Up Again Romania: Government Relief and Tax

Restructuring

1. Legislative changes: are there any additional processes or support which have been introduced as a response to the pandemic which I may not have considered previously?

On 14 May 2020, the Romanian government issued GEO 70/2020 addressing several aspects related to the current COVID-19 situation and amending several laws in conjunction with the transition from the state of emergency to the state of alert, which was declared on 15 May 2020 for a 30-day period.

For the first time since the institutionalised response to the COVID-19 outbreak, GEO 70/2020 introduces several relief measures for debtors facing insolvency, which are aimed at encouraging out-of-insolvency restructuring negotiations and workout agreements between distressed debtors and their creditors. The law leaves those debtors who are or become insolvent during the state of alert the option of filing for insolvency, if they choose to do so, but expressly provides that such debtors are not obliged to file for insolvency.

GEO 70/2020 provides that the 30-day period during which – under ordinary circumstances – Act 85/2014 imposes a duty to file on debtors becoming insolvent only starts to run after the end of the state of alert.

Similarly, if there are debtors negotiating a debt workout with their creditors, either as an informal out-of-court arrangement or as a court-supervised conciliation (mandat ad hoc) or scheme of arrangement (concordat preventiv), and such negotiations collapse during the relevant state of alert, the five-day period within which the debtors are ordinarily obliged to file for insolvency following the failure of such negotiations only starts on the end of the state of alert.

The measures indicated above in GEO 70/2020 are reiterated in a bill passed by the Romanian Parliament as Act 55/2020 on 13 May 2020, effective as of 18 May 2020 (the COVID-19 Response Act). COVID-19 Response Act makes more changes to the ordinary legal insolvency treatment, applicable during the state of emergency and the state of alert.

These changes are designed to encourage financial restructuring for those debtors who are insolvent or who are facing insolvency, and the business of which has been stayed, either entirely or partially, due to the measures imposed by the authorities in response to COVID-19, as follows:

  • The minimum aggregate value threshold for an eligible insolvency case is increased from RON 40,000 to RON 50,000 (around EUR 10,000).
  • The additional prerequisite that tax dues should represent less than half of the total value of claims at the time of the insolvency petition is put on hold during the state of alert.
  • The creditors of debtors forced to suspend, entirely or partially, their business during the state of emergency and state of alert due to the intervention of public authorities are allowed to file involuntary insolvency petitions against such debtors only if the creditors have first tried reasonably to reach a debt repayment arrangement with the relevant debtors.
  • The period during which ongoing negotiations are held between debtors and their creditors for preparing or reaching an agreement on a scheme of arrangement is extended for another 60 days and the implementation phase of such an arrangement is similarly extended for two months.
  • Further time extensions are being granted for:
    • ­the supervision period (perioada de observatie) within an insolvency case for three additional months;
    • ­the period available to propose a reorganisation plan, or an amended reorganisation plan, for three additional months;
    • ­the maximum original implementation periods and variation of restructuring plans for one additional year up to four years, with the possibility of a further maximum one-year extension for debtors that have entirely or partially suspended their business due to the intervention of public authorities;
    • ­the implementation of reorganisation plans for two additional months;
    • ­the interruption, on the relevant debtors’ request, of implementation of reorganisation plans for those debtors undergoing court-supervised reorganisations that have entirely suspended their business due to the intervention of public authorities for an additional two-month period; and
    • ­the extension up to five years of the implementation term of reorganisation plans, possibly in conjunction with other amendments of the reorganisation plans for those debtors undergoing court-supervised reorganisations that have entirely or partially suspended their business due to the intervention of public authorities.

2. Is there anything else I should look out for?

Any additional instructions should be made when legislative or secondary measures are adopted in respect of returning to business.

Corporate debtors undertaking financial restructuring arrangements, either bilateral or multilateral, should not overlook the potential tax effect of debt write-offs associated with debt restructuring, which are usually treated as taxable revenue. Tax advice should be sought to devise the optimal tax structure for debt restructuring.

Tax

3. What is the position with respect to the applicability of emergency tax measures , including

a. what they are and apply to;

b. when they are expected to be phased out on or following a return to business; and

c. whether any transitional periods are likely to apply.

There are a series of measures valid for the duration of the state of emergency period (applicable until 14 May 2020), such as:

  • incentive for timely payment of certain liabilities for first quarter of 2020;
  • postponement of payment for tax liabilities that become due during this period;
  • suspension of foreclosure activities;
  • extension of certain deadlines for paying taxes;
  • deferment of VAT payment in customs for imports of certain goods;
  • exemption of tax for entities active in the hospitality sector (accommodation facilities and restaurants); and
  • tax exemption for benefits in cash and in kind for certain categories of employees.

The above are meant to apply throughout the duration of the state of emergency period and, for the second and third bullet points, for a 30-day period after the end of that period.

Starting on 15 May 2020, the state of alert was declared, and additional tax measures were approved, as follows:

  • corporate income tax and microenterprise tax – incentive for timely payment of Q2 and Q3 liabilities
  • social security contributions – exemptions for bonuses granted to certain categories of employees
  • postponed submission of annual income tax returns mandatory for individuals and incentive for payments
  • VAT – exemption for supplies of medical devices and other products used in relation to the COVID-19 outbreak
  • local councils have the possibility to approve reduction of building tax of up to 50% of building tax under certain conditions
  • postponement of payment of income tax derived from events, applicable for resident individuals and non-resident entities and beneficiaries for income obtained from Romania further to performing activities concerning events organisation (i.e. cultural, artistic, sports, scientific, educational or entertainment events) or participating in such events

4. Are there specific steps that businesses should take to prepare for these tax measures being phased out – for example new timing of

a. payment obligations (and therefore likely pressure on cash flow); and/or

b. filing of returns?

Returns were filed as usual during the state of emergency period – no derogation or specific provisions were approved. As regards the payment of corresponding tax liabilities, they were postponed and will become due within 30 days from the date the state of emergency ended.

Businesses should, therefore, assess the potential impact on cashflow and plan accordingly, because any unpaid tax liabilities would generate late payment interest and penalties.

The tax authorities have developed and approved a tax amnesty covering the annulment, under certain conditions, of late payment penalties and interest related to outstanding tax liabilities. This is aimed at decreasing the financial impact of the current crisis on the taxpayers and encouraging payments of outstanding tax liabilities to the state budget.

The amnesty applies to all types of tax liabilities due to the state budget (e.g. corporate income tax, micro-enterprise tax, VAT, salary related taxes and contributions) and/ or to the local budgets (e.g. building tax), and can be claimed until 15 December 2020. For more information, see our article here.

This is in addition to the existing mechanism to ask for an instalment plan in relation to the tax liabilities, which can be accessed under certain conditions.

5. Should the impact of emergency tax measures be reconsidered by businesses – e.g. are there certain legal transactions (such as sales or reorganisations) that parties should preferably postpone or accelerate?

The impact of the emergency tax measures should be assessed on a case-by-case basis, as it depends on the operational activity of each entity and how its business was influenced by the current situation. As the period when the tax measures related to COVID-19 are in effect is relatively short, any major transactions envisaged by a company (e.g. reorganisation) would most likely not be materially influenced by such measures.

However, businesses should consider the indirect impact that the COVID-19 situation may have on their business and transactions, such as the following:

  • the impact on supply chains (difficulties in collecting receivables that would generate provisions and write-offs – deductible under certain conditions);
  • a reduction of activity that would lead to the business not using all the assets (and therefore not being able to deduct the corresponding depreciation)
  • additional loans contracted by a local entity may trigger non-deductibility of interest expenses and similar costs

As this indirect impact would most likely influence the local businesses for a longer period of time (not only for the period of the crisis generated by COVID-19), proper planning and documentation is needed to minimise the tax impact.

6. Are there any additional measures proposed, in particular any that are targeted at particular sectors (e.g. aviation)?

A series of measures were approved by the tax authorities sustain the sectors that were most affected by the pandemic, including:

  • exemption of tax for income derived from rent activities;
  • VAT exemption for supplies of medical devices under certain conditions; and
  • tax exemption for businesses in the hospitality sector.

7. Are there any sectors or interest groups that are now putting forward, or may in the near future request, special tax measures?

Besides the hospitality sector, other industries are requesting support in the form of a reduction of salary-related taxes, so they can resume economic activities.

8. Which taxes might be increased to address the financial burden caused by the crisis, for example,

a. are there political commitments or policy trends that might indicate the likely focus of any tax increase in the future (e.g. to maintain low corporation tax, but to increases taxes on personal wealth)

b. measures to broaden the tax base, such as digital services taxation and a pre-emptive response to the OECD/ G20 Inclusive Framework on BEPS (“BEPS 2.0”)

The authorities have not communicated any intention to change the current level of taxes, and currently there is no political commitment that would indicate such a decision.

9. Are there other actions that ought to be considered by businesses in your country e.g.

a. revisit past tax filings to claim carry back of losses;

b. revise or update preliminary tax assessments;

c. claim bad debt relief for VAT output tax

Local entities can consider making an assessment of their business model and potential areas of exposure that might trigger a tax consequence – both in relation to their own activity and concerning relationships with business partners.

For example, bad debt relief can be claimed only if certain conditions are met and proper documentation is available. So it’s important that these conditions are met, as the value of bad debts may increase considerably in the current circumstances.

Finance

10. What do you need to consider in terms of your funding requirements for returning to business and are there any return to business financial assistance packages being made available by government?

A business may experience a need for further financing, both for investment and to secure the working capital it needs to perform its activity. In this context, a borrower should ensure that any new funding arrangements are permitted under its existing finance documents.

Similarly to other EU Member States, Romania provides financial incentives aimed at supporting both individuals and corporates whose income/revenue stream is affected by the COVID-19 outbreak and limiting the negative impact of the restriction or interruption of economic activities resulting in a severe lack of liquidity.

The Romanian government adopted certain measures to offer financial support to small and medium-sized enterprises by granting state guarantees through the Ministry of Public Finances for loans obtained by SMEs for investment and working capital needs.

Under the RON15 billion (EUR3.1 billion) IMM INVEST ROMANIA financial stimulus programme adopted under GEO 110/2017, as amended by GEO 29/2020 and GEO 42/2020, state guarantees may secure a maximum of 80% of the value of principal under loans obtained by an eligible SME (interest, commissions and fees are not covered).

SMEs may obtain Romanian state guarantees for both investment loans up to of RON10 million (EUR 2.1 million), and working capital loans of up to RON5 million (EUR1 million), respectively, without exceeding the average value of expenses incurred to satisfy working capital needs over the last two years or, under certain circumstances, the liquidity needs of the applicant for the next 18 months, (as ascertained by specific  financial reports and forecasts).

The loans benefitting from state guarantees may have maximum duration of 72 months for investment loans, and 36 months for working capital loans.

Exceptionally, the Romanian state may guarantee up to 90% of working capital facilities (interest, commissions and fees are excluded), provided that the maximum amount of the loans is RON 500,000 (EUR100,000) for micro enterprises, and RON 1 million (EUR204,000) for small enterprises. In all cases, interest is subsidised entirely by the Romanian state.

The Romanian government passed GEO 37/2020, as further amended by GEO 70/2020, extending certain relief for loans granted by credit institutions and non-banking financial institutions to certain categories of debtors. Under GEO 37, the obligation to repay the outstanding debt, consisting of due and payable principal, interest and fees, under the finance agreements extended until the effective date of GEO 37 (i.e. 30 March 2020) is to be suspended, upon the debtors’ request, for a maximum period of nine months, without exceeding 31 December 2020.

Further, the draft law for the approval of GEO 37 (not yet in force) proposes a general debt repayment moratorium regarding enforcement proceedings already started on the date the law enters into force.

Under the current form of GEO 37/2020, borrowers are permitted to file, until 15 June 2020, a request with their lenders to suspend payment obligations arising under loans extended to 30 March 2020. The draft law for the approval of GEO 37/2020 (not yet in force) provides that such requests may be made by borrowers anytime, and that the suspension of payments may not go beyond 31 December 2020.

11. How will funding a return to business, including taking on additional indebtedness, impact on your financial or other covenants?

A borrower should assess:

  • whether any new financing is allowed under the existing financing arrangements and whether any consents or subordination are required; and
  • the impact of additional indebtedness in calculating financial covenants under existing finance agreements.

The ability to obtain new money or to introduce new measures to solve short-term cashflow issues may be limited by existing financing agreements.

As borrowers pursue new funding or conduct negotiations with a view to restructuring their current book of debt, they should act cautiously to avoid breaching financial and other general covenants in existing financing arrangements, which in turn may generate defaults and cross-defaults.

Income reduction or deterioration in asset value may lead to breaching certain financial covenants (such as debt service coverage ratio (DSCR) or loan to value ratio (LTV)) in existing financing arrangements. They could be resolved by way of equity injections or subordinated loans, if available. A partial pre-payment of the loan could result in restoring the financial covenants to acceptable levels. Alternatively, a reset or waiver of financial covenants for a certain period could provide some breathing room, but requires the lenders’ support.

Operating covenants, on the other hand, such as undertakings to remain open daily between certain hours, especially in the case of borrowers that own or operate retail facilities, could also be affected by COVID-19 restrictions (either voluntary or imposed activity limitation). However, a technical breach of such covenants should be carefully assessed, because it may contain important carve-outs.

12. Are there any remedies such as equity cure or margin ratchets that you should be checking on to provide liquidity to prevent a default or improve their financial position?

Though it is difficult to predict the depth of market disruption caused by the COVID-19 outbreak, there will be many businesses – such as those operating in the hard-hit aviation or tourism industries – that will be struggling to remain afloat over the coming months.

Companies should carefully assess their financial positions and, if necessary, their financing arrangements, and proactively address any issues with their lenders as they arise.

One of the most challenging issues for many companies is the preservation of liquidity, because COVID-19 has prompted many businesses to interrupt their activity, with significant impact on their cashflow.

The stakes are high, because liquidity issues may put the company in an undesirable situation where, for example:

  • various defaults occur under its existing financing agreements (including for failure to pass the financial covenants compliance test), which may lead to the lenders accelerating the outstanding loans and demanding repayment, or even taking enforcement action for the relevant events of default; or
  • its ability to access additional liquidity is restricted – for example, where it cannot draw down under existing credit lines (e.g. to secure some cash reserves to meet its ongoing payment obligations).

Though there may be various ways to preserve or improve a company’s liquidity position, and to remedy various financial covenants breaches under existing financing agreements, one solution may come from the company’s sponsors/shareholders wishing and being able to provide an equity cure (e.g. by way of share capital increase).

The existing financing agreements of the distressed portfolio company may already include equity cure provisions that require mandatory prepayment of loans triggered by an equity infusion. Sponsors may be drawing down on their own revolving facilities to meet any capital injection needs, and they should also undertake a review of their existing financing arrangements to ensure they comply with the relevant borrowing conditions under the new COVID-19 pandemic background.

The absence, in the loan agreements, of an equity cure option triggers – in case of a financial covenant default  – the necessity to negotiate with lenders over an amendment or waiver process or, undesirably, even enforcement actions.

Additionally, the financing documentation may also include a margin ratchet. If so, this should be considered by the relevant borrower, as the deterioration of its financial health in the current market affected by the COVID-19 crisis will lead to the increase of the interest to be paid for the respective loan. This is another area of concern that borrowers facing cash -crunch should consider when communicating with their lenders, with the aim of finding viable solutions for navigating through these challenging times.

13. What practicalities do you need to consider in relation to audit requirements?

The state of emergency brings a series of restrictions to free movement of people, goods and services which may also affect the audit processes. Businesses should consider adequate means for documenting internal processes and operations such as holding meetings, performing investigations, using of electronic means and consider replacing  physical human presence and a trail of documents with digital means (such as electronic format documents, electronic signatures). Regardless of these measures, the general auditing process of the annual corporate financial statements may still be complicated by the pandemic situation.

The Romanian government has adopted legislative measures allowing Romanian tax residents to temporarily postpone the filing of their annual tax reports during the emergency period, due to contact restrictions imposed for public officials and the absence of a virtual infrastructure generally available to the public.

If audited financial statements need to be delivered to lenders, borrowers should carefully review their contractual undertakings under the loan agreements to observe the relevant timelines for delivery, and assess whether they should discuss a temporary waiver of these provisions with the lenders, for a period sufficiently long for them to procure the audited documents and additional information.

14. What is the process if I need any amendments made or waivers given under my loan documentation (including in respect of financial covenants)?

Given the negative effects of the COVID-19 pandemic on the business environment, borrowers (particularly those facing sharply decreasing revenues) should proactively engage in regular dialogue with their lenders about all anticipated issues that may affect the performance of their obligations under existing financing agreements.

Equally, lenders are also interested in having this dialogue with borrowers, as they may be concerned about the prospects of facing a breach by the borrowers of their repayment obligations.

Companies in jeopardy will need to weigh up their risks and obligations in the months ahead and review their loan agreements, to consider with their advisors any obligations that may be affected by the COVID-19 pandemic.

This review may reveal that many obligations or conditions provided under the loan agreements are or could be affected by the pandemic: financial covenants may no longer be met, various representations and warranties may no longer be accurate with the consequence that such misrepresentations or beach of covenants breach may result in events of default under the loan agreements. Further, a default under a loan agreement may entail cross-defaults under  other agreements and vice-versa.

Under such circumstances, borrowers should consider approaching their lenders and obtaining temporary waivers of relevant covenant defaults (as a short-term relief), or even discuss with lenders the restructuring of their loan by amending the loan documentation (e.g. if the borrower expects lasting effects from the COVID-19 crisis, or if certain covenants are no longer relevant).

The distressed economic conditions during the COVID-19 pandemic may create opportunities for both borrowers and lenders to seek a restructuring of their financing arrangements, with clauses and conditions specifically tailored for the current circumstances.

15. Dealing with creditors, including amendments and waivers – Bonds

a. If I can’t comply with the terms of my bond covenants who do I need to notify?

Anticipating an impending breach of the bond covenants may require a set of measures aimed at addressing this potential issue.

For example, to the extent the bonds have been the subject of a private placement, and depending on the bond documentation structure and institutional roles, the bond issuer would usually contact the bondholder trustee, agent or similar representative authorised under the bond documentation to communicate with the bond issuer.

The representative will then pass on the information to bondholders via customary channels for consideration of potential negotiations and relief. If there is a small number of institutional investors, the bond issuer may alternatively get in touch with them or with the bondholders holding the requisite majority for waiving or amending the terms of the bond.

To the extent the bonds are listed on a public exchange, caution is required to avoid any inadvertent disclosure or use of market-sensitive information. If the breach of the bond covenants may have an impact on the market price, the bond issuer would need to take adequate advice and inform the market of such failure to meet the relevant covenants, by filing an adequate notice with both the exchange market where the bonds are listed and trading, and the bond issuer’s website, to ensure the constant flow of readily accessible information for current and prospective investors.

b. If I need to ask for a waiver or amendment to the terms of bonds issued by my business what steps do I need to take?

Depending on the type of bond issuance, bond documentation includes provisions requiring the issuer to comply with specified terms on an ongoing basis (maintenance covenants).

Maintenance covenants are aimed at assessing the continuing strength of the issuer and provide early warning signals to the bondholders if the business of the issuer is worsening. In such an event, the bondholder may want to contact the agent or the lead bank to start negotiations for a potential amendment to the relevant covenants, to prevent an imminent default.

In contrast with maintenance covenants, covenants requiring specified actions by the bond issuer on a case-by-case basis are often referred to as incurrence-based provisions (e.g. paying dividends, selling assets, or borrowing extra money). Generally, such incurrence-based covenants would only need test compliance if the bond issuer is proactively interested in taking relevant action.

c. What is the process for contacting bondholders and holding meetings to agree changes in the terms of my bond documents?

Both contacting and holding meetings with bondholders need to be done with the observance of the relevant provisions in the bond documentation. However, the pandemic and the ensuing gathering and travelling restrictions, and the specific limitations on physical interaction with public authorities, may place significant strain on both traditional channels of communication with the bondholders and holding physical meetings.

In contrast with legislative measures taken by Romanian authorities (Romanian government and the Financial Supervision Authority) to facilitate technically advanced methods for convening and holding shareholder meetings, no similar actions have been taken in respect of bondholder meetings.

To the extent the bond documentation does not forbid virtual communication and meetings, the bond issuer should, on its legal counsel’s advice, consider proposing methods similar to those that can be used for shareholder meetings.

This should include effective advance notice communication and accessible means of video and/or audio conferencing allowing the bondholders to log in readily and actively participate in such virtual meetings, while such meetings should be recorded and stored for evidence purposes.

Given the inherent data privacy implications, consent from participants should be obtained regarding the processing of their personal data.

16. Is the availability of any return to business funding or relief either (a) conditioned on the use of proceeds for green or social purposes or (b) linked to sustainability-related outcomes? If so, what are the applicable purposes or outcomes?

Financial stimulus legislation passed in Romania in the wake of the COVID-19 pandemic is not conditional on the availability of funding, or on guarantees on a specific use of proceeds or particular purposes or outcomes to be attained.

The stimulus requires, among other things, that entities have been affected, directly or indirectly, by the effects of the pandemic, such as through the full or partial closing of their business, the decline of income of a certain magnitude, and also the absence of insolvency before the start of the pandemic.