EMPLOYEE FINANCIAL PARTICIPATION IN ROMANIA 6 EMPLOYEE FINANCIAL PARTICIPATION IN ROMANIA In Romania in transition, EFP was laid down by art. 178 para.(4) of Law no. 31/1990 concerning Companies, according to which "the founders, administrators and staff of the company shall participate in the benefits, if this is provided for in the articles of association or, in the absence of such provisions, if this was approved by the extraordinary general meeting". This was a lax provision, which left EFP at the discretion of a majority of shareholders. EFP was extremely widespread in the 1990s following privatisations based on the MEBO method. Thus, until the early 2000s, profit-sharing was possible in the form of cash payments in the amount of 10 percent of the net profit, with payments being executed under collective labour agreements at the national level. The change in the philosophy of privatisation in the 2000s towards attracting strategic investors weakened EFP. Somewhat synchronously, starting in 2003, the possibility of EFP provided for in art. 183 paragraph(4) of the Companies Law was amended to remove staff from the category of persons who could apply for profit participation. Currently, according to art. 1 paragraph 1, letter(e) of GO no. 64/2001, amended by GO 61 from 5 August 2004, profit participation is granted by law only in the public sector, in"national companies, national enterprises and commercial companies with capital held in full or majority by the state, as well as the autonomous public entities that have committed and established through their revenue and expenditure budgets, the obligation to participate in profit, as a result of the services of their employees in their relations with them." EFP is granted for up to 10% of the net profit,"but not more than the level of an average monthly basic salary, achieved at the level of the economic operator, in the reference financial year." The idea of changing the law to stimulate the introduction of EFP for all employees is fair and equitable and moreover, importantly, it is already accepted in the business community in terms of its basic principle. The principle of profit-sharing is not considered extreme by the Romanian business elite- as long as it relates to the management. Thus, Deloitte describes the scheme as follows: “Offering benefits in the form of shares in the company is a type of remuneration through which the employer can connect the individual performance of top management employees with the performance of the business, generating both their loyalty and additional motivation. Although the taxation of this instrument is clearly more advantageous than for the usual salary elements, the implementation decision should be generated primarily by the business development strategy and the need for employees to be interested in carrying it out.” From this perspective, Romania is on a good position when it comes to sharing the profit of companies with senior management("stock options pentru top management," as is said in"Romglish"). Thus, according to a recent Deloitte report, offering shares in the employing company to key employees is more fiscally favourable compared to the same scheme in other countries in the Central and Eastern European region. More specifically, the Romanian tax legislation creates a small tax haven for these senior executives because by offering shares, taxation of employees' remuneration is shifted to taxation of their capital income at a rate much lower than taxation applicable to an employment contract. Thus, if the tax burden is 42 percent for work performed, reclassifying this work as capital allows senior executives to receive an additional 32 percent. Romania is also a relatively speaking smaller tax haven for this social strata: while income tax on capital gains is 20% in Latvia, 19% in Poland, and 15% in Serbia and Hungary, it is 10% at present in Romania. 1 1