VII. INVESTMENT CLIMATE (Note: This is a succinct presentation of the most salient features of the Romanian investment climate. A full-length Investment Climate Statement will be submitted by mid-October 1994.) Openness to Foreign Investment Recognizing the paramount importance of foreign direct investment to the country's economic development, the Romanian government has been trying to create a favorable investment climate. It has repeatedly fine-tuned legislation (most recently in May 1994) to increase Romania's attractiveness to foreign investors. The investment regime is open. Foreign investors are granted national treatment, have free access to domestic markets, and are allowed to participate in the country's privatization programs. They have the right to own up to 100 percent of enterprises (although joint ventures are the normal pattern) and to convert and repatriate 100 percent of after-tax profits. They are allowed to participate in the management and administration of the investment (consistent with specific terms agreed upon with the local partner), as well as to assign their contractual obligations and their rights to other investors, Romanian and foreign. For the duration of its existence, a foreign investment in Romania will be governed by the local conditions established by the Foreign Investment Law in force at the time of incorporation, unless a subsequent law contains more favorable provisions. Foreign investors enjoy considerable tax incentives, including 2-5 year tax holidays and reductions in succeeding years. Special provisions apply to companies with a foreign capital of at least $50 million, which are exempted from customs duties on raw materials, consumables, machinery and equipment for 7 years, and from income tax for 5 years from the date they start making a profit, on condition they manufacture products with at least 60 percent Romanian content and export at least 50 percent of their annual production. However, should such a company close its operation within 7 years from its inception, it will have the obligation to pay, retroactively, all relevant taxes and duties. The following laws provide the legal framework for foreign investment in Romania: -- Foreign Investment Law No. 35/1991, revised in 1993; -- Company Law No. 31/1990; -- Commercial Register Law No. 26/1990; -- Tax on Profit Law No. 12/1991; -- Privatization Law No. 58/1991; -- Accountancy Law No. 82/1991; -- Foreign Investments in Exploration and Production of Oil and Gas, Law No. 66/1992; -- Free trade Zones Law No. 84/1992. The Romanian Government is fully aware of business concerns related to imperfections in this legal framework and is committed to further improving it with a view to turning foreign investment into a real factor of economic progress. Conversion and Transfer Policies As already mentioned, there is no limit on foreign participation in commercial companies, foreign investors being entitled to establish wholly foreign-owned enterprise in Romania. All profits made by foreign investors in Romania may be converted into a freely usable currency and transferred abroad, after payment of due taxes. Proceeds from the sale of shares, bonds or other securities, as well as from winding-up an investment can also be repatriated. Expropriation and Compensation According to Romanian Constitution, foreign investments are not to be subject to nationalization, expropriation, confiscation, requisition or any other measures of similar effect, except when this is in the public interest, and then only under due process of law and with appropriate compensation. The compensation should be "prompt, adequate and effective." Dispute Settlement Commercial Arbitration is a very important feature of Romanian law for the foreign investor. Foreign companies engaged in trade or investment in Romania often express concerns with respect to the international commercial experience of the Romanian Courts. They fear entrusting the responsibility for resolving commercial disputes to judges who, admittedly, have had little opportunity to understand the functioning of a market economy, international business methods, or even the application of Romanian commercial laws which have not been in use in Romania for any extended period of time. Consequently, many, if not most, agreements involving international companies and Romanian counterparts provide for the resolution of such disputes through arbitration. Arbitration offers a suitable form of dispute resolution which, by avoiding long trials before non-specialized legal courts, meets the requirements of modern international commerce. The parties may choose one or more arbitrators who are specialists in international commerce and the particular industry that is the subject of the agreement. Romania recognized the importance of arbitration in the settlement of commercial disputes when it became a signatory to the New York Convention of 1958 regarding the recognition and execution of foreign arbitration awards. Romania is also a party to the European Convention on International Commercial Arbitration concluded in Geneva in 1961 and the ICSID Convention concluded in Washington in 1965. Arbitration awards are enforceable through the Romanian courts under circumstances similar to those in Western countries. The new regulations create a fresh and modern foundation for the pre-existing International Commerce Arbitration Court administered by the Chamber of Commerce and Industry of Romania (the "Arbitration Court"). The Regulations and Procedural Rules provide for the Arbitration Court to be a permanent non-governmental arbitration institution. The Arbitration Court is totally independent and there is no financial, administrative or organizational dependence upon any state body or institution. The Chamber of Commerce and Industry of Romania is also non-governmental, and is a self governing, public interest organization, statutorily charged with the duty to organize arbitration in Romania through the Arbitration Court and is in no way able to influence the arbitrator's awards. Romanian law and practice recognize applications to other internationally renowned arbitration institutions, such as the ICC Paris Court of Arbitration. In recent years, the Romanian International Commercial Arbitration Court has concluded cooperation agreements with arbitration institutions in such countries as the United States, Austria, Switzerland, India, South Korea, and others. The Tribunal level of the Romanian Courts has jurisdiction to deal with the recognition and enforcement of legitimate awards rendered by any foreign arbitration court. Right to Private Ownership and Establishment Until 1990, the largest part of real property in Romania was owned by the state. Industrial and commercial (office and retail) properties were state-owned. Agricultural land was either state-owned (and operated as state farms); nominally privately-owned but under state control (cooperatives); or owned by individuals. The majority of the urban housing stock was state-owned, being either nationalized or built after 1950. The new Romanian Constitution, adopted in December, 1991 guarantees the right to ownership of private property (mineral resources, air rights and similar attributes are excluded from private ownership). By virtue of the Land Law No. 18/1991, about 90 percent of the arable land, formerly under cooperative control, has been privatized. Land received from a cooperative by a member who did not directly contribute must be held for a minimum period of 10 years. In the residential housing sector, housing units built with state funds (generally after 1950) can be sold to their occupants. Prices and interest rates recognize the rent already paid and the condition of the units in question. The issue of how to privatize nationalized residential properties has not yet been resolved. For commercial and industrial property, land and real estate are being assigned to the commercial companies into which state enterprises were organized as a consequence of Privatization Law 58/91. These commercial companies are now being privatized. Thus as private owners take control of the companies, the land moves to private control. But the vestiges of a xenophobic attitude towards foreign economic domination, first articulated in the Romanian Constitution of 1923, can be found again in art. 41.2 of the new Romanian Constitution which prohibits the ownership of land by foreigners. If strictly applied, this prohibition will severely hinder foreign involvement in the Romanian economy. It will effectively eliminate the possibility of secured foreign lending on real property since lenders will be unable to foreclose and take possession of the secured property. However, it is possible that residential foreigners are not subject to such prohibition. Most significantly, some government officials and legal counsel believe that a Romanian corporation, whether wholly-owned by foreign interests or not, may own land despite such constitutional prohibition because a Romanian corporation is a Romanian juridical person and therefore not a foreigner. If they are right, and one U.S. law firm (Hall, Dickler, Lawler, Kent and Friedman) believes that they are, the constitutional prohibition would not affect foreign investment and would apply only to non-resident aliens. Nevertheless, the argument will be made that such interpretation would subvert the rationale underlying the constitutional prohibition. Protection of Property Rights Romania is a signatory to international conventions concerning intellectual property rights and has enacted domestic legislation that protects these rights. The Association Agreement with the EU also includes specific provisions which reaffirm the country's commitment to internationally agreed rules in this field. Romania has also concluded a number of bilateral conventions designed to protect industrial property. Signatory countries include Belgium, Great Britain, Italy and Russia. -- Patents: Romania is a party to the 1883 Paris Convention for the Protection of Industrial Property and has subscribed to all of its amendments. Foreign investors are therefore entitled to the same treatment as Romanian citizens. A new Patent law, Law No. 64/91, was adopted broadening and clarifying the basis on which a patent is granted. The patent validity period has been extended to 20 years. The period for contesting a patent application is six months. As a member of the Stockholm Convention of the World Organization of Intellectual Property, Romania is currently prepared to sign the Convention for Supplementing the Paris Convention on Patents. -- Copyrights: Romania is a member of the Bern Convention on Copyrights. The Copyrights law has been in force since 1956, with periodic amendments of the royalty regulations. Parliament will be considering a new law in the area, which will cover direct and indirect rights related to a broadened definition of creations. -- Trademarks: Romania joined the 1894 Madrid Agreement relating to the International Registration of Trademarks. The current trademark legislation has been in force since 1967/1968; a draft law has been prepared updating the law's terminology and harmonizing the domestic provisions with the international trends. According to the provisions in force, trademark registrations are valid for 10 years from the date of application, being renewable for similar periods. The first applicant is entitled to registration. The period for contesting a trademark is six months. The industrial property legislation now also includes the Law on the Protection of Industrial Drawings and Models which came into force January 1, 1933; legislation is presently being drafted on the protection of integrated circuit design. The State Office of Inventions and Trademarks reviews patent and trademark applications, issues patents and registers trademarks. Of considerable assistance in creating an improved legal framework for IPR protection in Romanian-U.S. relations is the Commercial Law Development Program (CLDP) initiated by the U.S. Department of Commerce for Eastern European countries. An IPR project organized under CLDP for the Romanian State Office of Inventions and Trademarks is underway. Capital Markets and Portfolio Investment Romania sees and accepts the need for capital markets, being an environment in which financial instruments can be freely bought and sold and where the transaction prices are set by supply and demand. As the privatization process has been evolving more slowly than expected and the enabling legislation is still before Parliament, the capital markets as mechanisms are still developing. Draft securities legislation is currently before Parliament; in the interim the process of establishing a securities commission regulating securities markets and protecting investors has been put in place through Ordinance No. 18/93. While the actual establishment of a stock exchange as provided in the draft legislation has been reserved for Parliament, progress is being made on several necessary aspects of the capital markets environment. This progress has been facilitated by the National Bank of Romania and the International Finance Corporation together with consultants funded by the Government of Canada. Ordinance No. 18/93 and Government Decision No. 552/92 have established a securities commission; the commission is charged with regulating the securities market in order to protect investors. The process principally provides for: registration and licensing of brokers and financial intermediaries, filing and approval of prospectuses; and approval of market mechanisms. The draft securities legislation is expected to be passed by the end of 1994, and the stock exchange will also be established shortly thereafter. The initial activity on the exchange will probably be concentrated in trading of government and private debt issues and in shares of greenfield investment projects. An important factor in reducing investor risk in the stock market will be the implementation of functioning debt recovery mechanisms as the absence of both working bankruptcy legislation and debt recovery court procedures reduces the ability of companies to operate effectively and profitably. Bilateral Investment Agreements Romania has concluded a number of bilateral treaties for mutual guarantee and encouragement of investment. A U.S.-Romanian Investment Treaty (signed May 1992) ensures national treatment guarantees for American and Romanian investors. It provides a dispute resolution framework and intellectual property right protection. Investment Insurance Programs In 1992, Romania became a member of the Multilateral Investment Guarantee Agency (MIGA). The Overseas Private Investment Corporation (OPIC) began operations in Romania in late 1992. Foreign Direct Investment Statistics In spite of the incentives provided by the Romanian investment law, the amount of foreign investment in Romania has not kept pace with expectations. This cautious attitude on the part of foreign investors reflects uncertainties over political stability, concern about productivity, and fears of inadequate return on investment prevailing mainly during the 1990-92 period. While the number of Romanian-foreign joint ventures is one of the highest in Eastern Europe, the volume of total investment is modest. As of June 13, 1994, there were 33,449 Romanian- foreign joint ventures. Total foreign investment was USD 859 million, the main investors being Italy (USD 108 million), the U.S. (USD 99 million), France (USD 90 million), Germany USD 84 million), and Canada (USD 62 million). As of the same date, there were 1,635 joint ventures with U.S. capital, most of them small and medium-size. The largest U.S. investors (more than USD 10 million each) are Coca-Cola, Amoco, and Colgate-Palmolive. A positive development over the last year has been the increase in the number of manufacturing joint ventures which have helped introduce to Romania not only advanced American technologies, but also U.S. managerial skills.