Issues Relating To Organizational Forms And Taxation ROMANIA NESTOR NESTOR DICULESCU KINGSTON PETERSEN

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1 Issues Relating To Organizational Forms And Taxation ROMANIA NESTOR NESTOR DICULESCU KINGSTON PETERSEN CONTACT INFORMATION Dragos Apostol NESTOR NESTOR DICULESCU KINGSTON PETERSEN Bucharest Business Park, Entrance A, 4th Floor 1A, Bucuresti-Ploiesti National Road, 1st District, , Bucharest, Romania T: (40-21) Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (eg., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. The following types of commercial companies can be incorporated in Romania, according to Law No. 31/1990 regarding commercial companies, as republished and subsequently modified and completed (the Company Law ): a) joint stock company (in Romanian: societate pe actiuni or SA ) The SA is selected in case of commercial activities requiring significant capital contributions (due to the possibility to establish such companies via public subscription and further issuance of bonds, floatation of shares on capital markets etc.), while for certain type of activities (e.g., banking, insurance, financial services, etc.), the SA form is mandatory under special regulations. The share capital is divided by shares, the shareholders being liable towards the creditors only up to the limit of their contributions to the share capital (with exceptions). Joint stock companies represent 2.4% of the total number of Romanian companies. b) limited liability companies (in Romanian: societate cu raspundere limitata or SRL )

2 The SRL is suitable for the activities which do not require a large number of investors or public capital (due also to the impossibility to issue bonds or float the shares on regulated markets). The share capital is divided by social parts and the shareholders are, with exceptions, liable only up to the limit of their contributions to the share capital. 95.1% of Romanian companies are established as SRL, due to the advantages offered by this form of company (e.g. corporate governance rules flexibility etc.) which is also the only option available where the company is owned by a sole shareholder. c) general partnerships (in Romanian: societate in nume colectiv or SNC ); General partnerships are the simplest type of company, in which the activity is collectively performed by the shareholders, jointly and unlimitedly liable for the company s debts. Due to its intuitu personae character, the shares may not be transferred to any third parties. This type of company represents 2.3% of Romanian companies. d) limited partnerships (in Romanian: societate in comandita simpla or SCS ) In a SCS, there are 2 types of shareholders: (a) the active partners, jointly and unlimitedly liable towards the creditors for the company s debts, and (b) the silent partners, liable up to the limit of their contributions to the share capital. In a limited partnership, the silent partners, having capital, contribute these amounts to the active partners, who shall perform the commercial activity in view of obtaining profit. Limited partnerships represent 0.1% of the Romanian companies. e) partnerships limited by shares (in Romanian: societate in comandita pe actiuni or SCA ) The partnership limited by shares comprises two types of associates: the active partners and the silent partners, while the share capital is divided by shares. The rules mentioned for the limited partnerships in relation to active/ silent partners are applicable as well. 2. Are there attributes of the form that you consider unique to your jurisdiction? N/A 3. Describe the management and governance structure for each organizational form. Given that most Romanian companies are established as SA or SRL, the presentation below details the rules pertaining to these two types of companies: 3.1 Rules applicable to SA a) General Meeting of Shareholders ( GMS ) The number of votes for each shareholder is determined pro rata with the participation to the share capital. There are 2 types of GMS: the ordinary general meeting of shareholders ( OGMS) and the extraordinary general meeting of shareholders ( EGMS ). The Company Law provides the decisions which are mandatory to be taken by the EGMS and those which must be taken by the OGMS, the quorum and voting requirements being provided differently for the 2 types of GMS. b) Management bodies

3 The administration system of an SA may be either a one-tier system or a two-tier system. i. One-tier administration system The management is undertaken by one director or by several directors, organized as a board of directors (the BoD ) and, if the case, by one or several managers (the Managers ), led by a General Manager. In case of companies having the legal obligation to have their financial statements audited, at least 3 directors must be appointed and the BoD must delegate the management to the Managers, save for certain powers. The BoD represents the company in relation to third parties and before the courts of law. When management powers have been delegated to Managers, the representation powers are held by the General Manager. The Managers are in charge with the day-to-day management of the company. ii. Two-tier administration system The management is undertaken by the Directorate and the Supervisory Board. The Directorate manages the company, except for the matters incumbent upon the GMS or the Supervisory Board, having representation powers in relation to third parties and before the courts of law. The Supervisory Board has the supervising duties in the company, such as permanent control rendered over the management performed by the Directorate. c) Controlling bodies Control of the management activity within an SA can be ensured by: i. a number of censors or by ii. external financial auditors selected by the GMS. 3.2 Rules applicable to SRL a) GMS Each share grants the right to one vote. The Company Law provides for the decisions and deliberation that are mandatory to be taken by the GMS. The GMS passes resolutions by the vote of the absolute majority of shareholders and shares. For resolutions concerning the outstanding amendment of the incorporation document, unanimity is required. b) Management bodies An SRL is managed by one or more directors, every director being entitled to represent the company towards third parties. The management systems regulated for the SAs are not applicable to SRLs. c) Controlling bodies Control of the management activity can be ensured by: i. one or more censors; ii. external financial auditors or iii. the shareholders who are not directors.

4 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Both the management and the owners of Romanian companies may be Romanian or foreign legal or natural persons, in any proportion, no residency restrictions/ prohibitions being applicable thereto. In order for a foreign legal entity to become a shareholder of an SA/SRL, in accordance with the Company Law such entity must not: a) have been declared as incapable (not having the capacity, according to its laws of incorporation to acquire shares in other jurisdiction), bankrupt or subject to pending bankruptcy/insolvency proceedings opened against it; b) have been convicted for fraudulent management, abuse of trust, forgery, use of forgery, fraud, peculation, perjury, bribe taking or giving; c) have been convicted for the crimes provided by Law no. 656/2002 regarding the prevention and sanctioning of money laundering, and for establishing certain measures for preventing and fighting against financing terrorist acts, as subsequently amended ( Law no.656/2002 ), namely: money laundering crimes consisting of: i. the action of transferring or changing assets knowing that the respective amounts of money are the result of criminal offences with the purpose of dissimulating or hiding the illicit nature of the respective assets or with the purpose to assist the person having committed the respective offences to escape criminal liability; ii. the hiding or dissimulating of the real nature of the source, disposition, circulation or ownership of the assets or of the rights thereof, knowing that iii. the respective assets are the result of a criminal offence; the acquisition, the possession, usage of assets knowing that the respective assets are the result of a criminal offence; non-observance of disclosure obligation: failure by the legal entities subject to provisions of Law no. 656/2002 on the observance of the obligations to disclose any type of information held by them in connection to the money laundering activities during their activity and after its termination. d) have been convicted for the offences provided by art of Insolvency Law no. 85/2006 ( Insolvency Law ), namely: simple fraudulent bankruptcy: such offence consists in the failure of the natural person or the legal representative of the company to file in due time a request for the commencement of the insolvency procedure once the company has become insolvent. fraudulent management: such offence consists of acts committed in bad faith by a specific category of persons (liquidator, debtor under the insolvency procedure) that was supposed to make preservation or administration acts in favor of a company, which resulted into damages for the respective company. actions of the judicial director or that of the liquidator in the insolvency procedure or by any of its representatives to acquire, use, dispose of assets, money or other values that such manages.

5 e) have been convicted for any of the offences provided by the Company Law. 5. Describe the extent to which management and owners are exposed to liability. 5.1 Management liability Directors are liable to the company if they do not perform their duties in accordance with the applicable provisions of the Company Law, the constitutive document and, as the case may be, any management agreement. Such liability is not extended to directors who can prove that they disapproved of a certain decision. The members of the Board of Directors, the Directorate and of the Supervisory Board are liable for the damage caused to the company by the non-observance of obligations in case of interests contrary to the company. The members of the Board of Directors or of the Directorate are jointly liable for: a) the reality of the amounts paid by the shareholders; b) the existence of the dividends paid; c) the existence and correct keeping of the registers; d) the fulfillment of the decisions of the general meeting of shareholders; e) the fulfillment of the duties provided by the law and the constitutive act. Such members are jointly liable with their immediate predecessors in case they have become aware of irregularities committed by predecessors and failed to communicate them to the censors/internal auditors and financial auditors. Under criminal law, Directors are responsible for damage caused to a company or bankruptcy caused by fraud. The Company Law lists criminal offences for which directors may be liable, including: a) the use of the company s assets or credit for their own benefit or for a purpose contrary to the company s interests; b) spreading false information or using other fraudulent means to obtain a benefit to the detriment of the company; c) payment of dividends from false profits in the absence of financial statements or based on false financial statements etc. According to the Company Law, the company s creditors may also sue the Directors for nonperformance of certain duties (i.e. on the commencement of bankruptcy proceedings if such failure has caused the entry into bankruptcy). 1. Shareholders liability As a rule, shareholders are not liable for the company s obligations. In principle, in case of SA and SRL, they are responsible only up to the limit of their participation to the share capital. Thus, shareholders are not liable for the debts of the company, except for the subscribed and unpaid capital. Certain cases when the said limitation of liability is not applicable (i.e. an exception known as piercing the corporate veil ) are contemplated by the Company Law. Thus, a shareholder can be held responsible unlimitedly for the unpaid debts of the dissolved/ liquidated company, including if (i) it uses the assets of the company as if they were its own or (ii) it diminishes the company s assets to its own/ a third party s benefit, knowing that this may determine the company s impossibility to pay its debts. Provisions regarding cases of piercing

6 the corporate veil can be found in special regulations in the insolvency, environmental protection and fiscal fields. 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? The share capital of the SA is divided in shares, each having a minimum nominal value of RON 0.1, while the share capital of the SRL is divided in social parts (hereinafter referred to also as shares ) having a minimum value of RON 10. SA may also issue preference shares (the only type of preference shares regulated by the Company Law is the preference shares with priority dividends without voting rights attached). Unless otherwise provided in the articles of association, shares in an SA are freely transferable between shareholders and/ or to third parties. In case of SRL, shares can be freely assigned between shareholders, while to third parties they can only be assigned with the approval of associates representing at least 75% of the share capital and the transfer only becomes effective on the expiration of a 30 day-term from the publication in the Official Gazette of the shareholders resolution approving the respective shares transfer. In addition, other transfer restrictions may be agreed between shareholders under the articles of association. An SA should have at least 2 shareholders, without an upper limit being provided by law. An SRL may be established with a sole shareholder, provided that the latter is not (i) a sole associate in another Romanian company or (ii) a limited liability company with a single shareholder. An SRL cannot have more than 50 shareholders. 7. Is there a minimum capitalization? An SA must have a minimum registered capital of RON 90,000 (approx. EUR 22,500), out of which at least 30% of the subscribed capital has to be paid upon registration, and the remaining part within 12 months as of registration in case of cash contributions, respectively within 2 years as of registration, in case of in-kind contributions. In case the SA is set up by public subscription, the shares representing in-kind contributions shall be paid in full. A SRL must have a minimum registered capital of RON 200 (approx. EUR 50), to be paid entirely upon incorporation. 8. Is there a security that can be issued to the public? Only an SA company can be listed and therefore issue floating shares, and bonds, the issue and the trading of which is done on regulated markets, subject to specific rules. 9. Can the form incur debt, or grant security for debt? Both joint stock companies and limited liability companies may, in principle, incur debts during carrying on their day to day business activity, and can grant security for debts. There are however restrictions imposed by law in connection with incurrence of debt or grant of security in relation to the securitization of third party debts (e.g. as fidejusor / third party guarantor).

7 Other restrictions in connection with incurring of debts are applicable in case of companies undergoing judicial reorganization or bankruptcy. 10. What is the duration of the form? Can it be renewed? The duration of a Romanian SA or SRL may be limited or unlimited. In case of limited duration, the company shall be automatically dissolved upon the expiry of the pre-agreed term, unless the duration is extended for another limited or an unlimited period, in compliance with the applicable law. 11. Describe the process, customary time period and approximate cost of establishing the form. The incorporation of an SA/SRL entails the performance of certain legal/administrative operations: a) Verifying availability of the company s name and reservation The availability of the name must be verified and reserved with the Trade Registry. A reservation of a name is valid for a period of 3 months from the date of its issuance. b) Execution of the articles of association and of the other incorporation-related documents The companies shareholders must prepare and execute the articles of associations, which must include certain elements: i. for all types of companies: identification data of the founders; corporate form, corporate name and registered office; business object (i.e. the business field and the main business); subscribed and paid-in share capital, value of in-kind contributions and the evaluation method thereof; each shareholder s participation to profits and losses; identity of directors/ managers of the company and powers vested in them; secondary offices (branches, agencies, representative offices) or the conditions to be met when setting them up at a later date; duration of the company; method for the dissolution and liquidation of the company. ii. for SA companies: number of shares in exchange of in-kind contribution and the corporate name of the persons making the contribution; value of such capital, if case; number and nominal value of the shares, whether they are nominative or bearer shares; if there are several categories of shares, the number, the nominal value and the rights attached to each category; any restriction on the share transfer, if case; identification data of the first censors/ financial auditors; provisions regarding the administration, management, operation and control of the company s management;

8 any special benefits granted to any persons who participated to the establishment of the company, and the identity of the beneficiaries of such benefits; total or estimate amount of all the establishment expenses. iii. for SRL companies: number and nominal value of all shares, contribution of each shareholder and number of shares per each shareholder; shareholders representing and managing the company or the non-associated directors, their identification data, the powers vested in them and the manner of exercising them; identification data of the first censors/ financial auditors. c) Execution of the lease agreement for the headquarters space and registration thereof with the fiscal authorities d) Opening of the share capital bank account and depositing the relevant cash contributions e) Preparation and submission of the incorporation file to the Trade Registry. The certificate of registration for the Romanian company would be issued in maximum 5 (five) working days from the submission of the corporate file with the Trade Registry. The registration costs amount to a maximum of Euro Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? As a general rule, there is no obligation generally applicable to central government, or to local public authorities to be part of a project or investment vehicle or to receive part of the profits arising therefrom. Nevertheless, in specific fields of activity such as public services of local interest (e.g. sewage system, waste management, water supply, etc.), the public service could be granted under concession to mixed companies the share capital of which is both public and private, if so decided by the local authorities, but this is merely a commercial decision based on feasibility of the proposal rather than a legal requirement (for instance, the concession could, if more feasible, be granted to a publicly owned company or to a private investor, as well). 13. For what taxes is the form liable? Please find below a brief presentation of the main taxes applicable to a form of organization (e.g. a company) in Romania Corporate income tax ( CIT ) Romanian legal entities and legal entities having their headquarters in Romania, incorporated as per the European legislation, are subject to CIT on their worldwide income. Foreign legal persons carrying out activities in Romania through a permanent establishment ( PE ) (branches included) are required to pay CIT for the taxable profit attributable to the PE.

9 The standard CIT rate is 16% and applies to the accounting profits adjusted for non-taxable income and non-deductible expenses. Expenses are generally deductible for CIT purposes provided they are incurred in relation to earning taxable income. Certain deductibility criteria apply for specific expenses (e.g. interest, sponsorships, services, etc.) and non-compliance with these rules leads to disallowance of their deductibility for CIT purposes. Starting May 2009, taxpayers are liable to pay, under certain conditions, a minimum tax which ranges between RON 2,200 and RON 43,000 per year, depending on the previous year revenues. 1. Withholding tax The standard rate is 16% (see details under question 14). 2. Value added tax ( VAT ) The Romanian VAT rules are aligned with the provisions of the EU VAT Directive 2006/112. In Romania, the standard rate was increased from 19% to 24% starting 1 July This rate is generally applicable to supplies of goods or services which are not subject to VAT exemptions or to the reduced rates. The reduced rates are 9% (applicable to certain supplies of goods and services - e.g. books, hotel accommodation) and 5% (applicable, under certain conditions, to supplies of social dwellings, including the related land). 3. Local taxes Local taxes are payable to the relevant local budgets. These taxes include inter-alia building tax, land tax, vehicle tax, and advertising tax. 4. Payroll contributions Payroll contributions are due both at the employer and employee level. Please find below the main contributions payable by employers: a) social security contribution between 20.8% and 30.8% depending on working conditions, applied to the total gross amounts paid to employees on a monthly basis ( the taxable base ); b) health fund contribution 5.2% applied to the taxable base; c) unemployment fund contribution 0.5% applied to the taxable base. Excise duties are applicable for the consumption of certain categories of goods (e.g. tobacco products, alcoholic beverages, electricity). The Romanian excise duty legislation is generally aligned with the relevant EU Directives. 14. What is the tax treatment of payments to foreign owners? Withholding tax ( WHT ) is applicable on a number of payments made by Romanian tax residents to non-resident recipients, such as dividends, interests, royalties, commissions, services rendered in Romania, management and consultancy services irrespective of whether such services are rendered in Romania.

10 The Romanian income payer is liable to withhold and pay the tax from the gross income payable to the foreign beneficiary. The standard WHT rate is 16%. However, such rate can be reduced or even eliminated, under certain conditions, based on the provisions of the relevant Double Tax Treaty ( DTT ) concluded between Romania and the country of residence of the foreign beneficiary, or based on the EU Parent-Subsidiary Directive and Interest-Royalty Directive, as implemented in the Romanian tax legislation. The provisions of a DTT may be invoked provided that the foreign beneficiary makes available its tax residency certificate to the Romanian income payer, valid for the period when the income is derived by the foreign beneficiary. The payment of dividends to a foreign shareholder-legal entity is subject to WHT as follows: 0% if the shareholder(s) are companies residing in EU or EFTA member states, in case of a minimum 10% shareholding, held for an uninterrupted period of two years at the payment date (other conditions refer to the legal form of the Romanian and the EU/EFTA companies, the tax residency of the EU/EFTA company and the fact that these companies should be subject to profits tax without the possibility of an exemption or option); or 10% in case of shareholder(s) from EU or EFTA member states, not fulfilling the conditions above; or 16% in the other cases. If the minimum holding period of two years is met after the date of the dividend payment, the Romanian paying company can request a refund of the WHT paid until then. Under the EU Interest & Royalties Directive implemented in the Fiscal Code, interest/royalty payments made by a resident legal entity to companies residing in an EU or EFTA member state are exempt from withholding tax in Romania if inter-alia the beneficiary holds minimum 25% of the share capital of the domestic legal entity for an uninterrupted two-year period at the date of the payment. This Directive was incorporated in the Fiscal Code with a transition period lasting until 31 December 2010 during which the WHT rate for interest/royalty payments will be 10%. If the above conditions are not met, the 16% tax rate applies to the interest/royalty payments made to EU/EFTA resident legal entities (or a tax rate available under a tax treaty, if favorable). Similar to the dividend payments, if the shareholding period condition is fulfilled at a later stage, refund may be requested. The domestic law does not allow application of DTT in case of net-of-tax arrangements, whereby it is the Romanian payer of income, and not the foreign beneficiary, that bears the tax. 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? Our comments below refer to shareholders - legal entities and include several main aspects that may impact foreign companies differently in comparison with Romanian residents Capital gains

11 In case of resident companies, capital gains derived from the disposal of shares held in other Romanian entities are treated as business income, being subject to the standard 16% CIT rate. Capital gains derived by non-resident entities from the sale of shares held in Romanian companies are generally subject to the standard 16% CIT rate, as well. However, under the majority of the DTTs concluded between Romania and other countries, such tax may be reduced to nil in Romania, provided that the foreign beneficiary makes available its tax residency certificate, valid for the period when the income is derived by the foreign beneficiary. 1. Dividends The standard dividend WHT rate applicable between Romanian companies was recently increased from 10% to 16%. By comparison, as mentioned under question 14, the WHT rate applicable to dividends paid to foreign companies may be reduced from 16% (or 10% in case of EU/EFTA companies)(see explanations under question 14), based on DTTs concluded by Romania or the EU Parent-Subsidiary Directive. Dividends paid by a Romanian company to another Romanian company should not be subject to WHT if the dividend beneficiary holds at least 10% of the Romanian company s shares for a period of at least two years (ending on the date when the dividends are paid). If the minimum holding period of two years is met after the date of the dividend payment, the Romanian legislation does not stipulate the possibility of recovery of the WHT paid until then based on the domestic 16% rate. As described under question 14, such possibility is stipulated only in the case of the dividend payments made to EU/EFTA beneficiaries based on the relevant European Court of Justice cases.