Regulars
LEGAL AND GENERAL
Investing in Romania? Then read this

by Alina Rosca
October 2004

As there are some very large international companies already established and doing business here, so too will many small and medium sized companies as well as private individuals soon begin queuing at Romania's door.

But while big international companies know their way around, it seems that small and medium sized companies do not always seem to be correctly informed or understand the legislation quite so well. There are many legal issues, in connection with doing business in Romania, that are important to know, but in this article I believe that it will be more useful to concentrate on some of the more common mistakes.

Is it a good thing to invest in your own name rather than in the name of a newly formed Romanian company? Many investors decide to invest in Romania in their own name rather than in the name of a Romanian company. This might not be a mistake as far as they know and understand the implications of the Romanian tax regime over their investment. For instance many foreigners are under the impression that whatever investment they make in Romania they owe no taxes to the state as they are not tax residents of Romania. This is not actually true. For example, an investor who buys a property in Romania in his own name, although he is not a tax resident he will still owe tax for income earned from rent. The tax will be due to the fact that the property, from where the rent is received, is situated in Romania.

I do not want to say that if one invests in his own name it is a mistake; on the contrary sometimes it might be the right decision, as long as an investor double checks the option with a Romanian lawyer as well as with a lawyer from the country where he is the tax subject. For instance investing in shares which are traded on the Romanian stock market, or buying, refurbishing and then selling property will carry no taxes for a foreigner who is not a Romanian resident from the tax point of view. Therefore, for such kind of investments there is no point in setting up a Romanian company.

Nevertheless, the fees to set up a Romanian company are not so high and the cost for maintaining it are considerably lower than in many other countries. Moreover the taxes to be paid on the profit made by the Romanian company are often lower than the taxes which have to be paid by the investor in his own country.

Under Romanian law, a company has to pay a tax of 25 per cent on profit unless its activity falls under the category where the taxes are higher. There are also the microcompanies which are taxed at 1.5 per cent of their profits. A microcompany is a company which fulfills the following conditions, on 31st December of the previous fiscal year:

ï its object of activity includes services, commerce and/or goods manufacturing;

ï has no more than nine employees but at least one;

ï the turnover of the company is less than 100,000 euros;

ï none of its shareholder is the Romanian state, the local authorities and/or public institutions.

A good idea is that the sole shareholder of the company will be not the investor himself but one of its companies set up abroad. This way, whatever tax schemes are in place for the investor, in the country were his other companies are domiciled, the profits made by the Romanian company may also be reflected.

Optimising taxes is an attractive and profitable task for any company. Nevertheless, many companies choose to optimise tax which looks to be profitable at the beginning but proves to have an unexpectedly costly result.

Many employers try to lower taxes which have to be paid on behalf of their employees, a result that is usually achieved by declaring lower salaries. As a result, employees get to be paid more and employers pay fewer taxes. Even expatriate employees seem to be very happy with these arrangements, and the practice is widespread. But this can lead to a major problem which affects an employees creditworthiness. Local employees and even expatriates who work in Romania for international companies often apply for a loan in order to buy a property or goods. Understating salaries in an employment contract may ultimately do the employee a disservice by thwarting their ability to apply for a housing loan, for example. These employees will sooner or later either ask for the company to declare their real salary, without lowering the level of payment received, or consider leaving the company. Moreover, the tax man will have a hard time believing that a company which has invested a great deal of money in its business is paying such small salaries to its employees. Optimising taxes is not impossible but the adviser has to carefully assess all the aspects that apply to a particular company.

Who's afraid of the tax man?

It is amazing how panic sets in at a company when a visit from the tax man is imminent. I have come across many shareholders who, although they have all the papers in order, completely freeze if the word 'tax inspector' is enunciated in their presence.

A tax inspector will visit your company for the following reasons:

ï to check on the documents and operations of the company in order to assess tax payments that are due to be made to the state;

ï whenever somebody sends the tax man to the headquarters because he believes that the company breached fiscal legislation (often this presumption is wrong as it is difficult for a person who is outside the company to know whether or not there has been a breach in the legislation);

ï to check the documents and operations of the company against the related documents held by other tax payers.

The tax inspector is not the big bad wolf who will come and blow down your house. If you make sure that you have all the required documents in place and you obey the tax law there should be no reason to panic. Moreover, you have to make sure that your accountant has enough experience to be able to answer the questions asked by the tax man and to quickly comply with any requirements. One of the silliest mistakes made is that although the company has all the required documents in order, they are written in a foreign language without being translated into Romanian. Be aware that there is no piece of legislation which states that a Romanian tax inspector is required to speak a language besides Romanian, and as a result he will not be obliged to take into consideration documents that he cannot read.

Mistaking company funds for personal funds

Many times have I been surprised to see shareholders who withdraw money in order to pay for their dinner or for daily expenses.

The turnover of a company is not equal to the profit of the company and the profit of a company is not equal to dividends of a shareholders. Even if one is able to assess the amount of dividends a company will declare early in the fiscal year, it is still not possible to take funds out as dividends before the decision at the general meeting of shareholders. So before you embark on a spending spree, make sure that you know what you are doing.

The next question which always arises is how am I going to live until the end of the year as the profits of the company are my only source of income? There is always the possibility of taking money out of the company accounts but this has to be done legally and be supported by documentation.

The truth is that everybody makes mistakes. Nevertheless, if one takes the time to think about it, he will find that the number of mistakes can be minimised by taking advantage of the professional expertise and by looking at the experience of other investors. Romania offers a good overall package for investors - together with the professional expertise and opportunities, there are some attractive facilities of which one can take full advantage.

Alina Rosca is a lawyer in private practice.