Investment in Bulgaria 2017

130 | Investment in Bulgaria 2017

KPMG in Bulgaria

kpmg.com/bg Investment in Bulgaria

Edition 2017 Investment in Bulgaria 2017 | 3 Preface

Investment in Bulgaria is one of a series of booklets published by firms within the KPMG network to provide information to those considering investing or doing business internationally.

Every care has been taken to ensure that the information presented in this publication is correct and reflects the situation as of May 2017 unless otherwise stated. Its purpose is to provide general guidelines on investment and business in Bulgaria. As the economic situation is undergoing rapid change, further advice should be sought before making any specific decisions.

For further information on matters discussed in this publication, please contact Gergana Mantarkova, Managing Partner.

KPMG in Bulgaria

Sofia Varna Burgas

45/A Bulgaria Boulevard 3 Sofia Street, floor 2 2B Serdika Street, floor 2 1404 Sofia 9000 Varna 8000 Burgas Bulgaria Bulgaria Bulgaria

Tel: +359 2 96 97 300 Tel: +359 52 699 650 Tel: +359 56 826 086 Fax: +359 2 96 97 878 Fax: +359 52 611 502 Fax: +359 2 96 97 878

[email protected] kpmg.com/bg 4 | Investment in Bulgaria 2017 Contents

General Information...... 7

Population and language...... 7

Infrastructure...... 7

Internet...... 11

Currency...... 12

Labor force...... 12

Political system...... 12

Opportunities created via EU funding...... 13

Bulgaria and NATO...... 14

Economy...... 14

Restrictions with regard to offshore companies...... 16

Opportunities for International Investors...... 18

Protection and promotion of foreign investments...... 18

Eligibility for investment incentives...... 21

Profit and capital repatriation...... 22

Establishment of new business entities or acquisition of shares in existing entities...... 22

Branches...... 23

Representative offices...... 23

Capital markets...... 23

Concessions...... 24

Licensing...... 24

Renewable energy...... 26

Banking and finance...... 28

Company Law...... 30

Rules applicable to all forms of business association...... 30

Limited liability company (OOD)...... 34

Joint-stock company (AD)...... 36

Other forms of business association...... 39

Commercial Register...... 40

Real Estate...... 42

Types of ownership over real estate...... 42

Condominium ownership management...... 43

Evidence of title...... 43

Acquisition of real estate...... 44

Project development...... 45

Participants in the development process...... 48

Accounting and Auditing...... 52

Accounting...... 52

Auditing and reporting...... 56

Taxation...... 60

Corporate tax...... 60

Taxation of individuals...... 70

EU social security...... 75

Property transfer, gift, inheritance and tourist taxes...... 76

Value added tax...... 77

Customs duties...... 88

Excise duties...... 90

Insurance Premium Tax (IPT)...... 91

Employment Regulations...... 92

Legislation...... 92

Employment contracts...... 92

Working hours...... 94

Holidays...... 94

Medical check-ups...... 95

Healthy and safe working conditions...... 95

Posting or sending of employees from Bulgaria to EU/EEA/Switzerland in the framework of provision of services...... 96

Termination of employment contracts...... 96

Foreign nationals working in Bulgaria...... 97

Foreign Nationals...... 98

Legislative framework and general principles...... 98

Visas...... 99

Residence permits, residence certificates and residence cards...... 102

Work permits...... 105

Posting to Bulgaria in the framework of provision of services...... 109

Government Control...... 110

Public procurement...... 110

Concessions...... 114

Public-private partnerships...... 116

Competition and antitrust regulations...... 117

Supervision of the Bulgarian National Bank over the activities of credit and financial institutions...... 120

Investment intermediaries in Bulgaria...... 120

Insurance companies and insurance intermediaries in Bulgaria...... 121

Limitations on cash payments...... 122

Foreign exchange regime...... 122

Appendix A: Bilateral Agreements for the Mutual Protection and Encouragement of Foreign Investment...... 125

Appendix B: Double Taxation Treaties to which Bulgaria is a party...... 126

Appendix C: Bilateral Social Security Agreements concluded by Bulgaria...... 129

Bulgaria is situated in South-Eastern According to the statistics from the most Europe, in the eastern part of the Balkan recent population census held in 2011, Peninsula. It borders Romania to the north, ethnic Bulgarians represent almost 85% the Republic of Serbia to the west, the of the population, while ethnic minorities Former Yugoslav Republic of Macedonia to of Turkish and Roma descent make up the southwest, Greece to the south and another 8.8% and 4.9% respectively. Turkey to the southeast. The Black Sea is Smaller ethnic groups in Bulgaria include to the east of the country; it enables direct Russian, Armenian and Jewish among maritime links with the Russian Federation, others. Nearly 76% of the Bulgarian Ukraine and Georgia. To the north, the population is Eastern Orthodox Christian. Danube River separates Bulgaria from Another 10% of the population state they Romania. Bulgaria is strategically located are Muslim. Catholicism and Judaism are along key land routes from Europe to the also represented. Middle East and Asia. Since 1990, the country’s net population Bulgaria’s total area is 110,910 sq km, growth has been negative (-6‰ for the year with 1,808 km of land borders and of 2016), in part as a result of significant 354 km of coastline. The country’s terrain outward migration, but also due to the is partly mountainous, with lowlands in country’s aging demographics. The trend the north and the southeast. The climate is of increase in the birth rate in the country Continental Mediterranean, it is temperate, in the period 2004 – 2009 reversed with cold, damp winters and hot, from 2010 onwards and the number of dry summers. births cumulatively decreased by 19.7% in 2016 compared to the 2009 levels Population and language further contributing to the decrease in the population. As per information of the National Statistical Institute, as at 31 December The country’s official language is Bulgarian. 2016 Bulgaria’s population is approximately Secondary languages closely correspond 7.1 million, representing 1.4% of the to ethnic background. English, and to a population of the European Union. Nearly lesser extent German and French, are used 73.3% live in urban areas. The capital, frequently in business. Sofia, is by far the largest urban center having nearly 1.32 million inhabitants. Infrastructure Approximately 18% of the population is under the age of 20, while approximately Roads and railways 61% is between the age of 20 and 64, and A network of international highways approximately 20% is over the age of 65. connects Bulgaria to Western Europe,

Russia, Asia Minor, the Adriatic, the Shipka Tunnel, some of which have Aegean, and the Black Sea. been completed and the work on others has already commenced. Financing The European corridors No. 4 (from sources for the planned infrastructure Germany to Istanbul), No. 7 (Rhine, Main, projects include Operational Program and Danube), No. 8 (from Durres, Albania Transport and Operational Program to Varna), No. 9 (from Helsinki, Finland to Regional Development (European Union Alexandropoulos, Greece) and No. 10 (from (EU) financing), the state budget, state Salzburg, Austria to Thessaloniki, Greece) investment loans, financing from the pass through the territory of Bulgaria. European Investment Bank and the According to the 2016 annual statistics World Bank. published by the National Statistical In 2013, the second bridge on the Danube Institute, the total length of the country’s River at Vidin – Kalafat and the last section road network managed by the Road of the Trakia Motorway were completed. Infrastructure Agency is 19,853 km, which In October 2015, Maritsa Motorway was includes 734 km of motorways, 2,954 km opened officially. Trakia, Maritsa and Lyulin of category I roads, 4,025 km of category Motorways are entirely completed with II roads, and 12,140 km of category III total lengths of 360 km, 117 km and roads. In addition, there are approximately 19 km respectively. 20,000 km of category IV roads, which are managed by the respective municipalities. After the successful completion of the Road transportation across most of the Maritsa Motorway, connecting the Trakia country relies primarily on two-lane roads. Motorway and the main entrance to The main transport corridors are Corridor Turkey – Kapitan Andreevo and Lots 2 and No. 10 Kalotina-Svilengrad linking Serbia 4 of the Struma Motorway during 2015, to Turkey, Corridor No. 4 Vidin-Sofia-Kulata development continued in 2016 with linking Romania to Greece, Corridor No. 9 the construction of Lot 3 of the Struma Ruse-Kazanlak-Kardzhali linking Romania Motorway and a tender for the selection of to Greece and Turkey, and Corridor No. 8 contractors for future works on Lots 1 and Kyustendil-Burgas-Varna linking Macedonia 2 of the Hemus Motorway. In April 2016, to the port of Varna. the 16.5 km long northern bypass highway in Sofia was opened for traffic. The bypass, Development plans focus on upgrades and with an estimated total cost at investments, particularly of motorways, to EUR 120 million, connects four motorways further integrate the country’s road system – Trakia, Hemus, Lyulin and Kalotina, and into the international network. According three pan-European corridors – No. 4, No. 8 to data from the Ministry of Regional and No. 10. Development and Public Works, priority road infrastructure projects in Bulgaria Bulgaria’s railroad network includes about until 2020 include the construction of 4,023 km of railway lines. Some 71.1% 620 km of motorways (Maritsa, Struma, of them are electrified and 24.6% are Kalotina, Hemus and Black Sea motorways) double-track. The majority of the network and the construction/rehabilitation of is designed to support a running speed of speedways, two new bridges over the up to 100 km per hour, with only 150 km Danube River and the construction of supporting a speed of up to 130 km per hour.

Following the failed attempt for privatization daily by 2020 upon completion of the third of the state owned rail company BDZ metro diameter. Tovarni prevozi EOOD in the summer of 2012 and 2015, the government launched Ports another process for the sale of the Both sea and river routes, the Black company during the spring of 2016, which Sea and the Danube River, offer reliable was unsuccessful as well. shipping transportation to and from the Priority railway infrastructure projects country. The largest Bulgarian seaports are in the country until 2020 include the Burgas and Varna on the Black Sea coast. rehabilitation, overhaul and modernization Varna handles mainly containers, grain works of more than 400 km of the existing and bulk goods, while Burgas deals mainly railway infrastructure and construction of with crude oil and some bulk commodities. new high-speed railroads in the following A ferry connection from Varna to Odessa directions: Sofia-Plovdiv-Burgas, Sofia-Vidin, (Ukraine), Kavkaz (Russia) and Poti Plovdiv-Svilengrad-Turkish border, Sofia- (Georgia) facilitates the transport of goods Dragoman, Sofia-Pernik-Radomir, Mezdra- between the countries. Gorna Oryahovitsa, Sofia intermodal The Danube River is navigable during most terminal and railroad junction and others. of the year and supports inland water The planned railroad infrastructure projects transport. With the Rhine – Main – Danube listed above will be financed mainly by EU canal in use since 1992, Bulgaria has funds and the state budget. The majority access to the large European ports on the of the planned works on the Sofia-Plovdiv- North Sea. The main Bulgarian ports on the Burgas and Plovdiv-Svilengrad-Turkish Danube River are Ruse, Lom and Vidin. border high-speed railroad lines were completed in 2014 and 2015. Bulgaria has 15 Black Sea and 13 Danube River ports for public transport with In 2015, Sofia’s subway infrastructure national importance consisting of a total reached important milestones. The subway of 84 and 74 wharves, respectively. The network was further expanded and now ports with regional importance for public connects Mladost area to Sofia Airport. The transport are 9 on the Black Sea coast and second metro diameter was completed in 21 on the banks of the Danube River. 2016 with the construction of the Vitosha station, while works on the entirely new According to the National Concession third diameter were launched in the Registry, 13 ports with national importance beginning of 2016 and tunnel drilling started are currently under concession. in March 2017 with an expected completion In 2013, the government granted a 35-year in 2019. As per the project plan, the third concession for the port terminals Ruse- metro diameter will have an estimated cost West, Nikopol, Vidin South and Lom. of EUR 680 million and will connect heavily populated Ovcha Kupel and Levski districts In addition, according to the Ministry of to the city center. According to Sofia Transport, Information Technology and Municipality, currently 380,000 people Communications, concession calls for the use the subway daily and their number is port terminals Ruse-Center and Tutrakan expected to increase up to 550,000 people took place at the end of 2012 and the beginning of 2013. Meanwhile,

Nesebar port terminal is already under constructed terminal ensures a higher concession agreements. standard of passenger handling and landing of wide-bodied aircraft. In late 2015, the In 2015, the Ministry of Transport, government announced its plans to launch Information Technology and a concession call for Sofia Airport. Communications performed a pre- The purpose of the concession of Sofia concession evaluation on port terminal Airport is to further extend the cargo and Ruse-East and port Vidin-Center and the passenger handling capacity of the airport concession call is still ongoing. and modernize its infrastructure. The concession tender was, however, Airports cancelled in April 2017. The newly elected Bulgaria has four operating commercial government in May 2017 announced plans airports – in Sofia, Plovdiv, Burgas and Varna. to restart the concession procedure for They handle both international and domestic Sofia Airport. flights. A tender for a 35-year concession for the management of Burgas and Varna Fixed-line communications Airports was held in June 2006 and the According to the latest available information government awarded the concession to a as of 2015, the fixed voice services had consortium between Fraport AG, Germany 1.59 million subscribers. The overall and a local company, named BM Star. fixed telephony penetration is estimated Furthermore, in response to the demand at 22.2% of the population in 2015, for cargo transport, the government has representing a continuous decrease in added the airports in Plovdiv (south-central recent years due to the shift in consumer Bulgaria), Gorna Oryahovitsa (north-central preferences in favor of mobile phones. Bulgaria) and Ruse (northern Bulgaria) to the There is an ongoing market trend for list of airports which accept international bundling fixed and mobile service offerings air traffic. In relation to Plovdiv Airport, the to subscribers. government is in the process of identifying concessioners for both the passengers and Mobile communications the cargo terminals of the airport. There are currently three operating In January 2016, the airport in Gorna telecommunications companies providing Oryahovitsa was awarded under a 35-year services in Bulgaria – Mobiltel EAD, Bulgarian concession following two unsuccessful calls Telecommunication Company AD (BTC) in 2011 and 2013. and Telenor Bulgaria EAD – respectively Sofia Airport, which handled almost 5 branded as M-Tel, Vivacom and Telenor – million passengers in 2016 (22% up from operating under the GSM 900 and GSM the 2015 level), has undergone significant 1800 standards. In January 2013, Bulsatcom investments in the last few years, including EAD, 4G Com EAD (revoked in 2014) and a new traffic control tower, thus increasing Max Telecom OOD were granted licenses to its capacity and providing modern facilities utilize the 1,800 MHz band network in the to respond to the growing demand country. The market has grown quickly, with for international air travel. The newly the number of mobile subscriptions rising from 8.2 million in 2006 to an estimated

9.2 million in 2015, representing a 128.5% The largest companies which provide such penetration of the population of the country. services are Bulgarian Telecommunication Based on publicly available information Company, Blizoo, Media and Broadband and calculated on the basis of mobile EAD, Mobiltel EAD and Bulsatcom AD. telecommunications service revenues, M-Tel In 2005, the Bulgarian Government has a 39% market share for 2016, followed granted the first point-to-multipoint by Telenor with 33% and Vivacom with 28%. wireless network licenses, which allowed In September 2015, it was announced that operators to upgrade their infrastructure by mid 2016 the only WiMAX company in and provide high-speed wireless quality Bulgaria, Max Telecom, would start supplying data, voice, video, and multimedia services voice telephony, making it the fourth mobile based on the WiMAX standard. The service supplier. Again, according to public companies providing WiMAX services sources, by the end of 2016, Bulsatcom, the were originally five; however, due to largest satellite TV operator which also owns operational difficulties, the licenses of Trans a mobile communications license, planned Telekom, Carrier BG and Nexcom were to launch mobile services, making it the revoked, while Mobiltel sold its license to fifth provider in Bulgaria. Currently the only Max Telecom, the only remaining active telecommunications companies with active participant in the sector. mobile phone subscribers are the three listed in the beginning – M-Tel, Vivacom Electronic payment methods and Telenor. Credit and debit card use is gaining Following a vote by the Members of the popularity, with an increasing number of European Parliament in December 2016, consumer retailers accepting payments via roaming charges will no longer apply; thus, such means. Local banks are offering online making calls, sending texts and using the banking services, debit card services, and internet will cost the same in any country of various forms of electronic payment for the EU starting from 15 June 2017. utility and telephone charges. A number of new electronic services Internet facilitating the payment process are As at the end of 2015, there were an developing in the market, e.g. electronic estimated 6.1 million internet subscribers invoice, electronic signature and others. (both fixed and mobile) in the country, They are driven both by changes in with a 80.8% penetration rate for mobile regulation and market innovation. internet and 48.6% for fixed internet The Bulgarian National Bank (BNB) has (in terms of households). This is a granted a system operator license to vibrant market populated by numerous System for Electronic Payments internet service providers (ISPs), whose Bulgaria AD to develop and maintain a rates and service quality vary widely. national mobile infrastructure for electronic According to a market report issued by the payments in the country. Communications Regulatory Commission, there were 690 companies operating data- transfer services as at the end of 2015.

Currency Political system The official currency in Bulgaria is the Bulgaria is a parliamentary republic. It held Bulgarian lev (BGN). The BGN is circulated its first multiparty elections in 1990 and in notes of BGN 2, BGN 5, BGN 10, its current Constitution was adopted on BGN 20, BGN 50, and BGN 100, and 12 July 1991. The national legislative body, coins of BGN 0.01, BGN 0.02, BGN 0.05, a unicameral Parliament, is comprised of BGN 0.1, BGN 0.2, BGN 0.5, BGN 1, and 240 members elected by popular vote BGN 2. Beginning in late 2015, a gradual who serve a four-year term. The president replacement of the banknote of BGN 2 by is the head of state and commander-in- a coin of the same nominal value began. chief of the army. The president and the vice-president are elected by a majority In July 1997, a Currency Board was vote and serve a five-year term. The current introduced and the lev was pegged to the president is Rumen Radev and his term German mark at the rate of BGN 1 to began in 2017. The President cannot initiate DEM 1. Presently, the lev is pegged to the legislation but has a qualified power euro at a rate of BGN 1.95583 to EUR 1. of veto. Exchange rates for other currencies are Executive power rests with the quoted daily by the BNB for statistical and government. It is headed by a prime accounting purposes. minister, who is appointed by a parliamentary majority. The current prime Labor force minister is Boyko Borisov, who is also the According to the National Statistical chairperson of the Council of Ministers. The Institute, as at 31 December 2016, latest parliamentary elections in Bulgaria approximately 4.3 million individuals, or were held on 26 March 2017 and won by around 61% of the population, are in the center-right Citizens for a European working age (defined as 16 – 63.8 years Development of Bulgaria (CEDB) party with for men and 16 – 60.8 years for women). 32.65% of the votes. The party did not While the Bulgarian labor force is generally receive enough votes for a parliamentary highly skilled and well educated, wage majority (it won 95 out of 240 seats) and, in levels in the country are significantly April, it was announced that CEDB would lower than those in Western Europe, form a coalition with the United Patriots, creating significant upside potential for whose share of the popular vote was labor-intensive investments. As per data 9.07%, to form a new government which provided by the BNB, the average gross stepped into power on 4 May 2017. monthly salary for December 2016 was EUR 506, compared to EUR 468 for The country is divided into 28 December 2015. administrative regions headed by regional governors appointed by the Council of After a period of four consecutive years Ministers. Bulgaria has 262 municipalities of increase in the unemployment rate in headed by mayors elected every four years. the country, in 2015 the rate decreased to Municipal Councils, the local legislative 10.0% from 10.7% in 2014 and further to bodies, determine the mayors’ executive 8.0% as at December 2016. functions.

Opportunities created via EU funding OP Human Resources Development EU funding opportunities will continue to is managed by the Ministry of Labor be available for businesses established and and Social Policy. It provides support to operating in Bulgaria. companies hiring interns, for health and safety at work and vocational training of Access to EU support is granted by means personnel. of implementation of national Operational Programs (OP) funded jointly by the The Rural Development Program is national budget and EU funds as well as managed by the Ministry of Agriculture from two national programs in the field of and Food. It provides funding for the rural development and fisheries. implementation of measures aimed at supporting knowledge transfer and OP Innovations and Competitiveness advisory services for the agriculture and and OP SME Initiative are managed by the forestry sectors, farm management and Ministry of Economy and are specifically farm relief services and cooperation. targeted at supporting the development of The Program also supports investments private economic operators. of agricultural holdings and forestry Public aid under OP Innovations and companies, as well as start-ups in farming. Competitiveness is provided in the form Financial aid is available for the food- of grants which are approved following a chain organization, including processing competitive project selection procedure. and marketing of agricultural products, The supported activities in 2017 will include animal welfare and risk management in support for introduction of innovative agriculture. Another priority of the Program products, creation and development is conversion to and maintenance of of thematically focused laboratories, organic farming, forest-environmental and promotion of small and medium-sized climate activities, and forest conservation. enterprises (SMEs) entrepreneurship, Public aid is also envisaged for renewable implementation of energy efficiency energy production, energy efficiency in the measures in large enterprises, increasing agricultural sector and food processing, resource efficiency in business through the as well as for diversification into non- development and implementation of new agricultural activities. solutions, techniques and methods. OP Maritime and Fisheries is managed OP SME Initiative is a joint financial by the Executive Agency of Fisheries instrument of the European Commission and Aquaculture. The program provides through Horizon 2020, the European assistance for reconstruction and Investment Bank and the Bulgarian modernization of the fishing fleet and Government. Its aim is to facilitate SME infrastructure, protection and restoration access to finance by providing guarantees of biodiversity, production of biological through a joint instrument blending Horizon and environmentally friendly aquaculture, 2020, COSME and European Regional as well as partnerships with research Development Fund (ERDF) resources, in organizations and development of cooperation with the European Investment innovations in the sector. Bank/European Investment Fund and with the aim of generating additional lending to SMEs.

OP Science and Education for Smart Bulgaria and NATO Growth is a new program managed by Bulgaria, together with six other East the Ministry of Education and Science. It European countries, joined the North provides support for investment in scientific Atlantic Treaty Organization (NATO) research and technology development, on 29 March 2004. life-long learning, and improving the In order to become a NATO member, quality of education. Among the main Bulgaria undertook a sizable modernization beneficiaries are the Ministry of Education of the army and compulsory military and Science, universities, the Bulgarian service was abolished. Academy of Science, schools, professional organizations and municipalities. Economy Cross-border Cooperation (CBC) In 2016, the Bulgarian economy continued programs are jointly managed and its recovery from the global economic and coordinated by neighboring countries. financial crisis. Although the estimated CBC programs support initiatives that real gross domestic product (GDP) grew aim to foster cooperation and tackle 0.2% slower than the previous year, 3.4% common challenges identified jointly compared to 3.6% in 2015, the economy between neighboring regions of Bulgaria continued to show stability. The fast and the Former Yugoslav Republic of GDP growth is based on the real estate, Macedonia, Serbia, Romania, Turkey and energy, outsourcing and IT sectors, while Greece. The programs offer assistance professional services and government to bodies governed by public law, non- spending increased slightly compared to governmental organizations (NGOs) and the 2015 levels. The Economist Intelligence SMEs in a number of different fields, such Unit forecasts an average real GDP growth as small-scale infrastructure in border of 3.2% between 2016 and 2020. Driven by regions, environmental protection, culture the plummeting oil prices and the decrease and education, business development, in international grain prices, the Bulgarian innovations and cooperation between economy recorded a third consecutive entities on both sides of the borders. year of deflation (-0.8% in 2016) following -0.1% in 2015 and -1.4% in 2014. For In addition, specialized financial 2017, the inflation rate is expected to rise instruments will also be available across between 0.6% and 1.1%, fueled by higher OPs to support businesses through loans, income and household expenditure and the guarantees, and venture and equity capital. expectation of rising oil prices. During the 2014-2020 programming period, all financial instruments will be managed The budget surplus in 2016 was the and implemented through the newly equivalent of 0.03% compared to a deficit established Fund Manager of Financial of 1.6% in 2015. The current account Instruments in Bulgaria (Fund of Funds). surplus in 2016 was the equivalent of 4.2% of GDP which represented an increase from 0.1% of GDP deficit from 2015, when the deficit amounted to EUR 60.5 million. The movement in the

Bulgarian key macroeconomic indicators

Indicator 2012 2013 2014 2015 2016

Real sector

GDP (million EUR) 41,946 42,010 42,250 45,285 47,363

GDP per capita (EUR) 5,707 5,765 5,911 6,136 6,629

Private consumption (% of GDP) 81.2 79.0 79.5 78.7 76.6

Annual real GDP growth (%) 0.0 0.9 1. 3 3.6 3.4

Inflation (av.) (%) 3.0 0.9 (1.4) (0.1) (0.8)

Average monthly wages (EUR) 3 74 413 418 468 506

Unemployment rate (%) 11. 4 11. 8 10.7 10.0 8.0

Foreign sector

Current account deficit/surplus (% of GDP) (0.9) 1. 3 0.1 (0.1) 4.2

Trade balance, FOB (EUR million) (3,992) (2,932) (2,776) (2,622) (1,844)

Export, FOB (EUR million) 19,674 21,217 21,026 21,919 22,555

Import, FOB (EUR million) 23,666 24,150 23,802 24,541 24,400

Foreign direct investments (EUR million) 1,321 1,384 1,161 2,535 702

Foreign direct investments % (GDP) 3.1 3.3 2.7 5.6 1. 5

Source: Bulgarian National Bank

Agreement of Association effective from European Union, Bulgaria participates in 1 February 1995 and the Interim the EU Customs Union, which includes Agreement on Trade and Trade Related Andorra, San Marino and Turkey. Matters covering various trade In February 2016, a Free Trade Agreement components, effective from 31 December with Vietnam was signed and, in October 1993. In accordance with the Agreement of 2016, a Comprehensive Economic and Association, customs duties on industrial Trade Agreement (CETA) with Canada was goods between Bulgaria and EU countries signed, both of which are not yet applied. phased out by 2007. Since 1998, the EU import of industrial goods of Bulgarian Foreign investment origin has been duty-free. Significant relief for agricultural produce is also According to the Bulgarian National Bank, provided. The EU accession of Bulgaria and FDI in 2016 amounted to EUR 701.7 million Romania in January 2007 expanded the (1.5% of GDP). The total value of FDI for export opportunities available to Bulgarian 2015 was EUR 2,534.8 million (5.6% of producers. GDP), whereas FDI for 2014 was EUR 1,161 million (2.7% of GDP).

EFTA The estimated top six FDI contributing According to this 1993 Agreement, countries ranked by the total FDI inflow trade with EFTA countries (Iceland, for 2016 were Austria, France, the Liechtenstein, Norway and Switzerland) Netherlands, Germany, the United Kingdom enjoys preferential terms and conditions and Norway. Outsourcing of business that are almost identical with those in the services and IT sectors attracted the Europe Agreement of Association. larger part of the new investments, while traditionally strong investment in the real Bilateral Trade Agreements estate sector shrank. As of 1 January 2007, the bilateral trade agreements signed between Bulgaria Restrictions with regard to offshore and other countries in the region were companies cancelled and the country adopted the The Act on the Economic and Financial preferential trade agreements of the EU Relations with Companies Registered with various countries. Presently, the in Preferential Tax Regime Jurisdictions, EU has such agreements with countries the Persons Related to Them and Their from the Mediterranean region (Algeria, Beneficial Owners (the “Act”) imposes Egypt, Israel, Jordan, Lebanon, Morocco, a prohibition for companies, registered Palestinian Authority, Syria and Tunisia) in preferential tax regime jurisdictions, and EFTA member countries, Mexico and and the persons controlled by them to be Chile, Ivory Coast, Madagascar, Mauritius, directly and/or indirectly involved in the the Seychelles, Zimbabwe, CARIFORUM following activities: States, Singapore and South Korea. The EU • Procedures for obtaining licenses has signed Stabilization and Association for credit institutions, insurance and Agreements with Albania, Bosnia and re-insurance companies, pension Herzegovina, Kosovo, Macedonia, insurance companies, payment Montenegro and Serbia. As part of the

institutions, mobile operators under the Electronic Communications Act, rendering of activities and services under the Financial Instruments Markets Act and Collective Investment Schemes and Other Undertakings for Collective Investments Act and others, as well as participation in such companies

• Procedures for obtaining concessions and permits for exploration and research of mineral resources, public procurement, concessions, public- private partnerships and others

• Participation in privatization transactions, as well as in companies with state or municipal ownership, companies carrying out activities under the Independent Financial Audit Act, the Independent Valuators Act and the Renewable Energy Act

• Acquisition of state or municipal property, as well as ownership over land and forests from the state forest fund.

Following the entry into force of the Act, companies registered in preferential tax regime jurisdictions are no longer able to hold certain shareholdings in companies that carry out licensing activity, participate in privatization, concession or public procurement, or acquire land and forests from the state forest funds and others.

There are certain cases where a company could claim to be excluded from the scope of the law, provided that it meets certain criteria and registers the circumstances for such exclusion in the Commercial Register.

Protection and promotion of foreign Protection of investments investments The Republic of Bulgaria is a party to 64 bilateral agreements for mutual protection National treatment and most favored and encouragement of foreign investment nation status (for a list please refer to Appendix A). The Bulgarian Constitution stipulates that It is also a party to the Convention on foreign persons (legal entities, individuals the Settlement of Investment Disputes or civil partnerships registered in a foreign between States and Nationals of Other country) must enjoy equal rights with States. Every Bilateral Investment Treaty local persons when conducting economic has a standard clause providing that, in the activities in the Republic of Bulgaria except case of a dispute between the Republic where otherwise provided by the law of Bulgaria and a potential investor, this (“national treatment”). This principle covers dispute shall be submitted before the World the entire range of economic and legal Bank’s International Center for Settlement forms used for business activity. of Investment Disputes. On these The Encouragement of Investment Act grounds, every investor in Bulgaria has the (EIA) provides for equal treatment of local opportunity to protect their investment if and foreign investors in the Republic of adverse legislation is adopted. Bulgaria. Foreign investors in Bulgaria can obtain the same assistance and use Incentives to investors the same privileges and opportunities as The EIA envisages different incentive granted by the law to local investors. measures and privileges for local and foreign investors who undertake significant If a bilateral treaty, signed and ratified by investments in certain economic activities the Republic of Bulgaria, provides for more within the territory of Bulgaria. The aim of favorable investment terms and conditions these measures, financed by the state, is for international investors, the citizens or to promote large investments and improve legal entities of the respective contracting the business environment in the country. country will enjoy preferential investor treatment (“most favored nation status”). The Regulation for Application of the EIA contains all detailed conditions, under which the investors may benefit from the incentive measures.

The EIA and the Regulation for its Investors implementing projects in the Application are the legislative basis for economic sectors, explicitly listed in the implementing a scheme for awarding EIA, may apply for a certificate for priority state aid in conformity with EU legislation. project if the project meets any of the All encouragement measures may criteria set out in the law, e.g. the amount be implemented by the state only in of the investment exceeds three times the compliance with EU state aid legislation minimum amount for class A investment, for granting state resources to private or the project includes development of entities. Investors must therefore fulfill the industrial zones or high-tech parks with conditions stipulated in the respective EU technical infrastructure. legislative acts in order to be eligible to The investors awarded with certificates receive state financing. for priority projects can be supported by In order to benefit from the resources the state with a package of the incentive under the state aid scheme, investors must measures described below. apply for a special certificate for class A The certificates for class A investment, investment, class B investment or a priority class B investment and priority projects project with the Bulgarian Investment are issued by the Minister of Economy and Agency. entitle the investors to benefit from the The required minimum investment following incentive measures: amounts for projects implemented in the • Right to purchase state or municipal industrial sector are: real estate property or to acquire limited • For class A investments – property rights over state or municipal BGN 10 million real estate property, located near the investment site, without tender • For class B investments – procedures, upon evaluation of the real BGN 5 million. estate property by at least two licensed The required minimum investment independent valuers and upon written amounts for projects implemented in the consent of the Minister of Economy and services sector are: the Minister of Regional Development and Public Works for those real estate • For class A investments – between properties owned by the State, and BGN 2 – 3 million depending on the approval of the respective municipal services sector council for any municipal real estate • For class B investments – between properties. BGN 1 – 1.5 million depending on the In order to take advantage of this services sector. incentive measure, the investors Lower minimum investment amounts awarded with certificates for class are envisaged in the case of investments A investment, class B investment in the industrial sector in economically and priority projects must apply disadvantaged regions and in high to the relevant local authorities by technology activities in the industrial and submission of their investment services sectors. projects and the documents set out

in the law. Non-implementation of the Economy to evaluate all submitted investor’s investment project within investment projects. the implementation term and for the • Financing of professional training amount of investment, and non- of persons, hired by class A and commencing of project works within B investors in relation to certified two years from the date of signing of investments, provided that the financing the sale-purchase contract (or contract is implemented in accordance with the for establishment of limited property requirements of the EIA, the Regulation rights) are grounds for its termination. for Application of the EIA, and The investor may not dispose of the real EU Regulation 651/2014. The Council estate property (or the limited property of Ministers grants such financing only rights), acquired according to the after a competition procedure is held by procedures under the EIA, prior to the the Ministry of Economy to evaluate all expiry of a five-year term (respectively a submitted investment projects. three-year term in the case of SMEs) as from the date of implementation of the • Issuance by local or governmental respective investment project. authorities of administrative documents for the realization of the investment Buildings and other sites financed with project within periods one-third shorter EU funds cannot be subject to the than the periods set out in the relevant above incentive transactions, unless 10 legislative acts. The reduced periods years have expired from the completion for administrative assistance of the of the construction to submission of the investors contribute to the timely application by the investor. and efficient implementation of their • Financing of construction of technical investment projects. infrastructure elements, such as roads, • Individual administrative assistance and drainage networks and facilities, and service from the Bulgarian Investment others. Eligible to receive such financing Agency, relating to the submission and are investors awarded with certificates obtaining of the necessary documents for class A investment, investors required under the Bulgarian legislation implementing priority investment for completion of the investment. project or at least two or more investors awarded with certificates for class • Financing in the form of partial refunding investment where the investment is of statutory social security contributions located in an industrial zone. and health insurance contributions paid by the investor in their capacity of an This procedure must be executed in employer for the newly hired employees accordance with the requirements of for a period not longer than 24 months the EIA, the Regulation for Application from the opening of the respective job of the EIA, the state aid legislation positions. and the EU legislation regarding state aid. The Council of Ministers grants Investors awarded with certificates for such financing only after a competition class A investment, class B investment and procedure is held by the Ministry of priority projects are eligible to benefit from the incentive measure provided that:

• They comply with all cumulative Added Tax Act, the Employment Promotion requirements set out in the law and Act and the Agricultural Land Ownership and Use Act provided that they are in • The newly opened job positions are compliance with the requirements set out occupied by Bulgarian citizens, citizens in these acts. of EU Member States, EEA states or Switzerland or by persons residing in Eligibility for investment incentives Bulgaria on the legal grounds stipulated in the Employment Promotion Act. According to the EIA, incentive measures and privileges shall be applied to initial Municipal councils and mayors of foreign and local investments in tangible municipalities may encourage significant and non-tangible fixed assets plus new investment projects realized on the territory employment. of their municipalities where the amount of investment does not exceed the minimum The investments must cumulatively fulfill amount for class B investment. the following conditions in order to be promoted under the EIA: The municipal council of each municipality shall determine the terms and conditions • They must relate to the establishment for encouragement of projects with of a new enterprise, extension of an municipal significance and for issuance of a existing enterprise, diversification of certificate for class C investment. the output from an enterprise into new products, or a material change in the Investors awarded with certificates for overall production process of an existing class C investment shall be entitled to enterprise benefit from the following incentive measures: • They must be implemented in the following economic areas, according to • Provision of administrative services the Statistical Classification of Economic by the respective municipality within Activities in the European Community periods shorter than the usual ones (NACE Rev. 2), applicable in Bulgaria as • Individual administrative assistance and Classification of Economic Activities (in service from the municipality and Bulgarian “KИД 2008”), namely:

• Right to purchase municipal real estate - Industrial sector: manufacturing (with property or to acquire limited property certain exceptions); or rights over municipal real estate - vService sector: high technology property, located near the investment activities in computer technology, site, without tender procedures, upon R&D, accounting, tax and audit evaluation of the real estate property services, education and human by at least two licensed independent health care, as well as storage of valuers and approval of the respective goods municipal council. • At least 80% of the future aggregate Furthermore, investments are encouraged income must arise from the products according to the procedures established produced by the economic activities by the Corporate Income Tax Act, the Value above

• The period of project implementation, • Income generated through an i.e. the period between the investment commencement and completion of the • Compensation against expropriation of project, must not exceed three years investments for state needs • The investment amount per project • Liquidation quotas upon termination of must not fall below the minimum the investment amounts specified in the Regulation on the Implementation of the EIA • Proceeds from the sale of an investment • At least 40% of the eligible costs for the investment must be financed by the • Sums received as a result of investor’s own or borrowed resources enforcement proceedings. (any resources allocated as state aid This right may also be exercised by foreign or involving an element of state aid, individuals working in the country with including retained corporation tax, respect to their remuneration, as well as are not considered own or borrowed those who have obtained a permanent resources) residence permit and are registered as sole • The jobs created in relation to the proprietors or participate in a co-operative, investment must be maintained in the in an unlimited partnership or as unlimited relevant region for at least five years in partners in a limited partnership, after the the case of large enterprises and three payment of all taxes due. years in the case of SMEs Establishment of new business • The investment must be maintained entities or acquisition of shares in in the relevant region for at least five existing entities years in the case of large enterprises and three years in the case of SMEs, The Bulgarian law provides for the calculated from the date of completion establishment of entities with foreign of the investment project participation or for the acquisition of shares in existing local entities. Such companies • Any long-term tangible and intangible must take the form of entities under the assets acquired shall be new and Bulgarian Commercial Act. There is no purchased under market conditions limitation on the share participation of from third parties independent from the foreign legal entities and individuals. investor. Under the Bulgarian Commercial Act, the Any other requirements under the effective following entities may be set up and have state aid legislation must be met. foreign investor participation:

Profit and capital repatriation • Unlimited partnerships Foreign investors can freely transfer, and • Limited partnerships purchase to transfer, foreign currency • Limited liability companies (solely- abroad after the corporate taxes due, owned limited liability companies) including withholding taxes, have been duly paid. The following may be transferred: • Joint-stock companies (solely-owned joint-stock companies)

• Limited partnerships with shares Capital markets • Sole proprietors. The emergence of capital markets in Bulgaria is a direct result of the structural, Generally, no prior permission from economic and social changes in the governmental institutions is required for country since 1989. The legislative basis the establishment of an entity of the above of the capital market was established in types, except for cases involving banking 1991 with the adoption of the Commercial or insurance activities, investment funds, Act. Currently, the legislation comprises management companies or investment numerous laws and regulations, the intermediaries, or special concession rights most important of which are the Markets and others. in Financial Instruments Act, the Public Offering of Securities Act, the Commercial Branches Act, and ordinances on the activities of Foreign legal entities or unincorporated investment companies, management entities may register branches in the companies, investment intermediaries and Republic of Bulgaria if they have received others. permission to conduct business activities under the terms and conditions of the Bulgarian Stock Exchange laws of their home country. Branches are The first trading session on the Bulgarian entered in the Commercial Register at the Stock Exchange took place on 21 October Registry Agency. 1997 with shares in companies privatized Though part of a foreign company, as part of the mass privatization program. branches are considered independent and The Bulgarian Stock Exchange (BSE) therefore must keep separate accounting is a joint-stock company. The majority books and prepare balance sheets. of its shareholders are private local or However, registered capital is not required foreign legal entities and individuals. Its for the establishment of a branch. shareholders elect the Board of Directors, which is responsible for the day-to-day Representative offices operations of the BSE. More than two- Foreign legal entities and individuals who thirds of its private shareholders are credit have received permission to conduct and financial institutions – banks, financial business activities under the terms intermediaries, insurance companies and and conditions of the laws of their others. home country are allowed to establish representative offices in the Republic of Market supervision Bulgaria. They are not treated as separate The Financial Supervision Commission legal entities and are not entitled to (FSC) is responsible for stock market conduct business activities as defined in supervision. The FSC is an independent Bulgarian law. state authority whose mission is to protect Representative offices are registered at investors’ rights and to enhance the the Bulgarian Chamber of Commerce and development of a transparent and efficient Industry and may engage in marketing, capital market. informational and promotional activities.

The FSC has the exclusive right of 2014/23/EU of the European Parliament and approval in respect of prospectuses for of the Council of 26 February 2014 on the public offerings of securities or take-over award of concession contracts. announcements. Issuers are obliged to file The effective Concessions Act regulates prospectuses and to register them with the the common terms for granting FSC before going public. Once registered, concessions. There are special rules they are required to periodically disclose set out in the Underground Resources information about their activities and Act, governing the terms for granting financial status. concessions for mining of underground resources, and the Waters Act, governing Trading procedures the terms for granting concessions for The BSE operates a continuous order- mining of mineral water. driven trading system. Orders are matched automatically according to time and price Licensing priority. The minimum lot size is currently one share. There are daily limits on share Licensing regime in electronic price movements for both the official and communications the free market. The Electronic Communications Act, The BSE’s fully automated trading system effective from 22 May 2007, reflects is designed to provide market transparency, the need to establish unified rules for liquidity and reflect price announcements. regulation of the common European The period of the trading session is from electronic communications market, part of 10:10 to 16:55. Apart from the trading which is Bulgaria. session there are also pre-trading and Under the Electronic Communications post-trading sessions. During these two Act, electronic communications may sessions, the participants can enter, be transferred, transmitted or accepted amend or delete their orders which shall be for all kinds of signs, signals, written executed on the next trading session. The text, pictures, sounds or information by pre-trading session is from 9:30 to 10:00, conductor, radio waves, optical or other while the post-trading session is from electromagnetic means. 17:00 to 17:30. Public electronic communications may be Concessions provided by any legal entity or individual who meets the general requirements The Constitution of the Republic of set out in the law, after first notifying the Bulgaria states that under the conditions Communications Regulation Commission. of a separate law the state can grant concessions for certain objects or activities Where legal entities want to use limited that are exclusive state property or subject resource for the purposes of carrying to sovereign state rights. These conditions out electronic communications, they are prescribed in the Concessions Act, have to obtain permission from the effective from 1 July 2006. Currently, a Communications Regulation Commission. new Concessions Act is in the process of The Communications Regulation enactment and it will implement Directive Commission may decide to hold a tender

Persons intending to create radio and No license is required for trading with television programs are to register with the natural gas. Media Council. There are restrictions placed on those entities which have already received Licensing regime in the energy and gas licenses for distribution of energy and sector distribution of natural gas to also be The last amendments to the Energy Act, granted licenses for other energy activities. effective from 2012, transpose the Third The entities which are licensed as Energy Package into Bulgarian law thus distributors of natural gas on a particular opening the Bulgarian energy and gas territory may also be licensed as end market to liberalization. suppliers of natural gas provided that the The main regulatory body in the energy, customers connected to the distribution gas and water supply sector is the Energy network are less than 100,000. and Water Regulatory Commission which is Any local legal entity, fulfilling the responsible for the issuance, amendment requirements of the law, is eligible to and withdrawal of licenses for activities in receive a license for the activities listed the energy and gas sector. above, as well as to perform gas trading In general, the law requires an individual activities. license for the specific energy activity, such Such license or the right to perform gas as generation of electricity and/or heat, trading activities may also be granted to transmission of electricity, heat or natural an entity registered under the legislation

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 26 | Investment in Bulgaria 2017 of one of the Member States or a country National support measures for that is party to the European Economic renewable energy producers Area Agreement. The major part of the REA regulates the For the purposes of issuance of a license, development of projects for generation of there is no formal requirement for foreign electricity from renewable sources. entities to be registered under the Pursuant to the REA, producers of Bulgarian Commercial Act. electricity from renewable energy sources Licenses are issued for a period up to (RES) are entitled to the following incentive 35 years. The term may be extended for measures: an additional 35-year period where the • Privileged connection of the renewable licensee performs all obligations and energy plants to the electricity grids requirements under the license, and has applied for an extension at least one year • Purchase of electricity produced by RES prior to the expiration of the initial license at preferential prices, as determined in a term. feed-in-tariff. According to the second National Report Renewable energy for the progress of Bulgaria in the Pursuant to Directive 2009/28/EC on the stimulation and the usage of energy from promotion of the use of energy from renewable sources, the national target of renewable sources, Bulgaria is required to a 16% share of renewable energy of total achieve a 16% share of renewable energy internal energy consumption was achieved of total internal energy consumption by by 27 December 2013. Thus, the above 2020. incentive measures will not apply for RES producers who apply for connection to the The production and promotion of electricity grid after 27 December 2013. renewable energy in Bulgaria is regulated mainly by the Energy Act and the According to amendments of the Energy Renewable Energy Act (REA), the latter Act, the electricity produced by RES implementing the provisions of Directive projects which entered into exploitation 2009/28/EC. The sublegislative acts after 6 March 2015 shall not be purchased concerning renewable energy in their major at preferential prices on the basis of long- part are adopted by the Energy and Water term agreements except for: Regulatory Commission (EWRC or “the • RES projects with a total installed Regulator”). capacity not exceeding 30 kW which shall be constructed over roofs and/or Licensing of renewable energy walls of buildings located within urban- producers ized territories, and No electricity production license is required for renewable energy plants with a total • Biomass projects with a combined cycle installed capacity of up to 5 MW. Operators and indirect usage of biomass which of renewable energy plants with a higher shall be constructed within urbanized installed capacity are to obtain a production zones, agricultural sites or production license according to the requirements of zones and a total installed capacity not the Energy Act. exceeding: (i) 1.5 MW when at least

60% of the used biomass represents sources. The Regulator determines the FIT animal fertilizer and meets some levels annually or whenever a significant mandatory criteria, and (ii) 500 kW change of any of the price components when using vegetable biomass which is was established as a result of analysis. their own production. The gratis period The period for mandatory off-take of for these biomass projects is until electricity depends on the type of the 1 January 2016 – all such biomass renewable energy project, namely: projects which have entered into exploitation after 1 January 2016 shall • 20 years for solar, geothermal and be subject to the above restrictions. biomass projects

• 12 years for wind projects, and Feed-in-tariff (FIT) The REA retained the feed-in tariff (FIT) as • 15 years for hydropower projects with a the main operating subsidy for production total installed capacity up to 10 MW and of electricity from renewable sources. The other renewable energy projects. principle of mandatory off-take of electricity According to the REA, the FIT shall be fixed produced from renewable sources on as at the date of entry into exploitation of the basis of long-term power purchase the renewable energy project, i.e. the date agreements has been maintained. The of issuance of the permit for use. persons obliged to purchase the electricity are the public provider (National Electricity As of 24 July 2015, all energy producers in Company EAD) and the end suppliers of Bulgaria are to pay monthly contributions electricity. in favor of the Electric Power Grid Security Fund amounting to 5% of their monthly The National Electricity Company EAD, revenues generated from electricity sold, in its capacity of public provider, and the VAT excluded. three licensed end suppliers (EVN Bulgaria Electrosnabdyavane AD, Energo-Pro Certificates of origin Prodazhbi AD and CEZ Electro Bulgaria AD) All RES producers which sell renewable do not purchase the entire volume of energy at preferential prices, as determined electricity produced by RES during one in FIT, must apply for and obtain certificates calendar year at the applicable FIT. They of origin for the produced renewable purchase at the applicable FIT only the energy. Certificates of origin represent electricity produced by RES up to the net electronic documents which verify that the specific production for the different RES electricity is produced from RES. producers as determined in the relevant decision of the Regulator. The public provider and end suppliers purchase at preferential prices only The volume of electricity produced by electricity from renewable sources for RES during the year exceeding the net which certificates of origin have been specific production shall be purchased at issued and transferred to them. lower prices determined for the excess of the balancing market. The FIT is fixed for The Sustainable Energy Development the entire period of mandatory off-take of Agency is the authority responsible for the electricity produced from renewable certificates of origin. Certificates of origin

Member State banks, including banks from Balancing of energy system the EEA, may perform only those activities Each RES producer must submit to the that are specified in their licenses. Activity transmission system operator (Energy can commence upon notification to the System Operator) schedules for the BNB by the competent bodies which have foreseen volume of produced electricity issued the license of the bank. and is financially responsible for any discrepancies between the foreseen A foreign bank registered in a third country and actually produced electricity. For (i.e. not in a Member State or the EEA) this purpose, RES producers participate may perform banking activities in Bulgaria in balancing groups with coordinators only upon opening a branch in Bulgaria and which are licensed by the Regulator and obtaining a license issued by the BNB. registered with the transmission system Financial institutions are legal entities other operator. than credit institutions for which the main

A financial institution can take the form of a joint-stock company, limited liability company or limited partnership with shares. The minimum share capital of a financial institution, regardless of the services to be carried out, is BGN 1,000,000.

Financial institutions having their registered address in a Member State or a country that is part of the EEA are also entitled to carry out commercial activities on the territory of the Republic of Bulgaria directly or through a branch upon fulfillment of a notification procedure between their home Member State regulator and the BNB.

The representative office of any bank in the Republic of Bulgaria is obliged to submit to the BNB a copy of the act for its registration with the Bulgarian Chamber of Commerce and Industry within 14 days after the date of issuance of the act. Such representative office may not carry out commercial activity in Bulgaria.

The primary law governing the formation, Rules applicable to all forms of operation, transformation and termination business association of companies is the Commercial Act, effective from 1 July 1991. Articles of Association The adoption of the Articles of Association There are five forms of business is an initial step in the establishment of a association in Bulgaria under the company. Commercial Act: The Articles of Association must contain: • Unlimited partnership (sabiratelno druzhestvo – SD) • Trade name, seat and address of the company • Limited partnership (komanditno druzhestvo – KD) • Scope of the company’s activities

• Joint-stock company • Management and representation of the (aktsionerno druzhestvo – AD) company

• Limited liability company • Identity of the partners/shareholders of (druzhestvo s ogranichena otgovornost – the company (except for the AD) OOD) • Type (cash or in-kind) and amount of • Limited partnership with shares partners’ contributions (for SD and KD), (komanditno druzhestvo s aktsii – KDA) and/or the amount of company’s capital (for OOD, AD and KDA), and All types of business association are recognized as legal entities. The founders • Other matters as regulated by the may participate in one or more companies Commercial Act which may differ for provided that the law does not prohibit each form of company. such participation. Founders may be In cases when a partner or a shareholder Bulgarian or foreign companies and/or intends to make an in-kind contribution, individuals. Irrespective of the nationality the Articles of Association must state the of its founders, each type of company is name of the contributor, the full description considered to be Bulgarian. of the in-kind contribution, its monetary The most usual forms of business value, and the grounds for the contributor’s association for foreign investors are the rights. limited liability company (OOD) and the In the case of a limited liability company, a joint-stock company (AD). joint-stock company or a limited partnership with shares, the in-kind contribution must

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Investment in Bulgaria 2017 | 31 be valued by three experts appointed by Announcement of the annual financial a registration official from Commercial statements Register with the Registry Agency. The All forms of business associations under conclusion of the experts must contain a the Commercial Act, including sole full description of the in-kind contribution, proprietors which are subject to statutory the method of valuation, the valuation and independent financial audit and branches of its consistency with the share of the capital foreign entities, are obliged to present their or the number, the nominal and issuing annual financial statements for the previous value of the shares being subscribed for by financial year to the Commercial Register. the contributor. The monetary value of the The deadline for announcement is 30 June in-kind contribution stated in the Articles of of the year following the reported year. Association may not exceed the experts’ valuation. Together with their annual financial statements, the limited liability companies, Registration joint-stock companies and limited partnerships with shares that are classified A newly established company comes as medium and large entities or public into legal existence with its entry in the interest entities are required to publish Commercial Register with the Registry information about the proposal of the Agency. The standard registration respective company’s management body application form must be filed by the for profit distribution or coverage of losses, appointed management body or by a proxy, as well as about the resolution adopted in duly authorized by the latter. The managing this regard. directors of the company have an obligation to notify the Commercial Register with All other enterprises are required to publish the Registry Agency, within seven days, of their annual financial statements for the any change in the circumstances already previous financial year in an economic registered. If the managing director fails to magazine or on the internet by 30 June of perform their duties, they are subject to an the year following the reported year. administrative fine. Termination of business associations Pre-company status There are several grounds for the Prior to registration with the Commercial termination of a company: Register, the founders may reach an • Expiration of the term of the company agreement on the actions that must be or other grounds/circumstances taken in preparation for incorporation. provided for in the Articles of The founders’ actions create rights Association and obligations for the persons who have undertaken the said actions. The • Resolution by the shareholders/partners latter are held liable jointly and severally of the company adopted with the for these obligations. Eventually, with qualified majority prescribed by the law the registration, these obligations are or the Articles of Association automatically assumed by the newly • Resolution of the respective district established company. court for declaring the company insolvent

• Transformation of the company in transformation agreement, depending certain cases on whether initially there is one or more participating company. The transformation • Termination by a resolution of the agreement/plan must be in writing and district court in cases provided by the it must be signed before a notary public law (e.g. where the company pursues by the official representatives of the objectives against the law) participating companies. It must specify • In the case of an AD – when the the terms and conditions of the intended company’s net asset value drops below transformation, as well as the obligations the amount of the registered capital of the participating companies with regard and, within one year, the company has to the transformation. The content of not resolved to reduce its registered the transformation agreement/plan must capital or to transform the company in be in compliance with the mandatory accordance with the requirements of requirements of the Commercial Act. the law The transformation agreement/plan must • Other specific grounds regarding the be reviewed by controllers appointed by SD, KD and KDA (e.g. insolvency of a the management bodies of each of the partner). companies involved in the transformation. Upon a request from the companies When one of the above occurs, involved, an official from the Registry the company undergoes liquidation Agency may appoint a joint controller proceedings unless an insolvency for all companies. The controller must procedure has already been initiated. be a registered auditor. The controller The company loses its legal status being must also meet other requirements deleted from the Commercial Register. set in the law, which guarantee the auditor’s independence from the merging Transformation of business associations companies, e.g. the companies are not Chapter 16 of the Commercial Act allowed to appoint auditors who have regulates mergers, consolidation of two audited them during the last two financial or more companies, demergers into two years, or who have performed a valuation or more companies, the spin-off of certain of an in-kind contribution to the capital of operations into a new company, and any of the companies. The controller is transformations whereby the type of the not allowed to audit any of the merging company changes. companies for a period of two years The applicable provisions specify following the date of the merger. and classify the types of business The review of the transformation transformations, the procedure for agreement/plan is not obligatory, if execution of the transformation, and the all shareholders of the companies rights and obligations of the companies and participating in the transformation express their partners/shareholders. their explicit written consent that no audit Prior to adopting a resolution authorizing of the transformation is to be performed. a transformation, companies must draft In this case, the written consent must be a transformation plan or conclude a announced at the Commercial Register with the Registry Agency.

The management body of a limited liability Insolvency company, a joint-stock company, or a Insolvency proceedings in Bulgaria limited partnership with shares is required are opened with regard to companies to adopt a report on the transformation. The which have been declared insolvent report must contain a detailed economic (e.g. companies which are unable to meet and legal explanation of the terms and their monetary obligations, or have not conditions of the transformation, as filed for announcement in the Commercial specified in the transformation agreement/ Register their annual financial statements plan. for the preceding three years, etc.) or The adoption of a report on the over-indebted (i.e. the assets of the transformation is not obligatory, if all company are not sufficient to cover its shareholders of the companies participating liabilities) by the competent district court. in the transformation express their explicit The company’s management body must written consent that no adoption is file an application with the competent necessary. In this case, the written consent district court for opening of insolvency must be announced at the Commercial proceedings within 30 days of becoming Register with the Registry Agency. insolvent or over-indebted. The application The report and the transformation may also be filed by any creditor of the agreement/plan must be announced company. at the Commercial Register with the Upon opening the insolvency proceedings, Registry Agency simultaneously by each the court appoints a trustee whose role is participating company and at least 30 days to represent and manage the current affairs prior to the date of the General Meeting of the company, to collect its receivables which will vote on the resolution for and to convert its assets into cash and transformation. subsequently distribute the cash to the The transformation agreement/plan, as company’s creditors. reviewed and approved by the controller, In 2016, insolvency proceedings were must be approved by the General Meeting opened with regard to 452 companies in of Shareholders of each of the companies Bulgaria. Over the last few years, there has involved in the transformation. The been a downward trend in the number of resolutions must be adopted by a qualified insolvent companies following the peak in majority of three-quarters of the capital in 2013 with insolvency proceedings opened the case of an OOD, or a qualified majority with regard to 820 companies. of three-quarters of the presented voting shares of the capital in the case of an AD. Stabilization The transformation enters into force The latest amendments to the Commercial from the date of its registration into the Act (effective as from 3 January 2017) Commercial Register with the Registry introduced an entirely new stabilization Agency. proceedings in Bulgaria applicable to traders (with the exception of public The Commercial Act also outlines simplified entities, credit institutions and insurers) transformation procedures, provided that who are not insolvent but are in imminent certain conditions are met. danger of insolvency.

The stabilization proceedings are voluntary are distributed to the partners/ and are opened upon the request of the shareholders, but not before six respective trader. They takes place before months have elapsed from the date the relevant district court, which appoints a of announcement of the notice to the fiduciary to act as an auxiliary body of the creditors at the Commercial Register. court within the proceedings. When all liabilities of the company have been settled and the remaining An essential part of the stabilization assets distributed, the liquidator applies proceedings is the stabilization plan for deletion of the company from the prepared by the trader, containing the Commercial Register. terms and conditions with regard to payment to its creditors, as well as the Limited liability company (OOD) extent of their satisfaction. The OOD is a commercial company whose The stabilization proceedings give shareholders’ liability is limited to the the trader the possibility to reach an unpaid portion of their shares1. An OOD is agreement with its creditors, to negotiate liable to its creditors only to the extent of debt restricting, and to create conditions its own assets. for the recovery and stabilization of its commercial enterprise and continuance of This form of enterprise is convenient for its activity and thus, to avoid the opening of small and medium-sized business activities insolvency proceedings. because of the advantages it offers over the other types of business associations: The provisions of the Commercial Act, regulating the stabilization proceedings, • The minimum capital required is enter into force on 1 July 2017. relatively low – BGN 2 • Shareholders’ personal assets are Liquidation protected from business debt because The liquidation procedure, in contrast their liability is limited to the amount to insolvency, is voluntary, except for a of their contribution into the capital. By liquidation by a court decision in cases contrast, unlimited partnership partners provided for by law, and is initiated in are liable to creditors with their entire the case of expiration of the term of property the company as set out in its Articles • The OOD avoids the higher publicity of Association, or by a resolution of the requirements and the complex members/shareholders of the company. incorporation procedures applicable to The General Meeting of Shareholders (or an AD company. the Partners in an SD or KD) must appoint Because of these advantages, the vast a liquidator. The latter is responsible for majority of foreign-owned companies inviting the company’s creditors to claim operate in this legal form. their receivables through announcement at the Commercial Register with the Registry The Bulgarian OOD resembles the German Agency. After the satisfaction of the and Austrian “GmbH” (Gesellschaft mit creditors’ claims, the remaining assets beschränkter Haftung), the French “Sarl.”

1 The English word “share” does not explain the difference between a share in an OOD and a share in an AD. The most important differences are that the share in an OOD is not freely transferable and is not necessarily of equal value, while the AD can issue only shares of equal value and these are more easily transferable. In addition, the shares of an AD are securities. For simplicity, shares in an OOD will be referred to as an “interest.” © 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Investment in Bulgaria 2017 | 35 and the English private company limited by One of the main characteristics of the OOD shares. is related to the transfer of shareholders’ interests. The transfer of an interest from Formation one shareholder to another is unrestricted An OOD can be formed by one or more but the transfer to a third party is subject persons. The Bulgarian Commercial to a more complex procedure. The new Act does not provide for a minimum or shareholder has to be admitted by the maximum number of shareholders in an General Meeting of Shareholders of the OOD. It should be taken into account that company following a written application a large number of shareholders will make stating that they accept the terms of the the company’s management cumbersome, Articles of Association. In the case of since all important decisions must be admittance by the General Meeting of taken unanimously or with a majority of Shareholders, a Share Purchase Agreement shareholders representing 75% of the must be signed before a notary public OOD’s capital. and the transfer must be registered in the Commercial Register with the The specific formation rules applicable to Registry Agency. the OOD are as follows:

• All the capital must be subscribed on Management incorporation and at least the minimum The OOD is managed by the General statutory capital (BGN 2) must be paid Meeting of Shareholders (the sole owner in before the standard registration in case of an EOOD) and by the appointed application form is submitted to the managing director(s). Commercial Register Each OOD must hold at least one General • The founders must appoint managing Meeting of Shareholders each calendar director(s) of the company. The year (Annual General Meeting). It is usually managing director does not necessarily convened at the managing director’s have to be an OOD shareholder, discretion, but it can also be convened Bulgarian citizen or resident upon the written request of shareholders whose interests amount to at least one- • In the case of an EOOD (single tenth of the company’s capital. member limited liability company), an Incorporation Deed must be drawn up Apart from the Annual General Meeting, instead of Articles of Association. the managing director may convene additional meetings commonly referred Capital to as Extraordinary General Meetings. The statutory minimum capital of an OOD An Extraordinary General Meeting must is BGN 2. The capital of the company is be called immediately when the losses divided into interests and the size of each of the company exceed one-fourth of the shareholder’s interest determines their registered capital or if the company’s net rights and obligations concerning the asset value falls below the amount of the company. It is possible for the interests of registered capital. There is no limit to the the individual shareholders to be of unequal number of General Meetings a company value. The interests of shareholders in an may hold each year. OOD are not securities.

The General Meeting is the company’s The managing director(s) in an OOD highest management body. It is is/are required to have written management empowered to make key strategic and contracts executed with the company. The executive decisions regarding the company. management contract must be signed by a The shareholders are authorized to person authorized by the General Meeting decide on the admission and expulsion of of Shareholders or, in the case of an EOOD, shareholders, the appointment of managing by the sole owner of the capital. director(s), a capital increase or reduction, In the case of an EOOD, the sole owner approval of the annual report and balance of the capital manages and represents sheet, distribution of profits and others. the company either personally or through The amendments to the Commercial an appointed managing director(s). When Act, effective as from 1 January 2017, the owner is a legal entity, the managing introduced a new requirement for notary director of the legal entity or a person certification of the signatures and the designated by them manages the company. content of certain resolutions, adopted by the General Meeting/the sole owner of Distribution of profits the capital of limited liability companies, namely the resolutions for acceptance and Shareholders cannot claim their interest dismissal of shareholders, share capital back while the company is in operation. increase and decrease, transfer of shares They are only entitled to receive profits to a new shareholder, appointment of a in proportion to their interest, unless managing director and acquisition and otherwise agreed by the shareholders. disposal of real estate and property rights Payment of interest on a shareholder’s to it. The notarization requirement may profits is explicitly prohibited. not be applied provided that the Articles of Association of the company explicitly Joint-stock company (AD) provide for a simple written validity form A joint-stock company is a company whose with regard to such resolutions. capital is divided into shares. The AD’s The day-to-day management of an OOD liability to its creditors is limited to the is conducted by at least one managing amount of its assets. Foreign investors director. The managing director represents prefer this type of business association the OOD in court and in dealings with when larger amounts of capital need to third parties. They are financially liable be raised, particularly when public capital for damages caused to the company. For markets need to be tapped. The Bulgarian example, in the case of over-indebtedness AD resembles the French “Societe or insolvency, the managing director must Anonyme,” the German and Austrian “AG” file an application initiating insolvency (Aktiengesellschaft) and is similar to the proceedings. If the managing director English public company limited by shares. does not perform their duty, they commit a criminal offence and may be held liable Formation for damages to both the company and its An AD is incorporated by a Constituent creditors. Assembly whereby all persons, who subscribe shares into the capital of the new

The AD is registered in the Commercial The shares in an AD can be traded on Register with the Registry Agency by the stock exchange if the company is filing its Articles of Association and other registered as a public company under the documents evidencing that: Public Offering of Securities Act.

• Its capital is fully subscribed The AD must set up a reserve fund mainly to cover losses. At least one-tenth of the • A portion of the value of each share company’s profit must be set aside until stipulated by the Articles of Association, the fund’s assets reach at least one-tenth but not less than 25% of the nominal or of the company’s registered capital. In issuing value, has been paid addition, any premium over the par value • The Board of Directors or, respectively, for shares and debentures obtained upon the Managing Board and Supervisory their issuance must be included in the Board have been appointed, and reserve fund.

• The remaining requirements of the The Bulgarian Commercial Act has a law have been fulfilled (e.g. banks, requirement that regulates the capital- insurance and investment companies credit ratio of joint-stock companies. The have to obtain the necessary licenses net value of the assets of a joint-stock granted by the Bulgarian authorities). company, i.e. the difference between the value of the assets and liabilities of the Capital company according to its balance sheet, cannot fall below the amount of the General rules registered capital of the company. If this The statutory minimum capital of an ratio is not observed, then the shareholders AD is BGN 50,000. A higher statutory are obliged to adopt a resolution either minimum is required for credit and financial to decrease the company’s capital, or to institutions, investment companies, transform the joint-stock company into insurance and health insurance companies. another form of business entity. If this is not done within one year, then a court The capital of the company is divided ruling issued upon the request of the public into bearer or registered shares. Within prosecutor can terminate the company. these two types of shares, the AD may issue ordinary and preference shares. An Increase of capital ordinary share entitles its holder to one vote. Preference shares may provide a A company’s capital may be increased in guaranteed or additional dividend or a one of the following ways: • Issuing new shares

2 Dematerialized shares have no physical substance and are issued in a book-entry form.

• Increasing the nominal value of shares Management already issued, or General rules • Converting debentures into shares. The joint-stock company’s governing The resolution to increase the capital bodies are the General Meeting of must be taken by the General Meeting of Shareholders and the Board of Directors Shareholders. (one-tier system), or the Supervisory Board and the Management Board (two- The Articles of Association may empower tier system). There are no requirements the Management Board (Board of regarding the nationality or residence of Directors) to increase the company’s members of either board. A member of the capital up to a specified amount. Under this Management Board may not be a member provision, new shares may be issued within of the Supervisory Board. The members of five years from the date of the company’s the Board of Directors, the Management incorporation. A resolution which allows Board and the Supervisory Board may for the issuance of new shares may also be shareholders. All Board members are be passed by amending the Articles of held liable jointly and severally before the Association of the company. If this is done, company for damages caused in the course then the Management Board (or Board of of their duties. Directors) may increase the company’s capital up to the amount specified in In a single member joint-stock company, the amending resolution for up to five the owner is empowered to decide on all years from the date of registration of the issues otherwise handled by the General amendment in the Commercial Register. Meeting of Shareholders.

The General Meeting of Shareholders Decrease of capital consists of all shareholders entitled to vote. A company’s capital may be decreased The first General Meeting of Shareholders through either of the following: must be held within 18 months of • Reduction in the nominal value of incorporation. Subsequently, a regular shares, or General Meeting of Shareholders must be held at least once a year, not later than • Cancellation of shares. 30 June. General Meetings of Shareholders A capital decrease requires shareholders’ are usually called by the Board of Directors/ approval. The resolution of the General Management Board or by the Supervisory Meeting of Shareholders on the Board, or upon a request of shareholders capital decrease must be announced representing no less than 5% of the in the Commercial Register. By its company’s capital. announcement, it is presumed that the The General Meeting of Shareholders may company is committed to secure or repay amend and supplement the Articles of all creditor claims. Creditor consent is Association, transform and dissolve the assumed if no written objections are filed company, elect and recall members of within three months from the date of the Board of Directors or the Supervisory announcement of the resolution for capital Board, appoint and dismiss registered decrease with the Commercial Register. auditors, approve the annual financial

If provided in the Articles of Association, Two-tier system certain resolutions of the Management The company’s constituent Supervisory Board may require prior approval from the Board must be elected prior to company Supervisory Board. registration. Subsequent members of the Board are appointed by the General One-tier system Meeting of Shareholders. The total number One-tier system companies are managed of Supervisory Board members may vary and represented by a Board of Directors. from three to seven. It consists of a minimum of three The Supervisory Board does not and a maximum of nine persons. The effectively take part in the management Board of Directors delegates the actual of the company. Its primary function is to management and representation of the represent the company in its relations with company to one or more of its members the Management Board. The Supervisory who are subsequently designated as Board appoints the members of the executive directors. They serve at the Management Board and exercises control discretion of the Board of Directors and over its activities and resolutions. The can be replaced at any time. The executive Management Board must report on its director of a joint-stock company is required activity to the Supervisory Board quarterly. to have a written management contract with the company. The management Members of the Supervisory Board and the contract must be executed on behalf of the Management Board are required to execute company by the chairperson of the Board management contracts with the company. of Directors. Management contracts with members of the Supervisory Board must be signed by a Non-executive members of the Board person authorized by the General Meeting of Directors can conclude management of Shareholders or by the sole owner of contracts with the company at the the capital of the company, in the case of company’s discretion. an EAD. All management contracts with members of the Management Board must Other forms of business association be executed on behalf of the company by the chairperson of the Supervisory Board or European forms of business association by their authorized representative. The European forms of business associations are unions of legal entities, The day-to-day management of an AD with individuals or both, from EU Member a two-tier management system is carried States. The EU legislation regulates the out by the Management Board under the following forms of business associations: control of the Supervisory Board. The (i) European company, established as a number of members of the Management European joint-stock company; (ii) European Board may not exceed nine and not be

The registration procedure is assigned Limited partnership with shares (KDA) to the Registry Agency at the Ministry of Limited partnerships with shares are Justice which is the registration authority. formed by at least three limited partners The Commercial Register is available to the whose liability is limited to the amount public, including via the internet – of their contributions to the company’s www.brra.bg. The Registry Agency also capital. There are also general partners with manages the reservation of company unlimited liability. names and announcement of documents The formation of a KDA is initiated by the and facts such as annual financial unlimited partners. They have the right statements, Articles of Association, invitations to shareholders and others.

The CRA determines the registration procedure of all five main forms of business associations, namely: unlimited partnership, limited partnership, joint- stock company, limited liability company and limited partnership with shares. Furthermore, the CRA regulates the registration procedure of sole proprietors, cooperatives and branches of foreign companies. It does not apply to partnerships, foundations, NGOs and others.

Following registration with the Commercial Register, companies obtain a registration number – Unified Identification Code (UIC) which is used for taxation, social security and statistical purposes. Once received, this UIC remains unchanged until termination and/or cancellation.

Apart from the registration of a company, the CRA also regulates subsequent corporate changes such as entry into the Commercial Register of a procurator, pledge of shares, pledge over a commercial enterprise, termination and liquidation of a company, initiation of stabilization proceedings, transfer or transformation of a commercial enterprise, change of the company’s representatives, seat or name and others.

However, the district courts retain their competency regarding insolvency and stabilization procedures.

The Bulgarian Registry Agency provides free SMS notifications to traders and branches of foreign companies when an application for registration of changes has been submitted to the Commercial Register.

The major legislative acts governing real contribution, exchange) and cannot be estate and real estate transactions in acquired on the basis of possession and Bulgaria are the Bulgarian Constitution, the expired prescription period. However, Ownership Act, the State Property Act, limited property rights (e.g. construction the Municipal Property Act, the Agricultural right) may be granted for municipal public Land Ownership and Use Act, the Civil properties and for state public properties Procedure Code, the Encouragement of (except for properties related to national Investment Act, the Territorial Development security and state defense), when provided Act, the Obligations and Contracts Act, the by the law. Condominium Ownership Management Act Private properties can belong to individuals, and the Ordinances on its implementation, entities, the state and municipalities. the Constructors Chamber Act. Private properties can be subject to real estate transactions. The sale and purchase Types of ownership over real estate of state and municipal property is usually Ownership of real estate in Bulgaria may executed by public tender or as part of a be public or private. public-private partnership (PPP) project. The Public ownership includes properties of exchange of ownership title or construction public interest and those designated for right over private state and municipal real public use only and public functions, such estate property can be performed only in as the coastal beach, national roads, forests cases explicitly specified in the law. The and parks, streets, squares, museums and lease period for state and municipal private schools. property cannot exceed 10 years and the granting of a lease is subject to public Public properties belong to the state and tender procedures or PPP procedures. municipality and are operated by the respective administrative department. By virtue of amendments to the Act to They can be granted for operation to third Supplement the Ownership Act (State parties through concession, public-private Gazette, issue No. 107 of 2014, effective partnership or lease upon satisfying as of 31 December 2014), the statutory conditions explicitly stated by law. In the prescription period for acquiring private latter case, the lease period for public state state and municipal properties has been and municipal properties cannot exceed stopped to run by 31 December 2017. Thus, 10 years, as the granting of the lease in this moratorium established initially back both cases is subject to public tender in 2006 has been prolonged yet another procedures. time until the end of 2017. This means that currently private state and municipal Public properties cannot be disposed of properties cannot be acquired on the basis (i.e. by sale purchase, donation, in-kind of expired prescription period.

When the property belongs to two or more to more than one owner (in this case the persons, co-ownership is established. The general rules of the Ownership Act shall co-owners decide operations by majority apply); and (ii) in case of buildings under and each has a right of first refusal in case condominium ownership in closed-type of disposal of the property. The co-owners residential complexes, the management can authorize one of themselves to of the common areas shall be agreed by represent their co-ownership before third written contract with notarized signatures, parties. concluded between the investor and the owners of the individual units. Buildings can represent condominium ownership. In this case, floors or specific As per the COMA, condominiums shall units of floors may be exclusively owned be managed by a general assembly of by separate persons while condominium owners and/or by an association of owners. ownership areas for all owners in the Unlike the general assembly of owners, building are the façade, the roof, the the association of owners is a legal entity construction and everything which is for which shall be established in accordance common use. Condominium ownership with the procedures set out in the COMA. is established when: (i) the building is The general assembly of owners or the completed, (ii) the floors in the building are association of owners may decide to two or more, and (iii) floors or specific units transfer the maintenance of the building on the floors belong to different owners by means of contract to a third party – (see Section “Condominium ownership individual or legal entity. management” below). For the purposes of maintenance of the common parts of a building, a Condominium ownership special Repairs and Renewal Fund is to management be created. The general assembly of The Condominium Ownership owners/the association of owners adopt Management Act (COMA) in force as of a plan for performance of repair works, 1 May 2009 regulates the regime of reconstructions and reorganizations in the buildings under condominium ownership, building. namely the management of common areas, the rights and obligations of the By virtue of the COMA, the municipalities owners and occupants of individual have established and maintain public dwelling units or parts thereof. registers of buildings or separate entrances under condominium ownership located on The COMA shall be applicable to the their territory. management of common areas of buildings under condominium ownership, i.e. in case Evidence of title floors or separate units (apartments, shops, The ownership title and limited property restaurants and others) of buildings are rights over real estate property in owned by different owners. Bulgaria are evidenced by ownership title There are two exceptions in which the documents (usually in the form of a notary COMA shall not apply, namely: (i) in case deed). In addition, the law requires that of buildings under condominium ownership title documents are registered at the Land with up to three individual units, belonging Registry. By virtue of this registration, the

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 44 | Investment in Bulgaria 2017 acquisition of the ownership title or limited Foreigners (non-resident or resident property rights becomes defendable citizens) may acquire ownership title over against third parties. land in case of legal succession. In case of inheritance of land by citizens and entities of Acquisition of real estate countries which are not members of the EU and the EEA, if not otherwise provided for in Direct acquisition an international agreement, they are obliged, In Bulgaria, foreign citizens and foreign within three years following the revealing of companies can directly acquire buildings, the inheritance, to transfer the ownership to premises within a building and limited persons who have the right to acquire such property rights (e.g. a construction right estates. and right of use). There are restrictions to foreigners owning land in Bulgaria, except Indirect acquisition for the cases reflecting the provisions of the The restrictions on the acquisition of land Act of Accession of Bulgaria to the EU into by foreigners do not apply to Bulgarian the national legislation, as described below. legal entities involving foreign participation. The Accession Act provides for restrictions However, the applicable laws provide for acquisition of land by EU citizens and for other restrictions to the acquisitions entities as follows: (i) for land provided for of agricultural land as described in the second residence and (ii) for agricultural present Section. Thus, in general, foreign land, forests and forest land. Since the legal entities and individuals can effectively five-year transition period for second acquire ownership rights over land through residence expired on 31 December 2011 the acquisition of shares or an interest in and the seven-year transition period for existing Bulgarian companies, or through the agricultural land, forest and forest the establishment of such companies land expired on 31 December 2013, EU under Bulgarian law. It is possible for such residents and entities can acquire urban a company to be 100-percent owned by a land, agricultural land, forest and forest foreign investor. land in accordance with the requirements Foreign companies and foreign citizens, specified by national law. The Ownership furthermore, can acquire shares in the Act, regulating the acquisition of land, does capital of a Bulgarian company which not specify whether the general legislative already owns a real estate in Bulgaria. provisions shall apply to the acquisition of land by EU residents and entities or specific In contrast to the above, the following rules are to be adopted for such acquisition. legal entities may not acquire and possess ownership title over agricultural land: Citizens (non-resident citizens) and entities of countries which are not members of the • Companies in which the shareholders EU and the EEA may acquire ownership title directly or indirectly are legal entities over land under the terms of an international registered in jurisdictions with agreement ratified under the terms provided preferential tax regimes for in the Constitution of the Republic of • Companies whose shareholder(s) are Bulgaria, which has entered into force. non-EU individuals and/or non-EU legal

entities, or whose shareholders are real estate properties and a voluntary citizens of/have their registered seat at a distribution agreement, notarization of the country, which is not a party to the EEA signatures is sufficient. agreement, as well as sole proprietors, A notary deed is not required for the incorporated by such individuals/legal sale of state or municipal property or in entities privatization transactions where the simple • Joint-stock companies which have issued written form is sufficient for a valid title bearer shares. transfer. There are also special rules and procedures governing the acquisition of Only individuals and legal entities who are real estate arising from enforcement, residents and have resided, respectively insolvency and similar procedures. have been registered, in Bulgaria for more than five years may acquire ownership Project development title over agricultural lands. Legal entities which have been registered in Bulgaria After the acquisition of the real estate, for less than five years may acquire the owner can commence the project ownership title over agricultural lands development, since the Bulgarian if their shareholders individuals have legislation recognizes as an investor resided/have been registered residents in the owner of land, or the holder of a Bulgaria for more than five years. construction right. However, certain exceptions are provided for the cables Transaction documents and pipelines of the common technical infrastructure, such as electricity The general rule under the Bulgarian law cables, water and sewerage pipelines, is that transactions involving real estate telecommunication cables and others. (e.g., a purchase and exchange) must be executed with a notary deed before Determining the feasibility of a real estate a registered notary public in the region project is a complex process. It requires where the real estate is located. input and knowledge from different areas, such as urban planning, geodesy The form of a notary deed is mandatory and geology, structure, and installation not only for transactions for transfer of engineering. The process also considers ownership title over real estate properties, the potential environmental impact of but also for establishment of limited the project and examines the investor’s property rights over real estate properties ability to financially support the project. (e.g., construction right and right of use). Due to the many elements in the project After execution of the deed, the notary development process and because each public is obliged, by law, to register the project is unique, the process may vary transaction into the Land Registry in order from project to project. to make the title of the acquirer defendable The main stages of the development against third parties. process can be divided into: For other real estate transactions, • Regulation and planning stage such as in-kind contribution, the sale of a commercial enterprise containing • Environmental impact assessment

• Permitting construction works and Specific requirements to the DDP can be stipulated for leisure and possible land-slide • Execution of construction works and areas, archeological areas and other similar commencement of use. zones. The major legislation governing the The Cultural Heritage Act, in force as development process in Bulgaria is made from 10 April 2009, provides for various up of the Territorial Development Act measures for protection of the immovable (TDA), the Constructors Chamber Act, the cultural heritage, including special rules Chambers of Architects and Engineers in regarding the territorial planning and Investment Design Act, the Development development of protected cultural zones. of the Black Sea Coast Act and various sublegislative acts. Environmental impact assessments

Regulation and planning Environmental impact assessments are required for real estate projects in two The regulation and planning stage cases: comprises approval of a Detailed Development Plan (DDP) or amendment • For projects which are presumed of an existing DDP, applicable when the to impact the environment, such as provisions of the current DDP are not chemical factories, oil refineries, thermal sufficient for the investor. The effective power plants and others, and DDP is the first precondition to commence • For projects impacting existing construction works. protected areas (reserves, national The DDP can consist of a regulation part parks and others) or existing and (plan for regulation) and/or a construction potential protected zones (Natura 2000). part (plan for construction). The plan for For certain projects, procedures for regulation transforms an unregulated land assessing the need for environmental plot into a regulated land plot through impact assessment need to be performed. determination of its borders (regulating lines) and provides access to the land Protected areas are designated to conserve plot from a street. In relation to the future biological diversity in ecosystems and construction, the construction part of the natural processes occurring in them, as DDP specifies the construction parameters well as typical or unusual non-living natural such as type and height of the building(s), features and landscapes. Protected areas the maximum density and intensity represent national parks, nature reserves, allowed, as well as the minimum green natural monuments, natural parks and area. protected sites.

Generally, the DDP is approved by the Natura 2000 is an ecological system of municipal authorities, but for construction protected zones in the European Union, projects of regional or national significance namely zones for the conservation of wild the DDP is approved by the Regional birds and zones for the conservation of Governor or by the Minister of Regional natural habitats. As an EU Member State, Development and Public Works. Bulgaria must comply with all relevant EU legislation and directives, including

EU Directive 92/43 on the conservation bodies and it serves as a ground for the of natural habitats and wild fauna and issuance of a construction permit. flora and EU Directive 2009/147 on the The investor may apply for the construction conservation of wild birds, which repealed permit simultaneously with the submission Directive 79/409. The requirements of of the design for approval. If the both directives were implemented in the construction permit is requested separately Bulgarian Biodiversity Act. from the investment design approval, the Though the protected zones in Bulgaria permit must be issued within seven days are still not fully approved, the legislation of the request. requires assessment of projects impacting The construction permit may be issued the potential protected zones to be for the entire project or, predominately completed. for complex infrastructure projects – for At present, the Council of Ministers has different stages of the project which can be adopted decisions for approval of 339 executed and used separately. protected zones under Natura 2000. In general, the investment design is The announcement of other protected approved and the construction permit Natura 2000 zones is still in process. is issued by the chief architect of a Interested parties may appeal the draft municipality. orders within a one-month term of their The construction permit issued by the publication. chief architect of a municipality must be More information on Natura 2000 zones in announced to interested third parties who Bulgaria, including detailed lists and maps, are entitled to appeal the construction is available on the internet at permit together with the approved http://www.moew.government.bg. investment design before the local department of the National Construction Permission of construction works Supervision Directorate (NCSD), where Construction works are permitted on the the construction project will be situated. In basis of an effective DDP. addition, the NCSD is entitled to perform an ex officio inspection and to repeal the Chronologically, the process starts with construction permit within 14 calendar the investor’s assignment of a project days after the NCSD has been notified of for execution of an investment design. the construction permit issued in cases After that, preliminary contracts between where the construction permit does not the investor and the utility companies comply with the legislative requirements. must be concluded and a valuation of the The NCSD decision is subject to court investment design must be obtained. In appeal. After issuance of a positive court some cases, coordination with special resolution confirming that the issuance controlling authorities (e.g. environmental of the construction permit is lawful, the inspection, fire safety department) is construction permit can be deemed valid required. and the investor can proceed with the The investment design is subject to preparatory stage of the construction approval by the respective administrative process.

Execution of construction works and compliance with the DDP, the approved entering into exploitation design, the legal requirements to the The next development stage is the construction works and the terms of execution of the construction works. There the construction contract. Based on is no mandatory term for their completion the provisional Taking Over Certificate, – it is a matter of agreement between the the construction project is entered into investor and the contractor. However, the exploitation and the construction becomes law provides that the construction permit feasible for use. shall lose legal effect unless construction In general, before entering into exploitation, has commenced within three years after a technical passport of the construction the said permit has become effective works shall be prepared by the respective or unless the rough construction work, consultant/technical controller. Depending including the roof of the building, has on the significance of the construction been completed within five years after project, its complexity and the associated the said permit has become effective operational risks, it can enter into and, applicable to physical-infrastructure exploitation through a: line projects, unless the construction is completed within ten years after • Permit for exploitation issued by the the said permit has become effective. NCSD director if it is a significant Construction works in respect of which the construction project, or construction permit has lost legal effect • Certificate for exploitation issued by the may be implemented after re-certification chief architect of a municipality if it is of the construction permit. The latter may not a significant construction project. be re-certified only once – for renewal of the term for commencement or for A permit for exploitation is based on a renewal of the term for completion of the complex procedure which includes a construction. protocol signed by a special committee (the so-called Act, sample 16) and a report During the construction works, a number issued by the construction supervisor. A of standard-form acts and protocols have certificate for exploitation is issued under to be compiled. The acts and protocols a simplified procedure which involves only serve as evidence for the items that are a desktop review of the documents for the recorded in them and they concern the construction project. commencement, execution and completion of the construction works. The participants Participants in the development in the development process who sign process these acts and protocols are jointly During the various stages of the responsible for the authenticity of the facts development process, the investor enters included in them. into relations with other participants, The completion of the construction works namely: the designer, the contractor, is certified by the execution of a provisional the consultant, the structural engineer, Taking Over Certificate (the so-called Act, the technical controller and the utility sample 15). With it, the participants certify companies. The relations between the that the works have been executed in participants in the development process

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Investment in Bulgaria 2017 | 49 must be settled by written contracts. As Act effective from 23 February 2010, the of 2017, a written contract for author’s registration of a constructor in a relevant supervision with the designer of the register in a Member State or in part of construction works has become a the European Economic Area shall be mandatory condition for commencement of treated as a registration in the Bulgarian construction. Central Professional Constructors Register. Switzerland was added to the above- The designer of the construction works mentioned countries according to the may be an individual with designer amendments of the Constructors Chamber capacity, or an entity employing such Act effective from 27 September 2013. individuals. Designers are responsible for the preparation of the investment design. Based on the above amendments, on They also exercise control to ensure that 9 February 2012 the Bulgarian Construction the construction works comply with the Chamber adopted a simplified procedure design (the so-called author’s supervision), for registration with the Constructors and are authorized to issue mandatory Register of constructors from the EU instructions to the contractor. who execute one-off specific construction projects in Bulgaria. From 27 September According to the Chambers of Architects 2013, the simplified procedure is also and Engineers in Investment Design applicable for constructors registered in Act, effective from 8 February 2008, Switzerland. foreigners and nationals of EU Member States, other EEA states and Switzerland, Exempted from registration are (i) those whose professional qualification has been contractors deemed not to work on recognized according to the Recognition significant construction projects and of Professional Qualifications Act, have the (ii) foreign contractors who execute right to practice as architects, landscape construction projects in Bulgaria according architects, urban planners or engineers to NATO’s program for investment in in the field of urban planning and/or security. development design in the Republic of The consultant is a trader who carries out Bulgaria. valuations to ensure that the construction The constructor is responsible for work complies with the investment design execution of the works in compliance with and exercises supervision over construction the approved design and permits, and works. the legal requirements applicable to such As a construction supervisor, the construction works. consultant is responsible for the lawful Construction works can be executed only commencement and execution of the by a constructor who: (i) is a trader duly construction works, the assessment of registered under the Bulgarian legislation their energy efficiency, as well as for or under the legislation in the country of the fitness of the completed works to origin, and (ii) is registered in the Central enter into exploitation. This person is also Professional Constructors Register at the authorized by law to certify certain acts and Bulgarian Construction Chamber. As per protocols during the construction works amendments to the Constructors Chamber and to issue instructions and orders which

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 50 | Investment in Bulgaria 2017 are mandatory for other participants in the supervision in a Member State, but for development process. whom the legislation of the Member State provides for no equivalent regime, are Pursuant to amendments of the TDA, temporarily entitled to act as consultants effective from 26 November 2012, the in regard to a one-off specific construction license regime applicable to consultants project after issuance of a certificate by the was revoked and replaced with registration Head of the NCSD. of consultants at a special register with the NCSD. The structural engineer is an individual possessing the special skills to exercise On 11 December 2012, Ordinance mandatory technical control over the No. RD-02-20-25 for the procedure structural parts of the investment design. and terms for issuance of registration The structural engineer must be included certificates to consultants for carrying in a promulgation in the State Gazette out compliance evaluations of investment list, prepared and updated annually by the designs and/or for exercising construction Chamber of Investment Design Engineers. supervision was promulgated in the State As of 23 February 2010, the activities of Gazette. It provides that, upon registration the structural engineer may be performed at the register with NCSD, the consultant by individuals entered in a relevant list or is granted a registration certificate with register kept by a respective competent a five-year term of validity. Consultants authority in a Member State or the EEA. who have been licensed by the Minister of Regional Development and Public The technical controller is a civil Works may conduct their activity until the engineer who manages the execution of expiration of their licenses. The certificate the construction works on behalf of the for registration is to be issued by the Head contractor. If the construction works are of the NCSD. executed by the investor themselves, the investor is obliged to appoint a technical No registration is required in case a controller. consultant executes pre-investment research, preparation for the design The utility companies are the suppliers process and coordination of the of electricity, water, sewerage and others. construction process until the project Prior to issuance of the construction enters into exploitation. permit, the investor signs preliminary contracts for supply with the utility Activities as a consultant may be rendered companies, followed by final contracts. by persons having a document issued When a construction project requires by respective competent authority in a external connections to the technical Member State or in an EEA state certifying infrastructure to be built, the utility the right to render such activity. In this companies become involved in the case, a subsequent certificate issued by investment design. the Head of the NCSD is required. Designers, consultants, contractors Persons who are eligible to carry out and structural engineers are obliged to compliance evaluations of investment insure their own professional liability for designs and/or exercise construction damages that may be caused as a result

Accounting • Criteria for application of either International Financial Reporting Introduction Standards (IFRS) adopted by the The Bulgarian accounting requirements European Union, or National Accounting are governed by the Accountancy Act Standards (NAS) (AA) effective from 1 January 2016 which • Mandatory preparation of additional transposes the requirements of Directive reports for certain entities 2013/34/EU. The Commercial Act, the Credit Institutions Act, the Bulgarian • Criteria for statutory financial audit National Bank Act, the Social Security • Preparation of consolidated financial Code, the Insurance Code, the Public statements (CFS) Offering of Securities Act and certain other laws also contain regulations applicable • Deadlines for publication of the annual to accounting and financial reporting financial statements and other reports. requirements. Categories of entities and groups The requirements of the AA extend to all business organizations, including The classification of entities and groups of branches of foreign organizations, with entities is at the core of the provisions of representative offices being the only the AA as different requirements will apply exception. on the basis of the categories, e.g. the preparation of additional reports for some Overview of the requirements of the AA: entities. Entities and groups are classified • It lays down definitions and in the respective category when, as at classifications of entities 31 December of the current year, they do not exceed at least 2 out of the 3 criteria.

Entities Micro Small Medium Large Carrying value of assets (BGN) 700,000 8,000,000 38,000,000 > 38,000,000

Net sales revenue (BGN) 1,400,000 16,000,000 76,000,000 > 76,000,000

Average personnel 10 50 250 > 250

“Group of entities” is defined as the parent company and all of its subsidiaries.

Groups Small Medium Large

Carrying value of assets (BGN) 8,000,000 38,000,000 > 38,000,000

Net sales revenue (BGN) 16,000,000 76,000,000 > 76,000,000

Average personnel 50 250 > 250

A 2016 amendment to the AA stipulates • Holding Bulgarian State Railways EAD that the categories of groups of entities and its subsidiaries; National Railway may be further defined on the basis of the Infrastructure Company sum of the values of the indicators in the • Commercial entities whose primary separate annual financial statements of the business activity is to produce companies in the group, prepared as of and/or transfer and/or sell electricity 31 December of the current reporting and/or thermal power and which are period. In this case, in determining the large enterprises category of the group, the thresholds of the criteria for the carrying value of • Commercial entities whose primary assets and the net sales revenue shall be business activity is to import increased by 20%. and/or transmit and/or distribute and/or transit natural gas and which Public interest entities (PIEs) are large enterprises as per the AA Every PIE must have an audit committee in • Water supply and sewage operators accordance with the requirements of the under Article 2, paragraph 1 of the Independent Financial Audit Act and these Law on the Regulation of the Water entities are required to publish additional Supply and Sewage Services which are reports together with the annual financial medium or large entities. statements. Preparation of annual financial The public interest entities in accordance statements (AFS) with the AA are listed below: All entities are required to prepare annual • Entities whose transferrable securities financial statements with a financial are admitted to trading on a regulated year end of 31 December. The financial market of a European Union Member statements are the responsibility of the State company’s management.

• Credit institutions Pursuant to the AA, companies prepare • Insurance and reinsurance undertakings stand-alone (non-consolidated) and consolidated financial statements • Pension insurance companies and funds (where required). In accordance with managed by them the requirements of the AA, financial • Investment intermediaries which are statements (interim, annual and large enterprises as defined in the AA consolidated) may be drawn up only by preparers of financial statements. Any • Collective investment schemes and individual or a specialized accounting management companies within the enterprise may be a preparer of financial meaning of the Collective Investment statements provided that they meet the Schemes and Other Undertakings for requirements of the AA for a minimum Collective Investments Act which are level of education and relevant professional large enterprises as defined in the AA experience. • Financial institutions within the meaning Depending on their classification (micro, of the Credit Institutions Act which are small, medium, large or PIE), the entities large enterprises as defined in the AA

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 54 | Investment in Bulgaria 2017 apply different criteria or may apply certain Entities which, in accordance with the exemptions for the preparation of a full set requirements of the AA, are mandatorily of annual financial statements. subject to audit (see below) are additionally required to prepare an annual management Applicable financial reporting framework report for the annual activity of the Public interest entities are required to company. This report includes, but is prepare and present their annual financial not limited to, information about recent statements on the basis of the IFRS as and future developments of the entity, a adopted by the EU. Entities other than PIEs description of the major risks, important apply the National Accounting Standards subsequent events, a description of which are adopted by the Council of financial instruments used by the entity and Ministers of Bulgaria but they may opt financial risk management. to voluntarily apply IFRS. Once having The statement of financial position and selected IFRS as an applicable framework, the statement of profit or loss and other entities generally may not revert to NAS. comprehensive income must be based on, However, the AA introduces the option for and supported by, bookkeeping records. a one-off transition to application of NAS for Comparative figures must be presented. certain entities currently applying IFRS. Entities under the supervision of the Non-profit legal entities, regardless of their Financial Supervision Commission, such as classification, prepare AFS in accordance banks, insurance companies, investment with NAS. companies, pension and health insurance The underlying accounting principles funds and listed entities, are required to under NAS are generally similar to those file certain additional reports with the under IFRS in their 2002 version. The Commission on a monthly basis. basic principles adopted by the AA are Under the AA, there are specific accounting going concern and the accrual basis of rules to be followed by companies in accounting. The principles of consistency, liquidation and bankruptcy. prudence, matching and substance over form are also incorporated into the The disclosure notes must include Bulgarian accounting practices. additional information necessary to give a true and fair view of the financial position Currently, the IFRS for SMEs which were and results of the business. This includes issued by the International Accounting an explanation of the accounting policies Standards Board (IASB) in 2009 are not applied in the accounts and disclosure endorsed in Bulgaria. notes.

Stand-alone financial statements Consolidated financial statements (CFS) The financial statements consist of Companies having a majority holding in, or a statement of financial position, exercising control over subsidiaries, must statement of profit or loss and other generally prepare consolidated annual comprehensive income, statement of financial statements. The consolidated cash flows, statement of changes in financial statements must present a true equity and disclosure notes to the financial and fair view of the group’s transactions statements. with third parties. To this end, all intra-group

CFS are prepared by a parent company - The state-owned entities under in accordance with the rules and Article 62(3) of the Commercial Act, requirements of the applicable accounting and standards – NAS or IFRS. CFS may not be - The commercial entities which prepared by a parent company of a small are more than 50% state- or group, unless at least one PIE is part of the municipality- owned. group. Exemptions from the preparation of Additional mandatory reports for certain corporate governance declaration are entities envisaged in the Public Offering of Certain mandatory reports are to be Securities Act for entities meeting certain prepared and published together with the criteria. AFS in addition to the annual report on Exemption from preparation of activity activities: report for micro and small enterprises is • Report on payments to governments – envisaged in certain circumstances. required from large enterprises and all PIEs active in the extractive industry or Equity requirements the logging of primary forests Equity includes share capital, reserves (including revaluation reserves) and retained • Non-financial declaration – required earnings. Joint-stock companies are required from large enterprises which are PIEs to allocate one-tenth of their after-tax profit and which, as at 31 December of the to a statutory reserve until the amount of reporting period, exceed the criterion for the statutory reserve exceeds one-tenth of average number of employees during the registered share capital of the company. the financial year – 500 employees In accordance with the requirements of the • Corporate governance declaration (in Commercial Act, a joint-stock company may accordance with the Public Offering be dissolved when the net worth of the of Securities Act, see also section company (its net assets) becomes less than “Reporting requirements as per the amount of the registered share capital. the Public Offering of Securities Act (POSA)” below) – required for: Filing requirements - Issuers of listed securities All entities publish their AFS, CFS and - Credit institutions the additional annual reports (if required) approved by the General Meeting of - Insurance and reinsurance Shareholders or by the respective undertakings committee; for all traders within the

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 56 | Investment in Bulgaria 2017 meaning of the Commercial Act, this is basis within 30 days of the end of the done through filing with the Commercial previous month. Register before 30 June of the following All enterprises are required to file their year. Management is responsible for annual corporate income tax declaration the timely preparation of the financial with the tax authorities by 31 March of statements and their content. the following year. This declaration needs Non-profit legal entities designated for to be accompanied by certain statistical public benefit have to file their annual summaries as defined in the Statistics Act. financial statements, together with an audit opinion (if required), with the Auditing and reporting Central Register at the Ministry of Justice. Effective from 1 January 2018, non-profit General audit environment legal entities designated for public benefit A new Independent Financial Audit Act shall publish their financial statements by (IFAA) was promulgated in the State filing to the Central Register of Non-profit Gazette on 29 November 2016. The Act Legal Entities, managed by the Registry became effective on 2 December 2016. The Agency by 30 June of the following year. IFAA transposes the provisions of Directive 2006/43/EC, amended by Directive Entities other than traders and non-profit 2014/56/EU, as well as Regulation (EU) legal entities designated for public benefit No. 537/2014. It introduces significant publish their financial statements in the changes in relation to the obligations of financial press or on the internet (if free the audit committees and in relation to access is granted for a period of not less the audit of PIEs. The IFAA lays down than three years after the date of release) new major principles such as joint audit, not later than 30 June of the following year. mandatory rotation of registered auditors, By 31 July of the current year, the Registry prohibition of the provision of particular Agency provides to the National Revenue services and restrictions on the fees for Agency electronically a list of the entities non-audit services. Audit committees which failed to publish their annual financial will be supervised by the Commission statements for the previous year within for Public Oversight of Statutory Auditors the time limit stipulated above. By (CPOSA). The changes are expected to 30 September of the current year, the influence significantly the PIEs. National Revenue Agency undertakes the The AA requires that financial statements necessary measures for reviews and for of those entities meeting certain criteria determining the violations. be audited by a registered auditor. The Listed entities and financial institutions IFAA in Bulgaria provides for the profession must present their audited stand-alone of independent auditors. It requires that financial statements and certain additional the International Standards of Auditing reports to the Financial Supervision be applied. The body which regulates the Commission within 90 days after the year auditors’ practice is the Bulgarian Institute end. In addition, such companies must of Certified Public Accountants. The public present a financial report to the Financial oversight over the registered auditors is Supervision Commission on a monthly implemented by CPOSA.

The auditor issues an opinion on whether The members of the Audit Committee the annual financial statements give a are appointed by the General Meeting of true and fair view of the financial position, the Shareholders or the Partners upon a the results of operations, the statement proposal by the chairperson of the Board of of cash flows and the movements in the Directors or the Supervisory Board or the statement of equity of the entity, and a Managing Director of the entity. Members summary of significant accounting policies may be chosen from among the members and other explanatory notes in accordance of the supervisory or management bodies with the Bulgarian accounting legislation. of the entity who are not executive members of the management body. The The general rule is that the entity subject General Meeting of the shareholders to audit must appoint an independent or partners approves a statute of the auditor. Auditors are usually appointed at Audit Committee in which its functions, the General Meeting at which the previous rights and responsibilities in respect to year’s accounts are approved. The selection the financial audit, internal control and of the statutory auditor has to be made internal audit, as well as in respect to its after a recommendation from the Audit relations with the management bodies, Committee for those companies required are stipulated. The Audit Committee’s main to have such a committee (as discussed functions and obligations are to: below). The independent auditor must be an individual or an audit company • Supervise the fees received by the registered with the Institute of Certified registered auditor of the PIE, including Public Accountants (“registered auditor”). supervision over the cap of the If an audit company has been appointed permitted non-audit services auditor, an individual who is a registered • Supervise the process through which auditor must be designated as the auditor the registered auditor assesses the responsible for performing the independent provision of permitted non-audit financial audit. KPMG in Bulgaria can be services, ensuring that particular appointed auditor as it is an audit company requirements regarding the permitted registered with the Institute of Certified services are met Public Accountants. • Assess the threats to independence The Credit Institutions Act requires that and the safeguards applied to mitigate the annual financial statements of banks those threats before approval of non- be audited and certified by two audit audit services. All permitted services companies which shall be registered require preliminary approval by the Audit auditors under the IFAA. Any bank must Committee coordinate in advance with the BNB the appointment of an independent auditor. • Provide guidelines and appropriate policies regarding the services which An important requirement of the IFAA is can be permitted that each entity which performs activities of public interest (PIE) is required to set up • Recommend the prolongation of an Audit Committee. PIEs are defined in the audit engagement only if it is the AA (see section “Public interest entities appropriate. The maximum initial (PIEs)” above). period can be prolonged under certain

conditions only if the Audit Committee • AFS of enterprises for which this recommends to the General Meeting requirement is established by law of Shareholders that the engagement • AFS of small entities which, on should be renewed and this proposal is 31 December of the current accounting accepted period, exceed at least 2 of the following • Monitor auditor independence. The criteria: registered auditor must confirm their -- Balance sheet assets as of independence from the audited entity 31 December: BGN 2 million to the Audit Committee annually in writing and discuss every threat to their -- Net revenue from sales for the year: independence as well as the safeguards BGN 4 million applied to mitigate those threats -- Average number of personnel for the • Observe the process of financial year: 50 persons. reporting and provide recommendations Micro enterprises which are not PIEs are and proposals to guarantee its exempt from statutory audit. Consolidated effectiveness financial statements and financial statements • Observes the effectiveness of the included in the consolidation are both subject internal control system, of the risk to an independent financial audit. management system and the internal Annual financial statements of non-profit audit activity regarding the financial legal entities designated for public benefit reporting in the audited entity and listed in the Central Register with • Report its activity before the the Ministry of Justice are subject to an appointment body. Prepare and present independent financial audit by registered an annual report to the CPOSA not later auditors where they exceed one of the than 30 June. following criteria for the current year:

The CPOSA supervises the activities of the • Total assets as of 31 December: audit committees of PIEs. BGN 1 million

• Revenue from for-profit and non-profit Audit requirements operations for the current year: Under the Accountancy Act, the following BGN 2 million reports are required to be audited by registered auditors: • Total amount of financing received during the current year and financing received in • AFS and CFS of PIEs and of medium- previous reporting periods not absorbed sized and large enterprises and groups, as as of 31 December: BGN 1 million. well as groups with at least one PIE The auditor’s report on the annual and on • AFS and CFS of joint-stock companies the consolidated financial statements has and limited partnerships with shares, to be issued by 30 June of the following except for the cases where these year because of the requirement to file the companies have not performed activities audited financial statements and audit report during the reporting period with the Commercial Register by that date.

Joint audit Prohibited non-audit services The new IFAA introduces the requirement Certain non-audit services may not be of a joint audit. Insurance, reinsurance, provided by the auditor of the PIE under pension insurance companies and funds the regulations of the new IFAA. and credit institutions will be required to be jointly audited by two audit companies Cap on fees for non-audit services and the auditors will be appointed provided to PIEs after preliminary coordination with the When the registered auditor provides to appropriate regulator, the Financial the audited PIE entity, its parent company Supervision Committee or the Bulgarian or its subsidiaries, for a period of three or National Bank. The criteria for coordination more consecutive financial years, permitted regarding the appointment of the auditors non-audit services, the total fees for such are accepted by the appropriate regulator, services shall be limited to no more than the Financial Supervision Committee or the 70% of the average of the fees paid in Bulgarian National Bank, in coordination the last three consecutive financial years with the CPOSA. for the statutory audit(s) of the audited entity and, where applicable, of its parent Mandatory rotation of the registered company, of its subsidiaries and of the auditors of PIEs consolidated financial statements of that The IFAA implements the mechanism group. The restriction shall not apply to non- of mandatory rotation of the registered audit services which are different from the auditors of PIEs. Namely, a registered prohibited ones and are required by law. auditor carrying out a statutory audit of a PIE withdraws after 7 consecutive Reporting requirements as per the years and may not carry out audit Public Offering of Securities Act (POSA) engagements for a period of 4 years after Entities within the scope of the POSA the withdrawal. For an individual registered are required to disclose specific auditor assigned by the audit company as financial information before the Financial responsible for the audit, the restrictions Supervision Commission every 3 months. encompass 4 consecutive years after Furthermore, these entities have to which they may not perform the role for disclose additional information in their 3 years after their withdrawal. There is no management report for the annual possibility for extension of the maximum activities. deadline through a tender procedure (unlike the possibilities set out in Regulation (EU) It is important to note that the No. 537/2014). requirements of the POSA for disclosure of information concern all public entities, as The initial date for calculation of the audit well as certain other entities (see section duration starts from the year when the “Additional mandatory reports for certain first audit engagement for a statutory entities” above). financial audit for the respective period is undertaken.

Corporate tax purposes, usually through an add-back The basic principles for the taxation of non-deductible expenses, or items of business profits are detailed in the that decrease the financial result for tax Corporate Income Tax Act (CITA). The purposes. The latter are usually specific current taxes and levies imposed by the income items which are exempt from CITA are: taxation, or tax incentives provided by the Government. There are expenses which • Corporate income tax are permanently non-deductible for tax • Lump sum tax levied on certain types of purposes and expenses which represent a expenses accrued by local tax residents temporary tax difference, and therefore are non-deductible for tax purposes in the year • Withholding tax. when accrued for accounting purposes but According to the provisions of the CITA can be claimed in a subsequent period. currently in effect, the corporate income tax rate is 10%. Corporate entities, Permanent tax differences including subsidiaries of foreign companies The major permanent tax differences incorporated under the Bulgarian include: Commercial Act, are considered Bulgarian • Expenses not related to the business tax residents. Upon registration in Bulgaria, activity of the company; costs incurred these legal entities are subject to tax on by an entity in favor of employees, their worldwide income, regardless of managers, shareholders and others whether or not it is generated in Bulgaria. (private costs), as well as expenses There is no withholding tax or income tax for services that do not benefit the tax on undistributed profits. liable persons are not recognized for tax Non-resident companies are subject to tax purposes on income and profits derived only from • Service costs and other costs accrued Bulgarian sources. at levels that differ from market levels

Taxable income • Penalties, fines and other sanctions for Generally, a taxpayer’s tax base is the violation of the law entity’s financial result according to its • Expenses which are not substantiated income statement, further adjusted for with proper documents corporate income tax purposes. These adjustments represent either items • Expenses for VAT charged in relation to that increase the financial result for tax items that are not tax deductible

• Expenses for VAT accrued by a supplier • Expenses for travel and accommodation or by the revenue authorities with of shareholders or partners when these respect to a performed supply (unless are performed by individuals in their the VAT expense is accrued in relation to capacity of shareholders/partners. an adjustment to the input VAT credit, in relation to supplies for no consideration Temporary tax differences or supplies performed upon VAT The major temporary tax differences deregistration) comprise the following:

• Expenses classified as hidden • Revenue and/or expenses in relation distribution of profit to subsequent revaluation/impairment • Expenses for bribery and/or concealing of assets is taxable, respectively bribery of a local or foreign public official tax deductible, in the year when the respective asset is disposed of, • Expenses in relation to waste and respectively written off shortage of inventory (except when these are due to force majeure, • Expenses in relation to provisions for technological losses, expiry of durability payables or unused annual paid leave term and others) of employees (including salaries and social security and health insurance • Expenses in relation to shortage of contributions) are treated as tax non- current and non-current assets (except deductible in the year when accrued, when those expenses are due to force except when they are capitalized as tax majeure, certain amount of shortage of depreciable assets in accordance with goods in commercial outlets with direct the applicable accounting legislation. physical access of the customers to the Such expenses are recognized as tax merchandise) deductible in the year when the payable • Revenues accrued in relation to is settled or when the employees waste and shortage of assets up to effectively use their paid leaves the amount of the tax non-deductible • Interest expenses exceeding the expenses incurred for the same reason threshold established by the thin (insurance cover received, receivables in capitalization rule (see section “Thin respect of shortage, theft and litigation) capitalization” below). • Income from dividends distributed by Bulgarian tax resident entities and by Tax depreciation foreign entities that are tax residents in The total amount of accounting an EU/EEA Member State, unless the depreciation charged to the income respective amount decreases the tax statement of an entity is added back to the result of the distributing entity (either as entity’s financial result for tax purposes, tax deductible expenses, or as another while the annual depreciation charge type of downward adjustment to the as per the Tax Depreciation Schedule tax base), irrespective of the applicable (TDS) is reported as a decrease to the accounting treatment entity’s financial result. Hence, only the depreciation charge established under the

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 62 | Investment in Bulgaria 2017 rules of the TDS will be recognized as an thin capitalization rules. Certain interest expense for income tax purposes. Specific expenses however are not subject to rules exist for idle assets. thin capitalization. These include interest in relation to finance lease and bank Tax depreciation must be accrued by loans received from non-related lessors/ multiplying the cost of acquisition of the banks (unless the loan is guaranteed or respective depreciable asset by the tax secured by a related party, in which case depreciation rate. The CITA sets out the the interest on them would be subject maximum annual tax depreciation rates to thin capitalization). Penalty interest for for groups of assets to be used in the late payment of taxes, interest expenses TDS. These maximum allowed annual tax capitalized in the value of an asset, in depreciation rates are as follows: accordance with the accounting legislation • For computers, computer peripherals, or other interest charges that are not tax software and software licenses, cell deductible on other grounds do not count phones: 50% towards the interest expenses subject to thin capitalization. • For machinery and production equipment: 30%. The rate can No thin capitalization would apply where be increased up to 50% for new the average debt/equity ratio for the year of manufacturing machines and equipment the tax liable person is smaller than three in certain specific cases defined in the to one. law The maximum amount of interest • For automobiles: 25% expenses subject to thin capitalization that would be tax deductible in the year • For transport vehicles other than when accrued is equal to the interest automobiles, roads and runways: 10% income accrued for the year plus 75% of • For buildings (including those held the profits before all interest income and as investment properties), facilities, interest expenses. If interest expenses installations, electrical wiring and lines subject to thin capitalization are accrued of communication: 4% in excess of this amount, the excess must be added back to the financial result when • Up to 33.33% for long-term intangible determining the tax base. This adjustment and tangible assets where legal or represents a temporary tax difference contractual restrictions apply on the and is reclaimable in the following five tax term of their use years up to the above-mentioned threshold • For all other tax depreciable assets calculated in those subsequent years. where specific rates are not provided: 15%. Tax losses When calculating their tax financial result, Thin capitalization tax liable persons are entitled to subtract Interest expenses accrued by tax liable tax losses incurred in previous periods. Tax persons in relation to certain types of debt losses may be subtracted from the positive finance are tax deductible up to the limits financial result over the following five set out in the CITA and known as

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Investment in Bulgaria 2017 | 63 years up to the amount of the positive tax contracts, unless the amounts are treated financial result in those future periods. as taxable income for personal income tax purposes. The lump sum tax on expenses Foreign-source losses can be carried is recognized as a tax deductible expense forward solely against foreign-source for the company and is paid on an annual income deriving from the same operation basis. unless the losses and the income were generated in an EU/EEA Member State Sources of income and the tax credit method applies or upon termination of the foreign source The profits and income of non-resident in another EU/EEA Member State when taxpayers are taxed in Bulgaria provided the exemption with progression method that they originate or are deemed to applies. originate from Bulgaria. The following types of gains/income derived by foreign entities Lump sum taxes without a permanent establishment in Bulgaria when accrued by a local tax Lump sum tax at a rate of 10% is levied resident entity are considered to have their on certain types of expenses accrued by source in Bulgaria including: Bulgarian tax resident entities as follows: • Interest including interest relating to • Representation expenses related to the finance lease company’s business activity • Royalties • Expenses for in-kind benefits provided to the company’s personnel (e.g. • Fees for technical services, i.e. services subsidized canteen, food allowances, of an advisory nature, services for organized holiday, holiday allowances, installation and maintenance of tangible subsidized vacation facilities, sports and assets and market research recreational activities) • Franchise and factoring fees • Contributions to voluntary insurance • Rent exceeding BGN 60 per month for each hired person • Fees for management and control of local legal entities • Vouchers for food provided in accordance with the provisions of the • Income from securities issued by law and exceeding the amount of local legal entities, the Government or BGN 60 per month for each hired municipalities. person (there is a list of requirements Gains of foreign entities without a which must be fulfilled by both the permanent establishment in Bulgaria from persons entitled to receive vouchers trading in shares and securities issued for food and the persons acting as by local legal entities, the government or operators for issuance and payment municipalities as well as from transactions with vouchers for food). with real estate properties in Bulgaria are Expenses in kind in relation to personal also considered to have their source in use of company assets by personnel and Bulgaria. individuals assigned under management

Gains made by foreign legal entities Foreign companies which are tax residents from the disposal of property belonging in the EU/EEA and which may not utilize to a permanent establishment of that the withholding tax paid in Bulgaria as a legal entity in Bulgaria or the permanent tax credit in their country of tax residence establishment itself are deemed to be of may choose an option to recalculate the Bulgarian source and, as such, are taxable withholding tax paid in Bulgaria so that the in Bulgaria. amount would equal the corporate income tax due if the income were derived by tax Income generated from penalties and residents of Bulgaria. Hence, the tax base indemnities of all types, except those of non-residents could be reduced by the accrued under insurance contracts by expenses attributable to the respective foreign legal entities established in the income whose source is Bulgarian. The listed jurisdictions with a preferential tax difference between the withholding tax regime (i.e. offshore companies) are also paid and the recalculated corporate income considered to have a Bulgarian source. tax due may be reimbursed up to the amount that could not be used as a tax Withholding tax credit by the non-resident in their state of Withholding tax at a rate of 10% (5% residence. This right is exercised by the for dividend distributions and liquidation foreign tax residents by filing a tax return quotas) is to be deducted by the payer by 31 December of the year following the when Bulgarian source income (see tax year when the income was accrued. Section “Sources of income” above) is accrued by a local tax resident entity Interest and royalties to non-resident taxpayers without a In accordance with Council Directive permanent establishment in Bulgaria, 2003/49/EC on a common system of unless a Double Tax Treaty (DTT) provides taxation applicable to interest and royalty for lower withholding tax rates. No payments made between associated withholding tax is due on income from companies of different EU Member States interest and royalties when accrued to (“the Interest and Royalty Directive”), associated companies tax resident in an interest or royalty payments arising in an EU Member State (see Section “Interest EU Member State are exempt from any and royalties” below) and on dividends taxes imposed on those payments in that and liquidation quotas distributed by local state, whether by deduction at source or entities to companies that are tax resident by assessment, provided that the beneficial in an EU/EEA Member State (see Section owner of the interest or royalties is a “Dividends and liquidation quotas” below). company of another EU Member State When foreign entities without a permanent or a permanent establishment of an EU establishment in Bulgaria realize capital Member State situated in another EU gains from trading in Bulgarian securities Member State. or real estate properties, withholding tax of 10% is to be levied on the capital gain As of 1 January 2015, the transitional and remitted to the Bulgarian state budget period for application of the maximum by the entity realizing the gain, unless withholding tax rates of 5% under the a DTT provides for exemption or lower Interest and Royalty Directive agreed withholding tax rates. following Bulgaria’s accession to the EU

• Income from interest payments on • (i) capital gains realized from the sale bonds or other debt instruments issued of shares in collective investment by a resident legal entity, the state or schemes and national investment funds, municipalities and admitted to trading shares, rights of public companies and on a regulated market in the country or government securities traded on the in an EU/EEA Member State Bulgarian or EU stock exchange within the meaning of the Bulgarian Markets • Income from interest payments on a in Financial Instruments Act, loan extended by a non-resident entity (ii) transactions with financial which is a tax resident of an instruments concluded in accordance EU/EEA Member State and is an issuer with the procedure for repurchase or of bonds or other debt securities, where redemption by collective investment the bonds or the other debt securities schemes which have been admitted to are issued for the purpose of lending public offering in Bulgaria or in another the proceeds to a resident legal entity EU/EEA Member State, (iii) transactions and have been admitted to trading on a with financial instruments concluded regulated market in an EU/EEA Member in accordance with the procedure for State redemption by national investment • Interest income on loans that are not funds which have been admitted to issued in the form of bonds under public offering in Bulgaria, and which the state or municipalities are (iv) transactions with financial borrowers. instruments concluded according to the procedure for tender offering Capital gains and losses under the Bulgarian Public Offering of Generally, capital gains are included in an Securities Act, or transactions of similar entity’s profit subject to corporate income type in another EU/EEA Member State. tax, except in the following cases which are not subject to tax: Dividends and liquidation quotas Dividends and liquidation quotas • Capital gains realized by non-resident distributed by local legal entities and taxpayers from the sale of real estate unincorporated entities to local individuals, property situated in Bulgaria or from

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 66 | Investment in Bulgaria 2017 local unincorporated entities, and foreign income or expenses during the fiscal period persons are subject to a 5% withholding are relieved from filing annual activity tax, unless an applicable DTT provides for a reports. lower withholding tax rate. Advance corporate tax payments are No withholding tax is due in Bulgaria on due either on a monthly or on a quarterly liquidation quotas and outbound dividends basis and are calculated on the basis of distributed by Bulgarian entities to tax the entity’s forecast taxable profit for the resident companies in the EU/EEA without current year. Both (i) tax liable persons any participation or holding requirements, whose net sales revenue for the previous except for cases of hidden profit year does not exceed BGN 300,000 and distribution. (ii) newly established companies (except when the establishment is a result from Dividends distributed by local legal and a corporate restructuring in accordance unincorporated entities to local legal with the Commercial Act) do not have an entities are tax-exempt except when they obligation to remit advance corporate tax fall under the Special Investment Purpose installments. Persons liable for tax with Entities Act. In the case of dividends a net sales revenue for the previous year received as a result of a profit distribution exceeding BGN 3,000,000 are obliged made by such companies, for example a to make monthly advance corporate tax real estate investment trust, the dividend is installments, otherwise quarterly advance taxed at the shareholder level in the same corporate tax installments are due. way as any other revenue received – at the corporate income tax rate of 10%. Withholding tax is payable by the end of the month following the calendar quarter Payment due dates and filing deadlines in which the income was accrued or the Companies subject to corporate income decision for distribution of dividends/ tax must file an annual return for each liquidation quotas was made. The persons calendar year together with the company’s obliged to withhold and pay tax have to annual activity report under the Statistics report the withholding tax due for the Act. Annual corporate tax returns must relevant calendar quarter by submitting a be filed and income tax liabilities must be standard return by the end of the month finally settled by all taxpayers for a calendar following the respective quarter. year by 31 March of the following year. A Taxpayers are required to include in the mandatory electronic submission of tax withholding tax return for the fourth returns under the CITA was introduced for quarter of the respective year the following all tax returns for which the filing obligation information regarding income accrued in arises after 31 December 2017. Taxpayers favor of foreign tax residents: may correct errors in the annual tax return already filed for the respective year by a • Fees received under management one-off filing of a new annual tax return by contracts and 30 September of the following year. Tax • Rental income or other types of income liable persons who have not performed from the use of or the right to use economic activities and have not reported immovable property.

This requirement applies also to foreign The repatriation of after-tax profits legal entities deriving the specified types of generated by a permanent establishment, income from a permanent establishment in including a branch, is not subject to the Republic of Bulgaria. withholding tax.

Local companies accruing income to Grouping/consolidated returns foreign tax resident entities not exceeding BGN 500,000 per annum for which a The concept of a consolidated company tax reduced withholding tax rate was applied return is not accepted under the Bulgarian under an existing DTT must submit to the legislation. Companies may not transfer revenue authorities a standard tax return their tax losses to other companies within reporting the amount of income accrued a corporate group. and the withholding tax relief granted. The deadline for submission of the tax Partnerships return is 31 March of the year following the Partnerships are treated as incorporated reporting year. entities for tax purposes. In other words, partnerships are non-transparent entities. The lump sum tax on expenses is payable by 31 March of the year following the Alternative assessment reporting year. It is reported in the annual corporate income tax return. When taxable income cannot be reliably determined, it is assessed by the revenue Relief from tax authorities on the basis of a number of factors including the type of activities Foreign tax credits undertaken, duties and fees paid, bank The domestic tax law provides unilateral account transfers, capital, turnover, profits relief to taxpayers whereby a tax credit of entities with similar activities and others. may be allowed for taxes paid abroad. Instead of being subject to a corporate income tax, state budget enterprises are Tax treaties taxed on their proceeds generated from Bulgaria has entered into a number of their activities as well as from lease of DTTs with other countries. For a detailed property. Specific taxation rules also apply overview of the withholding tax rates to certain activities of gambling companies applicable under the DTT network, see and ship operating companies. Appendix B. Anti-avoidance measures Branch vs. subsidiary Transfer pricing Permanent establishments, including branches, are subject to tax on profits Transfer pricing rules allow the revenue derived from Bulgarian sources. Effectively, authorities to adjust the tax base where there is no difference between the taxation transactions are not made on an arm’s of branches and subsidiaries with respect length basis or where transactions aiming to business profits. at tax evasion have been performed. Therefore, when the transfer pricing rules

Anti-avoidance provisions relating to Furthermore, interest expenses accrued business transformations by taxpayers are considered a hidden Generally, according to the provisions of distribution of profit provided that at least the CITA, transposing Council Directive three of the following four conditions are 2009/133/EC on the common system of met: taxation applicable to mergers, divisions, • The amount of the loan facility for which transfers of assets and exchanges of interest expenses are accrued exceeds shares concerning companies of different the equity of the payer of the interest as Member States (“the Mergers Directive”), at 31 December of the previous fiscal business transformations between year Bulgarian entities or involving entities of other EU Member States may be tax • The repayment of the principal as well neutral under certain conditions, meaning as the related interest due is not limited that no corporate tax effects are to arise on in time the date when the business transformation • The repayment of the principal and the is performed. related interest or the amount of the

interest due is made conditional upon 2014 – 2020 following a notice of receipt the amount of the profits realized by the with the final identification number of the borrowing entity aid granted by the European Commission on 20 March 2015 in accordance with • The repayment of the principal is made Commission Regulation (EU) No. 702/2014 conditional upon satisfying the claims of 25 June 2014. of other creditors or upon distribution of dividends. Production companies investing in municipalities with an unemployment rate If certain amounts accrued, paid or exceeding the average unemployment distributed by local taxpayers are rate for Bulgaria by 25% are entitled considered hidden profit distribution, these to up to 100% corporate income tax would be treated as dividend distribution. retention. In order to benefit from the tax The respective amount would not be relief, a number of additional criteria have recognized as deductible for corporate to be met. The tax relief for production income tax purposes and a penalty could companies investing in municipalities be imposed at a rate of 20% of the amount with a high unemployment rate under classified as a hidden profit distribution. the regional state aid regime can only The penalty can be avoided if the local be applied for the period 2015 – 2020 taxpayer which has made a hidden profit following a positive decision of the distribution reports this circumstance in the European Commission for the approval of corporate tax return for the respective year. the tax relief as compatible with state aid Additionally, a 5% withholding tax could be regulation issued on 14 September 2015. levied if the deemed dividend is distributed to a foreign tax resident entity. Retention of tax is allowed only if an order/approval is issued by the Bulgarian Corporate tax incentives Investment Agency (BIA) certifying the The corporate income tax incentives are maximum allowed amount of the state aid granted in two forms – a corporate income (the retained tax), the intensity and term tax retention and/or a tax reduction. of the aid (the tax periods for which the retention of tax is allowed) and confirming A corporate income tax incentive is granted the stimulating effect of the investment to enterprises employing people with project. For that purpose, a designated disabilities or unemployed people, and to application is to be filed with the BIA by the those providing student scholarships which companies eligible to regional state aid tax match certain criteria. relief before the start of implementation of Taxable persons registered as farmers are the initial investment project. also entitled to a corporate tax rebate up The relief claimed under the de minimis to 60% in the form of state aid for profits state aid regime can be applied for the derived directly from the production of period 2014 – 2020 without a preliminary unprocessed plant and animal products, decision of the European Commission provided that certain conditions are met. being required. The tax relief for registered farmers can be applied for each of the years in the period In addition, a positive decision by the European Commission is required for

Personal income tax Income subject to tax

Residence Individuals are subject to the following taxes on income: There are four criteria for determining the residence of an individual in Bulgaria • Employment3 income is levied with a for personal income tax purposes, of flat 10% personal income tax rate. The which three are mainly of significance tax on employment income is withheld for expatriates moving to Bulgaria: the by the employer at source on a monthly permanent address, the 183-day rule and basis. Certain statutory tax deductions the center of vital interests. may be claimed against the gross income. Individuals who have a permanent address in Bulgaria or who are physically present • Income received by partners in in Bulgaria for more than 183 days in the a partnership, cooperators and course of a 12-month period are considered shareholders holding more than 5% Bulgarian residents for tax purposes. The of a company’s capital in return for their respective individual becomes a Bulgarian personal involvement/work in the entity resident in the calendar year when their is treated as equivalent to employment stay in the country exceeds 183 days. The income. days of departure and arrival are treated • Non-employment income (e.g. income as separate days of physical presence in received under civil contracts) is also Bulgaria.

3 As of 1 January 2008, management income is considered equivalent to employment one for personal income tax purposes.

subject to a flat 10% tax rate. quarterly basis (without the fourth Certain statutory tax deductions may quarter unless specifically requested be claimed against gross income by the recipient) the due tax charge on (e.g., income received under civil the income. This does not waive the contracts). The due tax is withheld obligation of the recipient of income and paid on a quarterly basis by the to file an annual Bulgarian personal payer of the income if a legal entity income tax return at the end of the duly registered under Bulgarian law. year. A different treatment is applied in No tax is to be withheld and paid for the case of payment of rental income the fourth quarter of the year unless by Bulgarian entities to condominiums. specifically requested by the recipient In these circumstances, a final one-off of the income. In certain instances, the tax will be calculated, deducted and remittance obligation may also fall on remitted by the payer of the income the individual recipient themselves and no obligation for filing of an annual if (i) the payer is an individual or Bulgarian personal income tax return an entity not registered under arises for the recipient of the income. the Bulgarian law and (ii) the recipient • Advance personal income tax on a of the income under a civil contract is quarterly basis is also remitted by the a self-insured person for social security payer of the income if an entity or a purposes and has reported themselves self-insured individual with respect to as such to the payer (in this case, the other income (awards other than those status of the entity is of no importance). provided by the employer, indemnity for Under this scenario, the personal benefits lost, non-bank interest, etc.) income tax on that income is again following the rules already specified remitted on a quarterly basis (with the above with respect to rental income exception of the fourth quarter). (i.e. remitted quarterly for the first • In case of receipt of rental income, three quarters of the year by the end no remittance obligation arises for of the month following the respective the payer of the income if the payer quarter unless for the fourth quarter the is an individual. The full responsibility individual has asked payments to also for payment of the due tax charge is be made in which case withholding and borne by the recipient of the income. remittance will continue). Advance quarterly personal income • A 10% withholding tax applies to tax installments are to be made in interest, rents, royalties, capital gains, case of receipt of such income (with management income, income received the exception of the fourth quarter). under franchise and factoring contracts, The final assessment is performed leasing installments under contracts at year end with the annual Bulgarian according to which the ownership personal income tax return. When rights over immovable property are the payer of the rental income is an transferred, scholarships for studying entity or a self-insured person, then in Bulgaria and abroad, indemnity for they have the obligation to calculate, benefits lost, fees for technical services withhold and remit at source on a accrued to non-resident individuals

as well as income accrued by local Deductions legal entities to foreign sportspeople, Certain payments decrease an individual’s scientists and artists. A lower taxable income, including mandatory health withholding tax rate of 5% is levied insurance and social security contributions on dividends paid by Bulgarian entities (made both to the local and foreign to non-residents. Should there be an mandatory insurance systems), as well as applicable DTT in force, the rate of the personal voluntary pension, life and health withholding tax on the above mentioned insurance contributions to either local types of income may be reduced. insurance funds or those registered under The tax base is the gross amount of the jurisdiction of other EU/EEA Member income received. As of 1 January 2010, States. The deductibility of such voluntary Bulgarian legislation allows EU and contributions is limited up to certain 4 EEA nationals subject to Bulgarian maximum thresholds. withholding tax to calculate the tax base and the due tax following the same Statutory deductions are provided for rules applicable to local residents, i.e. the recipients of different types of the application of deductions from gross non-employment income (e.g. 25% for free income is possible through the filing of lancers; 40% for royalties, inventions and an annual Bulgarian personal income tax products of science or art; 10% for rental return. income; 10% for capital gains received from the disposal of immovable property). • A withholding tax of 8% is due on interest income accrued on all types of Deductions for donations to a list of special bank accounts. beneficiary organizations are also allowed provided that certain conditions are met. • A one-off tax of 5% is levied on As of 1 January 2010, donations to Bulgarian individuals receiving dividends EU organizations with an equivalent status from foreign entities. to those listed in the local legislation are • A one-off tax of 10/7% is levied on also deemed tax deductible. early withdrawal of accrued voluntary Furthermore, provided that certain social security/insurance contributions conditions are met, individuals may also depending on the circumstances. deduct from their taxable income the value Specific rules apply with regard to taxation of the mandatory personal social security of capital gains arising from disposal of contributions paid during the year for movable and immovable property. accumulating additional length of service for pension (up to five years for the period It is also specified that no withholding tax of university education and/or in case of is due on payments to residents of other insufficient length of service upon pension). EU Member States regardless of the fact that the types of income may fall in the As of 1 January 2009, the Bulgarian scope discussed above should this income personal income tax legislation introduced be exempt for Bulgarian tax residents. a tax allowance for young families who have a mortgage. With this allowance,

4 Except Iceland and Liechtenstein

As of 1 January 2015, two further Exempt income deductions are available: a child tax allowance with a decrease of the tax Exempt income includes state pensions, base by up to BGN 200 annually for the scholarships, certain state welfare first three children and a tax allowance payments, benefits/income received from for a disabled child with an annual the Bulgarian mandatory social security deduction of up to BGN 2,000 from the and health insurance system, an equivalent tax base. Taxpayers may benefit from foreign institution or under a voluntary these allowances through the annual social pension plan, provided that the latter reconciliation of employment income is registered in Bulgaria or in another performed by the employer at year end or EU/EEA Member State. Capital gains may through the filing of an annual Bulgarian also be tax exempt provided that certain personal income tax return. conditions are met.

As of 1 January 2017, a new tax relief Accommodation and daily allowances has been introduced, namely for the paid on behalf of the employer/assignor performance of cashless payments. to individuals under employment, It allows taxpayers to reduce their total management and civil contracts can be annual tax liability by 1% but no more than treated as non-taxable income depending

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 74 | Investment in Bulgaria 2017 on the type of business trip, the destination income tax return, if any, must also be paid country as well as certain conditions such within this filing deadline. as documentary substantiation of the If the annual personal income tax return business trip and the expenses occurred. is filed electronically by 31 March of the following calendar year and the individual Relief from tax does not have any outstanding public A tax credit may be used for foreign taxes liability subject to enforcement, a deduction paid provided that the relevant conditions of 5% from the outstanding tax liability are met. Relief from tax may also be is granted. The outstanding tax must be sought under the provisions of an existing remitted by 30 April of the following year DTT depending on the specific method, after confirmation by the authorities of the i.e. tax credit or tax exemption with submission of the return. progression. As of 1 January 2017, the legislation Tax rates and payment dates provides for the possibility to file a one-off corrective tax return should a mistake in The annual general flat tax rate applied for the return already filed be discovered. This taxation of an individual’s income is 10%. should be done by 30 September of the Individuals who derive income from year following the respective tax year. sources other than, or in addition to, Sole proprietors determine their taxable income under an employment contract base and make advance payments in for which the employer has performed accordance with the rules for corporate an annual reconciliation as at the year- taxation. The tax rate applied to this type of end (including dividends received from income is 15%. foreign entities which are taxed with a one-off tax) must file an annual tax return Individuals performing certain activities by 30 April of the following calendar (e.g., hotel accommodation, restaurant year. A tax return must also be filed if services, taxicab transportation, and other the individual owns shares/allotment in services) whose turnover for the previous foreign entities/permanent establishments/ year is below BGN 50,000 are instead immovable property regardless of whether subject to a lump sum license tax which is a transaction was made with them during regulated by the Local Taxes and Fees Act. the respective tax year. In addition, such tax returns must be prepared by individuals Fringe benefits who withdraw accumulated voluntary Certain fringe benefits, such as canteen or personal contributions prior to the food expenses like food vouchers provided expiration of the term under an insurance to employees/assignees (under certain policy as well as in instances where an conditions), transportation cards, use of the individual has received/granted a loan from/ employer’s sports facilities or rest/holiday to non-financial institutions or individuals homes, are not taxable in the possession (where certain conditions are met). of the employee if provided as a social The outstanding personal income tax as expense by the employer. However, social reported in the annual Bulgarian personal security and health insurance contributions are due on the amount of the fringe

Contributions On behalf of On behalf of Total employees employers Social security contributions 10.14% 13.66%* 23.80%**

Health insurance contributions 3.20% 4.80% 8.00%

* The total amount of social security contributions withheld on behalf of employers varies within the range of 13.56-14.2670% depending on the economic activity performed by the respective entity.

** 5% of the mandatory social security contributions for individuals born after 31 December 1959 are payable to private pension funds licensed to provide additional mandatory pension insurance.

The EU social security regulations are (i) the persons are moving within applied on the territory of the Member EU Member States on short-term States of the European Union and the EEA, assignments, (ii) they are simultaneously which comprises Iceland, Norway and working in more than one state and Liechtenstein, together with Switzerland (iii) they are simultaneously employed in for cross border situations with Bulgaria. one state and self-employed in another. Furthermore, it should be pointed out that In these cases, special rules apply with the EU provisions on social security do not respect to determining the relevant social apply to all individuals moving within the security system. EU and the EEA. Generally, the following individuals would be covered under the The EU social security regulations also aim regulations: to avoid discrimination in social security matters, i.e. individuals temporarily or • Employed workers permanently moving to an EU country for • Self-employed persons social security purposes must be treated no differently than local citizens of that • Civil servants Member State. • Students Property transfer, gift, inheritance • Pensioners and tourist taxes • Unemployed under certain conditions Local taxes and fees are determined and • Family members and heirs, regardless collected by municipalities within the of nationality ranges set in the Local Taxes and Fees Act.

• Third country nationals. As of 1 January 2015, exchange of information is introduced between In view of the above, no coverage under municipalities and the Ministry of Finance the EU social security regulations is on a daily basis. provided to persons who are no longer insured under a social security system in Transfer tax any of the Member States and who are Tax for the transfer of immovable property not considered immediate family to an and automobiles is in the range of 0.1 – 3% employed or self-employed person or a and is levied on the value of the property. pensioner. These individuals are deemed Transfer tax is also levied upon acquisition non-active persons. of real estate property or limited ownership rights related thereto as a result of the Main principles elapse of a prescribed time. The main principle of the EU social security regulations is to ensure that individuals fall Property tax and garbage collection fees under the jurisdiction of only one Member Owners of immovable property situated State at a time. Usually, this is the Member in Bulgaria are liable to property tax. The State where the person is physically tax is levied on the assessed value of the performing their work or where they act as property, depending on its area in square a self-employed person. However, certain meters and its location and for non- exceptions exist in instances where

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Investment in Bulgaria 2017 | 77 residential property owned by companies on property donated to spouses and – on the higher of the assessed value and immediate family members. the book value of the property. The tax is The inheritance and gift tax rates are as levied at a rate within the range of 0.01 – follows: 0.45%. A 50% tax rebate is allowed if the property is the principal residential property • In the range of 0.4 – 0.8% for property of an individual taxpayer. inherited by/donated to brothers, sisters and their children Owners of immovable property also pay garbage collection fees. Garbage collection • In the range of 3.3 – 6.6% for fees are determined by the respective inheritance/gifts (donations) between municipality. Properties which are not used unrelated persons. for an entire year are exempt from garbage collection fee if this is declared in the Tourist tax previous year. A tourist tax is due from suppliers of As from 1 January 2015, municipalities overnight accommodation services on a must notify tax liable persons of any tax monthly basis within the range of liabilities by 1 March of the year in which BGN 0.20 – BGN 3.00 for each overnight they are due. stay. The applicable tourist tax rate is determined by the respective municipality. Transport vehicles tax The deadline for payment of the tourist tax is the 15th of the month following the Owners of transport vehicles, including month when the overnight accommodation motor vehicles, ships and aircraft registered was supplied. in Bulgaria, are liable to transport vehicles tax. Various criteria are used for calculation Value added tax of the tax depending on the type of the transport vehicle, e.g. engine power, The Bulgarian VAT legislation is generally load-carrying capacity, number of seats, harmonized with the EU VAT Directives and and maximum take-off weight. The tax is adopted the EU VAT rules based on the payable in two equal installments by general principles of Directive 2006/112/EC. 30 June and 30 October of the year in The latest amendments to the VAT Act which it is due. came into effect on 1 January 2017. Generally, VAT is due on any supply Gift and inheritance taxes of goods or services with a place of Certain individuals inheriting property supply in Bulgaria made by taxable situated in Bulgaria are subject to persons in the course of their inheritance tax. The tax rates depend economic activities. “Supply” normally on the value of the property and the means goods or services provided in relationship of the beneficiary to the exchange for consideration. However, testator or donor. No inheritance tax is certain transactions carried out for no levied provided that the beneficiary is a consideration are also considered to be spouse or immediate family member. A gift supplies, for example, the private use of tax is levied on donated property, certain business assets. as well as on property transferred without The following transactions are generally consideration. No gift tax is levied

• Import of goods into Bulgaria. Exports

Tax regime and place of supply of goods The export of goods to customers outside the EU is zero-rated, provided that The location of goods at the time of the certain transportation and documentation supply determines the VAT treatment. If requirements are fulfilled. the goods are located in Bulgaria, then the supply is subject to 20% Bulgarian VAT. Imports However, if goods are dispatched or The import of non-Community goods from transported, the place of supply is the outside the EU is subject to Bulgarian place where the goods are located at the VAT and is payable by the importer to time when dispatch or transport of the the customs authorities. Under specific goods to the customer begins. conditions, import VAT may be “reverse Special rules apply for the supply of charged” if the importer is granted electricity, gas, heat or cooling energy authorization to apply such a regime in which are treated as goods for VAT connection with the implementation of an purposes. investment project.

Intra-Community supplies Supply of goods with installation If a Bulgarian VAT registered person sells Goods coming from other EU Member goods to a customer who is registered States and delivered under supply and for VAT in another EU Member State and install arrangement are subject to VAT the goods are physically transferred from reverse charge by the Bulgarian recipient Bulgaria (either by the supplier or by the if (i) the supplier is established in another customer) to another EU Member State, EU Member State and is not established in the supply is regarded as a zero-rated Bulgaria, and (ii) the recipient is identified (exempt with credit) intra-Community for VAT in Bulgaria. supply. Documents, as prescribed by law, evidencing the physical movement of the Place of supply and taxation of services goods from Bulgaria must be obtained in The place of supply rules with regard to order to support the zero rating. services follow the principles laid down by Directive 2006/112/EC as regards the place Intra-Community acquisitions of supply of services.

The acquisition of goods arriving in Generally, supplies of services fall into Bulgaria from another EU country by a two regimes – B2B services, i.e. services taxable person or by a non-taxable legal provided by one taxable person to another, entity when the goods are supplied by a and B2C services, i.e. services provided taxable person identified for VAT in another by a taxable to a non-taxable person. The

supplier is established. As exceptions to B2B regime of services this, the following services provided to Under the B2B regime of services, the non-taxable persons are considered to have place of supply follows the place where their place of supply in Bulgaria: the recipient is established or has a fixed establishment which receives the services. • Services connected to immoveable Thus, for cross-border supplies of services property located in Bulgaria where the supplier is not established in the • Services related to cultural, artistic, country of the recipient, VAT is usually due sporting, scientific, educational, by the recipient through the reverse charge entertaining and other events taking mechanism. place in Bulgaria

Exceptions to this rule include: • Services related to valuation, expert • The supply of services connected to examination or work on a movable immoveable property is taxable where tangible property taking place in the property is located (including hotel Bulgaria and accommodation services) • Short-term hiring of vehicles if the • The supply of admission to cultural, vehicle is placed at the disposal of the artistic, sporting, scientific, educational, client in Bulgaria entertaining and other events is taxable • Telecommunication – broadcasting and where the event takes place electronic services when the recipient • The supply of passenger transport is is established, has their permanent taxable in the place where the transport address or usually resides in Bulgaria takes place, proportionate to the • Transport of goods within the distance covered Community, including forwarding, • The supply of services connected to courier and postal services, when the short-term5 hiring of vehicles is taxable transport begins in Bulgaria in the country where the vehicle is • Intermediary services, when the placed at the disposal of the client underlying transaction has a place of • The place of supply of restaurant and supply in Bulgaria. catering services is taxable where the services are physically carried out. VAT rates The standard rate of VAT, which applies Services provided to taxable persons to most taxable supplies, is 20%. Two but used for non-business purposes by reduced rates are applicable for specific the owner or the employees are to be supplies. treated as services provided to non-taxable persons (B2C).

B2C regime of services Zero VAT rate

5 Short-term hiring for all vehicles apart from vessels is 30 days. The applicable term for vessels is 90 days.

Zero VAT rate applies to specific supplies Exemptions such as: Exempt supplies include:

• Intra-Community supplies of goods • Supplies related to health care

• Supplies of goods transported or • Supplies related to welfare and social dispatched outside the European security Community (exports) • Supplies related to education, sports • International transport of passengers and physical education and goods • Supplies related to culture and religions • Certain supplies related to international transport • Non-profit activities of eligible institutions • Supplies of non-Community goods placed under a special customs regime • Certain transfers of land and buildings (such as temporary warehousing, (with the option of charging VAT) customs warehousing, inward • Insurance services processing, temporary importation with full exemption from duties) • Financial services

• Services consisting in work on goods • Gambling (such as processing or repair) when the • Valid postage stamps recipient of the services is a person established outside the country and • Supply of goods or services for which the goods are imported within the credit for input tax has not been used Community in order to be processed because of legislative provisions. and after that re-exported

• Services rendered by agents, brokers Registration for VAT purposes and other intermediaries acting in the VAT can be charged only by VAT registered name and on behalf of a third person in persons. VAT registration cannot be relation to certain export transactions retrospective, unless it is performed at the initiative of the revenue authorities when • Import related services (such as the taxpayer fails to submit a registration commission, transportation and application on time. packaging) when their value is included in the customs value. Mandatory VAT registration for local The application of the zero VAT rate needs supplies to be substantiated by certain documents Mandatory VAT registration applies for required by the law. taxable persons, local or foreign, who perform taxable supplies with a place of 9% VAT rate supply in Bulgaria (excluding supplies for A reduced rate of 9% applies to which VAT is to be reverse charged by accommodation in hotels, sheltered the recipient) exceeding the registration housing and other places for threshold of BGN 50,000 for a period of accommodation. 12 consecutive calendar months.

Zero-rated supplies count toward the VAT threshold applies for intra-Community registration threshold as well. The taxable acquisitions of new means of transport and person must complete an application for excise goods). The VAT registration needs registration within 14 days from the end to be effected not later than 7 days prior to of the tax period when the registration the acquisition with which the threshold is threshold was reached. exceeded. The movement of own goods from one EU Member State where the Mandatory VAT registration for providing/ taxpayer is identified for VAT purposes to receiving services Bulgaria creates an identical registration Subject to mandatory VAT registration obligation. are all taxable persons who (i) receive Entities which are VAT registered on these services from suppliers established abroad grounds are obliged to charge and pay or (ii) provide B2B services to another EU output VAT upon the intra-Community Member State. A claim for VAT registration acquisition but are precluded to deduct needs to be filed with the revenue input VAT. Furthermore, entities registered authorities not later than 7 days before the under this regime are not obliged to charge tax on the supply becomes due. output VAT on the subsequent sale of The registration for providing/receiving goods. services is a specific registration which does not entitle the taxpayer to deduct Mandatory registration for supply of input VAT. telecommunication, broadcasting and electronic services Mandatory VAT registration for supply of Any taxable person who is not goods with assembly and installation established in Bulgaria and provides A taxable person established for VAT telecommunications, broadcasting and purposes in another EU Member State electronic services to non-taxable persons who is not established in Bulgaria and who are established, have their permanent supplies goods assembled and installed address or usually reside in Bulgaria is by them or on their account in the country obliged to register in Bulgaria if: is obliged to register 7 days before the • They are not registered for the chargeable event takes place, irrespective application of the “mini one-stop shop” of the threshold reached. This does not special scheme in Bulgaria or in another apply if the recipient is registered for VAT EU Member State purposes in Bulgaria. • They are not registered for VAT Mandatory VAT registration for intra- purposes on mandatory, supply-and- Community acquisitions install, distance sales and voluntary grounds. A taxable person or a non-taxable legal entity not VAT registered on other grounds The application for the VAT registration is subject to mandatory VAT registration must be filed not later than the 10ht day when performing intra-Community of the month following the month in acquisitions if their total amount during which the taxable event of the first supply a calendar year exceeds BGN 20,000 (no occurred.

Voluntary registration The application must state the grounds Any taxable person not meeting the for registration and must be submitted requirements for mandatory VAT together with information about the registration has the right to register monthly taxable turnover for the preceding voluntarily without fulfilling threshold 12 consecutive calendar months. requirements. Foreign persons who are obliged to or wish to register may do it only by securing “Mini one-stop shop” (MOSS) special the services of a fiscal representative in registration and reporting scheme Bulgaria. The fiscal representative is jointly Taxable persons established and and severally liable for the Bulgarian VAT registered for VAT in Bulgaria and providing liabilities of the foreign person. telecommunications, broadcasting and This does not apply for foreign persons electronic services to non-taxable persons from EU Member States who may register established in another EU Member State without appointing a fiscal representative. may register voluntarily for MOSS in If, however, they decide to appoint such, Bulgaria. the representative will not be jointly liable Non-EU taxable persons providing for the foreign person’s VAT liabilities. telecommunications, broadcasting and Persons applying for VAT registration need electronic services to non-taxable persons to designate an email address for official established in the EU, including Bulgaria, communications with the tax office. may register voluntarily for MOSS in Bulgaria if they are not registered for Deregistration MOSS in another EU Member State. Voluntary deregistration following a Registration for MOSS can be performed mandatory registration is possible when, electronically through a dedicated web- during the last 12 consecutive months based application available on the website before the current month, the taxable of the National Revenue Agency. turnover of the registered person does not exceed BGN 50,000. However, voluntarily VAT registration procedure registered persons cannot apply for Persons not registered for general tax deregistration before the expiration of purposes in Bulgaria may not register under 24 months from the beginning of the the VAT Act. The general tax registration calendar year following the year of for local companies is automatic after registration. registration with the Commercial Mandatory deregistration must be pursued Register is obtained. Foreign persons not in certain cases. established in Bulgaria need to obtain a tax number for this purpose. Obligations of VAT registered persons In order to register for VAT (under the mandatory or voluntary procedures), Format of the VAT registration number an entity must file an application with The format of a Bulgarian VAT registration the relevant territorial directorate of the number for legal entities is as follows: National Revenue Agency (NRA). BG 123456789, where 123456789 represents

VAT returns • Triangulation operations (if the supplier Each VAT registered person must submit acts as an intermediary) VAT returns accompanied by purchase and • Taxable services provided to taxable sales ledgers. The tax period under the persons established in other Member Bulgarian VAT Act is the calendar month. States (including cases of received The purchase and sales ledgers have to advance payments on such services) be prepared in prescribed formats and A VIES return is to be filed together with include detailed information about all the VAT return. The deadline for submission transactions having relevance to VAT. The of the VIES return is the 14th day of the sales ledger lists all tax documents on the month following the relevant tax period. basis of which output VAT is applied or not VAT registered entities filing VIES returns applied (i.e. includes exempt and zero-rated must file these electronically along with the transactions and reverse charged VAT). The VAT return and Sales and Purchase ledgers purchase ledger contains all tax documents using a qualifying electronic signature. on the basis of which input VAT is claimed or not claimed (including reverse charged Intrastat Return VAT). The Intrastat system in Bulgaria is The VAT return must be prepared on the regulated by the Intra-Community Trade basis of the information from the purchase Statistics Act and applies to the collection and sales ledgers for the respective month. of data of intra-Community trade in goods, The deadline for submission of the VAT including the movement of goods as a return and ledgers is the 14th day of the result of dispatches from and arrivals to month following the reference tax period. the territory of Bulgaria to/from other EU If, for a given month, either the Sales or the Member States. Purchases ledgers contain more than five Persons registered for VAT purposes in entries, the VAT records must be submitted Bulgaria which carry out intra-Community electronically with a qualifying electronic trade with goods have to file an Intrastat signature.

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 84 | Investment in Bulgaria 2017 return if they have exceeded either of the the cash accounting scheme. Specifically, following thresholds from intra-Community eligible taxable persons applying this trade: scheme can deduct input VAT once they have paid for the goods/services • BGN 240,000 for dispatches received. The input VAT deduction must • BGN 410,000 for arrivals. be supported, in addition to the supplier’s invoice, with a payment document and a Entities must submit Intrastat returns every special protocol issued by the supplier if month starting from the month when the the latter also applies the cash accounting relevant threshold was exceeded in the scheme, or by themselves if the supplier current year. does not apply the cash accounting The Intrastat returns are to be filed with the scheme. NRA by the 14th of the month following The right to input VAT of taxable persons the month when the arrival/dispatch receiving invoices from suppliers applying occurred. the cash accounting scheme will arise when they have paid for the goods/services Recovery of input VAT received. In order to deduct input VAT on A Bulgarian VAT registered person is such invoices, the recipient needs to have, entitled to recover input VAT in respect apart from the invoice, also a payment of taxable supplies from another VAT document and a special protocol issued by registered person or in respect of imported the supplier. goods, if they are used for the purposes of: A VAT registered person is not generally • Taxable supplies liable to Bulgarian entitled to recover input VAT on: output VAT • Purchases used for the performance of • Zero-rated (exempt with credit) supplies VAT exempt supplies such as the dispatch of goods to other EU Member States and the export of • Purchases used for the performance of goods to third countries free-of-charge supplies (there are certain exceptions) or transactions outside the • Supplies with a place of supply outside scope of the independent economic Bulgaria, insofar as input VAT would be activity of the taxable person deductible in relation to such supplies made in Bulgaria. • Purchases of passenger cars and motorcycles; fuel, repair and The input VAT claim must be supported maintenance of such cars and with an invoice and also with a so-called motorcycles; excluding the acquisition reverse charge protocol (when the VAT of a passenger car or a motorcycle used is to be charged by the recipient of a for certain qualifying activities such supply) and/or with a Single Administrative as resale, leasing, security and taxi/ Document (SAD) (in the case of import). courier service. If the passenger cars The invoices and protocols must be issued and motorcycles are not used solely for in compliance with the Bulgarian VAT Act. qualifying services, the taxpayers will be Special rules apply in respect to input entitled to full input VAT deduction if the VAT deductions in case taxpayers apply qualifying services represent more than

50% of the revenue generated by the In this respect, a new definition of taxpayer in the last 12 months “non-current assets” for VAT purposes is introduced which includes (i) immovable • Purchases used for representation or property, (ii) vehicles and (iii) goods and entertainment purposes. services which would qualify as non- A VAT registered person is entitled to current assets within the meaning of the pro-rata VAT deduction in respect of Bulgarian Corporate Income Tax Act with an purchases which are used to perform acquisition value of BGN 5,000 or more. both supplies qualifying for deduction and The proportional input VAT deducted initially exempt supplies. The pro-rata deduction is should be adjusted on a yearly basis upon based on the ratio of taxable supplies to changes in the use of the assets. total supplies calculated for the previous calendar year and adjusted on the basis Reimbursement of VAT of the current year’s ratio calculated with the December VAT return. Taxpayers If, in a given month, the input VAT are allowed to calculate the partial VAT deduction declared by the registered deduction for goods and services which are person exceeds the amount of output VAT different from non-current assets by using charged, the excess amount is subject to an alternative to the pro-rata coefficient reimbursement. method. The VAT for reimbursement is offset Registered persons may claim a VAT against VAT payables in the following two deduction within 12 months from the end months. If, after the two-month period, of the month in which the output VAT for there is still an outstanding balance for the supply became chargeable. No specific reimbursement, it is due for refund by the limitation applies to supplies subject to revenue authorities within 30 days together reverse charge, but notifications to the tax with any other VAT for reimbursement office are needed for deductions claimed declared in the monthly VAT returns in this after this 12-month period. two-month period. Accelerated refunds are available to Input VAT deduction on personal use of registered persons who during the last business assets 12 months have performed the following As of 1 January 2017, a new regime for supplies amounting to 30% or more of proportional input VAT deduction upon the their total taxable turnover for the same acquisition of non-current assets intended period: for mixed use by taxpayers is introduced. • Zero-rated supplies, and The proportional input VAT deduction applies for non-current assets used for • The following supplies having their place both business and private purposes. The of supply in another EU Member State business-to-private proportion is to be where the customer is VAT registered determined on the basis of a reasonable - Intra-Community transport of goods, criterion which should guarantee the forwarding, courier, postal and cargo correct calculation of the amount of the handling and direct agency services input VAT to be deducted taking into related to such transport account the nature of the assets.

- Valuations of and work on movable Refund under the 13th Directive goods. The 13th Directive refunds are based The term for the VAT refund is 30 days on reciprocity – the condition is that the from the date of filing the VAT return. country in which the person is established refunds VAT or similar tax to Bulgarian The VAT is usually refunded after a companies. tax review or tax audit by the revenue authorities, which could defer the refund Bulgaria has reciprocity agreements until after the audit is completed. The with the following countries: Canada, tax audit could last up to five months. FYR Macedonia, Iceland, Israel, Moldova, However, refund of VAT is allowed within Norway, Republic of Korea, Serbia, five days despite any ongoing audit after Switzerland and Ukraine. a collateral in the form of cash deposit, Taxable persons have a right to a refund if, government securities or irrevocable during the year for which refund is claimed: bank guarantee in favor of the revenue authorities. If any refund is postponed until • They had neither a seat of their the completion of the audit, the authorities business nor a fixed establishment in owe interest for the period of delay. Bulgaria and • During the same period they did not VAT refund to persons identified for VAT perform transactions with a place of in the EU and businesses outside the EU supply within Bulgaria except: Bulgaria has implemented the general - International transport and ancillary to provisions of the EU Directives in respect it services of VAT refunds to entities (i) established and registered for VAT purposes in other - Supplies of goods and services for EU Member States (Directive 2008/9/EC), which the tax is due by the recipient. or (ii) established outside the Community The application must be made in the (13th Directive 86/560/EEC). Bulgarian language and filed with the Refunds of input VAT incurred by foreign authorities by an appointed Bulgarian EU entities are available for purchases/ agent; the name and address of the person imports made in Bulgaria, provided that has to be written in the official language the input VAT deduction would have been of the country where the person is available if the foreign entity was identified established. for VAT purposes in Bulgaria. Applications must be accompanied by: The maximum period of time for which • A declaration that the person claiming VAT reclaims can be made cannot exceed refund is not established on the territory one calendar year. The minimum period of the country cannot be less than three months unless this period comprises the remainder of the • A certificate issued by the competent calendar year. tax authorities from the country in which the person is established, which proves that the person performed economic activity during the calendar

year when the right to reclaim VAT arose • Codified description of the goods and (this certificate must be translated into services purchased in Bulgaria Bulgarian by a certified translator and • Copies of invoices and SADs are not legalized) required but these need to be detailed • The original invoices/SADs on the basis in the application. of which the VAT refund is claimed The right to refund is exercised personally • Written power of attorney. or through an authorized representative.

Applications must be sent to the territorial The home state applications are referred to director of the NRA Territorial Directorate – the NRA which has four months to issue Sofia, located at 21 Aksakov Street, its decision to accept or deny the claim. If 1000 Sofia. additional documents are requested, the term for issuing the decision is extended The right to reclaim VAT on purchases by up to eight months from the submission made in 2016 must be exercised by of the claim. Following a positive decision, 30 June 2017. the claimed VAT must be reimbursed within 10 days to a bank account indicated by the Refund under Directive 2008/9/EC person. The NRA owes interest for any Taxable persons have a right to refund delay after the 10-day term. Bulgarian VAT if during the period when VAT was incurred they: The right to reclaim VAT on purchases made in 2016 must be exercised by • Had neither a seat of their business, nor 30 September 2017. a fixed establishment in Bulgaria and

• Did not perform transactions with a Penalties place of supply Bulgaria except: Penalties can be imposed by the revenue authorities in various cases of non- - Zero-rated supplies compliance, most notably for failure to - Transport and ancillary services charge output VAT, late charging of output VAT or failure to submit application for VAT - Supplies of goods and services for registration. which the tax is due by the recipient. Penalties in these cases are generally set Refund is claimed by home state at the amount of the underlying VAT not applications filed electronically with the charged as a result of the failures (except local revenue authorities in the Member for late charging of VAT) – if the delay is State where the respective person is within six months the potential penalty is established. 5% of the underlying VAT and if the delay Applications to refund Bulgarian VAT is more than six months but within 18 and all accompanying documents must months the potential penalty is 10% of the be completed in Bulgarian or English. underlying VAT). Applications must be accompanied by: In addition to this, penalty interest on • Codified description of the economic the unaccrued output VAT liability may be activities of the person calculated for the period of non-payment.

The penalty interest rate varies with an abridged version of the Bulgarian the prime rate of the Bulgarian National Customs Act (CA) and an entire revocation Bank and is 10.00% per annum as at the of the Regulations for its Application. In beginning of 2017. this regard, the current version of the CA regulates solely specific operational In the case of a failure to apply the reverse and technical aspects involving the local charge mechanism, the penalty amounts customs authorities and operators. to 5% of the underlying VAT, provided that the taxable person is entitled to Union and non-Union goods input VAT deduction. The penalty is 2% of the underlying VAT if the reverse charge Union goods are: mechanism is applied with a one-month • Goods fully produced or manufactured delay. within the customs area of the EU

Customs duties • Goods imported from outside the customs area of the EU and released New European and Bulgarian customs in the Union customs territory for free legislation circulation

The new EU customs legislation entered • Goods produced or manufactured within into force in the EU Member States, the customs area of the EU from the including Bulgaria, as of May 2016. abovementioned categories of goods.

In this regard, Regulation 952/2013 or the Non-Union goods are goods which do not Union Customs Code (UCC) has replaced meet the criteria for Union goods. Regulation 2913/92/EEC as the main legal act in the field of customs matters. If Union goods are exported outside the In accordance with the provisions of the customs territory of the EU, they lose Lisbon Treaty, the UCC is implemented their Union status. At the same time, through secondary legislation, namely in case Union goods are exported and Regulation 2015/2446 (the Delegated subsequently re-imported within the Act) and Regulation 2015/2447 (the customs territory of the EU, they will be Implementing Act). These acts, along with treated as non-Union goods (i.e. subject Regulation 2016/341 specifying transitional to customs duties) unless it is proven that rules for certain provisions of the UCC, the imported goods are the same as those currently constitute the regulatory previously exported and, while outside foundation of the Union customs policies. the EU, they have not been subject to The Union Customs Code aims to gradually any operations except for such aimed at introduce improvements in the existing preserving their good condition. customs procedures at the European level As a member of the European Union, as well ensure transition to an electronic Bulgaria applies the EU customs policies EU customs environment by 31 December toward third countries with the following 2020. main consequences:

These major EU regulatory developments • Non-Union goods imported in Bulgaria have also resulted in domestic changes: from countries or territories not forming

part of the customs territory of the the Community Combined Nomenclature EU are generally subject to the same and on the international Harmonized customs duties and formalities as those System used by many nations in the world. applicable to goods imported in any The respective classification of the goods other EU Member State within the tariff determines the rate of duty applicable upon import and whether any • Union goods released for free special preferential treatment is available. circulation in the EU move from Bulgaria to other EU Member States and vice Origin of goods versa without application of customs formalities and without customs duty The origin of imported goods and the route payment obligations. they take to the EU have considerable influence on their customs duty liability. If Release for free circulation (import) they originate from a country which has a preferential arrangements with the EU, the General procedures duty rate is reduced significantly or possibly When entering the customs territory of the to zero. The EU has such arrangements EU, non-Union goods must be declared with various countries such as the EFTA to the customs authorities and assigned countries, the European Economic Area, a customs-approved treatment or use. the Western Balkan countries, the Eastern Depending on the purpose, the goods Partnership countries, African, Caribbean may be released for free circulation by and Pacific states, etc. Suspension of the the Bulgarian customs authorities, i.e. full rate of duty may be available from imported in the country, or be placed under specified countries at certain times of other customs procedure such as transit, the year for particular goods. Similarly, storage in a customs warehouse, inward a quota may be in force which allows processing, etc. predetermined quantities of goods within certain tariff headings to be imported at Customs value lower than the general duty rates. Usually the customs value of the goods is Charges at importation their transaction value, i.e. the price paid or payable for the goods. Certain adjustments Customs duties are mainly charged on the to this price might be necessary (e.g. customs value of the goods (ad valorem), transport and insurance costs following although certain agricultural products are the entry of the goods into Bulgaria must also liable to specific duties, assessed be excluded from the customs value). according to weight or quantity, under the Alternative methods may be used, for Common Agricultural Policy of the EU. A example, where there is no sale, or where few items are subject to compound duties, the relationship between the parties i.e. a mixture of value-based and specific influences the sales price (e.g. related party duties. The rate and type of duty applicable transactions). to an item is determined by its tariff classification.

Classification of goods Domestic VAT is also charged on import. The applicable Integrated Tariff of the Any such VAT paid may be recovered as European Community (TARIC) is based on input tax provided that (i) the importer is

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 90 | Investment in Bulgaria 2017 registered for VAT purposes in Bulgaria, Excise duties (ii) the goods are intended for use in his VAT The main regulatory act in Bulgaria in the taxable business activities, (iii) the importer area of excise duties is the Excise Duty has an import customs declaration issued and Tax Warehouses Act (EDTWA). The in his name which is properly recorded in EDTWA follows the concepts laid down in the VAT ledgers and (iv) the import VAT was the main EU excise duty legislation such as effectively paid to the budget. Directives 2008/118/EC and 2003/96/EC. The latest changes to the EDTWA entered Export procedures into force as of 1 January 2017. Goods to be exported must be declared Taxable persons for the purposes of excise to the customs authorities. In the general duties are authorized warehouse keepers, case, the exporter is an EU established importers of excisable goods and other person who, at the time when the customs designated persons listed in the EDTWA. declaration is accepted, holds the contract with the consignee in the non-EU country Excise duty is charged on the following and has the power for determining that the goods: alcohol and alcoholic beverages, goods are to be brought outside the Union. tobacco products, energy products and electricity. Excise duty is usually charged on From a VAT perspective, the export of the basis of weight, volume and quantity goods to a destination outside the EU can of products. Exceptions are cigarettes for be zero-rated provided that (i) the goods are which the excise duty is calculated as a transported outside the EU by or on behalf combination of specific duty (based on of the supplier or by or on behalf of the number of pieces) and ad valorem duty customer not established in Bulgaria and (as a percentage of the sales price). The (ii) the exporter can produce the necessary amendments effective from 1 January 2017 evidence for export. provide for changes in the excise duty rates applicable for cigarettes. Special procedures In accordance with the EU-wide rules, for Standard tax rates for various groups of customs purposes goods may be placed products are explicitly determined in the under special customs procedures allowing law. Energy products for which no tax rate for suspension and/or reduction of the is specified in the law are taxed at the rate generally applicable customs duties and of equivalent products. VAT. These procedures include external The excise goods are subject to excise and internal transit, customs warehousing, duty at the time when they are produced free zones, temporary admission, end- or enter the territory of Bulgaria. The use, inward and outward processing. obligation for payment of the duty occurs The operation and monitoring of the when the respective goods are released for special procedures in Bulgaria follows the consumption. The accrual and payment of provisions of the UCC and is administered excise duty can be postponed, if the goods by the Bulgarian customs authorities. are produced, stored or moved under an excise duty suspension regime. Usually, goods are eligible for duty suspension if produced or stored in a tax warehouse.

At the same time, certain excisable “freedom-of-establishment” principle and goods (alcohol, tobacco and some energy foreign insurers established in the EEA and products) cannot be produced outside the acting by way of the “freedom-of-services” territory of such a warehouse. Furthermore, principle (FOS). The tax basis is the gross the goods can move under duty premium received by the insurer adjusted suspension within and out of the territory for certain discounts and/or fees. The tax of Bulgaria in the following cases: event is the moment when the premium payment is collected by the insurer. IPT • Movement of excisable goods between must be paid on a quarterly basis by the Bulgarian tax warehouses end of the month following the reference • Movement of excisable goods between calendar quarter. Bulgarian and EU tax warehouses IPT liabilities are reported in standard tax • Movement of excisable goods from returns each calendar quarter. IPT returns a Bulgarian tax warehouse to an exit must be filed by the end of the month customs office in case of export following the respective calendar quarter.

• Imported goods transported to a Registration of FOS insurers in Bulgaria Bulgarian tax warehouse is made on the basis of the first quarterly submitted IPT return in Bulgaria. • Other movements specifically listed in the EDTWA. FOS insurers can appoint a fiscal representative who will be jointly and • The movement of goods under duty severally liable with them. Alternatively, suspension within the EU is monitored they may settle their IPT liabilities directly by the computerized Excise Movement or assisted by a local service provider as all and Control System (EMCS). reporting documentation is in the Bulgarian language. Insurance Premium Tax (IPT) Insurance Premium Tax (IPT) at the rate of 2% was introduced in Bulgaria effective 1 January 2011. The latest amendments to the Bulgarian IPT Act were introduced on 1 January 2016.

Bulgarian IPT is charged on insurance premiums covering risks located in Bulgaria with the exception of exempt premiums collected on certain types of insurance contracts (e.g., life insurance, international transport and others). Taxable persons are local insurance companies and Bulgarian branches of foreign insurance companies established outside the EEA, Bulgarian branches of foreign insurance companies established in the EEA operating under the

Legislation Employment contracts The major item of legislation that governs Form of contracts and obligation for employment relations in Bulgaria is the Labor notification Code. The Labor Code regulates all major aspects of employment relations, namely: Employment contracts must be in writing.

• Conclusion, amendment and An employer is obliged to notify in termination of employment contracts writing the respective division of the National Revenue Agency of the following • Working hours, absences and holidays circumstances:

• Business travels inside the country and • The signing of each employment abroad contract – within three days from the • Employment discipline date of signing

• Compensation and contractual liabilities • An amendment to the position of of the parties to an employment the employee or the term of the contract employment contract – within three days from the date of signing of the • Special protection for some categories respective amendment or annex to the of employees contract

• Procedure for collective redundancy of • The termination of an employment employees. contract – within seven days after its Legal requirements are also provided in the termination. Healthy and Safe Working Conditions Act, The Labor Code provides that a fine the Encouragement of Employment Act, the of BGN 1,500 to BGN 15,000 will be Protection of Personal Data Act, as well as imposed on an employer for each case in a number of ordinances adopted on the of non-performance of one of the above basis of the Labor Code and the above laws. obligations for notification. One of the main goals of the Bulgarian employment legislation is to create a Types of employment contracts minimum level of protection for employees. The Labor Code regulates the following Therefore, the Labor Code, as well as major types of employment contracts: the other relevant Bulgarian legislation, • Contracts concluded for an indefinite contains numerous rules and regulations period of time (contracts with an which are mandatory for an employer hiring indefinite term) employees in Bulgaria.

• Contracts concluded for a fixed period favor of the employer, the employer will of time (fixed-term contracts), and be entitled, during the probation period, to unilaterally terminate the contract without • Contracts with a probation period. prior written notice to the employee and The most common and generally accepted without the need to present any grounds type of employment contract in Bulgaria for termination of the contract. If a contract is the contract with an indefinite term. It with a probation period is not terminated gives better protection to the employee’s by the employer as described above, then rights and interests because it provides for upon its expiration it becomes a “final” more stable and long-term employment. contract (fixed-term or indefinite) as Therefore, an employment contract specified by the parties to it. concluded for an indefinite period of time Youth employment cannot be transformed into a fixed-term contract without the prior written consent The internship contract is explicitly of the employee. regulated by the Bulgarian labor law and is set out in the Labor Code as a separate Under the fixed-term employment type of employment contract. Internship contract, the parties stipulate the period contracts can be concluded with high during which the contract shall be valid school or university graduates, persons and binding. In order to better protect younger than 29 years of age, who have no employees’ rights and interests, the Labor work experience related to their education Code provides that employment contracts or acquired qualifications. The internship can only have a fixed term in exceptional contract may be concluded for a term of cases, as expressly specified by the between six to twelve months. Young law (e.g. for performance of seasonal or people shall be hired in internship positions temporary activities, for completion of a corresponding to their qualifications and specific project, for temporary substitution education and, after the termination of the of absent employees and others). contract, the employer shall provide the If a contract is concluded for a fixed-term interns with recommendations, certifying in breach of the relevant provisions of the the skills acquired during the internship. Labor Code, it is deemed to be a contract Additional measures in relation to youth of indefinite term. unemployment are included in the A contract with a probation period is a Encouragement of Employment Act. If specific type of employment contract certain requirements are met, employers which gives the parties the opportunity to who hire persons younger than 29 years of assess whether the employee is capable age, who are registered as unemployed, as of performing the work under the contract. well as primary school, school or university A probation period clause may be included graduates without qualifications are in both fixed-term contracts and contracts entitled to receive financial resources for with an indefinite term. set periods.

The probation period can be in favor of the employer, the employee or in favor of both parties. If the probation period is in

Temporary employment through within the framework of provision of external agencies services. The ordinance regulates the The Labor Code contains provisions specific content of the employment regarding the temporary work of external contract concluded between a temporary employees, according to which a work agency and its employees, including company (temporary employer) has the employment remuneration, working hours/ right to temporarily employ an employee week, overtime work, official holidays, (temporary employee) of another company annual paid leave, travel expenses, (temporary work agency). Temporary allowances, etc. work agencies have the right to perform activities only upon registration before the Working hours Employment Agency. The Labor Code contains mandatory provisions which determine the regular Temporary work agencies have the right working hours under an employment to sign with their employees only two contract in Bulgaria. The regular working types of employment contracts: week is 40 hours, five working days of (i) until completion of specific work and eight hours each. (ii) for temporary replacement of an employee who is absent from work. The These are in fact the maximum working individual employment contract must hours that the parties to an employment contain a clause that the employee will contract can negotiate, unless otherwise be seconded to work with the temporary provided for in the Labor Code. The law employer, under its management sets out mandatory limits for working hours and supervision. The total number of within the working day and week in order temporary employees may not exceed to protect the rights of the employees and 30% of the total number of employees of to prevent an employer from imposing the temporary employer. extended working hours.

The Labor Code regulates in details the All exceptions from the regular working rights and obligations of temporary work week are expressly stipulated in the law. agencies and temporary employers. A requirement to work more than the The relations between both companies regulated hours is always compensated shall be regulated by virtue of a written for by the employer, in a way provided for agreement, with contents specified in the under the law. Labor Code. The temporary work agency Special regulations cover part-time work, and the temporary employer are jointly open-ended working hours, shift work, liable for the obligations to the temporary including night shifts, and overtime. These employees, related to the work assigned. provisions may vary depending on the Since January 2017, the legislation labor category of the employee and the related to sending employees hired by a associated working conditions. temporary work agency to a temporary employer in EU/EEA/Switzerland has Holidays been further detailed by the newly In general, full-time employees are entitled adopted Ordinance for the conditions to at least 20 days of annual paid holiday. and procedure for posting of employees

Certain categories of employees, as associated expenses shall be incurred by determined by the Council of Ministers, the employer. are entitled to extended holidays and/or additional holidays. Healthy and safe working conditions The employee is entitled to use annual paid leave at one time or in parts during the One of the main obligations of the calendar year for which the leave applies employer is to provide healthy and safe upon a written approval by the employer. working conditions. The law aims to secure greater protection of the employee’s life, The use of the annual paid leave may health and working capacity by holding the be postponed due to important reasons employer responsible for the conditions related to the business activities of the under which employees have to carry out employer. In such cases, the latter is to their employment obligations. give the employee the opportunity to use no less than half of the annual paid leave The labor legislation sets forth strict due for the respective year. Employees obligations of the employer in relation to may also postpone the use of the annual the provision and maintenance of healthy paid leave, when they use other types of and safe working conditions, which include leave or upon their request and consent of but are not limited to: the employer. • An assessment of risks to the health In case the leave is postponed and is not and safety of employees, which is used within the calendar year for which it is to be performed by an independent due, the employer is obliged to ensure the specialized company use of the leave not later than six months • Development of an overall and annual from the end of the year for which it is due. program to achieve the required healthy Upon termination of the employment and safe working conditions based on relationship, the employee is entitled to the risk assessment monetary compensation for the unused • Planning and performance of measures part of the annual paid leave, the right of necessary for the prevention of use of which has not been terminated due possible risks, including but not limited to expiry of the prescription period of two to: constant technical maintenance years. of equipment, provision of collective The official holidays are listed in the and personal protective means for Labor Code. The Council of Ministers can employees, informing employees of designate additional official holidays. possible risks, providing protective food and/or antidotes for employees Medical check-ups who work under unhealthy and harmful conditions All employees must undergo periodical medical check-ups. Their frequency • Providing special training for employees depends on the labor category, working on healthy and safe conditions. conditions and the employees’ age, as The due performance of the above determined by the Minister of Health. The obligations by employers is subject to

Posting or sending of employees Termination of employment from Bulgaria to EU/EEA/ contracts Switzerland in the framework Employment contracts may be terminated of provision of services on general or specific termination grounds New rules for the posting and sending which may or may not require an advance of employees within the framework notice. No notice is required if employment of provision of services are introduced contracts are terminated by either party on by amendments to the Labor Code one or more of the explicit grounds listed in promulgated on 30 December 2016 and the Labor Code. by the newly adopted Ordinance for the When a notice is required for termination conditions and procedure for posting of the employment, the notice period may of employees within the framework of vary from 30 days up to three months. If provision of services effective as of the required notice period is not observed, 10 January 2017. a compensation is due. As per the new legislation, Bulgarian In certain cases of unilateral termination employers are now obligated to conclude of employment by the employer when an additional agreement with employees the number of dismissed employees prior to their posting to another Member is to exceed the one provided by the State of the EU/EEA/Switzerland. The new Labor Code, a procedure for collective rules define a range of matters which must redundancy must be observed. This be regulated by the additional agreement. procedure is applicable in case of The additional agreement shall amend the liquidation, staff reduction, decrease of the

• To notify trade unions and employees of its intention to terminate the employment contracts

• To initiate consultations with employees in order to mitigate or avoid the consequences of redundancy

• To notify the Employment Agency and to participate in teams comprised by representatives of employees, the municipal authorities and the Employment Agency for the purposes of training of employees, initiating own business by the employees, participation of employees in alternative employment programs.

According to the Labor Code, a fine of BGN 1,500 to BGN 5,000 will be imposed on an employer and a fine of BGN 250 to BGN 1000 will be imposed upon the responsible official of the employer for each case of non-performance of any of the above obligations on notification to the employees.

Foreign nationals working in Bulgaria In most cases, foreign nationals seeking employment in Bulgaria must obtain work permits and their employment contracts are fixed-term. Also their employment contracts must contain provisions which regulate accommodation expenses, medical treatment, insurance, transportation costs to and from the country of permanent residence and others. For a discussion of work permits, please refer to Chapter 8.

Legislative framework and general European citizens who wish to enter principles and stay in Bulgaria do not need a visa. The legal status of foreign nationals in Foreigners are divided into two categories Bulgaria is governed by the Constitution – those who must secure a visa when of the Republic of Bulgaria, the Foreign crossing the borders of the Republic of Nationals Act, the Regulation on the Bulgaria and those who are exempt from Application of the Foreign Nationals in the that requirement. Republic of Bulgaria Act, the Ordinance on Visa requirements and the exemption the Terms and Procedure for Issuing Visas of such requirements for foreigners are and Determination of the Visa Regime, the governed by EU legislation, agreements of Labor Migration and Labor Mobility Act, the the European Union with third countries Regulation on the Application of the Labor for visa regimes and the effective Bulgarian Migration and Labor Mobility Act. Generally, legislation. the Bulgarian legislation concerning foreign citizens is in compliance with the EU Foreigners who wish to reside in Bulgaria legislation as related to immigration policy. on a long-term basis (in any case more Effective from 31 January 2012, Bulgaria than three months within each six-month unilaterally applies the Schengen acquis. period) shall be issued a residence permit. European citizens who intend to stay in The Foreign Nationals in the Republic of Bulgaria longer than three months are Bulgaria Act applies to the foreigners who issued residence certificates instead of are not citizens of any Member State of residence permits. the European Union, the States which are a party to the European Economic Area Foreigners may work in Bulgaria only after Agreement and the Swiss Confederation obtaining a work permit, unless otherwise (“foreigners”). stipulated by the law.

The legal status of citizens of any of the The Constitution of the Republic of Bulgaria Member States of the European Union, the provides that foreign nationals have all States which are a party to the European the rights and obligations accorded under Economic Area Agreement and the Swiss Bulgarian law and international agreements Confederation (“European citizens”) ratified by Bulgaria, except in respect to in Bulgaria is governed by the Entry, those rights for which the laws explicitly Residence and Departure of European require Bulgarian citizenship. Union Citizens and Members of Their Under the Bulgarian law, foreign nationals Families from the Republic of Bulgaria Act, are restricted in exercising the following as well as by the applicable Acts of the EU rights: legislation.

Ownership rights: Foreign nationals do the respective municipality for at least six not have the right to acquire ownership title months preceding the date of elections, over land except: (i) under the terms of an and they must not be exempt from the international agreement ratified under the right to vote in another EU Member State, terms provided for in the Constitution of including Bulgaria. In addition, they must the Republic of Bulgaria, which has been express their will to vote in writing. promulgated and has entered into force, or A citizen of an EU Member State over the (ii) through legal inheritance. age of 18 can be elected as a municipal Since the seven-year transitional period councilor provided that they meet the from the date of accession of Bulgaria to following conditions: (i) do not have the European Union expired on citizenship in a non-Member State, 31 December 2013, the citizens of EU/EEA (ii) have a long-term or permanent Member States, regardless of whether residence status in Bulgaria, (iii) have they reside in Bulgaria or not, can acquire resided in the respective municipality for ownership title over agricultural land, at least six months before the date of the forests and forestry land in Bulgaria. elections, (iv) have not been deprived of the right to be elected in any EU Member According to the Bulgarian legislation, States in which they are a citizen. However, no special permissions are required for only Bulgarian citizens are eligible to be individuals who want to acquire ownership mayors in the country. over premises and/or limited property rights over immovable property. This There is a general rule that foreign regime does not differ for citizens of nationals are obliged to observe Bulgarian EU/EEA Member States and citizens of laws and the established legal order, that other counties. they must be loyal to the Bulgarian state, and not derogate the prestige and dignity Political rights: Foreign nationals cannot of the Bulgarian people. In this respect, be candidates for positions such as those foreign citizens residing in Bulgaria bear of mayors, Members of Parliament, the the same civil, administrative and penal president. responsibilities as Bulgarian citizens, unless Pursuant to Article 42, paragraph 3 of the otherwise provided for under a special law, Bulgarian Constitution, the terms and or an international agreement to which the conditions for participation of citizens of Republic of Bulgaria is a party. EU Member States in local elections in Bulgaria are set forth in a special law. Visas

As from the date of Bulgaria’s accession According to the effective Bulgarian to the EU, citizens of EU Member States legislation, foreigners who are citizens of are entitled to vote for municipal councilors certain countries must obtain a visa before and mayors in Bulgaria. In order to take entering the territory of the Republic of part in the elections, the citizens of EU Bulgaria. The visa is a clearance, issued Member States over the age of 18 must to foreigners, for entry and stay on the have a long-term or permanent residence territory of the Republic of Bulgaria for a status in Bulgaria and must have resided in certain period of time.

The Ordinance on the Terms and Procedure without needing to have a Bulgarian short- for Issuing Visas and Determination of stay visa. the Visa Regime, referring to Council Foreigners who are exempt from the Regulation 539/2001 of 15 March 2001 and requirement for obtaining a visa can enter the relevant Regulations for its amendment and stay in the Republic of Bulgaria without determine the list of those countries a visa for up to 90 days within a period whose nationals must be in possession of six months. The entry and the short- of a visa when crossing the borders term residence in Bulgaria of holders of of the Republic of Bulgaria and those Schengen visas and/or residence permits whose nationals are exempt from that is limited to the period and the entries requirement. In addition, there are certain allowed in the respective visa/permit, but in countries whose nationals are exempt from any case holders of such documents may the requirement of possession of a visa not reside in Bulgaria for more than 90 days when crossing the borders of the Republic in any six-month period. This also applies to of Bulgarian by virtue of agreements holders of national short-stay and/or long- concluded between the European Union stay visas and residence permits issued by and the said countries for granting Croatia, Cyprus and Romania. exemption from the visa requirement. For foreign nationals of certain countries, A valid visa is not a guarantee of entry into the exemption from the requirement Bulgaria. The border control officers are of possession of a visa when crossing entitled to determine whether a foreigner the borders of the Republic of Bulgaria meets the requirements for admission. If depends on the holding of a special type of the border control officers establish that a a passport (e.g., a biometric passport). foreigner does not meet the requirement of the law, then the foreigner may be refused On the grounds of a resolution of the entry in the Republic of Bulgaria. Bulgarian Council of Ministers, until the date of Bulgaria's full accession to the The Foreign Nationals in the Republic of Schengen zone, Bulgaria shall unilaterally Bulgaria Act provides for the following main apply a visa-free system for holders of valid visa categories: air transit visa, short-stay Schengen visas and residence permits, visa and long-stay visa. and thus Bulgaria shall apply the Schengen An air transit visa is issued to a foreigner acquis. Effective from 31 January 2012, who travels by aircraft from a certain holders of Schengen visas and/or country and stays in the international residence permits shall be allowed to transit zone of an airport on the territory enter and reside short term in the Republic of the Republic of Bulgaria with the aim of Bulgaria without needing to have a of continuing their travel with the first Bulgarian short-stay visa. next flight to a different country. Air transit Bulgaria unilaterally recognizes short-stay visa allows a foreigner one, two or, as an and long-stay visas and residence permits exception, multiple entries in the territory issued by Croatia, Cyprus and Romania. The of Bulgaria. An air transit visa can be with holders of such types of documents may a validity term of up to three months from enter and stay short term in Bulgaria date of issuance. A foreigner traveling with an air transit visa is treated as not admitted to the territory of the Republic of Bulgaria.

A short-stay visa is issued to a foreigner for and coordination of the implementation the purposes of transit or planned stay in of a tourist services contract, foreigners the territory of the Republic of Bulgaria. The posted on behalf of a foreign employer for short-stay visa can be issued as one-entry, making investments in accordance with two-entry or multiple-entry visa. The term the Encouragement of Investment Act and of validity of the short-stay visa and the others). allowed period of stay are determined on The long-stay visa allows its holder multiple the basis of examination of the conditions entries into the territory of the Republic of of entry and risk assessment during the Bulgaria within its validity term. examination of the visa application. The term of validity of the short-stay visa All visa applications must be submitted cannot exceed five years. to the respective Bulgarian diplomatic missions and consular departments around A short-stay visa for transit allows a the world. In case there is no diplomatic foreigner who is on their way from one mission or consular department in a certain country to another to enter and stay in the country, visa applications can be submitted territory of the Republic of Bulgaria for a to such authorities of an EU Member State period of up to two days, unless otherwise with which Bulgaria has an agreement provided in an international agreement. The for representation in acceptance of visa total length of stay of a holder of a short- applications and issuance of visas. In stay visa for transit may not exceed three exceptional cases (e.g., the state’s interest months within every six-month period. or extraordinary circumstances), border A short-stay visa for planned stay allows a control officers can issue single short-stay foreign national single or multiple entries visas for transit visits with an allowed into Bulgaria for up to 90 days within a period of stay not exceeding two days, period of six months. This type of visa is unless an international agreement provides issued to foreigners who wish to enter and otherwise, and single short-term visas stay in Bulgaria for the purpose of short- for a planned stay of up to 15 days. The term personal, business or other related State Agency for National Security shall visits. The purpose of the visits is usually be immediately notified of the issuance of proved with written invitations. such visas.

A long-stay visa allows a foreigner to enter An application for issuance of a long-stay into Bulgaria and thereafter to apply for a visa is submitted only to the Bulgarian residence permit in order to stay long-term embassy or consular office in the country in the country. The validity of the long-stay where the applicant permanently resides, visa is six months and it allows its holder a or to such diplomatic missions and consular stay up to 180 days. For certain categories departments, which are accredited for the of foreigners, the validity of the long-stay respective country. In exceptional cases visa is up to one year and allows the holder (humanitarian reasons or extraordinary to stay up to 360 days (e.g. foreigners circumstances), the application for issuance conducting scientific research, foreigners of a long-stay visa can be submitted to posted on behalf of a foreign employer for Bulgarian diplomatic missions and consular performing specific tasks related to control departments in other countries.

An important condition upon applying for a residence permits and obtain Bulgarian visa is for the applicant’s passport to be in residence document (residence permit or compliance with certain requirements of residence card). the law, namely: (i) the validity term of the The certificates for European citizens, passport shall expire at least three months the residence permits for foreigners after the planned date of leaving the and the residence cards for European territory of Bulgaria, (ii) the passport shall citizens’ family members, who are not have at least two empty pages, and citizens themselves, are issued by the (iii) the passport is issued within the past Migration Directorate at the Ministry of the 10 years. Interior, the respective division as per the European citizens who wish to enter and applicant’s address of residence in Bulgaria. stay in Bulgaria do not need a visa. They enter and leave the country with a valid Residence permits identity card or passport. They can stay and The Foreign Nationals in the Republic of reside in Bulgaria for a period of up to three Bulgaria Act provides for three types of months starting from the date of their residence permits: first entry without the need to obtain any permits or certificates. • Extended residence permits – with a term of validity of up to one year and Foreigners who are family members of the option of renewal after submission European citizens may enter and leave the of an application territory of the Republic of Bulgaria with a valid passport and visa, if such is required. • Long-term EU residence permits – for Family members of a European citizen, an initial period of five years and the who are not European citizens themselves, option of renewal after submission of an are exempt from the requirement of a application, and visa only if they are in possession of a • Permanent residence permits – for an residence card issued by an EU Member indefinite period of time. State. In order to apply for an extended or Residence permits, residence permanent residence permit, a foreigner certificates and residence cards must initially obtain a long-stay visa. Foreigners who wish to reside in Bulgaria The most common grounds for issuance of on a long-term basis (in any case more than extended residence permits are: three months within each six-month period) • A foreigner who wish to work under are issued a residence permit. employment contract after obtaining a European citizens who intend to stay in permit from the Ministry of Labor and Bulgaria longer than three months are Social Policy A foreigner is a member issued residence certificates. of the management or supervisory body of a Bulgarian company, provided Family members of European citizens, that such company has employed at who are not European citizens themselves, least 10 Bulgarian nationals on full-time who wish to reside in Bulgaria for a period employment contracts longer than three months, must be granted

• A foreigner is a trade representative application for an extended residence of a representative office of a foreign permit, foreigners over the age of 18 must company registered with the Bulgarian also submit a conviction status certificate Chamber of Commerce and Industry issued by the state in which the foreigner is after verification and assessment of a citizen or from the state of their habitual the submitted documents regarding residence. Additional documents are the activity and tax compliance of the required depending on the specific grounds company, and regarding the planned for issuance of the permit. activities of the representative office The application for obtaining an extended • A foreigner who invested over residence permit must be filed before the BGN 600,000 in acquiring immovable Migration Directorate not later than 14 days property directly or through a Bulgarian prior to the expiration of the term of the company, in which he/she has invested long-stay visa. Applications are considered BGN 600,000 as capital and reviewed within 14 days of their submission and, if the case is complicated • A foreigner who invested over from a legal or factual perspective and if BGN 250,000 in economically additional documents need to be presented disadvantaged areas through a Bulgarian by the applicant, this term can be extended company, in which he/she has invested by one month. BGN 250,000 as capital, and as a result the company acquired fixed tangible and The extended residence permit can be intangible assets amounting to renewed if the grounds for issuance still BGN 250,000 and has employed at least exist at the time of the renewal. five Bulgarian nationals for the term of Once the foreigner is granted an extended the foreigner’s residence in Bulgaria. residence permit, they may live, reside The documents required for issuance of an and travel in the Republic of Bulgaria while extended residence permit include: the permit is valid. The foreigner may (i) a valid international passport of the freely choose and change their place of applicant with a validity term which residence, or leave the country and enter exceeds the term of the requested it again. residence permit by not less than six Foreigners who intend to reside in Bulgaria months; (ii) document(s) evidencing that for the purposes of employment shall the applicant has been provided with a be able to apply for a single work and place to live during their stay in Bulgaria residence permit. (e.g., rental contracts); (iii) a standard application form; (iv) document(s) Foreigners who have been granted status evidencing payment of the relevant state of a long-term resident in the Republic fees; (v) documents evidencing that of Bulgaria can obtain long-term EU the foreigner has health insurance in residence permits. Long-term resident compliance with the Bulgarian legislation; status can be granted to foreigners who and (vi) document(s) evidencing that have resided legally and continuously (i.e. the applicant has sufficient financial uninterruptedly) on the territory of the means to meet the costs of their stay in Republic of Bulgaria for five years prior Bulgaria. Upon submission of their first to the submission of the application for

Permanent residence permits are issued to • Who invested over BGN 500,000 foreigners: through a Bulgarian company in which the foreigner has invested the amount • Of Bulgarian descent as capital, and as a result the company • Who have been married for more acquired fixed tangible and intangible than five years to a foreigner with assets amounting to BGN 500,000 a permanent residence status in and has employed at least 10 Bulgarian Bulgaria and have resided legally and nationals for the term of the foreigner’s continuously on the territory of Bulgaria residence in Bulgaria. for a period of five years The extended, long-term or permanent • Minor or underage children of a residence status of a foreigner is evidenced foreigner with a permanent residence by the issuance of a Bulgarian personal status in Bulgaria, who are not married document (residence permit) evidencing the right of residence in the Republic of • Members of the family of a Bulgarian Bulgaria. citizen if they have resided continuously on the territory of the Republic of Residence certificates Bulgaria in the last five years European citizens are issued two types of • Who have invested in Bulgaria over residence certificates: BGN 1 million or increased their investment with such amount, through • Long-term residence certificates – with acquisition of shares in Bulgarian a term of validity of up to five years, and companies which are traded on the • Permanent residence certificates – for Bulgarian stock exchange, through an indefinite period of time. acquisition of rights under concession agreements on the territory of the The grounds for issuance of long-term Republic of Bulgaria, or through residence certificates are: acquisition of other securities or rights • A European citizen is employed or explicitly provided by the law self-employed in the Republic of • Who have invested in Bulgaria over Bulgaria BGN 6 million in the capital of a • A European citizen has medical Bulgarian company whose shares insurance and sufficient financial are not traded on the Bulgarian stock resources to cover the expenses for exchange their residence and that of their family • Who are shareholders, representatives members without being a burden to the or employees occupying key or Bulgarian social security system, or controlling position in a Bulgarian • A European citizen has enrolled in a company which conducts business school/college/university in Bulgaria for activity in Bulgaria and obtained

study, including professional training, them. If the person fails to correct the and has medical insurance and suffi- omissions within this term, the competent cient financial resources to cover their authority will deny the issuance of a long- expenses and that of family members term residence certificate. without being a burden to the Bulgarian The right of entry and the right of residence social security system. of a European citizen in the Republic of In order to apply for a long-term residence Bulgaria may be restricted in exceptional certificate, the European citizen must cases and on grounds related to national submit an application to the Migration security, public order or public health. Directorate at the Ministry of the Interior Permanent residence certificates are within three months of their first entry in issued to European citizens who have the Republic of Bulgaria. resided continuously in the Republic of The documents which must be enclosed Bulgaria for a period of five years or who with the application include: (i) a valid meet other special requirements set forth identity card or passport of the applicant; in the law. In order to apply for a permanent (ii) document(s) evidencing the existence residence certificate, the European citizen of the grounds on which the European must submit an application to the Migration citizen applies for their residence certificate Directorate at the Ministry of the Interior (e.g. employment contract, documents enclosing documents evidencing the proving registration of the applicant as a necessary circumstances. self-employed, documents proving that the applicant currently studies in Bulgaria); Residence cards (iii) document(s) evidencing the payment of Family members of European citizens, who the relevant state fee; and (iv) document(s) are not European citizens themselves, and evidencing that the applicant has medical who accompany or live with a European insurance and has sufficient financial citizen, are entitled to receive an extended means to meet the costs of their stay or permanent residence permit in the in Bulgaria (when required). Additional Republic of Bulgaria, on the basis of their documents may be required depending relationship with the European citizen. on the specific ground for issuance of the permit. A foreigner, who received an extended or permanent residence permit in Bulgaria, Applications are considered and reviewed is issued a Bulgarian residence document and the certificate must be issued on (residence card) evidencing their right of the day of submitting the application. residence in the Republic of Bulgaria. The certificate contains the person’s full name and the registration date. Upon Work permits their request, the applicant may receive a long-term residence certificate in the form General rules of an ID card with their photo and personal The main rules and procedures regarding number on it. the access to the labor market of foreigners In case some of the necessary documents are arranged in the new Labor Migration are missing or not valid, a European citizen and Labor Mobility Act (LMLMA), effective will be granted a seven-day term to correct from 21 May 2016, and the Regulation

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 106 | Investment in Bulgaria 2017 on the Application of LMLMA, effective In these cases, a number of legal from 30 September 2016. The LMLMA requirements must be fulfilled for the transposes the provisions of Directive access to be granted. Among them are: 2014/66/EU and Directive 2014/36/EU. As • Limitation on the number of foreign a result, new rules and procedures for the employees: There is a mandatory entry of intra-corporate transferees and legal requirement, pursuant to which seasonal workers were introduced. the number of the foreign employees In addition, the LMLMA establishes directly employed by the Bulgarian measures for equal treatment of the employer may not exceed 1/10 of EU/EEA/Swiss nationals who have the average number of the Bulgarian exercised their right of free movement and nationals and EU/EEA/Swiss nationals proclaims a set of substantial rights to third and other categories of foreign nationals country employees, including the right of employed by the local employer over access to information for job vacancies, the last twelve months. conditions of work, access to education • Performance of a market search: When and others. a local employer hires foreign nationals In general, foreigners may work in Bulgaria who are not EU/EEA/Swiss nationals, only after being granted access to the labor the employer is obliged to perform a market, unless otherwise stipulated by market search before submission of the law. an application for granting access to the market. The purpose of the search The new LMLMA sets forth the following is to prove that there are no qualified grounds for obtaining access to the market: and suitable candidates – Bulgarian • A foreigner signs an employment or EU/EEA/Swiss nationals – for the contract with a Bulgarian employer relevant position. The exceptions to this requirement are exhaustively provided • A foreigner is posted to Bulgaria in the for in the law. framework of provision of services Bulgarian employers must report signed • A foreigner is seconded in the labor contracts with foreigners and framework of an intra-corporate transfer European citizens at the National Revenue • A foreigner is performing activity as a Agency within three days from their self-employed individual. signing.

European citizens may be employed, Single work and residence permit self-employed or posted and may work in Bulgaria without restrictions and without A single work and residence permit shall the need of work permits. be issued to the foreigners who apply to reside in Bulgaria for the purpose of Except for the cases where the foreigner work or who have already obtained a valid will perform activities as a self-employed residence permit for purposes other than individual, the access to the labor market work. is requested by a local employer and a resolution for granting access is issued In such cases, the foreigner concludes by the Bulgarian Employment Agency. an employment contract with the local

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Investment in Bulgaria 2017 | 107 employer. For access to the labor market There are two categories of foreign to be granted, the local employer is to nationals who may apply for an perform market search as specified EU Blue Card. above. The requirement for the number of This first category includes foreign foreigners hired not to exceed 1/10 of the nationals who occupy specific types of average number of Bulgarian nationals and professions that are included in a List EU/EEA/Swiss nationals at the employer’s of the professions for which there is a enterprise is to be observed as well. shortage on the Bulgarian labor market After a resolution for access to the market approved by the Bulgarian Minister of Labor has been granted, the foreigner is to apply and Social Policy. The list may be updated for the single work and residence permit in annually by 31 January of the respective a uniform procedure before the Migration year. Currently, the list includes a group of Directorate at the Bulgarian Ministry of the professions in the IT sector. Interior. The permit consists the resolution The law requires the gross salary of these for granting access to the labor market. foreigners to be at least two times higher The single work and residence permit shall than the average salary in Bulgaria as per be valid for the period of the employment the official statistical data for the previous contract but for not more than 12 months. 12 months. For this category of EU Blue The term of validity of the permit can be Card applicants, there is no requirement for extended if the terms and conditions for performance of market search by the local its issuance are still valid, but the total employer. duration may not exceed three years. The second category includes foreigners “EU Blue Card” residence and whose professions are not included in the work permit List of the professions for which there is The EU Blue Card gives foreigners the a shortage on the Bulgarian labor market. right to reside and work in Bulgaria, For these applicants for EU Blue Cards, provided that they have higher professional the requirement for performance of market qualifications. search remains in force. Their gross salary is be at least 1.5 times higher than the Applying for an EU Blue Card also requires average salary in the country as per the an employment contract to be concluded official statistical data for the previous with the local employer. The main 12 months. precondition for a foreigner to obtain an EU Blue Card is that the foreigner has a The EU Blue Card residence and work university degree for at least a three-year permit shall be issued by the Migration educational course. Directorate at the Bulgarian Ministry of the Interior and it incorporates the rights under In the procedure for applying for and the resolution for granting access to the obtaining an EU Blue Card, the local labor market of the Employment Agency. employer is not required to observe the The permit is granted for a term of validity rule for the number of foreigners hired not less than 12 months. not to exceed 1/10 of the average number of Bulgarian nationals and EU/EEA/Swiss nationals at the employer’s enterprise.

Intra-corporate transfer permit Seasonal employment permit New rules and procedures have been Another development in the Bulgarian introduced by the LMLMA which facilitate legislation is the establishment of the entry of employees seconded in the procedures that facilitate the entry of framework of intra-corporate transfers. foreigners for performance of seasonal work. As per the LMLMA, seasonal work Within the meaning of the LMLMA, an is the activity dependent on the passing of intra-corporate transfer is the temporary the seasons which is tied to a certain time secondment of a foreigner for work or of the year by a recurring event or pattern training purposes from an undertaking of events linked to seasonal conditions having its registered seat and address during which required labor levels are outside of the territory of Bulgaria, and significantly above those necessary for to which the foreigner is bound by an usually ongoing operations. employment contract prior to and during the transfer, to an entity belonging to The Minister of Labor and Social Policy the undertaking or to the same group shall approve a List of the economic of undertakings which is established sectors with activities dependent on in Bulgaria. The intra-corporate transfer the passing of the seasons. Seasonal applies only in case of relocation of employment permits shall be issued only managers, specialists and trainee for the activities enumerated in the list. employees. For seasonal work, a foreigner shall There is no requirement for the local conclude a fixed-term employment company to perform market search, neither contract with the local employer. There is to observe the rule according to which the no requirement for the local employer to number of foreigners hired may not exceed perform market search, neither to observe 1/10 of the average number of Bulgarian the rule according to which the number of nationals and EU/EEA/Swiss nationals at foreigners hired may not exceed 1/10 of the local enterprise. the average number of Bulgarian nationals and EU/EEA/Swiss nationals at the local The intra-corporate transfer permit shall enterprise. be issued by the Migration Directorate at the Bulgarian Ministry of the Interior and it A seasonal employment permit shall be incorporates the right under the resolution issued by the Migration Directorate at the for granting access to the labor market of Bulgarian Ministry of the Interior and it the Employment Agency. incorporates the rights under the resolution for granting access to the labor market A foreigner transferred in the framework of of the Employment Agency. The permit is an intra-corporate transfer may work and issued for a period from 90 days to reside in the country for: 9 months in one calendar year. • Up to three years for managers and The law also provides for an option for specialists performance of seasonal work for a shorter • Up to one year for trainee employees. period, i.e. up to 90 days. For such short- term seasonal work, a one-off registration

• Family members of a European citizen Work permit for posted foreigners Foreigners temporarily posted to Bulgaria • Family members of a Bulgarian citizen. in the framework of provision of services may also work and reside in the country Posting to Bulgaria in the after the issuance of a work permit by the framework of provision of services Bulgarian Employment Agency. The employers registered in a Member State of the EU/EEA, in Switzerland or in a The work permit is issued for a term of third country who send their employees to maximum one year. The term may be Bulgaria in the framework of provision of extended for a new period of up to services should notify the Bulgarian Labor 12 months only by exception, when the Inspectorate prior to the commencement respective activity requires prolongation of of the work activities. When the posted the initial term. employees are non-EU/EEA/Switzerland In case of short-term assignment, i.e. up nationals, they may work after obtaining to 3 months within a period of 12 months, the relevant work permits. instead of work permit, one-off registration The foreign employer should also ensure is required. to the posted employees at least the same minimum working conditions as set Foreigners who generally do not out in the current Bulgarian legislation for require a resolution for access to the employees performing the same or similar labor market work. Also other obligations are set forth As per the LMLMA, the following main in relation of keeping the documentation categories of foreigners do not need to concerning the assignment at the disposal obtain a resolution for access to the labor of the authorities for certain period of time. market:

• Foreigners who have obtained an extended residence permit as members of the management or supervisory body of a Bulgarian company, provided that such a company has employed at least 10 Bulgarian nationals

• Foreigners who have obtained an extended residence permit as trade representatives of representative offices of foreign companies registered at the Bulgarian Chamber of Commerce and Industry

Public procurement the public procurements conducted by The principles, terms and procedures the public contracting authorities, the for award of public procurements are contracting authorities operating in the governed by the new Public Procurement defense sector, as well as for the sector Act (PPA) which entered into force contracting entities. on 15 April 2016, as well as by the Public procurements at a forecast value Regulation for its implementation. The below the established thresholds can be PPA implements Directive 2014/24/EU on awarded on the basis of simplified terms, public procurement and Directive such as collection of offers by virtue of 2014/25/EU on procurement by entities publication of a notice or through sending operating in the water, energy, transport of invitations to selected persons. and postal services sectors. Low-value public procurements may The public procurement regulations are be directly awarded to the selected applied by the Bulgarian contracting contractors without implementation of authorities in the process of spending procedures. resources not only from the state and municipal budget, but also from the Main participants European Structural and Cohesion Funds. Public procurement procedures involve many stakeholders, among which are the Public procurement activities contracting authorities/entities, candidates The range of activities included in the and/or tenderers (depending on what stage scope of public procurement are explicitly of the public procurement they participate), listed in the law and divided into three contractors and subcontractors. areas: Contracting authorities/entities • Execution of works The contracting authorities/entities are • Supply of goods divided into public contracting authorities • Provision of services. and sector contracting entities.

The legislator has established certain The public contracting authorities are as forecast thresholds, above which the follows: contracting authorities/entities are obliged • The President, the Chairperson of the to award public procurement contracts National Assembly, the Prime Minister, according to the terms and procedures the ministers, the Ombudsman, the stipulated in the Public Procurement Act Managing Director of the Bulgarian (PPA). The thresholds are different for National Bank

• The Chairperson of the Constitutional • Heads of central purchasing bodies Court, the heads of judicial authorities created for the purposes of satisfying and prosecution offices, the district the interests of sector contracting governors, the mayors entities.

• The chairpersons of state agencies and Candidates/tenderers commissions, the executive directors of Any Bulgarian and foreign legal entities and executive agencies, the heads of state individuals, as well as any combinations of institutions established by virtue of law them, and any entities entitled to execute or by decree of the Council of Ministers works or to supply goods or to render • The representatives of public services under their national legislation, organizations and medical companies, may participate in public procurement ownership of the state and/or the procedures and be awarded public municipalities, where over half of their procurement contracts. revenues come from the state and/or The application process usually requires municipal budget, or from the National provision of many corporate and financial Health Insurance Fund documents by the candidates/tenderers • The heads of diplomatic and consular to the contracting authorities/entities, missions/institutions of the Republic certifying the fulfillment of certain of Bulgaria abroad, and the heads of conditions, called selection criteria. permanent representative offices of Documents evidencing the fulfillment the Republic of Bulgaria at international of certain selection criteria have to be organizations presented also by the subcontractors of the candidates/tenderers depending on • The heads of central purchasing bodies the activities which the subcontractors will created for the purposes of satisfying perform. the interests of public contracting authorities The criterion for selection of the successful participant in the public procurement • Combinations of any of the above procedure is the economically most contracting authorities. advantageous tender. The sector contracting entities, performing Contractors and subcontractors activities in the sectors of natural gas, heat, electricity, water supply, transportation, Upon completion of the public procurement exploitation of geographical area and postal procedure and selection of a contractor, a services, are as follows: public procurement contract is concluded between the contracting authority/entity • The representatives of public entities and the contractor. and any combinations of them which perform one or more sector activities If the selected contractor has declared in the public procurement procedure that it • The representatives of entities which will use subcontractor(s), a subcontracting are not public and which perform one or contract is concluded between the more sector activities on the basis of an contractor and subcontractor(s). exclusive or special right

Notwithstanding the use of subcontractors, authority holds negotiations with invited the contractor assumes the entire short-listed candidates. The negotiations responsibility for the implementation of the may be held in consecutive steps, public procurement contract. in order to decrease the number of reviewed offers, by applying the award Types of public procurement procedures criteria.

The public procurement procedures set out • Innovation partnership – a new two- in the PPA are as follows: stage procedure used where the • Open procedure – in which all interested contracting authority/entity needs candidates may submit an offer. innovative goods, services or works. At the first stage, short-listed candidates • Restricted procedure – a two-stage are invited to submit final offers. After procedure in which short-listed negotiations held with the candidates, candidates invited by the contracting an innovation partnership agreement is authority/entity may submit an offer. concluded with the selected candidate.

• Competitive procedure with negotiation • Negotiated procedure without prior – a two-stage procedure in which the notice – in which the contracting contracting authority holds negotiations authority holds negotiations with one with invited short-listed candidates. The or more persons selected by it for procedure may be conducted only if the the purpose of determining the terms grounds explicitly listed in the PPA are and conditions of the agreement. The met. procedure may be conducted only if the • Competitive dialogue – a three-stage grounds explicitly listed in the PPA procedure in which the contracting are met. authority/entity invites short-listed • Negotiated procedure without prior candidates, holds dialogue with them invitation for participation – in which and after that invites one or more of the the sector contracting entities hold candidates to submit final offers. The negotiations with one or more persons procedure may be conducted only if the for the purpose of determining the grounds explicitly listed in the PPA are terms and conditions of the agreement. met. The procedure may be conducted only • Negotiated procedure with a prior if the grounds explicitly listed in the PPA invitation for participation – a two-stage are met. procedure in which the contracting • Negotiated procedure without entity holds negotiations with short- publication of a prior notice – which can listed candidates invited to submit be conducted only in the cases explicitly offers. listed in the PPA and if the subject of • Negotiated procedure with a prior the public procurement is related to the notice – a procedure applicable for defense and security sector. procurements in the defense and • Design contest – a procedure in which security sector in which the contracting the contracting authority/entity acquires

a plan or design in specific fields (e.g. Where the Commission for the Protection architecture, engineering) selected of Competition identifies that the appealed by an independent jury following decision, action or omission of the a competition with or without the contracting authority/entity is illegal, it awarding of prizes. The design contest shall annul it and instruct the contracting may be open or restricted. authority/entity to proceed with the procedure as from the last legal action or • Public competition – in which all decision. interested candidates may submit an offer. The procedure is conducted with The resolution of the Commission for the regard to procurements of low value. Protection of Competition may be appealed before the Supreme Administrative Court. • Direct negotiation – in which the The resolution of the court shall be final. contracting authority/entity holds negotiations with one or more persons Public Procurement Agency and Public for the purpose of determining the Procurement Register terms and conditions of the agreement. The procedure is conducted with regard The Public Procurement Agency is the to procurements of low value only if the authority which is responsible for the state grounds explicitly listed in the PPA are policy in the area of public procurement. met. It exercises various types of control over public procurements, such as: The above public procurement procedures are described generally. Some of them • Control on public procurements may be applied by the public contracting selected on a random basis authorities, while others – by the sector • Control on negotiated procedures contracting entities as explicitly specified in the PPA. • Control on certain exclusions from the scope of the PPA

Appeal of public procurement • Control on amendments of public procedures procurement contracts. Most decisions, actions or omissions The Public Procurement Agency also of the contracting authorities in a public keeps the Public Procurement Register procurement procedure until conclusion of which contains the following documents the contract or the framework agreement and information with regard to each public may be appealed by the interested parties procurement: before the Commission for the Protection of Competition. • Decisions for initiation of public procurement procedures and for The appeal, except an appeal against a approval of a notice for amendment or decision for selection of a contractor, additional information does not suspend the public procurement procedure unless a temporary measure • Notices of public procurement of suspension has been imposed by procedures above certain thresholds the Commission for the Protection of • Notices of public competitions and Competition. direct negotiations

• Notices of the completion of public Objects of concession agreements procurement contracts The objects of concession agreements are:

• Information on the resources spent • Exclusive state properties on public procurements above certain thresholds • Public state or municipal properties

• The written grounding sent by the • Private state or municipal properties contracting authority to the Public • Properties owned by public Procurement Agency in the case of non- organizations. compliance with the recommendations provided in the course of the preliminary The concession does not transfer an control. ownership title over properties; it only gives the concessionaire the right to use Concessions the said properties against concession payments (if envisaged by the grantor of The conditions and procedure for the concession), which ensure revenues for granting, implementation and termination the state or municipal budget. The grantor of concessions in Bulgaria are mainly of the concession can also resolve that the regulated by the Concessions Act, effective concessionaire shall receive compensation from 1 July 2006. The concession regime from the state/municipal budget depending applicable to underground resources is on the economic efficiency from the established in the Underground Resources operation of the object of the concession Act, effective from March 1999, while the agreement. mineral waters production concession is subject of regulation by the Water Types of concessions Act, effective from August 2000. The amendments made to the Concessions The types of concessions are: Act in 2008 introduced the possibility • Public works concession – for that concessions can be awarded to a implementation of a construction project mixed public-private company, where and management and maintenance of shareholders are a state/municipality/public the completed facility company and a private entity. • Service concession – for management A concession is defined as the right of the of a service of public interest concessionaire to operate a facility which is in public ownership and/or manage • Production (mining) concession – for a service of public interest against the extraction of natural resources by obligation to build, manage and maintain means of their exploitation. the facility or to manage the service at its own risk. Parties to concession agreements The public authorities that are grantors of Granting of concessions is an appropriate concessions are: method for governmental and municipal authorities to manage state or municipal • The Council of Ministers, for state properties by way of involving business concessions where the object of the entities in that management. concession is state ownership

• Municipal councils, for municipal the economically most advantageous offer, concessions where the object of the which is selected on the basis of different concession is municipal ownership criteria determined in the resolution for opening of the concession procedure, such • Public organizations, for public as: the quality of construction, the rendered concessions where the object of the service, price of construction, term of the concession is ownership of the public concession and others. organization and The maximum term of the concession • The Council of Ministers, the municipal agreement under the Concessions Act is council(s) and the public organization, 35 years. The term can be extended for a for joint concessions where the object period which shall be no longer than one- of the concession is joint ownership of third of the initial term of the agreement the state, one or more municipalities provided that the conditions set out in the and/or public organizations. Concessions Act are met. Any Bulgarian or foreign individual, legal According to the Underground Resources entity or a partnership between individuals Act, the production concession can be and/or legal entities meeting the legal granted through (i) a tender or competition, requirements set out in the Concessions (ii) direct nomination in the case of a Act may participate in a concession registered commercial discovery by the procedure and be granted a concession. holder of an oil and gas prospecting and However, the concession agreement exploration permit, or (iii) by virtue of the may be concluded only with a limited law, to a company under a privatization company (i.e. a joint-stock or limited liability transaction. company). Where a participant(s) awarded with a concession is/are not limited The maximum term of the production company(ies), they need to establish such concession is 35 years. It can be extended company which shall be a concessionaire for an additional period of up to 15 years under the concession agreement. under the terms of the signed concession agreement. Concession procedure and concession agreement Appeal of a concession procedure The Concessions Act provides that Any decision adopted by the contracting concessionaires are selected only through authorities within a concession procedure, an open procedure, where any interested including the decisions of the evaluation candidate may submit an offer. The open committee, may be appealed before procedure is also applied by the contracting the Commission for the Protection of authority for selection of the private partner Competition by any interested party within in cases where the concession is awarded 10 days from the date on which it was to a mixed public-private company. informed for the respective decision.

The offers submitted by candidates are Any appeal against a decision for evaluated by an evaluation committee awarding a concessionaire suspends the appointed by the grantors of the concession granting procedure until the concession. The evaluation criterion which final settlement of the dispute. In all other is applied by the evaluation committee is cases, the appeal does not suspend the

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 116 | Investment in Bulgaria 2017 concession granting procedure unless a • The activity of public interest cannot be temporary measure of suspension has implemented under the terms and con- been requested by the appellant. ditions of the Public Procurement Act since the public partner is not able to Where the Commission for the Protection ensure financing and better value from of Competition identifies that the appealed the invested public resources would be decision of the contracting authority is achieved through the allocation of the illegal, it shall annul it and instruct the risks between the partners and contracting authority to proceed with the concession procedure as from the last legal • The activity of public interest cannot action or decision. be implemented through a concession since no revenues are expected to be The resolution of the Commission for the received from the end users of the Protection of Competition may be appealed activity or from other third parties or, before the Supreme Administrative Court. where such revenues are expected to The resolution of the court shall be final. be received, the private partner is not entitled to them. Concessions Register The Council of Ministers keeps a public The main purpose of the PPPA is to Concessions Register which contains encourage private investments in the information on each concession procedure provision of services of public interest from its initiation until the termination of through financing, construction, the concession agreement. maintenance and exploitation of the technical and social infrastructure. Public-private partnerships Parties and main characteristics of a PPP The Public-Private Partnership Act (PPPA) which entered into force on 1 January 2013 The parties of a PPP are public partners regulates for the first time in the Bulgarian (ministries, agencies, municipalities, state legislation the public-private partnership as or municipal public-private organizations) a legal concept as well as the terms and and the private partner (an existing legal conditions for implementation of projects entity or a newly established project as public-private partnerships. company). A PPP is characterized by the following: Scope of the PPPA • The project is financed wholly or partial- A public-private partnership (PPP) is defined ly by the private partner in the law as a long-term contractual cooperation between one or more public • It represents a long-term cooperation partners, on the one side, and one or between the public and private partner – more private partners, on the other side, between five and 35 years to implement projects of public interest • The risks for project implementation through obtaining better value from the are allocated between the partners in invested public resources and allocation of the PPP contracts to achieve economic risks between the partners. balance. PPPs are established only where the following conditions are met:

According to the PPPA, the risks are between the public partner and a newly allocated between the public and private established limited company, called partner in each particular case depending public-private company, in which the on the capacity of each partner to evaluate, public partner and the selected private control and manage the risks. partner(s) are shareholders. The public- private company shall be managed by the The private partner always takes on the private partner but the public partner shall construction risk, implements the public be entitled to veto rights for the decisions interest activity and provides its portion adopted by the company regardless of the of the financing. The private partner amount of its share. participates in the PPP for a particular rate of return on its own capital, guaranteed by The PPPA allows the possibility that PPP the public partner. agreements may be amended, by virtue of written annexes but only in cases explicitly Procedure for selection of a private provided by the law. partner. PPP agreement A private partner is selected through an Competition and antitrust open procedure, a restricted procedure, regulations competitive dialogue or a competitive The major competition and antitrust negotiated procedure under the terms and legislation in Bulgaria is the 2008 Protection conditions of the Public Procurement Act. of Competition Act (PCA).

The decisions adopted by the public The PCA applies to all enterprises engaged partner during the procedure for selection in activities in or outside Bulgaria if they of private partner(s) are subject to appeal prevent, restrict or distort competition before the Commission for the Protection within the country, or if they create risk of Competition under the terms and to prevent, restrict or distort competition, conditions of the Public Procurement Act. as well as in cases of abuse of dominant position when negotiating. The PPP agreement is concluded between the public partner and the selected private An independent state authority, the partner if the latter is a limited company Commission for the Protection of (e.g., a joint-stock company or a limited Competition (“the Commission”), liability company). monitors the compliance of the actions of enterprises, carrying out activities on the Where the selected private partner is territory of the country, with competition not a limited company or where such a rules. condition is specified in the announcement or in the tender of the private partner, the The Commission is empowered to PPP agreement shall be concluded with a impose sanctions in cases of prohibited newly established limited company, called agreements, decisions and concerted a project company, in which the selected practices, unfair competition, abuse of private partner(s) is/are shareholder(s). monopoly or dominant market position and abuse of superior bargaining power. Where envisaged in the announcement, the PPP agreement shall be concluded The Commission is also responsible for issuance of authorization of concentration

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 118 | Investment in Bulgaria 2017 of economic activities (e.g., mergers, Abuse of monopoly or dominant acquisition of control, joint ventures). position The PCA generally prohibits granting of Prohibited agreements, decisions and a monopoly position to any enterprise concerted practices except in cases where such a position is The PCA expressly prohibits and declares authorized by the state by virtue of the law void all types of agreements between in accordance with the Constitution of the undertakings, decisions by associations Republic of Bulgaria. of undertakings, as well as concerted The PCA does not prohibit acquisition practices of two or more enterprises having and holding of a dominant position on a as their object or effect the prevention, relevant market; however, certain actions restriction or distortion of competition, of enterprises, enjoying a monopoly or which: dominant position, are deemed abuse and • Directly or indirectly fix prices or other therefore are prohibited by the law, namely: trading conditions • Imposing directly or indirectly purchase • Share markets or sources of supply or sale prices or other unfair trading conditions • Limit or control production, trade, technical development or investments • Limiting production, trade and technical development to the prejudice • Apply dissimilar conditions to equivalent of consumers transactions with other trading parties, thereby placing them at a competitive • Applying different conditions to identical disadvantage types of contracts with regard to certain partners, thereby placing them at a • Make the conclusion of contracts competitive disadvantage subject to acceptance by the other party of additional obligations or to the • Concluding contracts subject to conclusion of additional contracts. acceptance by the other party of additional obligations or concluding The Commission can initiate proceedings in additional contracts case the undertakings conclude and apply such agreements, decisions or concerted • Unjustified refusal to supply a good or practices upon its decision, upon request to provide a service to an existing or of an interested party or request of the prospective client, aimed at hindering prosecutor. the economic activities performed by it.

In case of the above infringements, In case the Commission finds in formal the Commission is entitled to impose a proceedings that an undertaking performs sanction at the amount of up to 10% of abuse actions, it is entitled to impose the aggregate turnover of the undertakings to the said undertaking a sanction of up or association of undertakings for the to 10% of its turnover for the preceding preceding financial year. financial year.

Abuse of superior bargaining position The law imposes on the enterprises The PCA prohibits any act or omission by participating in the concentration an an undertaking with a stronger bargaining obligation for a prior notification to the position during negotiations which is Commission, where the aggregate turnover contrary to good faith business practice of the enterprises realized in Bulgaria in and harms or may harm the interests of the the preceding financial year exceeds weaker negotiating party and consumers. BGN 25 million and provided that at least one of the following conditions has been The superior bargaining position shall be met: assessed by reference to the structure of the relevant market and the specific legal • The turnover of each of at least two of relationship between the undertakings the participants in the concentration concerned, taking into account the level of realized in Bulgaria in the preceding economic dependency between them, the financial year exceeds BGN 3 million, or nature of their activity and its difference • The turnover of the enterprise – subject in scale, the availability of alternative to acquisition realized in Bulgaria in the commercial partner, including the existence preceding financial year exceeds of alternative sources of supply, distribution BGN 3 million. channels and/or clients. If the participants in the concentration fail The abuse of superior bargaining position to notify the Commission, although they is penalized with a sanction of up to 10% have the obligation to do it, a sanction of the turnover of the infringer generated may be imposed on them of up to 10% from sales of the respective product in the of the turnover of the participants for the preceding financial year. The sanction shall preceding financial year. be of an amount not exceeding BGN 10,000. If the company which In a simplified procedure, the Commission committed the infringement has not authorizes the concentration within generated turnover, the Commission shall 25 business days from initiation of the be entitled to impose a sanction ranging concentration proceedings, provided that from BGN 10,000 to BGN 50,000. the concentration does not result in the creation or strengthening of a dominant Control on concentration of economic position that would significantly impede activities effective competition on the market. Concentration of economic activities may Where the Commission identifies in the have the following forms: simplified procedure that there are serious doubts that the concentration will result in • Merger or takeover of two or more the creation or strengthening of a dominant independent enterprises position that would significantly impede • Acquisition of direct or indirect control effective competition on the market, it can over a particular enterprise initiate thorough proceedings lasting for a period of four months in order to further • Creation of a joint venture that performs investigate the consequences of the all functions of an autonomous econom- concentration. ic entity on a lasting basis.

Prohibition of unfair competition In cases of violation of provisions of the The PCA establishes a general prohibition law or other acts, the BNB is empowered for unfair competition, which represents to impose certain measures on banks, any act or omission which is contrary to such as: issuance of written warnings and good faith business practice and harms or orders to eliminate violations, prohibition threatens to harm competitors’ interests. of certain transactions, prohibition on foreign banks to carry out activities on the Prohibited are also the specific forms territory of Bulgaria and the appointment of of unfair competition, such as harming conservators for a certain period. As a final competitors’ reputation, deliberate and exceptional measure, the BNB also has misleading, misleading and comparative the right to withdraw banks’ licenses or advertising, imitation, unfair soliciting of other permits. customers and disclosure of industrial and trade secrets. The BNB supervision also covers those activities of Bulgarian banks carried Infringements constituting unfair out abroad, as well as local activities of competition are penalized with a sanction branches of banks from Member States or of up to 10% of the turnover of the third countries. In exercising its supervisory undertaking which has committed the powers, the BNB shall cooperate with infringement for the preceding financial the relevant supervision authorities of the year. Member States/countries concerned.

Supervision of the Bulgarian Investment intermediaries National Bank over the activities of in Bulgaria credit and financial institutions The activities of investment intermediaries The Bulgarian National Bank is the state in Bulgaria and the supervision exercised body which exercises supervision over over them by the Financial Supervision banks and financial institutions and the Commission are regulated by the Markets compliance of their activities with the rules in Financial Instruments Act. established by the Credit Institutions Act and the respective ordinances of the BNB. In order to comply with the legislation, investment intermediaries must meet the The BNB has supervisory competencies following requirements before starting their with respect to banks, including but not be activities: limited to: • Be registered as a joint-stock company • Requiring all necessary financial or a limited liability company with a seat documents and registered address in Bulgaria

• Performing on-site inspections • Be granted a license by the Bulgarian • Appointment of external independent Financial Supervision Commission auditors • Have an initial paid-in capital, at an • Attending the meetings of management amount depending on the type of ser- and supervisory bodies of the banks. vices to be offered.

As per the law, investment intermediaries the European Union, including Solvency II may not conduct any other commercial Directive. activity as a regular occupation or business Pursuant to the provisions of the IC, an on a professional basis. This restriction insurance company licensed in a Member does not apply to credit institutions, State may carry out activity in Bulgaria on licensed to perform activities as an the basis of the freedom of establishment investment intermediary by the Bulgarian or the freedom to provide services National Bank. principles, provided that this activity is Foreign investment intermediaries having covered by its license. Before commencing their seat in a Member State, which have activity, the insurer must perform a obtained licenses for performing such regulatory procedure which involves activities by the competent authorities in notification to the Bulgarian regulator – the respective Member State, may provide the Financial Supervision Commission. services as investment intermediaries in The notification must be performed by Bulgaria. The activity can commence only the home Member State regulator upon after the Bulgarian Financial Supervision request of the insurer. Commission obtains the necessary Insurers from third countries (non-EU information from the competent home countries) may perform insurance activities state authorities. in Bulgaria by registering a local branch, In the course of performing activities in which needs to receive an insurance Bulgaria, investment intermediaries must license by the Financial Supervision comply with the Bulgarian legislation, Commission. This scope of the license provides to the Financial Supervision to be granted to such a branch may not Commission and publish all required exceed the scope of the insurance license documents and information with regard of the respective third-country insurer to their activities in Bulgarian language. which registered the branch. Investment intermediaries must also Pursuant to the IC, an insurance inform the National Revenue Agency about intermediary may be an insurance broker any transactions concluded by them with or an insurance agent, who carries regard to the acquisition of shares in the out insurance intermediation against capital of public companies by companies remuneration. registered in preferential tax jurisdictions, as well as by their beneficial owners. The insurance broker is a legal entity or sole proprietor (individual) who performs Insurance companies and insurance insurance intermediation upon the intermediaries in Bulgaria assignment of a consumer of insurance Insurance activity in Bulgaria, including services and following the assignment of the requirements for performing insurance an insurer. activity by insurers from Member States The insurance agent is an individual and third countries on the local market is or a trader who performs insurance regulated by the Insurance Code (IC), which intermediation under assignment of an entered into effect on 1 January 2016 and insurer, carried out on behalf and at the transposes the insurance directives of expense of the insurer. There are two types

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 122 | Investment in Bulgaria 2017 of insurance agents – tied and untied; a tied Foreign exchange regime insurance agent may not collect premiums Generally, the foreign exchange regime and effect payments to consumers of in Bulgaria is regulated by the Foreign insurance services. Exchange Act and regulations, issued A mandatory requirement for performing by the BNB, the Minister of Finance and insurance intermediation activities is others. registration of the broker/agent into a special register maintained by the Financial Registration regime Supervision Commission. Certain types of transactions have to be declared at the Bulgarian National Bank Limitations on cash payments not later than 15 days after their execution. Limitations on cash payments are imposed These include: by the Cash Payments Act to ensure • Granting of loans between local entities that payments are recorded in their real and foreign entities/individuals amounts. • Remitting securities abroad by a local As a result of its enactment, all payments entity and/or purchasing securities in Bulgaria of an amount equal to or without the assistance of a local exceeding BGN 10,000 must be executed investment intermediary only via transfer or deposit to a payment account. The same rule shall be applied to • Opening of a bank account abroad, cases where the payment is of an amount regardless of the amount of money lower than BGN 10,000, but represents transferred to the account part of a monetary obligation under an • Making initial direct investments of agreement whose total amount is equal to local persons abroad, regardless of the or exceeds BGN 10,000. The limitations are amount of the investment. also applicable for payments in a foreign currency equal to or exceeding the equiv- International payments and transfers alent of BGN 10,000 as per the Bulgarian Commercial banks in Bulgaria may execute National Bank’s exchange rate as of the cross border bank transfers and payments date of payment. by local persons to foreign persons from The scope of the Cash Payments Act ex- a third country (a country which is neither cludes cash withdrawals/deposits from/to an EU Member State nor part of the EEA) personal payment accounts (including only after being presented with documents from/to personal payment accounts of evidencing the purpose of the transfer and spouses, lineal relatives, legally incapable a declaration in a prescribed template. individuals or individuals with limited capa- The Payment Services and Payment bility), as well as payments of employment Systems Act provides for the possibility remuneration due as per the Labor Code entities other than banks, called “payment and cash transactions with foreign currency institutions,” to act as providers of payment carried out by an exchange bureau. services. Pursuant to the Payment Services and Payment Systems Act, a payment

Local and foreign individuals may import The Foreign Exchange Act also includes and export unlimited amounts of Bulgarian specific requirements regarding the levs, foreign currency in cash and bearer production, processing and trading of payment instruments, provided that they precious metals and gemstones, and their observe the requirements established import and export. under the Foreign Exchange Act.

If the imported/exported currency amount Register of the bank accounts and safe is less than EUR 10,000 or its equivalency deposit boxes in another currency, no customs declaration Since 1 January 2017, the Bulgarian is required. In case the amount is National Bank maintains an electronic EUR 10,000 or more and shall be imported/ Register of the bank accounts and safe exported to a country which is not part deposit boxes, containing information of the European Union, the individual about all bank accounts and safe deposit is obliged to declare the owner and the boxes opened by/kept at Bulgarian receiver of the amount, its kind, value, commercial banks, namely the account origin and purpose, as well as the transport numbers, their holders and the persons vehicle and route. If currency at the amount having disposal rights over the accounts,

Local companies and sole proprietors are required to report on an annual basis: (i) the operations, residues and other changes in the amount of the received/ granted financial loans, whose amount is between BGN 50,000 and BGN 500,000 or its foreign currency equivalent, and (ii) direct investments in real estate abroad.

Local individuals must provide the BNB with annual reports on their receivables

Bilateral Agreements for the Mutual Protection and Encouragement of Foreign Investment

Albania Latvia Algeria Lebanon Argentina Libya Armenia Lithuania Austria Macedonia Bahrain Malta Belarus Moldova Belgium-Luxembourg Mongolia China Morocco Croatia Netherlands Cuba Poland Cyprus Portugal Czech Republic Romania Denmark Russian Federation Egypt San Marino Finland Singapore France Slovakia Georgia Slovenia Germany Spain Greece Sultanate of Oman Great Britain and Northern Ireland Sweden Hungary Switzerland India Syria Indonesia Thailand Iran Tunisia Israel Turkey Italy Ukraine Jordan United States Kazakhstan Uzbekistan Korea Vietnam Kuwait Yemen Qatar Yugoslavia (i.e. Serbia, Montenegro, Bosnia and Herzegovina)

Double Taxation Treaties to which Bulgaria is a party

State Dividends (%) Interest (%) Royalties (%)

Albania 15/5* 10/0* 10 Algeria 10 10/0* 10 Armenia 10/5* 10/5/0* 10/5 Austria 5/0* 5/0* 5 Azerbaijan 8 7/0* 10/5* Bahrain 5 5/0* 5 Belgium 10 10/0* 5 Belarus 10 10/0* 10 Canada 15/10* 10/0* 10/0* Czech Republic 10 10/0* 10 China 10 10/0* 10/7* Croatia 5 5 0 Cyprus 10/5* 7/0* 10 Denmark 15/5* 0 0 Egypt 10 12.5/0* 12.5 Estonia 5/0* 5/0* 5 Finland 10 0 5/0* France 15/5* 0 5 Georgia 10 10/0* 10 Germany 15/5* 5/0* 5 Greece 10 10 10 Hungary 10 10/0* 10 India 15 15/0* 20/15*

State Dividends (%) Interest (%) Royalties (%) Indonesia 15 10/0* 10 Iran 7. 5 5 5 Ireland 10/5* 5/0* 10 Israel 10/7.5* 10/5* 7. 5 Italy 10 0 5 Japan 15/10* 10/0* 10 Jordan 10 10/0* 10 Kazakhstan 10 10/0* 10 Kuwait 5/0* 5/0* 10 Latvia 10/5* 5/0* 5/7* Lebanon 5 7/0* 5 Lithuania 10/0* 10/0* 10 Luxembourg 15/5* 10/0* 5 Macedonia 15/5* 10/0* 10 Malta 0 0 10 Moldova 15/5* 10/0* 10 Mongolia 10 10/0* 10 Morocco 10/7* 10 10 Netherlands 15/5* 0 5 North Korea 10 10 10 Norway 15 0 0 Poland 10 10/0* 5 Portugal 15/10* 10/0* 10 Republic of South Africa 15/5* 5/0* 10/5* Qatar 0 3/0* 5 Romania 15/10* 15/0* 15 Russia 15 15/0* 15 Serbia and Montenegro 15/5* 10 10 Singapore 5/0* 5/0* 5

State Dividends (%) Interest (%) Royalties (%)

Slovak Republic 10 10/0* 10 Slovenia 10/5 5/0* 10/5 South Korea 10/5* 10/0* 5 Spain 15/5* 0 0 Sweden 10 0 5 Switzerland 10/0* 5/0* 5 Syria 10 10/0* 18* Thailand 10 15/10/0* 15/5* Turkey 15/10* 10/0* 10 UK 15/5*/0* 5/0* 5 Ukraine 15/5* 10 10 United Arab Emirates 5/0* 2/0* 5/0* USA 10/5/0* 5/0* 5 Uzbekistan 10 10/0* 10 Vietnam 15 10/0* 15 Zimbabwe 20/10* 10/0* 10

Notes * The reduced rate can be applied under specific circumstances.

Bilateral Social Security Agreements concluded by Bulgaria

Albania Austria* Canada Czech Republic* Croatia* Germany* Hungary* Israel Libya Luxembourg* Macedonia Moldova Montenegro Netherlands* Poland* Serbia Slovakia* Spain* Switzerland* Republic of Korea Romania* Russia Turkey (for pensions only) Ukraine Yugoslavia**

* Superseded by EU Regulation 1408/71 and subsequently 883/2004 ** Effective with respect to Montenegro, Bosnia and Herzegovina

KPMG in Bulgaria

[email protected] kpmg.com/bg

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