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20 July 2020

Romania eases procedure for setting up new companies

A series of minor yet impactful amendments were introduced to the Romanian Companies Law through Law No. 102/2020, which came into force on 5 July 2020, making it easier for investors and entrepreneurs to set up a new company. The Romanian Parliament adopted the amendments in order to reduce the red tape around company incorporation and encourage investment in the Romanian economy.

The World Bank's Doing Business 2020 Report ranked Romania 91 out of 190 economies when it comes to the ease of starting a business. Despite the introduction of reforms which have made it easier for companies to do business in Romania, barriers persist that make company incorporation inefficient in terms of necessary procedures and time. One of the declared goals of the regulatory changes passed by the Romanian legislature regarding company establishment is to remove such barriers.

Removing restrictions on sole shareholder companies

Before the entry into force of Law No. 102/2020, the Romanian Companies Law did not allow for an individual or legal entity to be the sole shareholder in more than one limited liability company. This restriction was initially created to avoid situations where a single person had multiple legal capacities. Without such restriction, a person could create several limited liability companies and diminish their liability with the aim of committing unfair commercial practices via various channels in order to defraud other parties to the economic group.

The prohibition to act as the sole shareholder in more than one limited liability company has now been removed. Also, from now on, a limited liability company can have, as a shareholder, another limited liability company having a sole shareholder.

Despite the above-mentioned risks, the changes are welcome, since these limitations were anyway bypassed in practice using a series of creative measures.

For instance, if a sole shareholder in a limited liability company wanted to set up a new limited liability company in order to conduct distinct business activities, they would have invited other persons to become shareholders in the new company. In many cases, the only reason additional shareholders would join a new company would be to help the real founder bypass the legal limitation on sole shareholdings in limited liability companies. Thus, they were not genuinely interested in the company's business activity, which made the procedure for setting up a company even more complicated.

Reducing headquarter-related paperwork

Prior to the entry into force of Law No. 102/2020, when a new company was incorporated or its headquarters changed, a document had to be filed with the Trade Registry ascertaining the usage right over the space where the company is or will be headquartered.

If the usage right over the space was transferred to more than one party, an affidavit had to be filed with the Trade Registry ascertaining that the structure and area of the building allow for multiple companies to operate in distinct rooms or distinctly separate spaces. In addition, the number of companies that operated in a building could not exceed the number of rooms or distinctly separate spaces.

The amendments to the Romanian Companies Law do away with the affidavit and the interdiction on the number of companies that can operate in a building. A building therefore can now host an unlimited number of company headquarters, with no need for extra work to partition the space.

This measure naturally will contribute to reducing the red tape around company incorporation. But it also leaves room for situations that might be difficult for the authorities to control, such as small buildings hosting large numbers of companies. This opportunity could be exploited by those seeking to set up multiple ghost companies. It might also become more difficult for the authorities to monitor how the operating conditions are met by companies sharing the same space.

Household headquarters exception

Before Law No. 102/2020 entered into force, if someone intended to establish a company's headquarters in a household, they had to obtain written approval from the owners' association and from the affected neighbours residing directly next to the housing unit in question.

Now, an exception has been brought to this provision whereby such approval is no longer necessary if the company's management ascertains that the company's activity will not be performed at its headquarters.

This change is beneficial for entities that do not conduct their activity at the company's headquarters and only need an official correspondence address for their company.