Parliament eases procedure for setting up new companies | Romania

15 January 2020 | romania newsletters

Introduction

A series of minor yet impactful amendments will shortly be introduced to the Companies Law, making it easier for investors and entrepreneurs to set up a new company. Parliament adopted the amendments in order to reduce the red tape surrounding company incorporation and encourage investment in the Romanian economy.

The World Bank's Doing Business 2020 Report ranked Romania 91 out of 190 economies with regard to the ease of starting a business. Despite the introduction of some 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 refers precisely to removing such barriers.

Removing restrictions on sole shareholder companies

At present, the Companies Law does 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 will be removed. Despite the abovementioned risks, this change is welcome because entrepreneurs' good will should be implicit in the legislation. Further, in practice, the limitation was bypassed using a series of creative measures which made the procedure for setting up a company even more complicated.

For instance, if a sole shareholder in a limited liability company wanted to set up a new limited liability company to conduct distinct business activities, that person may invite other persons to become shareholders in the new company, in which they would hold one share. 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.

Reducing headquarter-related paperwork

Under the current Companies Law, when a new company is incorporated or its headquarters change, a document must be filed with the Trade Registry ascertaining the use right over the space where the company is or will be headquartered.

If the use right over such space has been transferred to more than one party, as per the records kept by the tax authorities, an affidavit must be filed with the Trade Registry. Such affidavit must ascertain that the structure and area of the building where the company is or will be headquartered allow for multiple companies to function in distinct rooms or distinctly separate spaces.

Further, the number of companies that function in a building cannot exceed the number of rooms or distinctly separate spaces.

The amendments remove both the abovementioned affidavit and the interdiction regarding the number of companies that can function in a building. Thus, a building could host an unlimited number of company headquarters, with no need for extra work to partition the space.

Of course, this measure will contribute to reducing the red tape surrounding company incorporation. However, it also leaves room for situations which might be difficult for the authorities to control, including the case of small buildings which could host large numbers of companies. Such opportunity could be exploited by parties who intend to set up multiple ghost companies in bad faith. Moreover, it might become more difficult for the authorities to control how the functioning conditions are met by companies which share a space.

Household headquarters exception

At present, if a person intends to establish a company headquarters in a household, the law on operating owners' associations in apartment buildings also applies. In such a case, the interested person must obtain written approval from the executive committee of the owners' association and the affected neighbours residing directly next to the respective housing unit.

The amendments introduce an exception to this provision to the effect that such approval is no longer necessary if the company director ascertains via an affidavit that no activity will be performed at the headquarters.

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

Comment

These regulatory changes have only recently been passed by Parliament's decisional chamber – more than two years after they were initiated. To become effective, they must be promulgated by the president and published in the Official Gazette.

Once effective, these changes to the Companies Law will reduce the number of bureaucratic procedures for setting up a company in Romania and may shorten the time that it takes to do so.

For further information on this topic please contact Vlad Săndulescu at Schoenherr by telephone (+40 21 319 67 90) or email (v.sandulescu@schoenherr.eu). The Schoenherr website can be accessed at www.schoenherr.eu.

Vlad Săndulescu

Attorney at Law

T: +40 21 319 67 90
v.sandulescu@schoenherr.eu

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corporate/m&a

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