Romania Business Passport - EY · large cities include Iasi, Cluj-Napoca, Timisoara, Constanta, Craiova, Galati and Brasov. Romania has a continental European climate with warm summers

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Romania Business Passport2019 Edition

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Contents

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Country overview 5Geographical overview 5Population and language 5Economy overview 5Political and legal environment 7Reforms and economic development 9EU funding and government incentives for enterprises 12

Business overview 18Types of business 19Labor force and employment regulations 21Work regulations for foreigners 24Entrepreneurship 26Intellectual and industrial property 27Competition legislation 28Environmental legislation 29

Financial Services 31Banking 31Capital Markets 37Insurance&Private pensions 40

Energy 44Oil&Gas 45Power&Utilities 50

Accounting, auditing and reporting 55Accounting and financial reporting 55Main bookkeeping and document submission requirements 57Auditing 59

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Taxation in Romania 61Corporate taxes at a glance 61Profits tax 61Withholding taxes 72Value added tax (VAT) 74Customs duties 82Excise duty 84Local taxes 85Stamp duty 87Individual taxation 87Tax Procedure Code 93Tax sanctions 97

Outsourcing Market in Romania 99Where SSCs nest and what they're doing 99Current and future workforce 100Office space 101Brief conclusion 101

EY in Romania 102

Appendix 106

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Country overview1

Moldova airview

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1.1. Geographical overviewRomania is located west of the Black Sea in Southeast Europe and has an area of approximately 238,391 sq km. Moldova and Ukraine border Romania on its east and north, while Hungary and Serbia border Romania on its west and Bulgaria borders its south. The country is broadly divided into three regions: the central and northwestern region, comprising Transylvania, Crișana, and Banat and encompassing the Carpathian Mountains; the southern region, comprising the Wallachian Plain with the river Danube forming the country's southern border; and the eastern region, comprising the Moldovian Plain. Bucharest is the capital city, with a population of 1.9 million. Other large cities include Iasi, Cluj-Napoca, Timisoara, Constanta, Craiova, Galati and Brasov. Romania has a continental European climate with warm summers and cold winters.

1.2. Population and languageRomania has an average density of 81.96 inhabitants per sq km and a population of 19.53 million (according to the latest available data, 2018), 88.9% of whom are ethnic Romanians. Minorities include Hungarian (6.5%), Roma (3.3%), German (0.2%) and Ukrainian (0.2%). Romanian is the common language used throughout the country. In the northwest and central regions, Hungarian and German languages are also spoken. Under the Constitution, ethnic minorities are allowed to use their mother tongue in certain circumstances (e.g. in court).

1.3. Economy overviewIn the last few years, the Romanian fiscal environment saw a lot of improvements, which ranks Romania on the 52th place in the World Bank's "Doing Business 2019" index. However, transparency and predictability of the regulatory framework could be further improved and this remains a top priority for the authorities. Although inefficiencies in public administration still represent a burden on business, they have been lowered by the actions taken in the recent years.

Addressing corruption and fraud in public procurement is a constant preoccupation of the relevant state bodies and positive results are now showing. Moreover, the civil society is more and more aware about these topics and the voice of the citizens is heard loud and clear when necessary.

Romania works on developing the infrastructure. Every year the motorways network is constantly expanded, although the pace could be significantly improved. The development of Romania's infrastructure is also supported by the availability of the EU structural funds.

Ease of doing business measured as distance to frontier

71.24

72.28

72.3

75.17

76.1

76.59

79.59

66 68 70 72 74 76 78 80 82

Bulgaria (59)

Hungary (53)

Romania (52)

Slovak Republic (42)

Czech Republic (35)

Poland (33)

Latvia (19)

Source: World Bank Doing Business 2019, Distance to frontier score captures the gap between an economy's current performance and the best practice across the entire sample of indicators across 10 Doing Business indicator sets. Higher distance to frontier scores show absolute better ease of doing business (as the frontier is set at 100 percentage points), while lower scores show absolute poorer ease of doing business (the worst performance is set at 0 percentage points).

1. Country overview

Romania Business Passport 2019

The progress with the promotion of competition in energy markets contributes to a more efficient energy infrastructure. Broadband coverage is high and the strong internet infrastructure allows high speed data transfer and positions Romania in the top 5 countries worldwide for broadband internet connection1.

In this environment, entrepreneurship rises and one can now see industry sector leaders being domestic entrepreneurial companies with 10-20 years of activity in average. Romania is one of the most attractive markets in Europe for IT investment and outsourcing, with a highly skilled and diversified workforce and competitive prices. Romania's IT sector has seen continuous growth over the past decade and stands at 5.1% of GDP in 2017.

The Romanian capital market is under development despite some important steps were made to solve this problem in the last period. Big companies start to identify it as a source of finance and an alternative market exists to small and medium enterprises (SMEs) – the AeRO secondary market.

1 - After Singapore, Iceland, Hong Kong and South Korea, according to Ookla (Global leader in internet testing, data and analysis), May 2019

How Romania ranks in the World Bank Doing Business 2019 by topic

Starting a business

Registering Property

Getting Credit

Protecting Minority Investors

Paying Taxes

Trading Across Borders

Enforcing Contracts

Resolving Insolvency

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Rank

44

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64

49

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52

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22

43

64

85

106

127

148

169

190

Source: World Bank Doing Business 2019, the ranks show how Romania is positioned by topic in the ease of doing business compared to other 190 measured countries

1 COUNTRY OVERVIEW

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1.4. Political and legal environmentRomania is a republic and its present Constitution was adopted by Parliament on 21 November 1991. It was subsequently amended and ratified by legislation, and the present form is effective since 29 October 2003. The Romanian Constitution guarantees a multi-party system, a free-market economy and protection of human rights. Legislative power is vested in a bicameral Parliament made up of a lower house (Chamber of Deputies) and an upper house (Senate). Parliamentary elections are held every four years, while presidential elections are held every five years. Being part of the European Union (EU), Romania also holds 33 seats in the European Parliament.

The President is elected by direct vote and has powers limited by the Constitution. The President is required to:• Nominate the Prime Minister following consultation

with the majority party • Promulgate laws passed by Parliament• Cooperate with the National Security Council on

relevant issues.

Under the Constitution, private property is guaranteed and protected by the Romanian state. Foreign nationals and stateless persons may obtain ownership right for land under conditions resulting from Romania's accession to the EU or by virtue of domestic laws and other international treaties to which Romania is a party.

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

Since signing the association treaty with the EU in 1993, Romania has adopted several regulations issued by EU bodies in domestic legislation. In 1994, Romania ratified the European Convention for the Protection of Human Rights and Fundamental Freedoms and agreed to enforce its provisions, including the right of individual petition and recognized the competence of the European Court of Human Rights. Any Romanian citizen may bring a case against the Romanian state before the European Court, whose rulings are binding upon the state.

Romania has enacted several legislations necessary for instituting and strengthening a free market, including laws concerning dispute resolution and related procedures. The concept of arbitration is also quite popular.

The Sucevita Monastery - Suceava County

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Romania Business Passport 2019The Sucevita Monastery - Suceava County

As an EU member state, Romania has to directly apply certain EU regulations without the need to have them adopted in the domestic legislation.

Courts are divided into civil and criminal and organized at the national, county, and local levels. The High Court of Cassation and Justice is the highest judicial forum in

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 Parliament. This competence is attributed to the Constitutional Court. Romania has traditionally used the civil system of law where judicial precedence does not constitute a recognized source of law.

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1.5. Reforms and economic development

Type of economyAfter the fall of the communism, Romania's authorities committed to a series of reforms to modernize the country in order to become member of NATO and European Union. Country's geo-strategic position, at the crossroads of many historical trade routes, should be exploited more in the coming future once the large infrastructure projects will be finalized. Constanta port, one of the largest on the Black Sea, links to the North Sea by a new navigation route through the Rhine-Maine-Danube Channel.

Being the ninth largest country of the EU and with a population of roughly 19.6 million citizens, Romania has one of the most diversified landscape, with mountains, hills and plains, being equally distributed on its 238,391 square kilometres, offering many opportunities for tourism activities. Also, the Danube river, the second largest river of Europe, flows into the Black Sea, forming the Danube Delta, which is the second-largest and best-preserved delta in Europe.

Romania is still largely an agricultural country, as this sector accounts for roughly 20% of GDP, 35% of employment and 10% of external trade. Some 10% of the Romanian economy is agrarian, with around one in five Romanians owning a small farm.

Additionally, Romania has a long tradition in exploiting natural resources, mainly oil&gas, being the largest oil producer until the Second World War and the first country which refined crude oil. Romania remains a significant oil producer in the region, due to the offshore exploitation of natural gas resources, especially from Neptun Deep block in the Black Sea that should assure the continuation of the sector's performance. However, the recent taxes introduced via the emergency ordinance in December 2018 (including a 2% tax on turnover for companies acting in energy sector and a cap on gas prices) don't provide the necessary prerequisites for multi-billion investments required by exploration and exploitation of offshore perimeters in the Black Sea. Furthermore, the lack of fiscal predictability has determined investors to take a step back from further developments in the Black Sea.

The start of 2019 marked the beginning of Romania's six-month Presidency of the European Union, being its first mandate. Romania is in close coordination with the Trio EU Presidencies of Finland (July-December 2019) and Croatia (January-June 2020).

COUNTRY OVERVIEW 1

The Sucevita Monastery

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General economic trendsRomania's economy had undergone many structural changes to meet the criteria of a market economy, and a considerable progress has been made on its way to reduce the gap between the living standards of its citizens towards the level encountered in developed European economies. Following positive economic growth rates between 2005-2018 (except for 2009-2010 when the economy contracted), Romania's 2017 GDP per capita (in purchasing power standards) is equivalent of 63% of EU27 average GDP per capita, up from the 35% level recorded in 2005.

Economic growth was among the fastest in the EU, with GDP growth rates of 7.0% y-o-y in 2017 and 4.1% y-o-y estimated for 2018, driven mainly by consumption boost, while investments performance was rather poor and net exports had negative contribution. Household spending was the main driver of economy's growth due to the falling

unemployment, wage increases and rebounding inflation, as a result of the pro-cyclical fiscal policy undertaken in the past years. On the negative side, the strong domestic demand triggered a surge in imports of goods and services, deteriorating the current account deficit. Traditionally, after the fall of communist regime, Romania is a net importer (except in 2013 when the exports reported an outstanding annual performance of +10% and had a positive contribution to the economic growth rate).

Economy's growth is set to slowdown in the foreseeable future (2019-2022), as fiscal easing puts pressure on government revenues and is expected to generate inflationary pressures, while the economy runs closely to its potential.

The table below illustrates the main economic indicators and the estimation until 2022.

1 COUNTRY OVERVIEW

Main macroeconomic indicators

2017 2018 2019 2020 2021 2022

Gross Domestic Product 7.0 4.1 5.5 5.7 5.0 5.0

Industry 8.3 4.1 5.4 4.6 4.3 4.5

Agriculture 14.6 10 1.9 1.1 1.1 1.1

Constructions -0.9 -5.6 7.2 7.7 7.1 7.1

Services 6.9 3.6 5.8 6.4 5.5 5.4

Final consumption 8.6 4.5 5.9 5.7 4.9 4.8

Household actual individual consumption 9.0 3.7 6.1 6.0 5.2 5.2

Government's actual collective consumption 5.2 12 4.5 4.0 2.5 2.4

Export of goods and services 10.0 5.4 6.9 7.1 7.0 7.0

Import of goods and services 11.3 9.1 7.8 7.9 7.8 7.8

Source: National Prognosis Commission (NCP), National Institute of Statistics

Structural changes of the economy in the past two decades resulted in the advance of services, which became dominant in GDP formation. Government's measures taken to support IT&C, showed their results in the past three years, with IT&C performance being one of the strongest among subsectors.

Industry contribution to GDP growth increased in the past years, mostly as a result of a strong rebound of Europe economic activity, with Manufacturing (i.e. machinery and transport equipment, automotive, manufacture of electrical equipment, computer, electronic and optical products) bringing the highest positive influence.

The lack of investments in agriculture infrastructure (i.e. irrigation system) increases the influence of the weather on agriculture production evolution and the unexploited business opportunities in this sector.

2 - According to The National Bank of Romania

Foreign direct investmentSectors that attracted foreign investments in past years include the manufacturing industry (mainly oil processing, chemical products, automotive, machinery and transport equipment, metallurgy), construction & real estate transactions, financial intermediation & insurance, and professional, scientific, technical and administrative activities. A deepening of the supply chain in machinery and transport is expected to raise technology and innovation-related investments in the future.

The FDI net flow in 2018 registered EUR 4.9 billion, following an upward trend over the last years. Among the largest investing countries in Romania are: The Netherlands (25.9%), Germany (12.8%), Austria (12.6%), Italy (6.2%) and France (6.2%)2.

Regional and international trade agreements and associationsRomania has signed the General Agreement for Tariffs and Trade (GATT), the World Trade Organization (WTO), the European Free Trade Agreement (EFTA) and the Central European Free Trade Agreement (CEFTA). Furthermore, Romania has entered more than 80 agreements for the

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avoidance of double taxation and the prevention of tax evasion on income and capital. Romania is also a member of the International Monetary Fund, the World Bank (i.e. the International Bank for Reconstruction and Development and the International Finance Corporation) and the European Bank for Reconstruction and Development (EBRD).

As an EU member state, Romania adheres to the bloc's Common Commercial Policy and accepts the European Commission as a collective negotiating body for important international trade-related matters, particularly negotiations within the WTO. It also complies with the anti-dumping and anti-subsidy measures adopted by the Community and does not adopt any trade defence measures or instruments against other EU member states.

Major trading partners and leading imports and exports

Imports and exports

The boost of the private consumption is the main culprit of the deterioration of the trade balance in the past two years, causing the trade deficit to widen through robust imports.

In 2018, imports increased by 9.6%, outpacing the exports' dynamics of 8.1%, resulting in a negative trade balance of EUR 15.1 billion, compared to a deficit of EUR 13 billion recorded in the previous year. Thus, the current account deficit widened to 4.5% of GDP in 2018, from a 3.2% level in 2017.

On both exports and imports side, machinery and transport equipment are the main traded category of goods, while EU countries are the main trading partners.

For 2018, at EU level the main export/import countries for Romania are presented in the following table:

Exports Imports

Germany 23.0% Germany 20.5%

Italy 11.4% Italy 9.4%

France 7.1% Hungary 6.9%

Hungary 4.9% Poland 5.6%

Great Britain 4.3% France 5.1%

Source: National Institute of Statistics, EY Research

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Takeaways• Private consumption is expected to remain the driver of

economic growth in the next years, although it is seen to slow down given the inflation upward trend, as well the fiscal and external imbalances

• Inflation has fallen back inside the target range, but is expected to swing around the upper end of the interval mainly due to the following factors: GDP growth, higher purchasing power, price recoveries for commodities, reduced VAT impact cooling off, etc

• In the foreseeable future, domestic currency is expected to remain relatively stable versus the hard currencies, with EUR/RON FX rates to hover around 4.7

• Pro-cyclical policies promoted by the Government will put pressure on budget's balance, leading to widening fiscal deficits in the upcoming years

• Domestic demand is expected to put additional pressure on the trade balance and hence on the current account deficit

• Recovery of the inflation might trigger a tighter monetary policy, leading slowly to higher interest rates

• Still low absorption rate of EU funds. Despite the higher fund allocation to Romania in 2021-2027, the low fund absorption is expected to have little effect on the GDP growth outlook

• Labour market is seen to tighten further, influenced, among others, by the ongoing migration of working-age population, negative demographic trends, mismatch between labour supply and demand, low labour force participation, high underemployment, pressure on nominal wages

• Stability of the banking sector, with a good solvability and liquidity ratios, but low financial intermediation as compared with average EU level.

1.6. EU funding and government incentives for enterprises

Romania and the European UnionRomania has been a member of the European Union since 1 January 2007, benefiting from financial support made available under EU policies in two subsequent programming periods, namely 2007-2013 and 2014-2020. In the period 2007-2013, European funds were divided according to three policies: the agricultural policy represented by the European Agricultural Fund for Rural Development (EAFRD), the fisheries and maritime policy represented by the European Maritime and Fisheries Fund (EMFF) and the structural policy represented by the Structural Funds which include the European Regional Development Fund (ERDF), European Social Fund (ESF) and the Cohesion Fund (CF). For the period 2014-2020, all these funds are part of the European Structural and Investment Funds (ESIF) that bring together the three policies.

Romania has been allocated EUR 30.72 billion from ESIF over the period 2014-2020 to be invested in various areas, from creating jobs and growth, to promoting innovation as well as protecting the environment and supporting social inclusion.

The European funds implemented in Romania through eight national and regional programmes that correspond to 11 thematical objectives (TO) are: • TO 1 "Strengthening research, technological

development and innovation" aims the improvement of R&D by focusing on the business's needs and on the new technological challenges

• TO 2 "Enhancing access to, and use and quality of information and communication technologies" has the objective to develop actions in the digital environment such as e-government instruments for citizens

• TO 3 "Enhancing the competitiveness of SMEs, the agricultural sector and the fisheries and aquaculture sector" aims to increase the competitiveness of SMEs and the labour productivity of SMEs

• TO 4 "Supporting the shift towards a low-carbon economy in all sectors" supports the improvement of the urban common transport and the improvement of the energetic efficiency of the buildings

• TO 5 "Promoting climate change adaptation, risk prevention and management" aims a better coordination in case of emergency

• TO 6 "Preserving and protecting the environment and promoting resource efficiency" has the objective to increase the protection of the biodiversity, to promote the waste management plans and to improve the air quality

• TO 7 "Promoting sustainable transport and removing bottlenecks in key network infrastructures" supports the improvement of Romania's transport system and a better connectivity between its regions

• TO 8 "Promoting sustainable and quality employment and supporting labour mobility" aims the improvement of the labour market and a sustainable integration of the NEETs (Not in Employment, Education or Training)

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• TO 9 "Promoting social inclusion and, combating poverty and any discrimination" propose a reduction of persons that are at the risk of poverty and social exclusion

• TO 10 "Investing in education, training and vocational training for skills and lifelong learning" aims to increase the quality of the educational facilities and to increase the participation rate of disadvantage population in educational structures

• TO 11 "Enhancing institutional capacity of public authorities and stakeholders and an efficient public administration" has the objective to reform the human resources in health and educational systems.

Operational Programs for Romania in 2014-2020 The ESI Funds were allocated to eight Operational Programs prepared by the Romanian Government and approved by the European Commission in 2015:

1) Competitiveness Operational Program (EUR 1.33 billion from European Regional Development Fund)Competitiveness Operational Program is focusing on strengthening research, development and innovation (RDI), supporting economic competitiveness and the development of business, as well as enhancing access to information and communication technologies (ICT), for a competitive digital economy. The main direction of investment in RDI is to build a more compact and modern R&D environment that focuses on the businesses' needs. It will boost private investments in RDI, develop centers of excellence, strengthen the links between businesses and research institutions and stimulate the creation of networks and clusters for developing new products and services. In the area of ICT, the program covers four main areas for development: a) e-government, interoperability, cyber-security, cloud computing and social networks, b) use of ICT in education, health, social inclusion and culture, c) e-commerce, clusters and developing innovation through ICT, and d) further deployment of the broadband infrastructure for the whole country.

2) Human Capital Operational Program (EUR 4.32 billion from European Social Fund and Youth Investment Initiative)Human Capital Operational Program represents an important source of investment in employment, education and social inclusion, with a focus on youth, Roma and rural population. The activities envisaged for young people under the Youth Guarantee scheme include support to set up companies, as well as incentives for employers to create jobs and apprenticeships programs. Integrated measures will help disadvantaged people, including Roma, to access the labour market, by improving their skills and supporting entrepreneurship and social enterprises, among other actions.

3) Large Infrastructure Operational Program (EUR 9.41 billion from European Regional Development Fund and Cohesion Fund)Large Infrastructure Operational Program addresses the development challenges in the field of transport

infrastructure, sustainable urban transport, environment, and energy and risk prevention. The main focus lies on removing the main transport bottlenecks and developing sustainable, efficient and green transport modes in the country including the development of the TEN-T and the subway network. Another strong focus relates to measures to increase energy efficiency and protect natural resources. It also includes investments in environment infrastructure and risk prevention.

4) Regional Operational Program (EUR 6.7 billion from European Regional Development Fund)Regional Operational Program aims at promoting smart sustainable and inclusive growth in all Regions in Romania. Among others, the following priorities will be funded: supporting transfer of technology and innovation take up by SMEs in areas for smart specialization; enhancing SMEs' competitiveness focusing on Romania's high-growth economic sector; promoting the low-carbon economy through investments in energy efficiency in buildings, public lighting and sustainable multimodal urban mobility; supporting sustainable integrated urban development and regeneration of deprived urban areas.

5) Administrative Capacity Operational Program (EUR 0.55 billion from European Social Fund)Administrative Capacity Operational Program has the objective to improve the efficiency, the transparency and the accessibility of Romania's public administration and judicial system. To attain this objective, investment will address the following priorities: strengthening the key functions of public administration and improving the administrative capacity to perform such functions; improving the functioning of the judicial system; enhancing

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the decision-making in local public administration and judiciary, by introducing common standards and practices and quality management systems, with a view to improving the services provided to citizens and businesses; and setting up a preventive framework both in public administration and in the judicial system to address ethics and integrity challenges.

6) Technical Assistance Operational Program (EUR 0.21 billion from European Regional Development Fund)Technical Assistance Operational Program is covering support for the management of European Structural and Investment Funds. These operational programs are managed by the Ministry of European Funds (Large Infrastructure, Human Capital, Competitiveness and Technical Assistance Programs) and the Ministry for Regional Development and Public Administration (Regional Development and Administrative Capacity Programs).

7) Romanian National Rural Development Program (EUR 8.1 billion from European Agricultural Fund for Rural Development)Romanian National Rural Development Program supports the strategic development of the rural area through the following objectives: restructuring and increasing the viability of agricultural holdings; sustainable management of natural resources and combating climate change and diversification of economic activities, job creation, improvement of infrastructure and services for improving the quality of life in rural areas.

8) The Fisheries and Maritime Affairs Operational Program (EUR 0.17 billion) The Fisheries and Maritime Affairs Operational Program, financed by the European Maritime and Fisheries Fund (EMFF), aims the development of sectors that are linked to the maritime transport, the conservation of the biodiversity and the protection of the environment.

Other programs include Territorial Cooperation Programs (EUR 0.45 billion) and Operational Program Aid to the Most Deprived (EUR 0.44 billion).

Moreover, at the beginning of 2016, the European Investment Bank Group has concluded an agreement with the Government of Romania and the European Commission for the implementation of an SME Initiative in Romania. It is expected that about EUR 0.5 billion of new SME financing will be provided under this Initiative. Romania is contributing EUR 0.1 billion from its European Structural and Investment Funds, which will be leveraged with commercial lending through a risk-sharing mechanism. This will result in more SMEs benefiting from European resources on advantageous terms, such as reduced interest rates and improved collateral requirements.

Furthermore, in 2017 the European Investment Bank Group lent EUR 1 billion to co-finance with European Structural and Investment Funds priority transport infrastructure projects to be implemented across Romania during the 2014-2020 EU programming period.

In 2018, Romania drafted the Integrated National Plan for Energy and Climate Change, an obligation for all Member States, which includes the elaboration of strategies in the two sectors in the period 2021-2030. This National plan aims to support the local energetic communities with grants in agriculture, in the public transport and in renovation in buildings.

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Implementation of EU assistance in 2014-2020As of February 20183, the current absorption rate (amounts declared to the European Commission) is 11.81% while the actual absorption rate (amounts reimbursed by the European Commission) is 10.07%.

State Aid SchemesWe refer below to the state aid scheme stimulating investments with major impact on the economy (Government Decision 807/2014) which provide grant given by the Romanian state budget and certain local tax exemptions. Thus, this Romanian national grant and local tax exemptions represent a major opportunity for investors from various sectors.

3 - For the following 2014-2020 ESI funds: ERDF, CF, ESF, EAFRD, EMFF

Main eligibility criteria for applying for this state aid scheme under Government Decision 807/2014 are:• The investment has to have at least a total value, value

added tax (VAT) excluded, of RON 4.5 million (the equivalent of approximately EUR 1 million)

• The investment has to be started within maximum 4 months since the financing agreement approving the grant is issued by the Ministry of Public Finance

• The investment must prove its economic efficiency and sustainability during implementation period and 5 years after its finalization according to the business plan.

Eligible costs based on which the state aid is computed are the costs (VAT excluded) related to production or acquisition of tangible and intangible assets, as well as the rental costs and costs with execution of constructions (within certain threshold) for buildings related to the initial investment.

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The application file for this scheme can be submitted during the financing calls announced by the Romanian authorities.

Financing agreements may be issued until 31 December 2020, the state aid payments being performed during 2015–2023.

State aid schemes are applicable to almost all economic sectors, with certain exceptions specifically provided by each scheme

The investment cannot be started before the submission of the request for the financing agreement with the Ministry of Public Finance.

The "de minimis" aid scheme for investments in industrial parks and the regional state aid scheme for supporting initial investments carried out in industrial parks

These are state aid schemes designed to encourage companies to set-up initial investments in industrial parks. Incentive granted under this state aid schemes consists

of, inter-alia: exemption from payment of building tax and land tax; exemption from the payment of taxes due to local authorities for the issuance of urban planning certificates, construction authorizations and/or authorizations for demolition of buildings for lands and buildings which are part of the industrial park infrastructure (industrial park); other facilities which can be granted, according to the law, by local public administration authorities.

For the "de minimis" state aid scheme the level of the grant is capped to EUR 200,000 and to EUR 100,000 for companies involved in road transportation services.

The eligible costs based on which the state aid is computed are the costs related to the initial investment (i.e. expenses with the acquisition/construction of tangible and intangible assets).

The schemes are managed by the relevant local authority where the industrial park is located and the Ministry of Agriculture and Rural Development and the National Agency for Cadastre and Land Registration.

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Start-up Nation – the programme for the creation of SMEs

The objective of the programme is to stimulate the creation SMEs, improve the economic performance of start-ups, increase the potential to access financing and facilitating this process. The expected results of the programme are the increase in the number of SMEs, increase the number of jobs generated for the economy, increase the digitalization of new enterprise through the acquisition of new, innovative technologies.

Startup Nation programme is regulated by Emergency Government Ordinance 10/2017 whereby each year, a total of 10,000 beneficiaries (SMEs) will be awarded the maximum amount of RON 200,000 per beneficiary, representing 100% of eligible expenditures.

The programme is managed by the Ministry for Business, Commerce and Entrepreneurship.

Tax incentivesRomania offers a highly competitive taxation scheme relative to many of its European peers. Since January 2005, the amended Tax Code has applied a flat tax rate of 16% on income and corporate profits, one of the lowest tax rates in Europe. Also, other favourable tax provisions are included in the Romanian tax legislation, as presented at the relevant sections, in respect of:• Corporate Income Tax, as detailed at 6.2. Profits Tax

section:• "Tax depreciation activities"• "Incentives for research and development (R&D)

activities"• "Tax exemption of reinvested profits"

• Income Tax exemption for employees working in the IT field or performing research and development activities - as detailed at section "Categories of income subject to taxation".

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Business overview2

2. Business overview

Sibiu airview

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2.1. Types of businessThere are no specific investment approvals required for setting up a business in Romania.

The procedure requires fulfilling certain legal formalities such as performing the registration with the Romanian Trade Registry and the tax authorities. In addition, running a business in certain sectors such as insurance/reinsurance, banking, financial investment services, etc. may require that particular authorizations are obtained prior to commencing the actual activity.

2.1.1. Limited Liability Company (SRL)The share capital of an SRL must be of at least RON 200 (approximately EUR 42, calculated at an exchange rate of RON 4.74/EUR), divided into shares with a minimum face value of RON 10 each. A SRL may be incorporated by a minimum of one shareholder and a maximum of fifty shareholders.

These shareholders may include individuals and/or legal entities. There is no distinction between companies operating with or without foreign share capital.

A person, either natural or legal person, cannot be the sole shareholder of more than one SRL. If a person intends to incorporate several companies in the form of a SRL, it is necessary for a minimum of one share to be held by another person or entity. Moreover, a SRL cannot have, as sole shareholder, another limited liability company that is also owned by a single shareholder.

The shareholders' liability is limited to the amount subscribed in the company's share capital.

A SRL is managed by one or more directors (in Romanian, "administratori") appointed through the company's Articles of Association or by resolution of the General Meeting of Shareholders. Directors may be granted full or limited powers and they may be Romanian or foreign nationals. The directors in a SRL are mandated to take all actions required in order to carry out the company's business. However, major decisions are left for the approval of the General Meeting of Shareholders.

Joint Stock Company (SA)The minimum statutory capital of a joint stock company is RON 90,000 (approximately EUR 18,987 calculated at an exchange rate of RON 4.74/EUR). Shares, which may be registered or in bearer form, must be held by a minimum of two shareholders, individuals and/or legal entities (there is no maximum limit), and can be open to either public or private participation. Unlike SRLs, SAs may issue bonds.

Two options have been provided for administration of joint stock companies: the one-tier system and the two-tier system.

One-tier system – the company is managed by one or several directors, always in an odd number, organized as a Board. The Board can assign management of the company to one or several managers (in Romanian, "directori"). For those companies whose financial statements are subject to auditing, the minimum number of directors is three.

Two-tier system – the management of the company is ensured by a Management Board (in Romanian, "directorat") and a Supervisory Board with the following duties:• The Management Board carries out the activities

and management of the company reports to the Supervisory Board

• The Supervisory Board exerts permanent control over the Management Board and reports to the General Meeting of Shareholders

• Managers and other members of the Management Board and the Supervisory Board may not conclude a labour agreement with the company; a management agreement is required instead.

2.1.2. Representative OfficeA representative office is usually set up by foreign companies in Romania to carry out non-commercial activities on behalf of the parent company, in accordance with the authorization issued in this respect.

In order to register a representative office, company officials should apply to the Ministry of Business Environment, Commerce and Entrepreneurship and pay an annual fee of RON equivalent of USD 1,200 for the authorization.

Upon authorization, the representative office must be also registered with the competent tax authority and pay an annual income tax of the RON 18,000.


2.1.3. Branch of a foreign companyA branch of a foreign company does not have its own legal personality or share capital. Being a unit of the parent company, branch activities cannot exceed the scope of activity of the parent company.

2.1.4. PartnershipPartnership as a legal form is seldom used in Romania. The three kinds of partnerships provided by law that lead to the creation of an entity with legal personality are:• General partnership (in Romanian, "societate în nume

colectiv")• Limited partnership (in Romanian, "societate în

comandită simplă")• Partnership limited by shares (in Romanian, "societate

în comandită pe acţiuni").

The partners in all three types of partnerships have unlimited liability and are jointly liable with respect to the obligations of the partnership. The creditors of the partnership must first act against the partnership in order to claim the execution of its obligations and, only to the extent the partnership does not comply with its obligations within 15 days, they may act against the partners.

The minimum share capital is stipulated only for a partnership limited by shares (approximately EUR 18,987 calculated at an exchange rate of 4.74 RON/EUR). No share capital requirements are provided for the other forms of partnerships.

2.1.5. ConsortiumDomestic legislation allows for the conclusion of a joint venture agreement (in Romanian, "contract de asociere în participaţie"). Under this agreement, parties act together for the accomplishment of a common business goal.

This form of doing business in Romania does not create a legal entity. The third party has no right towards the joint-venture and undertakes obligations only in relation to the co-contracting member of the consortium.

2.1.6. Economic Interest Group (EIG)An EIG is an association of two or more individuals or companies set up for a definite period for the purpose of facilitating the businesses carried out by its members and of improving the performance of such businesses. An EIG is allowed a maximum of 20 members.

A key feature of EIGs is the unlimited joint liability of its members for the obligations of the EIG (unless otherwise provided under the agreement signed with the third party) and the fact that it may not, directly or indirectly, own shares in one of its member companies or be a member in another EIG. An EIG is not allowed to issue shares, bonds, or other negotiable instruments. EIGs are regulated by Law 161/2003 regarding certain measures to ensure transparency in exercising public dignities, public duties and in the business environment, as well as for preventing and sanctioning corruption.

2.1.7. European Economic Interest Group (EEIG)An EEIG is similar to an EIG. It can be set up in any EU member state and may function in Romania through subsidiaries, branches, representative offices or other non-legal entities provided these comply with domestic legislation. The subsidiaries and branches of an EEIG are subject to the same registration procedure as EIGs.

EEIGs are governed by the provisions of Council Regulation (EEC) 2137 of 25 July 1985 on the European Economic Interest Grouping (EEIG) and Law 161/2003.

2.1.8. Societas Europaea (SE)A company may be set up within EU territory in the form of an European public limited-liability company (SE) on the conditions and in the manner laid down in the EC Regulation 2157/2001 on the Statute for an European company (SE). An SE shall be regarded as a public limited-liability company governed by the law of the Member State in which it has its registered office.

The capital of an SE shall be expressed in euro and may not be less than EUR 120,000 which makes SEs only suitable for large companies. The name of an SE shall be preceded or followed by the abbreviation SE.

SE shall comprise: (a) a general meeting of shareholders and (b) either a supervisory organ and a management organ (two-tier system) or an administrative organ (one-tier system) depending on the form adopted in the statutes.

2.1.9. Entities commonly used by foreign investorsLimited liability companies are the most popular vehicles for business in Romania because of their simple administrative requirements, greater flexibility compared to other types of companies and low capital requirement. However, joint stock companies remain an attractive option for investors which plan to list their companies on the stock exchange.

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Bucharest, Romania - Palace of the National Military Circle


2.2. Labour force and employment regulationsEmployment regulations and the employer-employee relationship are governed by the Labor Code (Law 53/2003, subsequently amended).

Labour market in RomaniaIn 2018, the employment ratio of the Romanian population (between 20 and 64 years old) was of 69.9%, with a difference of 0.1% in comparison with the national target set-up for European Strategy 2020 and in the first quarter of 2019, the employment rate of the working age population registered a value of 64.2%.

Labour costsRomania has some of the lowest labor costs in EU. As of 1 January 2019, the gross minimum base salary to be paid at the national level is of RON 2,080 per month (approximately EUR 438, considering an exchange rate of RON 4.74/EUR). This amount does not include allowances or other incentives.

The value of the gross minimum base salary to be paid at the national level is calculated for a normal working schedule on average of 167.333 hours, per month, representing RON 12.43 per hour.

By way of exception, for the employees hired on positions which require higher education, with a seniority of at least one year as high educated employee, the gross minimum base salary to be paid at the national level, not including allowances or other incentives, is of RON 2,350 per month, for the same working schedule.

Labour market challengesRomania benefits from a multilingual workforce with qualified professionals in high growth areas like IT&engineering and financial services.

The challenges faced though by employers across all sectors are fundamentally threefold:• Control the employment related costs: with a salary

inflation of 5% per annum for the last years, combined with constant changes in taxation, the topic stays high on any executive agenda

• Attract and retain more/better quality of educated/trained workforce: staff turnover is high across all industry sectors, in some cases (e.g. Retail, BPO/SSC) reaching even 50% per annum. With an average staff turnover of 15%, retention of all staff categories is a challenge

• Staff productivity/Human Capital Return of Investment: in spite of the low employment costs, overall staff productivity as compared to the other EU countries is in the lower median, mainly due to lack of process automation and low staff engagement rates.

ApplicabilityThe Labour Code covers Romanian employees with employment contracts, who perform activities in Romania or abroad for a Romanian employer (unless the legal framework in the country where the employment agreement is carried out is more favorable), as well as foreign individuals with employment contracts who perform activities for a Romanian employer in Romania.

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Biertan Citadel - Sibiu County

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Working relationship

Types of employment contracts

The law stipulates individual employment contracts for an indefinite period as the common method of employment. In addition, other forms of permitted employment are:• Fix-term individual employment contract • Temporary employment• Part-time employment• Flexible working arrangements (homebased work or

telework).

Special clauses in the employment contract

Before or upon the conclusion of a new or amending an existing employment contract, the employer has the obligation to inform the employee with respect to the essential clauses that it plans to include in the employment contract or to amend (e.g. working place, working time, salary, leave period, evaluation criteria, the position and the job description, trial period).

Along with the general terms, an individual employment contract may also include special clauses such as:• Non-compete clause – this clause obliges the

employee not to perform, after the termination of the employment contract, for himself/herself or for others, any activities considered as being in competition with the ones performed by him/her for the former employer, in exchange of a monthly compensation to be paid by the employer during the non-compete period.

The non-compete clause can only be effective if the individual employment contract expressly provides for the following:• The activities an employee is forbidden to undertake at

the end of the contract

• The amount of the monthly compensation• The period for which the clause will be in effect

(maximum two years as of the date the employment contract ends)

• The third parties for which the employee is forbidden to undertake activities

• The geographical area where the employee can be considered as competing with the employer.

The Labor Code provides that the non-compete compensation has to be negotiated and amounts to at least 50% of the gross average salary income of the employee for the last six months before the end of the employment contract.

In case of breach of the non-compete clause, an employee can be obliged to return the compensation and pay damages for the prejudice suffered by the employer.• Mobility clause – the parties may agree that,

considering the particularities of the work performed, the employee will not carry out his/her duties under the employment agreement, in a fixed location, in exchange for additional allowances in cash or in kind to be determined under the employment contract

• Confidentiality clause – the parties may agree not to disclose any information obtained during the employment relation for the entire duration of the employment contract and after its termination. The party in breach of this obligation is liable to pay damages to the other party.

General Registry of Employees ("REVISAL")The most relevant information included in each labour contract concluded in Romania has to be recorded in a special electronic recording system named the General Registry of Employees (REVISAL).

Cluj Napoca City Center

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Government Decision 905/2017 regarding the General Registry of Employees regulates the methodology for setting up the REVISAL, as well as the method of filing it in, by:• Individuals or private legal entities • Institutions/public authorities/other legal entities

that employ individuals based on an individual labour agreement

• REVISAL must be prepared in electronic format and submitted on-line on the Labour Inspection portal.

The following essential elements of the employment contracts must be submitted in REVISAL:• Identification data of the employer• Identification data of all employees: name, surname,

personal identification code• Employment date• The date when the employee is posted and the date

when the posting ends (with special requirements for transnational posting of employees as defined by Law 16/2017 regarding the posting of workers in the framework of the transnational provision of services and posting of employees in a state which is not a member of the European Union or of the European Economic Area)

• Position according to the Classification of Professions in Romania (COR)

• The monthly gross salary• Type of individual employment contract• The termination date of the individual employment

contract as well as the legal ground for termination.

Failure to fill in REVISAL and submit the relevant information to the competent authority within the legal deadlines may be assessed as minor offence and be subject to various fines.

Working hours and paid holidaysThe normal working time consists in 8 hours per day and 40 hours per week for full-time employment.

Maximum working time per week cannot exceed 48 hours, including overtime.

As per the law, overtime has to be compensated with paid leave granted within the 60 days following the performance of overtime or, if this is not possible, with a minimum 75% overtime allowance applied to the base salary. The standard working week is Monday to Friday. Employees are entitled to a weekly rest of 48 consecutive hours, usually on Saturdays and Sundays.

In addition to statutory holidays, employees are entitled to an annual paid leave equal to a minimum of 20 working days.

Work security and healthcare The employer is required to take necessary measures for the security and well-being of employees. The employer is also required to ensure employees have access to regular medical check-ups.

Professional trainingEmployers have to ensure that all their employees take part in professional training programs, as follows: (i) at least once every 2 years, if they have at least 21 employees and (ii) at least once every 3 years, if they have less than 21 employees.

The employer having more than 20 employees is required to ensure adequate professional training for employees on a continuous basis by setting up an annual training schedule by consulting with the trade union or with the representatives of the employees. The annual training schedule should be attached in the form of an addendum to the collective employment contract concluded at the company level.

The employee may take part in professional training programs, either following his/her own initiative or at the employer's initiative. The specific way in which the professional training will be organized, the parties' rights and obligations, the period of professional training as well as any other aspects concerning the professional training, including the contractual obligations of the employee towards the employer that has undertaken the costs of the professional training are to be established by mutual agreement of the parties under an addendum to the individual labour agreement.

Employees' representationWhenever an employer has over 20 employees and no representative trade unions, the interests of its employees may be promoted and defended by representatives of the employees elected for this purpose. The representatives of the employees are to be elected within the general assembly of employees with the vote of at least half of the total number of employees.

Biertan Village - Transylvania

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Termination of employment contractsIndividual employment contracts can be terminated by operation of law in certain cases (e.g. upon the death of the employee, in case the employer is subject to dissolution, on the expiry date of the term for which individual labour agreement was concluded), by mutual consent of the parties, or by either party to the employment contract by dismissal or resignation.

Dismissals may occur for reasons related to the employee (e.g. professional inadequacy, as a disciplinary sanction) or not related to the employee (e.g. job cancellations). As a general rule, employers must grant the dismissed employees a prior notice of minimum 20 business days. A prior notice of maximum 20 business days (45 business days for management positions) is also provided in case of resignation.

2.3. Work regulations for foreigners

Romanian visa regimeRomanian legislation allows two main categories of visas for foreigners, i.e. short-term and long-term visa, with single or multiple entries.

Both visa categories allow foreign citizens to stay in Romania for a period or several periods not exceeding

90 days within 180 days preceding their entry/exit on Romanian territory. While the short-term visa cannot be extended, the long-term visa may be extended by applying for a residency permit with Romanian authorities.

Under the immigration law, foreign citizens can obtain in certain cases (i.e. frequent business trips) short-term multiple entries visas, valid for a period of up to 5 years.

Visas are obtained with Romania's diplomatic missions or consulates while abroad and prior to the individual's arrival to Romania. The main documents foreign nationals must submit to obtain a Romanian long-term visa are:• Medical insurance for the visa period• Proof of accommodation in Romania• Means of support in Romania• Proof of police clearance issued by the authorities in

the home country• Documents supporting their purpose of stay in

Romania.

Citizens of European Union (EU) and European Economic Area (EEA) member states (i.e. Norway, Liechtenstein and Iceland) and Switzerland have no immigration restriction to travel to Romania and can enter the country by using either:• Passports or• Identity cards issued by relevant authorities from the

home country.

Citizens of certain states (e.g. United States of America, Canada, Japan) may also enter Romania without visa.

Special conditions are stipulated by current immigration legislation regarding certain categories of foreign nationals who are visa restricted (originated in high-risk immigration countries).

Registration certificatesEU/EEA/Swiss individuals staying in Romania more than 3 consecutive months should obtain a Romanian registration certificate.

Residency permitsAccording to the Romanian immigration law, foreign nationals staying in Romania for more than 90 days within 180 days preceding their entry/exit on Romanian territory should apply for a Romanian residency permit.

Romanian residency permits are usually issued for 1 year validity, with the possibility of subsequent extensions. In certain cases, the residency permit can be issued directly with a longer validity (i.e. 2 years up to 5 years).

Residency permits issued for secondment purposes cannot be extended beyond 1 year (except where the secondment is from EU/EEA/Switzerland located companies and where the secondment is intra-corporate). In case of regular secondments, foreign nationals should change their purpose of stay to continue to stay on Romanian territory.

Foreign individuals seconded from EU/EEA/Switzerland can extend their stay in Romania for secondment purposes as long as their residency documents from EU/EEA/Switzerland are valid.

Saint Michael's Church - Cluj-Napoca

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In case of intra-corporate secondments, the immigration documents are issued up to 3 years validity in case of professional specialists and up to 1 year for trainees.

Provided that certain conditions are met, foreign individuals can obtain permanent residency permits.

Work authorizationsThe EU citizens and their family members (irrespective of their citizenship) carrying out activities in Romania as secondees or local employees are not required to obtain Romanian work authorizations.

Non-EU/EEA/Swiss individuals should obtain work authorizations in order to work in Romania, either as secondees or local employees.

According to the current Romanian legislation, non-EU/EAA/Swiss nationals seconded by companies located in EU/EEA/Switzerland are exempt from obtaining a work authorization in this respect; however, they should establish their legal residence on Romanian territory by obtaining a residency permit.

There is the obligation either for the home or host company, as the case might be, to notify the Labour authorities in respect of foreign individuals seconded to Romania.

In case of local employment structures, the immigration legislation provides for two main types of work authorizations, respectively for: permanent workers and highly-skilled workers.

In case of secondment structures, the following work authorizations can be obtained: for intra-corporate secondees and for regular secondees.

Foreign nationals appointed as managers of Romanian branches/subsidiaries/representative offices of foreign companies, as well as those appointed directors (in Romanian, "administratori") of Romanian companies, may apply for a residence permit in such capacities without obtaining a work authorization and only if certain conditions are fulfilled.

Expatriate tax registrationForeign nationals assigned to perform activities in Romania are obliged to register for tax purposes within 30 days of the first day of assignment if certain conditions are met.

Non-resident individuals are taxed in Romania, for the income generated from dependent activities, as of their first day of presence in Romania, irrespective of the number of days spent in the country. However, the provisions of the Double Tax Treaties entered into by Romania should prevail over the domestic legislation. In order for the treaty's provisions to be claimed, the individuals should be able to provide to the Romanian tax authorities their residency certificate and its Romanian translation.

If a Double Tax Treaty is not concluded between Romania and the country where the individual in question is tax resident, or for any reasons its provisions cannot be sustained, then the non-resident individual would become taxable herein as of his/her first day of Romanian activities.

The individuals are personally liable to compute, declare, and pay the income tax by the 25th of the month following the one the income is earned. Failure to meet this deadline triggers fines and late payment penalties.

Also, the Romanian company at the premises where the secondees carry out activities has the obligation to notify the tax authorities about the start/end of the individual's assignment to Romania within 30 days since the event occurred. This obligation is applicable for both long and short-term assignments.

If a foreign individual has a local employment contract, the obligation to compute, withhold, and pay the income tax stays with the Romanian employer.

Alba Carolina Citadel - Alba Iulia

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2.4. EntrepreneurshipEntrepreneurship is becoming a major force in the Romanian economy, in line with the worldwide trend of increased entrepreneurial activity in emerging countries. The major challenge for Romanian entrepreneurs is to keep up with these rapid developments happening worldwide. In the same time, these trends are a challenge for Romanian public institutions. The regulatory issues, red tape, lack of fiscal predictability are the most pressing aspects for Romanian SMEs, compared with issues like growing the client base, which is the most important challenge for SMEs in the EU.

Entrepreneurship is more dynamic than ever in Romania and new initiatives around entrepreneurship are announced every week: hubs, pitching or networking events, as well as transactions involving Romanian technology start-ups. The most important development on the Romanian entrepreneurship scene seen in the last years, in April 2019, is the Series D (financing totals USD 568 million at a post-money valuation of USD 7 billion). The first Romanian unicorn is the fastest growing enterprise software company in history, expected to give a new boost to the Romanian entrepreneurial scene, attracting new VC investors and interest from young IT talents

To support Romanian entrepreneurship, a program for small and medium-sized enterprises was implemented by the Ministry for Business Environment, Commerce and Entrepreneurship called Start-up Nation. The main objective of the Program is to stimulate the establishment and development of small and medium enterprises and to improve their economic performance, create new jobs, disadvantaged people, unemployed and graduates, increase investment in innovative new technologies. Until now only one edition has been held - Romania Start-up Nation 2017. In 2018, the Program was reloaded, being very well received among young Romanian entrepreneurs.

If the momentum is maintained, the Romanian business environment will develop rapidly, due also to the mentality shift of the young people more willing to pursue an entrepreneurial challenge than a career as an employee.

EY Romania carries out a bi-annual study on the state of Romanian start-ups, The Romanian Start-ups Barometer, measuring the entrepreneurs' perceptions on 5 pillars supporting their actions: regulatory aspects and taxation, access to finance, entrepreneurial culture, entrepreneurship education and coordinated support.

According to the 2019 edition of the study, aspects from most of the 5 pillars registered the following:• Less startups believe Romanian education is an

obstacle for entrepreneurs (12% of respondents in 2019 versus 23% in 2017)

• Startup entrepreneurs are planning to access more governmental funds and microfinancing instruments in 2019 compared to the previous edition of the Barometer (28% in 2019 edition versus 15% in 2017 edition)

• In the last year the fiscal and regulatory environment for entrepreneurship has deteriorated according to the opinion of the startup leaders (52% in 2019 edition versus 44% in 2017 edition) and it might be an effect of last changes occurred in the country

• The number of startup entrepreneurs that receive mentoring, specific trainings and consultancy services is on the rise.

Government actions with the greatest impact in the short term to support entrepreneurs In view of Romanian start-up entrepreneurs, Top 5 measures that would support short-term business development are:• Decrease of tax burden for start-ups• Easier access to financing • A simplified tax and regulatory environment• Better fiscal and regulatory predictability• Increased focus on entrepreneurial education.

Coordinated supportCoordinated support offered by specialized organizations such as clubs and associations of entrepreneurs, informal networks of entrepreneurs, government agencies, business incubators and accelerators has improved in Romania over the last years.

"Co-working spaces" and "business hubs" entered the common vocabulary of start-up entrepreneurs. These centres organize meetings with potential financiers, various specialists and entrepreneurs who have managed to increase their business or to obtain a significant round of funding.

Most of such centres focus on IT business development and function as start-up hubs, which gather around them a community of entrepreneurs that share the same workspace.

The next step in the hubs' development would be for them to offer more funding options to the resident start-ups, which would help them become business accelerators.

Cluj-Napoca city

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27

Oradea

Timișoara

Cluj-Napoca

Bucharest

Sibiu Brașov

IașiPiatra Neamț

Constanța

• Coworking Oradea

• The start up Hub• Co-work Timișoara• Innovation Labs

• Central Hub• Innovation Labs

• The Grape• Fab Lab• Innovation Labs

• City Hub Constanța• Forte Life• Social Hub

• Cluj Hub• Cluj CoWork• Spherik Accelerator

• Simplon• Innovation Labs• Sillicon Forest thatdevspace

• Hub OneZero• Hub 1317• Alchemy Hub

• Orange Fab• Innovation Labs• Commons Lounge• WeLove Digital

• Impact Hub• TechHub• Talent Garden• NOD makerspace

• Mindspace• Spaces• 3house• Techcelerator

• Rubik Hub

Co-working spaces, business incubators and accelerators in Romania Source: EY and Impact Hub Research

2.5. Intellectual and industrial propertyRomania is a signatory to major international conventions and treaties on intellectual property rights. Thus, the main Romanian legislation enacted in the area of intellectual and industrial property follows the provisions of European directives and international treaties. The most important pieces of legislation enacted to this effect are the Patents Law (Law 64/1991, as further amended), the Copyright Law (Law 8/1996), the Law on Trademarks and Geographical Indications (Law 84/1998), the Industrial Designs Law (Law 129/1992) and the Semi-conductor Products Law (Law 16/1995).

The relevant Romanian authority for registration and protection of patents and trademarks is the State Office for Inventions and Trademarks (Oficiul de Stat pentru Invenții și Mărci - OSIM). As a matter of principle, the protection of patents and trademarks on the Romanian territory is obtained following the registration procedure in front of OSIM.

The regulatory body for copyright is the Romanian Copyright Office (Oficiul Român pentru Drepturi de Autor - ORDA). There are also private entities such as non-profit associations incorporated as per the provisions of the Copyright Law with the approval of ORDA, to ensure administration and protection of copyrights.

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.

Special attention has been paid to regulate e-business since 2000. The Electronic Signature Law was enacted in 2001 and republished in 2014 (Law 455/2001), while in 2002 Romania's Parliament approved Law 365/2002 on electronic commerce.


2.6. Competition legislationCompetition law is aimed at safeguarding competition, in order to ensure that consumers are provided with fair prices and a sufficient diversity of goods and services.

Competition law covers the following main areas: (i) anti-competitive agreements between undertakings active on a certain market (cartel); (ii) abuse of dominant position; and (iii) economic concentrations (mergers).

The core provisions of EU competition law are found in the Treaty on the Functioning of the European Union (TFEU). These main provisions are further implemented by means of European regulations and guidelines and notices issued by the European Commission.

The European Commission, by its Directorate General for Competition, is the European authority in charge with enforcing the provisions of the TFEU at European level. The EU Commission closely cooperates with national competition authorities.

The main legal act regulating competition in Romania is the Competition Law 21/1996 republished in the Official Gazette 153/29 February 2016, as further amended (the Competition Law). The Romanian legislation on competition is well harmonized with the applicable EU rules. The national competition authority is the Romanian Competition Council (in Romanian, "Consiliul Concurenței" and hereinafter the RCC).

The Competition Law is enforced by the RCC, in accordance with an array of instructions and guidelines outlining the steps to be followed in the context of certain proceedings (e.g. merger control, investigations). The Romanian national legislation on competition law is supplemented by European regulations, which are directly applicable at the level of EU member states. The RCC remains responsible for monitoring the competitive behaviour of businesses on the Romanian market, collusions between competitors in the Romanian market, potential abuses of market power and the growth of market structures (mergers and acquisitions). Violation of the national or European competition law provisions may result in significant consequences both for the involved company (e.g. fines up to 10% of the company's turnover on the year preceding the sanctioning decision, obligation to pay damages and market reputation being affected) and for its managers and employees (who are exposed even to criminal liability).

Anti-competitive agreementsBoth the TFEU and the Competition Law forbid anti-competitive agreements between undertakings, which are aimed at, in particular, fixing prices, limiting or controlling production and distribution of goods, partitioning markets

or supply sources etc. The applicable provisions take into consideration both horizontal agreements (i.e. agreements between competitors operating at the same level of the supply chain) and vertical agreements (i.e. agreements between undertakings operating at different levels of the supply chain, such as the ones between a manufacturer and its distributor).

Agreements, decisions and concerted practices which are exempted from the interdictions provided above, as well as the conditions and criteria for framing these agreements into certain categories are laid down by the Regulations of the Council of the European Union or of the European Commission on the application of the provisions of art. 101 paragraph (3) in TFEU, to specific categories of agreements, decisions of associations of undertakings or concerted practices, which apply accordingly.

Abuse of dominant positionDominance was previously defined by the ECJ as a company's possibility to act independently from the market behaviour of its customers and competitors. The EU Commission considers that a company holding less than 40% market share is unlikely to be dominant. This assumption was also included in the Competition Law, according to which an undertaking or a group of undertakings holding more than 40% market share are considered to be dominant, unless evidence is presented to prove otherwise.

Dominance in itself is not prohibited by competition law provisions, but any abuse of a dominant position held by one or more undertakings on the Romanian market or on a substantial part of it is prohibited. Such practices may consist in: (a) imposing, directly or indirectly, the sale or purchase prices or of other inequitable trade conditions;

Matei Corvin Monument - Cluj-Napoca

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(b) limiting production, trade or the technological development to the detriment of the consumers; (c) applying unequal terms for equivalent services to trade partners, thereby placing some of them at a competitive disadvantage; (d) making the conclusion of contracts subject to the acceptance by the other partners of supplementary obligations which, by their nature or according to commercial usage, have no connection with the object of these contracts.

Any time the Competition Council applies these provisions, to the extent the abuse of dominant position may affect the trade in the member states, it also applies the provisions of art. 102 of TFEU.

Economic concentration (merger)Simply put, the concept of "concentration" refers to the situation where the control in two or several undertakings comes to be held by the same individual(s) or undertaking(s). As per the Competition Law, a concentration takes effect when the long term change of control results from: (a) the merger of two or more previously independent undertakings or parts of undertakings; (b) one or more persons, already holding control over at least one undertaking, or one or more undertakings acquire either by purchasing securities or assets, or by contract or other means, the direct or indirect control over one or several undertakings or parts thereof. At national level, the approval of the RCC is required in case of economic concentrations that exceed the following: • EUR 10 million, in RON equivalent of aggregate

turnover of the entities involved, and• EUR 4 million, in RON equivalent of individual turnovers

generated in Romania, by at least two of the entities involved.

The threshold is assessed based on the exchange rate published by the National Bank of Romania (NBR) for the last day of the financial year previous to the transaction.

2.7. Environmental legislationEnvironmental protection represents an important objective both at European and at national levels. The main institutions responsible for environmental protection in Romania are the Ministry of Environment and the Ministry of Waters and Forests, which are the central regulatory authorities, along with the National Agency for Environmental Protection (in Romanian, Agenţia Naţională pentru Protecţia Mediului în România) and the National Environment Guard (in Romanian, Garda Naţională de Mediu), which are public institutions subordinated to the Ministry of Environment and financed from the state budget.

Ancient towerbell built in 15th century - Moldova

Financial Services3

Brasov City

3.1. Banking

3.1.1. Introduction As of December 2018, the Romanian banking sector was made up of 34 credit institutions maintaining a moderate level of market concentration. In addition to banks, in the financial landscape there are also Non-Bank Financial Institutions (NBFI), payment institutions and electronic money institutions that provide an alternative to the banking system.

On the back of the measures aimed at strengthening competition between credit institutions, the system consolidation started in the past years continued in 2018.

As the sector is following new strategies around digital banking, cost optimization and higher profitability, the number of bank branches continued its downward trend, similar to previous years – a number of 215 bank branches were closed and the number of employees in the market decreased with 1307 persons.

Credit institutions are looking to diversify their distribution channels, however the demand for digital banking offerings has still room to grow among Romanian customers, especially when compared to other European countries, as the number of electronic transactions per capita is 8 times smaller in Romania compared with EU average (ECB statistics). Also, the local financial inclusion is still low; according to the Global Findex report drawn up by the World Bank which analysed the level of access to and usage of banking services in 140 de countries all over the world, approximate 58% of adults in Romania have a bank account and only 47.2% have made or received digital payments. Despite these small local figures, there is a lot of potential for e-banking, especially within urban areas and population with higher education. This is evidenced by the on-going developments in the market in the area of online account opening, online lending, instant payments, new and improved mobile banking applications. New entrants in the market offering digital banking services quickly achieved a good penetration (Apple Pay; Revolut – over 250,000 users after only one year).

3.1.2. Business regulationBanking, insurance, securities, and investment fund activities are subject to special laws, which regulate the terms of conducting business, authorizing operators on the market and determining capital limits for carrying out such activities.

Since 1990, Romania's banking system has undergone major restructuring. The key elements of this restructuring process include:• Enforcing legislation to give NBR the statute of

country's central bank• Opening up the banking system to private and foreign

banks• Privatization of state-owned banks and• Most of the banks currently operating in Romania are

privately owned and belong to foreign shareholders.

The National Bank of Romania

The National Bank of Romania (NBR) is the central bank of Romania. Its fundamental objective is to ensure and maintain price stability.

The central bank is the sole institution vested with licensing and regulatory powers in the banking field, being responsible for prudential supervision of credit institutions in order to ensure the smooth functioning and viability of the banking system.

NBR is the only institution authorized to issue currency, in the form of banknotes and coins to be used as legal tender in Romania.

NBR implements and is responsible for monetary and foreign exchange policies, bank licensing and prudential supervision, monitoring of payments, issue of domestic currency and the administration of Romania's international currency reserves. The NBR collaborates with government agencies and foreign financial and banking institutions.

NBR can grant loans to banks against collateral, under certain terms and conditions. It also sets the methods for performing operations with banks such as opening accounts, payment systems, clearing, depository and payment services, 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. NBR maintains government reserves and is authorized to carry out operations in gold and foreign assets.

NBR has a board of directors and is headed by four NBR executives: the governor and three vice-governors (of whom one is the first vice-governor). Board members are appointed for a five-year term by the Parliament. Starting with 1 January 2007, when Romania joined the European Union, NBR became part of the European System of Central Banks (ESCB), and the NBR's Governor, member of the General Council of the European Central Bank (ECB).

3. Financial Services


Banking regulations

Government Emergency Ordinance 99/2006, on credit institutions and capital adequacy (GEO 99/2006) and NBR Regulation 5/2013 on prudential requirements for credit institutions, replace the former capital adequacy and authorization requirements and provide the regulatory framework, harmonized with the EU norms.

GEO 99/2006 allows financial institutions from Member States to perform banking services within the EU based only upon a notification (i.e. without authorization requirement) made between the central banks of the relevant countries with the observance of certain limited documents to be submitted.

The banking services may be performed either (i) directly, or (ii) through establishment of a branch.

A new set of requirements applicable to capital levels and maintained by entities operating in this field has been put forward.

As a first requirement, GEO 99/2006 sets a threshold of EUR 5 million (payable at RON equivalent) for the minimum initial capital that credit institutions must maintain in order for them to receive NBR's authorization. Similarly, credit cooperatives are required to maintain a minimum level of capital of at least (RON equivalent) EUR 5 million.

Second, EU-based credit institutions may open Romanian branches without being subject to any minimum endowment capital requirement, unlike non-EU credit institutions whose Romanian branches should have endowment capital of at least the (RON equivalent) EUR 5 million.

Additionally, NBR Regulation 5/2013 on prudential requirements for credit institutions provides different thresholds for the minimum initial capital considering the type of the credit institutions, as follows:• Banks seated in Romania – RON 37 million• Mortgage loan banks – RON 25 million• Saving houses – RON 25 million• Credit cooperatives – RON 300,000 (though for

a cooperative network it must be at least - RON equivalent - EUR 10 million).

For the institutions issuing electronic money, Law 127/2011 which regulates the activity of issuing electronic money, sets a minimum initial capital of (RON equivalent) - EUR 350,000.

Furthermore, the requirements for the credit institutions own funds during their activity are set out by the EU Regulation 575/2013.

NBR notifies the European Banking Authority since 2011 on any authorization granted, so that the credit institution's name is included in the list of credit institutions drawn up and updated by the European Banking Authority, as published on its website.

3 FINANCIAL SERVICES

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3.1.3. Market overview

Banking Associations

The Romanian Banking Association (RBA)The RBA is a legal Romanian entity, set up as a non-profit professional body and operating in conformity with its legal statute and the relevant Romanian laws in force, complying with the provisions of law regarding the business of banking. Dialogue, collaboration, exchange of experience, cooperation, common practices across the banking system are some of the elements which define the activity of the RBA.

Established in 1991, following the initiative of 14 commercial banks, the Association has 35 members: credit institutions with privately-owned capital or state capital and branches or representative of foreign banks. RBA has as main targets to represent and defend its members' interests, to promote the principles of banking policy in domains of general interest for its members, to promote cooperation among banks and with national and international institutions and banking associations from other countries, to train experts in the banking system, to communicate with the mass media. Moreover, the RBA agenda includes training programs in fields of interest for the experts of the banking system, along with participation to national and international seminars and conferences or deployment of common projects across the whole banking system.

The Council of Banking Employers in Romania (CPBR) CPBR was established as the country's first banking sector employers' organization on 28 April 2014. CPBR's member banks are Banca Comercială Română, BRD - Groupe Societe Generale, Raiffeisen Bank, ING Bank România and

UniCredit Ţiriac Bank. The banks that currently compose the CPBR together have about half of total bank assets in Romania, while employing more than 30% of total employees in the country's banking sector.

The main objectives of the CPBR are: (i) promote communication, cooperation and social dialogue with the authorities of Romania (ii) cooperate with the authorities to overcome difficulties and obstacles which may exist in relations with general public, customers, private domestic and foreign investors; (iii) contribute to increasing levels of industry standards and financial literacy in Romania; (iv) contribute to the initiation, preparation and promotion of new laws or other legislative or regulatory initiatives, or the modification of those already existing; (v) issue advisory opinions on proposed laws or other legislative or regulatory initiatives submitted for review.

Structure of the Romanian banking system

As of December 2018, the Romanian banking system counted 34 credit institutions, of which 27 Romanian legal entities and 7 foreign branches, as a result of Banca Transilvania S.A. concluding its absorption of Bancpost S.A..

According to NBR Annual Report, the structure of credit institutions and Romanian legal entities in terms of share capital was as follows: 21 credit institutions with majority private foreign capital, 4 credit institutions with majority private domestic capital (Banca Transilvania, Banca Comercială Feroviară, Banca Română de Credite și Investiţii, CREDITCOOP) and 2 credit institutions with fully or majority state-owned capital (CEC Bank and EXIMBANK).

Indicator (2018) Net Assets (% of total)

Banks with domestic capital, of which: 25%

• with majority state-owned capital 8.1%

• with majority private capital 16.9%

Banks with majority foreign capital 63.6%

Foreign Bank Branches 11.4%

Total Credit institutions 100%

Source: National Bank of Romania, Annual Report 2018

The Romanian banking system remains highly linked to the European banking system, as evidenced by the overwhelming share of foreign capital (banks with majority foreign capital, including foreign bank branches): 75% of the aggregated capital of the banking system at the end of 2018, slightly less than in 2017 when it was 77%, mostly due to the absorption of Bancpost S.A. by Banca Transilvania S.A., the latter being the biggest bank with domestic private capital.

Following Romania's joining the EU and the liberalization of services market, by the end of May 2019, 299 foreign institutions notified NBR of their intention to perform direct banking services on the Romanian territory.

FINANCIAL SERVICES 3

Timisoara City Center

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Main banksThe Romanian banking system features moderate, but growing concentration, illustrated by the market shares in terms of assets held by the top five banks. As of December 2018, the top five banks held the following shares in total banking market: 61% of aggregate assets and 68% of equity capital, both levels higher than in previous years.

Position Bank Net Assets (% of total)

1 Banca Transilvania 16.48%

2 Banca Comercială Română 15.05%

3 BRD Groupe Societe Generale 11.99%

4 UniCredit Bank 9.21%

5 Raiffeisen Bank 8.88%

6 ING Bank N.V., Amsterdam 8.51%

7 CEC Bank 6.50%

8 Alpha Bank 3.76%

9 OTP Bank 2.45%

10 Garanti Bank 2.27%

Source: National Bank of Romania, Annual Report 2018

Banking sector indicators

The Romanian banking sector further pursued non-performing loan resolution by means of loan sale or balance sheet clean-up, with a positive impact on loan portfolio quality and overall profitability. In December 2018, the non-performing loans ratio continued its downward trend to 4.96%, marking a 20% reduction as compared to the end of 2017. However, this is still above the EU banking system average of 3.2% (Q4 2018). On the other hand, the level of provisions held for non-performing loans in December 2018 (58.5%) was well above the EU average of 45.1% (EBA Risk Dashboard Data as of Q4 2018).

For the fourth consecutive year, the stock of domestic loans continued to rise in 2018, up by 7.9% compared to the previous year. 2018 was also marked by a significant growth in private sector loans in local currency (13.4% year-on-year increase), while foreign currency loans had tempered the decrease to -1.3%, whereas last year it was a -8.1% decrease. 67% of the private sector lending were loans in local currency and 33% foreign currency loans, the biggest ratio recorded for the local currency loans since 1996. Additionally, the ratio between loans and deposits remained steady at 74.80%.

Domestic deposits as a share of total liabilities remained roughly at the same level as in December 2017 (~64%), but the overall year-on-year increase of 9% in deposits was fuelled by both the population and non-financial companies. Notably, the banks were able to attract considerably more foreign currency deposits from the population, translating into 1.6 times change in the net lending position between banks and the population. As domestic deposits are going up, with deposits in RON from non-financial companies being one of the main drivers, external liabilities, including funding from parent banks, have been consistently reducing over the past years.

As of December 2018, the following indicators were published by NBR:

Indicator (2018) Value

Total Net Assets RON 451.2 billion

Loans to Deposits Ratio 73.64%

Non-performing loans ratio based on EBA definition 4.96%

Return on Assets (ROA) 1.55%

Return on Equity (ROE) 14.58%

Source: National Bank of Romania

Type of services

The Romanian banking sector provides a wide range of services and most of the players are universal banks.

Analysing from the perspective of product lifecycle, loan facilities (mortgage loan, including "First Home Governmental Program", consumer loan, SME & Corporate financing) are mature, well established products on the market with still very high potential.

Over the last years, cash-based banking products and services were in high demand detrimental to electronic payments and transactions initiated from banking accounts


34


in general. But the trend is slowly reversing since the introduction of specific regulations that prohibit payments in cash over a certain amount or remove barriers to entry for FinTechs, and due to technological advance.

Alternatively, the market of non-cash products such as credit cards and debit cards are becoming more and more effervescent. The last few years brought significant changes in the cards market, with more and more credit institutions offering diverse products, such as credit cards with fixed, interest-free monthly repayments for purchases made at a variety of merchants.

Still in the growth phase of the product lifecycle, the online banking penetration and proportion of digital clients is much lower than the EU average. Despite the significant number of smartphone users, mobile banking is even less used than Internet banking; typically, mobile banking is used for checking account balance, while Internet banking is the platform of choice for payments. As the rate of internet usage continues to grow countrywide, the usage of digital services in Romania is also likely to grow. According to the Global Findex report drawn up by the World Bank for 2018 which analysed the level of access to and usage of banking services in 140 countries all over the world, only 8.8% of Romanian adults have used a bank account to pay utility bills; 19.2% have used the internet to pay bills or buy something online, 12.3% used a mobile phone or the internet to access an account and 25.9% used a debit or credit card to make a purchase.

3.1.4. Trends The structural developments in 2018 were marked by the further consolidation of the Romanian banking system through mergers, as well as a new entrant on the market:• The acquisition of Bancpost by Banca Transilvania was

finalized in 2018. This is the second big acquisition Banca Transilvania undertakes after the Volksbank Romania takeover, a transaction that helped it climb from second to first place in the local banks' ranking.

• The acquisition of Piraeus Bank Romania by JC Flowers, an American private equity fund, also finalised in 2018, after being approved by the National Bank of Romania (NBR) and the Romanian Competition Council. The bank now operates under the name First Bank. First Bank announced the signing of an agreement with Bank Leumi le-Israel B.M for purchasing all the Bank's holdings in its subsidiary Bank Leumi Romania. The purchase is yet to be approved by the NBR and the Romanian Competition Council and is expected to be finalized in 2019.

Likewise, in the phase of awaiting approval by the National Bank of Romania and the Romanian Competition Council lies the agreement signed by EximBank (state-owned) with the National Bank of Greece, for purchasing 99.28% of the latter's holdings in Banca Românească. Further to this transaction, EximBank will become active in the retail banking segment of Romania for the first time, thus becoming a universal bank.

Historical Bridge - Targu Jiu



In January 2018, IFRS 9 standards entered into force in Romania with the financial sector having to adapt to new requirements in terms of determining credit risk indicators (PD, LGD) and an improved methodology for calculating provisions – by shifting to a forward-looking approach focused on macroeconomic prospects. In Romania, particularly, the positive outlook of the country's economy has enabled banks to decrease provision levels throughout 2018, leading to above-average reported profits.

During 2018, financial stability remained robust, with no severe systemic risks identified by NBR. The main systemic risks were external (i.e. Brexit and the sovereign debt situation in the euro area). The end of 2018 was characterized by an increased local regulatory risk, in the context of increased uncertainty which followed the adoption of Government Emergency Ordinance no. 114/2018. Overall, the Romanian banking sector maintained its macro-prudential adequacy, with the solvency and liquidity ratios being within the minimum regulated requirements. On an aggregate level, the high capitalization of credit institutions is likely to provide a cushion for unexpected losses and allows increased lending. At the same time, the high level of liquid assets held by the banking sector (especially government securities) demonstrates its ability to cope with potential adverse developments in their financing sources, as revealed by the latest stress testing exercises conducted by NBR which identified only limited risks for small banks.

Despite credit institutions being the main providers of funds and liquidity in the financial sector, one of the main challenges of the Romanian banking sector remains the low rate of financial intermediation – 26% (domestic credit to private sector % of GDP– World Bank), the lowest in the EU. The continuing trend of diminishing banking staff and the number of branches is likely to have a negative impact on the already precarious degree of financial inclusion and intermediation in Romania. Access to banking and financial services in rural areas will continue to be a challenge, but, for now, improving operational efficiency seems to be the focus of banks which have already increased their market share.

To reduce the risks related to the high indebtedness of low-income individuals, starting with 1 January 2019, the National Bank of Romania established a maximum level of the total indebtedness of 40 percent for consumer loans and mortgages. In the case of foreign currency loans or indexed at a foreign exchange rate given to a person exposed to foreign exchange risk, the maximum level of total indebtedness may not exceed 20 percent. Furthermore, starting May 2019, the Romanian Interbank Offer Rate (ROBOR) will be replaced by the Reference Index for Consumer Credits (IRCC) for consumer credit contracts in RON with variable interest rate.

The harmonization of European data privacy laws under the EU General Data Protection Regulation (GDPR) is likely to be another pain-point for banks, as some may be found to be non-compliant after its enforcement date (25 May 2018) and might face heavy fines and public scrutiny.

Another European Directive expected to be enforced in 2018 was the revised Payment Service Directive (PSD2), which allows bank customers to use third-party providers to access their accounts at different banks, make payments and manage their finances. Payment Initiation Service Provider (PISP) and Account Information Service Provider (AISP) are the new players that the Directive brings to the financial market. The Directive is expected to present a significant economic challenge for banks, as they will no longer be competing only against other banks and the payments value chain will fundamentally change, along with a number of opportunities to offer innovative digital services. Although delayed, the local Law transposing PSD2 is expected by the end of 2019.

Another significant and strenuous change that banks faced in 2018 was the implementation of the MiFID II legislative framework (transposed locally through Law 126/2018) and of the Anti-Money Laundering 4th Directive (although not yet transposed into local legislation) which poses challenges in terms of dealing with financial crime related aspects in a timely and efficient manner.


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3.2. Capital Markets

3.2.1. IntroductionThe Romanian capital market is continuing its development journey started back in 1995 (after almost 50 years of suspension following the establishment of the communist regime). At the moment, the Bucharest Stock Exchange (BSE) is providing financing opportunities for companies looking to raise funds on the Romanian capital market. Via the capital market, Romania has seen an increasing flow of capital in the recent past, coming from retail and institutional investors, both national and international.

Business regulation

Financial Supervisory Authority (FSA)In 2013, the FSA was created via Emergency Government Ordinance 93/2012 regarding the establishment, organization and functioning of the FSA, as an independent and autonomous administrative authority, with legal capacity, which took over all duties and prerogatives of the National Securities Commission, the Insurance Supervisory Commission and the Private Pensions System Supervisory Commission. The Financial Supervisory Authority exercises authorization, regulation, supervision and control powers

over the financial sector, comprising capital markets, insurance and the private pension funds.

FSA is the only national authority competent to represent Romania's interests before the International Organization of Securities Commissions – IOSCO, the European Securities and Markets Authority – ESMA, the European Insurance and Occupational Pensions Authority – EIOPA and the International Association of Insurance Supervisors – IAIS, being a rightful member of such international authorities, based on the applicable international legislation.

Regarding capital markets, FSA main objectives are:• To ensure the stability, the competitiveness and the

proper operation of the financial instruments markets• To increase confidence in capital markets and in

financial instrument investments• To ensure protection of market participants against

unfair, abusive and fraudulent practices• To promote stability of the insurance activity and to

protect the rights of policy holders• To ensure the efficient operation of the private pension

system and to protect the interests of the participants and beneficiaries

Streets of Sighisoara

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Main regulations:• The capital market Law 297/2004• FSA Regulation 1/2006 on issuers and securities• Emergency Ordinance 93/2012 on the establishment,

organization and operation of the FSA• Law 113/2013 for the approval of Government

Emergency Ordinance 93/2012 on the establishment, organization and operation of the FSA

• Law 10/2015 approving Government Emergency Ordinance 32/2012 on undertakings for collective investment in transferable securities and investment management companies and amending, and supplementing Capital Market Law 297/2004

• Law 24/2017 on issuers of financial instruments and market operations

• Law 126/2018 on markets in financial instruments.


Stock exchanges

BSE has a history tracing back to 1839, when commodities-trade exchanges were established. Re-established in 1995, BSE has developed continuously and nowadays it is the main stock exchange in Romania.

Sibiu Stock Exchange (SIBEX) was founded in 1994 having commodities intermediation as the main activity. Starting with 1997, the company focused on the development and the administration of securities and financial derivatives markets.

At the end of 2017, the merger by absorption between the BSE and SIBEX (absorbed company) was officially approved by the Bucharest Court and starting with January 2018, the BSE remains the only market operator in Romania.

BSE Regulated market

In 1995, the BSE was the first regulated market established in Romania. Soon after, in 1996, the RASDAQ market had been established, as an over-the-counter (OTC) market. BSE's regulated market offers the following products: shares and rights (local and international companies), corporate and municipal bonds, government securities, structured products and exchange-traded funds (ETFs). In October 2015, RASDAQ market ceased its activity.

Based on the BSE Alternative Trading System, a new market named AeRO (equities segment of BSE's alternative trading system) was launched on 25 February 2015. It is a market designed for the listing of start-ups/early stage companies and SMEs, to finance their projects, increase their visibility and contribute to the development of the business environment. In February 2016, the AeRO market introduced two new segments – Premium (16 companies) and Standard (the rest).

Main participants

The main actors involved in the capital market include:• Market operators: The BSE which operates a regulated

equity market and an ATS, and SIBEX, which operated an equity spot market, an ATS and a derivatives market, before absorption

• Issuers of securities: entities (private companies, government) that are aiming to finance their operations can issue securities (shares and bonds are the most common) via the capital market

• Financial investment services companies: all securities trading in Romania is carried out by brokerage companies called Financial Investment Services Companies (FISC) licensed by the FSA and established according to Law 126/2018

• Investment consultants: based on FSA/NBR authorization, individuals or legal entities can provide professional investment consultancy services

• Asset management companies and financial investment companies: the asset management sector plays an important role nowadays. In the current low interest rate environment, the trend set over the last 2 years is set to continue, as investors move away from bank deposits and become increasingly interested in such investments to capture higher yields.

Capital market indicators

Indicator December 2018

Total Market Capitalization (BVB) EUR 30.66 billion

Average traded value (equities) EUR 9.88 million/day

Market Capitalization of Romanian companies EUR 18 billion

BET Index yield (2018 closing year) 7,383.68 points

Number of listed companies at BVB 87

Source: Bucharest Stock Exchange, BSE Annual Report 2018

Compared to December last year, the Bucharest Stock Exchange (BSE/BVB) registered a total market capitalization of EUR 30.66 billion, a significant decrease of 13%. The regulated market of BSE also suffered a 34% decrease in the number of equity transactions and a 4% year-on-year decrease in value.

The BET index, which is the main index of the local capital market, closed with a 4.77% drop in value. The most significant depreciation was recorded by BET-FI with -12.63%, followed by BET-BK with -11.63% and BET-XT with -7.62%. BET-FI is a sectorial index that reflects the evolution of the investments funds that are traded on the BVB regulated market, BET-BK was created as a benchmark for funds managers; BET-XT tracks the price changes of the 25 most traded Romanian companies listed on the BVB.

Until mid-December 2018, the Bucharest Stock Exchange was performing well compared to the region, however there was a dramatic downward shift as a result of legislative projects (i.e. Government Emergency Ordinance 114/2018) which implied additional charges on the banking, energy and telecommunications sectors and the modification of Pillar II pensions scheme.


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Type of services

The capital market offers following type of services:• Sale or purchase of securities and other financial

instruments• Management of portfolio• Analysis of financial instruments• Market analysis• Consultancy/advisory concerning mergers,

acquisitions, capital structure, strategy, financing• Managing undertakings for collective investment in

transferable securities established in Romania or in other Member States.

3.2.3. TrendsAn increased focus on consumer protection, transparency and market efficiency continues to be an important trend for capital markets. To this effect, new and updated legislation is coming into effect, both domestically and internationally.

As with the banking sector, the Romanian capital market and all its players are required to adhere to the updated MiFID II legislative framework, as of January 2018 (Markets in Financial Instruments Directive). This aims to strengthen protection for investors in financial instruments and improve the functioning of financial markets through increased transparency and efficiency.

The main strategic goal of the BSE has not changed since 2016 and it remains the upgrade to Emerging Market status. FTSE Russell published on September 26, the Annual Country Classification Review, as per which Romania was maintained on the watchlist of countries with potential to be reclassified from Frontier Market to Secondary Emerging Market. Romania was added on the watchlist in September 2016.

Furthermore, the BVB Group took important steps in setting-up a Central Counterparty (CCP) by deciding on the local CCP solution. The aim is to relaunch the derivatives market through the implementation and authorization of the CCP, in line with EU regulation, so that the institution will be operational in the second half of 2020.

Purcari Wineries Plc. (WINE) got listed on the BSE regulated market, after the successful completion of the initial public offering during January 29-February 8, 2018. 49% of the shares were placed at a price of 19 RON/share, which raises the value of the market operation at approximately million RON 186 (EUR 40 million). Purcari Wineries is one of the leading wine producers in Central and Eastern Europe, with four wineries in the Republic of Moldova and in Romania.

Globalworth Real Estate Investment Limited, one of the leading real estate investment companies in Central and Eastern Europe, announced the second BSE listing of corporate bonds issued by the company, with a total value of EUR 550 million.

Alpha Bank Romania is the first Bank in Romania to issue covered bonds (EUR 200 million) as part of a Euro 1 billion direct issuance Global Covered Bond Programme. This marks a first for the Romanian Capital Markets, as the bonds will be listed on the Bucharest Stock Exchange. The issued covered bond has a 5-year tenor, pays a floating rate coupon and is backed by prime Romanian residential mortgages.

Another direction for the BVB is enhancing its relationship with local entrepreneurs, through the inception of the "Made in Romania" project. The project concluded its second edition in 2018, after a successful first round in 2017 and aims to provide an ecosystem for the business environment in Romania, where all participants can meet and learn from each other, so that the Romanian economy benefits from sustainable development.


Stavropoleos Church - Bucharest 39


3.3. Insurance&Private pensions

3.3.1. IntroductionThe Romanian insurance&private pensions industry has seen an important development during the last decade. As of 1 January 2016, the Solvency II Directive was implemented increasing capital requirements for insurance companies, in an effort to better protect consumers.

As with the other industries, technology innovation also plays an important role in the digital era of financial services and involves significant transformations for insurance companies to stay relevant and competitive within the market.

The insurance market in Romania is characterized by a high degree of concentration. In 2018, almost 89% of the total volume of gross premiums written was covered by 10 insurance companies, out of 29 companies, that carried out insurance/reinsurance activity until 31 December 2018, a similar situation compared to previous years.

With regard to the Pension System, for Pillar II (privately-managed compulsory pensions), there were 7.25 million participants and 0.472 million for Pillar III (voluntary contributions to pension funds or insurance companies) at the end of 2018, both Pillars registering a higher number of participants as compared to the end of 2017.

3.3.2. Business regulationThe FSA exercises authorization, regulation, supervision and control powers over the financial sector, comprising capital markets, insurance and the private pension funds.

Main role of FSA in the insurance market is to:• Promote the stability of the insurance market• Exercise the powers of authorization, regulation,

supervision and control over commercial insurance companies operating in, or from Romania

• Supervise the insurance intermediaries and reinsurance, as well as other activities in connection therewith, according to insurance and reinsurance regulation in Romania

• Provide authorization by line of business for companies complying with all criteria established for sale purposes

• Approve the list of auditors for statutory purposes• Offer educational programs related to insurance.

Insurance regulations

The insurance sector is regulated by Law 236/2018 on the distribution of insurance, Law 237/2015 on the authorization and supervision of the business of insurance and reinsurance, Law 132/2017 on compulsory motor liability insurance for damages caused to third parties by motor vehicle accidents and trams. The regulating and supervisory body of the insurance market is also FSA. The FSA was established in order to ensure a greater efficiency in the sectorial surveillance activity performed outside the scope of competence of the NBR.

The legislation allows setting up insurance companies under any of the following options:• Romanian legal entities established either as joint stock

companies or as mutual fund companies authorized by the FSA

• Insurance or reinsurance companies from Member States that perform insurance or reinsurance activities in Romania, according to their rights of establishment and provision of services

• Branches of foreign companies authorized by the FSA• Subsidiaries of foreign insurance or reinsurance

companies authorized by the FSA• Insurance or reinsurance companies that adopt the

form of Societas Europaea.

The paid-up share capital of insurance providers cannot be lower than the following amounts:a. RON equivalent of EUR 2.5 million for non-life insurers,

including captive insurersb. RON equivalent of EUR 3.7 million for non-life insurers,

including captive, covering also, in full or in part, risks included in Classes 10 to 15 listed in Section A of Annex 1 of the Law 237/2015

c. RON equivalent of EUR 3.7 million for life insurers, including captive

d. RON equivalent of EUR 6.2 million for composite insurers

e. RON equivalent of EUR 7.4 million for composite insurers, covering also, in full or in part, risks included in Classes 10 to 15 listed in Section A of Annex 1 of the Law 237/2015

f. RON equivalent of EUR 3.6 million for reinsurers andg. RON equivalent of EUR 1.2 million for captive

reinsurers.

Union Square - Timisoara



In accordance with the provisions of Law 260/2008, the Insurance Pool against Natural Disasters (PAID) was set up, as an insurance-reinsurance undertaking, with private capital, formed by the association of insurance companies for the conclusion of compulsory home insurance. PAID was established as an insurance company in November 2009, through the joint effort of 12 insurance companies.

PAD - the policy of insurance against natural disasters - is a compulsory insurance policy which covers damage from floods, earthquakes or landslides on dwellings. Depending on the type of dwelling insured, the PAD policy may have the following features:• TYPE A dwelling, with a sum insured of EUR 20,000

and an insurance premium of EUR 20/year• TYPE B dwelling, with a sum insured of EUR 10,000

and an insurance premium of EUR 10/year.

Due to higher capital and solvency requirements, there was a decrease of the Romanian insurance market. Currently (30 December 2018) there are 29 active insurance companies authorized by the FSA, compared with 2011 when there were 45 companies.

As of 1 January 2016, the implementation of the Solvency II Directive required insurance companies to align to new rules and standards. The Directive enhances consumer protection by introducing prudential financial requirements (Pillar I) aimed to ensure the guarantee of payments to owners and/or beneficiaries of insurance policies.

The Solvency II Directive raised capital requirements for insurance companies, directly linking these with the level of risks taken by the companies, both from an investment perspective and in terms of underwritings.

A comparative analysis between the capital requirements at the end of 2017 and the capital requirements at the end of 2018, indicates a slight decrease of the Solvency Capital Requirement (SCR) by RON 5.4 million.

As of December 2018, insurance companies held eligible own funds to cover capital requirements of RON 5.10 billion, 1% lower than the level registered at the end of 2017.


Romanian Insurance Market

The total gross premiums written by insurance companies and their subsidiaries on the Romanian market was about RON 10.14 billion, representing a 4.5% year-on-year increase.

The growth was generated by both life and non-life segments, just as the increase between 2016 and 2017.

The general insurance segment registered an increase of 4.6% compared to 2017, totalling around RON 8.04 billion. The main reason behind this positive movement is an increase of 9% in the volume of Class A3 land transport insurance (other than railway) and a 6% increase in the volume of Class A8 fire and natural disasters insurance, which represent roughly a quarter for the former and 13% for the latter of the total gross premiums written for non-life insurance. This movement was countered by a 2% decrease in Class A10 motor insurance (Motor Third Party Liability), which amounts to 47% of the value of the total gross premiums written for non-life insurance. Another notable increase in gross premiums written was for Class A2 health insurance, totalling a 60% year-on-year increase, however the value of Class A2 premiums represents only 2.8% of the total gross premiums written for non-life insurance.

Life insurance gross premiums recorded a 4.3% increase compared to 2017 and unlike the European insurance market, which is dominated by the life insurance segment, in Romania this segment represents only about 21% of the gross written premiums, the market being dominated by general insurance, respectively motor insurance. Total gross life premiums represent almost 0.24% of GDP in 2018, below the European average. This is partially explained by the faster GDP growth of Romania compared to EU 28 average.

In terms of mandatory insurance policies against natural disasters (PAD) there is still a very low penetration evidenced by the number of existing contracts compared to the number of households. 2018 has seen an increase of 1% in the number of new contracts for mandatory insurance policies, a 3% increase in gross written premiums and a 15% increase in gross indemnities paid. The voluntary segment of insurance policies against natural disasters however, although benefitting from a 5% year-on-year increase in gross written premiums and a -14% decrease in gross indemnities paid, saw a -13% year-on-year decrease in the number of new contracts.Romanian Private Pensions Market

Romania overhauled the old pension system in 2007, making it mandatory for all working Romanians under 35 to contribute to "Pillar II" private pension schemes, as well as their state pension "Pillar I". The evolution of the private pension system in Romania has been a positive one, year after year bringing a rise in participants and total assets.



The value of the total assets under management in the entire private pension system has continued to grow over the last few years. In December 2018, it reached a total of RON 49.60 billion (19.4% higher than December 2017), representing 5.22% of GDP, compared to 4.84% of GDP in December 2017.

The Romanian private pension system has two components:• Mandatory private pensions (Pillar II)• Voluntary pensions (Pillar III).

Romania's mandatory private pensions system (Pillar II) is based on the World Bank's multi-pillar model. It is a fully funded system, based on personal accounts and on

the defined contribution (DC) philosophy. The system was put in place in 2007, when it became mandatory for all employees aged under 35 and voluntary for employees aged 35-45. Participation is only open to employees paying social security contributions (CAS).

Romania's voluntary private pensions system (Pillar III) is a fully funded system, based on personal accounts and on the defined contribution philosophy. The system was implemented in 2007, when it became voluntary for all persons earning any type of income. The system is not occupational. Participation is open to everybody earning income, from employees to the self-employed.

Main players

According to the available data, as of December 2018, the top insurers based on the total gross written premiums (both non-life and life insurance) were as follows:

No Company name Total Gross*(million RON)

Total Market Share (%) Q3 2018

1 CITY INSURANCE S.A. 1,484.6 14.64%

2 ALLIANZ-ŢIRIAC ASIGURĂRI S.A. 1,317.3 12.99%

3 OMNIASIG VIG 1,172.3 11.56%

4 EUROINS ROMÂNIA ASIGURARE REASIGURARE S.A. 1,008 9.94%

5 GROUPAMA ASIGURĂRI S.A. 1,003.9 9.90%

6 ASIROM VIENNA INSURANCE GROUP S.A. 867 8.55%

7 NN ASIGURĂRI DE VIAŢĂ S.A. 770.7 7.60%

8 GENERALI ROMÂNIA ASIGURARE REASIGURARE S.A. 637.8 6.29%

9 BCR ASIGURĂRI DE VIAŢĂ VIENNA INSURANCE GROUP S.A. 365 3.60%

10 UNIQA ASIGURĂRI S.A. 351.9 3.47%

Source: Financial Supervisory Authority, Insurance Market Development in 2018 *Total Gross figures calculated based on the total market shares

Insurance market indicators

Overall, in 2018, the insurance market registered moderate growth, while the private pension funds market (Pillars II and III) had a more significant evolution compared to December 2017. Both remain highly concentrated markets, with life insurance and facultative pension schemes lagging average EU numbers.

Indicator (Q3 2018) Value (RON)

Gross Written Premiums (Total) 10,141 million

Gross Written Premiums (Non-life) 8,042 million

Gross Written Premiums (Life insurance) 2,099 million

Insurance penetration degree (2018) 1.13% of GDP

Insurance density (2017) RON 496/capita

Source: Financial Supervisory Authority, Insurance Market Development in 2018

3.3.4. TrendsAs a result of new European and local requirements, insurance companies are required to quickly adapt to more restrictive regulations. The impact of the Solvency II Directive requirements was not too significant. At the end of 2018, all insurance companies operating on the Romanian market were in compliance with both the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR), standing at 1.71 and 3.87 respectively.

At the beginning of 2022, another challenge that insurance companies have to take on is the implementation of IFRS 17 accounting standards, replacing IFRS 4. This will introduce a single reporting standard for all insurance companies, on a global scale. This single "accounting language" will allow global investors to have a better overview of the financial situation and risks faced by insurance companies, making it easier to compare different insurance companies, regardless of the market they operate on. Experts believe that insurers will face significant costs to implement the new accounting standard, in particular life insurance companies.


42


A notable event on the general insurance market was the adoption of Law 236/2018 in October 2018, through which the Insurance Distribution Directive (IDD) measures were transposed in the Romanian legislation. As a result, Law 32/2000 on the activity and supervision of insurance and reinsurance intermediaries was repealed. The aim of the new legislation is to further harmonize the insurance market for consumers and through this framework provide greater transparency in price and costs of insurance products and also enhance business conduct rules.

The insurance sector will continue to face the downfall of European legislative changes, after the implementation of the Packaged Retail Investment and Insurance-Based Products (PRIIPs) Regulation, in January 2018, the Insurance Distribution Directive (IDD) in October 2018 and General Data Protection Regulation (GDPR) in May 2018. IDD focuses on enhanced consumer protection,

with insurance companies and distributors being required to disclose a number of additional information regarding the products they offer, while PRIIPs aims to standardize and improve the information provided to clients regarding specific insurance products through a Key Information Document (KID).

To maintain organic growth and consistency in coming years, successful insurers will need to look for new ways to attract more customers by investing in their digital channels and by making better use of the data they capture to personalize products and services. The use of intelligent automation to develop self-service platforms which simplify their external and internal claims processes, improve underwriting and prevent fraud, are ways in which insurance companies can grow their customer base, while also minimizing losses and maximizing profits.

Brasov fortress - Brasov


43

Energy44. Energy

Grand Square - Sibiu

4.1. Oil&Gas

4.1.1. OilWith a history of over 150 years, Romania's oil industry stands as a strategic national sector. At the regional level, Romania is the fourth largest oil producer in the EU (6% of total production) and the fifth largest oil producer in Europe (2%). Its peak oil production was reached in 1977, with an annual production of 14.65 million tons. The BP statistical Review of World Energy reported that the annual oil production in Romania was approximately 3.6 million tons. Romania's estimated crude oil reserves are approximately 40 million tons. The estimated depletion period is 12-15 years.

Exploration of Oil and Natural Gas Sources

Hunedoara

Alba

Prahova

Buzău

Galaţi

Brăila

DoljOlt

Teleorman

Giurgiu

Călăraşi

Ilfov

București

Caraș-Severin

Mehedinţi

Timiș

Arad

Cluj

Sălaj

Satu MareMaramureş Suceava

Harghita

Mureş

Sibiu Braşov

Vâlcea ArgeşGorj

Botoşani

Iaşi

VasluiBacău

Covasna

Constanţa

IalomiţaDâmboviţa

Tulcea

Vrancea

NeamţBihor

BistrițaNăsăud

ROMGAZ

PETROM

OTHER TITLE HOLDERS

COUNTRY’S LIMITS

NONPERSPECTIVE ZONE

Source: The Romanian Agency of Mineral Resources

Most of the oil resources are located onshore; only 4% are situated in the Black Sea continental plateau. In the past years, natural factors such as the continuously declining oil reserves and economic factors such as a lack of oil drilling works and investments have led to a visibly diminishing oil production and, correspondingly, a steady rise in oil imports. Similarly, the fall in the annual growth rate of GDP has caused a decline in domestic consumption. Currently, there are 432 oil and natural gas fields, with approximately 10,000 oil wells and 4,000 natural gas wells.

In the long run, the solution to counter the depletion of oil reserves is prospective onshore (beyond 3,000 m depth) or offshore geological exploration (beyond 1,000 m depth).


Market

A pivotal role in the Black Sea is played by the Oil Terminal SA Constanţa. One of the largest terminals in South Eastern Europe, Oil Terminal operates 24 million tons/year of crude oil, petroleum, liquid chemical products and raw materials destined for import/export and transit. A joint-stock company (state-owned), the terminal has three large storages, with a total capacity of 1.7 million cubic meters, transport pipelines and loading capacity in 30 km landfills FF and discharging capacities at railway platforms to ensure the movement of petroleum products and chemicals. Oil Terminal is connected to all refineries in Romania, via a network of oil pipes of over 800 km. Moreover, it is the sole terminal in Western Black Sea that has a berth with a draught, allowing the unloading/loading of ships of maximum 150,000 tdw.

The Crude Oil National Transport System (N.T.S.) is the ensemble of interconnected major pipelines, providing the collection of the crude oil from the extraction sites or import crude and their routing from the sites they have been delivered by the producers/importers towards the processing units.

The first state company established in the oil sector as of Government Decree 1213/1990, CONPET operates the 3,800 km oil pipeline system that addresses 24 counties, with an overall transport throughput of about 27.5 million tons/year.

Acting as concessionaire of the N.T.S., CONPET is legally bound to provide to all applicants – authorized legal persons free access to the system's available throughput, under equal conditions, in a non-discriminatory and transparent manner.

Based on the type of oil supplied, the transport network comprises the following subsystems:• 1,348 km imported crude oil transport – 20.2 million

tons/year throughput and 45,000 mc storage capacity• 1,540 km domestic crude oil transport – 6.9 million

tons/year throughput and 126,000 mc storage capacity

• 921 km rich gas and liquid ethane transport – 0.33 million tons/year for rich gas and 0.1 million tons/year for ethane and overall 633 mc storage capacity.

4 ENERGY

Romania's Oil Transport SystemSource: CONPET

Confronted with a major dependence on one client and a low degree of capacity utilization of the subsystem for imported crude oil (approximately 30%), CONPET has adopted a long-term development plan to reduce loss prevention and expand the network. In particular, the Constanta-Pitesti-Pancevo Project seeks to connect the national crude oil pipeline transport system to the regional system by supplying Pancevo refinery (Serbia) and possibly Bosanski Brod refinery (Bosnia and Herzegovina). The pipeline will be 760 km, out of which 600 km in Romania.

46


Romania has the highest installed refinery capacity in Central and Eastern Europe. Out of 10 existing refineries, the following four currently operational:• Petrobrazi (OMV Petrom) – installed capacity of 4.5

million tons/year• Petromidia (Rompetrol) – installed capacity of 5 million

tons/year• Petrotel (Lukoil) – installed capacity of 2.4 million tons/

year• Vega (Rompetrol) – installed capacity of 0.4 million

tons/year.

Finally, Romania applies a system of gross royalties for both oil and gas paid by the titleholders on a quarterly basis. Royalties' rates range between 3.5%-13.5% for crude oil and 3.5%-13% for gas with respect to gross production and reference to prices established by the National Agency of Mineral Resources (NAMR).

4.1.2. Natural GasIn terms of annual production (11 bcm) and natural reserves available (101 bcm), Romania's gas sector is one of the most notable in Central and Eastern Europe. As a primary energy source, natural gas covers about 29% of the national consumption. Nevertheless, Romanian on-shore natural gas reserves are depleting rapidly – being sufficient for the next 15-20 years.

Predominantly, the conventional natural gas reserves are located onshore. In 2012, significant natural gas deposits were discovered offshore, in the Neptune perimeter of the Black Sea, with the prospects of increasing the overall reserves by 42-84 bcm.

On 17 November 2018, the first Romanian "Offshore law" came into force, which aimed to provide a set of legislative solutions to adapt the existing regulatory framework to offshore oil exploration, development and exploitation projects in the offshore oil perimeters, thereby ensuring their functionality.

The law stipulates aspects such as:• Romanian tax residency requirements - Petroleum

offshore oil permits have the obligation to ensure that at least 25% of the average annual number of employees are Romanian citizens with a tax resident in Romania

• Selling of the natural gas – 50% of the natural gas obtained offshore must be sold via the Romanian stock exchange market

• Taxation of the additional income – a progressive taxation system (30% to 70%) has been established applicable to the additional income generated from the evolution of gas prices.

Government Emergency Ordinance published in 2018 (OUG 114), which implied an additional 2% annual turnover tax and a price ceiling on the sale of the produced gas, along with the effects of the Offshore Law, were criticised by the Oil&Gas industry players interested in the Romanian offshore reserves, for limiting the investment potential in this area.

OMV Petrom and ExxonMobil, which hold a concession on the deep water Neptun Black Sea offshore gas perimeter, one of the largest EU natural gas deposits, planned to give the final green light for the start of the exploitation phase in 2018, after having spent around USD 2 billion to prepare the production. In light of the recent regulatory changes, the project was put on hold until more favourable conditions arise.

Black Sea Oil&Gas, controlled by private equity firm The Carlyle Group, confirmed, in April 2019, that it received approval from the Romanian government for the field development plan (FDP) for the Ana and Doina gas fields, which signifies the start of production at Midia Shallow Block, thus becoming the first company to tap the country's vast offshore resources. As a result of the recent regulatory changes, the firm later warned it could pull out of another project, if the regulations remain in their current forms.

Fortified Church - Biertan, Sibiu

47


Romania's Black Sea offshore gas reserves are estimated at 200 bcm, according to BP's statistical review, waiting to be explored.

Market

Since 2001, the gas market entered a restructuring phase, focused on the liberalization of the gas market, targeting the unbundling of production, storage, transmission and distribution activities and the devolution of market power in the production and import sectors by enhancing the number of licenses offered to companies.

The current structure of the gas market is as follows:• Competitive market, which includes:

• Wholesale market: (i) bilateral contracts between the gas economic operators, (ii) transactions on centralized markets managed by the operator of the gas market or the operator of the balancing market, (iii) other types of transactions or contracts

• Retail market: suppliers sell gas to final consumers based on contracts with negotiated prices

• Regulated market: natural monopoly activities and related gas supply activities with controlled process set by the ANRE approved framework agreements.

ANRE is also responsible for end customer awareness on their energy consumer rights in relation to the other operators in the electricity market.

In terms of major regulatory changes, the Government Emergency Ordinance published in 2018 (OUG 114) had a major impact in all segments of the energy sector. This directive sparked controversy, as it brought changes that directly impacted the cash flow of the companies, the most notable change being the increase of an annual turnover

tax, from 0.2% to 2% for most energy companies: • On the production side, coal-based power generation

capacities and electric and thermal energy cogeneration plants are exempted from the 2% annual turnover tax

• On the distribution side, the new regulated rate of return (RRR) for investments in this sector (recognizable in the respective tariffs) for the period 2019-2024 increased to 6.9% (up from 5.66% after the previous modification for the new regulatory period)

• On the supply side, the suppliers cannot unilaterally terminate a contract with an end consumer anymore. Energy must be purchased to satisfy consumer needs, with priority being given to the customers of the universal service. For gas supply, they are also obligated to acquire gas from domestic producers at a ceiling price of 68RON/MWh (set from 1 May 2019 to 28 February 2022), to serve household customers and heat producers using cogeneration plants and thermal power plants serving public consumption. The obligation to use a mixture of imported and domestic gas to cover the consumption of non-household consumers was also repealed.

With respect to the gas market, the regulation should set the requirements for a liquid trading platform, on which competitive natural gas prices can be developed. Every natural gas producer and supplier must close buy-sell contracts in a transparent and non-discriminatory manner, on the centralized market and following the regulations set forth by ANRE (including the minimum quantity gas established for the respective period as a % of the gas portfolio).

Fortified Church - Biertan, Sibiu

4 ENERGY

48


The current participants in the market are:• 1 operator of the National Gas Transmission System• 6 producers (decreased from 7 previous producers)• 3 underground storage operators (increased from 2

underground storage operators)• 34 distribution and supply operators to captive

consumers (decreased from 37 distribution and supply operators to captive consumers)

• 76 suppliers in the wholesale market (increased from 75 suppliers in the wholesale market)

• 2 market operators.

Covering over 13,000 km of pipelines with a total design capacity of 30 bcm/year (see figure below), the National Gas Transmission System (SNTGN) is operated by a single ENTSOG company - TRANSGAZ.

4

Based on the Concession Agreement concluded with the National Agency for Mineral Resources (ANRM) and the ANRE (issued Operating License 1933/2013 valid until 2032), the state-owned technical operator carries the gas transmission activity. In order to operate the NTS - SNTGN in a natural monopoly, the operator pays every quarter a royalty fee representing 10% of the revenues from gas transmission.

International gas transmission is carried out in the South-Eastern region of the country, Dobrogea. The three pipelines (1974, 1998, 2002 totalling 553 km) between Isaccea (Northern Dobrogea) and Negru Vodă (Southern Dobrogea) cover a 182 km area, part of the Balkan corridor for gas transmission from Russia to Bulgaria, Greece and Turkey. With a transmission capacity of 27.7 bcm/year, the 1000 mm gas pipeline and 200 mm gas pipelines have three separate entry points in Ukraine and three different exit points in Bulgaria, not inter-connected.

Romania's Natural Gas Transmission System

Source: Transgaz

ENERGY

49


SNTGN is connected to its neighbouring countries through the following key points:• Mediesul Aurit (Ukraine) – import capacity of 4.0 bcm/

year• Isaccea (Ukraine) – import capacity of 8.6 bcm/year• Csanadpalota (Hungary) – reverse flow with an import

capacity of 1.75 bcm/year and an export capacity of 0.087 bcm/year

• Iasi-Ungheni (Moldova) – export capacity of 1.5 bcm/year.

Given the new projects aimed to diversify gas transmission from the Caspian region to Central Europe and off-shore gas sources in the Black Sea, Transgaz aims to construct a new gas transmission route to ensure the capitalization of gas volumes on Romanian and European markets and permanent reverse flow at the Bulgarian and Hungarian connectors.

In 2016, with the help of the European Union, Transgaz started the development of the first part of the Bulgaria-Romania-Hungary-Austria (BRUA) pipeline, a natural gas pipeline from Podișor, Giurgiu County to Recaș, Timiș County, part of a larger initiative aimed at enhancing the gas interconnection between Bulgaria, Romania, Hungary and Austria. Preparations for the project started in 2016, and the actual construction phase started in the first quarter of 2018. The achievement of the first section is scheduled for the end of 2019.

The estimated capacity for the BRUA pipeline is approximately 1.5 bcm/year for each flow direction.

The pipeline attempts to reduce the region's dependence on Russian energy and energy imports and provide a new export route for the future natural gas exploitation in the Black Sea. The BRUA I pipeline is designed to be linked to the Giurgiu–Ruse (Bulgaria) and the Arad–Szeged pipelines (Hungary), while BRUA II is planned to connect the Black Sea reserves to the main BRUA I artery, connecting Hungary, Romania and Bulgaria.

As of February 2019, Transgaz has delayed the development of BRUA II due to reduced contracting capacity from bidders. Transgaz announced that only 40% of the BRUA II capacity is reserved, leaving the company with negative results on the economic tests performed.

4.2. Power&Utilities

4.2.1. ElectricityRomania's Electrical Energy market is extensive, diverse in its production mix and increasingly interconnected in the region (see figure below). In November 2014, the Market Coupling of the day-ahead electricity markets of Romania, Hungary, the Czech Republic and the Slovak Republic was launched in order to increase trading and capacity allocation efficiency, security of supply and liquidity and to lower price volatility. Romania is now part of the Price Coupling of Regions solution, a key step towards the full integration of the European electricity market.

Romania's Electricity Transmission SystemSource: Transelectrica

4 ENERGY

50


Moreover, Romania has the largest installed capacity of electricity production in Southeast Europe. Throughout the years, the net installed capacity has increased from 16.8 TW in 2008 to 19.2 TW in January 2019, due mainly to commissioning of renewable power generating capacities (more information http://www.transelectrica.ro/web/tel/productie).

As Romania's transmission and system operator, Transelectrica oversees the national electricity transmission grid made of 81 transformer electric substations, 8 transmission branches and 8,834 km of overhead lines at 110/220 kV, 400 kV and 750 kV.

The production mix of Romania's electrical energy system has changed heavily in recent years. In 2018, the structure of electricity production included the following:

Energy mix Hydro Coal Nuclear Natural gas Wind Photovoltaic Biomass

% 2018 29.06% 24.22% 17.91% 16.64% 10.7% 1.31% 0.09%

Quantity 2018 (TWh) 17.63 14.7 10.87 10.1 6.49 0.75 0.05

% 2012 22.8% 39.7% 20.2% 12.8% 3.5% NA NA

Quantity 2012 (TWh) 12.93 22.51 11.46 7.26 1.98 NA NA

Source: ANRE Reports 2012-2018

Electricity structure by primary sources (delivered by generators with dispatchable units)

BIOMASSHYDRO

29.06%

NUCLEAR

17.91%

GAS

16.64%

WIND

10.70%

SUN

1.31%

LIQUID

0,06%

SOLID

24.22%

0,09%

Most notably, the most spectacular annual rise was recorded by renewable energy as indicated by the wind power and photovoltaic increase in the energy mix (figure below).

Energy mix 2011 2012 2013 2014 2015 2016 2017 2018

Wind power 1.9% 3.5% 7.1% 9.2% 11.2% 11.1% 12.4% 10.7%

Photovoltaic power NA NA NA 1.0% 1.2% 1.2% 1.53% 1.31%

Source: ANRE Reports 2011-2018

Market

Beginning with 1998, the Romanian electricity market has experienced a high degree of restructuring, through which reforms have steadily facilitated liberalization and increased competition. Following successive government decisions in 1998 and 2000, the fully-vertically integrated

electricity monopoly was unbundled. At present, the electricity market is composed of the transport system operator, an energy market operator (OPCOM), distribution and supply operators and producers – both private companies and state-owned production facilities.

4ENERGY

51


• Retail market – also divided into the regulated market (contracts signed between the final customers with the last resort suppliers, at regulated tariffs) and the competitive market (contracts signed with all the suppliers, including the last resort ones, at negotiated prices on competitive markets)

GD 1563/2003: 40%

100 %

90 %

80 %

70 %

60 %

50 %

40 %

30 %

20 %

10 %

0 %

GD 644/2005: 83.5% Full market opening according to GD 638/2007

GD 1823/2004: 55%

79 %

Market opening degree as per applicable primary legislationConsumption (%) of the customers who switched or renegotiated the contract

Jan

2004 Apr Ju

lO

ctJa

n 20

05 Apr Ju

lO

ctJa

n 20

06 Apr Ju

lO

ctJa

n 20

07 Apr Ju

lO

ctJa

n 20

07 Apr Ju

lO

ctJa

n 20

07 Apr Ju

lO

ctJa

n 20

07 Apr Ju

lO

ctJa

n 20

07 Apr Ju

lO

ctJa

n 20

07 Apr Ju

lO

ctJa

n 20

07 Apr Ju

lO

ctJa

n 20

07 Apr Ju

lO

ctJa

n 20

07 Apr Ju

lO

ctJa

n 20

07 Apr Ju

lO

ctJa

n 20

07 Apr Ju

lO

ctJa

n 20

07 Apr Ju

lO

ctJa

n 20

19

Electricity Retail Market Opening Degree (January 2004 - January 2019)Source: ANRE Report, January 2019

At present, the structure of the Romanian electricity market consists of:• Wholesale market – divided into the competitive market (by the entering of Law 123/2012 into force, all the new

transactions must be the result of participation on the centralized markets). For a visual representation of the wholesale market structure, please see the figure below.

Physical notifications

Markets administrated by Opcom SA (The electricity market operator)

Market administrated by CNTEE Transelectrica SA (Balancing market operator)

D-n D-1

Offers Transactions Offers

Offers

Dat

a

Transactions

Transactions Offers Transactions

D+nD

Day ahead marketCentralised market of contracts

Intraday market

Balancing market Delivered electricity on BM BRP imbalances

Bilateralcontracts market

Export Import



BRP

Market participants

TSO Metering operator

Adjustments toD-1 schedule

Source: ANRE Report, November 2018

4 ENERGY

52


The most significant recent legal change was brought by the Government Emergency Ordinance 114/2018 with following amendments, which had a few changes in the electricity sector: the annual tax of 0.2% revenue for energy players will be increased to 2%, the gas and energy distributors will have the Internal Rate of Return set for 6.92% (down from 7.7% in 2018, up from 5.07% in the beginning of 2019), the clients on the competitive market will be able to come back to the regulated market, where the price will also be capped for the next 3 years. There are still talks in the public space regarding potential subsequent modifications of the Ordinance.

4.2.2. Heat SupplyThermal energy accounts for more than half of Romania's energy consumption and records the largest energy losses. In particular, the heat supply production for centralized heating system in Bucharest represents 41% of the national production.

The market is composed of two segments:• Central heat supply systems (SACET) which operate

in large urban areas and ensure the production, transport, distribution and supply to final consumers

• Decentralized heat supply systems, which include:• Consumers that have no access to the centralized

heat supply system and rely on firewood for heating. Most notably, in the rural area, wood remains the main heating fuel for stoves.

• Consumers that have disconnected from the central heating system and opted for an individual heating system. There is a total of approx. 8.5

million households, 7.5 million of them being inhabited: 4.2 million of these are individual households, while 2.7 million are located in apartment buildings. Out of all the households, only 1.2 million are connected to SACET. A third of all the households are using an individual heating system, using natural gas or coal fuels, with a low energy efficiency. Thermal energy consumption in residential buildings amounts to 250-300 kWh, double the EU average value. As 75% of the respective buildings are 40 years old, the heat loss of the buildings is as high as 40-50% of the final energy consumption. Moreover, with energy efficiency building upgrade of 5% of buildings blocks, utilities prices close to EU average and a low nominal average income, thermal energy requires substantial and immediate upgrade.

Energy Strategy

In March 2019, the Romanian Ministry of Energy published a draft for a new Energy Strategy, subjected to public consultation. The strategy focuses on the increase of nuclear energy in the country's energy mix, while decreasing the contribution of energy from coal. In order to decrease the need of energy imports, the strategy focuses on the development of newly-discovered Black Sea offshore gas deposits.

Sibiu Church

4ENERGY

53

Accounting, auditing and reporting5

Transfagarasan road

Accounting, auditing and reporting

5. Accounting, auditing and

reporting5.1. Accounting and financial reportingThe financial reporting and auditing requirements in Romania are consistent with accounting and financial reporting matters as covered by EU Directives.

The legislation currently regulating accounting and financial reporting comprises the Accounting Law 82/1991 and Minister of Public Finance Order 1802/2014 with its subsequent amendments (MoF) Order 1802, as well as specific legislation relating to the application of the International Financial Reporting Standards (IFRS) to the preparation of financial statements in Romania (MoF Order 907/2005, MoF Order 1121/2006, MoF Order 881/2012 and MoF Order 2844/2016).

As exception, entities supervised by certain authorities (e.g. NBR, FSA), such as banks, non-banking financial institutions, insurers, insurance brokers, pension funds, etc. are regulated by specific accounting regulations, issued by their supervisory bodies.

The Accounting Law indicates the requirements for the general accounting framework for Romanian entities, while MoF Order 1802 covers financial reporting and related accounting requirements.

The provisions of MoF Order 1802 have been prepared to reflect the new EU Directive in force, namely Directive 2013/34 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, superseding Directive IV for stand-alone financial statements and Directive VII for consolidated financial statements. The previous MoF Order 3055/2009 was replaced by MoF Order 1802 from 1 January 2015.

MoF Order 1802 covers entities whose securities are not admitted to trading on a regulated market, which, based on certain criteria, may need to prepare either a full or an abridged set of financial statements (these statements are the basis for dividend distribution and are subject to annual approval by the General Meeting of Shareholders). Entities are now classified into three categories, according to their size: micro, small and medium or large entities.

An entity will change the category only if it exceeds (or no longer exceeds) certain size criteria, for two consecutive years (the previous and the current year).

Micro-entities are those entities which, at the balance sheet date, do not exceed at least two of the following three criteria:• Turnover (for the period): RON 3 million• Total assets (at year end): RON 1.5 million• Average number of employees for the period: 10.

Worth mentioning is that for tax purposes there are other criteria to categorize a company as a micro-entity (please refer the tax section of this document).

According to the Order, micro-entities are required to prepare an abridged set of financial statements designed specifically for them.

Small entities refer to those entities which do not fit into the micro-entities category and which do not exceed at least two of the criteria below:• Turnover (for the period): RON 35 million• Total assets (at year end): RON 17.5 million• Average number of employees for the period: 50.

If an entity fulfils at least two of the three criteria indicated below it is classified as a medium or large entity. The criteria for qualification are:• Turnover (for the period): over RON 35 million• Total assets (at year end): over RON 17.5 million• Average number of employees for the period: over 50.

Medium or large entities, as well as public interest entities, prepare a full set of financial statements.

A full set of financial statements under MoF Order 1802 comprises the following:• Balance sheet• Profit and loss statement• Statement of changes in equity• Cash-flow statement• Explanatory notes.

An abridged set of financial statements for small entities comprises the following:• Abridged balance sheet• Profit and loss statement• Explanatory notes to the simplified financial

statements.

At their own discretion, entities below the size criteria may prepare a statement of changes in equity and/or cash-flow statement

56

An abridged set of financial statements for micro-entities comprises the following:• Abridged balance sheet• Abridged profit and loss statement• Abridged explanatory information to the simplified

financial statements.

Consolidated financial statements

Preparation of consolidated financial statements is a requirement for entities meeting certain criteria and listed entities. These consolidated financial statements are in addition to the individual financial statements prepared by each Romanian entity in a group in accordance with MoF Order 1802.

Companies reporting under MoF Order 1802 have also the option to prepare consolidated financial statements in accordance with IFRS.

In addition to listed entities, consolidated financial statements should be prepared where at least two out of the three criteria indicated below are met, based on the latest annual financial statements:• Turnover (for the period): over RON 210 million• Total assets (at year end): over RON 105 million• Average number of employees for the period: 250.

Groups which do not meet at least two of the criteria above are classified as small or medium. Large groups are those which are required to prepare consolidated financial statements, as above.

An exemption is available, if the group holding company is part of a larger group in Romania that prepares and publishes group results, in which the group holding company and all its subsidiaries are included, given that there is at least 90% ownership of the group holding company and the remaining shareholders have approved not to prepare consolidated financial statements (except for listed entities).

Small and medium groups are not exempted from preparing consolidated financial statements, if at least one of the subsidiaries is a listed entity.

In addition to the consolidated financial statements, an Administrator's Report is required to be completed along with an auditors' report.

Preparation of IFRS financial statementsMoF Order 907/2005 required credit institutions to prepare annual financial statements in accordance with the IFRS for the year ending 31 December 2006, for user information purposes (which implies preparation of consolidated financial statements for credit institutions which are parents as defined by IAS 27). Further, under MoF Order 1121/2006, additional requirements for preparation of financial statements in accordance with the IFRS were issued covering credit institutions and public interest entities.

Starting tax year 2012, companies whose securities are admitted to trading on a regulated market (i.e. listed entities) are required to apply IFRS for the individual stand-alone annual financial statements. These companies are no

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longer required to prepare, in addition, statutory financial statements in accordance with MoF Order 1802. MoF Order 2844/2016 (replacing MoF 1286/2012) are the relevant accounting regulations in their case.

The NBR requires credit institutions to issue also standalone financial statements in accordance with the IFRS for the years 2009-2011, by restatement of the statutory financial statements (Order 15/2009) and from 2012 onwards, IFRS will become the only accounting base for credit institutions (Order 9/2010).

5.2. Main bookkeeping and document submission requirementsThe following documentation and submission requirements apply for bookkeeping purposes:

Daily routine• Petty cash register updated with the payments and the

collections made during the day• Transactions included in the accounting system

normally on a daily basis in chronological order.

Monthly routine• Trial balance prepared for the month (though it is

mandatory to be prepared only once a year)• VAT return submitted and VAT paid (if applicable)

until the 25th of the next month, based on sales and purchases of the month (the return shall be prepared on a quarterly basis for small companies)

• Sales and purchases registers• Daily book (in Romanian, "Registrul Jurnal")• General ledger (in Romanian, "Cartea Mare")• Payroll statements and salary related taxes and

contributions computed and returns submitted by the 25th of the next month

• Intrastat statement (if applicable) submitted to the National Institute for Statistics by the 15th of the following month

• VIES statement (if applicable) submitted until 25th of the next month

• Withholding tax return (if applicable) in case of revenues paid to non-residents by the 25th of the next month

• Informative statement regarding sales and acquisitions on national territory (if applicable) submitted until 30th of the next month

• As exceptions, the deadline of tax returns due in December is 20 (instead of 25).

Quarterly routine• Corporate tax return submitted by the 25th of the

month following the end of the quarter• VAT return submitted and paid (if applicable) by the

25th of the month following the end of the quarter, if the company qualifies and chooses quarterly submission of VAT return.

Semester routine• Accounting reports prepared in accordance with

MoF Order 1802 and subsequent amendments. This requirement is applicable only for companies with a turnover in excess of RON 220,000 in the preceding tax year.

Annual routine• Financial statements shall be approved by the Annual

General Assembly, which is required to be held within 5 months from the previous financial reporting year end (4 months for listed companies)

• Romanian branches of foreign companies are also required to prepare financial statements in accordance MoF Order 1802 and submit them to the National Agency for Tax Administration. Branches of companies from the European Economic Area are only required to prepare and submit an annual accounting report

ACCOUNTING, AUDITING AND REPORTING 5



• Accounts inventory journal• Corporate income tax return by 25th of March for the

previous year end, for the entities with the fiscal year equal with the calendar year. For the entities with the fiscal year different than the calendar year, the submission deadline is 25th of the third month following the end of the fiscal year (i.e.: 25th of September for the fiscal year end date 30th of June)

• Annual tax statement regarding the withholding tax return in case of revenues paid to non-residents, due by the last day of January, for the previous year

• Annual informative statement regarding the tax withheld, the revenues from gambling and the capital gains/losses, by revenue beneficiaries by the last day of January of the following year.

Other annual financial statements submission requirements Under the Accounting Law, all entities are required to submit the annual financial statements to the National Agency for Tax Administration, Ministry of Public Finance. The term for submission is 150 days from the end of the previous financial year.

Entities regulated by the Financial Supervisory Authority are required to submit their annual financial statements, accompanied by the financial auditors' report to the FSA by 30th of April, following the reporting year end.

Credit institutions are regulated by the NBR, to which they are required to submit their annual audited statutory financial statements and annual audited financial statements prepared in accordance with the IFRS.

Insurance and reinsurance brokers regulated by the FSA are required to submit financial statements accompanied by the financial auditors' report to the FSA by 30th of April following the reporting year end.

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5.3. AuditingAll entities meeting the criteria for being categorized as medium and large entities, public interest entities (including listed companies and financial institutions, fully or majority state-owned entities, national companies, autonomous administrations (in Romanian, "Regii Autonome") are required to have a financial audit. Such audits are required to be performed by one or more independent external financial auditors, that are members of the Romanian Chamber of Financial Auditors (CAFR).

Medium and large entities are defined as being entities which, at the financial statements' date exceed (for two consecutive years) the limits of at least two of the following size criteria:• Turnover (for the period): over RON 35 million• Total assets (at year end): over RON 17.5 million• Average number of employees for the period: over 50.

In addition, there are required to have financial audit entities which, at the financial statements' date exceed (for two consecutive years) the limits of at least two of the following size criteria:• Turnover (for the period): over RON 32 million• Total assets (at year end): over RON 16 million• Average number of employees for the period: over 50.

Entities not included in the above categories, do not require a financial audit, unless required by other legislation or regulatory bodies which supervise their operations.

For SA entities, not audited by an independent external financial auditor, Company Law 31/1990 requires a report issued by censors on its financial statements. Such entities require a minimum of three censors who meet certain criteria on independence and qualifications.

The applied auditing standards are issued by CAFR and reflect the International Standards on Auditing (ISA) issued by the International Federation of Accountants (IFAC).

Under Company Law 31/1990, a company requiring an audit should make available the auditors' report for shareholders 15 days before the Annual General Assembly.

Law 162/2017 on the statutory audit of annual financial statements and annual consolidated financial statements and on amending other pronouncements, was published in the Official Journal 548 of 12 July 2017. The statutory audit is performed by financial auditors or audit firms approved in Romania under the provisions of this law, who enrol as members of the Chamber of Financial Auditors of Romania, according to the law and who register in the Public Electronic Register. The competent authority responsible for approving the financial auditors and audit firms is Public Oversight Authority for the Statutory Audit Activity (ASPAAS).


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Taxationin Romania6

Alba Iulia Fortress

6.1. Corporate taxes at a glance

Profits tax rate (%) 16 (a)

Capital gains tax rate (%) 16 (a)

Branch tax rate (%) 16 (a)

Withholding tax (%) (b)

• Dividends 0/5 (c)

• Interest 0/16 (d)

• Royalties 0/16 (d)

• Services 16 (e)

• Commissions 16

• Entertainment and sports activities 16

• Proceeds from liquidation 16 (f)

• Branch remittance tax N/A

Personal income tax (%) 10 (g)

Net operating losses (years)

• Carry-back N/A

• Carry-forward (years) 7 (h)

(a) See section profits tax.(b) The withholding taxes referred to above are levied

on income earned in Romania by non-resident individuals and legal entities (referred to below as "non-residents"), income that is not attributable to a Romanian permanent establishment of the non-resident income recipient.

(c) See section withholding tax on dividends.(d) See section withholding tax on interest and

royalties.(e) Withholding tax generally applies to services

rendered by non-residents in Romania, except for international transport and services related to such transport. However, income from management and consulting services is taxable regardless of whether these 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) Withholding tax applies to the proceeds from liquidation of a Romanian legal entity.

(g) For most types of personal incomes.(h) See section profits tax on relief for losses.

6.2. Profits taxThe Romanian Tax Code came into effect on 1 January 2004. The Code has integrated key tax legislation and provides the basis for a more stable framework of tax legislation by requiring amendments to follow a specific juridical route.

On 10 September 2015, the Romanian Tax Code was republished, consolidating the various amendments brought to it since its first publication in 2004 and also incorporating new provisions (with effect from 1 January 2016).

Tax yearIn Romania, the tax year is the calendar year.

However, taxpayers that have chosen to have a financial year different from the calendar year, also have the possibility to opt for a tax period in line with the financial year. This option is not available for taxpayers that qualify as Micro-enterprise income tax payers (see also section "Micro-enterprise taxation regime") or taxpayers for which the specific tax is applicable (see also section "Specific tax for hotels, restaurants and bars").

Tax payers

The following categories are subject to tax in Romania:• Romanian legal entities (except tax transparent legal

entities for which each member/participant is subject to tax)

• Romanian permanent establishment(s) of non-resident legal entities

• Non-resident legal entities having the place of effective management in Romania

• Non-resident legal entities that derive income from or in connection with immovable property situated in Romania, or from the sale/transfer of shares held in a Romanian legal entity (see also section "Capital gains tax") and

• Legal entities with registered office in Romania, incorporated in accordance with the European legislation

Romanian legal entities, non-resident legal entities having the place of effective management in Romania as well as legal entities having their headquarters in Romania but incorporated as per the European legislation (i.e. European companies) are subject to tax on their worldwide income.

Associations without corporate status between Romanian legal entities are taxable in Romania separately, at the level of each partner. For associations without corporate status between a Romanian legal entity and foreign entities, please see section "Withholding tax".

6. Taxation in Romania


Romanian permanent establishment(s) of non-resident legal entities and non-resident legal entities, that derive income from or in connection with immovable property situated in Romania, or from the sale/transfer of shares held in a Romanian legal entity are subject to tax on their Romanian-sourced income only.

Permanent establishment (PE)A PE is defined as a location through which the activity of a non-resident is wholly or partly carried on, either directly or through a dependent agent. A permanent establishment in Romania may be constituted inter-alia by: an office, a branch, a factory, a mine, land for oil and gas extraction, or a building site that exists for a period exceeding six months. Also, a permanent establishment includes the place where an activity continues using the assets and liabilities of a Romanian legal entity undergoing a restructuring process (e.g. merger, spin-off) involving entity/entities from other member state of the European Union.

The Romanian Tax Code makes a direct reference to the applicability of the commentaries to Article 5 of the OECD Model Tax Convention, when assessing whether the activities carried out by a non-resident in Romania create a PE or not.

Profits of the non-resident having a Romanian PE would be taxable in Romania to the extent that they are attributable to the respective PE (and observing the arm's length principle for transfers performed between the non-resident and its Romanian PE).

Romanian legal entities and the Romanian permanent establishments of foreign legal entities must notify the relevant tax authorities about any contracts signed with non-resident legal entities or individuals performing in

Romania construction and assembly works, surveillance, consultancy, technical assistance or any other activity performed in Romania.

Tax ratesThe standard profits tax rate is 16%.

Profits tax payable by companies earning revenues from night bars, nightclubs, discos or casinos including such type of revenues from an association agreement, is computed at the standard 16% rate, provided the tax amount is not less than 5% of the total revenue generated by these activities (case in which the taxpayer is liable to pay profits tax computed at 5% of this revenue).

Representative offices in Romania of non-resident legal entities are taxed on a yearly basis at a lump sum of RON 18,000 (payable in the last day of February of the taxation year).

Micro-enterprise taxation regimeA newly set-up Romanian company (with certain exceptions) or an already incorporated Romanian company meeting certain conditions as of 31 December of the previous year (as listed below) is considered as a micro-enterprise income tax payer and is subject to tax on revenues derived (not subject to 16% profits tax on the taxable profit):• The annual income level did not exceed EUR 1,000,000• The share capital was not held by State/local

authorities and• It was not undergoing dissolution, followed by

liquidation, registered in the trade registry or courts of law, as per the law.

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The tax rates for the micro-enterprises are as follows:• 3% for micro-enterprises having no employees• 1% for micro-enterprises having 1 or more employees.

Starting with 1 April 2018, the micro-enterprises which have as subscribed share capital of at least RON 45,000 and has minimum 2 employees will be able to opt, for the application of the profits tax regime, starting with the quarter in which the two aforementioned conditions have been fulfilled, the option being a definitive one.

If, during the year, the condition regarding the annual income level is not met, the system for taxation of micro-enterprises should no longer apply and the company would become liable to pay profits tax from the beginning of the quarter, when the threshold was exceeded.

Tax on assets for credit institutionsIn December 2018, the Emergency Ordinance no. 114/2018 was adopted, which, among other important amendments related to construction industry, energy sector, telecommunications, introduced the tax on assets for credit institutions. The tax on assets is applicable starting with 1 January 2019 and, in its current form – as it was significantly amended in March 2019 – represents 0.2% or 0.4% of the value of assets (except certain specific categories) of credit institutions, depending on their market share. Reduction of such tax is applicable in some cases, depending on the increase in the volumes of loans granted or reduction in the interest margin applied, or even exemption (e.g. if a credit institution records accounting losses).

As regards the impact of the Emergency Ordinance no. 114/2018 on the other industries, please refer to Financial services and Energy sections.

Specific tax for hotels, restaurants and barsFrom 1 January 2017, Romanian companies that undertake accommodation activities, restaurants/catering activities and bars/related drink serving activities (based on having as main or secondary NACE code related to such activities) and which do not qualify as micro-enterprise tax payers are subject to a specific tax, instead of profits tax. The amount of the specific tax due is computed based on specific formulas that include a fixed amount and other variables (i.e. depending on location, capacity, area and seasonality).

Capital gains taxNo separate capital gains tax is payable by resident entities. Capital gains of non-resident entities from the sale/rental of immovable property in Romania, from sale/transfer of shares held in a Romanian legal entity or from the exploitation of natural resources (including the sale/transfer of such resources) are taxed at the standard profits tax rate of 16%.

DividendsStarting 1 January 2016, the dividend tax rate is 5%.

Romanian legal entities distributing/paying dividends to their shareholders, Romanian legal entities, must withhold, declare and pay dividend tax by the 25th of the month following the distribution/payment of dividend. In case of dividends distributed, which were not effectively paid by the end of the tax year, the dividend tax must be paid by 25th of the first month following the tax year end.

Dividends paid by a Romanian legal entity are exempt from dividend tax in the following cases:• The recipient of the dividends (a Romanian legal

entity) holds minimum 10% of the share capital of the Romanian legal entity distributing the dividends for an uninterrupted period of 1 year ending at the date of dividend payment and

• Dividends are distributed to voluntary pension funds or to private pension funds, as well as to public administration bodies exercising the rights and obligations arising from the quality of state shareholder of the respective Romanian legal entity.

For the tax treatment of dividends distributed/paid by Romanian legal entities to their non-resident shareholders, please see section "Withholding tax".

Foreign tax reliefForeign taxes paid may be credited against the profits tax due in Romania, up to the level of the profits tax that would have been payable in Romania on that foreign income. Such credit is also conditioned by the applicability of the provisions of the double tax treaties concluded between Romania and the foreign state, as well as documentation requirements. The tax exemption of the profits realized by a foreign permanent establishment of a Romanian legal entity may also be possible, if the tax treaty between Romania and that foreign country provide for the exemption as method for eliminating the double taxation.

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External tax lossesTax losses incurred by a permanent establishment located in a state that is not a member of the European Union or of the European Free Trade Association or with which Romania has not concluded a convention for the avoidance of double taxation, are deductible only from the income obtained by the respective permanent establishment (separately, on each income source) in the next 5 consecutive tax years.

Determination of taxable profitThe taxable profit is computed as the difference between the revenues from all sources and expenses incurred in a tax year, less non-taxable revenues and other tax deductions, plus non-deductible expenses.

Accounting errors have different tax treatment depending on the way in which they were booked in the year (through retained earnings or profits and loss accounts).

The Romanian Tax Code also provides for special rules that have to be observed by taxpayers applying accounting regulations in accordance with the IFRS.

For the purpose of determining the tax result, taxpayers must prepare and keep a tax evidence registry.

Non-taxable revenues• Key revenues which are considered as non-taxable

include, inter-alia:• Dividends received from a Romanian legal entity• Dividends received from a foreign legal entity

resident in a country with whom Romania has concluded a double tax treaty, if the Romanian legal entity holds minimum 10% of the share capital of the entity distributing the dividends for an uninterrupted period of 1 year ending at the date of dividend payment. In addition, in case of dividends received from an EU resident entity, the dividends represent non-taxable revenue in Romania to the extent that they are not deductible at the level of the EU resident entity

• Gains in the value of the participation titles held in other entities, registered further to the increase of capital in those entities through incorporation of reserves, profits or issue premiums

• Revenues from the reversal of non-deductible expenses and of provisions for which no deduction was allowed

• Non-taxable income expressly provided by specific regulations

• Revenues from deferred profits tax computed and recorded by taxpayers that apply accounting regulations in accordance with the IFRS

• Revenues representing change in the fair value of real estate investments/biological assets upon the subsequent evaluation using the fair value model by taxpayers that apply accounting regulations in accordance with the IFRS

• Income derived from the valuation/revaluation/sale/transfer of shares, provided that the taxpayer is a company (Romanian company or tax resident in a country with whom Romania has concluded a double tax treaty) holding for an uninterrupted period of 1 year at least 10% from the share capital of the other company (Romanian company or tax resident in a country with whom Romania has concluded a double tax treaty)

• Income from the liquidation of a company, provided that (i) the taxpayer holds for an uninterrupted period of 1 year at least 10% from the share capital of the company that is being liquidated and (ii) that company is a Romanian company or a company which is tax resident in a country with whom Romania has concluded a double tax treaty

• Amounts received further to the refund of the shareholders' contribution share, within a share capital reduction.

Deductibility of expensesExpenses incurred for the purpose of carrying out economic activities, including those regulated by legal norms, as well as fees and contributions due to chambers of commerce and industry, employers' organizations and trade unions are considered deductible for the profits tax computation.

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Key expenses which are partially deductible include, inter-alia:• Provision expenses and contribution to reserve funds

within specified limits (please see section "Provisions and reserves")

• Entertainment expenses (and related VAT, if the case) up to 2% of the accounting profit to which profits tax and protocol expenses (and related VAT, if the case) are added

• Social expenses (e.g. birth, death, incurable disease support, expenses aimed at the proper functioning of certain units of taxpayers, e.g. kindergartens, canteens, sports clubs, schools, expenses provided in the collective labor agreement, as well as gifts in cash or in kind granted to e.g. underage children, certain employees, the cost for the supplies for treatment and rest of own employees and their family, etc.) currently up to 5% of the total salary fund

• Expenses for meal and vacation vouchers, granted according to the law

• Perishables and losses resulted from manipulation/storage, according to the law

• Technological losses included in the taxpayer's own consumption norm

• Exceeding borrowing costs within specific limits (see Thin capitalization rules section)

• Depreciation within specific limits (please see section "Tax depreciation")

• 50% of expenses (except depreciation) related to vehicles owned or used by the taxpayer which are not exclusively used for the economic activity and have a maximum weight of 3,500 kg and not more than 9 seats, including driver seat (except for certain situations specifically mentioned by the law, for vehicles used for e.g. paid transportation services, security services, repairs, sales and procurement activities)

• Expenses for the operation, maintenance or repair, excluding fuel expenses related to cars used by management and administrative personnel, limited to one car per person and observing the 50% deductibility limitation

• In the case of assigned receivables, the net losses, representing the difference between the sale price and the value of sold receivable, are deductible within a limit of maximum 30% of value of such losses.

Key expenses which are non-deductible include, inter-alia:• Romanian and foreign profits tax (a tax credit is allowed

for taxes paid in other countries – please see relief section "Foreign tax") and tax not withheld at source

• Sponsorship expenses (a tax credit is allowed for sponsorship expenses on meeting certain conditions – please see section "Sponsorship")

• Late payment interest, penalties, and fines paid to Romanian or foreign authorities (except certain specific cases)

• Expenses with inventory or fixed assets that are missing from stock or that are damaged and are non-imputable, including the corresponding VAT as applicable Exceptions are represented by inventory/fixed assets for which insurance contracts were concluded or that are expired, quality damaged or damaged further to force

TAXATION IN ROMANIA 6 Curtea de Arges Monastery - Arges County


majeure, the food for human consumption that are close to expiry, sub-products of animal origin which are not for human consumption and agrifood products that became inappropriate for human or animal consumption, in certain conditions.

• Any expenses made in favor of shareholders or associates other than those generated by payments for goods provided or services rendered at the market value

• Insurance premiums that are not related to the taxpayer's assets or its business scope, except for those relating to rented or leased assets or assets used as collateral for a business-related loan

• Expenses with benefits granted to employees by means of equity instruments with share/cash settlements provided that the benefits are not taxed at individual level

• Expenses related to non-taxable income• Service expenses, including management and

consultancy expenses, rendered by a person located in a country with whom Romania has not concluded a tax treaty, in case the transactions are deemed as being artificial

• Expenses related to the decrease in the value of fixed assets/intangible assets upon revaluation

• Losses recorded when writing off uncollected bad or litigious receivables, for the part that is not covered by a provision, except for certain cases (e.g. bankruptcy of the debtor based on a final court decision, liquidation of the debtor with no successor, conclusion of insurance contracts, etc.)

• Expenses with taxes and charges due to non-government organizations or professional associations related to the business carried on by taxpayers and which exceed the RON equivalent of EUR 4,000/year

• Expenses with the change of fair value of real estate investments, in the event that, after a subsequent evaluation, a decrease in their value is booked by taxpayers that apply accounting regulations in accordance with the IFRS

• Expenses recorded in relation to an inactive taxpayer (with certain exceptions)

• Expenses from the valuation/revaluation of shares, in case the taxpayer is a company (Romanian company or tax resident in a country with whom Romania has concluded a double tax treaty) holding for an uninterrupted period of 1 year at least 10% from the share capital of the other company (Romanian company or tax resident in a country with whom Romania has concluded a double tax treaty)

• Expenses with interest, recorded as per the accounting regulations in accordance with the IFRS, in case of fixed assets/intangible assets/stock acquired based on deferred payment contracts and

• Expenses with the amortization/depreciation of fixed assets booked by taxpayers that apply accounting regulations in accordance with the IFRS, at the moment of transfer from the category of fixed assets held for the purpose of sale to the category of fixed assets held for the purpose of own activity.

SponsorshipTaxpayers paying profits tax incurring sponsorship expenses in accordance with relevant legislation are entitled to a tax credit, i.e. deduction from the profits tax payable of an amount of the sponsorship representing the minimum of:• 0.5% of turnover and• 20% of the profits tax liability.

If the beneficiaries of the sponsorship are not for profit legal entities, the sponsor is entitled to claim tax credit only if the beneficiaries are registered, at the date when the sponsorship agreement is concluded, in a special registry. Sponsorship expenses not claimed as tax credit may be carried forward for the following 7 consecutive years.

Separately, companies subject to micro-enterprise tax regime which perform sponsorship actions, in accordance with the relevant legislation, to support non-profit organizations and cult institutions which are accredited suppliers of social services with at least one licensed social service, will be able to claim tax credit for the respective sponsorship expenses up to 20% of the tax on income derived by the micro-enterprises due for the respective quarter. Sponsorship expenses not claimed as tax credit may be carried forward for the following 28 quarters (i.e. 7 years).

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Provisions and reservesUnder the existing regulations, the following provisions and reserves are deductible for profits tax purposes:• Legal reserve, up to 5% of the accounting profits to

which Legal reserve, up to 5% of the accounting profits to which the profits tax expense is added, until the reserve fund reaches 20% of the share capital

• Bad debt provisions, in certain limits and if certain conditions are met

• Provisions for quality performance guarantees granted to clients, under certain conditions

• Specific provisions created by non-banking financial institutions registered in the NBR General Register, payment institutions Romanian legal entities, issuers of electronic currency Romanian legal entities, as well as specific provisions created by similar legal entities, as provided by the laws governing these entities

• Technical reserves set by insurance and reinsurance companies, as provided by the relevant regulatory laws, except for the equalization reserve

• Technical provisions set by legal entities, administrators of voluntary/private pension funds, as per law

• Risk provisions for financial market operations, as provided by the regulations of FSA

• Provisions for covering the maintenance/repair expenses for the aircraft fleet, in certain conditions

• Provisions for the closure/post-closure follow-up of waste storages, in certain conditions

• Reserves representing part of the expenses required for the development and modernization of oil and natural gas production, refining, transportation and distribution of oil products, set according to the law

• Adjustments for the depreciation of fixed assets, set-up in case of their destruction by force majeure or for which insurance contracts were concluded

• Certain adjustments for depreciation of assets/credits/investments, recorded within NBR regulations, and as per the accounting regulations in accordance with the IFRS

• Provisions for the restauration of affected land mandatory to be set-up by taxpayers authorized to work in the exploitation of natural deposits and

• Provisions for the decommissioning of oil wells, installations, annexes and environmental rehabilitation mandatory to be setup by oil agreement holders who carry out petroleum operations in maritime areas with water having depth more than 100 m.

Generally, the reduction or cancellation of any provision or reserve that was previously deducted has to be included in the taxable income. However, there are certain exceptions to this rule related to the taxation of (i) reserves constituted in connection with the revaluation of fixed assets performed after 1 January 2004, (ii) the reserves constituted in connection with the revaluation of intangible assets performed by taxpayers applying International Financial Reporting Standards, (iii) the legal reserve in case of a decrease of share capital and (iv) the reserves representing tax facilities.


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Reserves from revaluations of fixed assets performed after 1 January 2004 are taxable for profits tax purposes proportionally with the deduction of the tax depreciation, respectively upon the disposal of the revalued fixed assets. The same applies for the reserves constituted in connection with the revaluation of intangible assets performed by taxpayers applying the IFRS.

Thin capitalization rulesThin capitalization rules applicable to deductibility of borrowing costs incurred by profits tax payers were amended starting with 1 January 2018, further to the transposition into the Romanian Tax Code of the provisions of the 2016/1164 EU Council Directive laying down the rules against tax avoidance practices ("ATAD").

As per the Romanian Tax Code currently in force, profits tax payers can deduct during a fiscal period the exceeding borrowing costs (the amount by which the borrowing costs exceed the interest revenues) up to the deductible limit of the RON equivalent of EUR 1,000,000 (the exchange rate to be used will be the one from the last day of the fiscal quarter/year, as the case may be).

Furthermore, the borrowing costs exceeding the above cap have limited deductibility, in the fiscal period in which they

are incurred, up to 30% from the "adjusted EBITDA". The adjusted EBITDA is computed as:• total revenues – total expenses – non-taxable revenues

+ profits tax expense + exceeding borrowing costs + deductible tax depreciation.

In case the basis of calculation is negative or is equal to zero, the exceeding borrowing costs (over the EUR 1,000,000 cap) is non-deductible in the fiscal period in which they are incurred and they are carried forward for an unlimited period of time under the same deduction conditions. The same rule applies for exceeding borrowing costs over the second cap.

The non-deductible exceeding borrowing costs carried forward recorded by entities that cease to exist as a result of a split or merger may be carried forward by the new taxpayers or taxpayers that take over the patrimony of the merged or spun-off entity.

That above rules are applicable also for banks and non-banking financial entities, as well as in relation to borrowing costs owed to them.

By way of exception, of the above thin capitalization rules, the taxpayers who are independent entities, in the sense that are not part of a consolidated group from a financial accounting perspective and have no affiliated entities or

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permanent establishments, are able to fully deduct the exceeding borrowing costs, during the fiscal period in which are incurred. Moreover, certain specific exceptions where above thin capitalization rules are not applicable are also provided by the Tax Code.

The above new provisions are applicable to interest expenses and net foreign exchange losses carried forward according to the thin capitalization rule from periods prior to 2018. In case of independent entities, these carried forward amounts will be fully deductible as at 1 January 2018.

Exit taxationStarting 1 January 2018, further to the implementation of ATAD in the Romanian Tax Code, exit taxation rules were introduced that will be applicable in case of transferred assets, tax residency and/or economic activity carried out through a permanent establishment (PE) for which Romania loses its right to tax.

The exit tax is calculated by applying the tax rate of 16% to the difference between the market value and the fiscal value of the transferred assets. There is a mechanism of rescheduling the payment over a five-year period in case of transfers in which EU Member States or countries part of the EEA Agreement are involved.

Exit taxation is applied for the following types of transfers:• Assets transferred from the permanent establishment

in Romania to its head office or another PE in another EU Member State or third country, in so far as Romania no longer has the right to tax the transferred assets

• Transfer of business carried on in Romania through a PE to another EU Member State or a third country, in so far as Romania no longer has the right to tax the transferred assets

• Transfer of the tax residency from Romania to another EU Member State or third country (with the exception of assets that remain effectively linked to the PE from Romania)

• Assets transferred from the head office in Romania to its PE in another EU Member State or third country, in so far as Romania no longer has the right to tax the transferred assets.

Controlled foreign company rulesStarting 1 January 2018, further to the implementation of ATAD in the Romanian Tax Code, controlled foreign companies’ rules ("CFC Rules") have entered into force.

Based on the CFC rules, there are included in the tax computation base of the controlling company, certain types of non-distributed revenues of the controlled foreign companies (such as interest, royalties, financial lease revenues, insurance revenues, etc.) proportionally to the taxpayer's participation in the controlled entity.

A company is treated as a controlled foreign company of a profits tax payer, if the following conditions are met at the same time: • The taxpayer, by itself or together with its associated

companies, holds more than 50% of the voting rights, holds directly or indirectly more than 50% of the

capital of the controlled entity or is entitled to receive more than 50% of the profits of that entity and

• The actual profits tax paid by the entity or PE on its profits is less than the difference between the profits tax that would have been charged on that entity or PE within the Romanian profits tax system and the actual profits tax paid on its profits by the entity or PE.

The provisions are applicable also to the PEs from the EU Member States/third countries, whose profits are not subject to or are exempt from profits tax in Romania.

Some exceptions to the application of the above provisions are provided by the Romanian Tax Code.

Tax depreciationAccounting depreciation is non-deductible for tax purposes while tax depreciation is considered a deductible item. Deductibility of tax depreciation for vehicles (except vehicles used in certain situations specifically mentioned by the law, e.g. for paid transportation services, security services, repairs, sales and procurement activities, etc.) having no more than 9 places from M1 category (as defined in the relevant regulations) is limited to RON 1,500/month.

Three alternative methods are available for the computation of tax depreciation, namely:• Straight-line depreciation• Digressive depreciation and• Accelerated depreciation (for equipment and patents).

These methods must be followed consistently.

Buildings and certain intangible assets can be depreciated only on the straight-line method. Technological equipment, machines, tools and installations, computers may be depreciated using any of the three methods. Other fixed assets may be depreciated using only the straight-line or digressive method.

Land, goodwill, intangible assets with indefinite useful life, certain items not used in the economic activity, etc. are not considered depreciable assets for tax purposes.

From a tax perspective, the law prescribes the concept of "useful lives", which are provided by Government Decision, as follows:

Asset Years

Buildings and constructions(e.g. roads and fences) 8 to 60

Machinery and equipment 2 to 24

Furniture, fittings, and protection systems 2 to 24

Vehicles 3 to 9

Source: EY Research

The useful life for each type of asset is provided as an interval. Upon commissioning, the taxpayer is allowed to choose a useful life within such an interval.


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IT software is depreciated for tax purposes for a period of 3 years.

Patents, licenses, author rights, know-how, manufacturer's brands, trademarks, as well as other similar industrial and commercial property rights, development expenses, considered as intangible assets from an accounting perspective, acquired client portfolio, are depreciated over the period provided for their utilization or the contractual period, as the case may be.

Incorporation expenses recognized as an intangible asset are depreciated for tax purposes for a period of 5 years.

Special rules are provided for depreciation of expenses and assets related to exploitation/development of natural resources (including deep sea oil).

Equipment intended for research and development activities may be depreciated using the accelerated depreciation method.

Incentives for research and development (R&D) activitiesTaxpayers may (besides standard profits tax deduction on R&D project expenses) further decrease the profits taxable base by 50% of eligible costs for such activities. Also, the accelerated method of depreciation (i.e. 50% tax depreciation in the first 12 months of operation) may be applied for equipment used for the R&D activities.

The eligible R&D activities should be relevant to the industrial or commercial activity carried out by the

taxpayer and they should be carried out either in Romania, as well as in EU or EEA Member States.

The value derived as a result of the R&D activities may be either for the taxpayer's own benefit (i.e. by using the research results in its own activity), as well as through the sale of the results or exploitation of the intellectual property rights derived thereof.

The taxpayer can request a certification/expertise regarding the fulfilment of the conditions for granting the tax incentives as well as their corresponding value. The certification/expertise will be performed by the experts included in the Register of Experts on R&D areas constituted by the Ministry of Education and Scientific Research.

Starting with 2017, the taxpayers that carry out exclusively innovation and R&D activities, as well as related activities, are exempt, under certain conditions, from CIT over the first 10 years of activity.

Tax exemption of reinvested profitsThe profit reinvested in the production and/or acquisition of technological equipment used for the purpose of performing economic activities as well as IT equipment and the relevant software is exempt from profits tax.

The profits tax exemption is applicable in case of new technological equipment produced/acquired and put into use by the company in a certain tax period. There is a minimum period of retention in the patrimony of the technological equipment, but this does not exceed 5 years.

Taxpayers benefiting from the tax exemption for reinvested profit may not use the accelerated depreciation method for the respective technological equipment.

Leasing contractsWithin a financial lease contract, the lessee is treated as the owner of the asset from a profits tax perspective while within an operational lease contract it is the lessor.

Trust contractsSpecial rules are provided for trust contracts ("fiducia") concluded in accordance with the provisions of the Romanian Civil Code, depending on who is the beneficiary within such contracts.

Reorganization operationsThe below mentioned principles apply in relation to the following business reorganization operations between Romanian legal entities: merger, spin-off, in-kind contribution of a business activity and share exchange. Each such operation is defined in detail by the Romanian Tax Code.• The business reorganization operations mentioned

above should normally be tax neutral: the transfer of assets and liabilities within a business reorganization operation is not taxable for the difference between the market price and the tax value of the respective assets and liabilities


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• The issuance of shares within a business reorganization does not represent taxable income

• The income derived by a shareholder from the cancelation of shares held in its subsidiary further to a business reorganization operation is not taxable provided that its shareholding is more than 10%

• The distribution of shares is not treated as dividend payment.

However, certain conditions should be met in order for such transfers to be treated as tax neutral, inter-alia:• Tax value of assets/liabilities for the receiver should

equal the tax value of the same items for the transferor• Tax depreciation for assets should continue in the

same manner as before the transfer• Transfer of provisions/reserves previously deducted

should be taken over by the receiver in the same deduction conditions as before the transfer

• In an in-kind contribution of a business activity, the tax value of the shares received should equal the tax value of the transferred assets and liabilities before the reorganization

• In a merger/share exchange, the tax value of shares received should equal the tax value of the shares held before the reorganization and

• In a spin-off, the tax value of shares held before the spin-off should be allocated to the newly issued shares proportionally with the ratio between the book/market value of the new shares and book/market value of the shares held before the spin-off.

Similar principles as described above are also applicable to cross-border reorganizations, as a result of the implementation of the Council Directive 2009/133/EC ("the Directive") in the Romanian Tax Code. As such, cross-border business reorganizations (i.e. mergers, spin-offs, transfers of assets and exchange of shares) between Romanian companies and companies from other EU Member States should be tax neutral, subject to certain conditions. Anti-abuse provisions are also applicable in this case.

Relief for lossesTax losses may be carried forward for the following 7 consecutive years and are not updated for inflation purposes.

Tax losses recorded by entities that cease to exist as a result of a split or merger may be carried forward at the level of the new taxpayers or taxpayers that take over the patrimony of the merged or spun-off entity. The carry-back of losses is not permitted.

Tax consolidationTax consolidation for profits tax is not permitted between Romanian legal entities from the same group. Tax consolidation is only available at the level of more permanent establishments in Romania of the same foreign legal entity (the taxable profits of one permanent establishment may be offset against the tax losses of another permanent establishment).

Filing tax returnsProfits tax payers are required to file profits tax returns and pay profits tax quarterly by the date of 25th of the month following the quarter for which the computation is made for the first 3 quarters. The final annual tax return should be filed by the date of 25th of the third month following the end of the tax year.

As an exception, certain categories of taxpayers are required to pay profits tax by 25th of February of the following year.

Legal entities dissolved with liquidation during the course of the year need to file the final annual profits tax return and pay the profits tax by the date of submission of the Financial Statements to the relevant authority subordinated to the National Agency of Tax Administration (NATA).

Legal entities dissolved without liquidation during the course of the year, need to file the final annual profits tax return and pay the profits tax by the end of the tax period.

Historic Bridge - Timisoara


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Banks and branches of foreign banks in Romania are required to pay quarterly profits tax in advance, based on inflation adjusted past year after the tax results. Taxpayers applying the system of advance payments are required to file profits tax returns and pay profits tax quarterly by the date of 25th of the month following the quarter for which the computation is made for the first 3 quarters and by the date of the 25th of the last month of the tax year for the 4 quarter. The final annual tax return should be filed by the date of the 25th of the third month following the end of the tax year. The other profits tax payers have the option to apply this system of advance payments if certain conditions are met. Once chosen, the advance reporting and payment system for the profits tax is mandatory to be kept for 2 consecutive years.

Taxpayers subject to the micro-enterprise taxation regime are required to file tax returns and pay the tax quarterly by the date of the 25th of the month following the quarter for which the computation is made.

The Romanian companies applying the special tax for hotels, restaurants and bars are required to declare and pay the tax half-yearly, by the date of the 25th of the month, following the end of each semester.

Taxpayers which perform actions of sponsorship and/or patronage or grant private scholarships, that are subject

to profits tax or micro-enterprise tax regime, have to obligation submit to the tax authorities an Informative Statement regarding the beneficiaries of such actions. The deadline for submitting this statement is:• For companies subject to profits tax regime – until the

deadline for submitting the annual profits tax return• For companies subject to micro-enterprise tax retime –

until the deadline for submitting the tax return for the fourth quarter or the deadline for submitting the last quarterly return with the due income tax (for taxpayers which change the micro-enterprise taxation regime).

6.3. Withholding taxesWithholding tax ("WHT") is applicable on a number of payments made by Romanian tax residents to non-resident recipients.

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

Type of payment WHT Rate* (%)

Royalties (see explanations below) 0/16

Interest (see explanations below) 0/16

Commissions 16

Dividends 0/5

Various services ** 16

Gambling income 1

Other types of income (see explanations below) 16

* For certain types of income, the tax rate is increased to 50% in case such income is paid to an account from a country with whom Romania did not conclude a legal instrument for the exchange of information and the transaction is deemed as artificial.

** Covers all services rendered in Romania (except international transport) and management and consultancy services rendered worldwide.

Interest and royaltiesGenerally, royalty and interest income (including interest capitalization or interest on current accounts, term deposits, deposit certificates, etc.) derived by non-residents is subject to 16% WHT in Romania (or subject to a tax rate available under a tax treaty, if more favorable).

Furthermore, under Interest & Royalties Directive implemented in the Romanian tax law, interest and royalty income derived from Romania by entities resident in another EU Member State is exempt from Romanian WHT, provided, inter-alia, that the beneficial owner of the interest income holds at least 25% of the value/number of the participation titles in the Romanian company paying the interest or royalty, for an uninterrupted period of at least 2 years ending at the moment when the interest or royalty is paid.

Sighisoara City


DividendsDividends paid to legal entities resident in another EU Member State are exempt from WHT in Romania, provided that some conditions are met, including the condition that the non-resident shareholder owns a minimum 10% of the share capital of the Romanian legal entity for an uninterrupted one-year period ending at the date of dividend payment.

Unless such conditions are met, a 5% WHT rate applies to dividends paid to non-resident legal entities (or a tax rate available under a tax treaty, if more favourable).

Other types of incomeThe following income derived by non-residents is also subject to WHT in Romania:• Income from commissions• Income from sports and entertainment activities• Remuneration received by foreign legal entities acting

as administrator, founder or member of the Board of a Romanian legal entity

• Income from independent activities (e.g. doctors, lawyers, architects, etc.), in certain conditions

• Income from prizes • Income from liquidation of a Romanian legal entity

or from the reduction of its share capital, other than income derived from reimbursement of the capital contribution and

• Income from the transfer of the patrimony from the fiduciary to the non-resident beneficiary, within a trust (in Romanian,"fiducie") operation.

Income not subject to WHTKey types of income derived by non-residents that are not subject to WHT in Romania, include, inter-alia:• Interest income from corporate bonds, if the interest

is not paid to a related party and the bonds are issued based on a prospect approved by the relevant regulatory authority

• Income derived by non-resident collective placement bodies without corporate status and other assimilated entities, recognized as such by the relevant foreign authority, from the transfer of securities, respectively shares held, directly or indirectly, in a Romanian legal entity

• Income derived on foreign capital markets from transfer of securities issued by Romanian residents or shares held in a Romanian legal entity

• Interest on public debt instruments (in local and foreign currency) and interest related to instruments issued by the NBR for monetary policy purposes

• Interest/dividends paid to pension funds, as defined according to the legislation of the EU Member States or of the of the European Economic Area States provided that there is in place a legal instrument for exchange of information purposes

• Income from transactions with derivative instruments used for carrying out operations for the management of risks associated to public government debt, income from trading State bonds and bonds issued by local authorities (in local and foreign currency, on the domestic or foreign capital markets), income from trading securities issued by NBR, etc.

Key types of income derived by non-residents that are not subject to WHT, but are subject to profits tax or personal income tax ("PIT") in Romania (as the case may be) include, inter-alia:• Income attributable to a Romanian PE• Income of a legal entity from the sale/rental of

immovable property in Romania, from sale/transfer of shares held in a Romanian entity or from the exploitation of natural resources

• Income of a non-resident individual from the rental/transfer of immovable property in Romania, from the transfer of shares held in a Romanian entity or from transfer of securities issued by Romanian residents

• Income from activities performed by artists and sportsmen.

Filing WHT returnsThe tax should be withheld, declared and paid by the Romanian income payer by the date of the 25th of the month following the one in which payment was made. In case of dividends distributed, which were not effectively paid by the end of the year in which the annual financial statements were approved, the dividend tax must be paid by 25th January of the following year.

Moreover, Romanian income payers are required to file, in electronic form, an annual WHT return until 31th of January of the following year.

Claiming tax treaties and EU Directives benefitsRomania has an extensive treaty network, with more than 85 signed agreements for the avoidance of double taxation, with favorable WHT rates. Please refer to Appendix 1 for a summary of the WHT rates provided by the tax treaties where Romania is one of the contracting parties.

In order to apply the more beneficial provisions of a tax treaty, the non-resident income beneficiary has to provide upon payment of the income a certificate of tax residence issued by the relevant foreign authority, valid for the date when the income was derived.

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For applying the provisions of the EU Directives, the income beneficiary tax resident in EU should provide the Romanian company, in addition to a valid tax residency certificate, also with an attestation that the conditions required for the application of the European Union Directives were cumulatively fulfilled.

The WHT paid in excess may be refunded to the non-resident beneficiary of income, upon request.

Special attention should be given to "net-of-tax" arrangements (whereas the WHT is to be borne by the income payer and not by the beneficiary), as in this case the applicability of the tax treaty and EU Directives (as applicable) would need to be analysed on a case by case basis.

Romanian transparent associations/entities without corporate status and non-resident associations/entitiesThe Romanian tax law provide for new special and rather complex tax rules, depending on whether the association/entity is set up according to Romanian or foreign legislation and on whether the non-resident association/entity is deemed as tax resident of a foreign country or not.

Representative officesRepresentative offices in Romania of non-resident legal entities are taxed on a yearly basis at a lump sum of RON 18,000 (payable in the last day of February of the taxation year).

An annual tax statement should be filed until the last day of February of the tax year.

The representative offices are required to keep accounting books under Romanian law.

6.4. Value added tax (VAT)

RegimeThe Romanian VAT system is harmonized with the EU VAT Directive. Starting January 2016, the Romanian tax authorities obliged themselves to take into account the jurisprudence of the European Court of Justice in respect of VAT and excise duty.

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 independently carried out activities of producers, traders and suppliers of services.

Starting with March 2018, taxable persons established in Romania with an annual turnover exceeding EUR 88,500, whose RON equivalent is computed at the exchange rate communicated by NBR on accession date and is rounded to the following thousand, i.e. RON 300,000, are required to register for VAT purposes. Persons not meeting the above-mentioned turnover criterion may also opt to register for VAT purposes.

The registration may be performed before carrying out any taxable and/or exempt with right of deduction operations (by opting for registration or by declaring an envisaged turnover higher than the registration threshold upon starting the activity). Persons that were not registered as VAT payers will have to register within 10 days from the end of the month, during which the above threshold was reached or exceeded. A taxable person having the place of business outside Romania, but established in Romania via a fixed establishment is required to register for VAT purposes in Romania (i) before receiving services from taxable persons established in another Member State for which he is liable to pay VAT (general B2B rule), (ii) before supplying services from that fixed establishment to a beneficiary, taxable person established in another Member State, for which the beneficiary is required to pay VAT, (iii) before e.g. performance from that fixed establishment of activities which are taxable and/or exempt with credit or intra-Community acquisitions/supplies of goods.


Poenari Fortress - Arges County


A taxable person who is not established nor VAT registered in Romania, will be required to register for VAT purposes, before performing transactions for which it will be the person liable to pay the VAT such as e.g. intra-Community acquisitions/supplies of goods, etc.

A taxable person having the place of business in Romania, who was not required to register for VAT (e.g. hospitals, insurance companies, etc.) is required to register for VAT purposes before supplying/receiving services to/from taxable persons established in other Member States for which the beneficiary is liable to pay VAT (under the general B2B rule).

Under certain conditions, VAT groups may be formed in Romania. However, the VAT groups do not have the meaning defined by the EU VAT Directive. In Romania, the members of such a group could only offset their VAT payable/refundable positions (with impact on the VAT cash flow).

VAT representativeTaxable persons that are established in the Community (but outside Romania) liable to pay Romanian VAT (for certain transactions) and provided they do not give rise to a fixed establishment in Romania, have to register directly or to appoint a fiscal representative for VAT purposes to fulfil their VAT obligations in Romania.

If the person liable to pay tax is a taxable person who is not established in the Community, such a person is required to appoint a tax representative as the person liable to pay tax.

In specific cases, if the foreign taxable person is not registered and not established for VAT purposes, the VAT liability shifts, in principle, to the Romanian beneficiary of the supply (under the reverse-charge mechanism).

Intra-Community operators RegisterAs of January 2017, taxable persons are no longer required to register in the Intra-Community Operators Register, as their Romanian VAT ID is valid in VIES by default.

Taxable operationsTransactions subject to VAT refer to the supply of goods and services, imports of goods and intra-Community acquisitions of goods. To be taxable in Romania, a supply must cumulatively meet certain requirements (e.g. it is made by a taxable person for consideration, the place of the transaction is in Romania, etc.).

Supply of goodsSupply of goods refers to the actual transfer of the right to dispose as owner of the goods from one person to another against a consideration, directly or through an intermediary.

As a rule, a 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, delivered on board of ships, aircraft, trains, for distance sales and for supplies of natural gas, electricity, heat and refrigeration.

Supply of services The term "supply of services" applies to all supplies not treated as a supply of goods.

The place of supply of services to a taxable person acting as such is the place where the person receiving the services has established the place of business. If services are supplied to a fixed establishment of the taxable person, located in a place other than the place where he has established the place of business, the place of supply of services is the place where the fixed establishment of the person receiving the services is located (general B2B rule).

The place of supply of services to a non-taxable person is the place where the supplier has established the seat of business. If services are supplied from a fixed establishment of the supplier, located in a place other than where the person has established the seat of business, the place of supply of services is the place where that fixed establishment is situated (general B2C rule).


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There are derogations from the general rule concerning the place of supply of services (e.g. services in connection with immovable property, access to cultural, artistic events, passenger transport, restaurant and catering services, etc.). Also, Romania implemented the use and enjoyment rule for certain services supplied to taxable persons established in non-EU countries (e.g. work on tangible movable property, local transport of goods and ancillary services).

Import of goodsGoods brought from outside the Community and introduced into the EU territory in Romania are considered to be imports and fall within the scope of VAT, with certain exceptions (i.e. entry of goods under a qualifying customs duty suspension procedure).

Intra-Community acquisition of goodsIntra-Community acquisition of goods means the acquisition of the right to dispose, as owner, of movable, tangible property that is dispatched or transported to by or on behalf of the purchaser or the supplier to a destination in Romania from another EU member state from which the goods are dispatched or transported.

"Reverse-charge" VATIn case of taxable intra-Community acquisitions, certain acquisitions of goods/services and imports (e.g. if the postponement certificate is obtained by the taxable persons registered for VAT purposes performing such operations), for which the "place of supply" is deemed to be in Romania, the law imposes the application of the so-called VAT "reverse-charge" mechanism by the Romanian beneficiary provided certain conditions (which vary for different operations) are met.

Under the reverse-charge mechanism, the beneficiaries must recognize the related output VAT in their return for the respective month. The input VAT may, as a general rule, be recovered in the same VAT return to the extent of the beneficiary's right to deduct VAT.

Simplified recording of VATFor certain supplies such as waste and scrap materials, wooden material, CO2 emission certificates, certain cereals and technical crops, supply of electric energy to a taxable trader, buildings, building parts and lands if the transaction is taxable by law or option, investment gold if the transaction is taxable by option, mobile phones, integrated circuit devices (such as microprocessors and central processing units prior to integration into end user

Sighisoara City


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products), gaming consoles, PC tablets and laptops, a simplified VAT mechanism is applicable, provided that both the seller and the purchaser are registered as VAT payers in Romania.

Under this mechanism, the purchaser has to simultaneously recognize the related VAT, both as an output and input VAT in the return of the respective month, without any cash flow implications (provided the purchaser has a full right to deduct VAT).

Specific VAT schemes and simplification rulesRomania adopted in the national legislation simplification rules referring, inter-alia, to:• Triangulation transactions• Consignment/call-off-stock• Multi-party works on movable tangible property within

the Community • Repairs during the guarantee period• Returns of goods within the Community• Also, a series of special VAT schemes are applicable,

such as:• Special scheme for small undertakings• Special scheme for travel agents• Special scheme for second-hand goods• Special scheme for investment gold• Special scheme for electronic services,

telecommunication services, broadcasting or television services rendered by taxable persons not established in the EU

• Special scheme for electronic services, telecommunication services, broadcasting or television services rendered by taxable persons established in the EU, but in another member state than the one of consumption

• Special scheme for farmers.

Chargeable event and chargeabilityUnder the general rule, the chargeable event and the chargeability of the VAT occur at the date when the goods or services are supplied. By way of exception, the VAT chargeability shall occur at the moment an advance payment is made, or an invoice is issued before the supply.

Also, other exceptions may apply for specific cases.

Cash-accounting systemStarting January 2013, Romania has implemented the cash-accounting system, under which the VAT becomes chargeable at the date when full or partial payment is received for the supplies performed. The cash-accounting system is currently optional.

The persons eligible for applying the cash-accounting system are taxable persons having the seat of business in Romania, registered for VAT purposes whose turnover in the previous calendar year did not exceed the RON 2,250,000 cap.

Taxable baseVAT is assessed on the total amount received or to be received by the supplier as consideration for the supply of goods or services; this includes taxes, commissions, packaging, transport and insurance expenses. Certain elements such as price discounts, interests for late payment applied after supply date, the value of packaging that circulates between suppliers and customers, by exchange, without invoicing, etc. are not included in the taxable base.


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Tax ratesThe following rates apply in Romania:• 19% standard rate, which is applicable to supplies of

goods and services not subject to VAT exemptions or to the reduced rate

• 9% reduced rate, which is applicable to the following supplies:• Supplies of prostheses and accessories to them,

except for dental prostheses• Supplies of orthopaedic products• supplies of medicines for human and veterinarian use• Food, including beverages, except for alcoholic

beverages intended for human and animal consumption, live animals and poultry from domesticated species, seeds, plants and ingredients used to prepare food, products used to complete or replace food

• Supply of and water for irrigation in agriculture• Supply of fertilizers and pesticides used in

agriculture, seeds and other agricultural products for sowing or planting and the provision of services such as the ones specifically used in agriculture, provided by order of the Minister of Public Finance and the Minister of Agriculture and Rural Development

• Water supply services and sewage services• 5% reduced rate, which is applicable to the following

supplies:• School books, books, newspapers and magazines,

except for those used solely or mainly to advertising• Admission to e.g. castles, museums, memorial

houses, historical, architectural and archaeological monuments, botanical gardens and zoological parks,

services of allowing access to fairs, amusement parks and recreational parks, fairs, exhibitions cultural events and sport events, cinemas

• Supply of social housing under certain conditions expressly provided by the Tax Code

• Accommodation provided by hotels and similar establishments including the letting of camping sites

• Restaurant and catering services, excluding alcoholic beverages other than beer falling within a specific CN code

• The right to use sports facilities for the purpose of practicing sport and physical education

• Transport of persons with trains or historic vehicles with steam traction on narrow lines for tourism or leisure purposes

• Transport of persons using cable transport - facilities-cable car, gondola lift, ski lift - for tourism or leisure purposes

• Transport of persons with animal-traction vehicles used for tourism or leisure purposes

• Transport of persons with boats used for tourism or leisure purposes

• Delivery of high quality food, i.e. authorized mountain, Eco, traditional products.

Exempt operationsSupplies within the scope of VAT are considered as taxable operations and exempt operations.

Exempt operations are divided as follows:• Exempt supplies with credit for input tax (e.g.

exemption for intra-Community supplies of goods under certain conditions, exports and other similar supplies, international transportation of passengers,


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as well as specific exemptions related to international traffic of goods, etc.)

• Exempt supplies without credit for input tax (e.g. healthcare services, educational services, financial and banking services, supply of immovable property, except for new buildings, lease and renting of immovable property with certain exceptions)

• Exemptions for import and intra-Community acquisitions of goods whose local supplies are exempted, etc.

The Tax Code provides specific rules on goods benefiting from special customs regimes. The following transactions are VAT exempt with credit for input tax:• Supply of goods placed under a bonded warehouse

customs procedure• Goods introduced in free zones• Goods under an inward processing procedure, etc.

Credit for input VAT

General rule

Carrying out taxable supplies allows offsetting output VAT against input VAT. Exempt supplies do not allow the recovery of input VAT, except in the case of VAT exempt supplies with credit, for which input VAT can be recovered.

A taxable person is allowed to deduct input VAT incurred on the purchases of goods or services, provided that the goods or services purchased will be used to perform operations allowing VAT deduction and it holds a correct invoice. VAT deduction is allowed also based on invoices sent by electronic means which comply with certain conditions.

Companies performing both taxable transactions and exempt transactions without credit shall deduct VAT based on the direct allocation method and pro rata mechanism. By exception, for purchases intended for investments, which are foreseen to be used both for transactions

allowing VAT deduction and transactions which do not give rise to VAT deduction right, taxable persons are allowed to fully deduct input VAT incurred during the investment process and subsequently adjust the deducted VAT, observing the rules provided by the Tax Code. By way of exception from the above rules, a 50% cap shall apply to the right to deduct the input VAT related to the purchase, intra-Community acquisition, import, rental or leasing of motor road vehicles and the tax related to expenses borne in respect of vehicles owned or used by the taxable person, provided that such vehicles are not used exclusively for business purposes, except motor road vehicles having a maximum authorized weight of more than 3,500 kg and more than 9 passenger seats, driver's seat included.

However, there are certain exceptions when the VAT is fully deductible (vehicles used by sales and procurement agents, used for paid passenger transport including taxi, the ones used for supply of services against consideration, for interventions, security and protection, etc.). In case such vehicles are acquired with the view of further being object to leasing contracts, a VAT deduction on lease installments is, in principle, allowed at the level of the lessor.

In case of taxable person applying the cash-accounting system or performing acquisitions from suppliers applying the cash-accounting system, the VAT deduction right shall be postponed until the total or partial payment of the goods and services supplied is performed to the supplier/provider.

Refund of VAT

If the input VAT exceeds the output VAT, the recoverable balance VAT (defined as "negative VAT balance") may be:• Carried forward to the next period• Refunded by the tax authorities, based on the option

expressed by the taxpayer in the VAT return. The option can be exercised only for a negative VAT balance exceeding RON 5,000.

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As of February 2010, VAT returns with a negative VAT balance with a refund option for a maximum VAT amount of RON 45,000 are by default assigned a low tax risk. Also, large taxpayers may decrease the tax risk assigned to their VAT refund claims from high to low (with some exceptions) by filing bank guarantee letters for an amount equal with the negative VAT requested for refund.

For low tax risk claims, VAT refund should be performed without a tax audit or documentary analysis and in a shorter period of time. However, in the above-mentioned cases, the respective taxpayers would be nevertheless subject to a subsequent VAT audit.

A taxable person established in the Community, that is not registered or liable to register for VAT purposes in Romania, may request a refund of VAT paid in Romania.

A taxable person not established in the Community that is not registered or liable to register for VAT purposes in Romania may request the refund of the VAT paid if, under the laws of its country of establishment, a taxable person established in Romania has the same right in that country.

Taxable persons established in or outside the EU can claim a VAT refund, if the application refers to a period:• Less than a calendar year but not less than three

months; the amount requested for reimbursement cannot be less than the RON equivalent of EUR 400

• Equal to a calendar year or the remaining period of a calendar year; the amount requested for reimbursement cannot be less than the RON equivalent of EUR 50.

Invoicing

Documents or messages, both electronic and hard copy versions, are accepted by the Romanian authorities as invoices, if they meet the requirements provided by the Romanian Tax Code in respect of content of invoices. Moreover, any document that specifically and without ambiguities modifies or refers to an initial invoice will be considered as invoice.

If any adjustments of the taxable base are required and the supplier does not issue the correction invoice, the beneficiary has to issue a self-invoice so as to adjust deductible input VAT, by the date of the 15th of the month following the one during which the events that determined the adjustments occurred.

Taxable persons supplying goods or services should generally issue invoices by the date of the 15th of the month following the one in which the chargeable event occurs, unless the invoice has already been issued.

Romania has implemented the possibility to use e-invoicing and e–archiving procedure, self-billing and billing by a third party in the name and on behalf of the supplier, under certain specific conditions.

Tax period

The tax period is the calendar month. By way of derogation, the tax period shall be the calendar quarter, if the turnover recorded during the previous year by the taxable person does not exceed the EUR 100,000 cap, unless the taxable person performed one or more

intra-Community acquisitions of goods during the previous or current calendar year.

Payment and filing requirements

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 date of the 25th of the following month. In case of taxpayers having the tax period the calendar quarter, VAT returns should be filed with the tax authorities and VAT shall be paid by the date of the 25th of the month following the quarter the VAT return relates to.

A VAT recapitulative statement should be filed with the tax authorities on a monthly basis on or before the 25th day of the following month. In case of taxpayers having the tax period the calendar quarter, the VAT recapitulative statement shall be submitted by the 25th of the month following the quarter the recapitulative statement relates to Such statement should comprise: intra-Community supplies of goods exempt from VAT, intra-Community acquisitions of goods for which the beneficiary is obliged to pay VAT, and acquisitions as part of operations within the triangulation scheme, as well as acquisitions and supplies of intra-Community services based on the general B2B rule. Taxpayers are not required to submit nil recapitulative statements.

Taxpayers should also submit an informative declaration of all supplies/acquisitions of goods/services taking place in Romania to/from other taxable persons registered for VAT purposes in Romania. The declaration should be submitted by the 30th of the following month, In case of taxpayers having the tax period the calendar quarter, the VAT informative statement shall be submitted by the 30 of the month following the quarter the informative statement relates to. Taxpayers are required to submit nil informative declarations.


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Companies registered for VAT purposes in Romania, having deliveries of goods to/arrivals of goods from other EU member states which exceed an annual amount of RON 900,000 are obliged to submit INTRASTAT declarations on a monthly basis, by the 15th day of the following month. Taxpayers are required to submit nil INTRASTAT statements.

Romanian VAT Split Payment mechanismThe Romanian Government published on 31 August 2017, the Ordinance for the VAT split payment mechanism to be implemented mandatory by the taxable persons/public institutions registered for VAT purposes if they fall under one of the following situations: • As of 31 December 2017, they had outstanding VAT

liabilities, exceeding RON 15,000 in case of large taxpayers, RON 10,000 in case of mid-sized taxpayers, and respectively RON 5,000 for other taxpayers, if these liabilities were not settled by 31 January 2018

• Starting with 1 January 2018, they have outstanding VAT liabilities older than 60 working days as of the due date, exceeding RON 15,000 in case of large taxpayers, RON 10,000 in case of mid-sized taxpayers, and respectively RON 5,000 in case of other taxpayers

• Are subject to the provisions of the national legislation regarding insolvency.

The VAT Split Payment mechanism is optional for all other VAT registered taxable persons. A tax incentive of 5% decrease in the profits tax/income tax for microenterprises will be granted for the entire period during which the VAT split payment mechanism is optionally applied.

The VAT split payment applies to all taxable supplies of goods/services performed by the taxable persons applying mandatory the VAT split payment mechanism (either mandatory or by option), for which the place of supply is in Romania (some exceptions are provided: e.g. transactions

for which the beneficiary is liable to pay VAT through the reverse-charge mechanism; transactions that may fall under a VAT special regime).

The continuation of the VAT split payment mechanism is currently under discussion, as the European Commission did not approve this mechanism. No decision was reached so far.

How does the system work?

Each VAT registered taxpayer which applies the VAT split payment mechanism will have a separate VAT account, different from the regular bank account (opened either at a regular bank or at the National Treasury).

For each invoice issued by a supplier applying VAT split payment mechanism, the buyer will perform two payments:• One in the regular bank account, representing the

value of the goods/services. This payment is performed from the regular bank account of the beneficiary

• One in the VAT account, representing the VAT related to goods and services. This payment is performed from the VAT account of the beneficiary.

Exceptions apply to cash payments or through credit/debit cards or payments performed by persons not required to pay in the VAT account (e.g. natural individuals). In such a case, the customer will pay the gross amount (including VAT) to the supplier's regular bank account, the latter having the obligation to deposit in cash or to transfer the corresponding VAT amount from its regular bank account to its VAT account, within 30 working days since receiving the payment.

Penalties for not applying the VAT split Payment

Failure to communicate the VAT account to the beneficiaries triggers a fine between RON 2,000–4,000.

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Also, the Ordinance introduces, inter-alia, penalties if erroneous payments (e.g. performed in/from other account than the VAT account) are not corrected within a grace period of 7 working days, as follows: • 0.06% per day of delay, if the payment is done within

30 working days since the date of making the incorrect payment, increasing to 10% of the incorrectly paid amount if the 30 working days are exceeded

• A 50% penalty (count of incorrectly debited amount) is imposed if the VAT account is erroneously debited with amounts not allowed under the law (e.g. cash withdrawal) and such incorrect use is not rectified within 30 working days.

6.5. Customs dutiesThe EU customs regulations are directly applicable in Romania as from the accession date to the EU (i.e. 1 January 2007).

The persons who perform activities which are regulated by the customs legislation must register for customs purposes.

Also, the statute of authorized economic operator may be granted upon request under certain conditions. The respective statute concedes certain administrative incentives to its holder.

Common customs tariffThe specific customs duties payable upon releasing the goods into free circulation, are established based on the EU Customs Tariff (adopted for each year by the Commission) and related preferential tariff measures. There is an online EU customs tariff database (TARIC) which comprises the following:• The combined nomenclature of goods• The rates and other items of charge normally

applicable to goods covered by the combined nomenclature, as regards customs duties and import charges laid down under the common agricultural policy, or under the specific arrangements applicable to certain goods resulting from the processing of agricultural products

• The preferential tariff measures contained in agreements which the European Union has concluded with certain countries or groups of countries and which provide for the granting of preferential tariff treatment

• Preferential tariff measures adopted unilaterally by the European Union in respect of certain countries, groups of countries, or territories

• Autonomous suspensive measures providing for a reduction in, or relief from, import duties chargeable on certain goods

• Other tariff measures provided for by other Union legislation Customs duties are expressed as a percentage of the customs value of goods. Other taxes, duties and levies may be required to be paid upon import in addition to customs duties, such as excise duty, VAT, etc.

Customs value of goodsWhere the goods to be imported in Romania will be subject to a sale, the customs value should be based generally on the sale price increased with certain other costs that may have been incurred for the imported goods (e.g. insurance, transport, commissions, royalty and license fees).

The cost of e.g. (i) transport and insurance of the imported goods, and (ii) loading and handling charges associated with the transport of the imported goods to the place of entering into the customs territory of the Union shall be added to the price actually paid or payable by the importer when declaring the customs value of the goods, to the extent that they are incurred by the buyer but are not included in the price actually paid or payable for the goods.


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RoyaltiesUnder the customs legislation, a royalty is dutiable if it is related to the imported goods and is paid as a condition of their sale. However, starting with 1 June 2016, royalties and license fees are, in most cases, considered to be paid as a condition of the sale of the goods and would need to be included in the customs value.

Customs proceduresAs provided by the Union Customs Code, non-EU goods may be placed under various customs procedures, as follows:• Release of goods for free circulation• Transit• Customs warehousing• Inward processing• Temporary admission• Outward processing• Exportation• Free zone.

The release for free circulation confers non-Union goods, the status of Union goods. This means that the customs duties and charges have been paid and, as a result, the goods may freely move within the territory of the European Union from a customs perspective.

The specific customs procedures suspending the payment of the import duties are generally subject to authorization from the customs authorities.

The transit procedure allows the movement of non-Union goods from one point to another within the customs EU territory, without such goods being subject to import duties and other charges or to commercial policy measures for a certain period of time. Certain Union goods meant for export could also be placed under the transit procedure.

A customs warehouse is a place approved by, and under the supervision of, the customs authorities where goods may be stored under certain conditions.

The customs warehousing procedure allows the storage in a customs warehouse of the following• non-Union goods, without such goods being subject to

import duties or commercial policy measures• Union goods, where the specific legislation governing

certain fields provides that their placement in a customs warehouse attracts the application of measures normally used for export of such goods

The inward processing procedure allows that non-EU goods are processed within the EU customs territory without application of import duties or commercial policy measures, provided that certain conditions are met.

The temporary admission procedure allows the use in the customs territory of the EU, with total or partial relief from import duties and without them being subject to commercial policy measures, of non-EU goods intended for re-export without having undergone any change except normal depreciation due to their use.

The outward processing allows EU goods to be exported temporarily from the EU customs territory in order to undergo processing operations and the products resulting from those operations to be released for free circulation, with total or partial relief from import duties.

The export allows EU goods to leave the customs territory and entails the application of exit formalities, including commercial policy measures.

Free zones are parts of the customs territory of the EU or premises situated in that territory and separated from the rest of it in which non-EU goods are considered, for the purpose of import duties and commercial policy import measures, as not being on EU customs territory, provided they are not released for free circulation or placed under another customs procedure or used or consumed under conditions other than those provided for in customs regulations. Romania has currently the following free zones: Constanta, Braila, Galati, Sulina, Giurgiu and Curtici–Arad.

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The above special regimes are grouped together within four special procedures, namely:• Transit, including external transit and internal transit• Storage, including temporary storage, customs

warehousing (public and private warehouses) and free zone

• Specific use, namely temporary admission and end-use• Processing, namely inward processing and outward

processing.

Customs regime for individualsCustoms regulations provide for specific customs duty treatment for the goods belongings of individuals establishing domicile or residence in the EU, goods introduced into the EU upon marriage, inherited goods, as well as goods shipped between individuals.

Goods from the personal luggage of travellers brought into EU without commercial purposes may be exempt from customs duty. The customs duties, VAT, and excise duties exemption can be granted up to a total value of EUR 430/traveller, for air and sea travellers and up to a total value of EUR 300/traveller, for other travelers.

For certain goods, such exemption is granted within the following quantity limits:• Tobacco products:

• 40 cigarettes• 100 cigarillos (cigarillos are cigars of a maximum

weight of 3 grams each)• 50 cigars• 250 grams smoking tobacco.

Alcohol and alcoholic beverages:• A total of 1 litter of alcohol and alcoholic beverages

of an alcoholic strength exceeding 22% vol. or un-denatured ethyl alcohol of 80% vol and over, or

• A total of 2 litters of alcoholic beverages of an alcoholic strength not exceeding 22% vol.

• A total of 4 litters of still wine, and 16 litters of beer.

The duty exemption mentioned above for tobacco and alcoholic beverages does not apply for travellers under 17 years.

6.6. Excise dutyExcise duty is a consumption tax payable on certain categories of products including alcoholic beverages, energy products (e.g. gasoline, diesel), tobacco products, electricity and natural gas and certain other items. The tax is payable on import and release for consumption of locally produced items on the domestic market and is set as fixed RON amount per unit or as a percentage of a specified taxable base.

The excise duties in respect to the main categories of products are given in RON in the table below:

Category of products Excise duty rates valid for 2018

Alcoholic products Up to RON 3,411.15 per hl

Cigarettes RON 483.74/1.000 cigarettes

Car fuel RON 2,243.76 - RON 3,038.54 per ton

Electricity RON 2.44 or Ron 4.89 per MWh

Source: EY Research


Medieval fortress - Alba Iulia

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Moreover, non-harmonized excise duties will be applied for liquids containing nicotine (electronic cigarettes) and heated tobacco products.

Taxpayers are normally required to submit monthly tax returns and pay the excise duties for excise products by the 25 of the following month, with certain exceptions. In case of imported products, the related excise duty, if applicable, should be, in principle, paid in customs at the time of releasing the goods for free circulation.

A special supervision and control system is provided for the production and movement of excise products.

A specific reimbursement procedure for harmonized excise duties based on tax risk analysis is available for supplies of certain excise products.

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

The Tax Code allows production of electricity and natural gas outside fiscal warehouses.

Excise duty suspension regimeUnder certain conditions, the excise products could be moved under an excise duty suspension regime within the territory of the EU. The movement of the excise products under the suspension duty procedure must be covered by an electronic accompanying document (an electronic message from the consignor to the consignee, certified by the authorities of the Member States involved).

For this purposes, a computerized system for monitoring movements of the harmonized excise products under suspension excise duty within the EU, named EMCS (Excise Movement and Control System) is used.

6.7. Local taxesLocal taxes in Romania are regulated by the Tax Code. Local taxes represent a distinct category of taxes set by the local administration, which are payable by both individuals and legal entities in Romania.

The local councils may increase local taxes over the level established within the Tax Code, up to 50%, with a few exceptions.

Moreover, in case of land for farming that is not cultivated and in case of land and buildings that are in ruins, the local administration is entitled to increase the tax rate up to 500% the level from the Tax Code.

The legislation also provides for some exemptions, for example local councils may grant building and land tax exemptions to legal entities, provided these are in line with the state aid legislation.

Building taxBuilding tax is payable by owners of buildings located in Romania, regardless of their residence. The tax is assessed based on the destination of the building (i.e. residential, non-residential and mixt use).

The tax rate ranges between 0.08% and 0.2% applicable to the taxable base, for buildings with residential use and between 0.2% and 1.3% for buildings with non-residential (i.e. business) use. As an exception, non-residential buildings used for agriculture business are taxed with 0.4%, while the building tax due for buildings used for tourism purposes is 50% reduced, provided that the building is used for business purposes for maximum 6 months within a year.

In case of non-residential buildings, the taxable base is represented by:• The value reflected in a valuation report in case the

building is owned by individuals (unless the building was acquired or constructed during the last 5 years)

• The value reflected in a valuation report not older than 3 years in case the building is owned by legal entities (unless other specific cases apply).

The building tax rate applicable is set to 5% for the buildings held by legal entities that have not been revaluated during the last 3 years and to 2% for the buildings held by individuals that have not been revaluated during the last 5 years.

The tax must be paid annually, in two equal instalments by 31 March and 30 September.

Land taxLand tax is payable by owners of land. Generally, the tax is established as a fixed amount per hectare, depending on the location of the land within certain determined zones, towns or villages and depending on land use. The tax is payable annually, in two equal instalments, by 31 March and 30 September.


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Vehicle taxVehicle tax is payable by owners of land/water vehicles, which should be registered in Romania. The tax depends on the engine capacity or vehicle characteristics (e.g. number of axles, suspension system, weight, etc.). Electric cars benefit of exemption from vehicle tax. In addition, local administration can grant tax exemption in case of agriculture vehicles used effectively for farming and 50% reduction for vehicle tax in case of hybrid cars.

The tax is payable annually, in two equal instalments, by 31 March and 30 September.

Tax for construction authorizationsThe tax is established as a percentage on the construction value and is payable upon obtaining the construction authorization.

Publicity and advertising taxAdvertising tax is payable by the 10th of each month during the execution of the contract by the suppliers of publicity and advertising services rendered in Romania, except for publicity and advertising services through audio, video and the print medium. The tax rate is established by the local councils and ranges between 1% and 3%. It is applied to the value of the publicity and advertising services.

Users of outdoor advertising must pay an outdoor media advertising tax computed as a fixed amount established by the local councils per square meter, depending on the surface used for advertising. The tax cannot exceed RON 32/square meter, in case the advertising is done at the place of business, and RON 23/square meter in case the advertising is done in other places. Such tax should be paid in two equal instalments, by 31 March and 30 September.

Show taxShow tax is payable by individuals and entities for public performances at a rate of up to 2% or 5% (depending on the type of event) of revenues from the sale of tickets or subscriptions. The show tax is payable monthly, in arrears by the 10 of the month following the performance.

Other local taxesThe local councils may impose, inter-alia, taxes for temporary use of public places and for admissions to museums, memorials, or historical, architectural, and archaeological monuments, and also for the ownership or use of equipment that is held for the purpose of obtaining income using public infrastructure, as well as fees for activities with an impact on the environment.

Sucevita Monastery - Suceava county

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6.8. Stamp dutyStamp duty is payable on most judicial claims, issue of certificates and licenses, and documentary transactions which require authentication.

There are two types of stamp duty, which include the following:• Judicial stamp duty and• Extra-judicial stamp duty.

Judicial stamp duty is levied on claims and requests filed with courts and the Ministry of Justice, usually 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. A judicial stamp duty may also be levied at the transfer of real estate property under certain circumstances.

In 2013, the Romanian Government adopted Governmental Emergency Ordinance 80/2013 regulating the judicial stamp duties and repealing the former Law 146/1997 applicable to the same subject matter. It has raised the quantum of the judicial stamp duties, but it also eliminated the judicial stamp, a tax that had to be paid beside the judicial stamp duty.

Extra-judicial stamp duty is charged by the public authorities for the issuance of various certifications and documents such as identity cards, car registrations, etc.

Under certain conditions and cases stipulated by the law, individuals and legal entities may benefit from exemptions.

6.9. Individual taxationRomanian citizens domiciled in Romania are considered Romanian tax residents and are taxed in Romania on their worldwide income. Foreigners and Romanian individuals without a Romanian domicile may be subject to taxation in Romania on worldwide income under certain circumstances.

ResidenceAn individual is considered a Romanian tax resident if he/she fulfils at least one of the following conditions:• Individual is domiciled in Romania• Individual's centre of vital interest is located in

Romania• Individual is present in Romania for a period or periods

exceeding in aggregate 183 days during any period of 12 consecutive months ending in the calendar year concerned

• Individual is a Romanian citizen working abroad as an employee of the Romanian state.

TaxpayersIndividuals liable to income tax fall into the following two categories:• Residents, Romanian individuals domiciled in Romania

for income obtained from any source, both from Romania and abroad, and residents other than Romanian individuals domiciled in Romania

• 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-resident individual fulfils the second or third condition mentioned in the Residence section above and in the absence of a tax residency certificate issued by another state with which Romania has concluded a Double Tax Treaty, he/she becomes subject to taxation on worldwide income as of the date when he/she becomes a Romanian tax resident.


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Individuals who are tax residents in countries that have signed Double Tax Treaties with Romania may benefit from a reduced tax rate or a tax exemption under the terms of the respective treaties. Individuals who are tax residents in countries that have not entered into a Double Tax Treaty with Romania may become subject to Romanian taxation from the first day of presence in Romania.

Categories of income subject to taxationA flat income tax rate of 10% applies to the following categories of income:• Income from independent activities• Income from intellectual property rights• Salary income• Rental income• Investment income (certain types)• Pension income• Prizes• Agricultural income• Other income.

The Tax Code provides special tax rates in case of certain investment income, gambling, and transfer of real estate from personal patrimony.

Employment incomeTaxable compensation includes salaries, benefits in cash or in kind, bonuses, rewards, temporary disability payments, holiday premiums and any other income received by an individual based on an employment agreement/the document for appointing civil servants, secondment

document or a special statute provided by the law. Taxable compensation also includes compensation received by daily or temporary workers, fees and compensation paid to directors and managers of legal persons, to members of the board of directors and General Shareholders Meeting, to members of the administration council and to members of the audit committee.

For employment income, the taxable amount is determined by deducting the following from the gross income:• Mandatory social security contributions• Personal deductions allowed, if the case• Monthly trade union contribution• Contribution to the facultative pension scheme - Pillar III (up to EUR 400/year)• Voluntary health insurance and medical care subscription (cumulatively, up to EUR 400/year).

Under certain conditions, Romanian residents working abroad may benefit from tax exemption on salary income.

Also, subject to legal requirements in force, tax exemption is granted to employees performing software development activities, research and development activities construction activities and certain seasonal activities.

Personal deductionsRomanian individuals domiciled in Romania, as well as foreigners meeting the residence criteria, are entitled to personal deductions, which vary depending on the gross monthly income and the number of dependents, as follows:• For gross monthly income up to RON 1,950, the

monthly deductions vary between RON 510 for persons without dependents and RON 1,310 for at least four dependents

• For gross monthly income between RON 1,951 and RON 3,600, personal deductions are regressive as compared to the above and shall be set by order of the Minister of Finance

• For gross monthly income higher than RON 3,600, no personal deductions are granted.

Income from independent activitiesIncome from independent activities includes the following:• Income from production, commerce and services• Income from freelancing activities

• The net taxable income from production/commerce/services/freelancing activities is computed as gross income less specified deductible expenses that should fulfil certain conditions. Individuals authorized as freelancers must keep a Tax Evidence Registry

• Alternatively, income earned by certain categories of freelancers who do not have employees is subject to income tax based on income quota(s), which are annually established by the Ministry of Finance

Old Bridge - Arad


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• Income from other independent activities • Income derived by individuals from rental for tourism

purposes of rooms located in their own homes, with a capacity of accommodation of more than five rooms is assessed as income from independent activities and is subject to tax based on income quotas (fixed amounts set by the Government) or real system (actual income recorded based on the single-entry bookkeeping).

Income from other independent activities The net taxable income from intellectual property rights is computed either on real system or by deducting a 40% expense quota from the gross income. An exception is allowed for the situation where the income received from the same income payer exceeds 12 minimum national salaries, where withholding rules apply.

The income tax on intellectual property rights is determined by applying 10% on the taxable income.

Rental incomeGross rental income consists of amounts in cash or in kind, stipulated in the rental agreements and related to a tax year (regardless of the time of effective cashing), as well as certain expenses borne by the tenant and which, based on the law, are the landlord's liability.

The taxable amount is determined by deducting a 40% expense quota from the gross income. Tax on rental income is determined by applying 10% on the taxable amount. As an exception, taxpayers may opt for the determination of the rental income based on single entry bookkeeping.

Investment incomeInvestment income includes:• Dividend income• Interest income• Gains from transfer of securities and other operations

involving financial instruments• Income from transfer of financial gold• Income from liquidation of a legal person.

Dividend income

Dividends are defined as any grant of benefits in cash or kind, by a legal entity to shareholders or associates, as a consequence of holding participation titles (with certain exceptions).

The tax rate on dividends distributed to resident individuals is 5%. The tax rate is calculated, withheld and paid by the payer of dividend. The tax should be paid by the 25th of the month following the dividend payment.

In case of dividends distributed but not paid until the end of the year, the tax is payable by the 25th of January of the following year.

The dividend tax is final (i.e. the income is not subject to regularization).

The withholding tax for non-resident individuals is 5% or a more favourable rate, if a double tax treaty is applicable.

Mountain view


Interest income

Taxable income from interest is any income such as:• Interest from current account/on-sight deposits• Interest from on term deposits, saving instruments

and civil contracts• Interests paid by the issuance company of the loaned

securities, during the loan period.

The tax rate applicable to interest income is 10% and is calculated, withheld and paid by the payer of interest by the 25th of the month following the interest payment. The interest tax represents a final tax.

The withholding tax applied to interest income earned by non-resident individuals, as per the domestic legislation, is 10% or a more favourable rate if a double tax treaty is applicable.

Gains from transfer of securities and other operations involving financial instruments

As a general rule, the capital gain represents the positive difference between the sale price and the tax value of different types of securities, which includes the related transaction costs, as the case may be.

A capital gain on the disposal of shares obtained as a result of a stock option plan is defined as the difference between the sale price and the tax value (preferential acquisition price), which includes the related transaction costs. For shares obtained at nil price, the tax value is considered to be zero.

The "net capital gain" concept refers to the difference between gains and losses registered during one year (i.e. positive or negative differences between the sale and tax value, which includes the related transaction costs).

Income from transfer of financial gold

The gains/losses derived from the operations with financial gold are determined as the positive/negative difference between the sales price and the fiscal value, which includes the costs related to the transaction.

Income from transfer of securities, other operations involving financial instruments and from transfer of financial gold is subject to an annual regularization, which is performed by applying a 10% tax rate to the annual taxable income, less carried forward tax losses (if any) for a period of seven consecutive years.

Income from pensionsIncome from pensions comprises any amount received in form of pension from funds created from mandatory social contributions made to a social insurance system, including the amounts from pension system privately administered (Pillar II) and the ones financed from the State Budget. Monthly pension income of up to RON 2,000 is not taxable. The tax is final and is to be determined by levying 10% on the taxable amount. The tax computed for pension is withheld on the date of actual payment of the pension and remitted to the state budget by the 25th of the following month.

Income from agricultural activitiesTaxable income from agricultural activities is determined on income quotas issued by specialized territorial directorates of the Ministry of Agriculture and Rural Development, and shall be approved by the territorial general directorates of public finance. Alternatively, taxpayers earning income from agricultural activities may choose to determine the income based on single entry bookkeeping. The tax is computed by levying 10% on the taxable income.

Prizes and gambling income

Prizes

The tax on prizes is 10% and is levied on the net income, representing the balance between gross realized income and the tax free amount (i.e. currently RON 600). As a general rule, 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 and is final.

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Gambling income

The tax on gambling is also final and is determined by applying a tax rate of:• 1% on the net income, not exceeding RON 66,750,

inclusively• RON 667.5 plus a tax rate of 16% on the net income

that exceeds RON 66,750 and up to RON 445,000 inclusively and

• RON 61,187.5 plus a tax rate of 25% on the net income that exceeds RON 445,000.

The obligation of computing withholding and paying the tax rests with the income payer, except for online, remote gambling and poker festivals whereby the reporting is to be performed through annual individual tax return.

Taxation of real estate transactionsThe real estate transfer tax for buildings and their related land, as well as land without constructions, which has to be paid by the taxpayer on the transfer of the property right or its divisions, is computed as follows:• Sale amount up to RON 450,000 is tax free and • For a sale amount over RON 450,000, the tax due is 3%

applicable on sale amount exceeding RON 450,000.

Income from other sourcesIncome from other sources includes, 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

• Income borne by an individual as a result of commercial arbitration.

The income tax is withheld at source by the income payer, the tax being final.

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

Any income whose source is not identified is subject to 10% income tax applied to the tax base adjusted according to the procedures and indirect methods for the reconstitution of taxable base. The tax authorities compute the income tax and late payment penalties – i.e. currently 0.03/day of delay.


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Filing and payment requirementsAs a general rule, taxpayers, with certain exceptions, have to file an annual income tax return with the tax authorities by the 15th of March of the following year, for the income derived from Romania and abroad, and also for reporting the estimated income for the year in progress.

Taxpayers can make either advanced tax payments or an annual tax payment by the 15th of March of the following year the income is earned. Under certain conditions, tax incentives are granted to taxpayers that settle the respective tax liabilities before the deadline. In 2018, the tax incentives consist of: • 5% of the income tax due to the State Budget for

cases where the annual tax return is submitted electronically

• Additional 5% of the income tax due to the State Budget provided that the tax on 2018 estimated income is paid by 15 December 2018.

As an exception, for income earned in 2018, the annual tax reporting is due by 31 July 2019, including also the estimated income for 2019. Moreover, the tax due for 2018 shall also be paid towards the State Budget by 31 July 2019.

Taxpayers earning only salary income throughout the entire tax year fulfil their tax obligations through employer withholdings. Employers withhold the income tax on a monthly basis. Similar rules apply for activities performed based on sportive contracts and intellectual property rights. The income payer computes, withholds, declares and pays the income tax and social charges, only if the income exceeds 12 minimum national wages per year.

Expatriates employed and remunerated from 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, if certain conditions are met.

Social charges due on salary incomeUnder Romanian employment regulations, both employer and employee are required to contribute into the social security system.

As of January 2018, most of the employer social charges were transferred to the employee.

Social charges at the individual level• Social security contribution (i.e. pension) – 25% on the

gross monthly income• Health fund contribution – 10% on the gross monthly

income.

Social security charges at the employer level• Work insurance contribution – 2.25% on the gross

monthly income.

Social charges due by foreign individuals

Citizens of the European Union countries and Switzerland (as of 1 June 2009) benefit from coverage of medical expenses incurred on Romanian territory, as well as exemption from the social charges based on certificates of coverage (i.e. A1 and S1 certificates) issued according to the EU regulations on social security.

Also, certain exemptions may be applicable in case of non-EU citizens, if there is a Social Security Treaty in place between their home country and Romania and a certificate of coverage is obtained for them.

However, if an individual is not subject to mandatory social charges in the home country (as per the above rules), that person will fall under the jurisdiction of the Romanian social security system and social charges will be due under Romanian legislation (the home-country employer or the employee must follow a certain procedure to register for social security purposes).

Social charges due on income from independent activities• Social security contribution (i.e. pension) – due only

for taxpayers that estimate to obtain in the year in progress an income above 12 national minimum wages. In such a case, the contribution would be of 25% on the chosen income per year, but not less than 12 national minimum wages

• Health fund contribution – due only for taxpayers that estimate to obtain in the year in progress an income above 12 national minimum wages. In such a case, the contribution would be of 10% due on 12 national minimum wages per year.

Under certain conditions, tax payers do not have the obligation of paying the above social contributions.

Poenari Fortress - Arges County



Social charges due on income from intellectual property rights• Social security contribution (i.e. pension) – due only

for taxpayers that estimate to obtain in the year in progress an income above 12 national minimum wages. In such a case, the contribution would be of 25% on the chosen income per year, but not less than 12 national minimum wages

• Health fund contribution – due only for taxpayers that estimate to obtain in the year in progress an income above 12 national minimum wages. In such a case, the contribution would be of 10% due on 12 national minimum wages per year.

Under certain conditions, tax payers do not have the obligation of paying the above social contributions.

Social charges due on income from agricultural activities• Health fund contribution – due only for taxpayers that

estimate to obtain in the year in progress an income above 12 national minimum wages. In such a case, the contribution would be of 10% due on 12 national minimum wages per year.

Under certain conditions, tax payers do not have the obligation of paying the health fund contribution.

Social charges due on investment income • Health fund contribution – due only for taxpayers that


Social charges due on income from other income• Health fund contribution – due only for taxpayers that


Filing and payment requirementsAs a general rule, the health fund contribution is due only if the taxpayer estimates to obtain in the current year income from independent activities, rental income, intellectual property rights, investment income and other types of income, except for salary, above 12 national minimum wages.

Taxpayers who do not meet the abovementioned thresholds can still get insured either with the public health fund or pension system by choice.

Taxpayers, with certain exceptions, have to file an annual return with tax authorities by the 15th of March of the following year, for the income derived from Romania and abroad, and also for reporting the estimated income for the year in progress.

Taxpayers can pay either in advance or on an annual basis their social charges by the 15th of March of the following year the income is earned. Under certain conditions, tax incentives are granted to taxpayers that settle the respective social charges before the deadline.

As an exception, the estimated income for 2019 should be reported by 31 July 2019.

Taxpayers earning only salary income throughout the entire tax year fulfil their tax and social charges obligations through employer withholdings. Employers withhold the salary tax and social charges on a monthly basis. Expatriates employed and remunerated from abroad, but performing an activity in Romania, should file monthly tax returns and pay monthly salary tax and social charges in Romania by the 25th of the following month, if certain conditions are met.

6.10. Tax Procedure CodeThe Tax Procedure Code regulates the rights and obligations of parties engaged in tax relations regarding:• Administration of taxes (i.e. activities related to tax

registration, declaration, assessment, verification and collection of taxes, settlement of appeals against tax assessments) provided by the Tax Code

• Administration of customs duties• Contributions, fines, and other revenues of the general

consolidated budget.

The Tax Procedure Code constitutes the common law for administration of taxes and, in the absence of regulations regarding certain matters, provisions of the Civil Procedure Code are to be applied.

General principles for administration of taxes

Consistent application – states the obligation of the tax authorities to apply in a consistent manner the provisions of tax legislation with a view to correctly assess taxes due by taxpayers.

Right to be heard – according to this principle, the tax authorities are bound to allow the taxpayer to express its position with respect to the deeds and circumstances relevant in the decision-making process, prior to adopting a decision. The Tax Procedure Code stipulates several exceptions from this general principle.

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Confidentiality – tax authorities are obliged to ensure the confidentiality of information pertaining to taxes and taxpayers.

Good faith – both tax authorities and taxpayers are bound to act in good faith in all relationships under the Tax Procedure Code.

Representation and certification

Taxpayers may appoint representatives in their relations with the tax authorities. Representatives of taxpayers without Romanian tax residence should themselves be Romanian tax residents.

Taxpayers may opt for a certification by a tax consultant of their tax returns, including tax amendments, prior to the submission to the tax authorities.

General procedure provisions

Competence of tax authorities

The tax authorities are empowered to administer tax claims, perform tax audits and issue application norms for tax legislation. Customs authorities are empowered to manage customs related duties.

The competent tax authority for the administration of taxes is the tax authority where the taxpayer or the income payer has its tax domicile. In the case of taxpayers performing activities through a permanent Romanian establishment, the competent tax authority is determined based on the place where the permanent establishment is located.

Tax administrative document and its notificationThe tax administrative document shall be issued in writing, on paper or in electronic format.

The written tax administrative document shall be communicated by way of delivering it to the taxpayer/representative, under signature or by means of a registered letter with recorded delivery. The tax administrative document in electronic format shall be communicated by electronic means whenever the taxpayer has opted for this way of issuance and communication.

Tax administrative documents that have not been communicated according to the abovementioned provisions are not binding for the taxpayer and have no legal effects

Correction of material errors

The tax authority may proceed to correct material errors identified in the tax administrative deeds upon its own initiative, or further to an application submitted by the taxpayers.

Material errors are typing mistakes, omissions or erroneous mentions made in the tax administrative act, except the ones that lead to the nullity of the tax administrative deed or the ones that refer to the substance of the tax act.

The deed issued with regard to the correction of the material error, or the decision to reject the request for correction of the material error, as the case may be, will be communicated to the taxpayer.

Means of evidence

Any factual item serving to ascertain the tax situation, including audio and video recordings, data and information on any storage medium, as well as other legally permitted exhibits, shall be considered as evidence.

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94


Obligation to provide information

Taxpayers or their appointed representatives are bound to provide the tax authorities with the requested information necessary for the determination of the facts regarding the tax position. The tax authorities may request information from other persons with which the taxpayer has or has had economic or legal relations, and they have an obligation to provide the requested information. Such information will be considered only if it is confirmed by other evidence. All documents must be presented in Romanian language. In case the tax authorities request translations and the taxpayer fails to provide them, the tax authorities may ignore the documents.

The reporting obligations of residents of other EU Member States

Payers of specific categories of income and capital will have to submit a tax return for the income paid to each beneficiary who is a resident of other EU Member States, by the last day of February of the current year, for the elapsed year.

Taxpayers who are residents of other EU Member States and who derive income from real estate properties located in Romania shall submit a tax return for the income derived by May 25th of the current year, for the elapsed year.

Estimation of the tax base

Whenever tax authorities are unable to determine the actual tax situation, they will determine the tax base and related tax liabilities by reasonably estimating the tax base using any evidence and means of evidence provided by the law.

The resulting tax liabilities shall be determined subject to a subsequent verification, except for the ones determined during tax audits.

Transmission of documents via remote electronic means

Taxpayers may submit to the competent tax body requests, written documents or other documents via electronic means of remote transmission.

Registering for tax purposes of permanent establishments

The non-resident taxpayers operating in Romania through one or more permanent establishments have the obligation to indicate the designated permanent establishment(s) together with the declaration of tax registration.

The duration for settling the contributors' requests

The requests submitted by taxpayers to the tax body are settled within 45 days as of their registration. This period can be extended whenever further evidence is needed to enable the adoption of the decision, but no more than 2 months, 3 months or 6 months, depending on the type of additional information requested.

In the cases where, based on the risk analysis, the settlement of the demand requires a tax inspection, the deadline for solving the request is no more than 90 days from the registration of the application.

The statute of limitation for tax obligations

The limitation period of the right of the tax body to establish tax obligations is of 5 years and starts to elapse as of July 1st of the year following that for which the tax liability is due.

If the tax obligations result from acts falling under criminal law provisions, the statute of limitation is of 10 years.

Tax Audits

Method of selection for determining the taxpayers subjected to tax audit

The selection of the taxpayer’s subject to tax audits is made by the task authorities, depending on the level of risk identified further to the risk analysis. The risk analysis identifies and analyses the non-reporting risk of taxpayers and further conducts the appropriate assessment of the means for mitigating such risks in the tax administration activity. The taxpayer may not object to the selection procedure used.

The targeted time periods

The tax audit is carried out within the statute of limitation period and for the period starting at the end of the previously controlled period, if the limitation period allows it.

Tax audit duration

The duration of the tax audit is determined by the tax inspection body, depending on the objectives of the inspection, but it may not exceed a maximum of 180 days for large taxpayers as well as for taxpayers/payers with secondary headquarters, regardless of size, 90 days for medium-sized taxpayers and 45 days for other taxpayers.

If the tax audit exceeds the double legal duration stipulated by law (i.e. 180, 90 or 45 days), the tax audit shall cease without the tax authorities issuing a tax audit report and a tax decision. In this case, the tax audit may resume only

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with the approval of the hierarchically superior body of the one performing the audit and with the observance of the statute of limitation period.

Antifraud audit

Antifraud inspectors can carry out operative and unscheduled audits, except the ones part of the Directorate for combatting frauds (in Romanian, "Direcţia de combatere a fraudelor"). This type of audit may also be performed as a pro-causa audit (in Romanian, "control tematic") which is a check carried out to discover, review and assess a tax risk specific to one or more determined business areas.

Burden of proof

Taxpayers are responsible for proving the facts and deeds supporting their declarations and/or requests addressed to the tax authorities, whereas the latter have the obligation to motivate the tax acts issued based on their own evidence or findings.

Rescheduling the payment of tax debt

Subject to certain conditions, the payment of tax liabilities (of individuals or legal persons) which are administered by the NATA may be rescheduled.

The rescheduling of outstanding tax liabilities may be granted by the authorities (further to a request of the taxpayer) for a period of maximum 5 years. For debtors who do not set up any guarantee, the rescheduling may be granted for up to 6 months. The rescheduling period shall be determined by the competent tax authority according to the amount of the tax obligations and the financial capacity of the debtor.

Suspension of enforcement

The enforcement of tax deeds may be suspended if, after filing a tax challenge against the said deed, the taxpayer notifies and submits with the tax authorities a bank letter of guarantee/insurance policy at the level of the amounts owed as per the tax deed. The bank letter of guarantee/ insurance policy must be issued for a term of at least 6 months.

The taxpayer may also obtain the suspension of the tax deeds by means of a court claim. In such case, the taxpayer must pay a judicial bond in the amount set by the Tax Procedure Code and demonstrates: (i) the apparent unlawfulness of the tax deed, as well as (ii) the imminent damages facing the taxpayer in case the tax deed is enforced.

The procedure for challenging tax deeds

Competence to settle tax challenges

The challenges against tax deeds are settled by the specialized dispute resolution structures, as follows:• For the settlement of appeals concerning tax

receivables up to RON 3 million, the competence belongs to the specialized dispute resolution structures within the regional directorates of general public finances (in Romanian, "direcţiile generale ale finanţelor publice") in whose territorial jurisdiction the tax domicile of the taxpayer is

• For the settlement of appeals filed by great taxpayers, concerning tax receivables up to RON 3 million, the competence belongs to the specialized dispute resolution structure within the General Tax Administration Directorate for Great Taxpayers (in Romanian, "Direcţia Generală de Administrare a Marilor Contribuabili")

• For the settlement of appeals concerning tax receivables of RON 3 million or higher in value, the competence belongs to the special General Directorate for Solving Appeals within the NATA (in Romanian, "ANAF – Direcţia Generală de Soluționare a Contestaţiilor")

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96


The effects of non-settlement of a tax challenge by the tax authorities

If the tax challenge is not settled within 6 months as of its filing date, the taxpayer may address directly to the competent court for the annulment of the challenged tax deeds.

6.11. Tax sanctionsFailure to submit tax returns and failure to pay taxes in due time entails fines and penalties as follows:

Failure to file tax returnsNon-filing of tax returns by the respective deadline may attract the following fines:• RON 500 to RON 1,000 for individuals and legal

entities not falling into the category of medium and large taxpayers

• RON 1,000 to RON 5,000 for legal entities falling into the category of medium and large taxpayers

• Failure to submit the recapitulative statement shall be sanctioned with a fine of RON 1,000 to RON 5,000. Submittal of inaccurate or incomplete recapitulative statements shall be sanctioned with a fine of RON 500 to RON 1,500.

The above actions will not be punished if the persons correct the recapitulative statement until the lapse of the legal filing deadline, if the submittal of inaccurate or incomplete recapitulative statements was not identified by the tax body prior to correction, or if the persons, subsequent to the legal filing deadline, correct the statements following an event non- imputable to the taxable person.

The offender shall have the possibility of paying half of the fine's minimum amount within 48 hours.

Additionally, for failure to withhold or failure to pay taxes withheld at source (taxes on salary type income, dividend income and non-residents' income), a fine ranging between RON 1,000 and RON 27,000 could be applied, depending on the tax obligations.

Interest and penalties on delays in payment of tax due

For the late payment of tax liabilities, late payment interest and late payment penalties are due, as follows:• Late payment interest computed at 0.02%/day of delay• Late payment penalties computed at 0.01%/day of

delay.

For not declaring the tax obligations of the entity or incorrectly declaring it, where the tax obligation is assessed by the tax audit under tax decisions, a special non-declaring penalty of 0.08%/day is applicable. Late payment penalties are not cumulated with the special non-declaring penalty. Such penalty is reduced by 75% in case the taxpayer duly pays the tax obligations set under the tax decision issued as a result of the tax audit.

There is also a penalty for the late payment of tax liabilities due to the local budgets. The penalty is computed as follows: late payment charges of 1% are due, computed to the amount of outstanding tax liabilities, assessed for each month or fraction of the month, starting the day immediately following the deadline and up to their settlement

Deferral of outstanding tax liabilities

Tax liabilities under the administration of the NATA could benefit from the deferral of payment, as an incentive to ease the effects of the economic downturn.

Instruments for the prevention of offencesFor a limited number of offences, expressly provided by the law, the tax authority will issue a warning and, as the case may be, a remedy plan for the taxpayer to follow without impairing a fine. A remedy plan is not necessary in case the taxpayer fulfils its obligation during the audit or the offence does not have a continuous nature. In case a remedy plan has been set up and the taxpayer did not comply with the remedy measures, the ordinary sanctions (except the warning) will become applicable.

If, within 3 years from the implementation of prevention instruments, the taxpayer commits the same offence or another offence for which the instruments for prevention of offences are applicable, the exemption from fines will not be available and normal sanctions regime will apply.


97

Outsourcing Market in Romania7

Iasi City

7. Outsourcing Market in Romania

For the past decade, Romania has been a constant presence amongst the Top 10 favoured outsourcing destinations worldwide.

With more than 265 companies operating in the business services sector, Romania is highly ranked in the mature outsourcing market. Around 125,000 people work in the business services, representing 1.5% of the Romania's active population, and the industry's potential would be 300,000 employees, as estimated in by the Association of Business Service Leaders in Romania (ABSL).

Business services have grown at a rapid pace (>10% CAGR in the last 7 years) is dominated by BPOs (Business Process Outsourcing), SSCs (Shared Services Centres, R&Ds and ITOs opened by large multinationals operating in a variety of sectors (IT, Banking, Telecommunication, Automotive, FMCG, etc.), most of them (more than 95%) exporting services.

It is undeniable that the foremost reason for outsourcing business processes and back-office functions to off-/ near-shore destinations is primarily cost; however, the Romanian market is quite singular within the regional landscape of Central Europe. It's uniqueness lays in the fact that the mix of competencies, culture, business acumen and proficiency in foreign languages, is well blended with a relatively attractive cost rate.

7.1. Where SSCs nest and what they're doingAs expected, the SSC/BPO industry has developed in large urban centres, where a large, constant inflow of skilled graduates is available.

Thus, Bucharest as the leading academic centre, leads the way, with an estimated 75% of the business services being delivered from the capital. As the hiring challenge becomes more pervasive, companies are looking at Tier 2cities: Iaşi and Cluj-Napoca (also with a significant student population) are already established as prime locations since the 2010s. Incumbent locations, such as Timişoara and Braşov have the potential to join the leading pack by the mid-2020s.


OUTSOURCING MARKET IN ROMANIA7

Cluj-Napoca

Iasi

GalatiBrasov

Bucharest

Timisoara

CraiovaCalityUCMSCall Point

Selir SSCPopulation

320,000

Population 300,000

Population 290,000

Population290,000

Population2,000,000

Shifting towards the services they offer, SSCs/BPOs in Romania differ greatly and may be split is three categories: support centres, back-office focused, and innovation-driven locations.

The first category of support centres (call-centres) is expectedly the least flamboyant, as services rendered by these organizations have been largely commoditized or work has been replaced with partially automated processes. Typically, these centres ensure 1st and 2nd level support, customer care, help desk or surveys for large global organizations. Although still significant in terms of size (Arvato Bertelsman, Stefanini, Webhelp and Sykes Enterprises being the largest players), these are not expanding whilst new centres haven't opened during the past few years, facing the same hiring difficulties as the IT industry in Romania, which has been confronted with a systemic lack of resource availability for the last three years.

A second tier is represented by back-office driven SSCs/BPOs, who constitute the bulk of the local sector. Versatility is key to these centres, as services rendered may range from your typical Finance and Accounting, HR and procurement processes outsourcing, to highly specialized commodity trading and operational surveillance for global industrial conglomerates.

Given the structure and mindset of the workforce in such centres, an interesting development has marked the evolution of back-office centres during the last few years: many local SSCs have built or planning to build their own continuous improvement and automation practices, having

pro-actively asked their mother companies for financing towards self-development/ optimization. Leading players in this segment are P&G, Societe Generale, Genpact, Oracle, Orange, IBM, Honeywell, BAT, Continental, Office Depot, DB Schenker, Michelin, Molson Coors and many others.

The third layer may be the most prolific and the most expansive of the bunch: IT outsourcing, innovation and R&D centres. The likes of Amazon (AWS), Microsoft, UiPath, Adobe and Google occupy about 5,000-7,000 employees, who actively generate value-add for their global parents and contribute to building new cutting-edge technologies in areas of machine learning, augmented reality, big data, cloud or automation, to name just a few.

7.2. Current and future workforceGiven that the average age of SSC/BPO employees rarely exceeds 30, and in some organizations may even be around 25, a steady influx of talented, skilled and hard-working university graduates is a must, in order to ensure the sustainability of this thriving industry.

Romania has more than 100 academic institutions, split into large, multi-competency, traditional universities, in its largest cities, as well as smaller, local universities across the country. Bucharest, the country's capital city, has over 30 universities, with approximately 50,000 students graduating each year.

SSCsBombardierBEIS/HunnerbeckEmersonOffice DepotE.onLeoniRecall/Iron MountainSIG Combibloc SSCSteelcase SSCTenaris SSC

Call CentersArvato BertelsmanSykes Enterprises

ITOsAccenture (Evoline)Cybercom, EBS, Edava,Evozone, Fortech, I-Quest,Thomson Online Benefits

R&DsBosch, Emerson

BPOsBUW/ConvergysEvalueserveEXL ServiceGenpactHP (GEBOC)

SSCsAllianz TechnologyAlstom Finance SSCAtalianBATCameronCarestreamDB SchenkerDeutsche Bank

Deutsche TelekomEnelEricsson GSCGoodyearHoneywellHP (GeBOC)HuaweiKelloggMellon Romania

MichelinOMV Petrom SSCProcter & GambleRompetrolSamsungSchneider ElectricSociete GeneraleVodafone

BPOs & otherAccenture (BPO)ADP CoEAristonArvato BertelsmannAlliance (AMOS)CofaceConectysCGS

DellEOS (collection)Genpact (BPO)GFKIBM GBS (BPO)MictrosoftOracleS&TSiemens IT

SoftvisionStefanini (BPO)TeleperfromanceTELUS InternationalTemenos SSCTMF Group RomaniaWalter ServicesWiproXerox

SSCsContinentalBosch SSCAlcatel LucentDräxlmaierFaureciaFlextronics

HellaLinde GasTakata (closed)

Call CentersBUW

ITOsHaufe-LexwareHelplineNess Techmology

AccentureAlten GroupAmazon R&DArcadis Project Eng.CapgeminiConduentNew Call Concept

Ness TechnologySCC ServicesUnicredit BPVeoFinancesVS CommunicationXerox Services EuropeXL World

Arvato Services (BPO)DCI databaseIBm GDCIntesa Sao Paolo

Wind TechnologiesComputer Generated SolutionsRaiffeisen Bank

The business services market in Romania is mainly situated in Bucharest and Cluj-Napoca, with growth in Timisoara, Iasi and Brasov

100


OUTSOURCING MARKET IN ROMANIA 7

Buch

ares

t

Cluj Iasi

Tim

isoar

a

Cons

tant

a

Dolj

Arad

Sibi

u

Bras

ov

45

13 1215

85 4 3 3

Number of graduates (Public & Private Systems) '000

In terms of competencies, more than 50% of students graduate with majors in technical and business topics, which ensures a good pool of candidates for the services industry. In terms of foreign languages spoken, English is considered default, whilst French, German, Spanish and Italian constitute the second of the foreign languages mostly spoken.

Currently, the industry is already being confronted with a systemic lack of resource availability, as the demand highly offsets the supply of workers. This is still manageable for the existing players, however new comers often choose to provide higher wages, loyalty incentives, better amenities to scale up, unless they differentiate massively from the established firms.

As workers tend to switch jobs more often, following better paying jobs (up to 25% yearly turnover), recruitment costs rise, whilst productivity decreases (new people should be trained before they become productive). The cost of the skilled labour to continue to gradually converge with EU levels in the coming years, but sizeable labour cost advantage should remain for the next 15-20 years, the talent cost in Romania being as much as 3 times lower than in Germany, France and the United Kingdom.

Evolution of gross* average monthly salary in Romania

€ 480

€ 520

€ 480

€ 485

€ 510

€ 520

€ 550

€ 580

€ 650

€ 720

€ 730

€ 1,060

€ 1,080

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Gross average monthly salary in EU member countries April 2019

€ 5,200

€ 3,900

€ 3,000

€ 3,000

€ 2,600

€ 1,300

€ 1,200

€ 1,100

€ 1,100

€ 1,080

€ 640

Denmark

Germany

UnitedKingdom

France

Italy

CzechRepublic

Poland

Portugal

Hungary

Romania

Bulgaria

Gross average monthly salary figures Sources: public information, National Institute for Statistic of Romania / https://tradingeconomics.com/romania/wages?poll=2018.09.30

7.3. Office spaceAn additional and mandatory requirement is that of available office space, as both SSCs and BPOs typically occupy several hundreds of people. Responding to this demand, developers have built a significant number of modern furnished office buildings in the past few years (bringing the existing total to almost 4m sqm, with an additional 0.5m under construction).

Prices vary obviously, depending on location and amenities, however suitable locations can be found within a range of 10-15 EUR/sqm. Occupancy rates vary as well, however immediate availability is still a good bet, with Bucharest, Cluj-Napoca and Timişoara exhibiting around 5-10% vacancy.

Looking forward, we can observe migration of BPOs/ SSCs even further away from the current hotspots, into secondary and tertiary cities where workforce and office space are still plentiful and at lower cost.

7.4. Brief conclusionRomania, as an outsourcing destination is among the most mature places to open shop. On par with other destinations in terms of cost structure, availability of prime office space and infrastructure, it is differentiated when compared to others mainly by the nature of its workforce, which is culturally close to Western Europe, highly versatile and driven by growth and experience. Pared with investments in automation and a modern work culture, it will support the outsourcing sector estimated growth for the next years.

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EY in Romania8

8. EY in Romania

EY Romania has been a leader on the professional services market since its set up, in 1992. Our 850+ employees in Romania and Moldova provide integrated and seamless assurance, tax, transactions, and advisory services to clients ranging from multinationals to local companies.

We have a tailored approach to each sector we address, with key insights in areas such as: financial services, oil and gas, energy and utilities, public administration, FMCG, telecommunication and real estate.

Our portfolio of services

Our professionals in Romania have a deep and wide ranging expertise, covering all business areas:

Assurance ServicesEY Romania's reputation for providing high-quality professional audit services independently, objectively and ethically is fundamental to our success as independent auditors. We continue to invest in initiatives to promote enhanced objectivity, independence and professional scepticism. These are fundamental attributes of a high-quality audit.

As part of EY Vision 2020+, EY has invested significantly in improving audit methodologies and tools, with the goal of performing the highest-quality audits in the profession. This investment reflects EY's commitment to building trust and confidence in the capital markets and in economies the world over.

Our assurance team is coordinated by 8 experienced partners and 7 associate partners and comprises over 300 professionals.

We also help companies find ways to manage risk, investigate alleged misconduct, and measure the financial implications of disputes. We investigate unusual financial activity, perform electronic evidence discovery, and review financial reports - all with the sensitivity and urgency you require.

Our assurance services include:• External Audit• Financial Accounting Advisory Services• Forensic & Integrity Services

EY Romania leadership is responsible for setting the right tone at the top and demonstrating EY's commitment to building a better working world through behaviour and actions. While the tone at the top is vital, our people also understand that quality and professional responsibility start with them. Our shared values, which inspire our people and guide them to do the right thing, and our commitment to quality are embedded in who we are and in everything we do.

Advisory ServicesThe nature of business is evolving very fast, new generations are now dominating the workforce and disruptive technologies are helping us to become more innovative, more agile and more productive. We see an increased focus on business, digital and operating model reshape.

We believe better questions come from better connections. This means embracing a diversity of groundbreaking ideas and a rich mix of talents, backgrounds and experience. These combined perspectives will give you new insights, help you realize your organization's purpose and equip you to operate in an entirely new way.

EY BUILDING - BUCHAREST


We are already seeing the impact that this approach can make: how traditional business models can adapt to the changing tech landscape; how customers' experiences can become richer and more personalized through data-led insights and how can you solve burden business challenges through Intelligent Automation technologies. This is how we are answering tomorrow's questions today.

Operating model reshape

• Process improvement (including also employee and process analytics), Lean management;

• Intelligent automation (RPA, Chatbots, OCR, emerging technologies)

• Revenue improvement• Cost optimization• Innovation setup and implementation • Shared Services Centre setup

and improvement

IT & Data

• Enterprise architecture• Datawarehouse & Reporting setup and implementation• Data management• IT systems implementations• Cybersecurity • Asset management

Customer & Digital

• Customer and commercial analytics• Customer segmentation, experience and product

offerings• Digital strategy and digital execution

Regulatory

• Regulatory compliance with various regulations (e.g. PSD2, AML4/5/6, Basel IV, IFRS 9, IFRS 17, MiFID2, etc)

• Financial services risk management (credit risk, market risk, liquidity risk, operational risk, interest rate risk from banking book, etc)

Each of the services and solutions above are customized to specific client particularities and precise needs.

8 EY IN ROMANIA

Bucharest

Industry specific solutions

• Financial Services• Workforce planning analysis across the entity or for

specific organizational units • Network units analysis and optimization• Commercial transformation• Cost optimization• Customer analytics • Revenue improvement solution• Loan origination system• Advanced data reconciliation enabler• Business Process Management (front and back

offices activities)• Anti-Money Laundering solution

• Energy• Asset Management• Grid losses reduction• Network performance optimization• Customer experience• Operational excellence• Workforce management• Market risk management• Lean management implementation

• Government & Public Sector• Digital government• Organizational effectiveness• Public procurement support • Large public investments assessment and design

104

Tax advisory and compliance servicesOur taxation services are aimed at assisting enterprises to function effectively and efficiently within the Romanian tax and regulatory environment. We accomplish this by providing you with an understanding of both technical and practical issues associated with doing business in Romania, with the overall aim of taking decisions that optimize tax saving and mitigation of risks.

We offer the following services:• Business Tax Services• People Advisory Services• Indirect Tax Services• International Tax Services• Transaction Tax Services• Tax Controversy Services:

• Assistance and representation during the tax audit• Assistance and representation in front of the tax authorities and of the courts of law

Legal ServicesRadu și Asociații SPRL is a Romanian full-service law firm, offering both legal consultancy services and assistance before the courts of law, with a significant tax controversy practice.

Radu și Asociații SPRL is a member firm of Ernst & Young Global Ltd and part of the expanding EY Law global network, which has more than 2,300 lawyers and offices in 84 countries.

Our expertise has been recognized by the market and international firm directories. Chambers Global 2019 has recognized our Corporate/M&A Practice while Chambers Europe 2019 has placed our Tax Controversy practice on Band 1. The Legal 500 Europe, Middle East and Africa 2019 has also ranked our Commercial, Corporate and M&A Practice, as well as our Tax Controversy practice.

Transaction Advisory ServicesOur client-centered objective is to leverage the competitive advantage of EY's global connections as well as our local knowledge, to deliver integrated transactions advisory services tailored to client's specific needs. We identify the true value of the transaction, including synergies, company fit and future opportunities. Taking the best of our approaches, we tap into our extensive industry knowledge, and help you develop solutions that will build long-term value for your business.

We offer the following services:• Mergers & Acquisitions (M&A)• Capital & Debt Advisory• Transaction Diligence• Restructuring• Feasibility Studies and Business Plans• Valuations & Business Modelling• Data Analytic

Appendix99. Appendix

Alba Iulia Fortress

1. Double Tax Treaties - Withholding Tax Rates

Country Dividends (gg)

Interest (hh)

Royalties (hh) Commissions

Albania 10/15 (a) 10 15 15

Algeria 15 15 15 -

Armenia 5/10 (a) 10 10 15

Australia 5/15 (b) 10 10 -

Austria 0/5 (a) 0/3 (n) 3 -

Azerbaijan 5/10 (a) 8 10 -

Bangladesh 10/15 (b) 10 10 -

Belarus 10 10 15 -

Belgium 5/15 (a) 10 5 5

Bosnia and Herzegovina 5/10 (a) 7 5 -

Bulgaria 5 0/5 (ss) 5 -

Canada 5/15 (b) 10 5/10 (r) -

China (mainland) 0/3(ii) 0/3(aaa) 3 -

Costa Rica (dd) 5/15 (a) 10 10 5

Croatia 5 10 10 -

Cyprus 10 10 0/5 (e) 5

Czech Republic 10 7 10 -

Denmark 10/15 (a) 10 10 4

Ecuador 15 10 10 10

Egypt 10 15 15 16 (aaa)

Estonia 10 0/10 10 2

Ethiopia 10 15 15 -

Finland 5 0/5 2.5/5 (f) -

France 10 10 10 -

Georgia 8 10 5 5

Germany 5/15 (b) 0/3 (g) 3 -

Greece 25/45 (h) 10 5/7 (i) 5

Hong Kong 0/3/5 (yy) 0/3 (zz) 3 -

Hungary 5/15 (j) 15 10 5

Iceland 5/10 (a) 3 5 -

(a) The lower rate applies if the beneficiary of dividends is a company owning at least 25% of the capital of the payer.

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

(c) The rate is 0% if the indebtedness on which the interest is paid is guaranteed, insured, or financed by the other state or by a financial institution that is a resident of the other state.

(d) The 0% rate applies if the beneficial owner of the dividends is one of the following:

• The government of a contracting state or any governmental institution or entity of a contracting state

• A company that is resident of either contracting state and that has at least 25% of its capital owned directly or indirectly by the government or governmental institutions of either contracting state

(e) The 5% rate applies to royalties paid for patents, brands, designs and models and know-how.

(f) The 2.5% rate applies to royalties relating to computer software or industrial equipment.

(g) The 0% applies to interest paid to the German government, Deutsche Bundesbank Kreditanstalt fur Wiederaufbau or Deutsche Investitions und Entwicklungsgesellschaft (DEG) and to interest paid on a loan guaranteed by Hermes-Deckung. The 0% rate also applies to interest paid to the Romanian government if it is derived and beneficially owned by certain types of institutions (for example, the Romanian government, an administrative-territorial unit, a local authority, or an agency, bank unit or institution of the Romanian government) or if the debt claims of Romanian residents are warranted, insured or financed by a financial institution wholly owned by the Romanian government. In addition, as long as Germany does not impose taxes on interest, Romania may not tax interest. The protocol to the treaty provides that the following types of interest are taxed only in the state where the interest arises and according to the law of that state, provided that they are deductible in the



Interest (hh)


India 10 0/10 (pp) 10 -

Indonesia 12.5/15 (a) 12.5 12.5/15 (k) 10

Iran 10 8 10 -

Ireland 3 0/3 (l) 0/3 (i) -

Israel 15 0/5/10 (m) 10 -

Italy 0/5 (bbb) 0/5 5 -

Japan 10 10 10/15 (i) -

Jordan 15 12.5 15 15

Kazakhstan 10 10 10 10

Korea (North) 10 10 10 -

Korea (South) 7/10 (a) 0/10 (x) 7/10 (k) 10

Kuwait 0/1 (ii) 1 20 -

Latvia 10 10 10 2

Lebanon 5 5 5 -

Lithuania 10 10 10 2

Luxembourg 5/15 (a) 0/10 (c) 10 5

Macedonia 5 10 10 -

Malaysia 0/10 (o) 0/15 (p) 0/12 (q) 16 (vv)

Malta 5/30 (h) 5 5 10

Mexico 10 15 15 -

Moldova 10 10 10/15 (k) -

Morocco 10 10 10 10

Namibia 15 15 15 -

Netherlands 0/5/15 (s) 0/3 (t) 0/3 (t) -

Nigeria 12.5 12.5 12.5 16 (uu)

Norway 0/5/10 0/5 (ss) 5 -

Pakistan 10 10 12.5 10

Philippines 10/15 (a) 10/15 (u) 10/15/25 (v) -

Poland 5/15 (a) 10 10 0/10 (tt)

Portugal 10/15 (w) 10 10 -

Qatar 3 3 5 3

Russian Federation 15 15 10 -

San Marino 0/5/10 (ee) 3 3 -

Saudi Arabia 0/5 (jj) 0/5 (kk) 10 -

determination of profits of the interest payer:• Interest derived from rights or

debt claims carrying a right to participate in profits

• Interest linked to the borrower's profits

• Interest derived from profit-sharing bonds

(h) The lower rate applies to dividends paid by companies resident in Romania.

(i) The lower rate applies to cultural royalties.

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

(k) 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.

(l) The 0% rate applies to the following types of interest:• Interest paid in connection with

sales on credit of industrial, commercial or scientific equipment

• Interest on loans granted by banks or other financial institutions (including insurance companies)

• Interest on loans with a term greater than two years

• Interest on debt-claims guaranteed, insured or directly or indirectly financed by or on behalf of the government of either contracting state

(m) The 0% rate applies to interest arising in one contracting state with respect to debentures, public funds or similar instruments of the government that is paid to residents of the other contracting state and to interest on loans granted or guaranteed by the NBR or by the Bank of Israel. The 5% rate applies to interest paid with respect to sales on credit of merchandise or industrial, commercial or scientific equipment and to interest on loans granted by banks. The 10% rate applies to other interest.

(n) As long as Austria, under its national law, does not levy withholding tax on interest paid to Romanian residents, the withholding tax rate is 0%. Austria notified Romania that as of 2015, Austria started levying withholding tax to interest income derived by non-residents (except legal entities and certain categories of individuals).

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Interest (hh)


Singapore 0/5 (ff) 5 5 -

Slovak Republic 10 10 10/15 (k) -

Slovenia 5 5 5 -

South Africa 15 15 15 -

Spain 10/15 (a) 10 10 5

Sri Lanka 12.5 10 10 10

Sudan 5/10 (a) 0/5 (rr) 5 -

Sweden 10 10 10 10

Switzerland 0/15 (ll) 0/5 (mm) 0/10 (y) -

Syria 5/15 (a) 10 12 -

Tajikistan 5/10 (a) 10 10 -

Thailand 15/20 (a) 10/20/25 (z) 15 10

Tunisia 12 10 12 4

Turkey 15 10 10 6

Turkmenistan 10 10 15 -

Ukraine 10/15 (a) 10 10/15 (k) -

United Arab Emirates 0/3 (d) 0/3 (xx) 3 -

United Kingdom 10/15 (a) 10 10/15 (i) 12.5

United States 10 10 10/15 (i) -

Uruguay (qq) 5/10 (a) 0/10 (nn) 10 -

Uzbekistan 10 10 10 -

Vietnam 15 10 15 -

Yugoslavia (Federal Republic) (oo) 10 10 10 10

Yugoslavia (former) (bb) 5 7.5 10 10 (ww)

Zambia 10 10 15 -

Non-treaty countries 16 0/16 (cc) 16 16

(o) 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.

(p) The 0% rate applies to interest paid to Romanian residents on long-term loans.

(q) The 0% rate applies to industrial royalties received from Malaysia by Romanian residents.

(r) The 5% rate applies to the following:• Copyright royalties and similar

payments with respect to the production or reproduction of literary, dramatic, musical or other artistic works (but not including royalties with respect to motion picture films or works on film or videotape or other means of reproduction for use in connection with television broadcasting)

• Royalties for the use of, or the right to use, computer software, patents or information concerning industrial, commercial or scientific experience (but not including royalties paid with respect to a rental or franchise agreement)

(s) 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.

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

(u) The lower rate applies to interest related to sales on credit of equipment, loans granted by a bank or to public issues of bonds and debentures.

(v) 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.

(w) The 10% rate applies if the beneficiary of dividends is a company owning at least 25% of the capital of the payer for an uninterrupted period of two years.

(x) The 0% rate applies to interest

related to sales on credit of industrial and scientific equipment.

(y) Romania will not impose withholding tax on royalties paid to Swiss residents as long as Swiss domestic law does not impose withholding tax on royalties.

(z) 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.

(aa) NOT USED(bb) This treaty is currently applied

only to Bosnia-Herzegovina.(cc) The 0% rate applies to the

following types of interest:• Interest related to public

debt instruments or to

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instruments issued by the NBR with the purposes of reaching monetary policy objectives

• Interest paid to EU pension funds

• The 16% rate applies to other interest payments.

(dd) The treaty is not yet in force.(ee) The 0% rate applies if the

beneficiary of the dividends is a company owning at least 50% 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 10% rate applies to all other dividends.

(ff) The 0% rate applies to dividends paid to the government of the other contracting state.

(gg) In accordance with an EU directive, the following rules apply to dividends paid to companies residing in the EU:• The withholding tax rate in

Romania is 0% if certain conditions are met, such as the beneficiary of the dividends owns at least 10% of the capital of the payer for an uninterrupted period of one year before the payment of the dividends.

• The withholding tax rate in Romania is 16% if the conditions mentioned in the preceding bullet are not satisfied.

(hh) The withholding tax rate is 0% for interest and royalties if both of the following conditions are satisfied:• The beneficial owner of

the interest or royalties is a legal person resident in an EU member state or a permanent establishment of an entity resident in such a state.

• The beneficial owner of the interest or royalties holds at least 25% of the value or number of participation titles in the Romanian entity for an uninterrupted period of at least two years that ends on the date of

payment of the interest or royalties.

(ii) The 0% rate applies to dividends paid to the government or political subdivisions, local authorities or administrative territorial units. The 0% rate also applies to majority state-owned companies (at least 51%) if the minority shareholders are residents of that state.

(jj) The 0% rate applies if the beneficial owner of the dividends is one of the following:• The government of a

contracting state• A governmental institution

or entity of a contracting state

(kk) The 0% rate applies if any of the following circumstances exists:• The payer of the income

from debt-claims is the government of a contracting state or an administrative-territorial unit or an administrative subdivision or a local authority thereof.

• The income from debt-claims is paid to the government of the other contracting state or administrative-territorial unit, or an administrative subdivision or local authority thereof, or an agency or instrumentality (including a financial institution) wholly owned by the other contracting state or administrative-territorial unit, or an administrative subdivision or local authority thereof.

• The income from debt-claims is paid to any other agency or instrumentality (including a financial institution) with respect to loans made in application of an agreement between the governments of the contracting states.

• The income from debt-claims is paid on loans granted, insured or guaranteed by a public

institution for purposes of promoting exports.

(ll) A withholding tax exemption for dividends applies if either of the following circumstances exists:• The dividends are paid to

a company (other than a partnership) that holds directly at least 25% of the capital of the company paying the dividends.

• The beneficial owner of the dividends is the government of the contracting state or a governmental institution or entity of a contracting state.

(mm) The withholding tax exemption for interest applies if either of the following circumstances exists:• The interest is paid to

related parties (that is, direct parent or sister companies) that have a shareholding of 25% or more.

• The loan is secured by a governmental institution.

(nn) The 0% rate applies if any of the following circumstances exist:• The beneficial owner

is the government, an administrative subdivision, a local authority or an administrative-territorial unit.

• The beneficial owner is a bank owned by the government, an administrative subdivision, a local authority or an administrative-territorial unit.

• The loan is guaranteed, assured or financed by a bank entirely owned by the government.

(oo) This treaty is currently applied also to Montenegro and Serbia.

(pp) The 0% rate applies if the interest is derived and beneficially owned by:• The Government, an

administrative territorial unit, a political subdivision or a local authority or an administrative territorial unit, or

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110


• In the case of Romania – by the NBR, the Export-Import Bank of Romania; and in the case of India – by the Reserve Bank of India, the Export-Import Bank of India, the National Housing Bank, or

• Any other institution that may be agreed between the competent authorities through exchange of letters.

(qq) This treaty entered into force starting 1 January 2015.

(rr) The 0% WHT rate applies if:• The interest is derived and

beneficially owned by the government, local authority or administrative territorial unit thereof or any agency or bank unit or institution of that government, a local authority or an administrative territorial unit; or

• The debt is warranted, insured or financed by a financial institution wholly owned by the government.

(ss) The 0% rate applies to interest income:• which is derived and

beneficially owned by the Contracting State or an administrative - territorial unit or a local authority thereof, or the Central Bank of that State, or any agency or bank or institution of that State or administrative - territorial unit or local authority; or

• if the debt-claims of a resident of the Contracting State are warranted, insured or financed by a financial institution wholly owned by that State.

(tt) According to the Protocol to the tax treaty concluded between the two states, a tax rate of 0% will apply as long as Poland does not introduce in its domestic legislation the withholding tax of commissions paid to non-residents.

(uu) According to the Protocol to the tax treaty concluded between the two states, this applies only to the commission income

obtained by a tax resident of Nigeria from Romania.

(vv) According to the Protocol to the tax treaty concluded between the two states, this applies only to the commission income obtained by a tax resident of Malaysia from Romania.

(ww) This applies only to the commission income obtained by a tax resident of Egypt from Romania.

(xx) The 0% interest WHT would apply as follows:• in the United Arab Emirates

for the interest paid to the Government of Romania or to any of its financial institutions;

• in Romania for the interest paid to the Government of the United Arab Emirates or its financial institutions;

• for interest paid from institutions the capital of which is wholly or partially owned by the Government of Romania or the Government of the United Arab Emirates.

(yy) The 0% dividend WHT rate would apply for dividends derived and beneficially owned by: • in the case of the

Hong Kong Special Administrative Region: (i) the Government of

the Hong Kong Special Administrative Region;

(ii) the Hong Kong Monetary Authority;

(iii) the Exchange Fund;(iv) a financial institution

wholly or mainly owned by the Government of the Hong Kong Special Administrative Region and mutually agreed upon by the competent authorities of the Contracting Parties;

• in the case of Romania: (i) Romania or an

administrative -- territorial unit thereof;

(ii) the NBR;(iii) the Export-Import

Bank of Romania (EXIMBANK);

(iv) a financial institution

wholly or mainly owned by Romania and mutually agreed upon by the competent authorities of the Contracting Parties.

The 3% applies if the beneficial owner is a company (other than a partnership) which holds directly at least 15 per cent of the capital of the company paying the dividends;

The 5% applies in relation to the beneficial owner in all other cases.

(zz) The 0% interest WHT rate would apply for interest derived and beneficially owned by: • in the case of the

Hong Kong Special Administrative Region: (i) the Government of

the Hong Kong Special Administrative Region;

(ii) the Hong Kong Monetary Authority;

(iii) the Exchange Fund;(iv) a financial institution

wholly or mainly owned by the Government of the Hong Kong Special Administrative Region and mutually agreed upon by the competent authorities of the Contracting Parties;

• in the case of Romania: (i) Romania or an

administrative -- territorial unit thereof;

(ii) the NBR;(iii) the Export-Import

Bank of Romania (EXIMBANK);

(iv) a financial institution wholly or mainly owned by Romania and mutually agreed upon by the competent authorities of the Contracting Parties.

In addition, if and as long as the Hong Kong Special Administrative Region, under its internal legislation, levies no withholding tax on interest, no interest WHT should be applied by Romania also.

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(aaa) The 0% rate applies to the following types of interest:

(i) Interest paid in connection with sale on credit of equipment, merchandise or services

(ii) Interest on loans granted by financial institutions of the other state

(iii) Interest paid to the other state or a political subdivision, local authority or administrative-territorial unit thereof, or any entity wholly or mainly owned by the other state (more than 50%)

(bbb) 0 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 10 per cent of the capital of the company paying the dividends on the date the dividends are paid and has done so or will have done so for an uninterrupted period of two years in which that date falls.

2. Social Security TreatiesPlease refer to the below list with the states with whom Romania has concluded social security treaties, as well as comments and social security contributions covered:

Country Comments Social security contributions covered

Canada It only covers the pension contribution and it provides exceptions from paying contributions in case of assignment

Macedonia No administrative procedures have been put in place

MoldovaCovers pension and medical leave indemnities.It does not provide for any assignment provisions and exceptions from paying contributions

Russia Please refer to Note1 herebelowCovers pension and medical leave indemnities.It does not provide for any assignment provisions and exceptions from paying contributions

Armenia Please refer to Note1 herebelowCovers pension and medical leave indemnities.It does not provide for any assignment provisions and exceptions from paying contributions

Belarus Please refer to Note1 herebelowCovers pension and medical leave indemnities.It does not provide for any assignment provisions and exceptions from paying contributions

Ukraine Please refer to Note1 herebelowCovers pension and medical leave indemnities.It does not provide for any assignment provisions and exceptions from paying contributions

TurkeyCovers pension, health indemnity, medical leave indemnities, work accidents. it provides exceptions from paying contributions in case of assignment

AlbaniaNo administrative procedures have been put in place and the social security agreement is not in force

South Korea It only covers the pension contribution and it provides exceptions from paying contributions in case of assignment

Israel It only covers the pension contribution and it provides exceptions from paying contributions in case of assignment

Quebec Administrative procedure have been put in place as of 2015 Covers pension and medical leave indemnities

Serbia Administrative procedure have been put in place as of 2018 Covers pension, health fund and medical leave indemnities

Note1: the countries referred above are covered by the Totalization Treaty concluded between Romania and the former Soviet Union

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This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment.

Neither EYGM Limited nor any other member of the global EY organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

This book reflects information current as of 1 June 2019.

At EY, our purpose is Building a better working world. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

For more information, please visit www.ey.com or www.eyromania.ro.

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Contacts

Bogdan Ion Country Managing Partner Romania & [email protected]

Alex MilcevTax & Law Services Leader [email protected]

Dragoș RaduLegal Services [email protected]

Florin VasilicăTransaction Advisory Services [email protected]

Aurelia CostacheAdvisory Services [email protected]

Nicolas SabranAssurance Services [email protected]

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