United States: Industrial Parks ~ An Innovative New Investment Incentive

Having slammed foreign investors twice in 1999 with the retroactive abrogation of most statutorily guaranteed tax incentives and, finding, to its dismay, that foreign investors reacted by ignoring Romania, the government recently began to restructure an incentive program to bring investors back.

First, the incentives offered to investors in free trade zones and disadvantaged areas of the country, after some debate, were excluded from the obliteration of the other incentives. Then this new Law was enacted which presents a diversified range of incentives for investors conducting business within an "industrial park" that can be located in almost any part of the country, and is targeted at specific areas of national economic interest.

It differs from the legislative scheme for free trade zones because of the extraterritorial nature of such zones. Activities within such free trade zones are, in effect, regarded as outside of the tax scheme of the country. Interestingly, the Law allows for the possibility of instituting a free-trade zone regime within an industrial park should the companies operating in the park produce or provide services for export purposes only.

The new Law also differs from investments in disadvantaged zones, which afford incentives to investors in order to raise the economic level of the particular geographic area so designated. Such economic areas must meet at least one of the specific conditions required by Law 20/1999 for it to enjoy the status of a disadvantaged zone, for example, the unemployment rate must be 30% higher than the national average in such area.

The Law provides more attractive incentives to entities conducting business in an industrial park than does other existing legislation, such as:

1. the duty free importation and VAT exemption for machines, equipment, agricultural machinery and any other amortizable goods necessary for the investment, as well as for their installation and for the importation of raw materials, spare parts and components for building, repairing or maintaining the business located within the industrial park;
2. a tax exemption for the profit reinvested in technological development, industrial infrastructure, and in activities sustaining the development of the industrial park, all for a five year period from its commission;
3. co-financing with or without repayment, from the funds allocated for the development of industrial parks, up to 25% of the total investment requirements necessary to continue infrastructure and utility facilities in the industrial park. In other words, if a utility network in the park is not ready, and an investor is willing to contribute to the completion thereof, the government may grant to such investor no more than 25% of what would be sufficient to continue or finish such works. Exceptions are made for external finance, when the limit of co-financing is left at the discretion of the foreign finance provider. As regards the sources of such funds managed by the ANDR, the Law sets forth that they may either be apportioned as special funds under the annual budget law or under the PHARE Program, as structural funds or non-refundable financial aid. A major shortcoming of the Law is that it omits to specify the criteria to be met for the allocation of the respective funds. Instead, the Law makes reference to the Norms, which are yet to be issued; and
4. local tax concessions that may be granted for a maximum of five years by municipal or county administration bodies at the place of such industrial park.

In addition to the incentives afforded to corporations operating in industrial parks, as noted above, the holder of a license to manage an industrial park may enjoy a number of other favorable provisions. A tax exemption for use of state-owned lands for purposes other than agriculture or forestry and for certain lands no longer used for agricultural purposes, which are necessary for the investment, are also provided for in the Law. These provisions allow for the possibility of obtaining public and/or private land owned by the state under concession or lease agreements, through direct grant, and not by auction.

The Law states that the initiative to commission an industrial park may be brought by the localities, the local Trade and Industry Chambers, professional and employers organizations, and joint stock companies whose sole object of activity is the administration of industrial parks.

Indeed, a foreign investor may form a joint stock company for the sole purpose of managing an industrial park, as long as they meet all of the minimal conditions required by Law detailed below. As such, the newly created entity can initiate an industrial park at the site of its proposed activity and will enjoy not only the incentives that would have otherwise been granted to it as a mere independent investor, but also the exemption from the tax for the use of state land for purposes other than agriculture and from the tax levied on franchisees for diverting agricultural land to other investment purposes.

The ANDR is the state authority designated by the Law to receive proposals and provide analyses and approvals to commission industrial parks. It is also the administrator of such industrial parks. However, all of the criteria for such administration from land titles to budgetary management await the adoption of the Norms, without which, of course, the Law cannot be enforced.

An industrial park title must be granted by order of the ANDR President within 90 days of its registration, for a minimum of 25 years, pursuant to terms and conditions stipulated in the order. The title may be granted to any commercial entity headquartered in Romania and having as its activity the administration of an industrial park. All of the following minimal conditions must be fulfilled:

1. the right of ownership or the right of use for a minimum period of 25 years over the land for such industrial parks must exist;
2. a feasibility study and business plan for a minimum of three years must be part of any application;
3. a minimum of five corporate entities must undertake to do business and provide at least 300 new jobs within a maximum period of three years. Such intention must be supported with convincing documentation;
4. an environmental impact statement regarding environmental protective measures to be fulfilled according to current law must be attached; and
5. the Local/County/City Council’s approval for the entire functional duration of the industrial park, plus the approval of the ANDR stating that the business contemplated by the applicants fits in the Agency's program of social and economic development.

Applications for an industrial park may be denied if the applicant:

1. is currently in judicial reorganization, liquidation or insolvency;
2. has not complied with obligations previously assumed while exploiting another industrial park; or
3. is in default on taxes or other rates due for local or special budgetary funds.

Generally, industrial parks’ licensees must:

1. build and exploit the park within the limits imposed by the feasibility study, the business plan and the specific conditions of the ANDR President s order;
2. present an annual report regarding the Industrial Park s activity by March 31 of the following year;
3. provide quarterly financial reports, as well the annual report, if the project is financed from budgetary or extra-budgetary funds managed by the ANDR;
4. introduce the site to any potential investors, "taking care that the interests of [the existing] developers should not be harmed," at the request of the ANDR and for the purpose of promoting business in the industrial park; and
5. exploit the park through commercial contracts entered into between the licensee of the park and developers, the Law permitting the latter to be Romanian or foreign legal entities, "selected, if necessary, by public auction." Incidentally, the time when an auction must be held is yet another ambiguity of the Law, which future Norms will hopefully clarify.

Failure to comply with such obligations may result in:

1. withdrawal of the Industrial Park title where there is a failure to meet objectives, or the terms and conditions as stipulated in the order of the ANDR President, or there has been a misappropriation of grant funds. Note that a private joint stock company can receive PHARE funds or other grant money from the Romanian government to set up an industrial park through the ANDR. The licensee's forfeiture of his license does not automatically lead to revocation of the incentives already granted to the investors therein. As long as they are not found liable for the reasons that caused the revocation of the license, the investors will be able to continue their operations for the entire duration of the park; or
2. fines that could be double the amount of the initial grant funds or an amount related to the granted incentives plus the legal interests for the voluntary liquidation of the investment or of its specific activity, should this occur within a specified time smaller than the period for which the owner was granted such incentives. This penalty relates to a default from an implicit obligation, which is to maintain in operation the business developed for a period twice as long as the term of the incentives granted, and for which the Law provides a maximum period such as the exemption from tax on reinvested profit, on technological updating, and concessions regarding local taxes. Both types of incentives may be granted for maximum of five years, which means that recipients may not wind up or go into voluntary liquidation sooner than twice the time for which the incentives were granted.

The Law is more than welcome. In the absence of the yet to be published Norms, which may change our conclusion, it appears that the Law is more favorable than existing legislation providing for tax incentives in Romania. Information obtained from the Legal Department of the ANDR indicates that the elaboration of the Norms is in an advanced stage, but no publication date is yet anticipated. Although the Law cannot take effect before the publication of the Norms, as much of the Law contains references thereto, once the mechanism is put in place, it may well serve as an exciting and innovative incentive to foreign investment.

Most significantly, a foreign investor can form a joint stock company (which requires five shareholders) for the sole purpose of managing an industrial park. That newly created entity can initiate an industrial park application for the site of its proposed investment activity and enjoy not only the incentives that would have otherwise been granted to it as a mere independent investor, but also the additional incentives available to industrial park developers. Those incentives include exemptions from the tax for the use of state land for purposes other than agriculture and from the tax levied on franchisees for diverting agricultural land to other investment purposes.

Having experienced the acrid response of the foreign investment community to Romania’s abrogation of tax incentives – and the bite of the electorate to those failed policies -- the new government of Romania will likely embark upon a new effort to attract foreign investment through tax incentives and other forms of beneficial relief. The new Law, if administered liberally, could prove to be a linchpin in the revitalization of the Romanian economy.