Paper-doing Business In Romania

Doing Business In Romania

DOING BUSINESS IN ROMANIA

Summer Semester 2007

Prepared for Prof. Dr. Dirk Wentzel

Prepared by Mohit Handa Andrei Acatinicai

Abstract: This paper is intended as a first level business guide for Romania. Information collected by the authors, through first-hand experience or through various other sources, gives an introduction to economic, legal, political, social and cultural environment prevailing in Romania. Some finer aspects of business like taxation, banking system, capital markets, labour relations, infrastructure etc. have also been touched upon in the paper. In addition to to hard facts, “soft” facts pertaining to business culture have also been included in the paper. Also, some quick facts about the ease of doing business in Romania have been provided, which could serve as a tool for comparing Romania as a business destination vis-à-vis other countries in the world, and particularly, in the Central and Eastern Europe. 5th July 2007

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Doing Business In Romania

Table of Contents 1. 1.1 1.2 1.3

Introduction: Country Profile………………………………………………………3 Geographical Overview Population Education

2. 2.1 2.2 2.3 2.4 2.5

Business Environment……………………………………………………………..6 Political Structure Taxation Structure Free Trade Zones Infrastructure and Communication Labor regulations and Employment Standards

3. 3.1 3.2 3.4 3.5 3.6

Economic Climate………………………………………………………………….15 GDP in Romania Growth and Inflation Foreign Investment Foreign Trade Relations Romania in the European Union

4. 4.1 4.2

Corporate and Business Law……………………………………………………….21 Legal Framework Forms of Business Organizations

5. 5.1 5.2 5.3

Banking, Capital Markets and Insurance……………………………………………23 Banks and other lending institutions Capital Markets Insurance

6.

Ease of Doing Business……………………………………………………………..29

7. 7.1 7.2 7.3

Business Etiquette in Romania……………………………………………………...35 Meeting and Greeting Communication Meetings and Negotiations

8. 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9

Appendices…………………………………………………………………………..37 Appendix 1: Romania in the map Appendix 2: Population structure by Ethnicity Appendix 3: Value of Subscribed Capital by Field of Activity Appendix 4: Inflation rate during the period 2001-2004 Appendix 5: Reference Exchange Rate (RON/EURO) Appendix 6: Net FDI in Romania Appendix 7: Evolution of Romania Foreign Trade Appendix 8: Product-wise and Country-wise major trading areas Appendix 9: Cost of starting a business in Romania

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Doing Business In Romania

Introduction: Country Profile Geographical overview Romania is a mid-sized country, with a total surface of 238.391 sq km, slightly smaller in surface in comparison with Great Britain, situated in the South East of Europe, to the North of Balkans, in the inferior basin of the Danube, with an opening to the Black Sea, being cut by the Carpathian Mountains 1 (Appendix 1). The country lies between 4○37’40” latitude North and 9○25’40” longitude East and is crossed by the parallel of 45○F latitude North and by the meridian of 25○ longitude East. Is located midway between the North Pole and the Equator, and the midway between Europe’s Western and Eastern Extremities. Romania has Hungary as neighbor from the West, Ukraine borders in the North, Moldova from North East, Black Sea to the East, and Bulgaria and Serbia from the southern part. Romania has a very varied geographical landscape, composed of high mountains, hills, plains and depressions, which make the country a very beautiful tourism destination, with plains that go as high as 300m, hills up to approximately 1000m and highest mountains reach 2500m. The mountains represent 31% of the total surface of Romania, and are called the Carpathians; these are “young” mountains, of a medium height, as the highest peak in Romania is the Moldoveanu, which reaches and altitude of 2544 meters. In Romania the Carpathians are divided into 3 big groups, in Oriental Carpathians, Meridional, and Occidental Carpathians, and are a very big from the point of view of tourism, but also because they foster big amounts of natural resources like iron, cupper, gold, silver, zinc, salt, construction materials, coal and many other mineral salts. Hills are occupying a percent of 36 of the total surface, and are also of a great importance because of the beautiful natural spas, tourist attractions and natural resources.

1

http://www.infotravelromania.ro/en/romaniad.html

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Doing Business In Romania

Plains are also occupying 33% and there are 3 main plains in Romania – The Romanian Plain which lies in the South of Romania, The West Plain and Transylvanian Plain in the center of the country. The Danube Delta is the lowest region ion Romania, and it represents a very beautiful landscape. It is separated by the 3 arms – Chilia, Sulina and Sf. Gheroghe, and it represents one of the most important fishing regions in Europe, and attracts people from all around the continent. The Black Sea borders Romania from the East is also a very important tourist destination, a tradition of Scandinavian tourists are every summer filling the beaches of Mamaia, Neptun, Costinesti and others; also the biggest Romanian port is to the Black Sea, the Port of Constanta, where a huge amount of trades are made with Asia mainly, but also with countries from all over the world. The climate is depending very much on the geography of the country, but it is in general considered as a continental climate, with 4 seasons, very hot summers and cold winters.

Population Total population at the last census in 2002 was 21.7 M, therefore the country is ranked 12th largest in Europe from this point of view, being one of the biggest countries in Eastern Europe 2 . The population in Romania is a conglomerate of Romanians in a percent of 89.5, Hungarians 6.6%, rroma population of around 2.5% and also others. It can be said that today’s population structure is a direct consequence of the geographical position of Romania throughout the history, on the traditional commercial routes and the gate to Asia. To the South-East, in the city of Constanta there is a big community of Turks, as a memory of the centuries of their domination on the different regions in Romania. To the West, and North-West and Centre there is a big population of Hungarians, as they came in Romania when the Austro-Hungarian Empire conquered Transylvania, and dominated here for almost 1 century.

2

http://www.guv.ro/guvernul/afis-ministere.php

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Doing Business In Romania

The official language is Romanian, a language of the Latin family – together with French, Spanish, Italian and Portuguese, being the only Latin language in Eastern Europe, but also with some Slavic influences, and Turkish words. The fact that the population is a conglomerate has also an effect on the Romanian language, which is the official language, but there are different accents from region to another: to the West, and the center the accent has influences from Hungarian language, in Moldova – NorthEast of Romania – influences of Russian language, and to the south, in Wallachia influences of Turkish and Slavic languages.

Education The Romanian Educational System is central concern of the Ministry of Education and Research (MEC); first grade starts when children are 6-7 years old, and it is mandatory that everyone attends school until 10th grade. The higher education is very much in conformation with the European standards, as already many students from Romania are attending Erasmus, Socrates, Leonardo da Vinci programs all over the World. 3

3

http://www.mct.ro/web/2/default.htm

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Doing Business In Romania

Business environment

Political Structure Since 1989, after the Revolution against the communist regime, Romania became a parliamentary republic, having the president as representing the vote of the people and the legislative power give to the bi-cameral Parliament – the Senate, and the Deputy Chamber. The last elections were in 2004; the elected president is the Democrat – Traian Basescu, and the Liberal prime minister – Calin Popescu Tariceanu. The majority in the Parliament was ensured by coalition between the Democrat Party, Liberal Party – formed the DA Alliance (truth and honesty alliance), and another two parties – Democrat Magyar Union Party and the Conservator Party. 4 Until the entering in the European Union the politic situation was more or less stabile, but after that a scandal started between the Prime Minister and the President, having drastic consequences on the majority in the Parliament, which is ensured today by a part of the National Liberal Party (who was against the President), the Democrat Magyar Union Party which are supported by the Social Democrat Party who was before in the opposition. It can be concluded that the politic system in Romania at the moment is pretty unstable, and still when the influence of the politic on the economy is pretty high, the consequences are uncertainty, high risk which drives to decrease of FDI.

Taxation structure Romanian law provides for the following main taxes:5

4 5

-

corporate income tax(tax on profit)

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individual income tax(tax on salary)

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tax on agricultural income

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tax on dividends

-

withholding tax on income earned by non-residents

-

value added tax

www.cotidianul.ro/ Investment in Romania, KPMG report 2006, page nr. 27

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Doing Business In Romania

-

excise duties (on several products)

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custom duties (on imports)

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real estate taxes (on buildings and land)

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tax on domestic production of crude oil and natural gas

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local taxes

These are the main categories of taxes paid in Romania, but the paper will focus more on the ones that have impact mainly on business, therefore corporate taxation, tax on dividends, tax for micro enterprises, tax for representative offices, and Value Added Tax.

Corporate Taxation -

corporate income tax 6

Corporate profits are the subject of taxation in Romania in accordance with the Fiscal Code approved by the Law 571/2003, in force since 1st of January 2004. Still, there are a number of amendments since January 2004 – taxpayers are Romanian legal entities, subject to tax on their worldwide profit; foreign legal entities carrying out activities in Romania through a permanent establishment, public institutions on income derived from economic activities, non-Romanians carrying out activities in Romania through partnerships and associations that do not qualify as Romanian legal entities on income derived from Romania, and others. The standard tax rate is 16%, which is a very low one, and was established in order to offer incentives for Romanian businesses to come out from the Black and Grey Markets, also for the FDI. Compared to the other countries which entered European Union from the Eastern Europe, Romania and Hungary have the lowest corporate tax, 16%, Slovakia and Poland following with a 19% tax, Croatia and Slovenia with over 20% and the Czech Republic with the biggest, of 28 %. It is a sign that the countries which last entered European Union are moving in the direction of offering as many incentives as possible I order to attract FDI.

6

http://www.minind.ro/

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Doing Business In Romania

Country

Corporate Tax

Romania

16%

Hungary

16%

Slovakia

19%

Poland

19%

Croatia

20.32%

Slovenia

25%

Czech

28%

Rep. Further more, until December 2006 for investments of at least 1000000$ with major impact on the economy registered with the Agency of Foreign Investments according to the Law 332/2001, taxpayers may deduct, besides the regular depreciation charges, a supplementary deduction of 20% of the investment value.

Tax on dividends 7 The rate applied here is different – 10% for dividends paid to another Romanian legal entity – 16% for the ones paid to a Romanian individual – 16% paid to a non-resident Allocation of the dividends is decided by the general assembly of Shareholders on the basis of the annual balance sheet. Dividend tax is due on any profit distribution towards shareholders, individuals or companies, whether Romanian or non-Romanian. The dividend tax must be withheld and paid by the company that distributes the dividends at the date when the payment is made to the shareholders. The dividend tax must be paid by the 25th of the month following the month of paying the dividend. For non-resident shareholders the tax rate can be reduced through the application of Double Taxation Avoidance Treaties concluded between Romania and other countries (more than 80 treaties were in force by 2006).

7

http://www.minind.ro/

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Doing Business In Romania

Income Tax for micro-enterprises Micro-enterprises are defined by the Law in Romania as companies with up to 9 employees, revenues under 100000 EUR and fully private share capital. In order to encourage these types of businesses, the Government decided to give the liberty to choose instead of paying the normal income tax rate of 16% on the profit, to pay 3% of the total gross revenues. The change from 25% tax on profit and 1.5 of gross revenue in 2004 to what is today in place 16% of profit and 3% of revenues, from 2005 it can be seen that the choice is one or the other in connection to the specific of the core business.

Value Added Tax8 Value added tax (VAT) has the rate of 19% – in Romania, the regulations concerning this tax are in line with the EU 6th VAT Directive. From the 1st of January 2004, the legislation on VAT has been governed by the Fiscal Code as approved by the Law 571/2003 and its application Norms, provided by Government Decision 44/2004. Registration as a VAT payer through local tax administrations is compulsory for all businesses with turnover in excess of RON 200.000 which means basically any business with a turnover that exceeds 55000 EUR. Another interesting issue if that tax system in Romania is also used as an incentive in order to attract FDI, as tax reductions are offered for: -

direct investment

-

investment in disadvantaged areas

Free Trade zones At the moment, Law Number 84/1992 is regulating the establishment and carrying out activities in free trade zones; the areas which are declared free trade zones are established by Government Decision, which clearly defines the zone’s geographical coordinates in each case,

8

http://www.minind.ro/

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Doing Business In Romania

appoints free trade Zone Administration, as well as to list the exact economic activities that can be carried out. 9 In Romania there are several free trade zones because of the strategic position, where the investors can gain advantages: 6 free trade zones -

Sulina(Gov. Dec. 156/1993)

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Constanta-Sud (410/1993)

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Galati(190/1994)

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Braila(330/1994)

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Giurgiu(788/1996)

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Curtici-Arad(449/1999)

It is imperious to mention that in order to be able for a company to do business in one of the mentioned free trade zones; a license needs to be obtained from the Administration of the Free Trade Zones, and in concordance with the principles of free competition. 10 Investors which are doing business in these free trade zones can gain lots of advantages in terms of unrestricted import and re-export of goods, tax and custom incentives, free repatriation of profit and capital after the payment of all due taxes, transportation of products from one to another free trade zone is done without the need to pay any custom duties, all operations may be done in any freely convertible currency 11 . After the EU accession of Romania it was established that these royalties may still be offered until the 31st of December 2011.

Infrastructure and communication The infrastructure in Romania at the moment is an impediment for FDI, the structure of roads, railway, airports are not as developed as for example in Hungary, where investments in this area started around 15 years ago. Still, the situation is not so bad, and the country offers opportunities in 12 :

9

www.mefromania.ro http://www.mt.ro/

10 11

http://anaf.mfinante.ro/wps/portal/!ut/p/.cmd/cs/.ce/7_0_A/.s/7_0_1NV0/_s.7_0_A/7_0_1NV0;jsessionid=0000a Ogpw2SOxh0syxvenrkCpb3:10id29ssj 12 http://www.romturkonline.com/English/Romania/infra.htm

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Doing Business In Romania

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Airports – has 7 international airports – Buharest-Otopeni, Bucharest Baneasa, Constanta, Timisoara, Arad, Suceava and Cluj.

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and also airports which are used for domestic traffic, such as the ones in Bacau, Baia Mare, Caransebes, Craiova, Iasi, Satu Mare, Oradea, Suceava

Regarding transport on water, Romania has 3 ports at the Black Sea – the main one is Constanta, also Mangalia and Sulina. The water transport is also available on the Danube, which is totally navigable on the surface of Romania, with harbors at Orsova, Drobeta Tr. Severin, Turnu Magurele, Giurgiu, Oltenita, Cernavoda, Braila, Galati, Tulcea. Railroad in Romania is covering the surface of the country in a very efficient way, having a length of 11.385km of railroad available for human and merchandise transports. Regarding the network of roads it can be said again that the whole area of the country is covered, but there is the problem of lacking highways. Still, in Romania there are 73.160km public roads available, 14686km of national roads, 110km of motorways (Bucuresti-Pitesti). Urban Transportation offers the options between trams, buses and trolleybuses, and in Bucharest underground metros are also available.

Telephone communications: 13 •

38,000 km phone communication lines;

•

10,000 km optical fibers;

•

over 1,300,000 digital phone lines

•

mobile communication (MMT/450 Telefonica, Mobifon, Mobilrom, paging operation)

•

data communication network for:

•

o

data package commutation;

o

data transmission on CATV networks

o

VAT services

private networks: o

13

VSAT operators;

http://www.mcti.ro/index.php?id=261&L=1

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Doing Business In Romania

It can be said that at the moment the infrastructure and communication are not very developed in Romania, but since the entrance in the EU at the 1st of January 2007, many projects regarding building of highways and new roads have been discussed and they are due to be implemented; it would be fair to say that in the next period the infrastructure in Romania will therefore develop, encouraging more and more FDI. Real estate in Romania The law in this area is quite detailed, as in the Romanian legal system, private property may belong to either individuals, legal entities or to the State, while public property may only belong to the State, or to the local administrative units. It is stated that in general, public property may not be transferred to other persons, and that it cannot be a subject in any commercial transactions; still, under some special conditions, contracts of concession are established between the State, or local authorities and legal entities, for a determined period of time. Transfer of real estate In Romania, real estate can be transferred freely, being still subject to certain procedural formalities and legal restrictions. The difference between buying and purchasing land and building is that when 2 entities want to trade land, the assistance of a public notary is needed, whereas in the case of buildings, there is no need for that. In 2004 the Law changed in this area and the value of the stamp duties due for sale and purchase agreements whose object is land free of buildings, located outside town limits, was reduced by 50% starting with 2005 January. 14 In Romania at the moment, from a legal point of view it is impossible for foreign individuals to own land, unless is the case of inheritance. However, the Government tried threw this measure to give yet another incentive for foreigners to open businesses in Romania, because only then, as legal entities they are allowed to own land. Another amendment was applied since 2003, which allowed foreigners and foreign companies from the EU to own land privately under the terms of the Romanian accession to the European Union.

14

Investment in Romania, KPMG report 2006, page nr. 73

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Doing Business In Romania

Concession of public property Various categories of goods are available to be subject of concession, public activities and/or services including, but not limited to: transport, motorways, roads, railways, civil ports and airport infrastructure, power plants, postal services, telecommunication networks and mineral resources for exploitation. 15 Concessions are obtained by public tender or by direct negotiation and can be concluded for a period of maximum 49 years, and the period can be extended for a maximum period equal to the half of the initial duration, by mutual agreement of the two parties.

Labor regulations and Employment Standards 16 In Romania the relationship between employers and employees is regulated by the Labor Code , and it is useful to know that in general the labor contracts between legal entities in Romania and individuals are concluded for an indeterminate term; a work day in Romania is generally as long as 8 hours. In these papers usually is included setting forth duties, work hours, overtime – if it is the case, benefits, holydays and so on, as well as the value of the base salary and any guaranteed bonuses or incentives. Work Permits Non-nationals are allowed to work in Romania only if they have a valid work permit issued by the Office for Migrant Workforce from the year 1999, stated in the Law number 203. A work permit is a document which grants the opportunity for the non-national to perform economic relations with a Romanian individual or legal entity under an individual labor contract. Since Romania entered European Union, at the 1st of January 2007, this section of the Labor Code is under continuous discussion, since some EU countries are protecting themselves from the danger of cheap work force migration from Romania. Termination of individual labor contracts

15 16

Investment in Romania, KPMG report 2006, page nr. 76 http://www.mmssf.ro/website/ro/legislatie_rm.jsp

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Doing Business In Romania

This is not very complicated in Romania, in comparison with Germany, or France for instance, because the Unions do not have such a high power here. Still, in the Labor Code it is stipulated that a company can terminate the contract of an employee only in the cases specially provided by the law. However, in the case when an individual labor contract is terminated on employer’s initiative, the employee must get a further notice of 20 workdays before, and in some cases the employer will have to even pay a period of severance for the employee. Collective bargaining agreements and Trade Unions 17 The situation in Romania for companies with more than 20 employees is that they have to negotiate year by year the collective bargaining agreements, and these set the mutual obligations and rights of both the company and its employees: salaries, working conditions, social security, dispute settlement mechanisms, protection of trade union leaders, and miscellaneous rights and obligations. The durations as it was already mentioned before can be for one year and also for more, and when the contract expires the two parties may decide to extend its term with slight amendments, or to rethink the whole contract and sign something totally different.

17

Investment in Romania, KPMG report 2006, page nr. 79

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Doing Business In Romania

ECONOMIC CLIMATE GDP in Romania 18 It is common that in countries which are not so developed from economic point of view that agriculture plays a very important role in the national economy, and it can be expected that in Romania things are evolving in the same way. It is a known fact that the soil in Romania is one of the most fertile in all of Europe, and it is true that people feel that agriculture should play a very important role in the economy; this is a consequence of the 50 years of communism in Romania, when people were forced to give up their private properties, the land every family had, in the property of the Government. Therefore after the restitution of land in Romania, people feel that agriculture, land should play a very important role, should be invested in, and should be given incentives for. Most of the investments in the last time period were though not in agriculture, but in industry, which holds a share of 52.1% of the total subscribed capital by field of activity. Also very important investments in Services were made, having a share of 21.8% of the subscribed capital, in retail, wholesale and transportation – with shares of around 7%; So as it can be seen, the Romanian economy is moving from an economy which was very much influenced by agriculture, towards a European type of economy, having the biggest share of the GDP from industry and services. As a follow-up of the political decisions regarding the economy and the transition towards a free market economy, the GDP in Romania has steadily raised from year to year, as it can be seen in the chart below.

18

http://www.factbook.net/GDP_Comparison_data.htm

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Doing Business In Romania

Growth and Inflation 19 Source - http://rbd.doingbusiness.ro/bcr_evolution_integration_mart2007.htm#econom

Inflation rate (percentage) in Romania

Inflation rate

20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07

45 40 35 30 25 20 15 10 5 0

As it can be seed from this chart, in the year 2000, inflation was somewhere at 42%, having tremendous effect on the Romanian purchase power, a bread from one year to another raised in price with almost half of the initial value; it was a very hard period in Romania, the ROL depreciation in comparison with the $ and EUR had very much effect on the exports and imports of Romania.

19

http://www.convertor.ro/stiri/FMI_avertizeaza_ca_inflatia_din_Romania_ar_putea_ajunge_la_7.../457

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Doing Business In Romania

Still, the monetary politic of the Romanian national bank, combined with the economic development as a consequence of the FDI in Romania, the inflation dropped from 42 in 2000 until 30% in 2001, and kept the descendent flow until in 2005 a single digit inflation of 9% was reached. In 2007 the inflation rate is expected to be reaching a very good level in the economic context in Romania of 4%. A number of factors have resulted in faster than expected disinflation in the recent months, including the delayed implementation of the infrastructure spending program, the central bank’s tightening monetary policy, delays in scheduled increases in administrated prices, sharp falls in food process as well as falling price of oil on the global market. 20 The exchange rate (appendix 4, page ) has shown also an increase of the RON value, in comparison with the euro and the American dollar, as it can be seen in the chart below, from the year 2003, where the peak was reached at 4,11 RON for 1 euro until the year 2005 at a relation of 3.6 Ron for 1 euro. The rate today is 3.16 RON for one euro, according to the National Bank of Romania, at 29th of June 2007.

Foreign Direct Investment Romania is more and more appreciated as a destination of investment, as it has many incentives for it: -

second largest market in Central and Eastern Europe, with a population of 21.7 Million, which is opening more and more

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geographically in a strategic position, at crossroads of traditional commercial routes, establishing a link between Central and Eastern Europe, targeting over 200 million people

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labor is very cheap, and is predicted to stay the cheapest in Europe for at least next 15 years, highly skilled and able to communicate in foreign languages(English, French and German)

20

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wide range of natural resources

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industry potential, agriculture and tourism

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EU membership

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Fiscal reforms, flat tax of 16%

Romanian Business Digest, ING Romania, page 13, 20

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As a consequence, as it can be seen in Appendix 5, the FDI in Romania has steadily increased in the last years, and is predicted to increase even more after the EU membership in January this year, and after the infrastructure will be improved. At the moment, the foreign capital comes from many countries, Netherlands being on the first place, with investments of over 1.9 billion EUR, Austria is next with 1.4 billion, Germany with 930 million, and others like Italy, USA, UK, Turkey, Switzerland and Greece. 21 To mention some of the global players already present in Romania, are Kodak, MAN Trucks, Microsoft, Nokia, OMV, Oracle, Philips, Siemens, Bosch, Unilever, Procter and Gamble, Vodafone, Orange and many others. 22

Romanian foreign trade At the moment the situation at first site, as it can be seen is quite positive, compared to the situation a few years ago: starting from 2000, the foreign trade as a total has doubled in total, but the balance between imports and exports is negative 23 ; Romania at the moment is importing more than is exporting, but this situation is expected to change after the major investments in production facilities and manufacturing were made. Still, the situation is as follows – the exports steadily but slowly increased in the period 20002005, from a total value of 11273 Million EUR in 2000, until the value of 22255 Million EUR in 2005, and the imports have also have developed in total value from 14235Million EUR up to 32569 Million EUR; the situation in 2000 as it can be seen was the same, the exports were lower in value compared to the imports. Regarding the industries 24 , Romania is exporting machinery and equipment, textiles and products, base metals and products and minerals and fuels, to countries like Italy, Germany, Turkey and France. Regarding imports have to mention machinery and equipments, minerals and fuels, textiles and products, chemicals and products, from countries like Germany, Italy, Russia and France.

21

http://www.minind.ro/ http://www.factbook.net/countryreports/hu/Hu_FDI.htm 23 www.aneir-cpce.ro/chapter4/ft14.htm 24 http://www.economist.com/countries/Romania/profile.cfm?folder=Profile-FactSheet 22

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Doing Business In Romania

Romania in the European Union The European Parliament had voted in favor of accepting Romania and Bulgaria in the European Union, in the Accession Treaty signed on April 25 2006, when it was established that the 2 countries will accede at 1st of January 2007. From 1st of January 2007 therefore, Romania and Bulgaria had to withdraw from the Central European Free Trade Agreement, as they were included now in the EU-wide free trade area. 25 The consequence for Romania will be positive but also negative; Romania, as it was mentioned before, represents a very interesting target for FDI since the labor is very cheap, educated and motivated, also the population represents the second biggest market in Central and Eastern Europe, and in general the situation of the economy will improve, as in Poland, Czech Republic, Hungary priory did. The effects are separated in the time frame 26 : -

In 2-3 years from accession to the EU, there will be felt in Romania an increase in services, health system, education and creation of efficient markets. On domains, the effects will be felt by leasing companies, SME, telecommunication, telephone and internet companies, hardware and software industry.

-

In 3-5 years, effects will be visible in capital market, banking system, tourism, HR branch, agriculture

The SME in Romania is very important, as in Germany, and one negative effect of the accession to the EU will be the fact that a lot of pressure will be made on these, because of increasing competition, lack of international experience, lower productivity and so on. It is calculated by the specialists that in 3 – 5 years from the accession to the EU approximately 60% of the SME in Romania will go bankrupt, because of the new conditions which will characterize the market in Romania, and the lack of liquidities available for investment 27 .

25

www.europa.eu/ http://www.bizwords.ro/stiri/tendinte/9200/Efecte-asupra-economiei-romanesti-dupa-aderare.html 27 http://www.smartfiancial.ro/ 26

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Doing Business In Romania

Also there will be an effect of migration of the labor force from Romania to the more developed countries, such as Germany, Italy, Spain, Netherlands, France and others, which will have consequences in the labor markets of the countries above mentioned 28 .

28

http://www.mae.ro/

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Doing Business In Romania

Corporate and Business Laws Legal Framework Romanian legislation governing domestic and foreign investment has undergone radical changes since the 1989 Revolution, particularly with the introduction of the Company Law in 1990 (re-issued in 1998 and modified again in May 2001 and April 2003). The current legislative bases for investment and business operations in Romania are described below.

Company Law: Company Law governs certain forms of business organisation. The Law covers registration procedures and documentation, capital and shares, administration and shareholders, mergers and liquidation.

Commercial Register Law: The Commercial Register Law regulates the organization and functioning of the Trade Register, stipulates the obligation of business entities to register their entry into operation and any subsequent changes in status, operation, or nature of business, and details the registration procedure.

Competition Law: The Competition Law aims at maintaining a competitive market. Its provisions should be observed by all companies when establishing their business terms or acquiring new business. Clearance requirements, depending mainly on the parties' turnover, are set for mergers and acquisitions, as well as for certain agreements (e.g. agreements including exclusivity clauses).

Direct Investment Legislation The only legislation in force that stipulates certain incentives for investors in Romania is the Law on the Promotion of Direct Investments with Major Economic Impact (Law no. 332/2001). This law was passed in July 2001 and prescribes the procedures and conditions for the performance of large-scale investments in Romania (investments over USD 1 million). Investments that qualify as significant investments can benefit from a number of incentives as provided by the Fiscal Code (see Chapter 8 - Taxation of Corporations, for details).

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Doing Business In Romania

Forms of Business Organisation Company Law lists the following types of business organisation: 1. Limited liability company (societate cu raspundere limitata - SRL); 2. Joint stock company (societate pe actiuni - SA); 3. General partnership (societate în nume colectiv - SNC); 4. Limited partnership (societate în comandita simpla); 5. Limited partnership on shares (societate în comandita pe actiuni); 6. Silent partnership (asocatie în participatie - not a legal entity); 7. Sole proprietorship; 8. Family association; 9. Branch of a foreign company. The family association and sole proprietorship are types of businesses generally not available to foreign investors. It is also difficult for a foreigner to operate in a partnership in Romania. The forms of business most commonly used by foreign investors are the limited liability company (SRL) with one to 50 shareholders, and the joint stock company (SA) with a minimum of five shareholders and the branch (of a foreign parent company). Banks and insurance companies cannot be SRLs. Representative offices are often used as a market entry technique, allowing for an assessment of existing opportunities before committing financially to Romania.

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Doing Business In Romania

Banking and Other Lending Institutions Romania has a two-tier banking system. The National Bank of Romania (NBR) is Romania's central bank and is under the Parliament control. Lending institutions operate under the authorisation and strict supervision of the NBR. The privatisation of the largest Romanian bank, the Romanian Commercial Bank was postponed again due to unsuccessful tenders during 2003. In 2003, EBRD and IFC have jointly acquired 25% of the bank's shares, but they will be sold to the new investor when the privatization takes place.

The National Bank of Romania A Board of Directors consisting of nine members, who are elected by the Parliament of Romania, heads the National Bank of Romania (NBR). The term of office is usually six years. The Board of Directors includes the Governor of the NBR, three Vice-Governors (of which one is First Vice-Governor), and other five ordinary members. It is the responsibility of the directors to issue NBR policy guidelines. The prime functions of the NBR are: ■ To ensure stability of domestic currency with a view to maintaining price stability (key objective); ■ To issue and control the supply of banknotes and coins; ■ To license all banking institutions in Romania and monitor their activities; ■ To establish and manage the state's foreign exchange policy; ■ To establish and manage monetary and credit policy; ■ To supervise the foreign currency operations regime; ■ To ensure the integration of Romania's banking sector and monetary system into the EU norms and standards. NBR has its own Supervision Division conducting on-site evaluation of all lending institutions operating in Romania (i.e. commercial banks, credit unions, building societies and companies issuing means of performing electronic payments). This process generally takes place on an annual basis.

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Doing Business In Romania

There is ongoing co-operation between the NBR and international banking institutions, including the IMF and the World Bank, as well as with other European central banks. This is aimed at developing and improving procedures and supervisions and furthering the NBR's transformation into a dynamic, modern central bank. NBR also collaborates on domestic financial market with the Insurance Surveillance Commission and National Securities Commission for exchange of information and to maintain an adequate surveillance over the financial market in general. NBR publishes on a monthly basis the reference interest rate used as benchmark interest rate for domestic currency denominated loans. Important changes are expected in the coming period to the by-laws of the NBR in order to harmonise them with the EU legislation. Also, significant changes have been brought to the Banking Law at the end of 2003.

Commercial Banks Banking market has witnessed significant changes in recent years following the development of domestic banks and the influx of foreign banks into Romania. Most domestic banks in Romania are now private, and foreign banks are investing at a fast pace. During 2003, a higher number of banks started extending their retail activities. Consumer and mortgage loans noticed significant increases. This trend is expected to continue in the coming years. Currently there are 38 banks and branches of foreign banks authorised to operate in Romania. Thin capitalisation rules are not applicable to lending institutions. At the end of December 2003 significant new amendments have been brought to the Banking Law. The amendments are designed to be in line with EU Directives. New definitions of lending institutions are introduced, and now cover commercial banks, credit unions, building societies and those issuing means of performing electronic payments. The Banking Law only applies to banks and those issuing means of performing electronic payments, while special laws will separately regulate credit unions and building societies. Commercial banks in Romania must be registered with and operate under a license issued by the NBR. Banks may engage in the following activities:

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Doing Business In Romania

■ Taking deposits; ■ Making loans; ■ Issuing guarantees and letters of credit; ■ Issuing and trading securities; ■ Owning and administration of movable and immovable assets for own activity and bank's staff use, up to 5% of own funds; ■ Leasing through a subsidiary only until EU accession, and directly after that. Commercial banks may also participate in currency auctions provided they have broker or dealer licenses. The most important regulations issued by NBR for banks are: ■ Minimum share capital and own funds of ROL 370 billion from 31 May 2004 (only cash capital infusions are accepted); ■ Legal reserve: 5% of gross profit until the legal reserve represents a fifth of the share capital (deductible for tax purposes); ■ General banking risks fund of 1% of the balance of assets bearing risks specific to the banking operations (deductible for profit tax purposes); ■ Setting up of specific credit risk provisions for principal and interest related to loans granted (deductible for profit tax purposes) ■ Minimum reserve requirements of 18% (deposited with the NBR) for ROL and 25% for foreign currency (as at 31 December 2003); ■ Capital Adequacy Ratios of 12% (own funds/net exposure) and 8% (own capital/net exposure); ■ Lending limit of 20% of own funds to any client; ■ Total long term investments in non-financial companies and non-lending institutions (20% of nonfinancial company's share capital and 15% of bank's own funds), but total amount cannot be more than 60% of bank's own funds; ■ Financial statements need to be approved by external independent auditors; ■ Restrictions on holding property other than for own use; ■ Detailed operational reports to the NBR in standardised format and specific frequency. As a general trend, the supervision of banking activity has tightened in respect of significant shareholders, top management and administrators, internal audit, money

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Doing Business In Romania

laundering, customer identification procedures, solvency and investment portfolio risks. A legislative framework has been created for derivatives, but as it is relatively new, the market is still undeveloped. Also, the tax legislation has not been updated to include specific provisions regarding the tax treatment of derivatives.

Capital Markets During 2003, Bucharest Stock Exchange and the Electronic Stock Exchange RASDAQ created a merger plan to be in line with the EU markets. However, the merger procedure will only start after the new consolidated capital market legislation is approved, which is expected for 2004.

Bucharest Stock Exchange The first Bucharest Stock Exchange (BSE) opened in 1882, although in subsequent years most securities trading took place outside the market. The existing Stock Exchange opened in July 1995 with Canadian and British technical assistance. Currently more than 68 brokers are members of the BSE. BSE is open for trading during each working day. The exchange's trading system encompasses both order-driven and block trade markets and is fully automated, with all transactions matched and reported immediately. The BSE lists 62 companies divided into two categories (19 being listed in the first category). Certain criteria need to be fulfilled in order for a company to be listed on BSE (transparency included). Also, there are certain restrictions for trading and price fluctuation. The level of transactions on BSE has significantly increased in the previous year and it is anticipated that the trend will be maintained for 2004. Listing of municipal bonds, some mutual funds and development of derivatives instruments together with more-strict trading and transparency rules contributed to the increase of the transactions level on this market. The supervisory body is the National Securities Commission (which also regulates, supervise and controls the OTC market and institutional investors). The National Securities Commission was established after the initial Securities Exchange Law was passed in 1994. In 2002, the Government issued a new legal framework for securities transactions, regulated markets, brokers, investment funds and derivatives. This new legal

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Doing Business In Romania

framework tries to bring more transparency and accuracy of the transactions and participants on the capital market. However, new consolidated capital market legislation in line with EU Directives is due to be approved in 2004. The BET (Bucharest Exchange Trading), the official index, measures BSE performance. It is a synthetic indicator based on the ten most liquid shares traded on the BSE. All institutions under supervision by the National Securities Commission must apply IAS rules, starting with financial statements for 2003.

RASDAQ The RASDAQ trading system opened in October 1996 as part of a USD 20 million capital market development Development (USAID). RASDAQ is modelled on America's NASDAQ system. RASDAQ is an exchange market that trades all the companies initially privatised through the Government Mass Privatisation Programme. It has less rigorous requirements than the BSE. A RASDAQ index (composite) based on all transactions began as a benchmark of activity in 1998. As at end of 2003, there were more than 4,440 companies listed on RASDAQ in three categories (two top categories and a base category for most of the companies). New regulations have been issued for the purpose of tightening supervision and increasing transparency of transaction in this market. Thus, in the previous period an important part of the companies were unlisted, as a consequence of cleaning up the capital market with not tradable securities

Unlisted Securities In 1999, a third capital market was established for unlisted securities. Companies that are not listed in either of the two markets above can be traded on this market under certain conditions.

Derivatives Although the regulatory framework for issuance and trading of derivatives has been created, there are only two stock exchanges in Bucharest and Sibiu dealing with futures and options, but the trade volume is low.

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Doing Business In Romania

Insurance The Insurance Surveillance Commission (ISC) regulates and controls the activity of insurance companies and insurance brokers. A Council formed by a President, a Vice-president and 3 members nominated by the Parliament heads ISC. The prime functions of ISC are: ■ to supervise insurance companies' financial standing in order to protect the insured persons' interest; ■ to ensure that prudential norms specific to insurance activity are observed by the insurance companies; ■ to issue norms for enforcement of Insurance Law 32/2000, to contribute to elaborating the chart of accounts, the accounting norms and procedures specific to insurance activity; ■ to authorize insurance companies and insurance brokers and to apply non-compliance sanctions. Starting from September 2001, the ISC has been accepted as a member of the International Association of Insurance Supervisors. The insurance legislation is under continuing improvement. During 2003, numerous amendments to the existing regulations have been issued to fill in the legislative gap and to harmonise the domestic insurance legislation with EU Directives. This process is expected to continue in the coming period. The main rules refer to classes of insurance, insurers and insurance broker authorisation procedure, minimum solvency margins, insurers' insolvency, technical reserves calculation methods, life insurance funds administration, investments and asset valuation. Insurers have to set up specific technical reserves for their insurance activity, reserves that are deductible for tax purposes. The minimum share capital of an insurance company ranges between EUR 365,000 and EUR 1.240 million, depending the classes of insurance practicable. In early 2004, there were 43 insurance companies and 170 insurance brokers operating in the Romanian market. Among them, foreign insurance companies hold an important and have increased their market share, especially in life insurance area (i.e. AIG, ING Nederlanden, Generali, Allianz-Tiriac, Interamerican, Grawe, Aviva, etc). The insurance market has known a significant growth in 2003 in quantitative terms. The volume of gross insurance premiums earned by insurance companies operating in

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Doing Business In Romania

the market is projected to represent up to 2% of the GDP (as compared to 1% in 2002 and 0.87% in 2001). The volume of earn gross premiums is expected to reach EUR 810,000 million for 2003. Currently, non-life insurance represents more than 72% of the insurance activity in Romania, out of which compulsory third-party liabilities car insurance has the main share. The life insurance market, despite its significant increase during previous years, is still undeveloped, potentially due to the restrictive tax legislation and inexistence of private pensions funds. At the end of 2003 the Parliament was expected to vote a law regarding the occupation pensions and universal pension funds (Pillar II). Starting with 1 January 2002, insurance companies have applied IAS rules for accounting and reporting purposes.

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Doing Business In Romania

Ease of Doing Business Romania Region: Europe & Central Asia Income category: Upper middle income Population: 21,632,148 GNI per capita (US$): 3,830.00 Ease of...

2006 rank

2005 rank

Change in rank

Doing Business

49

71

+22

Starting a Business

7

6

-1

Dealing with Licenses

116

98

-18

Employing Workers

101

134

+33

Registering Property

114

115

+1

Getting Credit

48

41

-7

Protecting Investors

33

43

+10

Paying Taxes

131

142

+11

Trading Across Borders

35

121

+86

Enforcing Contracts

45

44

-1

Closing a Business

108

112

+4

Starting a Business (2006) 29 The challenges of launching a business are shown below. Included are: the number of steps entrepreneurs can expect to go through to launch, the time it takes on average, and the cost and minimum capital required as a percentage of gross national income (GNI) per capita. Indicator

Romania

Region

OECD

Procedures (number)

5

9.4

6.2

Time (days)

11

32.0

16.6

Cost (% of income per capita)

4.4

14.1

5.3

Min. capital (% of income per capita)

0.0

53.9

36.1

Dealing with Licenses (2006)

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Doing Business In Romania

Shown below are the procedures, time, and costs to build a warehouse, including obtaining necessary licenses and permits, completing required notifications and inspections, and obtaining utility connections. Indicator

Romania

Region

OECD

Procedures (number)

17

21.4

14.0

Time (days)

242

242.5

149.5

Cost (% of income per capita)

332.6

564.9

72.0

Employing Workers (2006) The difficulties that employers face in hiring and firing workers are shown below. Each index assigns values between 0 and 100, with higher values representing more rigid regulations. The Rigidity of Employment Index is an average of the three indices. Indicator

Romania

Region

OECD

Difficulty of Hiring Index

33

34.2

27.0

Rigidity of Hours Index

80

50.7

45.2

Difficulty of Firing Index

40

37.1

27.4

Rigidity of Employment Index

51

40.8

33.3

Nonwage labor cost (% of salary)

33.3

26.7

21.4

Firing costs (weeks of wages)

3.0

26.2

31.3

Registering Property (2006) The ease with which businesses can secure rights to property is shown below. Included are the number of steps, time, and cost involved in registering property. Indicator

Romania

Region

OECD

Procedures (number)

8

6.4

4.7

Time (days)

150

102.0

31.8

Cost (% of property value)

1.9

2.7

4.3

Getting Credit (2006) Measures on credit information sharing and the legal rights of borrowers and lenders are shown below. The Legal Rights Index ranges from 0-10, with higher scores indicating that

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Doing Business In Romania

those laws are better designed to expand access to credit. The Credit Information Index measures the scope, access and quality of credit information available through public registries or private bureaus. It ranges from 0-6, with higher values indicating that more credit information is available from a public registry or private bureau. Indicator

Romania

Region

OECD

Legal Rights Index

4

5.5

6.3

Credit Information Index

5

2.9

5.0

Public registry coverage (% adults)

2.6

1.7

8.4

Private bureau coverage (% adults)

5.5

9.4

60.8

Protecting Investors (2006) The indicators below describe three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index), shareholders’ ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index) and Strength of Investor Protection Index. The indexes vary between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Indicator

Romania

Region

OECD

Disclosure Index

9

4.7

6.3

Director Liability Index

5

3.8

5.0

Shareholder Suits Index

4

6.0

6.6

Investor Protection Index

6.0

4.8

6.0

Paying Taxes (2006) The data below shows the tax that a medium-size company must pay or withhold in a given year, as well as measures of the administrative burden in paying taxes. These measures include the number of payments an entrepreneur must make; the number of hours spent preparing, filing, and paying; and the percentage of their profits they must pay in taxes.

Indicator

Romania

Region

OECD

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Doing Business In Romania

Payments (number)

89

50.0

15.3

Time (hours)

198

423.0

202.9

Profit tax (%)

9.3

11.7

20.7

Labor tax and contributions (%)

38.6

30.6

23.7

Other taxes (%)

1.1

13.7

3.5

Total tax rate (% profit)

48.9

56.0

47.8

Trading Across Borders (2006) The costs and procedures involved in importing and exporting a standardized shipment of goods are detailed under this topic. Every official procedure involved is recorded - starting from the final contractual agreement between the two parties, and ending with the delivery of the goods. Indicator

Romania

Region

OECD

Documents for export (number)

4

7.4

4.8

Time for export (days)

14

29.2

10.5

Cost to export (US$ per container)

1,300

1,450

811

Documents for import (number)

4

10.0

5.9

Time for import (days)

14

37.1

12.2

Cost to import (US$ per container)

1,200

1,589

883

Enforcing Contracts (2006) The ease or difficulty of enforcing commercial contracts in is measured below. This is determined by following the evolution of a payment dispute and tracking the time, cost, and number of procedures involved from the moment a plaintiff files the lawsuit until actual payment. Indicator

Romania

Region

OECD

Procedures (number)

43

31.5

22.2

Time (days)

335

408.8

351.2

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Doing Business In Romania

Cost (% of debt)

10.7

15.0

11.2

Closing a Business (2006) The time and cost required to resolve bankruptcies is shown below. The data identifies weaknesses in existing bankruptcy law and the main procedural and administrative bottlenecks in the bankruptcy process. The recovery rate, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm, is also shown. Indicator

Romania

Region

OECD

Time (years)

4.6

3.5

1.4

Cost (% of estate)

9.0

14.3

7.1

Recovery rate (cents on the dollar)

19.9

29.5

74.0

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Doing Business In Romania

Business Etiquette For the globe-trotting international business person doing business in foreign country offers certain intercultural challenges. Do I shake hands? What are taboos? Do they negotiate like me? Understanding a country's business culture, protocol and etiquette is important in achieving success abroad. Meeting & Greeting 30 Although Romanians a very personable, initially business is somewhat reserved and formal. Romania is a country that still places an emphasis on good manners and demeanour, so one should endeavour to present themselves professionally at all times. When doing business in Romania shake hands with people upon arrival and also when leaving. It is good form to wait for a woman to extend her hand; older Romanian men may still kiss a woman’s hand but this practice is slowly dying out. Romania is a hierarchical culture. Respect and deference is shown to those that are older or more senior. As a result titles are very important as they demonstrate a high esteem; when doing business in Romania it is courteous to use someone’s title whether academic or professional. If no title is obvious then use "domnule" for a man and "doamna" for a woman with the surname. Communication Romania is a relationship driven culture but at the same time very private. It takes a while to earn trust, but once this happens it opens many doors. At first people are generally shy and quiet. Once you develop a personal relationship Romanians will open up. Maintain a relatively formal approach in communication - always polite, do not ask personal questions and stick to a last-name basis until asked not to. The communication style is a mix of direct and indirect. While being straightforward is valued in Romania, there is also an emphasis placed on delivering information in a sensitive way. Often, the level of the relationship will determine how direct someone is. For newly established and more formal relationships, a great deal of emphasis will be placed on

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Doing Business In Romania

diplomacy. But once a relationship has passed through the initial phases, people feel more comfortable speaking frankly with each other. In Romania eye contact can be very direct and is a sign of respect. If you are from a culture where intermittent eye contact is more prevalent, you may initially feel uncomfortable. Looking away will be interpreted either as lack of interest or rudeness. Meetings & Negotiations: Meeting schedules are not rigid in Romania. There may be an agenda, but it serves as a guideline for the discussion and can act as a springboard to other business. Remain flexible in your approach when doing business in Romania. Negotiations can be tough. Decisions are only made by the most senior member of the Romanian party, so it is recommended to save concessions and the like until speaking meeting directly with them. Avoid confrontational behaviour or high-pressure sales tactics. Contracts are seen as statements of intent rather than binding agreements. Note that decisions can be reversed and nothing is concrete when doing business in Romania.

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APPENDICES

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Doing Business In Romania

Appendix 1: Romania in the map (Source: www.romaniatourism.com)

Appendix 2: Population structure by Ethnicity (Source: National Institute of Statistics, Romania; accessed at http://www.aneir-cpce.ro/)

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Doing Business In Romania

Appendix 3: Value of Subscribed Capital by Field of Activity (1991-2005) (Source: National Institute of Statistics, Romania; accessed at http://www.aneir-cpce.ro/)

Appendix 4: Inflation rate during the period 2001-2004 (Source: National Institute of Statistics, Romania; accessed at http://www.aneir-cpce.ro/)

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Doing Business In Romania

Appendix 5: Reference Exchange Rate (RON/EURO)

Appendix 6: Net FDI in Romania (Figures in Euro Millions) (Accessed at http://www.aneir-cpce.ro)

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Doing Business In Romania

Appendix 7: Evolution of Romania Foreign Trade (Source: http://www.aneir-cpce.ro/chapter4/ft14.htm)

Appendix 8: Product-wise and Country-wise major trading areas (Source: http://www.economist.com/countries/Romania/profile.cfm?folder=Profile-FactSheet)

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Doing Business In Romania

S.No. Procedure 1

2

3

4

5

Obtain a certificate from the Trade Registry proving the availability of the proposed company name and make a reservation of the name Obtain a certificate from the Trade Registry proving the availability of the proposed company name and make a reservation of the name Obtain a certificate of fiscal record from the company associates and the legal representatives from the public finance department of the company Register with the Unique Office (Biroul Unic) of trade registry Registrul Comertului (BASC), Bucharest Tribunal. Also obtain court registration, publication of notice, and registration for statistical purposes and social security Register the employees contracts with the Territorial Labor Inspectorate (TLI)

Totals

Duration Cost (days) 1

RON 44

1

0 to 0.5% of capital

5

RON 50

3

RON36.6 (stamp duty) + RON120 (registration fee) + RON 30 for each mandatory element

1

No charge

11

~ RON 300

Appendix 9: Cost of Starting Business in Romania (Source: http://www.doingbusiness.org/ExploreTopics/StartingBusiness/Details.aspx?economyid=158)

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