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Doing Businessin Romania

2004

In the preparation of this guide, every effort has been made to offer current, correct and clearly expressed information. However, the information in the text is intended to afford general guidelines only. This guide is distributed with the understanding that Ernst & Young is not responsible for the result of any actions taken on the basis of information in this publication, nor for any errors or omissions contained herein. Ernst & Young is not attempting through this work to render legal, accounting or tax advice. Readers are encouraged to consult with professional advisors for advice concerning specific matters before making any decision. This book reflects information current as of 1 March 2004.

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Doing Businessin Romania2004 edition

Ernst & Young Romania is a member of Ernst & Young Southeast Europe that unifies the practices of nine countries in the region including Greece, Turkey, Bulgaria and Moldova.

Contents

Country Overview 1 Geographical overview 2Population and language 2Political and legal environment 3The reform process and economic development 5Romania’s proposed accession to the European Union 8

Business Overview 11 Types of business presence 12Accounting, auditing and reporting 14Investment legislation 16Foreign exchange regulations 22Financial services industry 23Capital markets 25Labour force and employment regulations 26Work regulations for foreigners 28Intellectual property 29Industrial property 30Competition legislation 30Environmental legislation 30

Taxation in Romania 31 Corporate taxes at a glance 32Taxes on corporate income and gains 33Withholding taxes 40Value added tax 41Customs duty 43Excise duty 45Local taxes 46Stamp duty 47Individual taxation 47Fiscal sanctions 54

Ernst & Young in Romania 55

Appendix: Treaty Withholding Tax Rates 57

DO I N G BU S I N E S S I N RO M A N I A

Country Overview

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Romania is a country of about 238,000 square km located on the western shore of the Black Sea in Southeast Europe. Moldova and Ukraine border Romania to its north, while Hungary and Yugoslavia to its west and Bulgaria to its south. The country is roughly divided into three areas: the central and

northwestern region comprising Transylvania, Crisana, and Banat and encompassing the Carpathian mountains; the southern region comprising the Wallachian Plain with the river Danube forming the country’s southern border; lastly, the eastern region comprises the Moldavian Plain bordering

Geographical overview

As per the Census of 18 March 2002, Romania’s population was 21,698,181, with an average density of 91 inhabitants per square km. Of the total population, 91% are ethnic Romanians and 6.7% are

Hungarians. Other minorities include Rroma (1.1%), German (0.2%), and Ukrainian (0.3%). The Romanian language is the common language used throughout most of the country. In the northwest and central

Population and language

Moldova and the Ukraine. The capital city is Bucharest with a population of nearly 2 million. Other large cities include Constanta, Iasi, Cluj-Napoca, Timisoara, Galati, Brasov and Craiova. Romania has a continental European climate, with warm summers and cold winters.

regions, Hungarian and German are also commonly spoken. Moreover, under the recently amended Constitution, ethnic minorities are now allowed to use their mother tongue in certain circumstances (e.g. in court).

DO I N G BU S I N E S S I N RO M A N I A3

Romania is a Constitutional Republic. The present Constitution was adopted by the Parliament on 21 November 1991 and was subsequently amended and ratified by Law 429/2003, such amendment being effective as of 29 October 2003. The Romanian Constitution confirms among its aims a multi-party system, a free-market economy and the respect of human rights. Legislative power is vested in a bicameral Parliament that is made up of a lower house of 345 seats (Chamber of Deputies) and an upper house of 140 seats (Senate). Parliamentary elections are held every 4 years while presidential elections are held every 5 years.

The President is elected by direct universal vote and has powers that are limited by the Constitution. The President is required to:

: act in compliance with the provisions of the Constitution;

: nominate the Prime Minister following consultation with the majority party;

: promulgate laws passed by the Parliament;

: co-operate with the National Security Council on relevant issues.

CO U N T RY OV E RV I E W

Political and legal environment

Under the Constitution, private property is equally guaranteed and protected by the Romanian State. Foreign nationals and stateless persons may obtain the right of ownership over land under the conditions resulting from Romania’s accession into the European Union or by virtue of domestic laws and other international treaties to which Romania has become a party.

All statutory provisions pertaining to civil, commercial, criminal, administrative and tax matters are enacted by the Parliament. International treaties are binding only if ratified by the Parliament.

Since the revolution in 1989, the reformation and harmonisation of laws with EU standards has become a key driver in Romania’s efforts of joining the EU. The association treaty signed with the EU in 1993 stipulates Romania’s obligation to adopt the regulations issued by EU bodies and to integrate them into domestic legislation. The signing of this treaty was followed by Romania’s official request for accession into the EU, which was presented in June 1995. The formal deadline envisaged by Romania for full membership into the EU is 2007.

In 1994, Romania ratified the European Convention for the Protection of Human Rights and Fundamental Freedoms. In accordance with the relevant ratification law, Romania has agreed to enforce the rights guaranteed by this convention, including among other things the right of individual petition, and to recognise the competence of the European Court of Human Rights. To this end, any Romanian citizen may bring a case against the Romanian State before the European Court, the rulings of which are binding upon the Romanian State.

Through the legislative initiatives of the recent years, many of the laws that are typical for a market economy have been enacted and have led to the relative stabilisation of Romania’s legal system. The laws concerning dispute resolution and related procedures are well established in Romania. The concept of arbitration is also widely spread.

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The court system is organised at the national, county and local levels and is divided into civil and criminal. The High Court is the highest judicial forum of Romania. Unlike the US Supreme Court, the Romanian High Court cannot exercise judicial review, adjudicating on the conformity of laws with the Constitution and other regulations of the Parliament to the same effect. This competence is attributed to the Constitutional Court of Romania. Moreover, judicial precedent does not constitute a recognised source of law.


Type of economy

Since the beginning of 1990, Romania has had a free market economy countered by a continuous government presence in the industrial sector. Successive governments have made strides in liberalising and privatising the economy.

Romania sits at the crossroads of many traditional commercial routes that allow access to a further 200 million consumers within a 1,000 km radius of Bucharest. The main focus of these routes is the Danube River and the port of Constanta, the largest port on the Black Sea, which is currently linked to the North Sea through a new permanent navigation route formed by the Rhein-Main-Danube Canal. The country boasts of a workforce which is experienced in areas such as

Particulars 2004 2003 ChangeGDP (%) 5.2 4.8 + 0.4Inflation rate (%) 9.0 14.0 - 5.0Cons. Budget Deficit (%) 3.0 2.7 + 0.3Domestic Demand (%) 5.5 5.1 + 0.4Unemployment (in thousands) 700 720 - 20


The reform process and economic development

engineering and manufacturing and is relatively cheaper compared to most other Eastern European countries. There is a large industrial infrastructure in many of the country’s leading cities, which together with the country’s considerable natural resources possess substantial potential for exploitation and development.

General economic trends

Like many countries in Eastern Europe and the former Soviet Union, Romania has been struggling to switch its previous central economy into a market economy. Successive governments have found it very difficult to turn the economy around because of the lack of hard currency and because of the inability to secure external funding of the country due to its high budget deficits, mainly accrued from the continuous

financing of loss-making state industries. It has been hard to change many of the old economic and financial mechanisms, as well as the bureaucratic culture that was inherent in many of the old institutions. In the last 3 to 4 years the overall economic environment has improved and the indicators look healthier.

The table below illustrates the main economic indicators (estimates) for the year 2004 in comparison with the year 2003.

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Leading industries

Romania’s main industries are primarily manufacturing and engineering. The country also possesses energy resources and substantial surfaces of agricultural land. Most areas of the economy remain underdeveloped and offer great potential, particularly in the industrial, agricultural and tourism sectors. The technology sector continues to play an increasingly important role in the economy due to the employees’ high level of education versus their low employment costs.

Preferred sectors which attracted foreign investment in the recent years have included oil and gas exploitation, car manufacturing, metallurgy, banking and finance, food processing, heavy engineering, telecommunications, commercial construction and consumer goods production. Investors have shown a willingness to invest in newly privatised industries as well as in green-field investments.

Government-ownedindustries and privatisation

Strategic interest activities are established in national companies where the State holds the majority or the entire share capital. The main areas

of interest comprise the postal services, radio communications, airport services, coal activities, oil and gas, harbour, water supply, electricity, energy, nuclear, defence and tobacco activities.The Romanian Government has declared its commitment to privatise state-owned companies. In executing this commitment, the relevant privatisation strategy is being formed, approved and executed by the competent Ministries in cooperation with the State designated Privatisation Authority (APAPS) on a yearly basis. Most of the companies to be privatised are listed on the two Romanian capital markets (i.e. Bucharest Stock Exchange and RASDAQ). The privatisation process is often carried out on these markets through electronic auctions, public selling offers and/or firm commitment underwriting. Moreover, in cases of large companies undergoing privatisation, where the State holds the majority stake, direct negotiations constitute a common practice.

In 2003, privatisations and restructurings marked an outstanding progress with the government selling three major state enterprises, namely Roman, Tractorul and ARO, and tendering for sale the country’s largest oil company, Petrom. More activity is expected in this field

over the forthcoming months as the country’s two distributors of natural gas (Distrigaz Nord and Distrigaz Sud) as well as two more electricity distributors (Banat and Dobrogea) are undergoing privatisation. The privatisations in the energy sector are anticipated to attract large foreign investments.

Regional and international trade agreements andassociations

Romania has been a contracting party to the World Trade Organisation (former General Agreement for Tariffs and Trade) since 1971. In 1994, the Romanian Parliament ratified the Marrakech Agreement, which established the World Trade Organisation.

Law 20/1993 ratified the European Agreement that established Romania’s association with the European Union.

Law 19/1993 ratified the European Free Trade Agreement (EFTA) concluded with Romania. Romania is also a party to the Central European Free Trade Agreement (CEFTA) since 1997, which establishes different customs facilities depending on the merchandise trade exchanges existing between Romania and



Particulars Imports ExportsFOB 2003 (USD million) 22,155.3 17,618.0

CIF 2003 (USD million) 24,003.1 N/A

Variation 2003 – 2002 (%) + 34.4 + 27.0

Itemised structure (% of total imports/exports)

Industrial supplies 40.4Capital goods 22.1Current use goods 13.7Fuels and lubricants 10.8Transport equipment 7.1Food and beverages 5.7

Industrial supplies 31.9Capital goods 9.8

Fuels and lubricants 6.5Transport equipment 7.3Food and beverages 2.8

Main sources/destinations(% of total imports/exports)

Italy 19.5Germany 14.8Russian Federation 8.3France 7.3Turkey 3.8Hungary 3.6Austria 3.5United Kingdom 3.3China 2.7USA 2.3

Italy 24.2Germany 15.7France 7.3United Kingdom 6.7Turkey 5.1The Netherlands 3.6USA 3.5Hungary 3.5Austria 3.2Greece 2.4

Source: National Institute for Statistics

the Czech and Slovak Republics, Hungary, Poland and Slovenia. Furthermore, Romania is a member of other trade groups, such as the P16 and the General System for Trade Preferences, and has signed bilateral free trade agreements with the Republic of Moldova, Turkey and Israel.

Up to date, Romania has entered into over 80 agreements for the avoidance of double taxation and the prevention of tax evasion on income and capital (treaties). A table of such treaties signed

by Romania is presented in the appendix section of this guide.

Romania is also a member of the International Monetary Fund (IMF), the World Bank (i.e. of the International Bank for Reconstruction and Development – IBRD, and of the International Finance Corporation – IFC), and the European Bank for Reconstruction and Development (EBRD).

Major trading partners and leading imports and exports

Imports/Exports

The following table contains a comparative illustration of the import/export flows of Romania for the years 2002 and 2003, and highlights both the main categories of circulated goods as well as the main sources/destinations, respectively.

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Evolution of negotiations1

The negotiations for Romania’s accession to EU were officially launched on 15 February 2000, on the occasion of the Intergovernmental Conference on Accession.

Since then, Romania opened and provisionally closed 22 of the 31 acquis chapters, as follows:

: in 2000: Small and medium-sized enterprises (Ch. 16), Science and research (Ch. 17), Education and training (Ch. 18), External relations (Ch. 26), Common foreign and security policy (Ch. 27), Statistics (Ch. 12), Telecommunications and information technologies (Ch. 19) and Culture and audio-visual policy (Ch. 20);

: in 2001: Company Law (Ch. 5), Consumers and health protection (Ch. 5) and Fisheries (Ch. 8);

: in 2002: Economic and Monetary Union (Ch. 11), Social policy and employment (Ch. 13), Industrial policy (Ch. 15), Telecommunications and IT (Ch. 19), Culture and audio-visual (Ch. 20), Customs Union (Ch. 25) and Institutions (Ch. 30); and

Romania’s proposed accession to the European Union

: in 2003: Free Movement of goods (Ch. 1), Free movement of capital (Ch. 4), Taxation (Ch. 10), Free movement of persons (Ch. 2), Transport (Ch. 9) and Financial Control (Ch. 28).

The remaining 8 chapters (i.e. Ch. 3 – Free movement of services, Ch. 6 – Competition, Ch. 7 – Agriculture, Ch. 14 – Energy, Ch. 21 – Regional policy and co-ordination of structural instruments, Ch. 22 – Environmental protection, Ch. 24 – Justice and home affairs, Ch. 29 – Financial and budgetary provisions) are regarded as difficult chapters, with financial implications, requiring a high level of domestic preparations.

Romania’s objective is to conclude the EU accession negotiations in 2004, to sign the Treaty of Accession in 2005, with a view to full EU accession on 1 January 2007.

Current status2

In the field of free movement of services, important progress has been made, especially in the field of financial services (banking, insurance and financial securities).

In the field of competition, the Competition Law and State Aid law were amended. The legislative development continued with the adoption of the secondary legislation in the field of anti-trust, as well as in the State aid field.

In the agricultural field, a large part of the acquis communautaire has been transposed in the Romanian legislation. Important milestones are the implementation of the community acquis at a higher pace, the focus on adopting commercial and quality standards, food safety and public health, creation of the IT market system and the customs veterinary and phytosanitary control, development of the agricultural market and strengthening the producers’ association.

The energy market has been exposed to privatisation in 2004. The government states that the State Budget for 2004 ensures the necessary financial resources for the implementation of the community legislation in the field of crude oil and petroleum products’ stocks, nuclear safety and coal sector restructuring process.

1 Source: www.mie.ro2 Source: ‘The Status of Romania’s Accession Negotiations to the EU’ – Vasile Puşcaş, Minister Delegate Chief Negotiator of

Romania with the EU, speech in The Joint Parliamentary Committee Romania-EU-Brussels, 5 April 2004


The institutional framework for regional policy and co-ordination of structural instruments was designed and normative acts were adopted with a view to ensure, starting with 2004, the staffing of the structures with responsibilities in this field. The Ministry of Public Finance was designated as Managing Authority for the Community Support Framework and for the Cohesion Fund. The Romanian Government is currently concerned with the strengthening of the administrative capacity in order to ensure an efficient and effective absorption and management of the community funds.

At present, the level of transposition of the environmental acquis into the national legislation has been significantly improved. Measures were taken for strengthening the administrative capacity and allocating the necessary financial resources. The implementation of the new legislation and plans in key sectors (water quality, waste management and industrial pollution) is enhanced.

In the field of justice and home affairs, the amendment of the Constitution in October 2003 created the bases for reform in the field of justice, which will be completed by adopting a number of additional laws.

A legislative package for the reform of the judiciary (currently subject to public debate) is to be adopted by June 2004 (i.e. Law on judicial organisation, Law on the statute of magistrates, Law on the Superior Council of the Magistracy). Preventive measures country wide concerning the security and border control, the connection to the early warning system and the raise of exigency have been intensified. A peer review mission of the Commission and the Member States took place at the beginning of April in Bucharest. The mission noticed the status of preparation and encouraged Romania to continue the reforms in the field.

Regarding the financial and budgetary provisions, Romania has made progress as regards the calculation of the financial flows to and from the EU Budget. A primary evaluation of Romania’s contribution to the EU budget was drawn up. Romania’s answers to the questionnaire forwarded by the European Commission for assessing the administrative capacity regarding the acquis implementation for this chapter was submitted at the beginning of March 2004.


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Key areas to develop3

As recommended by the Commission of the European Communities in the 2003 Regular Report on Romania’s progress towards accession, Romania still needs to develop a strategy to address reform of the policy and legislative process. The judicial system needs to improve the management of cases and the consistency of judgements, as well as to increase the independence of the judiciary. Also, Romania must enhance its attention to developing the overall capacity of the public administration to implement and enforce the legislation harmonised with the acquis. Although certain progress in establishing new institutional structures required by the acquis has been attained, this continues to represent a major constraint on Romania’s accession preparations and to address this issue will require a comprehensive, structural reform of both the public administration and the judicial system. These concerns also apply to the management of EU financial assistance.

Also, restructuring and privatisation in key sectors, such as energy, mining and transport, must be brought forward. This would greatly

support the establishment of a functioning market economy and the development of Romania’s capacity to cope with competitive pressure and market forces within the Union.

The Romanian Government’s committment is that, by the date of accession, Romania will fully comply with all Copenhagen accession criteria. After the conclusion of the accession negotiations, additional measures are envisaged to achieve the commitments undertaken during the negotiations.

3 Source: 2003 Regular Report on Romania’s progress towards accession


Business Overview

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There are no specific investment approvals required for establishing a business in Romania. The procedure requires the fulfilment of certain legal formalities including a delegated judge’s decision and registration with the Romanian Trade Registry and the Local Fiscal Administration.

Limited Liability Company

The minimum equity capital requirement for a limited liability company (Romanian: ‘Societate cu Raspundere Limitata’ or SRL) is currently ROL 2,000,000 and the minimum value per part is currently ROL 100,000. The maximum number of equity partners in such a company is 50.

An SRL is managed by one or more administrators who may have full or limited powers and who may be either Romanian or foreign nationals. There is no distinction in Romania between companies operating with or without foreign share capital.

Joint Stock Company

The minimum share capital requirement for a joint-stock company (Romanian: ‘Societate pe Actiuni’ or SA) is ROL 25,000,000 and the minimum nominal value per share is currently ROL 1,000. When an SA is established, at least 30% of the subscribed share capital, or 100% in respect of contributions in kind, must be immediately contributed upon formation of the company and all subscribed share capital must be fully paid in within 12 months of formation. Shares must be held by a minimum of 5 shareholders at all times (there is no maximum) and can be open to either public or private subscription.

One or more ‘Board of Directors’ members, who may or may not be shareholders of the company, govern the daily operations of the SA. Board members should convene a meeting at least once per month to decide on the topics of the agenda, with decisions being taken on the basis of the majority of votes given by those members of the Board who are present.

Representative office

Representative offices can be formed by foreign companies in Romania to carry out preparatory or ancillary activities such as advertising or market research on behalf of their parent organisation. Representative offices cannot carry out commercial activities in Romania. In order to register a Representative office, company officials should apply to the Department of Foreign Trade within the Ministry of Trade and Industry and pay an annual fee of USD 1,200 to receive the licence.

Branches of foreign legal entities

Branches of foreign legal entities can be registered to carry on commercial operations in Romania.

A branch is subject to corporate profits tax in the same manner as other Romanian legal entities, but currently no branch remittance tax applies in Romania. The use of branches is not widely spread, given the poor legislation

Types of business presence


governing such vehicle type as opposed to the clear and extensive provisions existing for SRLs and SAs.

Partnership

Under Romanian law, partnerships may be either limited partnerships or general partnerships, as follows:

: general partnership – the partnerships’ obligations are guaranteed by the capital and by the unlimited joint liability of all partners;

: limited partnership – the partnerships’ obligations are guaranteed by the capital and by the unlimited joint liability of all unlimited partners; limited partners are liable only up to the value of their share contribution.

The most significant characteristic of a general partnership is the unlimited joint and several liability of general partners for the debts of the partnership. A limited partnership is similar to a general partnership except that it has one or more limited partners who are liable for the debts of the partnership only up to the amount of their capital contributions.

In Romania, partnerships are not flow-through entities for tax purposes. Tax is applied at the entity level rather than on the individual partner level. Partnerships are not a preferred medium for doing business in Romania.

Consortium

The Romanian legislation allows for the conclusion of a joint venture agreement (Romanian: ‘contract de asociatiune in participatiune’). Under this agreement, parties act together for the accomplishment of a common business goal. This form of doing business in Romania does not lead to the creation of a legal entity. Generally, one party is in charge with the bookkeeping of the joint venture.

Trust

The Romanian legislation does not recognise the concept of a trust.

Economic Interest Grouping (EIG)

An EIG can be defined as an association of two or more individuals or legal entities, which is set up for a definite period of time, with its main scope consisting in the development of its members’ activity and only secondary in the development of the EIG itself. An EIG may not have more than 20 members.

A key feature of EIGs is the unlimited joint liability of its members and the fact that it may not, directly or indirectly, own shares in one of its member companies, or another EIG. Equally, an EIG is not allowed to issue shares, bonds or other negotiable instruments.

European Economic Interest Grouping (EEIG)

An EEIG is an association of two or more individuals or legal entities, set up for either a definite or an indefinite period of time, its main scope consisting in the development of its members’ activity and only secondary in the development of the EEIG itself.

This entity may be set up in any EU Member State, but may function in Romania by means of subsidiaries, branches, representative offices or other entities without legal personality, provided that the domestic legislation is being observed. The subsidiaries and branches of an EEIG are subject to registration following the same procedure as EIGs, namely with the Trade Registry in the jurisdiction in which the branches or subsidiaries will be located.

Entities commonly used by foreign investors

Limited liability companies (SRLs) are the most popular vehicles for carrying on business activities in Romania by local and foreign investors, because of the low administrative requirements, the greater flexibility compared to other types of companies and the low initial capital requirements. However, the number of joint-stock companies (SAs) and their attractiveness to investors is increasing in Romania.

BU S I N E S S OV E RV I E W

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Accounting

Harmonised accounting

The Ministry of Finance approved new accounting regulations in 2001 (i.e. Order 94/2001) with a view to harmonise the former Romanian accounting rules with both the Directive IV of the Economic European Community and the International Accounting Standards (IAS). The purpose is that, by fiscal year 2006, all Romanian companies except small enterprises should apply IAS rules in their accounting. The implementation process for this project is gradual.

During 2003 – 2005, companies satisfying two of the requirements presented in the table below are required to prepare harmonised financial statements.

During the first year of application, taxpayers must draw up separate financial statements according to the Romanian Accounting Standards and the harmonised accounting regulations. The financial statements prepared according to the harmonised accounting regulations must be audited and submitted to the territorial units of the Ministry of Finance by 30 November of the year following the one to which the reporting refers.

Accounting, auditing and reporting

Year ending 31 December

Turnover in prior year

Total book value of assets for prior year

Employees during prior year (average number)

EUR million EUR million No. persons2003 7.3 3.65 1502004 7.3 3.65 502005 7.3 3.65 50

Simplified harmonised accounting standards

As of 1 January 2003, simplified accounting standards harmonised with the European Directives (Order 306/2002) are also applicable to micro-enterprises and to companies not applying the Accounting standards harmonised with Directive IV of the Economic European Community and with the International Accounting Standards, as approved by Order 94/2001, based on the criteria mentioned in the section above.

Simplified financial statements that need to be produced by companies applying these accounting standards at year-end refer to the following:

: the balance sheet;: the profit and loss account;: the accounting policies and

the notes to the accounts; and (optionally)

: the cash-flow statement.

Auditing

Statutory audits to be performed by external auditors are not yet mandatory under Romanian law, except in the case of companies which are required to apply the Accounting regulations harmonised with the Directive IV of the Economic European Community and with the International Accounting Standards, as approved by Order 94/2001.

However, externally audited financial statements are a pre-requisite for companies with the intention to go public. Independent audits for banks and other financial institutions are also mandatory.

In other cases, the compulsory audit function is performed by internal auditors (‘censors’), in accordance with the Audit Norms issued by the Romanian Accounting Experts


the fiscal authorities the latest by the 25th of the following month. The return captures the profits tax due quarterly and the withholding and salary taxes as well as any other taxes payable by the company, whenever applicable.

Half-year reporting

The half-year reporting comprises the balance sheet, the profit and loss account, the appendix and the administration report and has to be filed with the Department of Public Finance until 31 July of every year.

Annual financial statements

The annual financial statements comprise the balance sheet, the profit and loss account, the appendix and the administration report. All of the above have to be certified by internal auditors and filed with the Department of Public Finance in Bucharest or any other competent county (depending on where the headquarters of the taxpayer are located).

The deadline for submission of the financial statements to the Romanian tax authorities is:

: 90 days following the end of the financial year for companies applying the simplified harmonised accounting standards (Order 306/2002);

: 120 days following the end of the financial year for companies applying the harmonised accounting standards (Order 94/2001).

VAT return

Taxpayers must file VAT returns with the tax authorities on a monthly basis, specifying the taxable amount and the tax due. The tax return must be filed and the respective VAT paid by the 25th of the following month. Taxpayers with an annual turnover of less than EUR 100,000 file their VAT returns with the tax authorities on a quarterly basis.

Social security returns

Social security returns are filed with the local Department of Labour and Social Security in the district in which the employer has its headquarters, within 25 days following the end of the month for which contributions (i.e. Social Security Fund, Health Funds, Unemployment Funds) are due.

and Chartered Accountants Association (CECCAR). Limited liability companies with more than 15 shareholders as well as joint stock companies are required to appoint censors.

Accounting evidence

According to the accounting regulations, companies should maintain the following accounting registers:

: Journal – recordings should be made in chronological order for all operations carried out by the company.

: Counting Report – recordings should depict all assets and liabilities of an entity-taxpayer.

: General Ledger – in which the recordings from the Journal are made on a monthly basis. On the basis of this register, the monthly trial balances are drawn up.

Furthermore, companies also need to prepare monthly trial balances and Sales and Purchases Journals (for VAT purposes). Fixed Asset Registers are also required under the depreciation laws.

Reporting

The main returns and statements that must be submitted periodically to the Romanian authorities are:

Monthly tax return

Such returns have to be submitted on a monthly basis to


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Investment incentives

Under the direct investment regulations, investments are encouraged by offering equal opportunities to foreign as well as to Romanian investors. In general, incentives are intended to enhance the economic development of the country, particularly the acceleration of industrialisation in disfavoured zones, as well as the development of small and medium enterprises, oil and gas industries and micro-enterprises.

Under the direct investment legislation (Emergency Ordinance 92/1997, as amended), legal entities and individuals may invest in Romania under a variety of forms. The regulation defines certain types of investments and provides a level playing field for foreign as well as domestic investors. The regulation establishes the general legal framework regarding guarantees and rights to be granted to investors and direct investments made in Romania.

To a large extent, tax incentives (for investments) were cancelled during 2000. However, certain tax facilities are still available to investments in free trade zones, disfavoured zones and industrial parks, as well as to small and medium enterprises (see below).

Investment legislation

For most of the tax incentives the legislation has specified that, if an investor ceases production or voluntarily liquidates the company before the expiration of twice the period for which tax incentives were granted, all previous exemptions enjoyed will be retroactively cancelled.

Investments with a significant impact on the economy

Law 332/2001 regarding the promotion of investments with a significant impact on the economy provides certain tax incentives for direct investments that exceed the equivalent of USD 1 million (or the equivalent in ROL or other convertible currencies) and which are contributing to the development and modernisation of Romania’s economic infrastructure, creating a positive spin-off effect in economy and creating new working places.

Under this law, direct investments in a Romanian company, which are to be effectively accomplished within a maximum of 30 months from the date of the statistical registration with the Ministry of Economy and Trade, will benefit of the following tax incentives:

: exemption from payment of customs duties for certain


new technological tools, installations, equipment, measuring and control devices, automation equipment and software products imported into Romania (manufactured within maximum 1 year before the importation date and without being used prior to their entering into Romania), as specifically provided in a list approved by the Ministry of Economy and Trade and the Ministry of Public Finance;

: for investments realised until 31 December 2006, one-off allowance of 20% of the investment value, granted as a reduction of the taxable base for profits tax purposes in the month when the investment was made;

: use of accelerated depreciation, without prior approval from the tax authorities (depreciation in the first year of activity of up to 50% of the entry value of the fixed assets, applicable for all fixed assets, except for buildings);

: local authorities may grant an exemption or reduction of the land tax for land related to the afore-mentioned investments for the execution period until commissioning, up to a maximum of 3 years from the beginning of the works.

In the event an investment qualifies for incentives under several laws, the investor has to opt explicitly for a single regime of facilities. Investors choosing to benefit of incentives under one specific law must waive the right

to benefit of incentives provided for the same investment by other legal provisions.

In case of voluntary liquidation of the companies which carried out the investment before the lapse of 10 years, the investor can be liable to pay all taxes and duties in relation to which the incentives were granted for the entire operating period, together with late payment interest. Such amounts are to be paid with priority from the liquidation proceeds.

Separately, investors will also be liable to pay the equivalent of incentives granted together with late payment interest stipulated by the law if the goods imported under the customs duty exemption provided by the law are alienated within a period shorter than 2 years from the date of acquisition or entrance into the country.

Small and medium-sized enterprises (SMEs)

Romanian law defines a SME qualifying for tax incentives as a company that has less than 250 employees, whose annual turnover does not exceed EUR 8 million and whose capital is 100% private (not in state ownership). As an additional condition, a company qualifies as SME for as long as any of its shareholders with an individual participation of at least 25% is not employing more than 250 employees. Banking companies, insurance


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companies, companies managing investment funds, security trading companies as well as companies performing foreign trade activities exclusively do not qualify as SMEs.

Presently, no incentives are available for SMEs. However, the certificates for deferral of VAT exigibility obtained under the provisions of Law 345/2002 (in force until 31 December 2003) are still valid for the period they were granted. Such certificates were issued for purchases of industrial machines, transportation means necessary for the performance of productive activities, technological tools, installations, equipment, measurement and control devices, automation equipment and software products, manufactured within maximum 1 year before purchase and which have never been used.

Micro-enterprises

To qualify for a micro-enterprise regime the following conditions should be satisfied as at 31 December of the prior year:

: the enterprise has as object of activity production of goods, supply of services and/or trade activities;

: the enterprise should have at least 1 employee but not more than 9;

: the annual turnover obtained should not exceed EUR 100,000; and

: the capital is 100% private and the shareholder of such

company should not employ more than 250 people.

Qualifying enterprises will pay a tax of 1.5% applied on any source income, except certain items of revenues specifically provided (e.g. income from stock variations, income from provisions, etc.). The tax is paid quarterly, by the 25th of the first month following the reporting quarter.

Companies complying with the above conditions and taxed under the general profits tax legislation may opt for the income taxation. In such cases companies should submit a declaration exercising their option until 31 January.

Disfavoured zones

Emergency Ordinance 24/1998 regulates disfavoured zones, as these are defined individually by Government Decisions. Such zones are for a duration of at least 3 but not more than 10 years, with the possibility of extension.

Currently, there are 38 disfavoured zones established in the country mostly with a duration of 10 years, especially in the mining areas of the country.

A wide range of incentives has been granted to investments in disfavoured zones, which include:

: customs duty exemption for imported raw materials and components, necessary for the realisation of own production in


the area, except for imports of meat-related raw materials;

: profits tax exemption for profits related to new investments, for the period during which the disfavoured zone status exists – only for legal entities which obtained the permanent certificate of investor in a disfavoured zone before 1 July 2002;

: access to a special development fund set up by the government in accordance with Emergency Ordinance 59/1997 as amended, with funds collected by the Romanian government from sales of state-owned companies; and

: income tax exemption for allowances received by individuals for their one-off relocation to disfavoured zones for purposes of employment.

Industrial parks

Based on Government Ordinance 65/2001, industrial parks are seen as strictly delimited areas where research and development, industrial production and technological development activities are performed.

An industrial park may be set up based on an association between the authorities of the central and local public administration and companies, research and development institutes and/or other interested partners. An industrial park is administered by a Romanian legal entity, called the administrator-company. No shareholder company using the

utilities and/or the infrastructure of the industrial park can hold direct or indirect control over the administrator-company.

The following incentives are granted for the setting up and development of industrial parks:

: exemption from taxes due on conversion of agricultural land to be used to the benefit of industrial parks;

: for investments in constructions or construction rehabilitation, internal infrastructure and in the utilities network, realised until 31 December 2006, one-off allowance of 20% of the investment value, granted as a reduction of the taxable base for profits tax purposes;

: buildings, constructions and land located inside industrial parks are respectively exempt from building tax and land tax;

: other incentives which may be granted, in compliance with the law, by the local public administrative authorities.

Scientific and technological parks

Based on Government Ordinance 14/2002, as amended by Law 50/2003 scientific and technological parks are seen as strictly delimited areas where education and research activities are performed, as well as the technological implementation of the results for the purpose of their utilisation in economy.

A scientific and technological park may be set up based

on a partnership agreement between an accredited university and/or another research and development unit and a consortium of companies, associations or individuals, Romanian or foreign. Upon set-up, a scientific and technological park needs to be authorised by The Ministry of Education and Research, who is further entitled to monitor the activities of the scientific and technological park. The park is administered by a Romanian company, designated by the consortium, called the administrator-company.

The following incentives are granted for the setting up and development of scientific and technological parks:

: advantageous conditions regarding location and usage of infrastructure and communications, with deferral of payments, ensured or facilitated by the administrator for a determined period of operation;

: discounts or gratuities for certain services supplied by administrator;

: exemption from taxes due on conversion of agricultural land to be used to the benefit of industrial parks;

: buildings, constructions and land located inside scientific and technological parks are respectively exempt from building tax and land tax.


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Free trade zones

Law 84/1992, as amended, regulates the Free Trade Zones regime. Currently, there are 7 free trade zones in operation in Romania, located in Constanta Sud-Agigea (at the Black Sea, including the harbour area), Sulina, Galati, Braila, Giurgiu (along the Danube river), Basarabi and Curtici-Arad (on the Romanian-Hungarian border).

The range of activities that can be carried out within a specific free trade zone by individuals or entities respectively, are determined by law and should be licensed by the administrative authority of the zone.

The following incentives are available within free trade zones:

: profits tax exemption until 30 June 2007, for taxpayers who, by 1 July 2002, performed in the free trade zone investments amounting to a minimum of USD 1 million in depreciable tangible assets used in the processing industry. This exemption does not apply in case a change of more than 25% in the shareholding structure takes place within one year;

: profits obtained from activities performed inside free trade zones on a licence basis are subject to a reduced profits tax rate of 5%, until 31 December 2004;

: excise duty exemption for goods introduced in the free trade zone;

: exemption from customs duties for goods introduced within the zone depending on the specific operations taking place, for as long as the goods are not imported into Romania; and

: VAT exemption for operations performed within the free trade zone.

Mining

Mining Law 85/2003 regulates the mining activities in Romania to ensure maximum transparency for mining activities and fair competition, without discrimination by the property type or origin of the capital, and nationality of operators.

Mining exploitations are carried out based on a mining concession granted by the National Agency for Mineral Resources (NAMR) for a period of at least 20 years with an extension clause in exchange for a mining royalty and an annual surface tax. Each mining concession is established through a Government Decision and its provisions will remain valid throughout the entire concession period.

Foreign legal entities are liable to set up a company in Romania within 90 days from obtaining the mining concession. Such company will be maintained throughout the licence period.


The titleholder of the licences may benefit from the following incentives:

: exemption from the payment of customs duties for the importation of goods required for the performance of mining activities;

: exemption from the payment of customs duties for newly imported equipment and installations, which are not produced in the country but are needed for environmental rehabilitation; and

: other incentives that may be granted by the local public administrative authorities in accordance with the law.

The incentives granted to the titleholders are maintained throughout the concession period.

Oil and gas incentives

Petroleum Law 134/1995 regulates operations involving oil and gas reserves within Romania. Oil and gas operations are carried out through exploitation concessions or exploration permits. Foreign operators should create a Romanian branch or company within 90 days of obtaining the oil and gas concession, which will be maintained throughout the entire period. Titleholders of an oil and gas concession are liable to pay a petroleum royalty to the State Budget.

Titleholders of an oil and gas concession benefit from the following tax incentives provided by the law:

: exemption from payment of duties on imports made by the titleholders or their subcontractors, relating to assets required for the conduct of petroleum operations;

: exemption from payment of duties for imported household and personal goods acquired by the expatriate personnel of the titleholder, its affiliated companies and foreign subcontractors; the goods so exempt must be designated in the annexes to the agreement.

In addition, foreign titleholders benefit from the following incentives:

: to receive proceeds derived from the export of their share of petroleum in hard currency, and retain such hard currency abroad after payment of liabilities to the Romanian state; and

: in the event the sale of petroleum to which the titleholder is entitled takes place in Romania, the titleholder has the right to convert the ROL amounts obtained into foreign currency, and dispose freely of such hard currency amounts which can be remitted abroad after payment of obligations towards the Romanian State.


The incentives granted to the titleholders of petroleum agreements under this law must be determined for each agreement and remain unchanged for the entire duration of the agreement.

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Currency

Romania’s monetary unit is the Romanian LEU (ROL). The foreign exchange policy of the National Bank of Romania (NBR) had been partially controlled, resulting in an almost continuous over-valuation of the domestic currency until 1997. Subsequently, the currency has been managed under a float system, whereby the NBR sets targets for the exchange rate and its devaluation. At times, the NBR intervenes in the market whenever these targets are threatened or whenever there is increased volatility.

The NBR has stated that it may move from exchange rate targeting to a policy of explicit inflation targeting during 2004, if conditions are appropriate (i.e. an inflation rate below 10% and stronger wage discipline in state-owned enterprises).

The currency regime in Romania is not governed by a currency law, but rather by a Currency Regulation issued by the National Bank (Regulation 1/2004).

Foreign exchange control

In Romania, transactions between resident companies or between resident companies and resident individuals must be made in ROL, with certain exceptions. Transactions between

Foreign exchange regulations

residents and non-residents must be made in foreign currency, with certain exceptions relating to payment of Romanian taxes, payments made by individual non-residents during their stay in Romania and payments made by Romanian residents to non-residents in form of profits, dividends, interest or other income, as explicitly provided by the regulations. In the free trade zones, most transactions must be made in foreign currency.

Certain transactions that are deemed by law to be capital transfers require the prior approval of the National Bank of Romania (NBR). Such approval will no longer be required for certain capital transfers (i.e. operations with securities and other instruments usually transacted in the monetary market) by the time of Romania’s accession to the European Union.

Residents and non-residents may open foreign-currency accounts in Romanian banks or foreign banks authorised to operate in Romania. Residents may open accounts in banks located abroad only if they obtain the prior NBR’s approval, with certain exceptions.

The currency market is a free market, but the reasons for purchases of foreign currencies must be disclosed. Under Emergency Ordinance 92/1997, foreign investors may transfer the following items to their countries, provided applicable taxes are paid: benefits, dividends, proceeds from sales of shares, proceeds from liquidations of companies, and certain other items relating to Romanian investments.


Romanian banking, insurance, securities and investment fund activities are subject to special laws, which regulate the terms of conducting their business operations, authorising the operators on the market and establishing the capital limits for carrying out these types of activities.

Since 1990, the Romanian banking system has undergone a major restructuring process. The key elements of this restructuring process have been the following:

: transformation of the National Bank of Romania into what is now effectively the nation’s Central Bank;

: opening up of the banking system to private and foreign banks; and

: privatisation of state-owned banks.

More than 60% of the banks currently operating in Romania are privately owned. In these private banks, over 50% of the ownership belongs to foreign shareholders.

Banking

Central bank

The National Bank of Romania, the country’s central bank, is the sole issuer of notes and coins to be used as legal tender on the territory of Romania.

Financial services industry

The main objective of the NBR is to ensure stability of the domestic currency with a view to maintaining price stability. To this end, the NBR implements and is responsible for the monetary, foreign exchange, lending and payment policies, as well as for bank licensing and prudential supervision within the general policy of the Government of Romania. The NBR co-operates with the public authorities as well as with foreign financial and banking institutions in its capacity as a member of these bodies. The NBR designs and implements the foreign exchange and monetary policies by using specific procedures and instruments; it discounts, pledges, acquires or sells claims and securities, it grants loans and it opens deposit accounts for keeping the banks’ minimum reserves. The NBR draws up and implements the regulations governing currency operations, and supervises the implementation of the foreign exchange regime in Romania.

Pursuant to the law, the NBR may grant loans to banks, with no longer than a 90-day maturity, against collateral under certain terms and conditions. Moreover, it sets the modalities for performing operations with banks, such as opening accounts, payment systems, clearing, depository and payment services, and mitigating and hedging risk. Operations with

the General Account of Treasury (including government securities operations) are jointly agreed upon between the NBR and the Ministry of Finance.

The NBR establishes and keeps the official reserves, and is authorised to carry out operations in gold and foreign assets.

The Board of Directors consisting of 9 members, out of which 4 are executives, the governor, the first vice-governor, and two vice-governors, heads the NBR. The Parliament of Romania appoints the members of the Board for a six-year term. The statutory audit committees are charged with checking the observance of the legal norms during the NBR asset valuation and the drawing up of the balance sheet and the profit-and-loss account, as well as the revenue and expenditure budget execution.

Banking regulators

Law 58/1998, as amended, regulates the Banking system. This law establishes the general rules and conditions of conducting banking activities. Under this law the NBR establishes certain regulations with regard to bank licensing and operational requirements in respect to the application of the monetary, foreign exchange, credit, payments and banking prudential supervision policies.


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It also refers to fund transfers, conditions under which the NBR may revoke the licence granted to banks, bank mergers and divestments. The application of the current law is supported by specific norms issued by the NBR in respect to conditions existing in the economy and the general economic policy of the government.

The privatisation process of the banking industry is regulated by Government Decision 458/1997, as amended, which makes reference, inter alia, to the privatisation procedures and the beneficiaries of the amounts resulting from sell-offs.

Insurance

The insurance industry is regulated mainly by Law 136/1995 regarding insurance and reinsurance, and by Law 32/2000 regarding insurance companies and supervision of insurance. The implementation and supervision of the law as well as the control of the observance of its dispositions are incumbent upon the Insurance Supervisory Commission, aiming at safeguarding the rights of the insured persons and promoting the stability of the insurance activity in Romania.

The law permits the establishment of insurance companies in one of the following legal forms:

: joint-stock companies;: mutual funds (companies);: subsidiaries of foreign

insurance companies set up as Romanian legal entities authorised by the Insurance Supervisory Commission; and

: branches of foreign insurance companies authorised by the Insurance Supervisory Commission.

The paid up share capital (or, as the case may be, the freely paid up reserve fund) cannot be lower than:a) ROL 15 billion for the activity of

general insurance, excluding compulsory insurance;

b) ROL 30 billion for the activity of general insurance;

c) ROL 21 billion for the activity of life insurance; and

d) the sum of values provided at letter a) and c) or b) and c), as the case may be, depending on the insurance activities performed.

The Romanian insurance market is evolving as regards both the number, as well as quality of operators and from a regulatory perspective. Currently, there are around 50 registered insurance companies in Romania, which are authorised by the industry’s regulatory body, the Insurance Supervisory Commission.


Stock exchange and regulating authority

The Romanian securities markets are functioning according to the Romanian Securities and Exchanges Ordinance (Emergency Law 28/2002 approved and amended by Law 525/2002), the Law on commodities, services and derivatives’ markets (Ordinance 69/1997 approved and amended by Law 129/2000) as well as Emergency Ordinance 26/2002 regarding the collective investment bodies. The main regulations are applied in practice according to the instructions and norms issued by the National Securities Commission (CNVM) that is empowered to act as the market’s main rule maker and watchdog.

The main securities’ markets in Romania are the Bucharest Stock Exchange (BSE) and the over-the-counter RASDAQ market. Additionally, the Monetary, Financial and Commodities Exchange in Sibiu (BMFMS) should be mentioned as Romania’s first financial futures and options exchange.

The BSE was established in 1995 with Canadian assistance and uses an entirely computerised trading system integrating the brokers (connected to the Stock Exchange by remote terminals) the shareholder registry and the

Capital markets

clearing and settlement system. The trading system is an order-driven system that automatically matches the orders. In its first trading session (in November 1995) shares of six listed companies were traded. As of November 2003, 62 companies organised on two tiers were listed on the BSE that had a total market capitalisation of close to USD 3,471 million. The BSE has two official indexes which are the BET, based on the basket of the ten most liquid stocks listed on the first tier, and an overall index the BET – Composite.

The RASDAQ has been operational since 1996, using an electronic quote-driven trading system (Portal) developed by the NASDAQ Stock Market of the United States with the initial aim of providing a trading ground for the shares of companies which were privatised under the Mass Privatisation programme. As of October 2003, 4,489 companies were listed on the RASDAQ and the market capitalisation was around USD 2,210 million.

Established in 1994, BMFMS currently provides the possibility to trade futures and options contracts in the most important currencies (ROL/USD, ROL/EUR, EUR/USD, etc.) and on BSE’s index BET.


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The employment relationship between employers and employees is governed by the Labour Code (Law 53/2003), which entered into force on 1 March 2003.

Applicability

The Labour Code covers Romanian employees with employment contracts who perform services in Romania or abroad for a Romanian employer, as well as foreign individuals with employment contracts who perform services to a Romanian employer in Romania.

Working relationship

Types of employment contracts

The law regulates individual employment contracts with an indefinite duration as being the general form of employment relationships. In addition, other forms of employment are stipulated, such as:

: individual employment contract with a definite duration,

: temporary employment,: part-time employment,: flexible working arrangements

(home-based work).

Under the Labour Code, service agreements (Romanian: ‘conventii civile de prestari servicii’) are not considered as employment.

Labour force and employment regulations

Special clauses in the individual employment contract

Before or upon conclusion of a new or amendment of an existing employment contract the employer has the obligation to inform the employee about the general terms regulating the employment relationship (term of the agreement, leave periods, allowances, etc.). Along with the general terms an individual employment contract may also include special clauses, such as:

: non-competition clauses – by which the employee undertakes the obligation to refrain from competitive activities against the employer. For the application of this clause the law also provides for a negotiable consideration, which is payable to the employee and which equals at least 25% of the salary.

: mobility clause – by which the employee accepts to perform his duties under the employment agreement in different locations. In case of existence of such clause the employee is entitled to additional out of base allowances, which can be in cash or in kind.

: confidentiality clause – a clause by which the employee undertakes the obligation not to disclose confidential information obtained in the



course of the employment. Usually, the term of such obligation goes beyond the duration of the employment.

Furthermore, an individual may only be employed if he/she provides a medical certificate. Failure to provide such a certificate renders the contract void.

General register of employees

Employers are obliged to keep a general register of employees, which must be registered with the relevant public authority within 10 working days from the date of commencement of the employment. The general register of employees contains all information regarding the employees’ data and employment records.

The registers are intended to replace the current employees’ workbooks. However, until 31 December 2006, employers will be required to keep the former workbooks with the general register of employees, as a proof of work seniority.

Working hours and paid holidays

Normal working days have an 8-hour duration in regards to full time employment. Maximum working hours per week cannot exceed 48 hours, including overtime. According to the law, overtime is to be settled with paid leave or a minimum 75% bonus calculated on the base salary.

The standard working week is Monday to Friday, followed by two resting days, Saturday and Sunday.

In addition to the statutory holidays, employees are entitled to a minimum of 20 weekdays annual paid vacation.

Work security and healthcare

The employer is liable to take necessary measures ensuring the security and health of its employees. The employer is obliged to ensure the access of employees to health check-ups. Moreover, the employer is responsible to insure all its employees against work accidents and work-related diseases in accordance with the specific regulations.

Professional training

The employer needs to ensure that adequate professional training is being offered to the employees on a continuous basis. In this respect, the employer must set up an annual training schedule which should be attached in the form of an addendum to the individual employment contract.

Moreover, employers are responsible to grant employees paid or unpaid leave for professional training purposes.

Criminal sanctions

The Labour Code stipulates that employers assume civil and criminal liability for damages or omissions. Specifically, failure of the employer to wire to the state budget the amounts withheld from employees as social security contributions, within 15 days, may lead to imprisonment between 3 to 6 months.

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Romanian visa regime

In case of expatriates, the Romanian legislation provides for two main categories of visas, i.e. short-term and long-term visa.

Both the short-term and the long-term visa can be either single or multiple-entry visas allowing foreigners stay in Romania for a period not exceeding 90 days during any 6 months. While the short-term visa cannot be extended, the long-term visa can be extended by the Romanian authorities upon request by the foreigner. Holders of long-term visas may further apply for a residence permit.

Romanian visas must be obtained by foreigners from the Romanian diplomatic missions or consulates prior to their arrival in Romania.

The following conditions must be fulfilled in order to obtain the long-term Romanian visa by expatriates seconded to Romania:

: to present a medical insurance for the visa period;

: to secure accommodation in Romania;

: to provide a crimine-free record from their home country.

Work regulations for foreigners

Also, in order to obtain the extension of the long-term visa, the expatriate seconded to Romania should prove self-support, which is a minimum cash equivalent of EUR 500/month.

EU citizens are not obliged to comply with the conditions imposed for visa issuance and extension. EU citizens have two alternatives to enter Romania:

: based on the ordinary multiple entry short-term visa for tourism purposes; this visa is valid for an period of 3 months and it can be extended for consecutive periods: the first extension is granted for up to 2 years and the second extension for a maximum period of 5 years.

: based on their valid ID cards issued by the relevant authorities from their countries of origin.

Apart from the EU citizens, citizens from countries of the European Economic Area (i.e. Norway, Liechtenstein, Iceland) and Switzerland may also enter Romania based on their valid ID cards.

Special conditions are stipulated by the current legislation with regard to foreigners who intend to set up companies in Romania.

Work permits

All foreign citizens wishing to work under Romanian employment contracts must obtain work permits issued by the Office for Migration of the Labour Force. However, work permits are not compulsory for foreign individuals meeting certain legal requirements. Work permits are issued for a limited period of 6 months and therefore need to be extended regularly.

Residence permits

According to current Romanian law, foreign individuals holding long-term visas can apply for extensions of such visas and for the acquisition of a Romanian Residence Permit that is valid up to expiration of the visa term. A similar residence permit will be issued, at request, for all members of the family accompanying the individual during the Romanian assignment.

An exception from this rule is provided for citizens of USA, Canada, Japan, Iceland, Norway and Switzerland who are not required to obtain a long stay visa prior to their arrival in Romania.


As a result of political and economic pressure on Romania by the western countries, intellectual and industrial property has become a major concern of the Romanian authorities since 1990. As part of the major international conventions and treaties regarding the protection of intellectual property rights that have been ratified by Romania, the internal legislation has been subject to important changes. Thus, major laws have been enacted in fields such as Patent Law (Law 64/1991 as amended and republished in October 2002), Integrated Circuits Law (Law 16/1995), Copyright Law (Law 8/1996) and Trademark and Geographical Indications Law (Law 84/1998).

The relevant body in the field of registration and protection of patents and trademarks is the

Intellectual property

State Office for Patents and Trademarks (OSIM) in the sense that, generally, patents and trademarks are protected only based on a certificate issued by OSIM. For household brands and trademarks protection may be available also without such certification.

There is also a regulatory body in the field of copyright – the Romanian Office for Copyright (ORDA), whose director is appointed by the Romanian Government. There are also private entities acting in this field under the form of non-governmental organisations established with the purpose to ensure the collective protection and the administration of copyright, their establishment being subject to prior approval by ORDA.

Expatriates’ fiscalregistration

Foreign and Romanian individuals without a domicile in Romania earning income from activities carried on in Romania, are required to fill in and submit fiscal registration declarations within 30 days from obtaining their first Romanian-sourced income. They will be provided with a fiscal registration certificate that includes their fiscal identification number.

Non-compliance with this deadline may trigger a fine ranging between ROL 500,000 to ROL 15,000,000.


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The Romanian legislation specifically regulates licensing agreements and assignment agreements (with regard to patents, trademarks and copyright). Such agreements should observe the legal framework established by each applicable law.

Industrial property

Ownership rights on trademarks and patents, as well as copyrights can be contributed to the share capital of Romanian companies as contribution in kind, subject to an independent valuation.

Since 2000, special attention has been paid to e-business. Thus, the Electronic Signature Law has been enacted in 2001 (Law 455/2001), while in 2002 the Romanian Parliament approved Law 365/2002 on electronic commerce.

Romanian competition regulations (Law 21/1996 and subsequent application methodologies) are well harmonised with similar European Union rules.

Competition legislation

In Romania, the Competition Council is the authority responsible for monitoring ‘market collusion’ (forbidden agreements) between competitors on the Romanian market and the evolution of market structures (mergers and acquisitions).

Collusive behaviour or anti-competitive agreements between competitors are strictly forbidden but mergers and acquisitions are authorised, provided that free competition is not hindered in the Romanian market.

In the context of the negotiations for Romania joining the European Union, environmental protection represents one of the most sensitive issues. From this point of view, an environmental strategy has been elaborated in Romania, which stipulates the priorities and institutional responsibilities as well as the structures involved in environmental protection.

Environmental legislation

The main institutions responsible for environmental protection are:

: the central environmental authority is the Ministry of Waters and Environmental Protection;

: the local environmental protection authority is the Environmental Protection Agency (LEPA) and the Administration of the Danube Delta Biosphere Reservation (ARBDD).


Taxation in Romania

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Corporate taxes at a glance

(a) See section related to profits tax.(b) The withholding taxes referred

to below are levied on income earned in Romania by Romanian legal entities (referred to below as ‘residents’) and non-resident legal entities (referred to below as ‘non-residents’), income which is not attributable to a permanent establishment of the non-resident recipient in Romania. This section does not cover withholding taxes applied on income earned by individuals.

(c) The 10% rate applies to residents and the 15% applies to non-residents.

(d) The 5% rate applies to non-residents for interest income related to term deposits, deposit certificates and other saving instruments provided by banks and other authorised credit institutions in Romania. The 15% rate applies to non-residents for any other interest income except the following: interest income related to non-term deposits in current accounts opened with credit institutions in Romania; interest related to debt instruments issued and/or guaranteed by the Romanian government, local councils, the National Bank of Romania, or by financial institutions

Particulars Rates NotesCorporate Income Tax Rate (%) 25 (a)Capital Gains Tax Rate (%) 25/10 (a)Branch Tax Rate (%) 25 (a)Withholding Tax (%) (b)Dividends 10/15 (c)Interest 5/15 (d)Royalties 15Trade commissions 15Services 15 (e)Commissions 15Entertainment and sport activities 15International air, water, railway, road transport 15Branch Remittance Tax 0Net Operating Losses (Years)Carryback 0Carryforward 5 (f)

acting as agent for the Romanian government; and interest related to debt instruments issued by a Romanian legal entity which is not affiliated to the interest recipient.

(e) Withholding tax generally applies to services rendered in Romania. However, income from management, intermediation and consultancy services is taxable regardless whether the services are rendered in Romania or abroad, if such income is obtained from a resident or if it is a cost of a permanent establishment in Romania.

(f) See section related to determination of taxable income.


The Fiscal Code entered into force on 1 January 2004. The Fiscal Code for the first time unifies key tax legislation and provides a basis for stable framework of tax legislation, by requiring amendments to necessarily follow the juridical route.

Fiscal year

In Romania the fiscal year is the calendar year.

Corporate income tax

Resident entities are subject to tax on worldwide income. An entity is resident in Romania if incorporated in Romania or if its effective management and control are in Romania.

‘Associations’ or ‘consortia’ between Romanian legal entities, which do not give rise to a legal person, are taxable in Romania separately at the level of each partner. For such associations between a Romanian legal entity and individuals or foreign entities, the tax must be computed and paid by the Romanian legal entity on behalf of the individuals or its foreign partners.

Non-resident companies are subject to tax on their Romanian-sourced income only. Sale of shares held in Romanian companies by non-resident companies and sale of real estate

Taxes on corporate income and gains

are also subject to profits tax in Romania (see section related to capital gains tax).

Non-resident companies are taxed in Romania at the standard rate of 25% on earnings derived exclusively from their Romanian operations (through branches, other permanent establishment or consortia). A foreign company is considered to have a permanent establishment in Romania, without a legal presence here, if it has any of the following types of presence in Romania: an office; a branch; an agency; a factory; a mine; a place of extraction for gas or oil; a building site that exists for a period exceeding 6 months.

Rates of corporate income tax

The standard rate of income tax for Romanian companies is 25%. Profits tax payable by companies earning their revenues from night bars, nightclubs, discos, casinos and sports betting is computed at the standard 25% rate, so long as the tax amount is not less than 5% of the total realised revenues. In case the profits tax payable is below the threshold, the taxpayer is liable to pay corporate income tax computed as 5% of the revenues realised from such activities.

Exports are no longer taxed at a reduced rate. Activities performed within free trade zones

TA X AT I O N I N RO M A N I A

continue to be taxed at a reduced tax rate of 5%, applicable until 31 December 2004.

Representative offices are taxed on a yearly basis, at a lump sum of ROL equivalent of EUR 4,000, payable in two equal instalments.

Capital gains tax

No separate capital gains tax is payable by resident entities. Capital gains related to income from immovable property located in Romania or from sale/transfer of shares held in a Romanian legal entity are currently taxed at the standard corporate tax rate of 25%. However, starting 2006, such capital gains will be taxed at a reduced rate of 10%, if the following conditions are met cumulatively:

: the taxpayer has owned the immovable property or the shares for a period of more than 2 years;

: the acquirer of the immovable property or shares is not a related party;

: the taxpayer acquired the immovable property or the shares after 31 December 2003.

Income from immovable property located in Romania includes the following:

: income from rental of immovable property located in Romania;

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: gain from the sale/transfer of rights of ownership or other rights related to immovable property located in Romania;

: gain from the sale/assignment of shares in a legal entity, if a minimum of 50% of the value of the fixed assets of that legal entity comprise, either directly or through one or more persons, immovable property located in Romania;

: income obtained as a result of exploiting natural resources located in Romania, including gains from the sale/assignment of any right related to such natural resources.

Separately, any fiscal loss resulting from the sale/assignment of immovable property located in Romania or shares held in a Romanian legal entity can be carried forward and recovered from taxable profits resulting from operations of the same nature for 5 subsequent years.

Dividends

Dividends paid out by a Romanian legal entity to another domestic entity are subject to a 10% withholding tax, while dividends paid out by a Romanian company to a non-resident are subject to a 15% withholding tax, unless otherwise provided by a treaty. Dividends paid out by a Romanian entity to individual resident shareholders are subject to a 5% withholding tax.

Payments made by a Romanian legal entity to any of its shareholders, for goods or services provided by the latter, in excess of the market value of the transaction, are assimilated to dividends from a tax point of view.

The dividend tax must be withheld and paid to the state budget until the 20th of the month that follows the one in which the dividend was paid, in the event recipients are resident entities and by the 25th of the following month in case the recipients are individuals or non-resident entities.

A participation exemption is granted to the recipient of dividends, Romanian legal entity, provided a participation of at least 25% in the share capital of the paying Romanian entity existed for a time period exceeding two years. However, such an exemption would only be available after Romania’s accession to the European Union.

Equally, after Romania’s accession, dividends received from EU resident entities would constitute non-taxable income at the level of the Romanian recipient, if such Romanian beneficiary of dividends participated in the share capital of the EU entity with at least 25% for a period of at least 2 years.

Foreign tax relief

Foreign income of Romanian entities is included in the taxable income. This includes passive income as well as capital gains. However, a credit is allowed with respect to foreign taxes paid, up to the level of the Romanian tax on that income.


Determination of taxable income

Starting point for determining taxable income

Taxable income equals revenues from all sources, including the delivery of goods and the supply of services, less expenses, less non-taxable revenues, less other deductible elements plus non-deductible expenses.

The following items are expressly considered as non-taxable:

: dividends paid out by a Romanian entity to another Romanian entity. Dividends received from a non-resident are taxable (see also Foreign tax relief and Dividends sections);

: gains in the value of shares held in other entities, caused by increase of capital in those entities through incorporation of reserves, premiums, profits, etc.;

: income related to debt cancellation if a debt-equity swap is performed;

: revenues from the reversal of expenses and provisions previously considered as non-deductible;

: non-taxable income, expressly provided as such by legal norms.

Deductions

As a general rule, expenses related to earning taxable


revenues, including those regulated by legal norms in force, are considered deductible.

The Fiscal Code also provides for certain types of expenses which are specifically deductible, such as:

: expenses incurred for labour protection, prevention of labour accidents and professional diseases;

: insurance premiums paid in relation to the above;

: advertising and publicity expenses incurred for the promotion of the business, products and/or services, if properly documented, as well as expenses for other goods and services incurred with a view to stimulate sales;

: transport and accommodation expenses of management as well as of other authorised persons, based on contractual clauses, provided that the taxpayer realises profit in the current and/or in the previous years;

: subscription fees, dues and other mandatory contributions, as provided by legal norms in force;

: contributions to the fund for the negotiation of the collective labour contract;

: expenses associated with the professional training of employees;

: marketing expenses, market research and promotion expenses in existing or new markets, participations in fairs and exhibitions, business missions, publication expenses for materials, if the taxpayer

realises profit in the current and/or in the previous years or is in a tax loss recovery period;

: research and development expenses;

: expenses incurred for the improvement of management, of information systems, for the implementation, maintenance and improvement of quality management systems, for the acquisition of certificates attesting the quality standards;

: expenses incurred for the protection of the environment and the preservation of resources;

: losses incurred after 1 January 2007 in relation to the write-off of bad debts as a result of termination of the bankruptcy procedures against debtors, as attested by a court decision;

: registration fees, dues and contributions owed to commercial chambers, unions and owners’ associations.

Key items which are partially deductibile, include, inter alia:

: provision expenses and contribution to the reserve funds exceeding the limits described in the Provisions and Reserves section below;

: protocol and entertainment expenses (i.e. gifts to clients, business lunches) up to 2% of the adjusted accounting profit before tax;

: employee-related expenses (i.e. birth, death, incurable disease support, expenses aimed at the proper functioning

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of certain units/activities of taxpayers, e.g. kindergartens, health units, canteens, sports clubs, sponsorship for schools, as well as Christmas gifts for employees’ children, part of employees’ transport costs, treatment in health resorts) currently up to 2% of the total salary cost;

: meal voucher expenses within the limits set by the relevant legislation;

: perishable goods within the limits provided by norms approved by the government;

: fees paid to non-governmental institutions or professional associations within an annual limit of the ROL equivalent of EUR 2,000;

: interest expenses and foreign exchange differences within the limits described in the Thin capitalisation rules section;

: expenses incurred on behalf of employees, which are in relation to optional occupational pension schemes, within the limits set in the law;

: health insurance premiums within the limits set in the law;

: expenses for the maintenance or repair of cars used by the management and administrative personnel, limited to one car per person.

Key expenses, which are expressly non-deductible, include, inter alia:

: Romanian and foreign profits tax (however, a tax credit is allowed for taxes paid in other countries – please refer to the

Foreign tax relief section);: sponsorship expenses

(however, a tax credit is allowed for sponsorship expenses, if certain conditions are met – please refer to Sponsorship section);

: late payment interest, penalties and fines paid to Romanian or foreign authorities;

: losses from reduction in the value of inventory and assets which have not been insured, including the corresponding VAT;

: VAT related to goods granted to employees as benefits in kind, if they were not taxed at employees’ level;

: any expenses performed in favour of shareholders or associates other than those generated by payments for goods and services at the market value;

: insurance premiums that are not related to the taxpayer’s assets or its business scope, except for rented and leased assets or assets used as a collateral for a business-related loan;

: insurance premiums and other employment-related expenses which are not taxable at the level of the employee;

: expenses related to non-taxable income;

: service expenses, including management and consultancy expenses, which cannot be substantiated by written contracts and documents proving the rendering of the services;

: losses in the value of shares

held in other entities, except for losses determined by selling such shares;

: contributions paid in excess of the legal limits or which are not regulated by legal norms.

In respect of a permanent establishment’s management and administration expenses, the deductibility is limited to 10% of the taxable salaries relating to such permanent establishment.

Sponsorship

Taxpayers incurring sponsorship expenses performed in accordance with the relevant legislation, are entitled to a tax credit (i.e. deduction from the profits tax payable of an amount equal to the sponsorship expense incurred) if the following conditions are cumulatively fulfilled:

: the sponsorship expenses do not exceed 0.3% of the turnover; and

: the sponsorship expenses do not exceed 20% of the profits tax liability.

Provisions and reserves

Under Romanian regulations, the following provisions and reserves are deductible for profits tax purposes:

: bad debt provisions within the limit of 20% of the outstanding value of receivables under certain conditions. This limit will be increased to 25%


Asset YearsBuilding and constructions (e.g., roads and fences) 10 to 50Machinery and equipment 4 to 10Furniture and fittings 5 to 10Motor vehicles 5 to 9


starting 1 January 2005 and 30% from 1 January 2006. Starting 1 January 2007 the bad debt provision is entirely deductible if certain conditions are met;

: provisions for quality performance guarantees granted to clients;

: specific provisions and reserves created by banks and other credit institutions, mortgage credit companies and finance service companies, as provided by the governing laws of those entities;

: provisions set by guarantee funds as provided by the norms of the National Bank of Romania;

: legal reserves and provisions set by the National Bank of Romania in accordance with relevant legislation in force;

: technical reserves set by insurance and re-insurance companies, as provided by the relevant regulatory laws;

: risk provisions for financial market operations, as provided by the regulations of the National Securities Commission.

Thin capitalisation rules

Generally, interest expenses incurred by companies (other than credit institutions) are subject to the following limitations:

: debt-equity ratio: interest expenses are fully deductible if the debt-equity ratio is lower than 1. In case such ratio is

higher than the aforementioned limits, interest expenses are deductible up to the amount of interest revenues plus 10% from the other revenues of the taxpayer (excess portion is carried forward for future deduction). Starting 1 January 2006, interest expenses would be fully deductible in case the debt-equity ratio is lower than 3.

: interest rate (for loans granted by companies other than credit institutions): interest rate is deductible based on the following limits:• the reference interest rate

of the National Bank of Romania relating to the last month of the quarter, for loans denominated in ROL;

• the annual interest rate of 9%, respectively 2.25% per quarter for loans in foreign currencies.

Deductibility of interest expenses incurred by credit institutions is not limited based on the above-mentioned rules.

Separately, the positive difference between foreign exchange losses and foreign exchange gains related to loans, if any, is regarded as an interest expense and is subject to the debt-equity ratio limitation.

Tax depreciation

Three alternative methods may be available for the computation of tax depreciation, namely:

: the straight-line depreciation;: the reducing balance

depreciation; and: the accelerated depreciation.

These methods must be followed consistently.

Buildings can be depreciated only based on the straight-line method. Land is not a depreciable asset.

From a tax perspective, the law prescribes the concept of ‘useful lives’. In the chart below the ‘useful lives’ pertaining to major categories of assets are presented. Increases or decreases in the useful lives of assets by up to 20% are allowed, if substantial justification is provided.

Patents, licences, know-how, manufacturer’s brands, trademarks and service marks, as well as other similar industrial and commercial property rights, are depreciated over the period provided for their utilisation. Goodwill is not considered as a depreciable asset for tax purposes.

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The revaluation of fixed assets after 1 January 2004 will not be taken into account for fiscal purposes.

Special depreciation allowance

Taxpayers investing in depreciable fixed assets and/or patents, meant for activities they are authorised for and who did not choose the accelerated depreciation regime, may deduct initial depreciation expenses representing 20% of the assets entry value. The remaining depreciation would be allocated for tax purposes to the years of useful life of the asset, based on the straight-line method. Such tax allowance is also applicable to fixed assets subject to a financial lease, only if the contract provides for a transfer of ownership at the end of the lease. The beneficiary of the allowance shall maintain the assets in its balance sheet for a period of at least half of the useful life of the asset.

Reorganisation, liquidation, other transfers

Capital contributions in exchange of shares are not considered as taxable transfers. The tax value of the assets received as contribution is equal to the tax value of these assets when held by the contributor. At the same time, the tax value of shares received by the contributor equals the tax value of the contributed assets.

Asset distribution to shareholders, either as dividend or following

liquidation is taxable, except in case of:

: merger, whereby the shareholders of merging entities receive shares in the resulting entity;

: split-up, whereby shareholders receive proportional stakes in the resulting entities;

: acquisition of the business of a Romanian entity by another Romanian entity in exchange of shares;

: acquisition by a Romanian entity of at least 50% of shares in another Romanian entity, in exchange of its own shares, and, as the case may be, for a cash payment not exceeding 10% of the nominal value of the newly issued shares.

In the above-mentioned cases, the following rules apply:

: transfers of assets/liabilities and exchange of shares held in one Romanian entity with the shares in another Romanian entity are not taxable;

: in a split-up, distribution of shares is not treated as dividend payment;

: tax value of assets/liabilities for the receiver equals the tax value of the same items for the transferor;

: fiscal depreciation for assets continues in the same manner as before the transfer;

: transfer of provisions/reserves is not taxable if the receiver takes them over and maintains the same value as before the transfer;

: in a share exchange (as above), the tax value of shares received equals the tax value of the shares transferred;

: in a split-up, the tax value of shares held before the distribution is allocated between these shares and distributed shares proportionally with their market value immediately after the split-up.

If a Romanian entity holds more than 25% of the shares in another Romanian entity, which is transferring its assets and liabilities to the shareholder, the cancellation of the shares is not a taxable transfer.


Transfer pricing

According to Romanian legislation, transactions between related parties must be performed in accordance with the arm’s-length principle (i.e. transactions should be performed at the same levels of price as if concluded among non-related parties). Fiscal regulations stipulate that, in case of transactions between related parties, the value accepted by the fiscal administration will be the market value of the transaction. The methods for the assessment of market value include in particular: The Comparable Uncontrolled Price Method, the Cost Plus Method, the Resale Price Method and any other method recognised by the transfer pricing guidelines issued by the Organisation for Economic Cooperation and Development.

Relief for losses

Tax losses may be carried forward over 5 years and are not updated for inflation purposes. Loss carry-forward is not available for entities that cease to exist as a result of split-up or merger. The carry-back of losses is not permitted.

Fiscal consolidation

The legislation regarding consolidation of companies is at an early stage of development and so far only the consolidation for accounting purposes is regulated. Special norms for consolidation of financial

statements for credit institutions are available since 2002 for company groups headed by a bank and since 2003 for those held by a credit cooperative house.

Currently, there are no provisions in the legislation regarding the consolidation for tax purposes.

Tax return filings

Taxpayers are required to file a profits tax return and pay profits tax quarterly (except for banks which fulfil such obligations monthly), by the 25th of the first month of the following quarter. The definitive annual tax return should be filed along with the financial statements.

Legal entities ceasing to exist need to file a final tax return and pay the profit tax within 10 days prior to the registration of such event with the Trade Registry.


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Type of payment Withholding tax rate (%)

Royalties 15Interest (except for current account bank depos-its, debt instruments issued and/or guaranteed by Romanian government, or issued by a non-related Romanian legal party and traded on a recognised securities market, which are deemed as exempt)

5/154

Commissions 15Dividends 155

Various services 15Gambling income 20

Withholding tax is applicable on a number of payments made by Romanian tax residents to non-resident recipients.

Types of payments which trigger withholding tax are presented in the table below.

After Romania joins the European Union, a participation exemption will be available for dividends paid out to companies incorporated in the European Community countries, provided that the beneficiary of dividends holds a minimum participation of 25% in the Romanian company paying the dividends, for a continuous period of 2 years, ending at the date of the dividend payment.

The withholding tax must be paid to the state budget until the 25th of the month following the one in which payment was made.

Companies are liable to file an annual return until 28th (29th) February of the year following the relevant tax year.

Withholding taxes

Romania has concluded about 80 treaties since the 1970s, which may reduce the applicable withholding rate.

In order to apply the more beneficial provisions of the treaty, the income beneficiary has to provide a certificate of tax residence issued by the foreign tax authority.

4 5% rate applies to non-residents for interest income related to term deposit, deposit certificates and other saving instruments provided by banks and other authorised credit institutions in Romania. The 15% rate applies to non-residents for any other interest income except the following, which are specifically exempt: interest income related to non-term deposits in current accounts opened with credit institutions in Romania; interest related to debt instruments issued and/or guaranteed by the Romanian government, local councils, the National Bank of Romania, or by financial institutions acting as agent for the Romanian government; and interest related to marketable debt instruments/securities issued by a Romanian legal entity which is not affiliated to the interest recipient.

5 Also see the participation exemption to be available after Romania joins the European Union.

Historically, the interpretation of treaty provisions by Romanian authorities has led to withholding tax being applied on a wide range of services contrary to OECD principles. In view of this practice, a foreign service provider may be advised to review the home country tax credit mechanisms to ensure availability of credit for the taxes withheld in Romania.


Regime

The Romanian VAT system is modelled on the basis of the 6th EU Directive, although less complex and open to alternative interpretations.

Taxable persons General

Any person supplying taxable goods or services in the course of business, on a regular basis, is considered a taxable person. The term ‘business’ refers to all the activities of producers, traders and suppliers of services, which are carried out independently. The activities of employees are outside of scope of VAT.

VAT representative

Foreign entrepreneurs without an establishment in Romania, but making taxable supplies in Romania are required to appoint a VAT representative, who will be responsible for fulfilling the administrative obligations and payment of the tax due on behalf of the foreign entrepreneur. In case foreign suppliers fail to comply with such obligation, beneficiaries are liable to account for/pay the related VAT.

Value Added Tax (VAT)

Taxable operations

Transactions subject to VAT refer to the supply of goods in Romania and provision of services, as well as to the importation of goods. To be taxable, a supply must be made for consideration.

Supply of goods

Supply of goods refers to the actual transfer of the ownership of the goods from one person to another against payment, directly or through an intermediary.

As a general rule, supply of goods has the place of supply where the goods are located at the moment when the delivery takes place, with certain exceptions for goods to be transported, installed, or for goods to be delivered on board of ships, aircraft, trains, etc.

Supply of services

As a rule, the supply of services is taxable in Romania if the place of supply is deemed to be in Romania. The general rule is that the place of supply is considered place where the supplier has his place of business, his fiscal establishment or his usual place of residence. However, there are several exceptions, similar


to those listed in the EU 6th Directive (e.g. services related to immovable property – place where immovable property is located; renting and leasing of movable goods and ‘intangible’ services – place where the recipient of the services is located). The term ‘services’ applies to all transactions, which are not treated as supplies of goods.

Importation of goods

The introduction of the goods from abroad to the territory of Romania is considered as importation of goods and it is considered within the scope of VAT with certain exceptions (i.e. supply of goods under customs suspensive regime).

‘Reverse-charge’ VAT

For certain services provided by a foreign supplier for which ‘place of supply’ is deemed to be in Romania (e.g. leasing and renting of tangible assets, marketing, e-services, banking, non-competition assurance and other specified services), the law imposes the application of the so called VAT ‘reverse-charge’ mechanism by the Romanian beneficiary.

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Under the ‘reverse-charge’ mechanism, the beneficiaries (provided they are registered for VAT purposes) have to simultaneously recognise the related VAT both as input and output VAT in the return of the respective month, based on a self-invoicing system.

Taxable base

VAT is assessed on the total amount received or to be received by the supplier, as consideration for the supply of goods or services, including taxes, commissions, packaging, transport and insurance expenses. The discount provided to the client is not included in the taxable base.

Tax rates

The following rates presently apply in Romania:

: 19% standard rate, which is applicable to supplies of goods and services not subject to the reduced rate; and

: 9% reduced rate, which is applicable to the suppliers of certain goods/services specifically enumerated in the Fiscal Code, such as sale of medicines, hotel accommodation services, books, tickets to museums, etc.

Exempt operations

Supplies within the scope of VAT are classified as taxable operations and exempt operations.

Exempt operations are divided as follows:

: exempt supplies with credit for input tax (exemption for exports and other similar supplies, international transportation, as well as specific exemptions related to international traffic of goods, certain transactions within the free trade zones);

: exempt supplies without credit for input tax (i.e. medical care services, educational services, financial and banking services, leasing and renting of immovable property with certain exceptions, etc.);

: import operations exempt from payment of VAT (exemption for imports).

Import of goods received as donations for humanitarian, social, religious, cultural, artistic, sports, scientific purposes are VAT exempt.

Also, the Fiscal Code provides for specific rules regarding to goods benefiting from special customs regimes. The following transactions are VAT exempt with credit for input tax, provided

they do not lead to a final use/consumption of goods within Romania:

: supply of goods placed under a bonded warehouse customs regime;

: foreign goods imported in free trade zones for storage purposes only;

: foreign goods introduced in free trade zones from abroad and sold within the free trade zones.

Persons with an annual turnover in excess of ROL 2 billion are required to register for VAT purposes. Persons not meeting the above-mentioned turnover criterion have an option to register for VAT purposes.


Credit for input VAT

General rule

As a general rule, the performance of taxable supplies allows offsetting output VAT against input VAT. Exempt supplies do not allow the recovery of input VAT, except in the event of VAT exempt supplies with credit, for which input VAT can be recovered. Companies performing a combination of taxable and exempt supplies generally have the right to recover the input VAT on a pro-rata basis. The unrecovered input VAT would generally represent a cost.

Refund of VAT

If the input VAT exceeds the output VAT, the recoverable balance VAT (defined as ‘negative VAT balance’) can be:

: carried forward to the next period; or

: compensated/refunded by the tax authorities, based on the option expressed by the taxpayer in the VAT return; the option can be exercised only for negative VAT balance exceeding ROL 50 million.

The VAT refund/compensation request should normally be granted within a 45-day term, during which tax authorities are entitled to require additional information from the taxpayer. Hence, the term can be extended with the equal of the number of days elapsed between the date of the additional information request and the date of the information receipt by the tax authorities. In case the refund/compensation request is not solved at the expiration of such term, the taxpayer is entitled to receive late payment interest from the state budget.

Foreign trade has been liberalised in 1990 and it generally follows the guidelines set by the European Union. As a result of this liberalisation and an on-going process of harmonisation of the Romanian customs rules with the EU system, imports and exports of commodities are not generally subject to special authorisation requirements. Exceptions apply to quantity restrictions or control

Customs duty

requirements imposed through the different agreements entered into by Romania. Licences are also required for barter transactions or compensations, as well as commercial operations performed using clearing accounts or governmental lines of credit.

Radioactive and explosive materials, chemical products, residues, weapons, nuclear

equipment and related materials are subject to particular legislation requirements. Specific laws prohibit the import of narcotics.

Customs duties

The customs duties are expressed as a percentage of the cost-insurance-freight (CIF) value of the goods. Other taxes, duties


Payment and filingrequirements

Taxpayers must file VAT returns with the tax authorities and pay VAT on a monthly basis, specifying the taxable amount and the tax due. The tax return must be filed and the respective VAT paid by the 25th of the following month. In case of taxpayers whose annual turnover is less than EUR 100,000 the VAT returns must be filed with the tax authorities on a quarterly basis.

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and levies may be required to be paid upon importation in addition to customs duties, such as import VAT, excise tax, customs commission or clearance fees.

Preferential rates apply to a wide range of products imported in Romania based on certain free trade arrangements (please see section Regional and international trade agreements and associations). There are certain internationally accepted aspects that are essential for determining the applicable customs duty rates, including the corresponding international tariff headings, value declared in customs and the country of origin of the goods.

Romania has adopted the ‘Brussels Harmonised System’ for the nomenclature of goods and follows the valuation rules of the World Trade Organisation for the assessment and declaration of the value in customs.

The law provides for two definitive procedures – import for free circulation and export. A definitive import triggers the payment of import duties (unless a specific relief is available); the export of goods is exempt from duties.

The Romanian Customs Code provides for several customs suspensive regimes, which may be granted for definite periods of time:

: inward processing;: outward processing;

: bonded warehouse;: temporary admission;: transformation under customs

control; and: customs transit.

The suspensive regimes do not require payment of the customs duties, although a bank guarantee equal to the amount of such duties may be required.

Besides the general customs clearance system, Romania has adopted simplified customs clearance procedures similar to those applied in the EU.

Temporary duty relief

Certain customs regimes may defer, suspend or allow for the refund of the customs duties and other import-related taxes, under specific conditions stipulated in the domestic customs regulations. Such temporary duty relieves may include the bonded warehousing regime, inward and outward processing relief or temporary admission regimes.

Individuals’ customs regime

Romanian customs regulations provide for a specific customs duty treatment for the personal belongings introduced by individuals establishing domicile or residence in Romania, goods introduced into Romania upon marriage, inherited goods and household goods used for furnishing a secondary residence in Romania, as well as goods shipped by individuals via parcels and postal services.

A specific import duty exemption applies for the goods contained in the personal luggage of travelers, brought into Romania without having commercial purposes. This duty exemption can be granted up to a total value of EUR 175 per traveler, for goods other than the following, which should not exceed: : tobacco products: 200 cigars

or 100 cigarettes (cigars having the maximum weight of 3 grams per piece) or 50 cigars or 250 grams smoking tobacco or their proportional mixture;

: alcohol and alcoholic beverages:• distilled and spirit

beverages whose alcoholic concentration exceeds 22% of the volume; not processed ethylic alcohol of 80% or more: 1 litre;

• distilled and spirit beverages and appetizers based on wine or alcohol, sake or similar beverages whose alcoholic concentration does not exceed 22% of the volume; sparkling wines, brandy: 2 litres or proportional mixture of such products;

• light wines: 2 litres;: perfumes: 50 ml and eau de

toilette: 250 ml;: medicines: the quantity

required to meet the needs of the travellers.

The duty exemption mentioned above for tobacco and alcoholic beverages does not apply for the travelers whose age is under 18 years.


Excise duty is a consumption tax payable on certain categories of goods including alcoholic beverages, gasoline, tobacco products, cars as well as perfumes and certain other items. The tax (also regulated by the Fiscal Code) is payable on import and sales of locally produced items in the domestic market and is set as fixed EUR amounts per unit (‘specific excises’) or as a percentage of a specified taxable base.

Currently, the excise duties in respect of the main categories of goods is established in EUR as presented in the table below:

Excise duty

Taxpayers are liable to submit monthly tax returns and pay the excise duties by the 25th of the following month. In case of imported goods, the related excise duty (if applicable) should be paid at the moment of registering the import declaration in customs.

A special supervision and control system is provided for the production and distribution of alcoholic beverages and certain mineral oils.

The fiscal warehouse regime

The fiscal warehouse regime allows the production, transformation and/or storage of products subject to harmonised excise duties (i.e. beer, wines, other fermented beverages, intermediary products, ethylic alcohol, tobacco products and mineral oils) without the payment of the related excise duties. Generally, the fiscal warehouse regime cannot be used for retail sale of such products.

Category of products Excise duty ratesAlcoholic products Up to EUR 150 per hlCigarettes EUR 4.47/1,000 cigarettes + 32% of the declared maximum retail priceCoffee EUR 850 - 5,000 per tonCar fuel EUR 221 - 404 per tonVehicles 0 - 27%Fur, jewels, crystal, perfumes 5 - 50%


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Starting 1 January 2004, local taxes in Romania are regulated by the Fiscal Code. Local taxes represent a distinct category of taxes set by the local administration, which are payable by both individuals as well as entities in Romania.

The local taxes include:

Building tax

Building tax is payable by owners of buildings located in Romania, regardless of their residence. The tax rate ranges between 0.1% and 0.4% for individuals and between 0.5% and 1% for legal entities. For buildings acquired by legal entities prior to 1 January 1998 and not revalued since then, the tax may vary between 5% and 10% applied on the book value of the building, resulted until its first revaluation. The tax is applied on the value of the building (minimum established values are provided) for individuals and on the book value of the building, for legal entities. The tax must be paid quarterly, the latest by the 15th of the last month of the quarter.

Land tax

Land tax is payable by owners of land. Generally, the tax is established as a fixed amount per square meter, depending on the location of the land within certain determined zones, towns and

Local taxes

villages and also depending on the use of the land. The tax must be paid quarterly, the latest by the 15th of the last month of the quarter.

Vehicle tax

Vehicle tax is payable by owners of land/water vehicles, which should be registered in Romania. The tax rate depends on the engine capacity, and it is computed as a fixed amount per 500 cubic centimetres. The tax must be paid quarterly, by the 15th of the last month of each quarter.

Tax for construction authorisations

The taxes are established depending on the construction value, land or installations, usually as a percentage/fixed amount on the value/area.

Publicity and advertising tax

Advertising tax is payable by the 10th of each month by the suppliers of publicity and advertising services rendered in Romania, except for publicity and advertising services performed through audio-video and printed mass media. The tax rate is established by local councils and ranges between 1% and 3%. It is applied on the value of the publicity and advertising services. Users of outdoor advertising

means have to pay an outdoor media advertising tax computed as a fixed quota per square meter, depending on the surface used for advertising. Such tax should be paid in four equal instalments by 15 March, 15 June, 15 September and 15 November.

Resort tax

The tax is due by individuals over 18 years for their stay in resorts and it is included in the hotel tariffs. The tax rate is established by local councils and ranges between 0.5% and 5% of tariffs.

Show tax

Show tax is payable by individuals and entities performing show-biz activities at a quota ranging between 2% to 5% of revenues, or a fixed fee depending on the surface of premises (from ROL 1,000/sqm/day to ROL 2,000/sqm/day). The show tax is payable monthly in arrears by the 15th of the month following the one in which the show took place.


Other local taxes

The local councils may impose a daily fee of up to ROL 100,000 for the temporary use of public places and for admissions to museums, memorial houses, or historical, architectural or archaeological monuments and also for the ownership or use of equipment that is held for the purpose of obtaining income. An annual fee of ROL 300,000 may be established by the local councils for a number of slow-

moving vehicles, specifically provided, which are normally used in construction activities (e.g. bulldozers, cranes, tractors, etc.).

Stamp duty is payable on most judicial claims, issuance of certificates and licences, and documentary transactions which require notarial registration.

Currently there are three types of stamp duties:

: notarial stamp duty;: judicial stamp duty; and: extra-judicial stamp duty.

Stamp duty

Notarial stamp duty is charged for the authentication of documents and other services rendered by public notaries. The duty is applied either as a regressive tax or as a fixed percentage tax, or even as a fixed amount, depending of the type of notarial service rendered.

Judicial stamp duty is levied on claims and requests filed

with Courts and the Ministry of Justice and it is established depending on the value of the claim. Quantifiable claims are taxed under the regressive tax mechanism. Non-quantifiable claims are taxed at fixed amount levels.

Extra-judicial stamp duty is charged for the issuance of various certifications such as ID cards, car registrations, etc.

As a rule, Romanian citizens domiciled in Romania are taxed in Romania on their worldwide income. Also, foreigners and Romanian individuals without a

Individual taxation

Romanian domicile, who become Romanian tax residents, may be subject to taxation in Romania on worldwide income, as detailed in the Taxpayers section.


Residence

An individual is considered as a Romanian tax resident if he/she fulfils at least one of the following conditions:

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a) the individual has the domicile in Romania;

b) the centre of vital interests of the individual is located in Romania;

c) the individual is present in Romania for a period or periods exceeding in total 183 days during any period of 12 consecutive months ending in the respective calendar year; or

d) the individual is a Romanian citizen working abroad as clerk or employee of the Romanian state in a foreign state.

Taxpayers

Taxpayers of individual income tax can be:

: residents, for incomes obtained from any source, both from Romania and abroad; a fiscal credit may be granted for tax paid abroad if certain conditions are met;

: non-residents, who either:• carry out independent

activities through a permanent establishment in Romania, for the net income attributable to the permanent establishment; or

• carry out dependent activities in Romania, for the net income from such dependent activities; or

• earn other types of income.

If a non-Romanian domiciled individual complies with one of the conditions mentioned in Residence section at points b) or c) for a period of 3 consecutive years, starting with the 4th year

he/she becomes subject to taxation on worldwide income. Until the end of the 3-year period, the respective individual is subject to Romanian income tax only for the Romanian-sourced income.

Individuals tax resident in countries that have concluded double tax treaties with Romania may benefit from tax exemption under the terms of the respective treaties. Individuals tax resident in countries that have not entered into a double tax treaty with Romania are subject to Romanian taxation starting with their first day of presence in Romania.

Categories of income subject to taxation

Employment income

Taxable compensation includes salaries, income in cash or in kind, wage premiums, rewards, temporary disability payments, paid holidays, inflation allowances and any other income received by an individual based on an employment agreement. Taxable compensation also includes salaries received by daily or temporary workers, fees and compensation paid to directors and managers of private companies.

Progressive tax rates are applicable with a marginal tax rate of 40% for monthly gross income exceeding ROL 13 million (approximately EUR 325).Employment income is subject to globalisation.

Income from independent activities

Income from independent activities includes:

: income earned from freelance activities;

: income from intellectual property rights;

: income from other activities.

Income from independent activities (as detailed below) is subject to globalisation.

Income earned from freelance activities

The net taxable income is computed as gross income less specific deductible expenses. The law specifically provides deductible expenses within a certain limit. Authorised individuals are obliged to keep single entry books.

Alternatively, income earned by certain categories of freelancers is subject to income tax based on income quota(s), which are yearly established by the Romanian Ministry of Finance.

Income earned from intellectual property rights

The net income from intellectual property rights results after deducting from the gross income the following:

: deductible expenses representing 60% of gross income;


: compulsory social security contributions.

The payers of intellectual property rights have the obligation to compute, withhold and pay a 15% advance income tax, by the 25th of the month following the income payment.

Income from other activities

Income from the following sources is taxed at 10% advance income tax:

: income from sale of goods on consignment;

: income from agent, commission or commercial mandate agreements;

: income from civil conventions concluded based on the Civil Code;

: income from accounting, technical, judicial and extra-judicial expertise.

Payers of such income are liable to compute, withhold and pay the advance income tax by the 25th of the month following the income payment.

Rental income

As a rule, gross rental income consists of amounts in cash or in kind stipulated in the rental agreements and related to a fiscal year (regardless of the moment of effective cashing), as well as certain expenses borne by the tenant and which, based on the law, are the landlord’s liability.

Net rental income represents gross rental income less:

: deductible expenses representing 50% of gross income, in case of buildings;

: deductible expenses representing 30% of gross income, in all other cases.

As an exception, taxpayers may opt for the determination of the net rental income based on single entry accounting.

Rental income is subject to globalisation.

Investment income

Investment income includes:

: dividend income;: interest income;: gains from the transfer of

securities;: income from futures/forward

transactions with foreign currencies and other similar operations.

Dividend income

Dividends are defined as any grant of benefits in cash and/or in kind to shareholders or associates from the annual profit. For taxation purposes, amounts received from holding participation titles in closed investment funds are treated in the same manner as dividends.

The tax rate applicable to dividends distributed to resident individuals is 5% and it is calculated, withheld and paid

by the payer of dividends. The tax should be paid until the 25th of the month following the month when the dividends were paid; in case of dividends distributed but not paid until the end of the year, the tax is payable by 31 December of that year. The dividend tax is final (i.e. the income is not subject to globalisation in Romania). The withholding tax for non-resident individuals is 15% (please see section Withholding Taxes).

Interest income

The taxable income from interest is any income in the form of interest other than:

: interest from current account deposits and deposits with mutual assistance institutions;

: interest relating to debt instruments, as well as municipal bonds, bonds issued by the National Agency for Housing, and other entities that issue bonds with respect to the construction of dwellings.

The tax rate applicable to interest income is 1% and it is calculated, withheld and paid by the payer of interest on a monthly basis, until 25th of the following month. The interest tax represents a final tax. The withholding tax applied to interest income earned by non-resident individuals varies between 5% and 15%, depending on the source of interest income (please see section Withholding Taxes).


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Gains from the transfer of securities

The capital gain represents the positive balance between sale price and the purchase price of different types of securities, reduced by intermediaries’ commissions, as the case may be. In case of transfer of shares in a limited liability company, the capital gain represents the balance between the sale price and the nominal value/purchase price of such shares. In case of redemption of investment titles held in open-ended investment funds, the capital gain is the positive difference between the redemption price and the purchase/subscription price.

Capital gains from sale of shares are subject to 1% tax. The capital gains tax is final (i.e. it is not subject to globalisation). Also, income from the sale of shares acquired based on a ‘stock option plan’ is subject to a final tax of 1%.

Generally, intermediaries are liable to compute, withhold and pay the capital gains tax at the completion of the transaction. The payment should be made by the 25th of the month following the withholding date. However, in case of a sale of shares in limited liability companies or closed-end companies, the liability to compute and withhold the tax belongs to the acquirer of income if the latter is a Romanian individual domiciled in Romania.

In this case, the deadline for the payment of the capital gains tax is the date when the documents are filed for the registration of the ownership right with the Trade Registry or in the shareholders’ register. The ownership registration cannot be completed without the proof of the capital gains tax payment to the state budget.

Income from futures / forward transactions with foreign currencies and other similar operations

Gains from contractual sale-purchase transactions of foreign currencies with subsequent term settlement, as well as from any other similar operations, are taxable at the rate of 1%. The tax is computed and withheld by the intermediary of such transaction (e.g. a bank), upon finalisation of the operation. Subsequently, the tax is payable by the 25th of the month following the date when the tax was withheld. The tax is final (i.e. the gain is not subject to globalisation).

Income from pensions

Taxable income from pensions comprises any amounts received in form of pension from funds created from the mandatory social contributions made to a social insurance system. Taxable income from pension also includes any amount from optional occupational pensions schemes and those financed by the state budget. All other types

of pensions are deemed as non-taxable income. The monthly pension income up to ROL 8,000,000 is not taxable.

The tax is to be determined based on the monthly tax brackets available for the anticipated payments on the account of the global income tax (please refer to Employment income section). The tax is final.

The tax computed as such is to be withheld on the date of actual payment of the pension and remitted to the state budget by the 25th of the month following the month in which the pension income is paid.

Income from agricultural activities

Taxpayers deriving income from agricultural activities are granted two alternatives to determine the net income from agricultural activities: either based on single entry accounting records, or based on standard income brackets. The net income from agricultural activities determined based on either of the two above-mentioned methods is taxed at 15%. The tax is final. The reporting and payment requirements are different for each method of determination of the net income.


Gambling income

Income from gambling and prizes is taxed in Romania, as follows:

: 10%, in case of prizes from a single contest;

: 20%, in case of income from gambling.

The tax is applied on the balance between gross realised income and the tax free amount (i.e. currently, ROL 7,600,000), the tax being final.

The tax is payable by the 25th of the following month and the liability to compute, withhold and pay the tax rests with the payer of the income.

Income from other sources

Income from other sources include, inter alia:

: insurance premiums borne by a freelancer or any other entity on behalf of an individual who is not an employee of the respective freelancer / entity; such income is taxable in the hands of the recipient at 40%, through withholding, the tax being final;

: income received by pensioners or former employees arising out of the employment contracts concluded with their former employers or based on some special laws, in the form of price differences for certain goods, services or other rights;

such income is taxable in the hands of the recipient at 10%, through withholding, and the obligation for the calculation and withholding rests with the payer of such income.

Tax on income from other sources is payable by the 25th of the month following the realisation of the income.

Deductions

Deductible expenses

In order to determine the worldwide taxable income, a resident taxpayer may deduct from the annual worldwide income the following:

: personal deductions (see section Personal Deductions);

: deductions for renovations of domiciles within the limit of ROL 15,000,000 per year;

: insurance premiums for the dwelling of domicile within the limit of the equivalent in ROL of EUR 200 per year;

: contributions to optional occupational pension schemes within the limit of the equivalent in ROL of EUR 200 per year;

: contributions for private health insurance within the limit of the equivalent in ROL of EUR 200 per year;

: trade union contributions;: carried forward tax losses.

Personal deductions

Resident taxpayers may deduct from the annual global income a base personal deduction at the amount of ROL 2,000,000 per each month of the taxable period. Also, several supplementary deductions can be taken into consideration in calculating the taxable income. All deductions for dependents (spouse, children, other) represent 0.5 times the base personal deduction. However, the total amount of personal deductions is capped at three times the base personal deduction.

Deductions for employees

For income tax purposes, employees may deduct from their gross monthly salary social security contributions (see section Social Security Contributions), contributions to the health fund and a nominal amount considered ‘professional expenses’ (i.e. ROL 300,000).


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Rates

The income tax rates are established on an annual basis, but the tax is collected monthly from the various sources of income.

The Ministry of Finance adjusts the tax brackets annually so as to reflect inflation and ROL devaluation. The annual income tax brackets in 2004 are as follows:

Annual taxable income Tax on lower amount Rate on excessExceeding

ROLNot exceeding

ROL

ROL

%0 28,800,000 0 18

28,800,000 69,600,000 5,184,000 2369,600,000 111,600,000 14,568,000 28

111,600,000 156,000,000 26,328,000 34156,000,000 41,424,000 40

Upon globalisation, such brackets will be adjusted with the inflation index available for 2004, based on an Order of the Minister of Public Finance, to be published subsequently.

Filing and payment requirements

Taxpayers who earn income subject to globalisation have to file a global income tax return as well as special declarations with the tax authorities by 15 May of year following the year in which income is earned. The tax authorities compute the global income tax on the basis of the information provided in the global income tax return. The taxpayers are subsequently informed about the tax payable/reimbursable and the deadline for its payment.

Taxpayers earning only salary income throughout the entire fiscal year satisfy their tax

liabilities through employer withholdings. Employers withhold the salary income tax on a monthly basis.

Expatriates employed abroad but performing an activity in Romania should file monthly tax returns and pay monthly tax in Romania by the 25th of the following month.


Social security

Under a Romanian employment arrangement, both employers and employees are required to contribute to the social security system.

Social security contributions at the individual level

: Social security contribution – 9.5% applied to the gross salary, capped at the level of five times the national average salary (for the respective year6);

: Health fund contribution – 6.5% applied on the monthly gross income subject to income tax; and

: Unemployment fund contribution – 1% applied on monthly base salary.

Social security contributions at the employer level

: Social security contribution – between 22% and 32% (depending on working conditions) of the total salary fund, which is capped at the level of five times the national average salary, multiplied by the average number of employees;

: Health fund – 7% of total salary fund;

: Unemployment fund – 3% of total salary fund;

: National insurance fund for work accidents and professional diseases – 0.5% of the total salary fund. Starting 1 January 2005, the contribution will range between 0.5% and 4% of the total salary fund, depending on the risk category; and

: Labour Chamber commission – 0.25% or 0.75% of total salary fund, depending on whether the company or the Labour Chamber keeps the workbooks.

Contribution to the health fund by foreign individuals

According to the current regulations regarding the health fund, foreign individuals having established their residence in Romania could become liable to contribute to the health fund an amount of 6.5% calculated at the level of the Romanian taxable income.

However, foreign individuals who are temporarily present in Romania may opt to contribute to the Romanian health fund an amount equal to 13.5% calculated on the value of two national minimum gross salaries.

6 For the year 2004, the national average salary is of ROL 7,682,000.


Citizens of European Union countries, as well as individuals resident in countries which have concluded with Romania totalisation agreements, benefit from the coverage of medical expenses incurred on the Romanian territory, according to the provisions of the respective agreements.

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Failure to submit tax returns, as well as failure to pay the taxes in due time, entails penalties as detailed below:

Failure to file tax returns

Non-filing of tax returns by the respective deadline may attract the following fines:

: ROL 500,000 to ROL 15,000,000 for individuals and ROL 100,000 to ROL 1,000,000 for the income tax return of individuals; and

: ROL 5,000,000 to ROL 100,000,000 for legal entities.

Taxpayers remain liable for the payment of the fines for late filing of returns regardless of the payment of the tax due.

Interest and penalties on delays in payment of tax due

Failure to pay the taxes at the prescribed dates is penalised with late payment interest, which is currently at 0.06% per day of delay. An additional penalty of 0.5% per month or fraction of month is also payable in respect of the liabilities not paid in due time.

Fiscal sanctions

Separately, failure to pay taxes withheld at source (taxes on salary-type income, dividend income and non-residents’ income) within 30 days after the deadline is considered as criminal offence and can be punished with imprisonment from 6 to 24 months or fine between ROL 100 million to ROL 500 million.


Ernst & Youngin Romania

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Ernst & Young Romania is a member of Ernst & Young Southeast Europe that unifies the practices of nine countries in the region including Greece, Turkey, Bulgaria and Moldova.

Since 1992, Ernst & Young Romania has been a leading company in the professional services market, delivering real added value to our clients. Our more than 200 professionals have extensive knowledge and deep technical skills. They have years of relevant experience in specialised industries in which Ernst & Young is acknowledged as a market leader in Romania: financial services, manufacturing, telecommunications, oil and gas, energy and utilities.

Ernst & Young professionals in Romania are experienced in all aspects of business services, particularly in the following areas:

: Assurance and Advisory An Ernst & Young audit is individually tailored, cost-effective and focused on the client’s areas of highest risk. We provide suggestions for improvement in controls, productivity and management.

: Tax We design and implement domestic and international tax planning solutions, which complement our clients’ business strategy. Whether our clients look for advice on tax matters in connection with a key business decision, ongoing advice in relation to their activities or full outsourcing of their tax functions, we provide assistance for an effective operation and minimisation of their taxes.

: Global Financial and Accounting We provide accounting, payroll, management reporting and other related services in the field of finance and accounting. We help develop and improve accounting, financial and reporting systems, comply with industry requirements, as well as changing regulations, and we account for complex transactions.

: Legal We provide legal assistance in the fields of corporate law, real estate, mergers and acquisitions, privatisations, capital markets, fiscal and commercial litigation and arbitration, employee benefits, intellectual property, information technology law, telecommunications, competition (antitrust) law and labour law.

: Transaction Advisory We assist companies initiate, structure and manage transactions, raise money through debt, equity and development capital, negotiate joint ventures and strategic alliances, conduct business valuations, and conform to stock market requirements. We help our clients locate suitable business partners, targets for mergers or acquisitions, or purchasers for all or part of their companies. We assist with integrating acquired operations into existing companies.

: Human Capital We provide advice on all issues affecting employers, including employment law and contracts, human resources policy, income tax and social security withholding, compensation and pensions, employee share

schemes and profit-related pay schemes. Also, as market leaders in expatriate services, we have the expertise to assist clients with a broad range of issues confronting individuals working and living abroad.

: Business Technologies and Risk Business Risk We generate ideas, which improve processes, enhance revenues and save costs, while at the same time manage issues more effectively. Our professionals are specialised in offering internal audit, operational support, corporate governance and fraud and forensics services. Technology and Security Risk We help clients improve their information technology systems and build and maintain the trust and credibility they need to succeed in a connected economy. Leaders of our Technology and Security Risk services team in Romania are certified information system auditors (CISA) with the IT Governance Institute (ISACA).

In Romania, Ernst & Young serves organisations of all sizes, from major multinational corporations to emerging local companies. Our clients comprise entities in many legal forms, including public and private companies, cooperatives, partnerships, non-profit organisations, mutual funds, and public bodies.


The following table shows the applicable withholding rates under Romania’s bilateral tax treaties.

AppendixTreaty Withholding Tax Rates

Country Dividends Interest Royalties Commissions% % % %

Albania 10/15(1) 10 15 15

Algeria 15 15 15 no specific clause

Armenia 10/15(1) 10 10 15

Australia 5/15(2) 10 15 no specific clause

Austria 15 10(3) 10 no specific clause

Azerbaijan(4) 5/10(1) 8 10 no specific clause

Bangladesh 10/15(2) 10 10 no specific clause

Belarus 10 10 15 no specific clause

Belgium 5/15(1) 10 5 5

Bulgaria 10/15(1) 15 15 no specific clause

Canada 15 15 15/10(9) no specific clause

China 10 10 7 5

Costa Rica(4) 5/15(1) 10 10 5

Croatia 5 10 10 5

Cyprus 10 10 0/5(5) no specific clause

Czech Republic 10 7 10 no specific clause

Denmark 10/15(1) 10 10 4

Ecuador 15 10 10 10

Egypt 10 15 15 no specific clause

Finland 5 5 2.5/5(6) no specific clause

France 10 10 10 no specific clause

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Georgia 8 10 5 5

Germany(7) 5/15(2) 0/3(27) 3 no specific clause

Greece 20/45(8) 10 5/7(9) 5

Hungary 5/15(10) 15 10 5

India 15/20(1) 15 22.5(28) 5

Indonesia 12.5/15(1) 12.5 12.5/15(11) 10

Ireland 3 0/3(12) 0/3(9) no specific clause

Iran 10 8 10 no specific clause

Israel 15 5/10(13) 10 no specific clause

Italy 10 10 10 5

Japan 10 10 10/15(9) no specific clause

Jordan 15 12.5 15 15

Kazakhstan 10 10 10 10

Korea 7/10(1) 10(29) 7/10(11) 10

Kuwait 1 1 20 no specific clause

Latvia(14) 10 10 10 2

Lebanon 5 5 5 no specific clause

Lithuania(14) 10 10 10 2

Luxembourg 5/15(1) 10(3) 10 5

Macedonia(14) 5 10 10 no specific clause

Malaysia 0/10(15) 0/15(16) 0/12(17) no specific clause

Malta 5/30(8) 5 5 10

Mexico 10 15 15 no specific clause

Moldova 10 10 10/15(11) no specific clause

Morocco 15 10 10 no specific clause

Namibia 15 15 15 no specific clause

Netherlands 0/5/15(18) 0/3(19) 0/3(19) no specific clause

Nigeria 12.5 12.5 12.5 as per Romanian law

North Korea 10 10 10 no specific clause

Norway 10 10 10 4

Pakistan 10 10 12.5 10

Treaty Withholding Tax Rates (continued)




Philippines 10/15(1) 10/15(13) 10/15/25(20) no specific clause

Poland 5/15(1) 10 10 no specific clause

Portugal 10/15(1) 10 10 no specific clause

Qatar(4) 3 3 5 3

Russian Federation 15 15 10 no specific clause

Singapore 5 5 5 no specific clause

Slovak Republic 10 10 10/15(11) no specific clause

Slovenia(26) 5 5 5 no specific clause

South Africa 15 15 15 no specific clause

Spain 10/15(1) 10 10 5

Sri Lanka 12.5 10 10 10

Sudan 15 10 10 15

Sweden 10 10 10 10

Switzerland 10 10 0(21) no specific clause

Syria 0 7.5 10/15(22) 15

Thailand 15/20(1) 10/20/25(23) 15 10

Tunisia 12 10 12 4

Turkey 15 10 10 no specific clause

Ukraine 10/15(1) 10 10/15(11) no specific clause

United Arab Emirates 3 3 0/3(24) 3

United Kingdom 10/15(1) 10 10/15(9) 12.5

United States 10 10 10/15(9) no specific clause

Uzbekistan 10 10 10 no specific clause

Vietnam 15 10 15 no specific clause

Yugoslavia(25) 5 7.5 10 10

Yugoslavia 10 10 10 no specific clause

Zambia 10 10 15 no specific clause

Non-treaty Countries 15 0/5/15(30) 15 15

AP P E N D I X

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(1) The lower rate is applicable if the beneficiary of dividends is a company owning at least 25% of the capital of the payer. In case of Denmark, dividends distributed to partnerships are taxed at the higher rate, irrespective of the participation share.

(2) The lower rate is applicable if the beneficiary of dividends is a company owning at least 10% of the capital of the payer

(3) 0% if paid to an Austrian bank or Luxembourg bank or financial institution.

(4) The treaty is ratified by the Romanian parliament, but it is not yet applicable.

(5) The 5% rate is applicable to patents, brands, designs and models as well as to know-how.

(6) The 2.5% rate is applicable to royalties relating to computer software or industrial equipment.

(7) A new treaty has been ratified by the Romanian Parliament. The treaty applies starting 1 January 2004.

(8) The lower rate is applicable to dividends paid by companies resident in Romania.

(9) The lower rate is applicable to intellectual royalties.

(10) The lower rate is applicable if the beneficiary of dividends is a company owning at least 40% of the capital of the payer.

(11) The lower rate applies to payments received for the use of, or the right to use, patents, trademarks, designs or models, plans, secret formulas and processes, or industrial, commercial or scientific equipment, and for information concerning industrial, commercial or scientific experience. In cases of Moldova and Ukraine, payments received for the use of, or the rights to use, industrial, commercial or scientific equipment are taxed at the higher rate.

(12) The zero rate is applicable if the interest is paid in connection with the sale on credit of any industrial, commercial or scientific equipment, or on any loan of whatever kind granted by a bank or other financial institution(including an insurance company), or on any loan of whatever kind made for a period of more than 2 years.

(13) The lower rate applies to interest related to bank loans or interest paid on loans used to purchase machinery and equipment for industrial, commercial or scientific purposes (except for transport means, in case of Philippines, for which the higher rate applies). In case of Israel, the lower rate also applies to interest paid on credit purchase of merchandise.

(14) Applicable starting 1 January 2003.

(15) The 0% rate applies to dividends paid by a company resident in Malaysia to a Romanian resident; the 10% rate applies to dividends paid by a company resident in Romania to a Malaysian resident.

(16) The 0% rate applies to interest paid on long-term loans to a Romanian resident.

(17) The 0% rate applies to industrial royalties paid in Malaysia by a Romanian resident.

(18) The 0% rate applies if the beneficiary of the dividends is a company owning at least 25% of the capital of the payer. The 5% rate applies if the beneficiary of the dividends is a company owning at least 10% of the capital of the payer. The 15% rate applies to other dividends.

(19) Romania will not impose withholding tax on interest and royalties as long as Dutch domestic law does not impose withholding tax on these types of payments.

(20) The 10% rate applies to royalties paid by a company that is registered as a foreign investor and is engaged in an activity in a priority economic field. The 15% rate applies to royalties related to film or television production. The 25% rate applies to other royalties.

(21) Under the Protocol to the Switzerland-Romania treaty the withholding tax rate is currently zero.

(22) The 10% rate applies to cultural royalties.

(23) The 10% rate applies if the beneficiary of the interest is a financial company, including an insurance company. The 20% rate applies to interest with respect to sales on credit. The 25% rate applies to other interest payments.


(24) The 3% rate applies to royalties for copyrights and artistic rights; other royalties are not subject to withholding tax.

(25) The provisions of this treaty are currently applicable only for Bosnia-Herzegovina. Macedonia applied the provision of this treaty until 1 January 2003, while Slovenia until 1 January 2004.

(26) Applicable starting 1 January 2004.

(27) The zero rate is applicable if the interest is paid to German Government, Deutsche Bundesbank Kreditanstalt fur Wiederaufbau or Deutsche Investitions und Entwicklungsgesellschaft (DEG) or interest paid in connection with a loan guaranteed by HERMES-Deckung. The zero rate is also applicable in case of interest paid to Romanian Government, if they are obtained and effectively detained or guaranteed by the Romanian Government or it one of its agencies. Also, as long as Germany does not levy taxes on interest, Romania may not tax interest, unless such interest derives from rights or debt-claims to participate in profits or the rate is linked to the borrower’s profits.


(28) The 22.5% tax also applies to technical services.

(29) Interest related to purchase of equipment is not taxed.

(30) The 5% rate applies to non-residents for interest income related to term deposit, deposit certificates and other saving instruments provided by banks and other authorised credit institutions in Romania. The 15% rate applies to non-residents for any other interest income except the following, which are specifically exempt: interest income related to non-term deposits in current accounts opened with credit institutions in Romania; interest related to debt instruments issued and/or guaranteed by the Romanian government, local councils, the National Bank of Romania, or by financial institutions acting as agent for the Romanian government; and interest related to marketable debt instruments/securities issued by a Romanian legal entity which is not affiliated to the interest recipient.

AP P E N D I X

Ernst & Youngin RomaniaPeter de Ruiter Country Managing Partner

Assurance and Advisory ServicesChristos Seferis, Partner [email protected]

Tax ServicesVenkatesh Srinivasan, Partner [email protected]

Global Financial and Accounting ServicesCamelia Horlaci, Partner camelia. [email protected]

Legal ServicesPeter de Ruiter, Partner [email protected]

Transaction Advisory ServicesCamelia Horlaci, Partner camelia. [email protected]

Human Capital ServicesPeter de Ruiter, Partner [email protected]

Business Risk ServicesCamelia Horlaci, Partner camelia. [email protected]

Technology and Security Risk ServicesChristos Seferis, Partner [email protected]

Address:Forum 2000 Building, 4th Floor75 Dr. N. Staicovici Street, Sector 5050557 Bucharest, Romania

Phone: (40-21) 402.4000Fax: (40-21) 410.7052Email: [email protected]

Dbir 2004 Eng

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Transcript of Dbir 2004 Eng