Key considerations on how to aquire a company in Romania
If a company has made the decision to purchase an asset in Romania, whether it be a Romanian company, or simply shares in a Romanian company, it is crucial to factor in some key considerations. As many lawyers and general counsels will know, commercial decisions are made, and then implemented by lawyers.
Companies often ask themselves whether they should conduct specific research before acquiring a company, however often lean on the knowledge and expertise of their lawyers to solve any problems or issues they are facing.
Although lawyers may help to solve many challenges, companies should have legal provisions in place to reduce their risk, and ultimately help to ensure their success. It is an imperfect world for many Romanian transactional lawyers and therefore potential purchasers in Romania need to be aware of certain issues which have been outlined below.
What legal challenges can be expected?
This article is intended to review some of the initial problems that organisations should consider from a legal and tax perspective. The first and second questions are:
- What type of transaction is your firm trying to conduct.
- Is your organisation looking to make an asset purchase, or are you purchasing shares within a company?
For buyers who have no legal entities or presence in Romania at the time of the purchase, the transaction may raise some concerns. If a foreign company is looking to acquire a company in Romania, they will need to financially register themselves before the transaction can be compleated. This include:
Once a company is financially registered, they immediately have a permanent establishment in Romania. This means that tax authorities can now charge the purchaser as they are now a taxable, Romanian entity. All relevant assets can therefore be taxed. This often leads to a popular question; should companies set up or incorporated a business before they proceed with an acquisition?
Registering an entity, such as limited liability companies, or private limited companies may help to simplify the incorporation procedure. Ultimately, a tax implication will apply to the purchaser as to whether they acquire a local company, or set up their own entity, they will need to complete legal formalities and confront taxes potentially payable.
To prevent complications and foreign ownership restrictions, the simplest route for companies could be to incorporate a local company in Romania. Additionally, incorporating a company may allow for the acquirer to benefit from a number of tax exemptions, including a double tax treaty.
Setting up a local entity also helps to tap into the local Romanian market, and can help to offer increased representative offices for your services or product within the region. Corporate entities with offerings in other EU member states often consider establishing Romanian companies.
What tax challenges and exemptions apply
Tax exemptions are often relevant to the corporate taxes companies need to pay. However, there are exemptions that apply to income payments between the parent company and the subsidiary.
For example, dividends received from a Romanian company or paid to it, provided that a dual taxation agreement is in force, will not have to pay withholding tax if the company has at least 10% of the issued shares and has been established for at least one year.
The same type of exemption applies if there is income from a valuation, revaluation sale, or transfer of shares of either a Romanian company or subsidiary in another jurisdiction provided the transaction is in relation to companies in states where Romania has a Treaty against Double Taxation.
Other tax considerations that sometimes arise relate to the shared exchanges or mergers that assist in facilitating the acquisition.
Shared exchanges do exist in some cases, however, mergers and demergers are more likely. In these cases, there are limited taxation issues. However, it is always advised to consult a specialist to fully understand the main transfer tax exemptions. The outcome may change on a case-by-case basis.
Taxation of a target company in Romania
Romania follows the more popular approach when it comes to the taxation of a target company during a transaction. Because the target company is a legal entity, the taxation applies within the trade registry of that location. more normal routes in relation to the taxation of the target company during any transaction.
The taxable position of the company will not be altered by the change of ownership of the shares of the company.
Cost of acquisition transactions
The costs of the transaction will also need to be reviewed in relation to the taxes which might be payable as a result of the acquisition. For the acquisition of shares or social parts the only tax payable will be that charged by the Official Gazette for the publication of the shareholders’ resolution. These are not calculated on the value of the transaction and are minimal.
However, if there are assets being transferred and these assets are real estate then there will be notary fees and land registration fees.
The notary fees are charged based on the value of the real estate. The minimum value is set by the Notary table of real estate values. Another matter that might be considered by the acquiring company is the question of the deductibility of interest on the funds used to finance the purchase.
Exemptions for independent taxpayers
As a general rule, the interest will not be deductible and is generally applied to all companies and is related to the implementation of anti-tax avoidance directives. There is however an exemption relating to independent taxpayers permitting full deductibility of interest and foreign exchange losses.
The question of the availability of any tax exemption needs to be examined carefully in respect of any acquisition and the buyer's finance department or independent advisors need to consider this question.
As matters in relation to taxation can arise after the closing of the purchase of a company or the assets it is also prudent for the acquiring company to consider there is a retention of part of the purchase consideration until such time as the total tax liability of the parties has been ascertained.
The question of any outstanding ability to mitigate tax liability will become apparent during the due diligence phase of the transaction and will therefore need to be covered in the transaction documents. Depending on the nature of the retention any withholding may be treated as conditional payment of the purchase consideration and dealt with accordingly.
Final considerations; Expertise matters
When working with companies for these types of transactions, we have found that the matters are often resolved during the negotiation process and when the purchase has successfully been completed.
However, the key takeaway for any purchaser should that quality legal and tax advice should be a priority before commencing with an acquisition in Romania. We will help to ensure that the whole transaction is conducted with the minimum tax and legal liability for both parties as permitted by law. Contact Us!
How to Get the Acquisition Ball Rolling
Acquiring a company in Romania is actually much simpler than many realise. Doing internationally is a challenge, but when done correctly, it can be a streamlined process that enhances your business hugely.
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