Romania is very much in the thinking of Foreign investors looking for a base in Central and Eastern Europe. The quality of its people as employees and as entrepreneurs is well known. However, aside there are other considerations to be taken into account when looking at setting up a business in Romania.
One of the first questions as a Romanian law firm advising potential investors who are thinking of opening a business in Romania is, “What type of structure should I be looking at?”.
There are three basic legal structures recognised in Romania by which a foreign investor can legally have a business presence in Romania. These are a representative office, a branch or a subsidiary.
While a representative office is not a legal structure recognized under the Companies Law 31/1990 as amended, it is a structure through which foreign companies do business in Romania. From a legal perspective, it is a branch of a foreign company.
Its position in the Romanian business world arose as it was originally the only way a foreign company could legally have a presence and be represented in Romania. Some companies are still represented in Romania by a representative office as they have not need to change their structure as the original reason still remains. Such an office does not trade in Romania; it can only “represent” the foreign company. It cannot enter into contracts other than those necessary for maintaining its presence. If you are a business collecting information only this might be considered as a possible structure. It will give you a taxable presence in Romania.
Another possibility is to register a branch in Romania. As amended, a branch is mentioned in and provided for in the Companies Law 31/1990. A branch is an extension of the parent company and has no legal personality and no independent existence separate from the parent. Such a structure will allow the parent company to be directly involved in the management and control of the branch. The registration procedure is similar to registering a subsidiary and therefore requires not dissimilar documentation.
It is important to note that Romanian Law no. 105/1992 regulating Private International Law Relationships has adopted the international practice by which the law of its parent company governs a branch. This is important regarding setting up the branch, for the parent must be a registered recognised legal entity in its own country.
Consequently, if intending to establish a Romanian branch, the business entity remains dependent on the foreign or parent company. It does not have a distinct legal personality from the parent company, whether Romanian or foreign, therefore, any liability of the branch flows straight back to the parent company abroad and impacts on its business and balance sheet.
From the Romanian tax perspective, the branch can be treated as a separate entity from the parent to assess profits tax and transfer pricing if the parent company is non-Romanian. In such cases, the Romanian revenue may assess the profit of the branch as to what the authorities think it has earned or should have rather than the profit it actually generated. This can be rebutted by evidence to the contrary.
Finally, the more usual structure foreign investors adopt is for them to set up a Romanian subsidiary company. Such a company is a Romanian legal entity with foreign shareholders. It is a separate, distinct legal entity from its shareholders (i.e. a foreign company).
Such a company can be owned one hundred percent by a foreign company. It has no connection with the foreign company other than that a foreign company owns all the shares. There is no transfer of liability. The subsidiary enters into contracts and employs its staff in the usual way. Any financing provided to the company is the responsibility of the subsidiary unless the lender has negotiated a guarantee from the parent regarding any loans to the subsidiary.
The advantage of this to a foreign investor is that the liability of the Romanian subsidiary is it’s alone and has no impact on the balance sheet and business of the foreign company. The Romanian subsidiary can contract with its shareholder in the normal way as a normal Romanian company and subject to certain exceptions, can enter into management contracts with the majority shareholder or, indeed, any shareholder. There is no limitation on its business or how it is managed in Romania. It is a Romanian company with foreign shareholders.
The question then asked is – which should I set up? This depends on the nature of the business and what the client is trying to achieve. For example, a number of consulting companies are registered as branches in Romania as they are not concerned regarding liability. However, we always recommend setting up a subsidiary for trading and manufacturing companies as this keeps the liabilities incurred in Romania in Romania.
Each case is different and needs to be assessed at the time the client is considering investing in Romania.
