Frontier Markets Focus | Romania

Author: Al Emid

Romania aggressively pursues foreign direct investment by providing a number of incentive programs. But international investors should approach each one carefully.

The government of Romania touts many incentives for foreign investment, including its membership in the European Union—meaning a standardized system of laws that apply in all member states, a gateway to 500 million EU consumers—and a rank as the ninth-largest member of the EU in terms of territory.

However there are some legal limitations that Western investors need to recognize in their dealings in the country, according to an analysis prepared for Global Finance by Budapest-based Hugh Owen, partner with responsibility for Romanian transactions in global law firm Allen & Overy. The analysis cautions that transposition of EU legislation into Romanian law does not mean total harmonization of legal principles and cites differences in corporate, real estate, employment and intellectual property law.

Romanian authorities point out the country’s strategic location: close to Europe, the Balkans, the Middle East and North Africa and at the junction of three Pan-European transportation corridors. But for the most part these benefits are as yet unrealized, according to the A&O analysis.

Romania is becoming an increasingly competitive destination for foreign direct investment. Adding to its appeal, the government allows a range of commercial freedoms to outside investors, including the option of working without a local joint-venture partner, although bottom-line considerations such as local expertise and local distribution might influence the decision.

Foreign-owned companies receive the same treatment under the law as domestic investors—often termed “national treatment”—and do not face any restrictions on repatriation of capital and after-tax profits.

But challenges include bureaucracy, poor infrastructure and lack of predictability of the tax regime, whose laws change frequently. The arbitrary passage of ill-conceived revenue measures can serve as a disincentive to multinational investment, explains Owen. He notes, however, that the situation is improving.