A Branch or a Subsidiary

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One of the first questions as a firm advising potential investors who are thinking of opening a business in Romania, is what type of structure should I be looking at?

Tax considerations aside there are three structures by which a foreign investor can legally have a business presence in Romania.  These are a representative office, a branch or a subsidiary.

Whilst a representative office is not a legal structure recognized as such under the Companies Law 31/1990 it is a structure through which foreign companies do business in Romania.  From a legal perspective, it is a branch of the foreign company.

 It’s position in the Romanian business world arose as it was originally the only way that a foreign company could legally have a presence and be represented in Romania.  Currently, some companies are still represented in Romania by a representative office.  Such an office does not trade in Romania it can only “represent” the foreign company.  It cannot enter into contracts other than those necessary for maintained its presence.

A branch in Romania this is mentioned in the Companies Law 31/1990. A branch is just an extension of the parent company and has no legal personality and no independence from the parent.  Romanian Law no. 105/1992 regulating Private International Law Relationship adopts the international practice by which a branch is governed by the law of its parent company. This is important in respect of setting up the branch for the parent must be legal entity in its own country.

Consequently, if intending to establish a Romanian branch, the business entity remains dependent on the foreign or parent company.  It does not have a distinct legal personality from the parent company, whether Romanian or foreign therefore any liability of the branch flows straight back to the foreign company abroad and impacts its business and balance sheet.

From the Romanian tax perspective, the branch can be treated as a separate entity from the parent for the purpose of assessing profits tax if the parent company is non-Romanian.  In such cases, the Romanian revenue may assess the profit on the branch as what the authorities think it has earned rather than the profit it actually generated.  This can be rebutted by evidence to the contrary.

The more usual structure adopted by foreign investors is to set up a Romanian subsidiary company.  Such a company is a Romanian legal entity with foreign shareholders.  It is a separate distinct legal entity from its shareholders (i.e. a foreign company).

Such a company can be owned one hundred per cent by the foreign company.  It has no connection with the foreign investor other than the fact that all the shares are owned by a foreign company.  There is no transfer of liability.  The subsidiary enters into contracts and employs its staff in the usual way.

The advantage of this to a foreign investor is that the lability of the Romanian subsidiary is it’s alone and has no impact on the balance sheet and business of the foreign company.  The Romanian subsidiary can contract with its shareholder in the normal way as a normal Romanian company and subject to certain exceptions can enter into management contracts with the majority shareholder or indeed any shareholder.  There is no limitation on its business or the way the business is managed in Romania.

The question then asked is – which should I set up.  This depends on the nature of the business and what the client tis trying to achieve.  For example, a number of consulting companies are registered as branches in Romania as they are not concerned regarding liability.  However, for trading and manufacturing companies we always recommend the setting up a subsidiary as this keeps the liabilities incurred in Romania in Romania.

Each case is different and needs to be assessed at the time the client is considering investing in Romania.