Setting up a branch of a foreign company in Romania
Acting as we do for foreign investors in Romania one of the first questions, we are asked is what type of entity should we register in Romania. As a Romanian law firm we try and approach this from a more pro-active way. It would be very easy to advise the incorporation of a company in Romania but there are times when a branch of the parent company is a better option. This can happen for many reasons especially when the client wants to leverage the parent company balance sheet for investment or other reasons.
The legal regime through the Romanian Civil Code and Companies Act recognizes that the branch of either a foreign nationality company or a Romanian based company is considered an extension of the parent company. The branch does not have the same legal capacity as a limited liability company or a shareholding Company. It does not have a separate distinct share capital, and as mentioned above it uses the share capital of the parent company. Although, it does not have legal capacity, the Romanian courts recognizes its capacity to stand trial in certain cases. For example, when it involves a trial in regard to a contract concluded by the representative of the branch in the name of the branch, and in the country of the branch’s registration, and it is not acting as a proxy of the parent company, the branch itself can stand trial for the performance or non-performance of contract. Whilst t will have this capacity this liability will flow back to the parent company.
The branch can perform any of the authorized activities of the parent company which do not require special authorization from the different institutions in Romania. Such activities can be individualized in the Decision to register the branch and it is recommended to do so.
The person in charge of the branch is the branch’s legal representative. Their powers are usually strictly determined in the decision to register the branch, therefore not leaving room for any kind of interpretation as regards to what extent he can conclude and perform contracts on behalf of the parent company. This is important both for potential customers as well as the parent company. There is also the possibility to appoint more than one representative of the branch with the same comments regarding their powers and limitations and their possibility to act either individually or jointly.
As to the restrictions which need to be set in place when setting up a branch. It is necessary to strictly determine for example in contracts as to what amount the branch can conclude and perform contracts, or what kind of contracts can be conclude on behalf of the parent company, as the parent company is the one that shall be liable for the non-performance of the contract in cases where the branch is not able to properly perform its obligations under the contract.
The fate and future of the branch is tied to the parent company, meaning that when the parent company undergoes liquidation or re-organisation the branch will be liquidated or reorganized as well.
In relation to the fiscal obligations of the branch it is considered in certain circumstances as a separate taxable entity by the Romanian Tax Authorities. The branch must be registered as a profit tax payer therefore paying profit tax for the income generated from Romania. The tax on profit in Romania is currently 16%. The branch can be registered as a VAT payer to recover the VAT for the operations performed in Romania.
The name of a branch is composed of the name of the parent company, the region/district where the parent company is headquartered and the word Branch in Romanian and the name of the city/region where the branch is registered. Although, it is not mandatory to reserve the name it is recommended to reserve it prior to commencing registration to ensure the name is reserved by a third party.
For the registration of the branch there are several documents which have to be provided. As the branch is not a separate legal entity it does not require its own share capital using upon the registration the annual financial situation of the parent company from the previous financial year concluded according to the legislation of the state of origin. If this state is not in the European Union, or the European Economic Area the financial situation must be audited and published according to the Romanian legislation if the foreign state does not have similar provisions.
Upon registration there are several statements which must be given by the branch through it’s authorized representative/representatives who also have to provide a specimen of their signature. In addition, a certified copy of the Articles of Association of the parent company, the decision to register the branch issued either by the board of directors or the shareholders of the parent company and proof of registration from the country of origin. As with any other legal entity in Romania there is the need for a registered headquarter evidenced by a rent contract together with the relevant documentation of the premises which will shall be the headquarter. This can in limited circumstances and for a short period of time be a virtual office.
The debate as to whether to register a branch or a separate legal entity (“subsidiary”) will have to be decided by the investor who will also have to consider liability issues in relation to the business, financing and employment and management issues.
As a Romanian law firm, we have assisted and provided legal and commercial legal advice in relation to setting up many branches in Romania. Our experience is that there is no clear cut answer to the decision that has to be taken by the management as to a branch or subsidiary as it will depend on the individual circumstances and the development of the company.
Nicholas Hammond/Costin Botnărenco