CIBR Blog

Recent Developments in the Business Legal Environment in Romania

by Reff & Associates SCA correspondent law firm of Deloitte Romania

1. Legal and tax structuring of real estate transactions

2. Public works concession and services concession contracts in Romania

3. Trademarks protection

1.Legal and tax structuring of real estate transactions

The present article, written without the objective to exhaust the subject matter, is intended to illustrate the author’s belief that the legal and tax aspects of transactions are interconnected and may hardly be addressed from one perspective only. The optimization of real estate transactions is just one example among many of how legal mechanics and taxation influence each other in a complex manner, which requires a multi-disciplinary approach.
Phases and structures

In principle (and with a certain degree of simplification), legal and tax optimization of real estate transaction implies at least three phases: due diligence (with respect to property and special purpose vehicle, if any), structuring (considering liabilities, financing, joint venture, various taxes etc.) and implementation (conclusion of contractual documentation, registration, remittance of taxes etc.). The following considerations apply primarily to the structuring part of the process, which is based on conclusions of due diligence and sets the framework for the implementation of the transaction.

There are two main structures for real estate transactions: asset deal - when the property is being sold directly by its owner, and share deal - when the property belongs to a special purpose vehicle (SPV), whose shares are being sold. Thus, the distinction is drawn from the direct or indirect manner in which the owner is selling the property and not necessary from the existence of a corporate vehicle, which may be one established by the buyer for the acquisition. Both structures have various advantages and disadvantages, from both legal and tax points of view, therefore choosing an optimal structure requires the analysis and conciliation of these sometimes conflicting characteristics.
Structuring: legal aspects

The following are examples of legal aspects influencing the structuring of the transaction as an asset or a share deal:

• Foreign investment. Presently, foreign individuals and legal entities may own land in Romania under special restrictions, therefore they may be interested to acquire the shares of a company already owning the property or into which the property is being contributed for the purpose of the transaction. However, the foreign investor may set up its own SPV through which to acquire the property, in which case the transaction itself should be viewed as an asset deal, as the owner is selling an asset and not shares.

• Liability. The acquisition of an asset protects the buyer, to a large extent, from also taking over liabilities of seller. Although certain liabilities do follow the property (such as a mortgage, a short-term lease or a longer-term lease registered in the Land Registry and a few others), most obligations of the seller are not transferred to the buyer. By contrast, in a share deal, the SPV may be expected to also have liabilities, from which the buyer may seek protection mainly through due diligence, representations and warranties.

• Financing and exploitation. Under a share deal, the buyer acquires a structure which gives more flexibility in terms of financing and conducting commercial activities. An SPV, which may be financed with a combination of equity and debt, provides a liability shield for the investor and its scope of activity may be adjusted to accommodate the business contemplated by the investor. As mentioned, the buyer may also set up its own SPV and acquire the property under an asset deal. Finally, certain activities related to the mere exploitation of the property (such as letting) may be undertaken without a corporate vehicle, subsequent to a simple asset deal.

• Joint venture. Real estate transactions are often undertaken in joint venture, for instance between the owner of the land and the investor financing the development of the property. A share deal enables the set up of the joint venture as a corporate entity, much more efficient than an association in participation, which would be an alternative structure corresponding to an asset deal.

• Implementation. In certain cases, pre and post-acquisition formalities related to the implementation of a real estate transaction are simplified under a share deal, for which the more sensitive aspect is probably the remittance of the capital gains tax, on which depend the transfer itself or at least its registration. Under an asset deal involving properties in various counties (for instance when a retail network is being sold), obtaining the documents required for the transfer and then registering the acquisition may be burdensome.
Structuring: tax aspects

Similarly, examples may be given of fiscal aspects influencing the choice of transaction structure:

• Taxation of profit. When the property is owned by a company, which is often the case, particularly in case of foreign investors, an asset deal leads to the company paying 16% tax on the profit realized. As an alternative, more straightforward share deal, the company owning the property may be sold, which make fiscal sense if the owner of the company is a tax resident of a state with which Romania concluded a double tax treaty providing for taxation of capital gains in the country of residence, so that Romanian taxation be avoided completely. Such advantageous holding structure should be put in place as early as possible, ideally from the initial acquisition of the property, in order to avoid challenges by the tax authorities on transfer pricing grounds. A disadvantage for the buyer under such share deal structure is the acquisition of an asset which is undervalued for tax purposes, which implies the existence of a “latent tax” liability.

• Taxation of revenue. Individuals owe at present a tax applied to the value of the transaction between 1%-3%, depending on value and history of ownership. Under a share deal (notwithstanding the possibility, under a tax treaty, to move the tax liability to another, hopefully more advantageous, jurisdiction), individuals owe a tax on capital gains of 16%.

• VAT. In the past, the application of 19% VAT in case of an asset deal, when the seller was a VAT payer, represented a significant downside of the structure, at least in terms of cash flow. More recently, this is no longer the case when both parties are VAT payers, due to the introduction of reverse taxation. However, VAT is still a huge issue in an asset deal in which only the seller is a VAT payer. Value added tax was therefore an important reason for using share deal structure, as VAT does not apply to either the contribution in kind of the property or to the sale of the shares. Alternatively, buyer would set up a VAT-registered vehicle, in order to recover the tax under what remains otherwise an asset deal.

• Transfer taxes. As of January 1, 2007 the notarial stamp duties have been eliminated and replaced, in case of asset deals exempted from tax on revenue (e.g. the seller is a legal entity) with a registration tax of 0.5% to be paid by a buyer legal entity, respectively 0.3% by individuals, for the registration of the transfer with the Land Registry. In addition to the registration tax, notary fees apply at the level of roughly 0.5% (depending on value). These costs may be avoided under a share deal, as the transfer of shares does not have to be done through a notarized agreement. If the corporate structure is put in place for the purposes of the transaction, these transfer costs apply at the contribution of the property, presumably at a lower value, which still allows some savings.
Concluding comments

The above list of legal and tax aspects of asset and share deals hopefully illustrates the complex and often conflicting implications of real estate transactions.

Not surprisingly, an advantage for one party may translate into a cost or risk for the other party, such that agreeing on the optimal structure of a deal becomes not just a technical but also a negotiation exercise. For instance, a seller may wish to minimize taxation applicable to the transaction (either by paying a lower capital gains tax, say 1%, or by avoiding it altogether under a double tax treaty) and thus prefer a share deal. In his turn, the buyer may be concerned about taking over liabilities of such corporate structure and inheriting a “latent tax” liability, related to the difference between the transaction price and the fiscal value of the asset.

In the negotiation process, a well-advised party will identify all such implications and will either seek to impose its own structure or trade the disadvantages resulting from the other party’s proposed structure against financial or other compensation.

2. Public works concession and services concession contracts in Romania

 
The Romanian legal framework

Romanian law provides for several types of instruments through which State or local authorities entrust undertaking of works, supply of goods or services to private investors, namely by means of public procurement, public works concessions and services concessions contracts. The relevant legal framework was dramatically modified in 2006, following EC’s recommendations and with a view to comply with Romania’s engagements in the field of ensuring free movement of goods in the context of Romania’s accession to the EU. Currently, the key legal instrument governing public procurement, public works concession and services concession contracts is Government Emergency Ordinance No. 34/2006 (GEO No. 34/2006), entered into force on June 30, 2006 approved, modified and supplemented by Law No. 337/2006. GEO No. 34/2006 aims to harmonize the relevant Romanian legislation with several EU directives in the area of public procurement, including Directive 2004/18/EC, Directive 2004/17/EC, Council Directive 89/665/EEC, and Council Directive 92/13/EEC. The contracts falling under the scope of GEO No. 34/2006 are public procurement contracts and concession contracts. With respect to public works and services concessions, GEO No. 34/2006 establishes the general framework for granting such contracts, while the specific provisions regarding the substantiation of the decision to undertake the project, the method of transfer and recovery of the object of the concession, the method of preparation of the granting documentation and application of procedures are regulated through Government Decision No. 925/2006 (GD No. 925/2006) and Government Decision No. 71/2007 (GD No. 71/2007).
Concession concept under Romanian law

Romanian law does not provide for a definition of concession and the references are always to a concession contract. The attempt to define the concept of concession is difficult as it has a general meaning which is wider than the one used in the procurement context. Thus, the term concession is used to describe a number of commercial arrangements – from contracting services to the offering of an opportunity to run an asset owned by the State, sometimes being also used as a synonym for a public private partnership (PPP) (i.e., a PPP can be created through grant of a concession). Generally, concession could be defined as a form of cooperation between the public sector (as initiator of public interest projects) and the private sector (as finance and management supplier for the respective projects). Given the specific provisions currently regulating the grant of concessions in Romania, the concept of concession could be defined as a medium or long term relation between the public and private sectors based on which the former grants and the latter undertakes a certain activity of public interest through a contractual arrangement, sharing the rights and benefits and using their expertise and resources with a view of creating a public asset or performing a public service.
Types of concession contracts

EGO No. 34/2006 regulates two types of concession contracts, specifically public works concession contracts and services concession contracts. However, EGO No. 34/2006 does not apply to concession of public assets – as regulated by Emergency Government Ordinance 54/2006 regarding the legal regime of the concession contract of public assets and Government Decision No. 168/2007 approving the Methodological Norms of application of Emergency Government Ordinance No. 54/2006 – except for the case in which such concession of public assets is granted for the purpose of performing public works or services.

The concession of public works contracts, respectively of service concession contracts, are the contracts having the same characteristics as the works contract/services contract, based on which the contractor (concessionaire), receives from the contracting authority (conceder), in consideration for the works/services to be carried out, the right to exploit such works upon their completion/supply such services, taking over the highest share of the operating risks attached together with the right to receive certain payments. In case that the highest share of the operating risk does not stay with the private partner, the contract will be qualified as a public works/services procurement contract (i.e., versus concession). In all cases, it is essential for a concession contract that based on it, the concessionaire receive the right to exploit, in total or in part, the works or the services with the observance of the objectives and quality standards established by the conceder. The concessionaire also receives the right to use the assets object of the concession contract in accordance with their nature and the scope mutually agreed by the parties.

Distinction between the concession contract and the public procurement contract shall be made in accordance with the distribution of the risks attached to the performance of public works and services. However, the law does not provide for the risk definition. The conceder may use, as a model, the preliminary matrix of the project’s risks repartition contained by Annex 1 of GD No. 71/2007.
The parties of the concession contract

The parties in a concession contract are the conceder, respectively the contracting authority which grants the right to operate a public work or service and the concessionaire, respectively the economic operator which benefits of the right to operate and exploit.

The contracting authority entering into a concession contract could be :

• any State body – public authority or public institution – acting at central, regional or local level;

• any other body governed by public law, having legal personality, set up for satisfying general interest needs, without commercial or industrial character, mainly financed or subordinated, controlled or managed or supervised by a contracting authority as defined above or other body governed by public law;

• any association made up of one or more contracting authorities, mentioned above;

• any public enterprise performing one or several activities relevant in the public utility sectors: water, energy, transport and post, when it grants public procurement contracts or concludes framework - agreements regulating the performance of the respective activities;

• any entity, other than those mentioned above, performing one or several activities relevant in the public utility sectors: water, energy, transport and post, based on a special or exclusive right granted by a competent authority, when it grants public procurement contracts or concludes framework - agreements destined to the performance of the respective activities.

The private partner (i.e., referred in the law as “economic operator”) could be any individual or legal entity, State or privately owned, or a group of such entities, lawfully supplying goods, services or undertaking works and complying with specific criteria related to personal status, economic and financial status, capacity to exercise its professional activity, technical and/or professional capacity, compliance with quality insurance standards and with environment protection standards.
Procedures for granting the concession contract

The contracting authority has the obligation to grant the works concession contracts and services concession contracts in accordance with one of the following four procedures, which, among others are also applicable in case of granting a public procurement contract:

• open tender - any interested economic operator has the right to submit an/the offer;

• restricted tender - any economic operator has the right to candidate and, only selected candidates will have the right to submit the offer;

• competitive dialogue - any economic operator has the right to candidate and the contracting authority conducts a dialogue with the admitted candidates for the purpose of identifying one or several solutions that would satisfy its needs and, on the basis of the respective solution/s the selected candidates would elaborate the final offer;

• negotiation with prior publishing of a participation announcement - procedure through which the contracting authority consults with one or several of the selected candidates and negotiates contractual clauses, including the price, with one or more of them.

The concession contract is granted either based on the criterion of the most advantageous offer from an economic point of view or, exclusively based on the lowest price criterion (in case of open tender and restricted tender); or based on the criterion of the most advantageous offer form an economic point of view (in case of competitive dialogue and negotiation with prior publishing of a participation announcement).
Concluding comments

While EGO No. 34/2006 has entered into force since June 2006, a procedure for granting a concession contract in accordance with its requirements is yet to be completed. It is expected that due to the very detailed and complex information that the contracting authority is required to prepare for the purpose of granting a concession, in the initial stage of application of the law, the competitive dialogue be the most likely procedure chosen by the authority. This would allow that during the stage of the competitive dialogue, the contracting authority benefit of the expertise of the candidates in order to better assess the risks attached to the project and identify the technical, financial and economic aspects of the project. It should be acknowledged that the execution of a concession contract implies a complex process be successfully completed by the contracting authority as a key player, having the power to initiate, choose, cancel or continue the procedure during its various stages, to prepare the main documents of the entire process (most of them such as the tender book/descriptive documentation being part of the concession contract) and the investor.

3. Trademarks protection

 
Changes in trademark protection as of Romania’s EU accession

On January 1, 2007, the European Union has been enlarged, Romania being one of the two newest member states. In the trademarks area, new doors have been opened for the foreign investors, which now can benefit from the already EU registered rights to protect their trademarks also in Romania. As a Community trademark holder, one will not need to file a new application for protection for his designs or brands in Romania. All previously granted Community design and trademark registrations, together with applications that are pending, will automatically be extended to include Romania. It will also be possible to claim seniority in the Community trademark. This means that, with effect from 1 January 2007, you may claim precedence for your national trademark even in Romania. This applies equally to both new applications and existing Community trademark registrations.

Some important points for European Union trademark owners to consider:

• All marks registered or applied for before January 1, 2007 in the European Union will automatically be extended to Romania.

• Owners of national trademark registrations in Romania will not be entitled to use their national rights to bring invalidity proceedings against Community trademarks filed prior to January 1, 2007.

• Office for Harmonization in the Internal Market (“OHIM”) will not be able to raise substantive objections to applications filed in the EU Office prior to January 1, 2007 on the grounds that a mark is generic, descriptive, customary, or deceptive in the Romanian language.

• Community trademark applications filed after July 1, 2006 may be subject to opposition based on earlier rights in Romania.

• Community trademark owners, including those who have filed applications in OHIM prior to January 1, 2007, may claim seniority from both national registered trademarks in Romania and international marks protected in Romania.
Trademark protection in EU

Since 1 January 1993, the free movement of goods, persons, services and capital within the Community has given a European dimension to the trademark policies of an increasing number of companies. EU legislative measures were adopted contributing to the creation of a trademark system which allows on one hand, the registration of a trademark in the entire European Union and, on the other hand, the harmonization of the judicial system of the national trademarks and the protection granted to them. Currently, there are three levels of trademark registration:

• Registration at national level: involves registering identical trademarks in each MemberState of the European Union.

• Registration at international level: makes it possible to register a number of trademarks so that, in each of the countries party to the Madrid Agreement or the Madrid Protocol designated by the applicant, are the same as national registration. This involves applying to WIPO in Geneva on the basis of a trade mark already applied for and registered in a country party to the Agreement or the Protocol. This route is available only to companies having their headquarters or a real and effective establishment in those countries.

• Registration at Community level: the Community trademark offers the advantage of uniform protection in all countries of the European Union on the strength of a single registration procedure with OHIM.

These three types of trademark are not mutually exclusive and each of the three types of trademark offers a level of protection adapted to specific business needs (i.e., the national trademark protection covers the market of a single country, the Community trademark protection covers the entire EU market, and the international trademark covers also the countries outside the European Community).
Trademarks protection in Romania

Romania is a party to the Paris Convention of 1883 for the protection of industrial property, and also signed all subsequent amendments. Romania also adhered to the Madrid Arrangement of 1894 regarding the international registration of trademarks, as well as the international classifications in the field of industrial property, adopted by means of the Nice and Vienna Arrangements. The applicable internal legal framework for trademarks protection, consists of Law No. 84/1998 and the Government Decision regarding the approval of the enforcement regulation No. 833/1998. These regulations detail the procedure for trademarks registration with OSIM, the right of priority and the right of exclusive use, as well as the related obligations.

The right over the trademark is acquired and protected by means of the registration of such trademark with Romanian State Office for Inventions and Trademarks (OSIM), operating in favor of the person who first filed the application for the registration of the trademark (the statutory national deposit). The only exception to the above-mentioned rule is that of notorious trademarks, when the rights are acknowledged over a trademark regardless of one’s failure to file for registration. The notoriety is estimated on a national level and must be proven with documents (in practice being quite difficult to prove).

Any natural person or legal entity, whether Romanian or foreign, is entitled to file with OSIM an application for the registration of a trademark. The representation of foreign applicants before OSIM is compulsory to be done by a Romanian authorized representative, acting on the basis of a power of attorney.

Similar to EU, a trademark can obtain protection in Romania in three different routes: (i) National route, with OSIM, filing a national trademark application, (ii) International route, with WIPO, according to the Madrid Agreement and Protocol and (iii) Community route with OHIM, filing a Community trademark application, the protection obtained extending over all the member states.
Conditions and duration for trademark registration in Romania

In order to be granted protection in Romania, a trademark must fulfil three general conditions: not to infringe other earlier rights, to be distinctive in association with the goods/services to which it refers and not to mislead the public as in several respects, such as the extent of protection, the quality of the goods or services to which it refers, the geographic origin, etc. The procedure for the registration of a trademark in Romania extends over a relatively short period, namely one year from date of filling the application; however, this period may be larger for those trademarks facing with notifications from the Office or third parties’ oppositions. The initial trademark’s registration produces effects starting from the date of filing the application for 10 years, with the possibility to be unlimitedly renewed for successive periods of 10 years, with the payment of the fee provided for under the law.
Solutions for settling the conflict between the national trademark and the Community trademark

Following Romania’s accession to the European Union certain contradictions are likely to appear between Community and national trademarks. Even if the national system coexists with the Community system, it does not mean that identical or similar trademarks should coexist as well (even they have been registered in good faith), if their use is likely to create the risk of confusion or association for the final customer. In the unsought case when national trademarks are identical or similar to the Community trademarks, registered for identical or similar goods, they can coexist only based on an agreement of their respective owners. If not settled amiably, all the conflicts regarding the trademarks will be resolved by filling in the competent courts of law applications for the annulment of the respective trademarks registration. In a conflict between the national trademark and the community trademark the principle of priority of the registration shall apply, so that on the Romanian territory the prior registered trademark shall survive.

Depending on the moment of registration, there are two solutions in case the owners fail to reach an agreement regarding the coexistence of the trademarks:

• In case the national trademark has been registered prior to the Community trademark, it is forbidden to use the Community trademark on the national territory, but the trademark remains valid on the rest of the community territory, where the Romanian trademark cannot be used.

• In case the Community trademark has been registered prior to the national trademark, the cancellation of the national trademark registration may be requested.

Of course, an agreement regarding the problems generated by situations such as the similarity or identity of the trademarks, is possible and the parties may, at any time, conclude a transaction by which they agree upon the use of their respective trademarks, by means of limitation of the interest domains or of the registrations for classes of goods or services which are of smaller interest to each of them.

Reff & Associates SCA correspondent law firm of Deloitte Romania
Soseaua Nicolae Titulescu Nr.4-8, America House, Aripa de Est, Etaj 3, Sector 1, 011141, Bucuresti
Tel.: 0040 21 207 5212
Fax: + 40 21 319 5102
www.deloitte.com/ro/legal

Contact:
Real Estate
Alexandru Reff, Attorney at law - Senior Manager
E-mail: areff@deloittece.com

Concessions:
Georgiana Singurel, Attorney at law - Manager
E-mail: gsingurel@deloittece.com

Trademarks protection:
Sergiu Florea, Attorney at law - Senior Associate
E-mail: sflorea@deloittece.com