Foreign Representative Offices in Romania

Foreign Representative Offices in Romania GUIDE FOR THE ORGANISATION AND FUNCTIONING OF FOREIGN REPRESENTATIVE OFFICES IN ROMANIA Although the legal status of representative offices of foreign commercial companies in Romania and business organisations was regulated in the domestic legislation immediately after the December 1989 Revolution (under Decree Law no. 122/1990 concerning the authorisation and functioning in Romania of representative offices of foreign commercial companies and business organisations), the Romanian legislation has not yet concretely defined the concept of representative office. This role has been entrusted to judiciary practice and doctrine, which defined the institution of representation as a technical legislation procedure whereby a person concludes juridical acts with third parties in the name and on behalf of another person, called the representative, with the result that the effects of the juridical acts concluded are directly borne by the representative. In practice, representations or representative offices have been likened to branches, starting from the premise that, since they are not legal entities distinct from the companies they represent, they act in the name and on behalf of the latter, they lack equity capital (distinct from the equity capital of the parent company) and they only possess assets required for carrying out the representation business in the country. And yet, the status of a representative office has many particular features that differentiate this corporate structure from a branch. Thus, the representative office (unlike the branch) may not be a goods-producing entity, a service provider or an entity carrying out works for customers or business partners. A representative office carries out the specialised function of an intermediary between the primary commercial company, which set up the representative office, and the company s commercial partners, which carries out the tasks of an authorised agent. As an authorised agent, the representative office concludes juridical acts with third parties in the country where it resides, in the name, to the accounts and under the responsibility of the foreign company it represents. In all instances, the representative offices in Romania of foreign commercial companies do not acquire their own legal personality, as they are a prolongation in fact and by right of the parent company whose economic interests it serves on this territory; moreover, it is unanimously accepted that their activities are limited exclusively to concluding juridical acts as an intermediary between the parent company and the company s commercial partners in Romania. The legal rules in force do not specifically state the activities that may be carried out by the representative offices, but, implicitly reasserting the principle of free trade, Decree Law no. 122/1990 specifies that the representative offices carry out activities assigned to them by the parent companies they represent. The activities of representative offices include intermediation of quite different types of actions that are aimed at developing international trade, such as issuing and receiving offers or orders, negotiating and signing commercial contracts on behalf of the parent company, spreading commercial and advertising information, providing technical assistance and services, and, generally, any kinds of economic activities designed to promote commercial relations between the parent company and Romania. 30, A.S. Puskin St., Sector 1, 011996 Bucharest, Romania tel: (+4) 0311 00 11 26 / 27 /28 fax: (+4) 0311 00 11 29 www.sova.ro

Nonetheless, it should be emphasised that representative offices may not carry out operations that the parent company is not authorised to conduct in the country where it is registered or which are not included in the business object established under the authorisation. When the activity of foreign representative offices in Romania oversteps the framework of activities designed to establish commercial contacts and relations and enters the sphere of commercial acts, the Ministry of Economy and Trade shall refuse to issue an authorisation to function or shall order the cancellation of such authorisation, as appropriate, but these aspects will be detailed towards the end of this presentation (below). Representative offices carry out their activities under an authorisation to function issued by the Directorate General for Commercial Policies of the Ministry of Economy and Trade. The following is an enumeration of the documents currently required for issuing an authorisation to function to a representative office of a foreign commercial company: - an application for issuing an authorisation. This should include information on the representative offices and the foreign commercial company represented, such as: the registered office of the representative office, the business object concordant with that of the parent company, the duration of the functioning, the number and functions of the persons intended to be employed by the representative office, etc. It is essential that the nature of the activities to be carried out be clearly specified, and this must be related to the business object of the foreign commercial company. - a certificate, in the original, issued by the Chamber of Commerce and Industry or another competent body of the country where the parent company has the registered office that attests to the legal existence, the business object and the share capital of the foreign commercial company concerned; - solvency certificate, in the original, issued by a commercial bank through which the foreign company concerned carries out its financial operations; - the statutes or other statutory documents attesting to the legal format and the functioning of the foreign commercial company concerned; - a proxy, in the original, issued by the foreign commercial company on the name of the chief of the representative office, notarised in the respective. To these documents, proof of payment of a functioning fee of the representative office of USD 1,200/year serviceable in lei at the exchange rate posted by the National Bank of Romania in the payment day, shall be attached. The amount of USD 1,200 is due for the authorisation of each calendar year of the functioning of the representative office of the foreign commercial company, and, when the authorisation is issued after the beginning of the year, only the amount corresponding to the period of time in which the representative office carries out business that specific year will be paid out. All the documents mentioned above, together with their translations notarised by a Romanian notary office and a copy of the tenancy agreement for the space where the representative office is to function, will be filed with the Directorate General for Commercial Policies of the Ministry of Economy and Trade, which will analyse the documents and, within 30 days, at the longest, of the submittal date, will either issue an authorisation to function or reject the application of the authorisation and justify its rejection, as appropriate. However, if within the 30-day time limit the parent company withdraws its application or if the Ministry of Economy and Trade rejects the application, the foreign commercial company will be reimbursed 80% of the application fee. The fee is not reimbursable when the foreign company renounces the authorisation after the authorisation is issued, or when the Ministry of Economy and Trade orders, for justified reasons, the cancellation of the authorisation. 2

After the authorisation procedure is followed out before the Ministry of Economy and Trade, the foreign representative office will have to register with the tax bodies and with Romania s Chamber of Commerce and Industry. As far as taxation is concerned, representative offices are subject to the taxation regime provided for by the Romanian legislation in force. Thus, the Romanian Tax Code requires that foreign commercial companies register with the tax administration under whose jurisdiction its registered office is located, in order to be awarded a tax code. This shall be done within 15 days, at the longest, of the date the authorisation to function has been issued to its representative office in Romania. Currently, all foreign legal persons with a representative office authorised to function in Romania are obliged to pay annual taxes standing at the lei equivalent of 4,000 at the exchange rate of the foreign exchange market communicated by National Bank of Romania on the day preceding the payment. Correspondingly, in the case of foreign legal persons establishing and discarding representative offices in Romania during a tax year, the rates and taxes due will be calculated proportional to the number of months in the life of the representative offices in the year in question. The rates and taxes due by the representative offices are payable in two equal instalments (by June 20 and December 20), and the representative offices shall file for taxes by the end of the month of February of the taxation year. As far as the Value Added Tax is concerned, it should be mentioning that, because representative offices do not carry out sale business and are not a party to some sale agreement, they do not qualify as VAT tax payers, but, on the other hand, since they function in Romania, they are not entitled to refunds of the VAT paid for the goods and services they acquire. As regards the employment relations, Decree Law 122/1990 specifies that representative offices and their staff shall conduct their business by observing the Romanian legislation; in practice, a problem that may arise relates to the paying of the wages in a foreign currency. The Regulation of the National Bank of Romania concerning the carrying out of foreign exchange operations mentions that representative offices ( ) of foreign legal persons as well as of any other foreign entities registered and/or authorised to function in Romania shall be included in the category of residents, and, according to the relevant legislation, payments between residents shall be performed in the local currency, the leu (RON), only. Consequently, representative offices shall pay the staff wages in RON, save when the employment contracts are conclude by the parent company directly. Another discussion that emerges from the capacity of the representative office as an employer concerns the fulfilment of all obligations connected to the servicing of contributions to social security, the healthcare fund, the employment fund, the risk and accident fund, etc. Additionally, the representative offices of foreign commercial companies that function in Romania must keep the accounting books as required by the Romanian legislation in force, namely all the records must be in RON. By taking into account the fact of their capacity as representatives of foreign companies, the representative offices may not earn its own revenue and the only funds at their disposal are those received from the parent company in a foreign currency. 3

It should be also mentioned that foreign commercial companies or business organisations represented in Romania are obliged to notify to the Ministry of Economy and Trade (the General Directorate for Commercial Policies) all modifications in their legal status, particularly those changes in their business object, registered capital or registered office, when applicable, and request their authorisation to function be modified accordingly, within 30 days, at the longest. The functioning of representative offices may cease either as a result of a decision to this end taken by the parent company, or as a result of a decision to this end by the Ministry of Economy and Trade. Thus, the functioning of representative offices ends by right when the foreign commercial companies or the business organisations they represent cease to exist or when the foreign commercial companies or the business organisations order the representative offices to end business, in which case the order shall be notified to the Ministry of Economy and Trade and the closing up of the representative offices shall be commenced within 90 days after the notification, at the latest. Yet, as we mentioned above, the authorisation to function may be cancelled before its expiration by the Ministry of Commerce and Trade. The cancellation decision of the Ministry may occur only in certain cases specifically mentioned by the law to sanction: a) the representative staff violating the legal provisions in force in Romania regarding public order; b) overstepping the business object established under the authorisation; c) failure to meet the tax obligations. In all these instances, the Ministry of Economy and Trade will inform the foreign commercial company or the foreign business organisations, as appropriate, and their representative offices in Romania, about the cancellation of the permit, and will allow them 90 days to liquidate their business in Romania. Alexandra Ciocodeica Senior Associate Sova & Partners 4

Sova & Partners is a Romanian multidisciplinary business group that comprises our law firm, a bankruptcy and liquidation firm, and an EU funding consultancy group. We cover a broad range of business and legal practices, such as banking and finance, corporate restructuring and bankruptcy, commercial contracts, privatisations, mergers and acquisitions, project finance and energy, real estate, tax, and industrial property. Our partnership was founded in 1997 in Bucharest, Romania with an unparalleled commitment to excellence and a priority in providing the highest quality service to our clients. Our firm has experienced consistent and dynamic growth by keeping in line with the latest business trends and developments in the law. It has built an integrated multidisciplinary, business-oriented culture, aimed at achieving our clients objectives through strategic planning and innovative methods of execution. Our determination to delivering results and expanding opportunities serves as our guiding principle, setting apart our law firm from the rest. Sova & Partners is a leader in the market, ranked among the top five law firms in Romania, both domestic and foreign. We have a strong, experienced, talented and highly educated team of professionals that include several partners, senior associates, associates, and trainees. In addition, we have a legal support team comprised of translators, paralegals, and legal staff that works closely with our attorneys to provide the most comprehensive resources to our clients. We represent domestic and multinational companies and corporations operating in the fields of industry, commerce and services, telecommunications, oil, media, as well as government agencies and public authorities. In order to deliver our clients' requests expeditiously, Sova & Partners cooperates with a host of specialised national and international law offices. Banking and Finance Competition Corporate and Commercial Dispute Resolution Employment Law IT & Telecom Intellectual Property Judicial Restructuring and Bankruptcy Project Finance and Energy Public Procurement Real Estate Tax The starting point at Sova & Partners for legal counsel and all other activities is solid analysis based on careful examination of all legal and economic issues. Our firm s aim is to provide excellence of services by developing imaginative solutions to complex problems in order to meet our clients' requirements. We provide such solutions through our team of experienced lawyers and tax advisors who have excelled in their academic and professional careers. We have built an integrated, business-oriented culture, aimed at achieving our clients objectives through strategic planning and innovative methods of execution. Our determination to delivering results and expanding opportunities serves as our guiding principle, setting apart our law firm from the rest. 5