Fri, Oct 1 2010
By Ioana Patran
BUCHAREST (Reuters) - Tough budget measures to keep its international bailout on track have helped prompt thousands of Romanian companies to relocate to neighboring Bulgaria, where lower taxes and more stable regulations offer an easier place to do business.
Bulgaria has corporate and income tax on profits of just 10 percent, compared with Romania's 16 percent, and now also has lower value added tax after Bucharest hiked its rate as part of efforts to meet the conditions of a 20 billion euro EU/IMF bailout.
Sofia has also cut red tape and initial capital for setting up a company is now 2 levs ($1.39), compared with a previous 5,000 levs and 200 lei ($63.55) in Romania. It takes less than a week, almost half the time needed in Romania.
That may seem like small beer, but business people say the speed of the changes forced by the bailout and uncertainty over future cuts in Romania have encouraged them to move base.
Bulgarian authorities have not released precise data, but local media report up to 2,500 Romanian companies have set up there already and another two are registering daily in the border city of Ruse alone.
"Romanian legislation and taxation are changing from one day to another. So how can I have any guarantee, any certainty if I open a company here?" said 23-year-old Bogdan Popescu from Bucharest, who wants to open an online television business.
"I could as well wake up with a 40 percent income tax tomorrow (instead of 16 at present)," said Popescu, who plans to put his headquarters in Bulgaria. "The present fiscal legislation is in no way a stimulus."
The two Balkan countries share a long border and though links can be complicated -- only one bridge connects the states along a 470 kilometer (294 miles) stretch of the Danube -- companies can set up a paper headquarters but still effectively run operations from Romania.
Both suffered deep and painful recession after 2008's financial crisis, but while Romania is having to cut spending and raise taxes, Bulgaria previously ran large fiscal surpluses and has enough reserves to keep taxes low despite dwindling revenues.
Major foreign investment has been at the heart of the transition to developed market economies for countries like Poland, Hungary and the Czech Republic, whom Romania and Bulgaria followed into the EU in 2007.
Taxes in both countries are low compared to most and they remain out on their own in terms of low labor costs, but still have a lack of business-friendly infrastructure.
Bulgaria, however, is the bloc's poorest member and its social security contributions are two-thirds lower. Its sales tax of 20 percent is now lower than in Romania, which hiked from 19 to 24 percent to close its budget gap to the 6.8 percent of GDP demanded under the bailout.
"If Greece and Romania have to battle the crisis by increasing taxes, it will be beneficial for Bulgaria if it does not do the same," said Georgi Angelov, a Sofia-based economic analyst with Open Society Institute.
Lawyers said companies who have already done so are reluctant to talk with media because of concerns they may attract attention from Romanian fiscal authorities.
"There is an increased interest of Romanian companies about costs for setting up a business in Bulgaria," said marketing expert Desislava Grozeva of the Bulgarian-Romanian chamber of commerce, based in Ruse.
"The VAT increase has an effect on Romanians' decision to register businesses in Bulgaria, that's a fact."
Romanian lawmaker Varujan Pambuccian says the country needs to address the situation by making it easier for companies to do business by cutting bureaucracy and ensuring taxes are not significantly higher than in neighboring countries.
The accelerating trend, though not affecting Romania's drive to balance the budget, may yet leave it with serious long-term problems, analysts said.
"This is more an image problem because we don't attract other companies ... Other companies don't come to invest in Romania, and Romania needs investments now," said Nicolaie Alexandru-Chidesciuc, ING Bank's chief economist in Bucharest.
"The impact is very small if we strictly talk about revenue loss. Some 0.1-0.2 percent (of GDP), maybe 0.3 percent is lost."
Denislav Marinov -- a lawyer in Ruse who helps companies register, sift through paperwork and translate from Bulgarian -- said he is now registering four Romanian businesses a month, double the number before the VAT hike in July.
Most of Marinov's such clients are in sectors like wholesale trade, retail, construction materials, transport and farming.
"What is important is that these companies will pay taxes here and not in Romania which means revenues will enter Bulgaria's coffers," said Borislav Stefanov, head of Bulgaria's investment promotion agency.
(Additional reporting by Tsvetelia Tsolova and Irina Ivanova in Sofia; Editing by Sam Cage and Patrick Graham)