvency, have to prepare financial statements in technical reserve calculation methods, life accordance with European Directives applicable insurance funds administration, investments and to insurance companies. asset valuation. Insurers have to set up specific technical reserves for their insurance activity, which are tax deductible. The latest changes 5.5 Private pensions and pension brought to the insurance legislation refer to the establishment of the Car Insurance Bureau in funds Romania, in accordance with the Green Card International Convention, as well as of the Green New legislation was published in Romania, with a Card Mutual Fund. The establishment of the view to implement Pillar III – optional pensions, Street Victims Protection Fund is also regulated, privately managed. It is expected that the first with a view to collect contributions and indemnify pension funds would be established early next car accident victims. year.

There are 42 insurance companies and 319 Changes in the insurance legalisation were insurance brokers currently operating in Romania. brought with a view to accommodate the Among them, foreign insurance companies hold distribution of private pension services by the an increasingly large share of the market, insurance intermediaries.

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Chapter 6

Corporate and Business Law

Provided by D&B David si Baias, correspondent law firm of PricewaterhouseCoopers in Romania

ƒ Legislation allows for the establishment of a wide range of business entities, including wholly foreign owned subsidiaries and branches ƒ The most common type of company is the limited liability company (SRL), largely because it is easiest to operate and can have a sole shareholder ƒ Many foreign businesses initially establish representative offices ƒ Expert legal and tax advice should be sought in the early stages of operation, as legislation varies according to interpretation and changes regularly

6.1 Legal Framework agreements (e.g. agreements including exclusivity clauses). Romanian legislation governing domestic and foreign investment has undergone radical Investment Legislation changes since the 1989 Revolution, particularly with the introduction of the Company Law in 1990 Most incentives ceased on 31 December 2006 , (republished in November 2004, modified again in but new incentives were introduced based on a October 2005, May 2006 and July 2006). The specific investment Law. Further details are current legislative bases for investment and provided in Chapter 9. business operations in Romania are described below. 6.2 Forms of Business Company Law Organisation

Company Law governs certain forms of business Romanian legislation lists the following types of organisation. The Law covers registration business organisation: procedures and documentation, capital and 1. Limited liability company (societate cu shares, administration and shareholders, mergers raspundere limitata - SRL); and spin-offs, dissolution and liquidation. 2. Joint stock company (societate pe actiuni - SA); Commercial Register Law 3. General partnership (societate în nume colectiv - SNC); The Commercial Register Law regulates the 4. Limited partnership (societate în comandita organisation and functioning of the Trade simpla - SCS); Register, stipulates the obligation of business 5. Limited partnership on shares (societate în entities to register their entry into operation and comandita pe actiuni - SCA); any subsequent changes in status (e.g. 6. Branch of a foreign company; management, shareholding structure), operation, 7. Silent partnership (asocatie în participatiune - or nature of business, and details the registration not a legal entity) procedure. 8. Sole proprietorship; 9. Family association. Competition Law All such entities (except for the silent partnership), The Competition Law aims at maintaining a if registered in Romania, are considered as competitive market. Its provisions should be resident in Romania for tax and currency observed by all companies when establishing their regulation purposes and must comply with business terms or acquiring other businesses. statutory requirements in Romanian legislation for Clearance requirements, depending mainly on the book and record keeping (see Chapter 8 for parties' turnover or market shares, are set for further details). The silent partnership is mergers and acquisitions, as well as for certain considered as resident in Romania for tax

28 PricewaterhouseCoopers - Business Guide to Romania 2007 purposes, while for currency regulation purposes case of carrying out certain activities provided it will have the Leader’s status. by the law. ƒ The company legally exists and has the right Dividends/net profits are to be distributed to start and run its activities starting from the according to the approved annual accounts. date of its registration with the Trade Register.

The family association and sole proprietorship are The branch registration procedure is technically types of businesses generally not available to similar to the above. foreign investors with the exception of EU citizens and the European Economic Area citizens. During the registration procedure, the company would have a limited legal capacity - i.e. only for The forms of business most commonly used by registration purposes. The incorporation foreign investors are the limited liability company procedure takes between three and five days from (SRL) with one to 50 shareholders, the joint stock when the relevant file is submitted with the Trade company (SA) with a minimum of five Registry. shareholders and the branch (of a foreign parent company). Banks, non – banking financial Companies and branches whose names contain institutions (e.g. leasing companies) and the words “national, Romanian, institute” and/or insurance companies can only be organised in the their derivations or words commonly used in form of joint stock companies (SAs). connection with central public authorities and institutions, have the obligation to seek a Representative offices are often used as a market supplementary approval from the General entry technique, allowing for an assessment of Secretariat of the Government prior to submitting existing opportunities before making a more the incorporation file with the Trade Registry. If substantial commitment to Romania. the trade name includes words commonly used in connection with local public authorities and Registration Procedure institutions, the approval of the County Hall should be obtained. The registration procedures for limited liability companies and joint stock companies are quite Capital and Shares similar and consist of the following main steps: ƒ The constitutive documents (by-laws) must be The minimum capital required for an SRL is RON signed by the shareholders; certain other 200, about EUR 55. Capital contributions can documents must be signed in front of a notary either be in cash or in kind, but cannot be entirely public or a lawyer. in kind. ƒ As a rule, the subscribed capital must be paid upon submission of the incorporation SRL’s capital is divided into shares (Rom. "parti documents. However, in the case of a joint sociale") that cannot have a value of less than stock company (SA), each shareholder must RON 10. Shares can be freely transferred pay at least 30% of its subscribed capital between existing shareholders. Transfer of the upon submission of the incorporation shares to third parties can only be done with the documents. Capital in cash is required for all approval of shareholders representing at least types of companies; 75% of the capital. The transfer of shares must be ƒ The company is registered with the Trade registered with the Trade Register and entered in Register by issuance of a Registration the company's Shareholders Register. Certificate. This provides a Registration Code (Rom. “cod unic de inregistrare”, abridged as A SA-type company must have a minimum capital “CUI”) valid for both the Trade Register and of RON equivalent of EUR 25,000 in cash or in the tax authorities. kind contributions . Part of the share capital must ƒ The Registration Certificate also includes in be contributed in cash. At least 30% of the the appendix a certificate of status certifying subscribed capital must be paid up when founding the registration of the statements that the the company. The balance must be paid within 12 company meets all the requirements for months from the foundation of the company. engaging in the activities covered by the company’s objectives. The relevant SA’s capital is divided into shares and the nominal authorities would subsequently conduct value of a share must be at least RON 0.1. investigations at the registered head-offices of Shares can either be nominative or bearer shares, the company, or at other locations where as established in the company’s constitutive activity might be carried out, in order to documents. However, shares that are not fully assess the fulfilment of the operating paid up can only be nominative shares. requirements. Likewise, specific authorisations/permits should be obtained in In general, shares must have equal value and grant equal rights to the shareholders. The

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Company Law, however, lists the conditions under 6.3 Branches which preferential shares can be issued (such shares may be issued only in case of a company Branches must be registered using the same organised as SA). Such shares give their holders procedures for SRLs and SAs. The foundation of the right to a preferential dividend, but they do not a branch requires the following documentation: confer any voting rights. ƒ Records of the existence of the parent company (i.e. company memorandum and The Company Law states that upon finding that, articles of association, Trade Registry due to losses incurred, the net asset value, excerpt, letter of reference from bank, latest determined as the difference between the total financial statements); assets and the company's debts, amounts to less ƒ Decision of the Board of Directors to establish than half of the share capital, the directors shall a branch in Romania, listing the activities of convene the extraordinary general meeting to the branch and nominating a General decide on whether to reinstate the share capital, Manager. reduce it to the remaining value or dissolve the company. Branches must have a General Manager appointed by the Board of Directors of the parent Directors (Administrators) company, who will represent the branch in dealings with third parties in Romania. The Both SRLs and SAs must have one or more General Manager can be Romanian or a foreign directors (administrators), each appointed by the citizen. Branches can only operate in the same shareholders. Directors are responsible for the field of activity as their parent companies and they management of the company. are not allowed to include in their objectives more or other activities than the parent company. The administrators can be Romanian or foreign citizens, in any proportion.

Administrators may appoint one or more executive 6.4 Representative Offices managers to carry out the day-to-day business of Representative Offices are often established as a the company. first step in committing to Romania. Legally

speaking, a Representative Office cannot commit Censors to any contractual engagements in its own name but can perform the following activities for its If a limited liability company has more than 15 parent company: shareholders, it has the obligation to appoint ƒ Using facilities only for the purpose of storage company censors (see Chapter 8 for further or display of goods or merchandise belonging details). to its parent; ƒ Maintenance of a stock of goods or As explicitly stated in the Company law, joint stock merchandise belonging to its parent only for companies are under an obligation to appoint the purpose of storage or display; either censors or auditors, depending on the ƒ Maintenance of a stock of goods or specific situation of the company. merchandise belonging to its parent only for

the purpose of being processed by a third General Meeting of Shareholders party; ƒ The sale of goods or merchandise belonging The General Meeting of Shareholders decides on to its parent displayed at exhibitions or trade all major issues concerning the company, in fairs which are not permanent or are accordance with provisions in the company's occasional, if the merchandise or goods are constitutive documents and in the Romanian not sold later than within a month after the Company Law. Among others, the General closing of the trade fair or exhibition; Meeting of Shareholders decides on: ƒ Maintenance of a fixed place of business ƒ Change of the head office; solely for the purpose of acquiring products or ƒ Opening branches, subsidiaries or working goods or collecting information for its parent; units; ƒ Maintenance of a fixed place of business ƒ Changes in the object of activity; solely for the purpose of carrying out activities ƒ Increases and decreases in capital; of a preparatory or auxiliary nature by its ƒ Appointment and revocation of directors parent; (administrators) and censors; ƒ Maintenance of a fixed place of business ƒ Approval of annual accounts (including solely for a combination of the activities dividend distribution); mentioned above, under the condition that the ƒ Merger and spin – off, whole activity carried out through the fixed ƒ Dissolution and liquidation. place of business is of a preparatory or auxiliary nature.

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Chapter 7

Labour Relations and Social Security

ƒ Salary costs are relatively low (the gross average monthly wage is around EUR 308) ƒ Employer social security, health and unemployment contributions amount to maximum 30.75 – 44.75% of gross payroll costs ƒ It is not compulsory for expatriates to be employed by a Romanian company for rendering services in Romania

7.1 Labour Relations and the ƒ the non-compete clause (binding employees to refrain from carrying out competing Labour Code activities against the employer, valid maximum 2 years as from the termination of Availability of Labour the employment agreement, provided that clause is worded as required by law); Romania has a well educated labour force. ƒ the mobility clause (entitling employees to Unemployment was unknown prior to 1989, extra benefits for employment requiring them largely due to overstaffing. After 1989 to move from one place to another); unemployment increased rapidly, but since mid- ƒ the confidentiality clause (whereby parties 1999 it has steadily declined from 11.3% to 5.9% agree not to disclose information acquired in December 2005. during the course of employment).

Skilled labour is mainly available in the industrial Special types of contracts are regulated by the and services sector. Certain skills, such as Code, including staff leasing, part-time knowledge of Western style accounting and employment, and home-based work. double entry bookkeeping are mainly focused in big cities, but the situation is gradually improving. Employers are required to maintain a general register of employees, to be filed with the relevant Employer / Employee Relations authorities. All employees are to be entered in the register, with information regarding their Employer-employee relations are governed by the employment record and data including Labour Code (effective March 2003), other special performance and termination of employment laws and the National Collective Agreement. contracts. The individual labour books (Rom. “cărţi de muncă”) will continue to be used until the end The Labour Code covers Romanian employees of 2008. under individual employment contracts, working in Romania or abroad for a Romanian employer, and Fund to Guarantee Outstanding Salary foreign nationals or persons without citizenship Payments under employment contracts working on Romanian territory for a Romanian employer. A new piece of legislation establishing the Guarantee Fund for payment of outstanding A number of framework regulations contained in salaries due by insolvent employers became the Labour Code have been subsequently effective as of January 2007. Employers are detailed by special laws (e.g. protection of required to contribute to the guarantee fund for: employees in case of transfer of undertakings, ƒ outstanding salary payments; employees’ register, work safety, etc.). ƒ outstanding debts representing financial Furthermore, the new standard form of compensations due by the employer for employment contract allows for individual employee holidays (maximum for one year of contracts to include special clauses, such as: employment);

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ƒ outstanding compensation payments up to per month. Employer social security contributions the amount established under the collective also apply to the gross salary (refer below). employment agreement, upon termination of the employment; Working Hours ƒ outstanding employment compensations that employers must pay as per the employment The standard working week is 40 hours, generally agreement. Monday to Friday from 8:30 am to 5:00 pm with a 30-minute lunch break. Industrial workers usually The fund is set aside to ensure settlement of start the day earlier than white-collar employees. amounts related to outstanding salaries, but is not The maximum working time, including overtime, accessible to firms that are undergoing insolvency cannot exceed 48 hours per week. procedures. Starting from 1 January 2007, employers pay a monthly contribution to the Overtime can be remunerated by time off in lieu or Guarantee Fund, which amounts to 0.25% of the extra pay. Under the new Labour Code, overtime salary fund, and, as of that date, the contribution pay is set by negotiation, either in the collective to the unemployment fund will decrease by agreement or in the individual employment 0.25%. contracts. According to the effective National Collective Agreement, overtime is paid at the rate Unions of 100% of the gross salary. The Collective Agreement prevails over the Labour Code. Legislation regarding trade unions was implemented in February 2003. Under this law, Paid Holidays unions are independent organisations, comprising of at least 15 individuals, working in the same In addition to statutory holidays, under the new industry, but not necessarily for similar employers. Labour Code employees are entitled to a Union rights include the right to bring a court minimum of 20 days annual paid vacation. Under action to defend the interests of any of their the National Collective Agreement, the minimum members without a power of attorney. Elected holiday is 21 days. union representatives cannot be dismissed during their term of office and for a period of two years Annual paid holidays, as well as additional paid beyond the end of their term. leave - for special occasions, such as marriage, Employers are under an obligation to invite union birth of a child, or study - must be specified in the representatives to board meetings. Resolutions individual or collective agreement. Most carried out by the board of directors are required companies grant 21 to 24 days of annual holiday to be notified to the unions within 48 hours of in addition to the seven days of statutory holiday being passed. (refer to Chapter 1).

Equal Opportunities 7.2 Working Conditions The Constitution guarantees equal rights for Salaries and Wages members of ethnic and religious groups, as well as for men and women. Average salaries in Romania are low compared to Western European countries and to other Companies with 75 or more staff are required to countries in Eastern Europe. The average national employ disabled people in at least 4% of all gross salary in Romanian organisations was the positions. Companies that do not meet the RON equivalent of EUR 308 per month at the end required number of disabled employees must pay of August 2006. Romanian law guarantees an additional monthly amount equal to the entitlement to the minimum gross salary, currently minimum salary (about EUR 106) for every of RON 370 (approx. EUR 106). From time to position that should have been offered to a time, due to increases in the price of consumer disabled person. goods, the government raises the level of the minimum gross salary in RON terms. The new Labour Code emphasises equality of payment for equal work. Persons employed in the Certain private sector salaries are increasing same position and carrying out the same work, rapidly due to the limited availability of skilled staff should earn the same base salary. in certain professions. Consequently the average gross salary shown in official statistics is likely to be misleading to foreign investors seeking skilled employees for a new business venture. The average gross salary cost (including salary tax) for a skilled employee is likely to exceed EUR 500

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Health and Safety Termination of Employment

Health and safety regulations vary according to Clauses and grounds for termination are classified the particular hazards of the industrial sector in by the following: question. In general, they are less stringent than ƒ termination by operation of the law; those applied by other European countries. ƒ agreement between parties, on the agreed date; However, the new legislation obligates employers ƒ unilaterally by either party, in the cases and to ensure the access of employees to specialised under the restrictive terms as under the law; medical care, either independently - by concluding ƒ dismissal (by an act of employee or for an individual employment contract with an reasons other than an act of the employee); occupational medical practitioner - or by ƒ resignation. concluding a contract with another employer or with an employers association. Resigning employees are required to give no more than 15 calendar days notice (for non- A new law on labour safety and health, providing managerial positions), and 30 calendar days for the general principles regulating aspects such notice for managerial positions. In the event of as prevention of professional risks and means of dismissal, the employer is required to give notice ensuring labour health, workers safety, of at least 15 working days to the employee. information, training, consultation of employees However, the effective National Collective and of their representatives, etc. has been Agreement, which takes precedence over the recently passed. This piece of legislation applies Labour Code, stipulates that the notice period for to all activity sectors, both public and private, and dismissal is 20 working days. took effect as from 1 October 2006. Certain special rules are set out for collective Protection of employees in case of the dismissals. transfer of an undertaking, unit or parts thereof 7.3 The Social Security System The law regulates in more detail than the Labour Code the conditions for protecting the employees’ Social security legislation was overhauled in April rights set forth in the applicable individual labour 2001. The law introduced new definitions of public agreements and collective labour agreements in system, persons and risks covered in the public case of transfer of undertakings, units or parts system, contribution and assimilated periods, thereof to another employer, pursuant to an personal social security code, pensions, and assignment or merger. The law will came into monthly rates of contribution. effect at the date of the Romania’s accession to the European Union. The law also stipulates the change of computation method for state social security contributions (the Posting workers in the framework of quotas being annually determined by the laws on the state's social security budget). providing transnational services In Romania all employers and employees, as well Another law which entered into force from as other categories of taxpayers must contribute Romania’s accession to the European Union is to the state social, health and employment the one transposing Directive 96/71/EC security system. concerning the posting of workers in the framework of the provision of transnational services. Under this law employers are obliged to Coverage grant the posted employees at least the minimum rights stipulated by the Romanian Law concerning Social and health security covers pensions, child working hours, rest hours, minimum wage, labour benefits, illness and other social care services. protection, etc. The law applies to undertakings Employment security covers minimal established in a member state of the European unemployment benefits, and grants aimed at Union or of the European Economic Area, which, generating employment. in the framework of the provision of transnational services, post employees with whom they have Contributions employment relationships, either to a Romanian company or to an undertaking from the group Both employers and employees are required to located in Romania. The law also applies to the contribute to the social security system. The employees of foreign recruitment or employment percentages paid by the employer and the agencies which posts personnel to their employee are based on gross salary and are as contractual partners in Romania. follows:

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Employees’ Contributions as a Percentage of ƒ only a local employment agreement. Gross Salary: ƒ Social security contribution - 9.5% (this As a general rule, foreign individuals working in percentage applies to a base capped at five Romania need to apply for a Romanian work times the average salary for the respective permit (before obtaining the residency permit). year). In 2006, the national average gross There are also certain exceptions to this rule. salary was RON 1,077 (approx. EUR 308) per month; Work Permit for employment purposes ƒ Unemployment fund - 1%; (type A) ƒ Health fund - 6.5%. If a local employment contract is concluded Employers’ Contributions: between expatriates and a Romanian company, ƒ Social security fund – 19.65%; 24.65%; the expatriates become taxable in Romania from 29.65% depending on working conditions, the first day. Salary tax and social charges will be capped at five times the national average withheld monthly by the employer through the gross salary multiplied by the average number payroll. of employees ƒ Health fund - 7%; ƒ Contribution for medical leaves – 0.85% Work Permit for secondment purposes ƒ Guarantee Fund – 0.25% (type B) ƒ Unemployment fund – 2.25%; ƒ Work accidents insurance fund - 0.5% - 4%; Foreign individuals can be seconded to Romania ƒ Labour office commission - 0.25% - 0.75%. (i.e. based on a foreign employment contract, and the appropriate work permit) for 1 year. However, The percentage of work accidents insurance fund the law on work permits has been amended in varies between 0.5% and 4%, depending on the September 2006 and its new provisions risk category. The criteria for establishing risk introduced some exceptions regarding the categories were established by the secondment extension, as follows: methodological norms. ƒ foreign individuals can be seconded to a Romanian company for a period up to 3 years Employers calculate and withhold salary provided that the specific company contributions when paying salaries. State budget undertakes direct investments with a contributions are payable by the 25th of the month significant impact on the economy; following the month the salary relates to. Failure ƒ foreign individuals’ secondment can be to pay these withholding contributions within 15 extended based on the bilateral social days from this date is a minor offence and is security agreements to which Romania is a sanctioned accordingly. party (i.e. France, Turkey, the Czech Republic, Luxembourg and Germany); ƒ foreign individuals assigned to perform services in Romania by companies located in 7.4 Foreign Personnel member states of EU / EEA can benefit from an extended period of secondment; although Fiscal Registration Number the law does not impose in this case a specific limit of the secondment period, Foreign individuals receiving personal services actually such period cannot exceed an income and certain other income sourced in interval of 2- 5 years as the EU social security Romania need to lodge a fiscal application form regulations will prevail. with the Romanian tax authorities by means of a fiscal agent, in order to obtain a fiscal registration In order to obtain a work permit, a working visa number. should be obtained from the Romanian diplomatic mission or from the Romanian consular offices in Foreign staff should be aware that the number of the country where the expatriate is domiciled, their residency permit will be used as their fiscal unless the foreign individual is a citizen of an EU identification number upon registering with the member state or one of the countries indicated Romanian Tax Authorities. below, under the residency permit section.

Work Permit The individual seconded to perform services for a Romanian company is required to contribute to Foreign individuals performing services in the health fund. The 6.5% health fund contribution Romania may have: is in line with the latest interpretation of the ƒ only a foreign employment agreement; National Health Insurance House payable once a ƒ both a foreign and a local employment residency permit is obtained, as the foreigner is agreement; or considered to have his residency in Romania. The

34 PricewaterhouseCoopers - Business Guide to Romania 2007 individual has to calculate and pay salary contributions on a monthly basis.

The type of employment relationship can affect significantly the tax liability and the social security liability (i.e. foreigners performing services in Romania based on local employment agreements are liable to pay all social security contributions required by the Romanian legislation, while foreigners sent to Romania on assignment benefit from a tax free secondment allowance for the first year of activity).

Residency Permit

Foreign individuals whose stay in Romania exceeds 90 days within a six-month period need to apply for a temporary residency permit, unless a relevant international bilateral agreement stipulates otherwise.

Prior to applying for a temporary residency permit, a visa from the Romanian embassy or consulate in their country of residence must be obtained for entry to Romania, except for citizens of: ƒ EU member states ƒ United States ƒ Canada ƒ Japan ƒ Liechtenstein ƒ Norway ƒ Iceland ƒ Republic of Moldova

The documentary requirements for obtaining Romanian residency permits depend on the purpose of stay here.

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Chapter 8

Accounting and Audit Requirements and Registration

ƒ Accounting Regulations compliant with Fourth and Seventh European Directives ƒ Group of companies should prepare consolidated financial statements ƒ Gradual introduction of International Financial Reporting Standards (IFRS) ƒ Audit requirements depend on the size of business ƒ Implementation of the Eighth Directive

8.1 Accounting If a company exceeds at its balance sheet date the limits of two of the three criteria in two consecutive years it must prepare a full set of General Accounting Framework financial statements comprising balance sheet, profit and loss account, statement on changes in The general accounting framework in Romania is equity, cash flow statement, and explanatory represented by the Accounting Law no. 82/1991, notes to the financial statements. last republished in 2005. Otherwise, it shall prepare simplified annual Under the Accounting Law, Romanian companies financial statements comprising simplified balance and permanent establishments in Romania of sheet, profit and loss account and explanatory foreign companies are required to organise and notes to the financial statements. The company conduct their own accounting, including can also opt for preparing a statement on changes preparation of interim and annual financial in equity and/or of cash flow statement. statements. Credit institutions (i.e. banks, cooperative credit Starting from 1 January 2006, Romanian organisations, electronic currency issuer companies and foreign entities doing business in institutions, saving banks acting in the real estate Romania through permanent establishments must sector, and branches in Romania of foreign credit apply the newly issued accounting regulations institutions), insurance companies, and entities depending on the nature of their business. authorised, governed and supervised by the National Securities Commission apply specific Trading companies apply the Accounting accounting regulations issued by their regulatory Regulations compliant with Fourth and Seventh bodies (i.e. National Bank of Romania, National European Directives, approved by the Order of Securities Commission, Insurance Surveillance Ministry of Public Finance of Romania no. Commission etc). 1752/2005 (“OMF 1752/2005”). Starting with 2006, a second set of financial Individual Annual Financial statements prepared in accordance with Statements International Financial Reporting Standards (IFRS) is mandatory for credit institutions and OMF 1752/2005 distinguishes the companies that optional for the other so-called Public Interest should prepare simplified financial statements Entities. However, this IFRS set of financial from the companies that should prepare statements has to be prepared only for the “complete” financial statements based on three information purposes of users, other than State size-criteria: authorities (e.g. Ministry of Public Finance, Office ƒ total assets – EUR 3,650,000, of Trade Registry, other tax authorities). ƒ annual net turnover – EUR 7,300,000, and ƒ average number of employees during the Lease activity and leasing companies are financial year – 50. regulated by the Government Ordinance no 51/1997 (republished in 2000) and its subsequent amendments.

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Consolidation 8.2 Audit requirements

Starting 1 January 2006 the preparation of General Legal Framework consolidated financial statements is mandatory unless the parent company is exempt under one The general audit framework in Romania is of the criteria listed below. represented by the Government Ordinance no. 75/1999 on financial audit activity, republished in Under OMF 1752/2005, a parent company is 2003, with subsequent amendments. exempt from having to prepare consolidated financial statements if, at balance sheet date, the Audits may be performed only by financial entities to be consolidated do not together exceed auditors – individuals or legal entities – that are the limits of two of the following three criteria: authorised by the Chamber of Financial Auditors ƒ total assets – EUR 17,250,000, of Romania. In order to audit financial statements ƒ turnover – EUR 35,040,000 of certain types of companies, there are additional ƒ average number of employees during the audit requirements established under the norms of financial year – 250. each accounting regulatory body.

The above mentioned size criteria will be Generally, the financial statements of the entities determined based on the most recent annual which meet the size criteria mentioned above and financial statements and before the elimination of prepare a full set of financial statements in inter-company balances and transactions. accordance with OMF 1752/2005 and the consolidated financial statements should be This exemption, however, is not granted if one of audited by authorised auditors. the subsidiaries to be consolidated is a company whose securities are traded on a regulated Among exemptions from auditing requirements market. are: ƒ simplified annual financial statements Application of IFRS prepared by the companies under OMF 1752/2005; Similarly to the Regulation (EC) 1606/2002 of the ƒ annual financial statements prepared by European Parliament and of the Council, the insurance and/or reinsurance brokers which Ministry of Public Finance Order 1121/2006 on their balance sheet dates do not exceed, in defines the types of companies applying two consecutive financial years, the limits of International Financial Reporting Standards two of the above size criteria. (IFRS) in Romania as well as the timetable for transition. Annual financial statements, which are exempted from audits performed by authorised financial Starting with financial year 2007, the auditors, are generally subject to audit performed implementation of IFRS is compulsory for legal by censors. entities that, at the balance sheet date, meet both of the following criteria: Auditing Standards ƒ have transferable securities accepted for trading on a regulated market and Audits carried out by authorised financial auditors ƒ must prepare consolidated financial have to be performed under the Auditing statements under OMF 1752/2005. Standards adopted by the Romanian Chamber of Financial Auditors which are similar to Public interest entities, other than those obliged to International Auditing Standards. implement IFRS, may implement IFRS for their own information needs. Audits performed by censors do not have to follow any particular framework. For reporting to Romanian authorities, all entities, including those that implement IFRS, must also It should be noted that the Eighth Directive has prepare financial statements in concordance with been recently revised in the European Union, with Romanian statutory accounting rules based on a large impact on auditors and companies whose European Directives (as stipulated by OMF financial statements are subject to audits. The 1752/2005). changes have to be implemented by the European member states, as well as Romania, by 29 June 2008. The Ministry of Public Finance, the Romanian Council for Accounting and Financial Reporting as well as the Romanian Chamber of Financial Auditors have started talks on the implementation of the new EU regulations.

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This Directive defines public interest entities (PIE) as those entities whose transferable securities are admitted to trading on any regulated capital market of any Member State, credit institutions, insurance undertakings, any other entities designated as PIE by the Member State that are of significant public relevance because of the nature of their business, their size or the number of their employees.

The main provisions of the new Audit Directive with direct impact on the auditors and the companies whose financial statements are subject to audits refer to: ƒ rendering of additional services other than the audit services, provided that the independence and objectivity of auditors is observed; ƒ use of International Auditing Standards as framework for audits; ƒ full responsibility of the group auditors for audit reports in relation to consolidated financial statements; ƒ public oversight of the auditors; ƒ appointing procedures of the auditors which should ensure their independence in relation to the persons that prepare financial statements of the audited firm; ƒ PIE should have an Audit Committee.

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Chapter 9

Taxation of Corporations

ƒ Standard corporate income tax rate of 16% ƒ Quarterly reporting and payment; the advance payments system is in effect from 2007 for banks and from 2008 for all the other categories of profit taxpayers, with certain exceptions ƒ Dividend tax of 10% (or 0% under certain conditions) on dividends paid to resident legal persons and 16% on dividends paid to individuals ƒ Micro-companies pay 2% income tax on revenue in 2007, 2.5% in 2008 and 3% in 2009 ƒ Most tax incentives ceased on 31 December 2006; new incentives will be introduced through a special Investment Law ƒ The fiscal year is the calendar year for all entities or the period of the year during which the entity existed if it was set up or ceased to exist during the year

9.1 Corporate Income Tax Micro-companies

Taxpayers Starting from 1 January 2007, several amendments are brought to the micro-companies’ The following entities are liable for corporate taxation regime. Thus, the companies that have income tax: opted for the micro-company regime (annual ƒ Romanian companies; turnover up to EUR 100,000 and between 1 and 9 ƒ Foreign companies doing business in employees) must fulfil a new condition, namely Romania through a permanent establishment; they have to derive more than 50% of their ƒ Foreign companies and non-resident income from activities other than consultancy and individuals doing business in Romania management. Also, the income tax rate is 2% of through a joint venture; revenues earned in 2007, 2.5% of revenues ƒ Foreign companies which derive revenues earned in 2008 and 3% of revenues earned in from real estate transactions or from 2009. The income tax is payable each quarter, by transactions with shares of a Romanian the 25th of the month following the quarter for company; which the tax is paid. ƒ Romanian individuals who form joint ventures with Romanian companies, for revenues If during a fiscal year a micro-company derives derived in or outside Romania. revenues higher than EUR 100,000, it becomes a profit tax payer starting from the quarter in which the limit was exceeded; its first tax computation Territoriality should include all revenue and expenditure from the start of the fiscal year. A company is considered resident if it has its head office registered in Romania or has its place of effective management in Romania. Representative Offices

A Representative Office can only undertake Corporate Income Tax Rate auxiliary or preparatory activities. A Representative Office cannot trade in its own The standard corporate income tax rate is 16%. name and cannot engage in any commercial activity. The profit tax liability due by nightclubs and gambling operations cannot be lower than 5% of There is a flat tax of EUR 4,000 per fiscal year on the revenues obtained from such activities. representative offices, payable in RON using the exchange rate valid on the payment date.

The tax is payable in two equal instalments by 20 June and by 20 December.

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In the situation in which a Representative Office is non-taxable provided that the Romanian company set up or closed down during the year, the tax due is a profit taxpayer and holds at least 15% for the respective year is pro-rated for the months (respectively 10% starting with 2009) of the for which the Representative Office is operational subsidiary’s shares for a continuous period of at in the respective fiscal year. least two years concluded upon the date the dividends are paid. Computation of Taxable Profits Deductibility of expenses Accounting period As a general rule, expenses are deductible only if All entities doing business in Romania are incurred for the purpose of generating taxable required to keep their accounts by calendar year. income. The Ministry of Public Finance can establish other terms than the calendar year for drafting and Deductible expenses submitting of financial statements. Among deductible expenses considered to be Certain categories of companies (i.e. Romanian incurred for the purpose of generating taxable branches of foreign companies and consolidated income are the following: Romanian subsidiaries of foreign companies, except for credit institutions) are allowed to set a ƒ Expenses incurred for the acquisition of different financial year from the calendar year, if packages during their useful life; the financial year of the parent company is ƒ Expenses incurred for work safety, prevention different from the calendar year. of work accidents and occupational diseases, the related insurance contributions and The fiscal year is considered to be the calendar professional risk insurance premiums; year or the period of the year during which the ƒ Expenses incurred for advertising in order to entity existed in case it was set up or ceased to promote the company, products or services, exist during that year. based on a written contract, as well as costs associated to the production of materials that Business profits are necessary for broadcasting advertisements, including goods granted as The taxable profit of an enterprise is calculated as samples, for product testing at selling units, the difference between the revenues derived from as well as other goods and services granted any source and the expenses incurred in order to in order to stimulate sales; obtain taxable revenues, throughout the tax year, ƒ Travel and accommodation expenses related of which non-taxable revenues are deducted and to business trips performed in Romania or to which non-deductible expenses are added. abroad by employees and administrators; Revenue from interest, royalties and service fees ƒ Expenses incurred for professional training is taxable as a part of a company's business and development of employees; profits for accounting purposes and is subject to ƒ Expenses incurred for marketing, market corporate profit tax at the normal rate. research, promotion on existing or new markets, participation in fairs and exhibitions, Other elements similar to revenues and expenses in business missions, publishing of own are considered when computing the taxable profit. brochures; ƒ Research and development expenses that do The annual accounts are used as the basis for not meet the requirements to be recognised calculating taxable profit (further details on as intangible assets for accounting purposes; required adjustments are given below). ƒ Expenses incurred for improvement of management, IT, introduction, maintenance Non-taxable revenues and development of quality management systems, obtaining confirmation of quality The most relevant non-taxable revenues compliance; stipulated by the Romanian Fiscal Code are ƒ Expenses incurred for environmental dividends received from a Romanian legal entity, protection and resource conservation; revenues from reversal of expenses/provisions ƒ Bad debts expenses are fully deductible in that were previously non-deductible and non- one of the following cases: bankruptcy taxable income expressly provided for under procedure of the debtor was closed based on agreements and memoranda approved under a court decision; the debtor is deceased and items of legislation. the receivable cannot be recovered from the heirs; the debtor is dissolved or liquidated; the After Romania’s accession to the EU, dividends debtor has major financial difficulties affecting received by a Romanian company from a its entire patrimony. subsidiary situated in a EU member state will be

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Limited deductibility expenses ƒ Expenses for withholding tax supported by the Romanian taxpayer on behalf of the non- The deductibility of certain expenses is limited, resident. including: ƒ Insurance expenses not related to company’s ƒ Interest and foreign exchange losses under assets/business, except for insurance against thin capitalisation rules (see details below). work related accidents, insurance for ƒ Representation expenses are limited to 2% of professional risks or insurance related to the difference between taxable revenues and assets owned, rented or leased by the deductible expenses, except representation taxpayer. and profit tax expenses. ƒ Bad debts expenses in excess of the ƒ Daily allowances for domestic and foreign deductible provision (see below). travel expenses are deductible up to the level ƒ Expenses registered for accounting purposes of 2.5 times the ceiling set for public that are not substantiated with "justifying" institutions. documents. ƒ Expenses for inventory and fixed assets subject to depreciation and destroyed further Provisions and reserves to natural disasters are deductible irrespective of the existence of an insurance contract, Amounts used for setting up or increasing under certain conditions. reserves or provisions are deductible as follows: ƒ Social expenses are deductible to the level of ƒ Setting up or increasing the legal reserve fund 2% of the salary expenses. Maternity to a limit of 5% of the yearly accounting profit allowances, expenses for nursery tickets, before tax (with adjustments) until it reaches funeral benefits and allowances for serious or 20% of the share capital. incurable diseases and prostheses, as well as ƒ Provisions for doubtful debts recorded after 1 expenses for proper operation of certain January 2004 are deductible within the limit of activities or units that are under taxpayers’ 30%, if the related receivables simultaneously administration fall under this ceiling: (i.e. meet the following conditions: kindergartens, nurseries, health services − are not collected for a period exceeding supplied for occupational diseases and work 270 days from the due date; accidents until admission to health − are not guaranteed by another person; establishments, canteens, sports clubs, clubs, − are due by a person who is not affiliated etc). with the taxpayer; ƒ Health and private pension insurance − were included in the taxable income of the premiums are deductible for the employer up taxpayer. to the limit of EUR 200 per year per person. ƒ Bad debt provisions are fully tax deductible if ƒ Taxes and contributions paid to non- the following conditions are met : governmental organisations and professional − receivables are booked after 1 January associations which are related to the activity 2007; of the taxpayer are deductible within the limit − the debtor is a company declared of EUR 4,000 per year. bankrupt by a court ruling;

− receivables are not guaranteed by Non-deductible expenses another person;

In addition, a number of expenses are specifically − the debtor is not a related party; non-deductible, including: − receivables were included in the taxable ƒ Profit tax as well as tax on revenues obtained income of the taxpayer. in foreign countries. ƒ Provisions for receivables recorded before 1 ƒ Fines and penalties due to Romanian or January 2004 are deductible within the limit foreign authorities, as well as to non-residents stipulated by the Fiscal Code for provisions based on commercial agreements. established for receivables recorded after 1 ƒ Expenses incurred for services (management, January 2004 (i.e.30%). In addition, two consultancy, assistance), if no written conditions have to be met: bankruptcy agreements are concluded and if the proceedings against the debtor have to be beneficiaries cannot justify the necessity of opened and no tax deductible provisions receiving these services for their activity. should have been previously set up for such ƒ Expenses related to non-taxable revenues. receivables. ƒ Sponsorship and patronage expenses and ƒ Specific provisions established by credit expenses for private scholarships (but the institutions, non-banking financial institutions taxpayers are granted a fiscal credit with the and other similar entities. limit of 0.3% of turnover and 20% of the profit ƒ Technical reserves set up by insurance and tax due). reinsurance companies, in accordance with ƒ Other salary and/or similar expenses (if not their regulatory legal framework except for the taxed at the level of the individual). equalisation reserve.

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ƒ Risk provisions for transactions carried out on New wording of the Fiscal Code has lead to the the financial markets, in accordance with the interpretation that as of 1 January 2007 rules issued by the National Securities accounting revaluation will be part of the fiscal Commission. depreciation base. However, clarification norms to the contrary may be issued. The reduction or cancellation of any provision or reserve that were deducted from taxable profit, Companies need to be prepared to keep separate due to changing the destination of the provision or records to reflect the distinct computation of the reserve, distribution towards shareholders in any fiscal and the accounting depreciation. form, liquidation, division, merger or any other reason, is included in the taxable revenues and Thin capitalisation rules taxed accordingly. The deductibility of interest and foreign exchange Accounting and fiscal depreciation losses is subject to certain limitations, including thin capitalisation rules. The Fiscal Code makes an explicit distinction between accounting and fiscal depreciation. For The first rule limits the deductibility of interest on fixed assets commissioned after 1 January 2004, loans contracted with all parties not being credit fiscal depreciation is to be computed based on the institutions, non-banking financial institutions*) or rules set out by the Fiscal Code and deductibility other entities that grant credits according to the will no longer depend on the level of depreciation law, as well as interest related to bonds traded on recorded in the accounts. a regulatory market to the limit of 6% for loans in foreign currency **) and of the National Bank of Fiscal depreciation should be computed based on Romania’s reference interest rate for RON loans. the asset’s entry value and useful life for tax Interest exceeding this limit is tax non-deductible purposes, by applying one of the permitted and cannot be carried forward in future periods. depreciation methods. *) where non-banking financial institutions are defined The following methods of fiscal depreciation are by the law as Romanian companies which perform available: lending activities on a professional basis and which are ƒ Straight-line method. financed from own resources or from resources borrowed from other financial institutions or from other ƒ Accelerated depreciation. sources provided by the law. ƒ Degressive method. **) this limitation was established for the year 2006; the Technical equipment, computers and peripherals limit for 2007 has not been established yet. can be depreciated using the straight-line method, the accelerated method or the degressive method. The second rule is the general thin capitalisation For any other fixed asset (except for buildings for rule. This rule states that if a company's debt-to- which only straight line method can be applied), equity ratio is higher than three or if the the straight line or digressive method can be company’s equity is negative, the total amount of used. interest expenses and net foreign exchange losses from long-term loans (other than those Companies are allowed to revalue their fixed contracted from credit institutions and non- assets for accounting purposes at the end of each banking financial institutions and other entities year or during the year, in cases specifically that grant loans according to the law, as well as provided by law (mergers, spin-offs and interest related to bonds traded on a regulatory liquidations, contributions in kind, etc.). The market) are non-deductible. Expenses assessed revaluation needs to be made on the basis of the as non-deductible under this rule can be carried fair value of the fixed assets established under the forward without limitation and are deductible in the criteria stipulated by law. first year the thin cap criterion is met.

The Fiscal Code also states that the fiscal Debt included in the calculation of the debt-to- depreciation of fixed assets existing in the equity ratio is represented by all loans with a company's records as of 31 December 2003 will maturity period of over one year. The equity be computed considering the net book value of includes share capital, reserves, retained such assets at 31 December 2003 (i.e. including earnings, current year earnings and other equity any revaluation recorded until that date), the elements. Both debt and equity are calculated as remaining useful life and by using the same the average of values existing at the beginning depreciation methods as in the past periods. and at the end of the period in which profit tax is calculated.

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Transfer pricing Underlying foreign corporate income tax is not creditable against Romanian income tax, except In line with the Romanian transfer pricing for corporate income tax by a foreign permanent legislative framework, transactions between establishments or branch. related parties should observe the arm's length principle. Provided that transfer prices are not set Fiscal losses at arm’s length, the Romanian Tax Authorities have the right to adjust the taxpayer's revenues or Companies are allowed to carry forward the fiscal expenses, so as to reflect the market value. losses as declared in the yearly profit tax returns for a period of five years based on a FIFO Traditional transfer pricing methods (comparable method. No adjustment for inflation is allowed in uncontrolled prices, cost plus and resale minus), this respect. as well as any other method that is in line with the OECD Transfer Pricing Guidelines (transactional For foreign legal persons this rule (i.e. carry net margin and profit split) may be used for setting forward the losses) applies only to revenues and transfer prices. Domestic legislation expressly expenses attributable to their permanent stipulates that in the application of transfer pricing establishment in Romania. rules, the Romanian tax authorities will also consider the OECD Transfer Pricing Guidelines. Reporting and Payment Requirements

TP documentation General aspects

Taxpayers engaged in related-party transactions Tax returns have to be submitted on a quarterly are required to prepare and make available upon basis along with the appropriate tax payment, by request of the Romanian Tax Authorities a the 25th of the next month. transfer pricing documentation file. The detailed content of the transfer pricing documentation file The profit tax system with advance payments will be approved by order of the president of the made on a quarterly basis is applied by Romanian National Agency for Tax Administration, to be banks and branches of foreign banks starting with issued soon. In light of EU accession, it is 1 January 2007. The other profit tax payers (with expected that the content of this file will be in line certain exceptions) will apply this system from with the EU Code of Conduct on transfer pricing 2008. documentation. Non-resident companies deriving income from a Advance Pricing Arrangement real estate property located in Romania or sale of shares held in a Romanian company are required The Advance Pricing Arrangement is an to pay corporate income tax and to submit a tax administrative act issued by the National Agency return. Foreign companies can appoint a fiscal for Tax Administration at a taxpayer’s request in representative to take care of such obligations. relation to establishing in advance the conditions However, the Romanian law also states that in and methodology to set transfer prices in related case the foreign company has the obligation to party transactions for a fixed period of time. The submit tax returns to the Romanian Tax Advance Pricing Arrangement is opposable and Authorities, such foreign company must appoint a binding on the tax authorities as long as its terms tax agent to perform its obligations towards the and conditions are observed. The procedure for Romanian Tax Authorities. If a Romanian issuing the Advance Pricing Arrangement is to be company or a permanent establishment of a approved by Government Decision. foreign company in Romania pays the income to the non-resident company, the payer of the There is growing interest of the Romanian Tax income is obliged to pay the capital gains tax. Authorities towards transfer pricing, which is expected to become one of the main areas of tax Consolidation investigation. There is no tax consolidation or group taxation in Fiscal relief Romania. Members of a group must file separate tax returns. Losses incurred by members of a In the absence of a double taxation treaty, group cannot be offset against profits made by unilateral relief is provided by way of an ordinary other group members. credit for income taxes paid abroad, which cannot exceed the profit tax computed by applying the Romanian profit rate (i.e. 16%) on the taxable profits obtained abroad. The Romanian company should have available documentation attesting the taxes paid abroad.

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Administration of taxes 9.3 Dividend Tax

Administration of taxes, duties and contributions is Dividend payments by a Romanian company to regulated through the Fiscal Procedure Code another Romanian company are subject to 10% approved by Government Ordinance no. 92/2003, dividend tax. republished in 2005, subsequently amended and the Norms for its application. After Romania's accession to the EU (1 January 2007), dividends paid by a Romanian company to Starting from 1 January 2006 there is a single another Romanian company will not be taxed if type of late payment penalties amounting to 0.1% the beneficiary holds at least 15% (respectively per each day of delay. 10% starting with 2009) of the shares of the Romanian company for a continuous period of at Advance Tax Ruling least two years concluded upon the date of dividends payment. Companies may request an advance tax ruling issued by the National Agency for Fiscal Administration, subject to certain fees. The procedure for the advance tax ruling will be 9.4 Withholding Tax published by a future Government Decision. Non-resident companies and individuals are The taxpayer may propose the content of the subject to the following withholding taxes if there advance tax ruling in the request submitted. If the are no overriding provisions in international taxpayer does not agree with the advance tax treaties: ruling, it may notify the issuing authority within 15 ƒ 20% on gambling proceeds obtained by non- days; in this case, the ruling does not have legal residents. effects. ƒ 16% withholding tax on other revenues derived from Romania, such as: The advanced tax rulings are opposable and − Interest*); mandatory against tax authorities only if their − Royalties; terms and conditions have been observed by the − Dividends**); taxpayers. − Revenues from services performed in Romania, except revenues derived from international transport and accessory services that are no longer considered to 9.2 Capital Gains be revenue derived from Romania;

− Revenues obtained from management Capital gains are taxed in the year in which they and consultancy services, irrespective of arise. Capital gains obtained by a Romanian where the services are performed; resident company are included in ordinary profit − Commissions; and taxed at 16%. Capital gains obtained by non- residents from the sale of real estate located in − Revenues derived by non-residents from Romania or from the sale of shares held in a liquidation or dissolution without Romanian company are also taxable in Romania liquidation of a Romanian legal entity, at 16%. starting 1 January 2007.

*) The withholding tax rate applicable for income from The provisions of Double Taxation Treaties prevail interest on time deposits, demand deposits/current over the provisions of domestic legislation. accounts created, certificates of deposits and saving Capital losses related to sale of shares are, in instruments purchased before 1 January 2007 is the general, tax deductible. one valid at the moment of creation/purchase.

Starting with Romania’s EU accession date (1 **) The 16% dividend tax rate is applicable for dividends January 2007), mergers, splits, transfer of assets paid by a Romanian company to a beneficiary resident and exchange of shares between a Romanian in a country with which Romania has not concluded a Company and Company resident in another EU Double Taxation Treaty. However, if such payments are made to a beneficiary resident in a country with which Member State should not trigger capital gain tax. Romania has concluded a Double Taxation Treaty and the beneficiary of the payment makes available a fiscal residence certificate, then the Romanian withholding tax rate applicable for residents (i.e. 10%) or the rate stipulated in the Treaty would apply, whichever is more favourable.

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Double Taxation Treaties signed by Romania may ƒ Revenues from consultancy, technical reduce the withholding tax rate on the payments assistance and similar services financed by listed above, based on a fiscal residence means of non reimbursable funds and loans certificate made available by the non-resident granted to the Romanian state, or loans beneficiary of the payment. The reduced rates guaranteed by the Romanian state, provided vary according to the country to which the that the interest rate for such loans is below payments are made, and according to the Double 3% per annum. Taxation Agreement applicable (see Appendix VI ƒ Revenues from international transportation. (a) and (b)). ƒ Prizes paid from public funds.

The notarised Romanian version of the tax residence certificate can be submitted in the year 9.5 Tax Incentives when income is derived or later on, within the statutory period of limitation (5 years), but in this case the revenues must be taxed under Tax Incentives Romanian law, followed by a settlement (reimbursement) of the WHT as per the conditions Direct investments of the DTT when the certificate is provided. In practice, this procedure appears to be very The law on direct investments with a significant difficult. As of 2007, the fiscal residency certificate impact on the economy was in force until 31 valid for the year for which the payments are December 2006. A new Investment Law may be made is also valid during the first 60 days of the issued in the near future. following year, provided that the residency conditions have not changed. Investment Law Project*

Withholding tax due on payments in foreign Types of incentives currency must be made at the exchange rate valid on the day the tax is withheld. ƒ Loans with preferential interest (i.e. interest subsidised up to 30% by the state). As of Romania’s EU accession (1 January 2007), ƒ Loans guaranteed by the state (up to 80%). the provisions of the Parent – Subsidiary Directive ƒ Free access to utilities apply. Thus, dividends paid by a Romanian ƒ Right to use properties from the private company to a company resident in one of the EU domain of the state or of the local authorities member states are exempt from WHT if the ƒ Subsidies dividend beneficiary holds minimum 15% of the ƒ Exemptions, reductions and postponement of shares of the Romanian company for a local taxes continuous period of at least two years concluded ƒ Other tax incentives such as: offset of fiscal upon the date of dividends payment. The loss with profit obtained from investment in minimum holding percentage would change to the next 5 years, accelerated depreciation for 10% starting with 2009. equipment/installations necessary for the investment, exemption/reduction of VAT and Also, the provisions of Interest and Royalties corporate income tax, up to maximum amount Directive apply after Romania’s EU accession. of the state aid as per legal provisions. Romania has a transitional period for the application of this Directive until 2010. During the In order to benefit from the above incentives, the period between the accession date and 31 investments must fulfil the conditions regarding December 2010, 10% WHT applies on payments amount, duration, objectives and eligibility criteria of interest and royalties made by a Romanian stipulated in the Investment Law. Incentives are company to a company resident in a EU member not granted for investments made in the fields state holding at least 25% of the share capital of expressly excluded from the regulations regarding the Romanian company for a continuous period of state-aid issued by the Competition Council, at least two years elapsing upon the date of irrespective of their value. payment of interest/royalties. Starting with 1 January 2011, such payments will be WHT Categories of investments exempt, under the same conditions stated above. ƒ Category 1 The following categories of income derived from − - amount of investments: higher than EUR Romania by non-residents are exempt from 75 million. withholding tax: − - investments must be kept in the ƒ Bonds issued and/or guaranteed by the patrimony at least 15 years after Romanian government. finalisation. ƒ Revenues derived from interest on demand − - incentives will be granted for 5 years. deposits/current accounts

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ƒ Category 2 between revenues and expenses from − - amount of investments: between EUR exploitation, throughout the entire period of the 25 - 75 million. exploitation of natural deposits. For titleholders of − - investments must be kept in the petroleum agreements that conduct petroleum patrimony at least 10 years after operations in marine perimeters with waters finalisation. deeper than 100 metres, the provision for − - incentives will be granted for 4 years. dismantling oil rigs, as well as for environmental recovery, is 10% of the difference between ƒ Category 3 revenues and expenses registered throughout the − - amount of investments: between EUR 1 duration of the petroleum exploitation. - 25 million. In addition, under the Fiscal Code the tax − - investments must be kept in the depreciation of buildings and constructions related patrimony at least 5 years after to petroleum operations whose useful life is finalisation. limited to the duration of the reserves, and which − - incentives will be granted for 2.5 years. cannot be used for any purpose after the reserves are depleted, should be calculated on the basis of Objectives of investments units of production, based on the exploitable petroleum reserve. Investments should meet at least one of the following objectives in order to benefit from incentives: 9.6 Local Taxes and Other Taxes ƒ Regional development ƒ Protection and rehabilitation of environment Building Tax ƒ Research and development ƒ Development of human resources and social The building tax rate is between 0.25% and 1.5% integration on the entry value of the building. A municipality has the right to install a rate that goes maximum * The new Investment Law enters into force as at 20% beyond the statutory cap. This percentage is January 2007; at the date when our Business Guide was prepared the Law was not in force being in a draft increased to between 5% and 10% if the building phase subject to public debate. has not been revaluated, for accounting purposes only, in the last three years. It is recommended to Disadvantaged areas always observe this provision when drawing up the annual accounts and, if necessary, revaluate Legal persons that have obtained a permanent the property. investor certificate in a disadvantaged area prior to 1 July 2003 are exempt from paying profit tax The local council may decide to grant a reduction throughout the existence of the disadvantaged of up to 10% if the building tax for the entire year area. is paid in advance by 31 March of the relevant year. Industrial parks Land Tax No property tax is due for buildings and constructions located in an Industrial Park. Also, Owners of land are subject to land tax which is land within Industrial Parks is exempt from land established at a fixed amount per square metre, tax. depending on the rank of the locality where the land is located, and the area and/or category of Oil and gas incentives use of land, in accordance with the classification made by the local council. Under the current Petroleum Law, there are no specific incentives for companies operating in the Companies are not subject to land tax on land that field of crude oil and gas exploration and is used to host buildings or special constructions extraction. However, all the incentives granted used for agricultural activities. under the previous Petroleum Law by companies that have obtained the Petroleum Licence before Land tax is paid twice a year, in equal instalments. September 2004 are still applicable for the period in which the Petroleum License is in force. However, if the land tax due for the entire year is paid in advance by 31 March, a reduction of up to The Fiscal Code stipulates that taxpayers 10% may be granted, as established by decision operating in the field of exploitation of natural of the local council. deposits are obliged to set up and deduct for tax purposes provisions for rehabilitation of the exploitation area, up to 1% of the difference

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Local Taxes Incentives Health Tax

As of 2007, new incentives can be granted by the The providers of advertising services for tobacco local councils for investments exceeding EUR products and alcohol pay a 12% health tax. The 500,000: tax is applied on the value of cashed advertising ƒ building tax and land tax exemptions for a revenues. period of up to five years inclusively. ƒ the possibility to apply a reduced tax rate of There is also a health tax due by the producers 0.25% when computing the building tax, for a and importers of tobacco products, as follows: period of up to three years inclusively, in the ƒ cigarettes: EUR 10/1,000 pieces. case of investments completed and ƒ cigars: EUR 10/1,000 pieces. commissioned by 1 January 2007. ƒ tobacco: EUR 13/kg.

The producers and importers of alcoholic drinks, other than beer, wine, other ferment drinks and intermediate products, are also liable to pay health tax in the amount of EUR 200/hectolitre of alcohol or EUR 2/litre of pure alcohol.

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Chapter 10

Taxation of Individuals

ƒ 16% flat tax rate for most types of income eared by an individual ƒ Romanians domiciled in Romania subject to taxation on their worldwide income (except for salaries received from abroad for services performed abroad) ƒ Romanians not domiciled in Romania and foreign individuals, regardless of their domicile, subject to Romanian taxation only for income sourced in Romania (starting with 2007 foreign individuals may be taxed on their worldwide income if specific criteria are met)

ƒ Foreign individuals required each month to calculate, declare and pay individual income taxes and the

contribution to the health fund, for income in relation to personal services performed in Romania ƒ Salary tax exemption for software engineers if certain conditions are fulfilled ƒ Dividend income subject to a final 16% withholding tax; ƒ Capital gains tax on gains from transfer of shares taxed at 1% or 16%, depending on certain criteria ƒ Domestic interest income subject to 16% income tax ƒ Income from rental of real estate subject to 16% tax rate

10.1 Individual Income Taxpayers h) Income from real estate transactions i) Income from gambling Romania's individual income tax legislation j) Other income subject to 16% flat tax rate defines taxpayers as: ƒ resident natural persons; Types of income and the ƒ non-resident natural persons conducting corresponding tax rates independent activities through a permanent establishment in Romania; a) Salary Income ƒ non-resident natural persons conducting dependent activities in Romania; Salary is income in cash and/or in kind received ƒ non-resident natural persons deriving specific by an individual based on an employment income from Romania. agreement and is taxed at a flat rate of 16%.

Criteria for qualifying as resident are the following: Income relating to salaries includes director’s fees ƒ Domicile in Romania, or received by members of the General Meeting of ƒ Centre of vital interests in Romania, or Shareholders and of the Board of Directors and ƒ More than 183 days in 12 consecutive months taxable benefits expressly stipulated by specific ending in the calendar year concerned* Romanian legislation, which include, among others, private use of company car and of * Residents (for second and third criteria above) for telephone. three consecutive years are taxable on worldwide income as of their fourth year of stay The following individuals are considered taxpayers: ƒ Employees of Romanian companies, 10.2 Taxable Income and Method branches and representative offices of foreign of Taxation companies; the employer is liable to calculate, withhold and transfer salary taxes, on a The following categories of individual income is monthly basis; subject to taxation under the Romanian Fiscal ƒ Foreign individuals performing services in Code: Romania based only on a foreign employment a) Salary income agreement; they are liable to submit a b) Income from independent activities monthly tax declaration and pay monthly c) Income from transfer of usage rights income tax based on salary sourced in d) Pensions income (over RON 900) Romania. e) Income from agricultural activities f) Income from prizes g) Income from investments

48 PricewaterhouseCoopers - Business Guide to Romania 2007 b) Income from Independent Activities Net taxable income is determined by deducting a 25% expense quota from the gross income, and it Income from independent activities is taxed at a is taxed at a flat rate of 16%. flat rate of 16%, and includes: 1) income from freelance activities Individuals earning such income have to make (authorisation needed); quarterly provisional tax payments during the 2) income from intellectual property rights; fiscal year. 3) income from a commercial mandate and commission agreement. d) Income from Pensions b.1) Freelance Activities Pensions are taxable at a flat tax rate of 16% for the amount that exceeds RON 900 per month. Income from freelance activities is assessed on The mandatory social contributions (i.e. health the basis of entries in the single entry fund contribution of 6.5%) are deductible for bookkeeping ledgers that providers of Romanian tax purposes. independent activities are obliged to keep. Net income is computed as gross income less e) Income from Agricultural Activities deductible expenses. The following activities are considered agricultural For freelancers (both Romanians and foreigners), activities: the following are non deductible: fines, late ƒ flowers and vegetables farming and selling, in payment penalties (other than contractual greenhouses and/or in an irrigated system; penalties), donations, sponsorship, and protocol ƒ farming and selling of shrubs, decorative expenses in excess of upper limits set by law, per plants and mushrooms; diem and other expenses exceeding limits ƒ vineyard farming. provided by current law. The income from agricultural activities is Alternatively, certain categories of freelancers are determined either on an income quota basis, or by taxed on the basis of an income quota, as single entry accounting, by applying a flat rate of communicated yearly by the Romanian Ministry of 16% on the taxable income. Finance. f) Income from Prizes Freelancers earning income from independent activities have to make equal quarterly provisional Tax on income from prizes is withheld at source tax payments during the fiscal year. and determined by levying 16%. b.2) Intellectual Property Rights g) Income from Investments

The payers of royalties must compute, withhold, ƒ dividends (16% flat tax rate) and pay a quota of 10% advance tax. The ƒ income from interest (16% flat tax rate) receiver includes the income in the annual tax ƒ capital gain is taxed as follows: return on the basis of which the tax authority − 1% income tax paid in advance for decides the amount of the final tax. income derived from futures transactions in foreign currencies. The annual income b.3) Commercial Mandates and tax is established by the tax authorities by Commission Agreements levying a 16% rate on the net income. − 1% income tax paid in advance for A 10% withholding tax also applies for commercial income derived from transfer of securities mandates or commission agreements as advance listed on the stock exchange. The annual tax payment. The receiver includes the income in income tax is established by the tax the annual tax return on the basis of which the tax authorities as follows: authority decides the amount of the final tax. - 16% for listed securities owned less than 365 days; c) Rental Income - 1% for listed securities owned for more than 365 days; Gross annual income represents the income earned by the owner during the year as stipulated The obligation of calculating, withholding in the rental agreement registered with the and remitting the advance income tax lies Romanian tax authorities. with the intermediaries (or other income payers), following each transaction.

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Losses incurred by the sale of listed i) Income from Gambling securities shall be offset against gains of the same category derived during the Tax on income from gambling is determined by same year. Annual loss resulted further to levying the tax rate on the gross income, as such offset shall not be carried forward, follows: as it is a final loss. ƒ 20% for amounts up to RON 10,000 (≈ EUR 2,850). − 16% income tax for capital gain derived ƒ 25% for amounts exceeding RON 10,000 from securities of unlisted companies and shares of limited liability companies; the The tax calculated and withheld upon income tax is calculated after each disbursement is final. transaction and is deemed final. j) Other Income Subject to 16% Flat Tax The obligation of calculating, withholding Rate and remitting the income tax (based on

the agreement between parties) lies with The following types of taxable income are the domestic purchaser. In case of a included in this category (the list not being foreign purchaser, the vendor must retain limitative): and pay the tax. ƒ insurance premiums incurred by the payer

with respect to a service rendered to an h) Income from real estate transactions individual that has no employment relationship with the payer of the insurance Income from the transfer of real estate shall be premium; taxed as follows: ƒ gains received from insurance companies as a result of the insurance contract concluded ƒ for real estate owned less than three years: between the parties on “depreciation − for values up to RON 200,000 the income drawings” (trageri de amortizare); tax is 3%; ƒ income granted to pensioners in the form of − for values exceeding RON 200,000, the discounts for goods, services and other income tax is RON 6,000 + 2% of the entitlements, former employees, according to amount exceeding RON 200,000; clauses in the employment agreement or under special laws; ƒ for real estate owned more than three years: ƒ income derived by natural persons in the form − for a value up to RON 200,000 the of fees from commercial arbitration. income tax is 2%; − for a value exceeding RON 200,000, the income tax is RON 4,000 + 1% of the 10.3 Tax-exempt Income amount exceeding RON 200,000;

The main categories of tax-exempt income are: No income tax is due for ownership over the ƒ Allowance for maternity leave, maternity risk estate acquired as per special laws, for the and for child care leave (up to two years) paid donation deeds between relatives up to third from SSC budget; degree, between spouses and in case of ƒ Salaries obtained by seriously disabled inheritance, provided the procedure is finalised individuals (from their basic activity); within two years (an income tax of 1% is levied if ƒ Meal tickets; the procedure is not completed within the two ƒ Stock options plan advantages, at the years). moment of their grant and exercise;

ƒ Amounts received for covering transport and Income tax due for transfer of ownership shall be accommodation expenses incurred during calculated at the value declared by the parties in delegation / secondment; the transfer documents and shall be withheld by ƒ Salary income related to the design and the notary public. If the value declared by the creation of software (certain criteria needs to parties is lower than the estimated value be observed); established by the expert appraisal conducted by ƒ Sponsorship and donations; the Chamber of the Notaries Public, the income ƒ Inheritance; tax shall be calculated at the reference value. The ƒ Income from sale of movable assets (with the tax shall be remitted by the 25th of the month exception of shares described as "capital following the one the income was withheld. gains"), if not regularly made.

ƒ Nursery tickets, distributed as per law.

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10.4 Deductions from Income Tax d) interest income paid by a non resident, if the non resident has a permanent establishment ƒ For the main job, in order to compute the in Romania and the interest is a deductible taxable income from salary, the following expense for that permanent establishment; amounts are to be deducted from the gross e) royalties derived from a resident; income: f) royalties paid by a non resident, if the non − social security contributions resident has a permanent establishment in − personal and family related deductions Romania and the payment is a deductible calculated as per law; expense for that permanent establishment; g) income from commissions paid by a resident; − contributions to optional pension funds, h) income from commission paid by a non within the RON equivalent of EUR 200 resident, if the non resident has a permanent annually; establishment in Romania and the payment is − trade union membership fees paid in an expense for that permanent establishment; accordance with the relevant laws. i) income derived from sports and entertainment − expenses incurred in connection with the activities performed in Romania; collective savings system for the house j) income from transactions in unlisted shares; stock (“home (loan) banks”), within the k) income from management and consultancy RON equivalent of EUR 83. activities; ƒ For each of the secondary jobs, the taxable l) income from independent activities; income is assessed as the difference between m) income from prizes received in Romania; the gross income and the social security obligations. Income from gambling, real estate transactions

and income derived from transactions in listed Taxpayers may dispose upon the destination up shares, is taxed at specific rates, according to the to 2% of the annual income tax due for charitable income category. purposes (sponsorship).

Where the foreigner can claim treaty protection,

the more favourable rates under the relevant tax 10.5 Taxation of Non-residents treaty can immediately be applied by the Romanian disburser of the income, if the Income earned by non-resident individuals from beneficiary has produced the required fiscal activities performed in Romania is also subject to residency certificate. taxation in Romania. A 16% withholding tax rate is applicable on the following types of income: Starting with 1 January 2007, several a) salary income and director’s fees received for amendments were brought to the taxation regime administrators or members of the Board of for non-residents, with respect to interest income. Directors, paid by a Romanian company; Pursuant the new law, income from savings in the b) dividend income paid by a Romanian form of interest payments received from Romania company; by non-residents of EU Member States will be c) interest income paid by a resident; exempt from withholding tax.

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Chapter 11

Indirect Taxation

Value Added Tax ƒ 19% standard VAT rate and 9% reduced VAT rate ƒ New VAT treatment for EU trade ƒ No VAT pre-finance for import of goods and ICA ƒ Transfer of total assets/ branch of activity outside VAT scope ƒ Taxation applies to factoring and debt collection ƒ Extension of simplification measures for construction works ƒ New VAT reporting regime ƒ VAT refund for non-resident businesses

Customs and International Trade

ƒ As a EU member, Romania applies the EU Common Customs Tariff & EU customs regulations

ƒ Romania applies all EU free trade agreements concluded with third countries

ƒ Import licences are required for commodities such as oil, certain chemical products and weapons

ƒ No customs formalities are applied for goods with community status (goods produced in the EU or

goods released for free circulation in the EU)

ƒ Compensatory interest is due for Inward Processing&Temporary Admission regime goods released

for free circulation in the EU

Excise duties ƒ “Harmonised” excisable products and “non-harmonised” excisable products ƒ Tax warehouse for production and storage purposes ƒ Registered and non-registered traders ƒ Excisable products can be produced, transformed, transported and stored under suspensive arrangements

Environmental Fund Contributions ƒ Contributions for packaging, tyres, air-pollutant emissions

ƒ Certain contributions depend on compliance with waste management obligations

11.1 Value Added Tax (VAT) The import of goods, the intra-community acquisitions and operations deemed as intra- community acquisitions are also within the VAT Scope of VAT scope.

Concepts A taxable person is any person conducting economic activities anywhere in an independent The operations included in the VAT scope are manner, irrespective of the purpose or result of those for which the following conditions are those activities. Also, any private individual who fulfilled: performs a supply of new means of transport (i.e. ƒ They represent a supply of goods / services in which was either supplied not longer than six return for a consideration or an operation months after the date of first entry into service or assimilated thereto; has not traveled more than 6,000 kilometre) is ƒ The deemed place of supply is in Romania; also deemed as a taxable person. ƒ They are performed by taxable persons; ƒ They result from economic activities.

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Intra-community trade irrespective of its form) is not considered supply of goods, if the recipient is a taxable person. In Romanian companies performing transactions addition, the recipient is regarded as the with companies within the EU will deal with assignor’s successor for purposes of adjustment operations such as intra-community supplies and of the VAT deduction right. intra-community acquisitions. Territoriality Rules Intra-community supplies are VAT-exempt with deduction right, provided that certain conditions The rules for establishing the place of supply for are fulfilled, whereas intra-community acquisitions goods and services (and therefore the place of are subject to VAT under the reverse charge VAT taxation) are fully aligned with the EU 6th mechanism. VAT Directive. New rules on the place of supply for services related to intra-community trade – Special regimes are applicable for transactions in such as transport, ancillary and intermediary new means of transport, excisable products and services, to works on movable goods are distance sales. applicable.

In addition, new concepts have been introduced Also, new rules have been introduced in respect (i.e. transfer, non-transfer, deemed intra- of telecommunications, radio / TV broadcasting community acquisitions). Companies performing and electronically-supplied services, leasing such operations or triangulation operations, works operations with means of transport. on movable goods, or having goods placed in a consignment stock, at the disposal of the client The supply of gas/electricity is VAT–able where (call-off stock), or goods on trial may face new the trader is established. obligations in respect of VAT registration. However, simplification measures may apply Services provided by offshore entities provided that certain conditions are fulfilled. Services provided by offshore entities to Reporting Requirements Romanian companies with a deemed place of supply in Romania are subject to Romanian VAT. The new system to be enforced in Romania starting with 1 January 2007 for intra-community A reverse charge mechanism applies for services trade in goods entails additional compliance which have the place of supply where the requirements consisting in Intrastat, beneficiary is established or has a fixed Recapitulative Statement (for both intra- establishment (e.g. consultancy, marketing community supplies and intra-community services, telecommunications and electronically- acquisitions) and other supplementary supplied services). This is possible provided that documentation for justifying the VAT exemption the non-residents are not established in Romania applicable to intra-community supplies, as well as for VAT purposes. Under the VAT reverse charge supplementary information for filling in the VAT mechanism, VAT is not actually paid, but only return. shown in the VAT return as both input and output tax, provided that the beneficiary is registered for Import of goods VAT purposes.

VAT on imported goods is no longer actually paid Under certain conditions, the reverse charge in customs by the persons registered for VAT mechanism also applies for other types of purposes, but will be shown in the VAT return as services (e.g. work on movable goods, intra- both input and output VAT. community transport of goods, services ancillary to intra-community transport of goods), if such The taxable amount for VAT purposes for services are provided by offshore entities to imported goods is the customs value, to which Romanian entities which communicate their customs duties, excise duties (if any) and ancillary Romanian VAT registration number to the expenses add up, such as commissions, packing, suppliers, or if the services have the place of transport and insurance costs occurring supply in Romania. subsequent to the entry of goods into Romania until their first destination. The beneficiary is no longer required to issue self- invoices for the services received, unless the Outside VAT Scope invoice issued by the offshore supplier has not been received until the 15th business day of the Transfer of business month following the one in which the tax is due.

Any type of partial or total transfer of assets and liabilities (i.e. transfer of going concern,

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VAT Chargeability Exemption without credit

Invoices for domestic supplies must be issued no VAT exemption applies to a range of activities later than the 15th business day of the month including banking, finance and insurance. following the one when the supply of goods However, as of 1 January 2007, certain financial occurrs. services will be subject to 19% VAT (e.g. factoring, debt collection, managing and Conversely, the chargeability for ICS occurs at the depositing certain equity papers). date when the invoice is issued for the entire value of the supply in question, but no later than The VAT exemption also applies for medical, the 15th of the month following the one when the welfare and educational activities, if performed by ICS is performed. licenced entities.

The exemption applicable for rental of real-estate Taxable Amount provided for under the former VAT legislation remains in force. Furthermore, leasing operations Taxable persons registered for VAT purposes are involving immovable goods, as well as the supply allowed to adjust the output VAT if the value of the of old buildings (i.e. any building which has not goods or services supplied cannot be cashed in been so transformed that its structure, nature and because of the declared bankruptcy of the client. even its destination have been modified, or in the The initial output VAT can also be adjusted for absence of such criteria, when the cost, exclusive price increases or discounts and for returns of of the tax, of the transformations reaches less goods. than 50% of the open market value of the building, less the value of the land, after such Taxable Regimes transformation) and land not used for construction purposes are also VAT exempt. However, the Standard rate option to tax these operations is available.

The standard VAT rate is 19% and is levied for all VAT Deduction supplies of goods and services, including imports, which do not qualify for an exemption (with or Input VAT related to expenses incurred in respect without credit) or for VAT reduced rate. of set-up transactions can be retroactively deducted when all requirements for VAT Reduced rate deductibility are fulfilled, within a period of 5 years.

The reduced VAT rate is 9% and is levied for VAT payers with mixed regime medicines for human and veterinarian use, books, newspapers and periodicals, accommodation in If a taxable person registered for VAT purposes hotels or in areas with a similar function, cinema performs both taxable and exempt operations tickets, admission fees at museums, historical without deduction right, the 'input VAT' can be monuments, zoos and botanical gardens, fairs recovered according to the following criteria: and exhibitions, supply of school manuals, supply ƒ directly attributable to VAT-able transactions - of prostheses and orthopaedic products. fully deductible; ƒ directly attributable to exempt transactions - Exemption with credit fully non-deductible; ƒ related to both VAT-able and exempt There are also operations that are exempt with transactions - subject to pro rata. credit (i.e. deduction right) for input VAT: ƒ export of goods, transport and related A new computation mechanism of the pro-rata is services; applicable. Thus, the value of sales of capital ƒ intra-community supply of goods; goods, as well as the value of other operations ƒ international transport of passengers; performed on an occasional basis, (e.g. leasing, ƒ certain operations performed in free trade rental of immovable goods) is not included in pro- zones and free warehouses; rata computation. ƒ supply of goods to a bonded warehouse, a VAT warehouse and related services; Moreover, the pro-rata is rounded up favourably ƒ supply of foreign goods, which are placed (e.g. from 4.1% to 5%). under suspensive customs regimes: ƒ supply of services in connection with goods Non-deductible input VAT placed under customs suspensive regimes; ƒ supply of goods and services to diplomatic VAT related to goods and services that are not missions, international organizations and purchased for business purposes is non- NATO forces.

54 PricewaterhouseCoopers - Business Guide to Romania 2007 deductible, nor is VAT related to the purchase of to perform both incoming and outgoing alcoholic beverages and cigarettes. transactions of the taxable person, and d) the object of the structure's activity is the VAT deduction for capital goods supply of goods or services.

As of Romania’s EU Accession, changing the VAT Consolidation original destination of a capital good (e.g. a fixed asset or a movable good), namely using this asset Under specific conditions, it is possible for certain for operations entitling to deduction in a different companies to form a single fiscal group for VAT proportion than the one originally established, purposes. However, the VAT grouping would entails the adjustment of the deductible right consist only in the consolidation of the VAT during an allowed period (i.e. 5 to 20 years). In payable / reimbursable positions within the group, addition, transitional rules are applicable for the whereas the transactions between the members real estate sector (i.e. 5-year period). are still subject to VAT.

VAT Registration Threshold Simplification Measures

The revenue threshold for VAT registration is For sale-purchase transactions between taxable lowered from RON 200,000 (around EUR 57,000) persons registered for VAT purposes in Romania to the RON equivalent of EUR 35,000 and a new that involve land, buildings or part of buildings, computation method for this threshold is waste materials, scrap iron and non-ferrous introduced (i.e. revenues derived from the metals and wood, VAT is not actually paid, but operations not entitling to deduction). This means only shown by both parties in the VAT return as that more companies are required to register for both output and input tax . Such simplification VAT purposes (including all banks and insurance measures are also applicable for construction and companies). assemblage works, and for goods/services supplied by/to bankrupt persons respectively. VAT Registration VAT Compliance The Romanian VAT registration system becomes more complex and includes: Fiscal period ƒ Standard VAT registration of companies established in Romania; As a general rule, the fiscal period is the calendar ƒ Special VAT registration of Romanian month. For taxable persons registered for VAT companies for intra-community acquisitions purposes whose previous year-end turnover did (e.g. public institutions); not exceed EUR 100,000 the fiscal period is the ƒ VAT registration of foreign companies through calendar quarter. appointment of a VAT Fiscal Representative; ƒ Direct VAT registration of foreign companies. Invoicing

A Romanian company may be required to register In addition, the usage of standard pre-printed for VAT purposes in a number of other EU fiscal invoices is no longer mandatory, but only Member States where it performs certain the issuing of invoices containing the minimum operations (e.g. import of goods from outside the information required by law. Taxable persons are EU, intra-community acquisitions). also allowed to issue summary invoices or invoices on behalf of the supplier, and to issue The new VAT law introduces the VAT and store the invoices electronically. From a VAT establishment concept. Thus, a taxable person is perspective, the signing and stamping of the established in Romania provided that the following invoices is no longer mandatory. conditions are cumulatively met: a) the taxable person has in Romania Ledgers and returns corporate headquarters, a branch, a factory, a workshop, an agency, an office, a Taxable persons must keep complete and purchase or sales office, a depot or any detailed records for computation of VAT liabilities. other fixed structure except for construction VAT returns should be submitted to the tax sites, and authorities by the 25th of the month following the b) the structure is managed by a person fiscal period; the VAT is due by the same date. authorised to bind the taxable person to The VAT return should be submitted using an clients and suppliers, and electronic carrier (floppy disk). c) the person authorised to bind the taxable person to clients and suppliers is authorised

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Taxable persons not registered for VAT purposes The customs debt includes only the customs are required to pay VAT and to submit a special duties for import/export and equivalent taxes. VAT return on services rendered by non- residents, which have the deemed place of supply In case of chain transactions with goods intended in Romania. These obligations must be fulfilled by to be imported, the customs value may be the 25th of the month following the one when the determined, under certain conditions, based on services are supplied. the price of the first transaction (first sale principle). This way, the customs value can be As of the EU Accession, taxable persons are determined based on a price lower than the one required to file quarterly summarised declarations paid/payable by the importer. for intra-community supplies and intra-community acquisitions. Also, new reporting requirements The customs value can be modified within 12 must be complied with, such as the non-transfer months from the date of the acceptance of the ledger and the ledger for goods received from customs declaration for release of the goods for another Member State. free circulation, in specific cases (e.g. in the case of defective goods). VAT Refund Under specific conditions, determining the precise If a company is in a VAT refundable position, it customs value upon import is possible, despite must tick the VAT refund box on the VAT return to missing elements (e.g. licences, royalties) that claim the refund. Alternatively, the balance can be need to be added to the customs value and which carried forward against VAT liabilities reported in are not quantifiable upon import. future returns. The refund claims must be processed by the tax office within 45 days from The customs authorities may perform the control submission. of the customs value either during the customs clearance or during a post-import audit (the Large taxpayers (as classified by law) are entitled customs authorities are entitled to perform such to refund on request, with a subsequent an audit during a five-year period running from the inspection (i.e. a “fast refund”). Other taxpayers date of import). may be entitled to a “fast refund” (i.e. without a prior inspection) but only after a complex risk It is also possible to amend or invalidate the analysis. customs declaration, as follows:

If the VAT is not reimbursed within the legal term (i) the amendment of the customs declaration (i.e. 45 days), taxable persons would be entitled to before customs clearance is obtained. claim interest, currently standing at 0.1% per day (ii) the invalidation of the customs declaration, of delay. within 90 days from the date the customs clearance is obtained. Refund to non-residents (iii) the amendment after the customs clearance is obtained can be performed under the current Starting with 1 January 2007, taxable persons Romanian customs legislation within 5 years from registered for VAT purposes in Romania are not the date of the customs clearance. Please note the only ones entitled to VAT refund. Thus, that this facility is also provided for in the EU taxable persons established in the EU and taxable customs legislation, but the traders can request it persons established outside the EU (under within a 3-year term. reciprocity conditions) are also entitled to VAT reimbursement from Romania, if certain Customs Duties conditions are fulfilled. The customs duties are those specified in the EU Common Customs Tariff.

11.2 Customs and International Customs duties are expressed as a percentage Trade applied to the customs value (i.e. ad valorem taxed), or as an amount applied to the customs Customs Value value (i.e. specific taxes).

The customs value is determined and declared by Agricultural products (i.e. products from chapters importers in accordance with the provisions of the 1 – 24) are subject to specific taxation. There are WTO Customs Valuation Agreement (i.e. the cases (e.g. meat) when the customs duty rate is Agreement pertaining to the implementation of established with regard to the CIF price of the Article VII of the GATT Agreement). products or an entry price. In other cases the customs duty rate is established by adding additional duties as agricultural components (EA),

56 PricewaterhouseCoopers - Business Guide to Romania 2007 additional duties for sugar (AD S/Z) and additional Temporary Admission (TA): Goods that are duties for flour (AD F/M). introduced into Romania in order to be temporarily used and subsequently returned to the foreign Examples of customs duty rates are provided in owner are granted total or partial relief from Appendix VIII. customs import duties. Total relief means no payment or bond is requested by the customs Binding Origin Information (BOI) / Binding Tariff authorities in connection with the customs import Information (BTI) duties, VAT and excise duties, if applicable. Partial relief means the customs authorities will Companies can obtain rulings from the Romanian levy a monthly portion of 3% of the customs duty customs authorities on the tariff classification of and the importer should provide a bond covering imported goods that are binding to customs the balance. In case the products are released for authorities, for a six-year period, whenever goods free circulation in the EU, compensatory interest is identical to the one described in the BTI are due. imported. Free warehouse (FWH): In a FWH the foreign Also, a similar type of ruling can be obtained in goods may be stored for an unlimited period of respect of the origin of goods. The BOI is valid for time, the payment of the customs rights and the a three-year period. submission of the customs bond being suspended, and the customs procedure simplified. Temporary Import Relief Trade measures Inward Processing Relief (IPR): If raw materials, components or accessories are imported into the For some agricultural products, the EU generally EU (Romania or other Member States) for imposes specific measures, for instance values or processing and subsequent re-export of the quantitative quotas on imports from other finished products (compensatory products) countries. For such a product it is mandatory to be outside the EU, customs duty relief is available issued an import licence before performing the through IPR. Processing covers the full import. assemblage and manufacturing process. Under this regime, importers can opt either for a duty Moreover, import / export licences from relevant suspension system (no payment is due for the authorities are required also for commodities that import duties, but generally a bond is required to are regarded as potentially hazardous to human cover against the customs debt risk) or for a duty health or to the environment (such as certain drawback system (the import duties are to be paid chemical products, certain types of waste and at the import date, but the customs duties are scrap) for commodities the end-use of which is reimbursed when the finished products are re- controlled (such as explosives) or for products exported). In case the compensatory products are which could conceivably have a dual use (i.e. both released for free circulation in the EU, civil and military). compensatory interest is due.

Outward Processing Relief (OPR): The OPR 11.3 Other Indirect Taxes customs regime allows for the export of raw materials to be processed outside the EU and subsequent re-import of the end products with Harmonised Excisable Products partial or full customs duty relief. This regime also applies for goods or equipment sent for repair Scope and/or modernisation. The following products are subject to harmonised excise duties: alcoholic beverages, tobacco Bonded Warehouse (BWH): The BWH is a products and energy products (e.g. unleaded customs regime allowing temporary suspension of petrol, electricity, coal). payment of import duties on foreign goods stored in warehouses until they are taken out of the Chargeability warehouse. Both goods owned by foreign entities Excise duties are due when the products are and goods initially purchased by the Romanian released for consumption (e.g. imported in titleholder of the BWH authorisation can be placed Romania, taken out of an excise duty suspension under the BWH customs regime. regime) or when losses or shortages of excisable products occur. Romanian agricultural products can be placed for storage purposes in a BWH regime with the Excise duty suspension arrangements intention to have them further exported outside Excisable products can be produced, transformed, the EU. held and received under a duty suspension arrangement only in a tax warehouse, which

57 PricewaterhouseCoopers - Business Guide to Romania 2007 should have prior approval from the tax Other Excisable Products authorities. Scope Such excisable products can also be received The other excisable products are coffee, natural from within the EU under excise duty suspension fur products, jewellery, crystalware, hunting riffles, arrangements by registered / non-registered perfumery, yachts and leisure motor boats and traders. others.

Starting with 1 January 2007, Romanian tax For coffee, the excise duty will be gradually warehousekeepers will also be deemed decreased to nil by 2011. authorised for the intra-community movement of excisable products under excise duty suspension Chargeability arrangements. Excise duties are due when the actual delivery takes place, or when the products are granted as The movement of these excisable products under dividends or as payment in kind, when they are a duty suspension arrangement has to be made consumed for advertising and publicity purposes, based on the accompanying administrative or when they are used for any purpose other than document (AAD). commercial.

The production, holding and movement of Excise duties are also due when excisable excisable products under duty suspension products are received from within the EU or when arrangements are subject to bond. they are released for free circulation in Romania.

Exemptions Exemptions Ethyl alcohol and other alcoholic products are Excise duty exemption applies in this case, exempt from the payment of excise duties if they provided that excisable products are exported or are denatured, used in nutritional, placed under a suspensive customs regime. pharmaceuticals or cosmetics industry. Exporters of roasted coffee may benefit from the The excise duty exemption for alcohol products refund of the excise duty paid upon the release for and energy products can be granted in some free circulation of the green coffee used as raw cases directly based on an end-user licence or material. indirectly through reimbursement / compensation. Car Registration Tax Excise duty reimbursement In some cases, traders could claim the refund of The excise duty for motor cars and motor vehicles excise duties paid (e.g. excise duty paid for goods has been replaced by a special registration tax. released for consumption in Romania, but This special tax must be paid upon the first intended for consumption in other Member States, registration of a motor car or motor vehicle in tobacco products not fit for consumption). Romania and is computed based on the emission standard, cylinder capacity and age of the vehicle. Marking Before being released for consumption in Environmental Fund Contribution Romania ethyl alcohol products and tobacco products are subject to fiscal marking. The For certain activities involving waste (e.g. sale of responsibility of such marking lies with the tax ferrous and non-ferrous scrap, hazardous warehousekeepers, registered / non-registered substances, activities resulting in air-pollutant traders and importers releasing such goods for emissions, placing of packaging / tyres on the consumption. market), companies have to pay contributions to the Environmental Fund. Derogations Following the negotiations for the EU Accession, In certain cases (e.g. packaging waste, tyre Romania was granted several derogations in the waste) the contribution to the Environmental Fund field of excise duties. Thus, for certain products depends on the degree to which companies (e.g. tobacco products, unleaded petrol, diesel, achieve the recovery / recycling targets stipulated natural gas used for non-commercial purposes, by the relevant legislation on waste management. burning oil used for urban heating, electricity for Thus, in this case, the contribution to the commercial and non-commercial purposes) Environmental Fund is currently RON 1 per kilo of Romania can apply transitional periods before packaging and RON 1 per kilo of tyre weight reaching the minimum excise duty level set within introduced on the market and it is owed for the the EU. The minimum excise duty level will be balance of the recovery target stipulated by law reached gradually. and the percentage actually achieved by companies.

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Companies carrying out activities that result in the Companies that store on new land recoverable discharge of air-pollutant emissions (e.g. nitrogen waste (i.e. waste resulting from extraction and oxides, sulphur oxides, persistent organic processing of crude oil, waste resulting from pollutants, heavy metal emissions, such as lead, primary processing of wood, waste resulting from cadmium, mercury) have to pay taxes to the alcohol manufacturing, carboniferous slurry, Environmental Fund, which vary between RON furnace slag, ashes from thermal power plants, 0.02 (about EUR 0.006) and RON 20 (about EUR pyrites ashes, phosphogypsum, metal slag) have 5.71). to pay tax to the Environmental Fund. This tax ranges from 0.2 RON (about EUR 0.057) per sq Importers and producers of hazardous substances meter to 4 RON (about EUR 1.14) per sq meter, have to remit to the Environmental Fund a per year, depending on the type of waste stored contribution of 2% of the value of the substances on the new land. placed on the market (save for those used for the production of medicines). Also, companies selling Companies have to report and pay these taxes ferrous and non-ferrous waste and companies monthly, semi-annually or yearly - depending on dealing in wood / wood products have to the tax concerned - to the Environmental Fund contribute to the Environmental Fund (i.e. Administration, by submitting a declaration in this currently, the contributions are set at 3% and 1% respect. respectively, of the revenues / sales value). .

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Chapter 12

Fiscal Procedure

Provided by David & Baias, correspondent law firm of PricewaterhouseCoopers in Romania

ƒ New principles introduced such as: the rule of good faith, the right of the taxpayer to express its point of view, the confidentiality of information ƒ Tax registration within 30 days from the incorporation date

A new Fiscal Procedure Code entered into force Liability of Other Persons on 1 January 2004 that unifies former legislation regulating tax audits, collection of budget Shareholders, directors, managers and other receivables, as well as legislation on tax returns, persons may be held liable for the duties of the tax assessment and tax jurisdiction. It applies to taxpayer under certain circumstances. (e.g. taxes and duties payable both to the state budget persons provoking the insolvency of the debtor by and local budgets, as well as to custom duties and transferring the ownership over the debtor’s payables from contributions, fines and other assets or hiding such assets; persons acquiring in amounts treated as revenues to the state budget bad faith the debtor’s assets within three years of or other budgets. The Romanian Government has the debtor’s insolvency) As a general rule, the also issued norms containing detailed legal liability of the shareholders may not extend provisions for the implementation of the Fiscal beyond the value of their contribution to the share Procedure Code. capital (except for the cases listed in this code).

The Romanian Parliament has also enacted a Rules Governing Evidence new law governing the procedure for challenging administrative acts (including those of the tax Specific rules apply insofar as burden of proof is authorities), which entered into force at the concerned. Taxpayers should thus produce beginning of 2005. evidence sustaining the facts included in tax declarations, whilst tax authorities should base their tax decisions on a factual and legal 12.1 General Principles perspective.

Several important principles governing the Persons bound to provide relevant information to relations between taxpayers and tax authorities the tax authorities and persons who may refuse to have been enacted. These principles are the rule provide information are also mentioned in the of good faith, the right of the taxpayer to express Fiscal Procedure Code. Special obligations are its point of view, tax secrecy (confidentiality of imposed on the banks that are required to information) and the active role of the tax communicate on a monthly basis data regarding authorities in advising taxpayers on the correct the names of individuals opening or closing application of tax legislation. accounts.

The fiscal legislation is to be construed in a Fiscal Administrative Acts uniform and non-discriminatory manner. To this end, the Central Fiscal Commission has been Specific rules apply to the preparation and serving established as the only entity empowered to issue of acts issued by the tax authorities to the official interpretations of the tax legislation. taxpayers. The code also stipulates the elements that should be included in the fiscal administrative As a rule, revenues are subject to taxation acts. regardless of whether they are generated by legal or illegal activities.

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Fiscal Domicile Tax Audit

The concept of fiscal domicile is defined, as The procedure for conducting tax audits is also applying to both individuals and legal persons. regulated. The control minutes finalising the This concept is essential in defining both the tax procedure have been replaced with tax audit jurisdiction and tax registration obligations. reports, based on which the tax assessment is made. The tax audit report is communicated to the Tax Jurisdiction tax payer along with the tax assessment.

The deadline allowed for submitting objections Collection of Budgetary Receivables against fiscal administrative acts is now 30 days. If the fiscal administrative act fails to meet certain Detailed rules apply to the payment methods, formal requirements, the deadline is three months. payment deadlines, the applicable penalties, the The plaintiff is allowed to withdraw the complaint enforcement of budgetary receivables and without losing the right to file a new complaint complaints against the enforcement procedure. within the legal deadlines. If the taxpayer is not The off set between the taxpayer's receivables satisfied with the solution of the tax authorities, it against the budget and the budgetary receivables may file a claim with the court within six months prevails over restitution. The off set is allowed for from the day the solution was announced. The liabilities to or from different budgets, provided deadline may be extended on serious grounds up that a certain off set order is observed. to one year from the day the solution was issued. For 2006 the late payment penalties were Other Rules 0.1%/day. The level of the late payment penalties may vary by annual budgetary laws. Any request by the taxpayer must be processed and answered by the tax authorities within 45 The status of limitations for collecting budgetary days. Should the authorities fail to answer within liabilities is five years from the year following the this deadline the tax payer may file court claim for one when the right to collect the relevant liabilities such a failure. had arose.

12.2 Specific Tax Procedures

Tax Registration

The categories of persons required to perform tax registration within 30 days from the date of incorporation .The form and contents of the tax registration applications are regulated.

Tax Returns and Tax Assessment

Another fundamental change is that penalties for failing to submit tax returns in due time (computed previously as a percentage of the due tax) have been eliminated.

The new form and contents of the tax returns, specifications in the tax assessment decisions and the limitation period applicable to the assessment of tax liabilities have also been established.

The status of limitations for tax authorities assessing additional tax liabilities is five years as of 1 January of the year following the one when the taxable events occurred.

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Chapter 13

PricewaterhouseCoopers in Romania

PricewaterhouseCoopers has been present on the processes and organisational structure, Romanian market since 1991 and has developed sustainability solutions, reporting and a board range of services which it continues to performance management systems, IT expand with in-depth knowledge of Romania's management. business environment. PricewaterhouseCoopers provides the highest level of professional services ƒ Tax Services: all aspects of inbound to international and Romanian enterprises. investment into Romania, corporate Overseen by ten partners and employing over 500 structuring of investments and trading specialists and support staff, activities, international tax planning, indirect PricewaterhouseCoopers operates in Romania taxation (customs and VAT), individual and Moldova from a network of four offices in taxation and human resources advisory. Bucharest, Timisoara, Cluj-Napoca and Chisinau. ƒ Legal Services: provided by D&B David si The combination of local experience and a one- Baias, the correspondent law firm of firm culture enables PricewaterhouseCoopers to PricewaterhouseCoopers in Romania, who provide advice that is consistent with its standards advise on all significant areas of law, including globally and responsive to local conditions and corporate law, mergers and acquisitions, requirements. Engagements are generally staffed project finance and privatisation, and litigation by a combination of Romanian specialists, with representation. knowledge of local conditions and regulations, and international consultants, with expertise in tackling issues faced by international enterprises Assurance Services and practice in operating in the Romanian environment. The key element of The Assurance Services practice comprises PricewaterhouseCoopers' success in Romania is internationally trained Romanians and foreign the quality of its staff, to whom partners are accountants. All Assurance Services staff are committed to providing the most up to date familiar with local and international accounting management training throughout their careers. standards and practices. As part of our long-term

development strategy, PricewaterhouseCoopers Service lines include: Romania requires its local auditors to obtain an

internationally recognised professional Assurance Services: external and internal ƒ qualification in accounting (UK ACCA) to enhance audit, financial and accounting reviews and their understanding of International Financial investigations; regulatory consulting; training Reporting Standards and International Standards courses. on Auditing.

ƒ Advisory Services includes: PricewaterhouseCoopers’ knowledge and − Transactions: financial due diligence, experience gained over the period of reform in all feasibility studies and preparation of of the former Eastern European countries enables business plans, mergers and acquisitions, its specialists not only to advise on audit and non- project finance and privatisation, valuation audit matters, but also to place them in context and strategy, post-deal services; and to advise on the likely impact that the pace − Crisis Management: business and direction of economic and financial change restructuring, judicial reorganisation and will have on commercial activity in Romania. bankruptcy, voluntary liquidations, dispute analysis and investigation services; As a result of a long-term presence − Performance Improvement: internal PricewaterhouseCoopers Romania has developed control & risk management, internal audit, strong relationships with key contacts, including compliance with regulations and ministries and other government bodies and standards, optimisation of business leading professional organisations. These

62 PricewaterhouseCoopers - Business Guide to Romania 2007 relationships enable the firm to be well placed to Crisis Management: Crisis Management services assist in resolving questions on accounting, refer to corporate recovery and turnaround, reporting and related regulatory issues. optimised exits, insolvency/liquidation, as well as dispute analysis and investigations. Services available include: PricewaterhouseCoopers was Romania's first Big Audits in accordance with International Standards Four consulting firm to be licensed and to develop on Auditing (ISA) or other generally accepted a dedicated team of professionals specialised in auditing standards; compilation of financial business recovery and insolvency. It advises statements in accordance with International on and implements a complete range of solutions Financial Reporting Standards (IFRS) or other for business recovery situations, corporate recognised accounting standards (US or UK bankruptcy and implementation of large-scale GAAP); compliance audits (Security Commission turnarounds for underperforming corporations. and National Bank of Romania); internal audit; The practice has extensive experience in the training in IFRS, Statutory Accounting Rules and management of underperforming loan portfolios, others. as well as in divestment of the underperforming assets of a business (optimised exits) in order to For further information please contact: extract or preserve the optimum value for shareholders. Vasile Iuga ([email protected]) Dinu Bumbacea ([email protected]) Our dispute analysis and investigations David Fuller ([email protected]) (forensic) practice involves corporate Alexandru Lupea ([email protected]) investigations, fraud risk management, Joerg Wiederhold ([email protected]) background research of entities, computer forensics and cybercrime investigations, as well as investigations into insolvency and bankruptcy, Advisory Services together with intellectual property matters.

The Advisory Services practice provides three Performance Improvement: Our Performance types of services which are provided to the private Improvement department is dedicated to helping sector but also to the public sector with the clients improve their financial and operational support of a specialised Public Sector Team: performance. Our Group works closely with other advisory practices in the firm to assist clients in Transactions: Transactions refer to corporate meeting their most pressing challenges. finance, including the execution of all types of The assistance we provide is targeted at financial transactions, providing advice on strengthening management control, increasing mergers and acquisitions, privatizations, value operational effectiveness and thereby increasing advisory and business valuation including real shareholder value. We know from experience that estate and asset valuation, feasibility studies and improving performance requires companies to business plans, market analysis, project finance focus on four distinct aspects: business model, (including Public-Private Partnership schemes), financial drivers, management system and value finance raising but also financial and operational creation system. due diligence and post-deal services. In our experience, projects are judged a success PricewaterhouseCoopers provides a full range of when the expected business benefits are clearly services to guide clients through complex defined up front and when the project is managed business transactions, and supports companies to demonstrate achievement of those business through every aspect of a transaction, from benefits. By employing this principle in our identifying the appropriate acquisition or methodologies, the PwC Performance divestiture candidates to assisting with deal Improvement team strives to provide superior structuring and capital sourcing. A wide range of value to our clients. privatisation services including lead advisory, target identification, company profiles, analysis of For further information please contact: privatisation options, and transaction support are Vasile Iuga ([email protected]) available, as well as assistance and support for Dinu Bumbăcea ([email protected]) companies seeking new capital, or companies Emilian Radu ([email protected]) involved in an acquisition, divestiture, Dan Iancu ([email protected]) restructuring or shareholder buyout. Services in relation to transactions, such as identification and evaluation of a transaction through due diligence, structuring services, market analysis and post- deal services are provided.

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Tax and Legal Services customs regimes, the obtaining of all kinds of Customs and trading licenses. Our indirect tax PricewaterhouseCoopers Romania's tax advisory experts can also assist you in optimization of your practice, with over 150 staff the biggest practice in supply chain transaction from the perspective of the country, has reached the critical size intra-community trade. Further, support is given in necessary for operating in dedicated teams of VAT and Customs audits, appeals and litigation. local and international tax professionals focusing on specific types of tax or industry and product Human Resource Services. The HRS group areas. As a consequence of this approach, people combines all expertise required in the human dealing with Corporate Tax, Indirect Tax and resource consulting arena, and includes Human Resource services have been allocated to specialists in individual tax, payroll, benefits, special services teams covering: Financial assessment, training, equity plans, reward, Services, Real Estate, Merger & Acquisition, regulatory, and process management. Services Consumer and Industrial Products, include the annual issue of PayWell, the leading Communication and IT, and Transfer Pricing. study with numerous indicators and trends in the development of staff compensation in Romania. Corporate Tax. The group’s focus has developed from dealing with inbound greenfield investment Legal Services are provided by D&B David si and take-overs to corporate restructuring, Baias, a fully-fledged law firm acting as a outbound investment and international group correspondent to PricewaterhouseCoopers. Its structuring. The Transfer Pricing group is fully up attorneys are qualified to give legal guidance and to speed with international best practices, and the represent clients in a multitude of areas with latest developments in Romania on the matter. special focus on ‘greenfield’ investments, real estate, mergers and acquisitions, banking, Indirect Tax. The Indirect Tax group includes securities and financing, legal audit, corporate some of the most experienced VAT, Customs and structuring, competition, trade practices, Foreign Trade, excise and environmental tax consumer protection, intellectual property, data specialists in the country. They have been heavily protection and employment, tax and commercial involved in harmonizing Romanian VAT, Customs litigation, public procurement. law and excise with the EU Directives and implementing regulations. Services include all For further information please contact: aspects of indirect tax optimization related to the cross border supply chain and the business model Rene Bijvoet ([email protected]) for multinational and local companies. Indirect Tax Mihaela Mitroi ([email protected]) people assist in VAT refunds, VAT returns and Peter de Ruiter ([email protected]) other compliance issues, as well as the planning Sorin David ([email protected]) ideas in case of goods placed in temporary

64 PricewaterhouseCoopers - Business Guide to Romania 2007

Appendices

65 PricewaterhouseCoopers - Business Guide to Romania 2007

Appendix I Government Ministries

Minister Ministry Phone Fax Călin Constantin Anton Popescu - Tăriceanu Prime Minister 313.1450 312.2436 Mihai Răzvan Ungureanu Foreign Affairs 319.2108 319.2173 Anca Daniela Boagiu European Integration 301.1400 301.1630 Sebastian Vlădescu Public Finance 410.3400 312.2509 Monica Luisa Macovei Justice 314.4400 312.4023 Teodor Atanasiu National Defence 402.3400 319.5698 Vasile Blaga Administration and Interior Affairs 313.0423 310.3072 Gheorghe Barbu Labour, Social Solidarity and Family Affairs 313.6267 315.8556 Ioan-Codruţ Şereş Trade and Economic Affairs 202.5140 202.5177 Gheorghe Flutur Agriculture, Forestry and Rural Development 307.2424 307.8554 Sulfina Barbu Waters and Environment 410.0215 410.0282 Radu Mircea Berceanu Transport, Constructions and Tourism 222.3636 312.0772 Mihail Hărdău Education, Research and Youth 315.5099 315.5099 Adrian Iorgulescu Culture and Religious Affairs 224.2510 223.4951 Eugen Nicolăescu Health 307.2500 314.1526 Zsolt Nagy Communications and Information Technology 336.1961 336.1961

Calls from outside Romania should be prefixed by the international dialling code, then 40 for Romania and 21 for Bucharest.

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Appendix II Operational Programmes Management Bodies 2007-2013

Coordinator - Ministry of Public Finance Operational Managing Authority Intermediate Body EU Fund Programme Increase of Economic Ministry of Economy and Trade National Agency for SMEs ERDF Competitiveness Ministry of Education and Research Ministry of Communications and Information Technology Ministry of Economy and Trade MEC – Energy Department

Transport Ministry of Transport, - ERDF+CF Construction and Tourism Environment Ministry of Environment and Regional Environmental Protection ERDF+CF Water Management Agencies Human Resources Ministry of Labour, Social National Agency for Employment ESF Development Solidarity and Family Ministry of Education and Research – County School Inspectorates Regional Operational Ministry of European Integration Regional Development Agencies ERDF Programme Technical Assistance Ministry of Public Finance - ERDF Administrative Ministry of Administration and - ESF Capacity Interior Development European Territorial Ministry of European Integration Regional CBC Offices (Calarasi, Oradea, ERDF Cooperation Suceava, Iasi, Timisoara) Objective

Source: Ministry of Public Finance

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Appendix III Banks Operating in Romania *

Bank Phone ƒ ABN Amro Bank (Romania) 202 0400 ƒ Alpha Bank Romania 209 9999 ƒ BCR (Romanian Commercial Bank) 312 1678 ƒ Banca de Export Import a Romaniei EXIMBANK 405 3333 ƒ Banca Romaneasca 305 9300 ƒ Banca Romana pentru Dezvoltare - Groupe Societe Generale 316 6969 ƒ Banca Transilvania (40 264) 407 150 ƒ Bancpost 302 7626 ƒ CEC (Romanian Savings Bank) 311 1119 ƒ Citibank Romania 203 5550 ƒ Banca C.R. Firenze Romania 201 1930 ƒ EBRD (European Bank for Reconstruction and Development) 202 7100 ƒ Egnatia Bank (Romania) 303 2100 ƒ Emporiki Bank-Romania 310 3955 ƒ Finansbank (Romania) 301 7100 ƒ Garantibank International NV – Romania branch 230 8430 ƒ Banca Comerciala HVB Tiriac 203 2222 ƒ ING Bank N.V., Amsterdam - Bucharest branch 222 1600 ƒ Italo Romena Bank SpA Italy Treviso – Bucharest branch 317 1311 ƒ National Bank of Greece, Athens - Bucharest branch 330 7012 ƒ OTP Bank Romania 307 5700 ƒ Piraeus Bank Romania 303 6969 ƒ ProCredit Bank 201 6000 ƒ Raiffeisen Bank 306 1000 ƒ UniCredit Romania 200 2000 ƒ Volksbank Romania 204 9206

Calls from outside Romania should be prefixed by the international dialling code, then 40 for Romania and 21 for Bucharest.

* Please note that the above list is not exhaustive.

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Appendix IV Hotels and Restaurants

Bucharest has seen a significant increase in the number of hotels and restaurants in recent years. Here is a selection:

Hotels Phone ƒ Athenee Palace Bucharest Hilton (*****) 303 3777 ƒ Crowne Plaza Bucharest (*****) 224 0034 ƒ Intercontinental (*****) 310 2020 ƒ JW Marriott Grand (*****) 403 0000 ƒ Howard Johnson Grand Plaza 201 5000 ƒ Bucuresti (****) 312 7070 ƒ Continental (****) 313 3694 ƒ Sofitel (****) 224 3000 ƒ Class (****) 233 2814 ƒ Gallery (****) 411 4185 ƒ Lebada (****) 255 0281 ƒ Lido (****) 314 4930 ƒ Majestic (****) 310 2772 ƒ Parliament (****) 411 9990 ƒ Novotel (****) 312 5114 ƒ Armonia (****) 312 0477 ƒ Dalin (***) 335 5541 ƒ Erbas (***) 232 6931 ƒ Helvetia (***) 223 0566 ƒ Ibis (***) 222 2722 ƒ Minerva (***) 311 1550 ƒ Opera (***) 312 4857 ƒ Sky Gate (***) 203 6500 ƒ Caro (***) 208 6100 ƒ Best Western Parc (***) 224 2000 ƒ Ambasador (***) 315 9080 ƒ Duke (***) 212 5344 ƒ Still (***) 233 3990 ƒ Rembrandt (***) 313 9315

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Restaurants Phone ƒ Al Casolare (Italian) 225 4186 ƒ Amsterdam Grand Cafe 313 7580 ƒ Aquarium 211 2820 ƒ Barka Saffron (Indian/International) 224 1004 ƒ Basilicum (Italian) 222 6779 ƒ Bistro de l'Institut Francais (French) 212 0853 ƒ Byblos (International) 313 2091 ƒ Balthazar (French/Asian) 212 1460 ƒ Cafe Royal Brasserie (International) 303 3777 ƒ Casa Caragiale (French/International) 211 1518 ƒ Casa Doina (Romanian/International) 222 3179 ƒ Casa Vernescu (Romanian/International) 231 0220 ƒ Casa M (Italian) 233 2632 ƒ Casa Di David (Italian) 232 4715 ƒ Cucina (Italian) 403 1902 ƒ Die Deutsche Kneippe (German) 679 2363 ƒ Darclee (French) 224 3000 ƒ Gallery (Greek) 211 5899 ƒ Jaristea (Romanian) 335 3338 ƒ McMoni's (International) 224 2676 ƒ Mesogios (Mediterranean) 313 4951 ƒ Noblesse (French) 230 5406 ƒ Piccolo Mondo (Middle Eastern cuisine) 222 5755 ƒ La Provence (French) 243 1777 ƒ Silviu's (Italian) 410 9184 ƒ Trattoria Il Calcio (Italian) 0722 134299 ƒ Trattoria Roma (Italian) 210 8157 ƒ Tandoor (Indian) 222 1855 ƒ La Villa (French) 224 1505 ƒ White Horse (English/International) 231 2795 ƒ Kiraly Csarda (Hungarian) 230 42 03 ƒ Capriciosa (Italian) 230 11 92 ƒ Bistro Atheneu (International) 313 49 00

Calls from outside Romania should be prefixed by the international dialling code 40 for Romania and 21 for Bucharest.

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Appendix V Accountants and Law Firms

Accountancy firms and tax consultants Phone ƒ PricewaterhouseCoopers 202 8500 ƒ Audiconsult 336 9088 ƒ BDO Conti Audit 323 5980 ƒ Deloitte & Touche 330 5775 ƒ Ernst & Young 410 4449 ƒ KPMG 336 2266

Law firms Phone ƒ David & Baias 202 8770 ƒ Miculiţi & Asociaţii (Linklaters) 307 1500 ƒ Moore, Vartires & Associates (Salans) 312 4950 ƒ Musat & Asociaţii 223 3717 ƒ Nestor Nestor Diculescu Kingston Petersen 201 1200 ƒ Popescu şi Asociaţii (Stephenson Harwood) 312 2425 ƒ Leroy Popovici Dumitrache (Gide Loyrette Nouel) 233 03 10 ƒ Stoica & Associates 402 0930 ƒ Voicu & Filipescu (Squire, Sanders & Dempsey) 314 0200 ƒ Wood, Lupaşcu, Dumitrescu & Associates (Hall Dickler) 223 4444

Calls from outside Romania should be prefixed by the international dialing code, then 40 for Romania and 21 for Bucharest.

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Appendix VI (a) Double Taxation Agreements

Double Taxation Agreements to which Romania is a party:

Albania Indonesia Philippines Algeria Iran* Poland Armenia Ireland Portugal Australia Israel Qatar Austria Italy Russian Federation Azerbaijan Japan Slovakia Bangladesh Jordan Slovenia Belarus Kazakhstan South Africa Belgium Korea (Republic) Spain Bulgaria Kuwait Sri Lanka Canada Latvia Sudan China Lebanon Sweden Costa Rica* Lithuania Switzerland Croatia Luxembourg Singapore Cyprus Macedonia Syria Czech Republic Malaysia Thailand Denmark Malta Tunisia Ecuador Mexico Turkey Egypt Moldova Ukraine Estonia Mongolia United Arab Emirates Finland Morocco United Kingdom France Namibia United States Georgia Netherlands Uzbekistan Germany Nigeria Vietnam Greece North Korea Yugoslavia** Hungary Norway Zambia India Pakistan

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Appendix VI (b) Withholding Tax Rates of Some Major DTAs

Country Commissions (%) Dividend (%) Interest (%) Royalty (%) Non Treaty 16 16 10/16 16 Australia X 5/15 10 10 Austria X 0/5 0/3 3 Belgium 5 5/15 10 5 Bulgaria X 10/15 15 15 Canada X 5 10 5/10 Cyprus 5 10 10 5 Czech Rep X 10 7 10 Denmark 4 10/15 10 10 Estonia 2 10 10 10 Finland X 5 5 2.5/5 France X 10 10 10 Germany X 5/15 0/3 3 Greece 5 20/45 10 5/7 Hungary 5 5/15 15 10 Ireland X 3 3 3 Israel X 15 10/15 10 Italy 5 10 10 10 Japan X 10 10 10/15 Korea 10 7/10 0/10 7/10 Luxembourg 5 5/15 0/10 10 Malta 10 5/30 5 5 Moldova X 10 10 10/15 Netherlands X 0/5/15 0 0 Norway 4 10 10 10 Poland 10 5/15 10 10 Portugal X 15 10 10 Russia X 10/15 15 10 Singapore X 5 5 5 Slovakia X 10 10 10/15 South Africa X 15 15 15 Spain 5 10/15 10 10 Sweden 10 10 10 10 Switzerland X 10 10 0 Turkey X 15 10 10 Ukraine X 10/15 10 10/15 UK 12.5 10/15 10 10/15 US X 10 10 10/15

X - Not stipulated.

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Appendix VII Individual Income Tax Calculation

Monthly calculation of individual income tax and social security contributions due on local employment contracts:

RON EUR Gross Salary (assumed)a 3,565 1,000 Benefits in Kind (assumed) – grossed – up amount 713 200 Total Gross Salary 4,278 1,200 Employee Due Social Security Contributions (9.5%) 406 114.00 Health Fund Contribution (6.5%) 278 77.98 Unemployment Fund Contribution (1%) 36 10.00 Total Social Security Contribution due by Employee 720 201.98 Deductions 0 0 Taxable Salary 3,558 998.02 Individual Income Tax 569 159.61 Retaining of Benefits in Kind (net) 500 140.25 Net Salary (cash) 2,489 698.16 Employer Due Social Security Contributions (19.65 %) 841 235.90 Unemployment (2.25 %) 96 26.93 Health Fund Contribution (7%) 299 83.87 Contribution for the medical leaves (0.85%) 36 10.09 Guarantee Fund (0.25%) 11 3.08 Accident Risk Fund (0.5%) 21 5.89 ITM (0.75%) 32 8.98 Total Social Security due by the Employer 1,336 374.75 Total Costs Incurred by the Employer 5,614 1,575

a - The exchange rate used in this calculation is EUR 1 = RON 3.565. b - The Social Security Contribution is capped at five times the average national salary estimated for 2006 (amounting to RON 1,077 or EUR 302).

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Appendix VIII Customs Duty Rates

Rates applicable in Romania to:

Product Tariff code Duty rate % Quota tax % quantity Carcase of bovine animals 0202.10.00 12,8 + 176,8 20 37950 t €/100kg(net) Milk, of a fat content, by weight, 0401.30.11 57,5 €/100kg(net) - - exceeding 6% Coffee roasted not decaffeinated 0901.21.00 7,5 - - Saussages 1601.00.91 149,4 €/100kg(net) 747€/100kg(net) 3002 t Chocolate 1806.32.10 8,3 + EA MAX 18,7 43 107 t + AD/SZ Beer made from malt 2203.00.01 0 - - Cigarettes 2402.20.90 57,6 - - Medicaments containing penicilins 3004.10.90 0 - - Combined refrigerator-freezers 8418.10.20 1,9 - - Laptop 8471.30.00 0 - - Microwave ovens 8516.50.00 5 - - Telephones for celular networks 8517.12.00 0 - - Reception apparatus for television 8528.72.20 14 - - Motor cars for transport of persons 8703.21.10 10 - -

a. EA = agricultural component b. AD/SZ = the additional duty on sugar

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Appendix IX Excise Tax for Domestic and Imported Products

Crt Products or Group of Products Excise Rate No 1 Beer EUR 0.748 hl / 1 degree Plato 2 Sparkling wines EUR 34.05/ hl of product 3 Intermediate products EUR 51.08/hl of product 4 Cigarettes EUR 34.5/1,000 cigarettes1) 5 Smoking tobacco EUR 46/kg2) 6 Unleaded petrol EUR 425.06/ton 7 Diesel fuel EUR 307.59/ton 8 Electricity for business use EUR 0.26/MWh3) 9 Electricity for non-business use EUR 0.52/MWh4) 10 Green coffee EUR 612/ton5) 11 Roasted coffee EUR 900/ton5) 12 Natural fur clothes (excepting rabbit, sheep and goat) 45% 13 Crystal products 55%5) 14 Jewellery made of gold and platinum, exclusive of wedding rings 25%5) 15 Perfumery products 10% - 35% 16 Weapons 100% 17 Cars Car registration tax*

1) it will reach gradually the minimum level set within the EU of EUR 74/1000 cigarettes in 2010 2) it will reach gradually the minimum level set within the EU of EUR 81/kg in 2009 3) it will reach gradually the minimum level set within the EU of EUR 0.5/MWh in 2010 4) it will reach gradually the minimum level set within the EU of EUR 1/MWh in 2010 5) the excise duty for these products will be eliminated until 2011 * the car registration tax is computed based on cylinder capacity, emission standard and age of the vehicle

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www.pwc.com/ro

PwC

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