In 2023, Moldova’s GDP amounted to approx. USD 14.5 billion, a slight increase compared to 2022. The 2022 drought was one of the factors that contributed to the decrease of the GDP, leading to a 25.8% reduction of the gross added value of the agricultural sector to the GDP and an overall 2.7% GDP decrease.
The Moldovan economy has been also severely affected by a surge in inflation, which reached an average of 28.7 percent in 2022. Despite the efforts to mitigate the impact of the crises with a forceful fiscal impulse and swift monetary stance, private consumption was restrained by the erosion of households’ disposable income and private investments by the uncertainty and challenging financial conditions, causing the economy to plunge into a recession in 2022. Moldova’s external position has deteriorated due to the impact of the energy crisis and lower remittances.
With a moderate climate and productive farmland, Moldova’s economy used to rely heavily on its agriculture sector, featuring fruits, vegetables, wine, and tobacco. According to National Bureau of Statistics, the impact of agriculture on the economy decreased over the past years, representing at one point 7.9% of the GDP. In recent years, Moldova’s GDP structure has progressively turned towards services, to the detriment of agriculture and heavy industry. ITC sector has grown during the recent years, representing 7% of the GDP in 2022, approaching at one point a total value of revenues of about USD 900 million.
Moldova relies on its traditional advantages, such as being at the crossroads of the major routes linking Europe, the Middle East and the Commonwealth of Independent States (CIS) and having competitive-skilled and inexpensive work force.
Moldova has clear opportunities that can be harnessed to unleash private sector growth. The country has already shown it can produce differentiated products and services. Following the successful example of wine, agribusiness could become a driver of growth by investing in new technology and policy reforms. In agribusiness, with a proactive package of policy reforms, Moldova could double horticulture exports to its main markets, amounting to nearly US$500 million annually. Still incipient, Information and Technology Offshoring (ITO) services are also expanding rapidly, and Business Process Offshoring (BPO) and Shared Service Center (SSC) are showing promising growth potential along with exports doubling in the next decade with continued private investment.
In response to the unfolding energy crisis and import dependence, Moldova can mobilize private investment toward its significant technical potential to generate renewable energy, estimated at nearly 25 gigawatts (GW)—21 GW in wind and 4GW in solar generation—or three times its current installed capacity. Similarly, improving roads and trade border-crossing logistics points alone could boost exports by an additional 0.4−1.8 percent. Finally, the financing gap for micro, small, and medium enterprises (SMEs) stands at 14 percent of GDP, pointing to opportunities for banking and nonbanking financial institutions to expand access to finance for SMEs with adequate regulatory and policy reforms.
On the political dimension, initially after the collapse of the Soviet Union, Moldova had considered its relations with Russia to be of strategic importance. The frozen international conflict in the eastern part of Moldova and sporadic Russian bans on imports of wine and other food products from Moldova, coupled with increased institutionalized support for Moldovan reform projects from EU and US have irrevocably changed the vector of the Moldovan foreign policy and integration effort. A proof that Moldova is currently in a robust manner oriented towards the free, market-based economy serve the latest July 2021 nation-wide elections, which resulted in a landslide win for the pro-European Party of Action and Solidarity (PAS) led by Moldovan President Maia Sandu. On February 10, 2023, President Sandu nominated her defence advisor Dorin Recean to be the country’s new Prime Minister. Dorin Recean, a former Secretary of Security Council and former Minister of Internal Affairs, has pledged to deepen the Moldova’s EU pursuit.
In March 2022, the Republic of Moldova applied for the EU membership and was granted candidate status in June 2022. Notably, the World Bank has designed a Country Partnership Framework for Moldova for 2023-2027, aimed at supporting the country’s sustained recovery focusing on reforms to support job creation and a greener, more inclusive economy and to address Moldova’s longer-term development agenda with the goal to advance the agenda toward EU accession. In December 2023, the European Council decided to open accession negotiations with the Republic of Moldova.
MODERN LEGAL FRAMEWORK
The legal environment in Moldova has improved significantly over recent years, but progress remains uneven. The country’s legal framework consists of its constitution, organic and ordinary laws passed by the Parliament, and administrative acts issued by the government and other public authorities. Moldovan legislation has been fully revised after 1991 and is currently experiencing yet another wave of legal reform. The country has shown important improvements on the registration of business and simplifying procedures to decrease state intervention in business activity, a reform of permits and licenses, streamlined inspection bodies, and the simplified administrative procedures across business operation.
Civil and Commercial Law
The Civil Code is the most comprehensive and detailed legislative act in the area of private law in Moldova. In 2019 it underwent a wide modernization process. This brought domestic private law rules in-line with European and international standards. It enhanced the freedom of contract in B2B transactions and improved consumer protection in B2C transactions. Among the many novelties is the introduction of the law of trusts (fiducia), digital asset, sale of immovable assets under construction and the contractually agreed limitation periods. Many existing concepts have been developed and brought in line with the current stage of economy or technology evolution.
In 2023, the law on crowdfunding services was enacted. The galloping growth of crowdfunding in the last decade has attracted the need for a normative framework to regulate this financing model. The law transposes the provisions of Regulation (EU) 2020/1503 on European providers of crowdfunding services for businesses and amending Regulation (EU) 2017/1129 and Directive (EU) 2019/1937.
Furthermore, the legal framework on limited liability companies has been reformed in the summer of 2023. Amendments include flexibility in profit sharing, corporate contract, phantom stock, distribution of profit regardless of share and greater transparency. Inspiration was drown from the European Model Companies Act and certain legal provisions from the laws of US, Estonia, and Ukraine.
Civil Procedure and Administrative Code
The significant amendment of the Civil Procedure Code, enacted in June 2018 has generally modernized the legal framework and enabled the development of due process.
The amendments to the Civil Procedure Code better equipped the Moldovan judges and good faith trial participants to discourage and curb the hindering and protracting of proceedings. Also, new concepts such as the low value written procedure lawsuits was introduced.
On the administrative side of things, a new Code was enacted in April 2019. All regulations on the administrative non-contentious procedure and the administrative litigation have been structured so that to ensure coherence and accessibility. The new code has drawn inspiration mainly from German law and clarified the matters of enactment, validity, retraction and revocation of the administrative act as a central feature of the administrative process.
In terms of appealing state body decisions that could affect the rights and interests of individuals or legal entities, the recourse to administrative courts has been kept as a second step in the appeal process. Pre-trial interim measures have also been introduced in the Moldovan administrative law.
Capital Markets Legislation
Despite the enactment in 2012 of the much progressive Capital Markets Law, transposing 11 EU directives, including MiFID, the Takeover Bids Directive and the Market Abuse Directive, the Moldova’s capital market is still underdeveloped.
Currently, Moldova Stock Exchange (MSE) is the only operator authorized to manage and operate a regulated market in Moldova. Transactions on MSE regulated market are performed according to the MSE Rules. As of March 15, 2023, the securities of 15 issuers are admitted for trade on the MSE-regulated market, represented by eight commercial banks, three insurance companies, and two issuers from other non-financial industries. The total value of ECM transactions on the regulated market in 2022 amounted to MDL 364.93 million.
The weak capital markets infrastructure has thus caused Moldovan business to seek financing abroad, with the first ever large-scale Eurobond issuance being committed by a local Agri-group in 2019. Followed by an even larger issuance of USD 0.5 billion in 2021 by the same issuer.
Employment and Migration Law
Recent years have witnessed a number of successive amendments to the labor laws. The option of the parties to choose a foreign law to the employment agreements, re-balancing the rights and interests of the employers and employees have marked a definitive departure from the old employee-friendly legal regime. Among the novelties recently introduced are the possibility for non-compete clauses, dismissal for failure to meet the KPIs and less bureaucratic method to communicate with the employees.
Insolvency
Albeit rather new, the 2012 Insolvency Law have already revealed a number of material flaws which determined a recent legislative reform in 2020. The amendment law introduced important changes to reorganization procedures. Reformed areas are related to direct access to instituting the insolvency proceeding (no need to obtain first a final court judgment), catalyzing to post-commencement financings, by clear priority and collateral creation rules, encouraging accelerated out-of-court restructuring, based on the pre-negotiated deals concept, and adequate protection for the secured creditors, including those not having pecuniary claims against the debtor in insolvency.
The amendment law also introduced an electronic registry of insolvency cases. All interested parties can obtain information on the relevant insolvency case and parties to the insolvency case can obtain such electronic extracts free of charge. However, the registry is still under development and until it is operational, the conclusions of any insolvency judgments, as well any notifications to the parties to any insolvency cases, will be published in the Official Gazette.
Renewable energy
Since 2010, when the Republic of Moldova became a full-fledged member of the Energy Community (thus undertaking to transpose core EU energy legislation), a long and sometimes contradictory policy dialog has been in place which culminated in enactment, in March 2018, of the new Law on the promotion of the use of energy from renewable sources, transposing the EU Directive 2009/28/EC. The law brought new support mechanisms, including feed-in tariffs and net metering, and was followed by the secondary legislation regulating the procedure of auctions for determination of eligible producers, the capacity limits and determining the central electricity supplier (Energocom JSC). The other legal novelties refer to the obligation by the central electricity supplier to purchase renewable electricity, guaranteed and non-discriminatory access to the grid, and priority dispatch.
In December 2021, the government decided to raise up to €800 million the amount of investments in renewable energy and expanded the quota to 400 MW for the next four years, in an additional effort to catalyze investment in the sector. Lastly, in 2023 the Government included a portfolio dedicated to energy. The Ministry of Energy was created by splitting the Ministry of Infrastructure and Regional Development, which included a directorate – the Directorate of Energy Policies and a State Secretary responsible for this field.
Foreign Investment Protection
The Moldovan legislative framework is favorable to FDI (see more below – ”Operating and Divesting from a Company”). Foreign companies enjoy national treatment in most respects. The laws on investment prohibit discrimination based on citizenship, domicile, residence, place of registration, place of activity, state of origin or any other grounds. Foreign investors are allowed to invest in any Moldovan assets (except for agricultural and forest land) and hold majority equity interests in any business area (with some limitations of investor’s jurisdictions in the financial industry and upon privatization). There is no fiscal tax on the acquisition of shares of a Moldovan entity and also the law does not generally require foreign investors to partner with the state or state-owned enterprises before undertaking projects in Moldova.
Expropriation of foreign investment in Moldova is only permitted on “public interest” grounds. The law on expropriation, enacted in 1999, has been over the course of 20 years tested for the observance of the explicit provisions containing the conditions and the procedure of expropriation. Affected parties are allowed to negotiate compensation with public authorities. In case an agreement is not reached, an experts’ committee is constituted by a court to determine the amount and timeframe for effecting compensation.
Intellectual property rights are protected by international and bilateral agreements as a type of investment. Copyright is generally granted throughout the lifetime of the author and for 70 years after his death. As opposed to protection for the trademarks, patents, industrial designs or other intellectual property objects, there are no formalities required for protecting a copyright. The former shall be registered with the State Agency on Intellectual Property (AGEPI) against a stamp duty.
Alternative Dispute Resolution
Arbitration and voluntary mediation are sufficiently regulated in special laws. The arbitration procedure is usually confidential, more expedited than the public court proceedings and offers more flexibility since the parties may agree on the detailed procedure.
Mediation is briefly reflected in the legislation of the Republic of Moldova, and the implementation mechanisms are not very functional. The official statistical data show an increase in the number of cases mediated in the last three years, which represents a rather modest figure compared to the number of cases mediated in western countries.
Foreign court judgements are recognized and enforced on a multilateral or bilateral basis. National laws do not require the exhaustion of local remedies before recourse to international commercial arbitration. Also, as a matter of general rule neither do the vast majority of the Bilateral Investment Protection Treaties have clauses to the end of a need to exhaust the local remedies for appealing to international investment arbitration.
WELL ORGANIZED REGULATORY SET-UP
To align with international best practices, the Government strives constantly at delineating the responsibility of state bodies, thus creating a good degree of separation between the regulatory and decision-making functions.
Public Services Agency
After a recent administrative reform, the State Registry of Legal Entities is held and maintained by the Public Services Agency (PSA), which shall ensure the publicity of various events – from registration to deletion – in the lifetime of business companies, certain freelancers (individual entrepreneurs) and other entities (see more below – ”Types of Companies and Setting Up”). Investors may find that the registrars from State Registry of Legal Entities tend to be rather formalistic and bureaucratic, especially when it comes to untested or complex operations. Hence, all registration related documents shall be carefully prepared, taking into account also the local customs.
PSA is the largest public service provider in Moldova. The use of digital services is steadily growing from year to year and currently spans over 46% of the services. PSA has set up the Public Services Portal, an one-stop-shop for accessing comprehensive information about 648 public services provided by the central Government.
National Bank of Moldova
Operating on various control levels and combining the monetary and FX policy drafting and promoting with the bank supervision, the National Bank of Moldova (NBM) has felt in the recent 7-8 years a significant pressure both form Moldovan policy-makers and IFIs to ensure restoring the confidence in the banking sector, undermined after the high-scale frauds involving major Moldovan banks with local capital (labelled as the ‘one billion dollars theft’).
Recent success stories include the 2018 sale of significant shareholdings in the largest Moldovan bank to an EBRD-led consortium and further 2019 sale of the controlling stake in the second largest bank to EU fit and proper investors, lifting the early intervention regime in the largest Moldovan bank and robust implementation of Basel III standards.
National Commission for Financial Markets
The National Commission for Financial Markets (NCFM) received in the summer of 2023 a new mandate from the Parliament with a goal of creating the needed institutional premises for strengthening the financial education, enhance the transparency of the financial products, eradicating the incorrect commercial practices and abusive clauses, efficient settlement of disputes with the providers of financial services. Oversight over insurance and other financial institutions was transferred to the NBM.
Competition Council
Since succeeding the National Agency for Protection of Competition in 2012, the Competition Council has gained momentum in actively promoting a competitive environment and compliance with antitrust requirements. Although falling short of experience (but eager to learn from best practices, including via the International Competition Network) the Competition Council is generally both feared and respected by the local companies primarily for its extensive powers, which include the ability to search companies’ premises without any warrants issued by a judge. Notably, since the examination of the first foreign-to-foreign transaction in 2016, the Moldovan Competition Council shall be considered for obtaining clearance in foreign deals potentially affecting the local market.
State Agency on Intellectual Property
The main focus of the State Agency of Intellectual Property (AGEPI) has been largely on promoting the national system of protection and enforcement and use of intellectual property rights. Currently, Moldova is party to 39 multinational and bilateral conventions, arrangements, treaties and agreements in the field of intellectual property.
AGEPI created a free and publicly available online IPR database. Also, its continued to integrate its legal services and data into the international and regional platforms. In response to the Covid-19 pandemic, AGEPI redesigned most of its processes, including IP consultancy and support services, by moving online and encouraging IP holders to use electronic communication.
Courts of Law
With no specialized courts, there is a three-tiered system in Moldova – namely, there are fifteen District Courts, four Courts of Appeal and the Supreme Court of Justice. These all hear cases based on hard-paper files, save for one District Court in the south of the country where a digitalization pilot project is being currently underwent. The delivery of time bound judgments is only scarcely captured in the law, however, this is encouraged by the judge’s administration body, the Superior Council of Magistrates. Court judgments under Moldovan law have no official precedential effect. In the recent years, however, the lawmakers and judicial authorities have put more emphasis on the need to have a consistent and predictable case-law.
Notably, in 2021, the Government started the justice sector reform, aiming to ensure integrity and accountability of justice sector stakeholders and to increase society’s trust in the justice sector. As part of the justice sector reform, the government decided to conduct an extraordinary vetting exercise of judges and prosecutors, to improve the integrity in the justice sector. This vetting process is a unique endeavour for the Moldovan society.
INVESTING IN MOLDOVA
In 1998 Moldova has acceded to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, in 2011 it has ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID) and, as of yet, Moldova has in place 44 bilateral investment protection and promotion treaties. The country it is also a party to the Geneva European Convention on International Commercial Arbitration of April 21, 1961, and the Paris Agreement relating to the application of the European Convention on International Commercial Arbitration of December 17, 1962.
The Government has long understood that providing attractive conditions for investors means working in the right direction. The projection and the results of this is not always well reaching out of the Moldovan borders, as better attention should be given to efficiently communicating the country’s policies to investors and strengthening their robustness.
Types of Companies and Setting Up
LLCs are the most popular type of company in Moldova. LLCs and JSCs can be founded by one person, unless the JSC founder is another business entity having a sole shareholder. LLC’s statutory capital is divided into participatory interests (părți sociale), while JSC’s capital is divided into shares (acțiuni).
Foreign companies may opt for the old model of opening a Moldovan subsidiary or the new (enacted in Mach 2019) model of operating in Moldova via branches. The laws do not distinguish between companies incorporated in the European Union or elsewhere.
Operating and Divesting from a Company
Beside traditional operational requirements, referring to having a proper book-keeping and reporting, employment and labor immigration, complying with customer protection, product safety and competition requirements, the newer requirements the Moldovan companies have to pay proper care or refer to personal data protection, know-your-customer and other AML/TF requirements.
Articles of association remain the core corporate document of any company, and its provisions are binding both upon the shareholders and the management. Shareholder agreements were specifically regulated under Moldovan law in the summer of 2023. Under banking regulations, shareholder and similar agreements are deemed to give rise to action on concert and must be disclosed to the issuer and to the regulator.
Antitrust clearance is mandatory and non-compliance may result in severe sanctions. The notification with the Competition Council shall be filed before the implementation of the share transfer or similar transaction, implementation meaning the conclusion of the agreement, the announcement of the public bid or the acquisition of a controlling interest.
Taxation
The Republic of Moldova has a very attractive tax system compared to many European Union countries. Moldovan Tax Code provides that legal entities pay corporate income tax in the amount of 12% of taxable income (general taxation system). In addition to the general taxation system, in the Republic of Moldova there are two preferential taxation systems: (i) Moldova IT Park; and (ii) Free Economic Zones.
Moldova IT Park has many advantages among which is the single tax rate in the amount of 7% of the sales revenue. Free Economic Zones, are parts of the customs territory of the Republic of Moldova, economically separated, strictly delimited throughout their perimeter, in which are allowed, under preferential regime special types of entrepreneurial activity.
Open discussions with the tax authorities have shown to be good practice. Recent fiscal reforms provided the possibility of securing tax rulings granted by competent Moldovan tax authorities which are binding in respect of a particular set of facts.
Capital, payments and profits of foreign investors are freely transferable to their home jurisdictions. Favorable tax regime for new investments in Free Economic Zones have featured benefits in relation to VAT, income tax and customs duties.
As of August 2023, Moldova has 52 operational Double Taxation Treaties, which include among others countries from the European, Asian and the African continents. These treaties prevail over national legislation and provide for more favorable tax rates, including for withholding tax.
Iulian Pașatii, Partner
Cătălina Stavila, Associate
