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Offshore Law: many questions, few answers

The draft law which sets the rules for offshore oil and gas exploitation in the Black Sea, also known as the 'Offshore Law', is certainly one of the hot topics of the moment. Recently adopted by the Romanian Parliament, the current form of the draft unfortunately raises more questions than provides for answers.

2018-09-10 15:45:16

The President of Romania has called for the Parliament to review the stability and predictability of the legal framework applicable to this sector.

Further on, we want to point out some ideas, which are mentioned (or not) in the version sent for promulgation (compared to the initial version of the law), that we consider relevant and which can significantly affect the way the Offshore Law applies.

Progressive taxation of additional income obtained from the sale of gas extracted from offshore perimeters, depending on the price of gas

The tax on additional income is determined based on the calculation formulae set out in Annex no. 2 of the draft Law, the tax rates varying depending on the sales price ranges of gas. This tax has not been mentioned in the initial version of the Offshore Law and its introduction generated many discussions. However, this tax is also stipulated, but in a different form, by the Government Ordinance no. 7/2013 regarding the tax on the additional income generated by the deregulation of gas prices. More specifically, the Government Ordinance no. 7/2013 provides a tax rate of 60% for selling prices of natural gas up to 85 lei / MWh and 80% for selling prices of natural gas higher than 85 lei / MWh, and provides that out of the tax base royalties related to the additional income, are deducted. The Offshore Law repeals the provisions of Government Ordinance no. 7/2013 regarding the offshore perimeters and introduces a new calculation formula for offshore supplementary income tax.

Exclusion of the tax credit

The provision, which stipulated that titleholders of offshore permits, executed on the date of the entry into force of the Offshore Law, would benefit from a tax credit for amounts charged by public authorities in addition to the amounts due under this law, has been retracted from the version voted by the Parliament.

Deduction of upstream investments

Although at first glance the deduction of upstream investments seems a major inventive for titleholders, it is in fact limited to a maximum of 60% of total additional income. Furthermore, according to the formula in Annex no. 2, the deduction is calculated and applied on a monthly basis, considering only the value of investments made in the same month in which the sale of gas was actually performed. Thus, it is not possible to carry forward investments made in previous periods. In practice, much of the investment is done before selling the gas extracted from the perimeter. Therefore, to represent an incentive of interest for investors, we believe that a clarification of the law is necessary to allow the possibility of deducting a larger part of the investments.

The exclusion of the text stipulating that titleholders of agreements in progress at the date when the law enters into force benefit from the tax regulations existing at the date when the law enters into force

Although in the explanatory memorandum of the draft Offshore Law it is mentioned that the decision to invest is related to the confidence of prospective investors in a stable and predictable tax regime over the entire duration of the project, the version sent for promulgation seems to disregard this aspect.

Obligation to set up branches or subsidiaries for non-resident subcontractors of titleholders

The Offshore Law sets the obligation for all subcontractors to register a presence in Romania through a subsidiary or branch. This provision may be interpreted as being inconsistent with the existing European legislation (i.e. regarding the free movement of services, which is transposed in the domestic legislation) which clearly prohibits conditioning the provision of services on the territory of Romania, by registering a presence.

According to the EU case law, temporary activities fall under the protection of the free movement of services and this does not require the presence in the state where the services are provided. However, the temporary nature of services is determined based on both the duration of service provision and criteria such as regularity, periodicity and continuity.

Moreover, from a tax point of view, a non-resident must establish a form of incorporation in Romania under certain conditions only. On one hand, a non-resident having a fixed place at his disposal where he has been carrying out his activity for a certain time and through dependent persons, should register in Romania and be subject to corporate income tax. On the other hand, a non-resident providing services remotely would not become subject to corporate income tax in Romania.

The Offshore Law provides significant fines for non-compliance with these provisions, corresponding to 10% out of the total value of the contract.

Additionally, the law provides that titleholders must purchase goods and services from economic operators in Romania and the European Union (under technical and price conditions). The offer should not contain more than 50% of products originating in third countries with which the EU has not concluded any agreement in a multilateral or bilateral framework. The law provides fines corresponding to 10% out of the total value of the contract. Therefore, in order to minimise the risks, titleholders must ensure that they have a clear record with offers received and products originating in third countries.

Another controversy arises from the provision that at least 25% of the employees involved in offshore activities must be Romanian citizens with tax residence in Romania. This raises many questions too, and it is unclear what the legislator understands by ‘employees': if this refers only to the titleholders′ own employees, or the condition must be met for all the employees involved, including those of the subcontractors.

Moreover, the aforementioned regulation on the establishment of a minimum percentage of employees with Romanian citizenship and fiscal residence in Romania may be interpreted as a breach of the EU provisions governing the free movement of persons, one of the four fundamental freedoms of the internal market.

The free movement of persons entails the prohibition of any form of discrimination on employment, with recognition of the same employment priority as that enjoyed by the nationals of the member state concerned.

By imposing the above-mentioned conditions regarding the citizenship and fiscal residence for at least 25% of the employees, shows that there is a will to protect the labour market in Romania and to ensure that a certain percentage of the personnel involved in the offshore activities is subject to income tax and related social security contributions in Romania.

Ensuring the minimum percentage of Romanian citizens with the qualification or experience required for carrying out such specific activities in the exploration and exploitation of natural resources in the exclusive economic zone, the territorial sea and the contiguous area can be a difficult task for the companies involved because the Romanian labour market is not extremely developed in this sector. Therefore, in order to ensure a high and continuous personnel flow, necessary for the optimal progress of development and exploitation of projects in the Black Sea, normative acts have been adopted in the last years, granting access facilities on the territory of Romania to foreign citizens coming from states with extensive experience in this field.

Moreover, irrespective of nationality, income earned by offshore workers for activities carried out in the Black Sea exploitation and exploration projects is already subject to income tax and social security contributions in Romania, in accordance with the provisions of the Fiscal Code, the Double Tax Treaties concluded by Romania with the majority of states, as well as of the Social Security Agreements.
When not observing these provisions, the titleholders may receive a fine equivalent to a gross minimum wage, multiplied by the number of employees for whom the statutory obligation has not been met.


Certainly, in the investment process, especially in a sector where the investment value is significant, a potential investor considers the whole range of risks to determine the feasibility of a project and its economic profitability. Risk factors relate mainly to the size of resources, complexity of production, trade conditions and political and fiscal environment. Therefore, the more an investor in offshore activities takes high risks, the more a predictable, stable and clear fiscal framework is crucial.

Author: Andreea Mitirita,, Partner, PwC Romania

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