Romania: Employee Incentives

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in Romania.

This Q&A is part of the global guide to Employee Incentives. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/employee-incentives/

  1. What kinds of incentive plan are most commonly offered and to whom?

    As a rule, there are no mandatory incentive plans expressly provided by law. The decision of offering incentive plans thus lies with the employer, depending on its business organisation needs and typically cascading their group's culture and approach into their Romanian affiliates.

    Incentive plans are used for motivating employees and typically, in practice, there is a distinction between the plans for sales employees by comparison with other categories of employees. More specifically, considering the nature of their work and its direct impact, sales employees are generally incentivised with commission schemes or incentive plans closely linked to sales targets, while the most common type of incentive plan for other categories of employees is the performance bonus. This is also linked to (annual) performance targets / objectives, typically comprising an element of individual performance and an element of business performance of the organisation. Based on our experience, the majority of Romanian employers offer performance-related incentive plans, especially for white collar / office jobs, usually to all their employees.

    Of course, incentive plans may be used not only to motivate employees to do their job and possibly an extra mile for reaching their targets, but also for employee retention and fidelity/ loyalty. In these cases, the incentive depends on the element of time, namely the seniority within the employer (for example, by granting seniority bonuses at certain work anniversaries, such as 5 years, 10 years, 15 years etc.). Flexible-benefits type of arrangements - essentially allowing employees to choose whatever serves them best from a pre-set pool of benefits committed by the employer - are increasingly gaining popularity for the same reason.

    Share option plans are the incentive type that could secure both motivation and retention of the employees as the employee's benefit grows proportionately with the success of the business and the vesting depends on the individual still being employed with the company at relevant dates, therefore covering both elements.

  2. What kinds of share option plan can be offered?

    Romanian legislation is rather silent on the type of share option plans that can be offered to local employees - as this depends on the will of the employer and the rationale for implementing the incentive plans. As the share option plan is generally implemented in the context of an underlying classic employment relationship (or a similar relation between an entity and an individual - such as a director mandate), it is seen as a benefit in kind (part of the remuneration package).

    Notwithstanding the above, Romanian tax legislation contains specific provisions under which a share option plan that fulfils certain conditions may qualify as a tax exempt benefit granted to employees.

    The conditions mainly refer to: (a) the period of time for which the share option plan is implemented; (b) the entity designing and implementing such a plan; (c) the relationship between this entity and the individuals potentially benefiting of the plan; (d) existence of specific terms and conditions for the plan.

    In principle, the aim of such tax legislation is to support the efforts of the business environment to motivate and retain their employees within a highly competitive market. However, in order to claim this more favourable tax treatment, one should ensure that all conditions are met and properly documented - this requires a detailed case-by-case analysis of such motivational schemes.

  3. What kinds of share acquisition/share purchase plan can be offered?

    Similarly with incentives plans generally, Romanian legislation is rather silent in what concerns the type of incentive plans that can be implemented locally, the only difference arising in terms of applicable tax treatment. In this view, the rules are the same regardless of the type of the titles covered by such incentive schemes, as follows: shares of a joint stock company, participation titles in a limited liability company, shares of a listed entity, shares within a closed entity.

    It is however equally noteworthy that we rarely see the actual Romanian employer being in charge with managing the plan and/ or offering its shares as part of the plan. It is more often that the underlying Romanian employment relationship is used to originate and facilitate participation in the plan, which will typically follow rules of a group entity based in another jurisdiction.

  4. What other forms of long-term incentives (including cash plans) can be offered?

    Please refer to our answer to question 1.

  5. Are there any limits on who can participate in an incentive plan and the extent to which they can participate?

    For incentive plans not expressly regulated by law, there are no limits related to participants, mainly depending on the business interest of the employer. For example, some employers offer share option plans only to management level employees whose activity can actually directly lead to the business' success, others (usually in the Technology sector and especially in start-ups) offer them to all employees to secure a strong interest in the success of the business they thus arguably feel more intrinsically linked to.

  6. Can awards be made subject to performance criteria, vesting schedules and forfeiture?

    Typically awards are made subject to performance criteria as this helps measure the success of the business and the individual's own contribution to the respective success.

    Also, subjecting awards to vesting schedules is almost always used for practical reasons, mainly for securing the employee fidelity / retention element, but also for allowing sufficient time for actual calculation of business performance indicators relevant for the incentive plan awards.

    With respect to forfeiture, employers typically document incentive plans through internal regulations, internal policies / plans or other documents issued by the employer alone/ unilaterally (without requiring employee consent). This is intended for securing their unilateral character and therefore to showcase the employer's flexibility in unilaterally amending or even terminating the plans. Certain incentive plans however require employee consent, such as the relevant agreements executed in relation to share options. However, in these cases, as anticipated above, it is generally recommended that this is granted by a different entity than the employer to keep it completely separate from the employment relationship and from the individual employment agreement executed between the employee and the employer. This is meant to clarify that the relevant documents for implementing this compensation are civil / commercial agreements, outside the scope of the employment relationship (even if granted in consideration of the individual's capacity of employee of the employer). Nevertheless, case-by-case analysis is always recommmeded.

  7. What are the tax and social security consequences for participants in an incentive plan including: (i) on grant; (ii) on vesting; (iii) on exercise; (iv) on the acquisition, holding and/or disposal of any underlying shares of securities; (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.

    The tax implications (from an income tax and social security contributions) depend on the type of the plan implemented by the employer, as follows:

    A. if the incentive plan qualifies as a non-taxable benefit (meaning that all conditions contained within the Romanian tax legislation are complied with), the only taxable event arises for the participants at the moment when the shares are sold. At this moment (i.e. disposal of shares), any gains obtained by the participants represent taxable revenues and are subject to income tax (currently of 10%). Certain declarative obligations also need to be fulfilled by the participants.

    Depending on the level of the gains derived from the sale, the participants may also owe health fund contribution for their gains - the applicable thresholds in what concerns the level of the gains derived are subject to updates and approvals.

    B. if the incentive plan does not qualify as a tax-exempt benefit, the participants would be considered to receive salary assimilated revenues (taxable) represented by the difference between the market value of the shares/ titles received and the price they paid for such shares/ titles (if the case). If the shares/ titles were granted free of charge, their entire market value represent salary assimilated revenue and is subject to tax.

    Nevertheless, the participants do not have any reporting or payment obligations, since the employer (or the entity that qualifies as deemed employer) has the obligation to compute, declare, withhold and pay to the Romanian state budget all salary related liabilities. These obligations arise at exercise moment - since this is the moment when the participants effectively receive the benefit.

    Regarding the loans to be offered to participants within such incentive plans, this is not a common practice on the Romanian market. From a tax perspective, any loans received by the employees that are not reimbursed represent salary assimilated revenues.

  8. What are the tax and social security consequences for companies operating an incentive plan?

    Similarly as for the previous case, the consequences for the companies (employers or deemed employers, within the scope of tax legislation) depend on whether the incentive plan qualifies as taxable or not, as follows:

    A. for non-taxable incentive schemes - the employer does not have any obligations towards the authorities, since the participants are solely responsible to declare their gains and pay the corresponding income tax and social security contributions.

    B. for schemes that do not meet the specific conditions - they are fully taxable and the employer (or deemed employer) has the obligation to compute, declare, withhold and pay to the state budget the income tax and social security contributions. This obligation arises at exercise moment.

  9. What are the reporting/notification/filing requirements applicable to an incentive plan?

    The share option schemes (regardless if they qualify as non-taxable benefits or not) should be based on structured plans that represent supporting documentation from a tax perspective. Such documentation does not need to be filed with the authorities, but should be readily available and provided to the authorities upon their request.

    Moreover, implications from a capital markets perspective should be considered - for this, please see below our input to question 13.

  10. Do participants in incentive plans have a right to compensation for loss of their awards when their employment terminates? Does the reason for the termination matter?

    Since, as a rule, incentive plans are not expressly required / provided by law, the eligibility and granting rules can arguably be unilaterally established by the employer as designer and issuer of the incentive plan. Typically, in practice, employers implement several eligibility and granting conditions, including that the individual is still employee of the company upon certain events (such as vesting, payment etc.), the employee is not on notice for termination etc. The reason for termination is also relevant, as plans usually "sanction" terminations initiated by the employee (via resignation) or related to the person of the employee (for example, disciplinary termination, poor performance termination, etc.) and, arguably, not necessarily restructurings. This is because the aim of the plan is to incentivise good performers with long-term loyalty towards the employer.

    Therefore, in cases in which the employees fail to observe the "continued employment"-related conditions, they are not granted the award. In principle, they should have no right for compensation for loss of their award in these cases, but it depends on how the plan and conditions are drafted. In some cases, a pro-rated amount may be exceptionally granted, however, it depends on the conditions in the plan.

  11. Do any data protection requirements apply to the operation of an incentive plan?

    As a rule, there are no data protection requirements specifically applicable to the operation of an incentive plan. However, the employer should consider the general applicable principles of the General Data Protection Regulation ("GDPR") - especially the integrity and confidentiality principle - with respect to the personal data of the employees benefiting from an incentive plan.

  12. Are there any corporate governance guidelines that apply to the operation of incentive plans?

    Romanian law does not set out specific express guidelines for the operation of incentive plans.

  13. Are there any prospectus or securities law requirements that apply to the operation of incentive plans?

    Potential prospectus requirements should be considered when envisaging to grant equity-based compensation to the employees of a Romanian subsidiary.

    It is unlawful for a public offer of securities to be made without prior publication of a prospectus approved by the Romanian Financial Supervisory Authority ("FSA"), unless the offer or the offered securities qualify for an exemption provided by law.

    Listed companies fall under the capital market regulations, so all share option plans which offer shares in a listed company to employees must comply with the prospectus requirements.

    It is debatable to which extent options to acquire shares (which are generally not transferable) are "securities" or not. Where the options are not transferable and are awarded at no cost for the employees, one could argue that such should not be deemed as "securities".

    However, since there is no clear general guidance, it should be further assessed whether exemptions to the prospectus requirements are also incident. There are various exemptions under the law when there is no need to have a prospectus approved by the FSA (considering either the type of offer or the type of securities). For example, there is no need to publish a prospectus should the offer be addressed to less than 150 natural or legal persons (other than qualified investors) per Member State. In addition, there is no need to publish a prospectus if the securities are offered, allotted or to be allotted to former or existing members of the management or employees by their employer, or its parent company or a subsidiary, but this exemption currently applies only provided that the respective issuing company has its head office or registered office in the EU or, if established in a non-Member State, its securities are listed on an EU-regulated market or (subject to an equivalence decision adopted by the European Commission on the request of the competent authority of the Member State) on a third-country market. However, companies will need to make available a document containing mainly information about the issuer and the number and nature of the securities and the reasons for and details of the offer.

  14. Do any specialist regulatory regimes apply to incentive plans?

    Please see answer to question 13 above.

  15. Are there any exchange control restrictions that affect the operation of incentive plans?

    In principle, there are no foreign exchange restrictions applicable in this context.

    However, should payments be made to Romanian employees in connection with the options through a Romanian subsidiary, it may be construed that such payments need to be made in Romanian currency.

    Also, should an employee, Romanian resident, hold at least 10% from the share capital of a non-resident company, the respective employee would need to notify the National Bank of Romania of the acquisition of the respective shares.

  16. What is the formal process for granting awards under an incentive plan?

    Since, as a rule, incentive plans are not expressly required / provided by law, the formal process for granting awards is usually unilaterally established by the employer. This, of course, depends on the type of incentive plan and specific conditions established for granting. However, considering that, as a general rule, in practice, the majority of incentive plans are performance-driven, the process typically starts with reviewing the individual performance results of the employee and/or the business performance results of the employer. Based on the outcome of this review, the award is calculated based on the formula established by the company and afterwards communicated to the employee.

    Provided that the incentive plan is share based, it should be implemented based on an framework detailing the conditions and the applicable mechanism for granting the award, as well as certain documentation supporting the accession of the employees to the scheme.

  17. Can an overseas corporation operate an incentive plan?

    Strictly from a Romanian employment law standpoint, there are no special prohibitions or limitations when comparing local companies to overseas companies in terms of operating incentive plans. However, from a practical perspective, considering the relevant tax implications is key when taking this decision.

    In practice there are situations when incentive plans are implemented by multinational groups of companies for worldwide employees. Such scenarios are - in principle - also covered by the Romanian tax legislation, but the specifics of each scheme needs to be analysed so as to determine the local tax implications.

  18. Can an overseas employee participate in an incentive plan?

    Strictly from a Romanian employment law standpoint, there are no special prohibitions or limitations between local and overseas employees for participating in an incentive plan. However, from a practical perspective, considering the relevant tax implications is key when taking this decision.

    In practice there are situations when incentive plans are implemented by multinational groups of companies for worldwide employees. Such scenarios are - in principle - also covered by the Romanian tax legislation, but the specifics of each scheme needs to be analysed so as to determine the local tax implications.

  19. How are share options or awards held by an internationally mobile employee taxed?

    The tax treatment applicable to share options or awards granted to and held by internationally mobile employees depends on: (a) the tax residence of the employees; (b) the jurisdiction that has the right to tax the salary income (based on source taxation rules) and (c) whether the incentive scheme that the employee has adhered to qualifies as tax-exempt benefit.

    In practice the situation usually depends on various factors - therefore a case-by-case analysis is always necessary.

    For the situation of a truly internationally mobile employee - one that does not have a fixed location where he/ she carries out the activity - the most important factor is his/ her tax residence. Under provisions of Romanian tax legislation, a Romanian tax resident is taxed on his/ her worldwide income and the taxable basis is determined separately for each type of revenue.

  20. How are cash-based incentives held by an internationally mobile employee taxed?

    Cash-based incentive usually represent salary assimilated revenues and are taxed accordingly (i.e. are subject to income tax social security contributions). Within an international mobility context, several factors may influence the jurisdiction that has the right to tax such income, but again an important factor is the tax residence of the individual receiving such incentive.

  21. What trends in incentive plan design have you observed over the last 12 months?

    In the last 12 months the employers have shown an increased interest in implementing share option plans, since such schemes represent useful tools in both (a) motivating and (b) retaining the employees. Combining such elements with the possibility to also have a tax efficient salary/remuneration package to be offered to the employees could transform companies in employers of choice.

    Equally, the extent of the employer's commitment on incentives (in the sense of either (1) the employer retaining as much flexibility as possible on vesting terms, to the point of clearing that the incentives are discretionary and can be withdrawn/ amended unilaterally (similarly to how it was awarded), or rather (2) documenting incentives (as part of either individual or collective employment agreements) for stronger reliability by the employees), as well as due treatment of incentives following complex M&A projects (especially with a transfer of business/ assets component typically triggering, from an employment perspective, the applicability of Acquired Rights Directive related Romanian legislation) remain both highly ranked on the list of employers' main focus points, when it comes to employee incentives.

  22. What are the current developments and proposals for reform that will affect the operation of incentive plans over the next 12 months?

    Legislative reforms that could affect incentive plans are difficult to anticipate, since changes in various fields may potentially have an impact on them (such as tax reforms, regulatory capital markets changes, etc.).

    Strictly from a Romanian employment law standpoint, changes could occur in case trade unions are granted extended powers compared to their current ones and incentives appear on the agenda of collective negotiations (employee benefits being always a top priority for negotiations of collective labour bargaining agreements).