PERMANENT OFFICE OR SUBSIDIARY?

Are you considering launching your activity on the international market, developing a new activity or rather opening a new production site? If you haven’t decided to establish a company incorporated under the Romanian law yet, you can choose from two legally and fiscally different structures, namely between a permanent office and a subsidiary. Choosing one of these structures depends on mother company’s strategy in the medium and long term.

SUBSIDIARY VS. PERMANENT OFFICE

According to the Law no. 31/1990 relating to companies, a SUBSIDIARY is the unincorporated office of a company, whose registration with the Trade Register is obligatory. After its registration, the subsidiary receives a unique registration number issued by the Minister for Public Finances which is mentioned on the registration certificate of the subsidiary in question, issued by the Trade Register.

That being said, there exists some characteristics which can be resumed as follows:

• non-incorporation, meaning that the subsidiary does not act in its own capacities from a legal point of view in relation to the mother company;


• particular economic, legal and management autonomy in relation to the mother company;


• capacity to conclude legal acts in the name and on behalf of the mother company, within the limits of the power granted to it by the mother company, with or without representation;


• absence of own patrimony; the subsidiary exercises its activity with the means provided by the mother company.

However, it should be noted that although the subsidiary does not have its own patrimony, it does have its own capital, i.e. a number of goods allocated to integrally, but belonging to the mother company from a legal point of view.

• relative independence, in general, the person in charge of the subsidiary has broad legal powers of representation, within the limits established by the mother company;


• capacity to conclude commercial acts and engage in trade, provision of services or works activities;


• capacity to hire staff; work agreements are concluded between the subsidiary and its employees.

Unlike the subsidiary, the PERMANENT OFFICE does not represent a genuine legal structure, but rather a fiscal establishment. It is a fixed establishment by means of which a non resident exercises its activity integrally or partially, directly or through a dependent agent.

The permanent office does not need to be registered with the Trade Register, but with the Tax Administration located in the area where the office of the establishment is to be found. The permanent office receives a tax registration code and a tax registration certificate for non-residents.

From a legal point of view, the permanent office, which is established outside the structure of a subsidiary, is treated as a secondary office of the mother society.

The main characteristics of the permanent office are the following:

• non-incorporation;


• it cannot conclude legal acts in its own name and the legal acts concluded in the name and on behalf of the society, must include the elements granted to it by the Romanian relevant authorities;


• it can conclude legal acts and engage in trade, provision of services or works;


• it generally represents an establishment of a lesser importance (i.e. it has a lighter material structures and limited powers) compared to the subsidiary;


• it implements regular operations in the area where the non-resident is located (even though there are temporary interruptions of activity).

ATTENTION! However, according to the Fiscal Code, some of the activities are not proper to a permanent office, even though these activities are exercised in a fixed place of business.

• it can have employees, but the work agreements are concluded between the foreign legal entity and the employees.

THE TAXATION OF THE PERMANENT OFFICE AND OF THE SUBSIDIARY

Subsidiaries have a fiscal regime similar to that of permanent offices. Thus, each of the two structures:

• shall pay a corporate income tax in Romania at a general rate of 16%;


• can be subject to VAT payment. In certain cases expressly described by the Fiscal Code, the permanent office is obliged to register as VAT payer;


• the net profit registered after the payment of the tax which is to be distributed to the mother company cannot allow for the payment of dividends, because the structures are not entitled to decide whether they are to distribute the profit or not. The profit belongs to the company as a whole;


• fiscal losses are deductible from profits taxable for 7 consecutive years. The losses/ profit of the permanent office are determined by the income and expenses imputed to the permanent office.

Finally, the conclusion is that when we are talking about a permanent office and a subsidiary we are talking about two different representation of a sole society. A subsidiary can represent for instance the first step towards the deployment of a future fiscally independent company in a foreign country.