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Romania Needs A Sense Of Legislative Predictability To Persuade Multinationals To Reinvest Their Profits Here

Romania Needs A Sense Of Legislative Predictability To Persuade Multinationals To Reinvest Their Profits Here
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Estimation: approximately EUR 1,700 million is the amount that can represent the profits of foreign-owned companies for the year 2018, which could be reinvested into the economy in 2019. However, the decision depends on the State’s legal and tax framework predictability

After a foreign investment stagnation period in Romania during the 2012-2014 years, starting with 2015, these have surged in Romania on a yearly basis with approximately 8%. Investors from countries such as the Netherlands, Germany, Austria, Italy or France manage a portfolio of approximately EUR 48,387 million, which is roughly 64% of the total foreign investments in the Romanian market (EUR 75,851 million as of December 31, 2017), according to the statistical information provided by the National Bank of Romania in its Report for Direct Foreign Investments in Romania for 2017.

However, all these investments were made from profits realized in periods prior to 2017, periods in which to a certain extent, the tax and legal framework was predictable in Romania. More specifically, from 2015 until the end of 2017, the profit which was reinvested in Romania by these foreign-owned companies represented approximately EUR 3,381 million. On a yearly basis, the reinvested profits were increased by about 7% in comparison to previous years. For instance, 32.9% of the total profit for 2017 recorded by foreign-owned companies was reinvested in Romania. This leads us to the conclusion that the estimated return on investment was at least reasonable, not to say exceptional.

To date, no statistical information was published regarding 2018. Leaving aside the unpredictability factor of the tax and legal framework which could influence the foreign investors’ decisions when closing the 2018 financial year, theoretically, if the bullish trend which was recorded in the last 3 years also persisted throughout 2018, an amount of approximately EUR 1,700 million should be reinvested in Romania for the period starting with 2019, with the assumption that the 2018 figures would be somewhat similar to those of 2017. Chances that these figures would be better than expected are high, given that the government has announced an economic growth at the end of 2018, mainly based on consumption that is generated by investors (both foreign, as well as local entrepreneurs). Therefore, in the theoretical scenario in which there still is some confidence left in the Romanian business environment, we could conclude that we have all the premises to sustain a continuity trend in foreign investments in our country. M&A transactions in the recent years confirm the above conclusion. Luxembourg, for example, almost tripled its investments in Romania from 2015 to the present.

However, we should definitely mention that reality has shown that investors tend to show a greater interest in areas which are more predictable for business, from a tax and legal framework perspective. Business plans are made for a minimum of 3 years. Many of the investors are required to prepare certain reports on a frequent basis, given that they are listed on the stock exchange or need to comply with the requirements set up by the final investor. Legislative unpredictability, such as the approval of unexpected fiscal taxes and/or parafiscal taxes could easily dismantle business plans that were built throughout the years and could create an adverse climatic feel for foreign investments.  For example, as it was previously mentioned, the Netherlands is the largest investor in Romania. Why? Because the investments in Romania were made on the premises of long-term investments. The results of such investments, which have increased with 48.4% since 2012, represent one of the pillars of our economy. Hypothetically speaking, if many these investors, which have future business plans in Romania, are required to report on a quarterly basis to third parties such as stock exchanges, as mentioned above, the ambiguous figures could lead, sooner or later, to an interruption in their activity in Romania, or lack of future investments. Such decisions could have a huge impact on the economy and should be proactively anticipated when preparing tax and economic policies with immediate effect, implemented through legislative levers such as emergency ordinances.

In conclusion, whilst the relevant information from the closing of the financial year of 2018 is still pending and is expected to become available shortly, it would be beneficial for the Romanian economy if the positive investment trend from 2015 up to date to be continued by the investors, and at least partially, for the profits realized in 2018, to be reinvested in the Romanian economy. However, it is worth mentioning that, from our extensive practice, a substantial number of investors, not only those from the IT sector, are reluctant to continue their bet on increasing their investments in Romania, referring to the unpredictability of the legislative framework, which has caused some unpleasant surprises during the last (1) one year.  

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Cromwell Evan Global in association with boutique law firm, Vernon | David, provides integrated tax, law and business advisory services.

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