Two threats and two opportunities for Romania’s IT industry in Q4 2023

IT&C has stood out among the sectors of the national economy in recent years through its high gross added value. However, the coming months are likely to be hectic for this key Romanian industry. New European financial instruments and the growing inflow of foreign investors will balance out some of the threats, namely the elimination of certain tax facilities and the decline in funding.

By Claudiu Vrinceanu

THE DANGER OF CANCELLING TAX FACILITIES

The government is currently weighing the elimination of some fiscal facilities for IT, construction, and agriculture employees. The shift could be made in two stages, with the first change expected on September 1, 2023, and the second on January 1, 2024. The elimination of the income tax exemption for IT professionals may lead to a deepening of the personnel crisis in the IT sector, as some local employees may switch to working remotely for foreign companies.

Romania’s competitive advantage has been boosted in the last 20 years: employees in specific IT sectors get an exemption from the 10% income tax on wages and other wage-assimilated incomes. About 104,000 employees directly benefit from this measure, which was first introduced in 2001. A total of 270,000 employees in Romania are supported by the software and IT services industry, which has recorded the fastest growth rate in the number of employees in the last five years.

According to a Roland Berger study, the software and services industry makes a contribution of about 6.2% to GDP formation—or about EUR 13.6 billion. Broken down, EUR 8.8 billion of direct impact represents the gross operating surplus, taxes, and personnel expenses, EUR 2.6 billion represents the indirect impact of economic transactions with Romanian suppliers of industrial enterprises, while EUR 2.2 billion represents the wages spent in the national economy by employees who are directly or indirectly supported by this industry.

A MAJOR THREAT OF 2023: THE STARTUP FUNDING DROUGHT

The amount of funding attracted by entrepreneurial tech firms was three times lower in the first half of 2023 than in the first six months of 2022. The number of tech investments received from financial investors and business angels halved in the same period, based on Business Review calculations. Even with the emergence of several new investment funds that focus on tech startups in recent months, the number of financing rounds is expected to decline in the last quarter of 2023 as well, after a summer with few new investments.

THE OPPORTUNITY OF PNRR PROJECTS

One of the essential factors influencing the growth of IT companies in the fourth quarter of 2023 derives from the opportunity of accessing funds available for digitalization through Romania’s National Recovery and Resilience Plan (PNRR). The new funding will increase the number of managers and entrepreneurs deciding to digitalize their business practices. Currently, there are many requests for offers of equipment and IT solutions for digitalization included in the projects submitted by applicants, which will be positive lines in the cashflow of IT companies in the next two to three quarters.

More than 7,000 financing requests from SMEs are being evaluated by the Ministry of Investments and European Projects for the allocation of funds aimed at digitalizing the business environment.

STRATEGIC INVESTMENTS & NEW TRANSACTIONS

Another opportunity for Romanian IT lies in new strategic investments being made by foreign investors, along with local transactions that can strengthen certain players and turn them into regional companies.

This trend has taken shape in the last two years and may continue in the fourth quarter of 2023. After French group Publicis bought local software company Tremend at the beginning of the last year, Qualitance, a Romanian technology scaleup founded 15 years ago, was bought by French company Alten. The trend persisted in 2023: US technology group Encora acquired Romanian IT company Softelligence, founded in 2006 by brothers Adrian and Teodor Blidarus.