Republic of Moldova A. Definitions and sources of data

Data on foreign direct investment in the Republic of Moldova are reported by the National Bank of Moldova (NBM). Since the 1991 independence, the transition to a market economy was hampered by various unfortunate external factors, including the collapse of the former USSR trading system, the 1992 war in Transnistria and the 1994 drought that heavily impacted the agricultural sector. Though serious efforts were made in implementing reforms, including the return of land to private ownership, the 1998 Russian monetary crisis put the financial system under intense pressure. According to the Constitution, foreign nationals are guaranteed the right of ownership and the protection against unjust expropriation. Current legislation does not make any distinction between foreign and local investors. Under the 2001-2005 programme, emphasis is laid by the Government to create a favourable environment to attract FDI for resource mobilization and private-sector development. Investment opportunities exist in the country. Food-processing industries, textiles and machinery are making important contributions to the economy.

The National Agency for Attracting Investment, a governmental body established in 1998, acted

as a one-stop shop to potential investors and is responsible for foreign-investment development in priority areas. This agency was restructured to become the Moldovan Investment Development Agency, a department within the Moldovan Export Promotion Organization (MEPO). Under the 1992 Law on Foreign Investments and its amendments, foreign investors are defined as persons with foreign citizenship, or citizens of the Republic of Moldova with permanent residence abroad, or legal entities registered abroad, and also foreign states. Contributions to investment capital may be made in cash, in kind, or in rights. Foreign investors may enter business through the establishment of a limited liability company, a joint-stock company and a wholly foreign-owned firm, or through the privatization process. The purchase of an existing company or a proportion of shares of an existing entity is authorized. The exploitation of natural resources, according to concession agreements signed, is possible. Prior to operating a business, registration has to be made with the State Registration Chamber of the Ministry of Justice. A guarantee of unrestricted transfer of profits and of invested capital is given. Foreign investors may generally invest in all activities without any prior approval. However, companies with foreign equity participation of over US$ 5 million have to be approved by the Anti-Monopoly and Competition Department in the Ministry of Economy. Activities in banking are registered with the NBM. Whenever bilateral or international treaties, to which the Republic of Moldova is a party, provide for more favourable terms, the application of these extended concepts will be given priority over local legislation.

To enhance the country’s ability to attract FDI, efforts are made to improve the legislative framework to international standards. The investment regime offers tax and customs incentives to foreign investors. Imported capital goods, which contribute to the formation or expansion of a foreign-investment company, and imports of operating items needed for meeting export production requirements are allowed duty-free entry. The weighted average of import tariff in 2000 was 4.5 per cent. The corporate income tax has been reduced from 32 to 22 per cent. Currently the VAT is set up to 20 per cent. There are no additional taxes on remittances of dividends and interest. The country does not impose any condition on investors to purchase inputs from local sources, or to export a certain percentage of their output. Favourable systems of registration, taxation and financial facilities are available in Free Enterprise Zones.

Data compiled by the NBM are reported in accordance with the guidelines set out in the Balance of Payments Manual, 5th edition, 1993, of the International Monetary Fund. They do not include FDI in Transnistria, territory of the Republic of Moldova. A foreign direct investor is defined to reflect an ownership of 10 per cent or more of the ordinary shares of an incorporated or unincorporated enterprise. In addition to the non-resident’s equity capital, reinvested earnings and intra-company loans, investments in long-term assets are included as FDI. Outward investment flows are recorded only under equity investment and intra-company loans.

B. Statistics on FDI and the operations of TNCs

Table 1. Summary of FDI

(Millions of dollars)

Variable Inward Outward 1. FDI flows, 1998-2001 (annual average) 101.8 ..

2. FDI flows as a percentage of GFCF, 1998-2001 (annual average) 46.2 ..

3. FDI stock, 2001 608.5 ..

4. FDI stock as a percentage of GDP, 2001 41.2 ..

Sources : Based on tables 3a and 4; UNCTAD, FDI/TNC database.

Intra- Intra-Reinvested company Reinvested company

Year Equity earnings loans Total Equity earnings loans Total

1998 54.2 5.8 15.5 75.5 .. .. .. ..1999 36.6 5.7 - 1.9 40.4 .. .. .. ..2000 83.6 11.7 47.5 142.8 .. .. .. ..2001 114.6 8.3 25.8 148.6 .. .. .. ..

Source : Moldova Export Promotion Organization (MEPO), unpublished data.

Intra- Intra-Reinvested company Reinvested company

Year Equity earnings loans Total Equity earnings loans Total

1994 .. .. .. 11.6 .. .. ..1995 65.2 .. 1.7 66.9 .. 0.5 0.51996 21.1 .. 2.7 23.7 .. 0.6 0.61997 69.5 0.9 8.3 78.7 0.4 0.1 0.51998 54.2 5.8 15.5 75.5 0.0 -0.8 -0.71999 36.6 5.7 -1.9 40.4 0.1 .. 0.12000 83.6 11.7 47.5 142.8 0.1 .. 0.12001 114.6 8.3 25.8 148.6 0.1 .. 0.1

Source : International Monetary Fund, September 2002 Balance of Payments CD ROM.

Table 3b. FDI flows, by type of investment, 1994-2000

(Millions of dollars)

Inward investment Outward investment

Inward investment Outward investment

Table 3a. FDI flows, by type of investment, 1998-2001

(Millions of dollars)

Intra- Intra-Reinvested company Reinvested company

Year Equity earnings loans Total Equity earnings loans Total

2001 476.5 32.5 99.5 608.5 .. .. .. ..

Source : Moldova Export Promotion Organization (MEPO), unpublished data.

Note: Data are based on cumulative flows since 1994.

Inward investment Outward investment

Table 4 : FDI stock, by type of investment, 2001

(Millions of dollars)

Table 6 : FDI flows in the host economy, by geographical origin, 2001

(Millions of dollars)

Region/economy 2001Total world 148.6

Developed countries 99.6Western Europe 90.6

European Union 75.8France 10.4Germany 8.9Italy 10.4Netherlands 38.6United Kingdom 7.4

Other Western Europe 14.9Switzerland 14.9

North America 8.9United States 8.9

Developing economies 28.2Virgin Islands 28.2

Unspecified 20.8

Source : Moldova Export Promotion Organization (MEPO), unpublished data.

Table 86 : Largest home-based TNCs, 1999

(Millions of dollars)

Company Industry Sales

A. Industrial

Moldova Steel Works JSC Iron and steel 15.6

B. Tertiary.. .. ..

C. Finance and Insurance Assets.. .. ..

Source : UNCTAD, FDI/TNC database.

Company Home economy Industry Sales

A. Industrial

Acorex SRL United States Beverages ..Alba United States Food ..Balteanca SA Germany Textiles ..Ciment SA France Non-metallic mineral products ..Coca-Cola Bottlers Chisnau SRL United States Beverages ..Fabrica de Produse Lactate din Hancesti United States Food ..Farmaco SA United States Chemicals ..FMI-Hincesti United States Food ..Glass Container Co. United States Non-metallic mineral products ..Link SA United States Electrical equipment ..McDonald's Republic of Moldova United States Food ..Moldkarton Switzerland Paper products ..Neptun Nord SA Italy Fishing ..Orlovschii vinzavod SA Italy Beverages ..Piele SA Italy Leather ..Redeco Moldova United States Petroleum ..Vianta United States Beverages ..Weather Wise SRL United States Machinery and equipment ..

B. Tertiary

Agro-Petrol SA United States Distributive trade ..Air Moldova Germany Transportation ..CET Chisnau, Central and South Spain Electricity ..Cavalleri Ottavio Italy Construction ..Cinematograful Patria Italy Other services ..Complexul hotelier Palase SA Italy Hotel ..Hotelul Chisinau SA Italy Hotel ..Interforum-M United States Distributive trade ..Moldcell Turkey Telecommunications ..Moldtelecom Sa Denmark Telecommunications ..Moldova Gaz Russian Federation Gas ..Moldova Tur SA Israel Other services ..Redeco Moldova United States Business services ..Roua Univers United States Distributive trade ..Sun TV United States Other services ..Tirex Petrol Germany Distributive trade ..Voxtel France/Romania Telecommunications ..

C. Finance and Insurance

Asito Australia Insurance ..Bancoop Romania Banking ..Banca Comerciala Romana Romania Banking ..Banca Turco-Romana Romania/Turkey Banking ..International Commercial Bank of Greece-Moldova Greece Banking ..

Table 88 : Largest affiliates of foreign TNCs in the host economy, 1999

Sources : Business Information Service for the Newly Independent States, Country Commercial Guide to Moldova, FY 2002 , 15 July 2001 (http://www.bisnis.doc.gov/bisnis/country/010725MoldCCG.htm); and the Europa World Yearbook 2000, Moldova, vol. II, 41 edition (London, Europa Publications Ltd., 2000), pp. 2514-2529.

C. Legal framework for FDI

1. National policy framework Moldova is keen to attract FDI. It envisages the creation of a favorable investment climate and

actively promotes foreign investment in the production sector, particularly in scientific and high-tech production areas. It has created a free enterprise zone intended to attract foreign investment and technology. Foreign investors are offered in principle a national treatment concerning access to market, credit, and other business operations. Foreign investment is governed under foreign investments law. Among other things, the law provides foreign investors and investment protection from expropriation, nationalization or other extra legal influence. It also protects enterprises with foreign investment from subsequent legislative acts that might change the business conditions for such enterprises, or that affect the right of the enterprises to continue their operations according to the legislation that has been in force at the moment of their establishment, for a period of ten years after the new legislative acts have come into force. Other relevant legislations include Foreign Exchange Regulations, the Law on State National Bank of Moldova, Decision of the Parliament No. 600-XII/11 June 1991 and Decree of the President No. 6/13 January 1994 on Some Measures to Provide for Currency Control on the Territory of the Republic of Moldova; Commercial Code (No. 7632 of 4 November 1992); Law on Commercial Register (No. 7667 of 28 January 1993); Law on Enterprises and Entrepreneurship (No. 845-XII/3 January 1992); Law on Joint Stock Companies (12 July 1997) Law on Free Economic Zones (Nr. 440-XV/27.07.2001); Law on Procurement of Goods, Works and Services for Public Needs; the law on property; law on small business support; law on financial institutions; law on insurance; law on franchising; land law and the tax Code. As of March 2003, the main features of the national FDI regime included the following:

Admission and establishment: As a rule, all sectors of the economy are open to FDI. In principle,

foreign companies may be established with out approval, subject to the anti-trust law and inline with its security, environmental, health, social and moral concerns. There are few activities that require approval from the government or are closed to FDI altogether. Establishment of an enterprise with investment exceeding US$ 5 million requires authorization. Specific approval is required for businesses in certain sectors including, banking, insurance and joint stock companies, and their branches and representatives. Activities closed to foreigners (and private citizens) include the sale and production of narcotic, toxic, and poisonous substances; sale and production of combat and special military technical equipment; and some types of medical care and treatment. For all purposes, foreign investors enjoy national treatment with regard to licensing, approval, procurement and establishment of businesses. Founders are required to register their enterprise before starting their activities. FDI is not subject to screening per se.

Foreign business may be organized in the form of individual enterprises, General partnership;

Limited partnership; Limited liability company; Joint-Stock Company and Limited partnership by shares. A general partnership is created by two or more legal or natural persons that have consolidated their property with the aim of conducting joint entrepreneurial activity with a common company name under the foundation agreement entered into among them. All members bear unlimited joint and several liability for the partnership's obligations. A limited partnership must have one general and one limited partner. Both the general partnership and the limited partnership are not legal entities. A Joint-Stock Company may be established with shareholders ranging from 1 to 50 for a closed-end company and 1 to unlimited number for an open-end company. The minimum capital requirement for closed-end companies is MDL 10,000 and MDL 20,000 for open-end companies. A foreign company is permitted to open a branch. Branches are registered into the Commercial Register. Companies with foreign participation are registered at the Registration Chamber of the Ministry of Justice. The National Bank of Moldova carries out the registration of banks with foreign participation and their branches.

Ownership and control: Foreign investors in Moldova may acquire property rights on buildings

(and the right to use land on which their premises are built). Agricultural land plots may be rented to enterprises with foreign investment for a term of up to 49 years with or without the right to prolong this

term. If national enterprises are given the right of ownership over certain land, this right will be also given to enterprises with foreign investment.

Operational conditions: There are no local-content or export performance requirements.

Nevertheless, certain projects in the fields of energy, telecommunications, wine, and tobacco designated for privatization carry specific requirements. Both foreign and domestic investors are required by law to disclose certain information. There are no discriminatory visa, residence, or work-permit requirements against foreign investors.

Foreign exchange controls: The foreign exchange regime is governed by the Foreign Exchange

Regulations in accordance with the Law on State National Bank of Moldova, Decision of the Parliament No. 600-XII/11 June 1991 and Decree of the President No. 6/13 January 1994 on Some Measures to Provide for Currency Control on the Territory of the Republic of Moldova. Foreign exchange operations was liberalized based on the adopted stipulations of Article VIII, Sections 2,3 and 4 of the IMF Agreement signed in 1995,which resulted in convertibility of the national currency (MDL), allowing economic agents to freely buy and sell foreign currency for all international currency operations and for some capital operations. There are no restrictions to exchange of foreign currency in cash. Exporters are allowed to collect and keep income from export at their foreign currency accounts and there is no obligatory selling of foreign currency to the state; foreign investors have the right to repatriate profits from their investments. Credit granting and guarantees to non-residents and other capital transfers to non-residents require the authorization of the National Bank of Moldova. The Bank carries out the foreign currency sales and purchase transactions with authorized dealers, foreign banks and the Government. Residents are not required to sell foreign currency if such residents are: authorized dealers; enterprises with foreign investment registered in Moldova, if the share of foreign investors in the capital stock of these enterprises exceeds a pecuniary evaluation of USD 250,000, or 30% of the capital stock. Residents not mentioned above who receive foreign currency in payment for goods, services and labour, exported to non-residents, are obliged to transfer 100% of the received foreign currency to the account with an authorized bank within 15 days from the day of receipt of the foreign currency.

Incentives: The Moldovan legislation offers a number of investment facilities to the foreign

investors. Foreign investors are eligible for a 50% exemption of their profit tax for a five-year period, if: i) the enterprise has foreign capital; ii) the foreign corporate capital has been fully formed; iii) the first profit has been declared; iv) the foreign investor’s equity capital exceeds USD 250,000; and v) more than 50% of the enterprise’s income is derived from the sale of its own goods end services. Foreign investment enterprises are exempted from customs duties for goods (raw materials, semi-fabricates, etc.) imported for the production of goods due for export.

The Government has exceptional competences to grant foreign investors concessions on exploration, extraction and development of natural resources in accordance with its resolutions. The term of natural resources concession may not exceed 50 years. The Government may grant foreign investors the right to use existing objects or objects under construction being a state (municipal) property but not transmitted under economic jurisdiction to enterprises, institutions or organizations. All legal entities carrying out a business activity in Moldova are liable to pay income tax on their taxable profits. From 2002 the standard income tax rate is 22%. This rate is also applied to foreign legal persons operating through a “permanent establishment” in Moldova. Interest, royalties and service fees are included in the company’s gross income for accounting purposes and are subject to income tax at the normal rates. Dividends received by a Moldovan legal entity from another Moldovan legal entity are not subject to income tax. Dividends received from a foreign corporation are included in the taxable income. Enterprises that carry out production activities or render services to the populace, with up to 19 employees, and which gain up to MDL 3 million per year, are exempted from payments of income tax. Enterprises are exempted from income tax by the way of decreasing the tax liable income by 50% of the investments made for the purchase or construction of fixed assets (except for personal automobiles and office furniture), but which do not exceed the amount of the taxed income. The same tax exemption is

applicable to the enterprises that have got their fixed assets on a leasing basis. Small enterprises deriving income from the realization of their own goods and/or from providing services are entitled to 35% tax rate reduction for a two-year period; Commercial banks providing long-term capital investments loans in order to finance project planning, elaborating, mastering and implementing new methods and technologies; reorganizing and modernizing equipment for production processes; planting and trimming of perennial green plantations; purchasing and maturation of spirits for the production of cognacs; wine materials for the production of classic wines, saturated with carbon dioxide, and high quality wines, are exempted from tax on income received on loans provided for a 2 up to 3 years term at a rate of 50%, and at a rate of 100%, provided that the loan has been given for a period exceeding 3 years.

Source: based on information from the Government of Moldova; Law Moldova: Internet (http://www.law-moldova.com/legal_framework_foreign_investors_moldova.html) and the IPAnet Investment Promotion Network (http://www.ipanet.net).

2. International framework

a. Multilateral and regional instruments Moldova is a party to the following multilateral and regional instruments: Paris Convention for

the Protection of Industrial Property of 20 March 1883, as amended and revised; the Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 18 March 1965, signed on 24 Mars 1975, effective 1 June 1991; the ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy, adopted on 16 November 1977; the Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices, adopted on 5 December 1980 by the General Assembly of the United Nations (resolution 35/63); the Convention Establishing the Multilateral Investment Guarantee Agency of 11 October 1985, signed on 30 September 1996; the Agreement on Trade-Related Aspects of Intellectual Property Rights, signed on 15 April 1994; in force on 1 January 1995; the General Agreement on Trade in Services, signed on 15 April 1994; in force on 1 January 1995 (including the Fourth Protocol to the General Agreement on Trade in Services of 15 February 1997 and the Fifth Protocol to the General Agreement on Trade in Services of 12 December 1997 and the Energy Charter Treaty of 17 December 1994, effective since 16 April 1998.

b. Bilateral treaties

1. Bilateral investment treaties for the protection and promotion of investments: China 1992, Romania 1992, Kuwait 1993, United States 1993, Germany 1994, Poland 1994, Turkey 1994, Finland 1995, Hungary 1995, Islamic Republic of Iran 1995, Netherlands 1995, Switzerland 1995, Ukraine 1995, Uzbekistan 1995, Bulgaria 1996, United Kingdom 1996, Belgium / Luxembourg 1996, France 1997, Georgia 1997, Israel 1997, Italy 1997, Greece 1998, Russian Federation 1998, Belarus 1999, Czech Republic 1999, Latvia 1999, Lithuania 1999, Austria 2001 and Croatia 2001.

2. Bilateral treaties for the avoidance of double taxation: Poland 1996, Uzbekistan 1996, Romania 1997, Ukraine 1997, Hungary 1997, Belarus 1997, Russian Federation 1998, Germany 1995, Japan 1998, Bulgaria 2000, Estonia 1998, Latvia 1999, Lithuania 1999, Czech Republic 2001, Switzerland 2001, China 2002, Azerbaidjan 2000, Turkey 2001, Netherlands 2002.

D. Sources of information

1. Official

Department of Privatization and State Property Administration Ministry of the Economy and Reforms Moldova Investment Development Agency National Bank of Moldova (Banca Nationala a Moldovei)

2. Secondary 1. The Europa World Yearbook 2000, “Moldova”, Vol. II, 41 edition (London, Europa Publications Ltd., 2000),

pp. 2514-2529.

2. Business Information Service for the Newly Independent States, “Country commercial guide to Moldova, FY 2002”, 15 July 2001 (http://www.bisnis.doc.gov/bisnis/country/010725MoldCCG.htm).

3. Davidson, Helen, “Russia fall-out: Central Europe under a cloud”, Central European, United Kingdom, Vol. 8,

October 1998, pp. 14-18.

4. Djarova, Julia, “Foreign investment strategies and the attractiveness of Central and Eastern Europe”, International Studies of Management & Orgainization, White Plains, Vol. 29, Spring 1999, pp. 14-33.

5. Euromoney, “Eastern Europe: reshaping the future”, Euromoney, No. 348, April 1998, pp. 51-130.

6. Henriot, Alain, “Economic interpenetration between the European Union and the Central and East European

countries”, Russian & East European Finance and Trade, Armonk, Vol. 34, January 1998, pp. 5-31.

7. Marinov, Marin, “Foreign investor strategy development in the Central and Eastern European context”, International Business Review, New York, Vol. 41, January 1999, pp. 107-130.

8. The Republic of Moldova site, “Search in Moldova database” (http://www.moldova.org/business02.html).

9. Trade Point, “Law of the Republic of Moldova on foreign investments”, Chisnau

(http://tradepoint.moldova.md/Forinv~1.htm).

10. The Washington Times, “Moldova”, The Washington Times, 22 April 1999 (http://www.washtimes.com).