Leasing in Romania
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Since the revolution in 1989, Romania has made considerable progress towards the development of democratic institutions and a market economy. Romania's private sector is growing rapidly and has become the chief engine of economic growth. Recently enacted economic reform legislation is helping to create a positive business and investment climate.
Romania started its transition to a market economy from a difficult position. Unlike former communist countries such as Poland and Hungary, Romania had no experience of partial economic reform prior to 1989. Thus, the adjustment shock of the first transitional years caused a sharp contraction of GDP, with gross output falling by nearly a quarter through 1992. However, the implementation of a strict macroeconomic stabilization program starting in 1992-93 arrested this decline and brought about significant macroeconomic improvements.
Economic growth became positive in 1993 with GDP up 1.3 percent, followed by a rise of 3.5 percent in 1994. In 1995 growth was a positive 6.9 percent. On the inflation front, the tight monetary policy and fiscal austerity required by Romania's IMF-backed stabilization plan led to a decline in consumer price inflation from 292 percent in 1993 to 62 percent in 1994 and 27.8 in 1995.
Another important factor in the improvement of the economy is the development of a vibrant private sector which now accounts for 45 percent of GDP (compared to only 13 percent in 1989) and nearly half of employment. Over 80 percent of Romania's farmland is now in private hands and the private sector accounts for 70 percent of retail sales. Privatization lags in the industrial sector where 84 percent of output still originates in state-owned factories.
Romania's economy relies heavily on imports, especially for energy, raw materials, and capital equipment. Total imports increased steadily, reaching $7.1 billion in 1994 and $8.7 billion in 1995. Romanian exports increased 25 percent in 1994 to $6.2 billion and reached $7.5 billion in 1995.
Foreign investment in Romania since the revolution has been disappointing, totalling only $1.7 billion as of mid-April 1996. The annual inflow of foreign capital reached a record $650 million in 1994, but went down to only $323 million in 1995. Germany is the largest investor ($162.5 million), followed by South Korea ($159.1 million), Italy ($147.5 million), and the United States ($134.5 million). American companies such as Coca-Cola, Amoco, Colgate-Palmolive, Kraft/Jacobs Suchard, Proctor & Gamble, Tenneco Packaging, M-I Drilling, IBM, Citibank, McDonalds, Pizza Hut, Oracle, Pepsi, and Reynolds Tobacco have invested in Romania, along with numerous other U.S. small and medium-sized companies. As of mid-April 1996, there were 2,231 U.S. investors in Romania.
Leasing law in Romania:
One of the first attempts to codify a leasing law in Romania started as early as in 1994 - see history of legislative development below. In 1995, this law was replaced by another brief law with only a few clauses.
Click here for the full text of the 1995 law.
Romania's leasing legislation is finally moving closer to those of western countries. On April 28, 1998, Law No. 90/1997 regarding Leasing Companies and Leasing Operations (the "Leasing Law"), which was passed by the Romanian Parliament on March 30, 1998 became effective. The Leasing Law modifies some of the provisions of Government Emergency Ordinance No. 51/1997, enacted in August 1997 (the "Ordinance").
These modifications and amendments partially reflect the public criticism of the previous legislation, which created some uncertainty and ambiguity with foreign and domestic investors and businesses. (See The Romanian Digest™ – November 1997 issue, available at our web site.) Consequently, the expected increase in leasing activities did not come to fruition. In essence, the Ordinance did not permit the business community to engage in "normal" leasing arrangements, in part, because of the large number of administrative formalities and ambiguities with regard to custom duties and tax considerations. For example, the public institutions set forth in the Ordinance for the registration of leased goods were never established, and the custom duties provisions were in conflict with the new custom duties code that also came into effect in August 1997 (Law No. 141/1997).
The registration procedures for certain leased goods and certain accounting
reporting requirements, which were set forth in the Ordinance (Articles 20 and 21), have been eliminated. Previously, moveable leased goods had to be registered in a special registry with the court in the appropriate county where the leasing company's headquarters were located. However, leasing contracts for immovable property must still be registered in the land registry book at the court in the proper county (Article 16 of the Leasing Law).Other administrative formalities which were eliminated include the requirement for the leasing company to register with a department of the Ministry of Finance within 15 days of obtaining its certificate of registration (Article 15 of the Ordinance), and the yearly submission by a leasing company of its balance sheet and its profit-and-loss statement (Article 16 of the
Ordinance). Furthermore, leasing companies no longer have to contribute part of their yearly income for a reserve fund, which contribution was to represent 10 percent of the leasing company's share capital (Article 17 of the Ordinance).A major modification has been to Article 25 of the Ordinance, which allowed Romanian customs officials to levy a charge of 3% of the outstanding custom duties on imported leased goods on a monthly basis for a period of 33 months (because the custom duties code defined leasing as a "temporary
submission"). Now, all imported leased goods are exempt from any custom duties and they have the status of being temporarily duty free goods.Articles 4 and 5 of the Ordinance were also very restrictive with regard to the obligations of both the Lessor and the Lessee. The Leasing Law has recognized the restrictive nature of these provisions by adding language which explicitly states that these obligations shall not be limited by Articles 4 and 5, and that the Lessor and Lessee shall have the right to negotiate and stipulate their rights and obligations in a particular leasing contract.
While the newly amended Leasing Law has made a number of practical modifications to the Ordinance, as the practice of leasing begins to grow in Romania and with the country's drive to join the European Union, the Leasing Law will require some additional modifications so that Romania can have a leasing regime comparable to the United States or the countries of the European Union.
Cross-Border Leasing
The Leasing Law still has not focused directly on cross-border leasing. The tax treatment in this regard needs to be clarified and the ownership rights of foreign lessors has to be protected by effective execution procedures. Since the Leasing Law defines leasing rates as "royalties", this may create confusion, as most of the double- taxation treaties provide for withholding taxes between 10% - 20 % for such royalty payments.Another unclear aspect relates to a provision in the non-residents' tax law
(No. 47/1997), according to which the interest rate on cross-border leasing contracts is treated the same as the interest rate on loan agreements, meaning a withholding tax of 10%. However, neither the tax law nor the Leasing Law provides for a definition of this interest rate. Such ambiguities should be clarified so that foreign investors will have the legal certainty needed to facilitate leasing arrangements with Romanian business - an important means of financing needed goods in a country where obtaining of any type of financing can present a major obstacle.Another important consideration is that the leasing contracts concluded for
more than one year or for more than US $60,000 have to be registered with the National Bank of Romania. However, there are no clear regulations or requirements for obtaining such approvals. Consequently, the situation could arise where the use and implementation of such a business arrangement in Romania would depend upon the whims of a "front-line" bureaucrat.As noted above, the Ordinance took the first steps towards the creation of a local leasing regime. However, the problem with Romanian domestic leasing appears to be the lack of financing and not the lack of legislation. As long as leasing companies cannot easily get financing in a foreign currency of the Romanian Leu for the goods that they have to purchase for their lessees, significant increases in the number of local leasing contracts are unlikely to occur.
A second major problem in this area is that the tax and accounting treatment for leases in Romania is still inferior to that found in Western Europe and the U.S. For example, there should be a clear distinction made between the treatment of financial leasing and operational leasing, and there should be specific regulations setting forth that leased goods must be dealt with appropriately in balance sheets.
The Leasing Law does not provide definitions for financial and operational forms of leasing. The Leasing Law should be modified to clarify such considerations because of the differing tax and accounting treatments ordinarily accorded to such differing arrangements. Due to the different nature of these forms of leasing, clear definitions and specific requirements as to financial and operational leasing would go a long way in clarifying the presently ambiguous leasing situation in Romania.
Consumer leasing is another area that should be explicitly addressed by the Leasing Law. The potential consumer demand for financing substantial purchasing transactions is large.
Presently, the Leasing Law does not provide a definition for a Consumer Lease, which will hinder the development of this type of leasing -- leasing companies and consumers will be hesitant to enter into transactions which are not clearly addressed and specified in the Leasing Law (note the U.S. Uniform Commercial Code – Article 2A – 103 (1)(e) for such a clear definition of a Consumer Lease).
The Leasing Law is another step towards establishing the financial characteristics of a western-style leasing system, but as long as Romanian tax and accounting procedures do not embrace generally accepted Western tax and accounting principles for leasing transactions, this sector of the economy will not develop as it should -- even with attractive custom duties incentives. Consequently, the recent modifications to the Leasing Law could result mainly in an increase in the number of inter- company leasing arrangements as a means of avoiding custom duties, and not in the growth of real leasing transactions, as found in Western Europe and the U.S.
ANNEXURE
Text of the 1997 leasing law in Romania
GOVERNMENT ORDINANCE NO 51/28 AUGUST 1997
on leasing operations and leasing societies
Click here for text of the 1995 leasing law
CHAPTER I - General Provisions
Art. 1 – This ordinance applies to leasing operations where one party, called locator (lessor), pledges, at the indication of another party called user (lessee), to purchase from a third, and to grand the use or possession of a movable or real asset with a view to its commercial exploitation or final consumption.
Leasing operations may have the following objects:
a) the use of industrial equipment;
b) the use of real assets of commercial and industrial purpose, purchased or built by a leasing society, hereinafter called real asset society for commerce and industry (SICOMI),
c) the use of the commerce fund or of another of its intangible elements;
d) the use of durables and of dwelling quarters for natural persons, with observance of the legal provisions on the protection of the consumers.
The following cannot be used in the leasing system:
a) the assets that make the object of a concession;
b) audio and video tape recordings, theatrical plays, man scripts and patents.
Art. 2 – To make a leasing operation, any natural or legal person may forward to a leasing society a firm offer, accompanied by the list of assets that it intends to use, as well as by the documents attesting to its financial status.
Art. 3 – In order to finalise a leasing operation, the user has the right to choose the supplier, with the exception of the case where the leasing society also has the quality of supplier, as well as the company that will insure the asset, with the agreement of the leasing company.
CHAPTER II - The obligations of the Parties to a Leasing Operation
Art. 4 – The leasing company, as locator, is bound:
a) to assure for the user the possibility of negotiating with a supplier of goods the sale and purchase contract on the asset to be used, with the exception of the case when the leasing company has also the quality of supplier;
b) to close a sale and purchase contract with the supplier designated by the user, in the terms expressly formulated by the latter;
c) to close a leasing contract with the user, and give the user, under the leasing contract, all the rights deriving from the sale and purchase contract, with the exception of the right of provision;
d) to grant the user a right to the use of the purchased asset;
e) to observe, at the expiry of the leasing contract, the right of option of the user which consists in the possibility of requesting the purchase of the asset, recovering it or prolonging the leasing contract;
f) to insure the user against eviction by any natural or legal person claiming to have a right of property or any real right on the asset used in the leasing system.
Art. 5 – The user is bound:
a) to receive the asset within the terms stipulated in the sale and purchase contract and the leasing contract;
b) not to conclude a sub-location (sub-lease) contract concerning the asset entrusted without the agreement of the leasing society;
c) to make the payments of premiums, in the value quota established and on the dates set in the leasing contract; the premium paid will be calculated taking into account the margin of profit and the full pay-back of the asset or at lest of part of its original value; in this case, the pay-back system will be established by the parties in perfect agreement, function of the nature of the asset and its original value, in conformity with Law no 15/1995 on the pay-back of the capital put in tangible and intangible assets, with subsequent amendments;
d) to bear the maintenance outlays and pay the insurance premiums related to the asset used;
e) to assume all risks in case of destruction or damage of the asset used by own acts or the acts of its associates, or in cases of force majeure, and to continue premium payments until the value of the leasing contract is fully paid;
f) to defend, in the relations with third parties, the right of property of the leasing company on the asset that makes the object of the lease.
Art. 6 – in case that, at the expiry of the leasing contract, the user expresses the intention of purchasing the asset, the leasing company must take into consideration the previous premium payments, as well as the residual value of the asset, if the contract provides a utilisation term corresponding to the full pay-back.
Art. 7 – The right of option, consisting in the purchase of the asset in conformity with Art. 4 letter e) of this ordinance may be also exercised at the expiry of the leasing contract, if the user forwards a firm and irrevocable purchase offer.
Art. 8 – The actual rights of the locator on the asset used on the basis of a leasing contract are binding to the syndic judge in the situation where the user i= in the state of reorganisation or compulsory liquidation, in conformity with the stipulations of Law no 64/1995, with subsequent amendments.
The provisions of the previous paragraph shall also apply to the liquidator appointed as per Law no 31/1990 on the commercial companies, with subsequent amendments, if the user is in state of dissolution and liquidation.
CHAPTER III - Responsibility of the Parties
Art. 9 – In case the user refuses to receive the asset within the term stipulated in the sale and purchase contract or in the situation when he is in a state of compulsory liquidation, the leasing society has the right to rescind the leasing contract unilaterally with damages-interest.
The leasing society shall not be liable in case the asset that makes the object of the leasing contract fails to be delivered to the user.
Art. 10 – With the exception of a contrary provision, in case the user fails to pay the premium, the leasing company has the right to rescind the leasing contract and the user is bound to return the asset and pay the premium instalments due and irredeemable, with damages interest. The damages-interest contain the value quota of the premium to be still paid until the expiry of the leasing contract.
Art. 11 – Failure to observe the user's right of option binds the leasing company to the payment of damages equal to the residual value of the asset, if it has been fully paid back, or its circulation value calculated on the date of the expiry of the leasing contract.
Art. 12 – In case of sale of the assets that make the object of the leasing contract until the expiry of the contract term, the buyer is bound by the same obligations as the seller that has to guarantee the fulfilment of these obligations to the user.
Art. 13 – From the moment the leasing contract is concluded and until expiry and repossession, the leasing company as locator is exonerated from any responsibility towards third parties for the damages caused by the assets that make the object of the use and possession of the user.
CHAPTER IV - Leasing Societies
Art. 14 – Leasing activities are authorised by the Ministry of Finance for commercial companies established under Law no 31/1990, with subsequent amendments.
The following are authorised to make leasing operations:
a) the commercial companies that have as object of activity the leasing of industrial equipment, of durables and commercial- and industrial-purpose real estate, of dwelling real estate, or the leasing of the commerce fund or of one of its intangible assets, called general leasing societies;
b) the commercial companies estab-lished by the companies producing industrial equipment or goods of final purpose, without consuming their substance, called integrated societies;
c) the commercial companies that have as object of activity the purchase or construction of commercial or industrial purpose real estate with a view to using or selling them, called real estate societies for commerce and industry (SICOMI).
Art 15 – The Office for Leasing Operations will be set up within the Ministry of Finance and the leasing societies are under obligation to register with this Office within fifteen days from the date they obtained the registration certificate.
Art. 16 – The leasing societies will forward yearly to the Office for Leasing Operations a copy of their accounts and financial statements and of the profit and loss account.
Art. 17 – At the end of each financial-accounting year, the leasing societies are under obligation to set up, out of the benefits made, a reserve fund representing at least 10 per cent of their nominal capital.
CHAPTER V - Contraventions and Penalties
Art. 18 – In case the responsible leasing society fails to observe the provisions under Art. 14, it will no longer have the right to make leasing operations until the Ministry of Finance grants approval, and it will be assessed a fine representing at least 10 p r cent of the value of the contracts concluded.
The contravention and the penalty provided in the previous paragraph will be assessed by the territorial bodies of the Ministry of Finance. Under the law, the leasing society may lodge a complaint against the penalty report with the court within the radius of which the contravention has been perpetrated.
CHAPTER VI - Publicity of Leasing Operations in Movables and Real Estate Matters
Art. 19 – The leasing contracts that have as object the use of real estate will be recorded in the Land Register, part third, of the real estate publicity cadastral register of the court within the radius of which the respective asset is situated. In case changes occur in matters that concern the headquarters of the user or the locator, or changes in the juridical status of the asset, the leasing society and the user must proceed to a correction in the Land Register and the Trade Registry Office.
If the publicity proceedings provided under par. 1 and 2 have failed to be fulfilled, the contract concluded with the user by the leasing society does not bind the creditors of the latter.
Art. 20 – The provisions under Art. 19 shall also apply adequately to the leasing contracts that have as object movables. In this case, the court within the radius of which the main (real) headquarters of the leasing society is established will open a special register for recording the leasing contracts having as object movables. Furthermore, the user is under obligation to inscribe the asset including the identification elements of the leasing society, the right of property included.
CHAPTER Vll - Special Provisions
Art. 21 – The commercial companies undertaking leasing operations, as well as the commercial companies using movables or real estate in the leasing system are under obligation to put down in their books of account the following data:
a) the value of the assets the moment the contract was signed;
b) the total sum of the instalments as per the contract for a fiscal year, including their indexation quota, if the parties have provided in the contract for the periodical revaluation of the quotas;
c) the pay-backs; their payment will be inscribed only by the user;
d) the evaluation, on the date of clos-ing the accounts, of the instalments to be paid back.
The operations will be evidenced distinctly, according to the nature of the leased asset.
CHAPTER Vlll - Final and Transitory Provisions
Art. 22 – The provisions of this ordinance will be also applied in the situation when a legal person sells industrial equipment to a leasing society, to be used in the leasing system, with an obligation to buy it back.
Art. 23 – The industrial equipment or the constructions can be used in the leasing system by several commercial companies if they have concluded a contract with a view to making an investment or using it in common.
Art. 24 – The real estate societies for commerce and industry, SICOMI, that close a leasing contract having as object the use of a construction or the making and use of a construction, can agree on the following:
a) granting the right of use or purchase of the land on which the job undertaken by the contractor;
b) the irrevocable purchase of the building by the user on the expiry of the leasing contract.
Art 25 – The movables that are imported with a view to being used in the leasing system fall in the category of goods temporarily admitted for import without payment of customs duties.
In case of purchase of imported goods in the leasing system, in keeping with the term agreed upon by the parties, under the leasing contract, the purchaser is under obligation to pay the customs duty calculated according to the value of the asset at the moment of the sale, on the basis of the final import customs statement.
In case at the termination of the leasing contract the user has not exercised his right of option on the extension of the contract or the purchase of the asset, and the asset has not been given back, the customs authorities will levy the customs, duties corresponding to the original value of the asset in foreign currency, transformed into lei at the exchange rate in force on the day of notification. (This document was published in "Monitorul Oficial al Romaniei" – Official Gazette – no 224/30 August 1997).
regarding certain measures concerning custom regime for all machinery, equipment and installations imported in leasing system and for the raw materials, spare parts and other materials and components used for the own production of the economic entities No. 12/January 31, 1995
Machinery, equipments and installations necessary for production purposes, imported by the Romanian legal persons based upon a leasing contract are admitted as temporary import, without any custom guarantee, according to the present Ordonance.
Are included in this temporary import regime, without custom guarantee, all the machinery, equipments and installations, less older than two years at the begining date of the leasing contract, proved by any documents or regulations added in the leasing contract.
The period within all these goods must be returned or re- oriented to another custom destination is that agreed by the parts of the leasing contract, but no longer than 36 months.
In case that, at the end of the leasing contract, the leasee of goods mentioned at art. 1 makes his option for buying its, he is obliged to announce the Custom authorities with 30 days before the end of the legal exemption period about this buying operation and to pay all custom duties according to the Romanian Custom List, at the remained value agreed by the partners as the final selling value.
The payment established as mentioned in the above paragraph must be all done until the depositing of the final Custom Statement as irrevocable import.
In case that the period specified in art. 2 granted as temporary import is ended and the goods are neither returned nor bought, the Custom Authorities will collect doubled tax duties related to the value mentioned in The Custom Statement registered at the date of the entrance in Romania of all kind of machinery included in the present Ordonance.
In these situations, the elements for determing the tax duties are those established at the day of registering the Custom Statement for the import of the goods in temporary import regime.
Are exempted for custom duties, for a two years period, all the raw materials, spare parts, other materials and components necessary and effectively used in the own production purposes of foreign investors, which will be processed, transformed or assembled in order to achieve goods with different technical features or with other nature as the materials imported and included in the new product, this new product begin registered in other position in the Romanian Custom List.
Any other regulations concerning the present ordonance is cancelled from this day.