Investment in Bulgaria 2018

KPMG in Bulgaria

kpmg.com/bg

Edition 2018 Investment in Bulgaria 2018 | 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 April 2018 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

45/A Bulgaria Boulevard 3 Sofia Street, floor 2 1404 Sofia 9000 Varna Bulgaria Bulgaria

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

[email protected] kpmg.com/bg

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...... 15

Economy...... 15

Restrictions with regard to offshore companies...... 17

Opportunities for International Investors...... 19

Protection and promotion of foreign investments...... 19

Eligibility for investment incentives...... 22

Establishment of new business entities or acquisition of shares in existing entities...... 23

Branches...... 23

Representative offices...... 23

Capital markets...... 24

Concessions...... 24

Licensing...... 24

Energy and gas regulations...... 26

Banking and finance...... 28

Company Law...... 30

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

Limited liability company (OOD)...... 33

Joint-stock company (AD)...... 35

Commercial Register...... 38

Real Estate...... 39

Types of ownership over real estate...... 39

Condominium ownership management...... 40

Evidence of title...... 40

Acquisition of real estate...... 40

Project development...... 41

Participants in the development process...... 43

Accounting and Auditing...... 44

Accounting...... 44

Auditing and reporting...... 48

Taxation...... 53

Corporate tax...... 53

Taxation of individuals...... 63

EU social security...... 68

Property transfer, gift, inheritance and tourist taxes...... 69

Value added tax...... 70

Customs duties...... 81

Excise duties...... 83

Insurance premium tax (IPT)...... 84

Employment Regulations...... 85

Legislation...... 85

Employment contracts...... 85

Working hours...... 87

Holidays...... 87

Personal data of employees...... 88

Medical check-ups...... 88

Healthy and safe working conditions...... 89

Posting or sending of employees from Bulgaria to EU/EEA/Switzerland in the framework of provision of services...... 89

Termination of employment contracts...... 90

Foreign nationals working in Bulgaria...... 90

Foreign Nationals...... 91

Legislative framework and general principles...... 91

Visas...... 92

Residence permits, residence certificates and residence cards...... 95

Work permits...... 98

Requirements for foreign employers posting their employees to Bulgaria in the framework of provision of services...... 101

Public Procurement, Concessions, Antitrust and Competition...... 102

Public procurement...... 102

Concessions...... 105

Competition and antitrust regulations...... 107

Supervision of the Bulgarian National Bank over the activities of credit and financial institutions...... 109

Investment intermediaries in Bulgaria...... 110

Insurance companies and insurance intermediaries in Bulgaria...... 111

Limitations on cash payments...... 111

Foreign exchange regime...... 111

Appendix A: Bilateral Agreements for the Mutual Protection and Encouragement of Foreign Investment...... 115

Appendix B: Double Taxation Treaties to which Bulgaria is a party...... 116

Appendix C: Bilateral Social Security Agreements concluded by Bulgaria...... 118

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 110,994 sq km, with growth has been negative, in part as a 1,808 km of land borders and 354 km of result of significant outward migration, coastline. The country’s terrain is partly but also due to the country’s aging mountainous, with lowlands in the north demographics. The trend of increase in and the southeast. The climate is mostly the birth rate in the country in the period humid continental, with an Alpine climate 2004 – 2009 reversed from 2010 onwards in the highest mountains and a subtropical and the number of births cumulatively has climate in the southernmost regions. fluctuated tending to go down, further contributing to the decrease in Population and language the population.

As per information of the National The country’s official language is Bulgarian. Statistical Institute, as at 31 December Secondary languages closely correspond 2017 Bulgaria’s population is approximately to ethnic background. English, and to a 7.1 million, representing 1.4% of the lesser extent German and French, are used population of the European Union. Nearly frequently in business. 73.3% live in urban areas. The capital, Sofia, is by far the largest urban center Infrastructure having nearly 1.32 million inhabitants. Approximately 18% of the population is Roads and railways under the age of 20, while approximately A network of international highways 61% is between the age of 20 and 64, and connects Bulgaria to Western Europe, approximately 20% is over the age of 65. Russia, Asia Minor, the Adriatic, the Aegean, and the Black Sea.

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 World Bank. According to the 2016 annual statistics 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. Thus, Trakia, Maritsa and of category I roads, 4,025 km of Lyulin Motorways are ready with total category II roads, and 12,140 km of lengths of 360 km, 117 km and 19 km category III roads. In addition, there are respectively. approximately 20,000 km of category IV In 2015, Maritsa Motorway, connecting the roads, which are managed by the respective Trakia Motorway and the main entrance to municipalities. Road transportation across Turkey – Kapitan Andreevo and Lots 2 and 4 most of the country relies primarily on two- of the Struma Motorway were successfully lane roads. The main transport corridors are completed. In April 2016, the 16.5 km long Corridor No. 10 Kalotina-Svilengrad linking northern bypass highway in Sofia was Serbia to Turkey, Corridor No. 4 Vidin-Sofia- opened for traffic. The bypass, with an Kulata linking Romania to Greece, Corridor estimated total cost at EUR 120 million, No. 9 Ruse-Kazanlak-Kardzhali linking connects four motorways – Trakia, Hemus, Romania to Greece and Turkey, and Corridor Lyulin and Kalotina, and three pan-European No. 8 Kyustendil-Burgas-Varna linking corridors – No. 4, No. 8 and No. 10. Macedonia to the port of Varna. Bulgaria’s railroad network includes about In accordance with Operational Program 4,023 km of railway lines. Some 71.1% Transport and Transport Infrastructure of them are electrified and 24.6% are 2014-2020, the Road Infrastructure Agency double-track. The majority of the network sets out the following key projects: is designed to support a running speed of construction of Struma Motorway Lot 3; up to 100 km per hour, with only 150 km construction of the western arc of the supporting a speed of up to 130 km Sofia Ring Road, section 2; development per hour. and implementation of an intelligent transport system within the scope of Following the failed attempt for privatization Trakia Motorway (i.e. toll system) and of the state owned rail company BDZ preparation of the project: Tovarni prevozi EOOD in the summer of Road I-1 / E-79 / Vidin - Montana – Vratsa. 2012 and 2015, the government launched On 27 March 2018, the construction of the another process for the sale of the Hemus Highway Section from Yablanitsa to company during the spring of 2016, which road junction Boaza commenced. Financing was unsuccessful as well.

Operational Program Transport and in March 2017 with an expected completion Transport Infrastructure 2014-2020 in 2019. As per the project plan, the third earmarks funds for railways amount at metro diameter will have an estimated cost EUR 1 billion for new projects. The of EUR 680 million and will connect heavily beneficiary is NR Railway Infrastructure. populated Ovcha Kupel and Levski districts These funds come from two sources – to the city center. According to Sofia EUR 385 million from the Connecting Municipality, currently 380,000 people Europe Facility (CEF) and the other over use the subway daily and their number is EUR 600 million from OP Transport and expected to increase up to 550,000 people Transport Infrastructure. daily by 2020 upon completion of the third metro diameter. The priority railway infrastructure projects in the country until 2020 include the Ports rehabilitation, overhaul and modernization works of more than 400 km of the existing Both sea and river routes, the Black railway infrastructure and construction of Sea and the Danube River, offer reliable new high-speed railroads in the following shipping transportation to and from the directions: Plovdiv-Burgas amounting country. The largest Bulgarian seaports are to EUR 425 million, Skutare-Orizovo- Burgas and Varna on the Black Sea coast. Mihaylovo, Straldzha-Tserkovski, Yambol- Varna handles mainly containers, grain Zimnitsa, Elin Pelin-Ihtiman Kostenets, and bulk goods, while Burgas deals mainly design and construction of a signaling and with crude oil and some bulk commodities. telecommunication system for Plovdiv- A ferry connection from Varna to Odessa Burgas, railway connection between (Ukraine), Kavkaz (Russia) and Poti Burgas railway station and Burgas airport, (Georgia) facilitates the transport of goods modernization of the railway line Elin Pelin- between the countries. Kostenets, modernization of the The Danube River is navigable during most Sofia-Pernik-Radomir-Gyueshevo-border of the year and supports inland water line with the Republic of Macedonia. transport. With the Rhine-Main-Danube The majority of the planned works on canal in use since 1992, Bulgaria has the Sofia-Plovdiv-Burgas and Plovdiv- access to the large European ports on the Svilengrad-Turkish border high-speed North Sea. The main Bulgarian ports on the railroad lines were completed in 2014 Danube River are Ruse, Lom and Vidin. and 2015 Bulgaria has 15 Black Sea and 13 Danube In 2015, Sofia’s subway infrastructure River ports for public transport with reached important milestones. The subway national importance consisting of a total network was further expanded and now of 84 and 74 wharves, respectively. The connects Mladost area to Sofia Airport. The ports with regional importance for public second metro diameter was completed in transport are 9 on the Black Sea coast and 2016 with the construction of the Vitosha 21 on the banks of the Danube River. 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 2013, the government granted a 35-year Airports concession for the port terminals Ruse- Bulgaria has four operating commercial West, Nikopol, Vidin-South and Lom. airports – in Sofia, Plovdiv, Burgas and Varna. In 2015, the concession of Ruse-West They handle both international and domestic was terminated due to concessionaire’s flights. A tender for a 35-year concession negligence. In the beginning of 2016, for the management of Burgas and Varna at the request of the company that Airports was held in June 2006 and the previously held the rights over Vidin- government awarded the concession to a South, the contract was terminated. A consortium between Fraport AG, Germany new concessionaire was chosen again in and a local company, named BM Star. 2016 for a 35-year concession and total Furthermore, in response to the demand investments of EUR 1.9 million for for cargo transport, the government has the period. added the airports in Plovdiv (south-central In addition, according to the Ministry of Bulgaria), Gorna Oryahovitsa (north-central Transport, Information Technology and Bulgaria) and Ruse (northern Bulgaria) to the Communications, concession calls for the list of airports which accept international port terminals Ruse-Center and Tutrakan air traffic. In relation to Plovdiv Airport, the took place at the end of 2012 and the government is in the process of identifying beginning of 2013. concessioners for both the passengers and the cargo terminals of the airport. In 2015, the Ministry of Transport, Information Technology and In January 2016, the airport in Gorna Communications performed a Oryahovitsa was awarded under a 35-year pre-concession evaluation on port terminal concession following two unsuccessful Ruse-East and port Vidin-Center and the calls in 2011 and 2013. concession call is still ongoing. Sofia Airport, which handled 6.5 million In accordance with Operational Program passengers in 2017 (30% up from the Transport and Transport Infrastructure 2016 level), has undergone significant 2014-2020, a number of river infrastructure investments in the last few years, including development projects are to be a new traffic control tower, thus increasing implemented, e.g. Modernization and its capacity and providing modern facilities optimization of the rehabilitation activities to respond to the growing demand of the mutual Bulgaria-Romania shipping for international air travel. The newly route on the Danube River, by supply constructed terminal ensures a higher of equipment; Feasibility study for the standard of passenger handling and landing development of a system for electronic of wide-bodied aircraft. In late 2015, the information exchange in Bulgarian government announced its plans to launch ports (Port Community System, PCS); a concession call for Sofia Airport. The Improvement of the Navigation and purpose of the concession of Sofia Airport is Topohydrographic Measurements on the to further extend the cargo and passenger Danube River; Delivery, installation and handling capacity of the airport and commissioning of port reception facilities modernize its infrastructure. The concession (PPPs) in Bulgarian public transport ports tender was, however, cancelled in April of national importance. 2017. In the beginning of 2018, plans for a

© 2018 KPMG Bulgaria EOOD, 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 2018 | 11 restart of the concession procedure were service supplier. Again, according to public announced. sources, by the end of 2016, Bulsatcom, the largest satellite TV operator which also owns Fixed-line communications a mobile communications license, planned According to the latest available information to launch mobile services, making it the as of 2016, the fixed voice services had fifth provider in Bulgaria. Currently the only 1.4 million subscribers. The overall fixed telecommunications companies with active telephony penetration is estimated at 20% mobile phone subscribers are the three listed of the population in 2016, representing a in the beginning – M-Tel, Vivacom continuous decrease in recent years due to and Telenor. the shift in consumer preferences in favor Following a vote by the Members of the of mobile phones. European Parliament in December 2016, There is an ongoing market trend for roaming charges no longer apply; thus, bundling fixed and mobile service offerings making calls, sending texts and using the to subscribers. internet costs the same in any country of the EU starting from 15 June 2017. Mobile communications Internet There are currently three operating telecommunications companies providing As at the end of 2016, there were an services in Bulgaria – A1 Bulgaria EAD estimated 6.7 million internet subscribers (formerly named Mobiltel EAD), Bulgarian (both fixed and mobile) in the country, Telecommunication Company AD (BTC) and with an 87.8% penetration rate for Telenor Bulgaria EAD – respectively branded mobile internet and 51.3% for fixed as A1 Bulgaria, Vivacom and Telenor – internet (in terms of households). This is operating under the GSM 900 and a vibrant market populated by numerous GSM 1800 standards. In January 2013, internet service providers (ISPs), whose Bulsatcom EAD, 4G Com EAD (revoked in rates and service quality vary widely. 2014) and Max Telecom OOD were granted According to a market report issued by the licenses to utilize the 1,800 MHz band Communications Regulatory Commission, network in the country. The market has there were 674 companies operating data- grown quickly, with the number of mobile transfer services as at the end of 2015. subscriptions rising from 8.2 million in 2006 The largest companies which provide such to an estimated 9 million in 2017. Based on services are Bulgarian Telecommunication publicly available information and calculated Company, Blizoo, Media and Broadband on the basis of mobile telecommunications EAD, Mobiltel EAD and Bulsatcom AD. service revenues, Vivacom has a 37% market In 2005, the Bulgarian Government share for 2017, followed by A1 Bulgaria with granted the first point-to-multipoint 34% and Telenor with 32%. 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

The Bulgarian National Bank (BNB) has After a period of four consecutive years granted a system operator license to of increase in the unemployment rate in System for Electronic Payments the country, in 2016 the rate decreased to Bulgaria AD to develop and maintain a 8.0% from 10.0% in 2015 and further to national mobile infrastructure for electronic 5.6% as at December 2017. payments in the country. Political system Currency Bulgaria is a parliamentary republic. It held The official currency in Bulgaria is the its first multiparty elections in 1990 and Bulgarian lev (BGN). The BGN is circulated its current Constitution was adopted on in notes of BGN 2, BGN 5, BGN 10, 12 July 1991. The national legislative body, BGN 20, BGN 50, and BGN 100, and coins a unicameral Parliament, is comprised of of BGN 0.01, BGN 0.02, BGN 0.05, 240 members elected by popular vote BGN 0.1, BGN 0.2, BGN 0.5, BGN 1, and who serve a four-year term. The president BGN 2. Beginning in late 2015, a gradual is the head of state and commander-in- replacement of the banknote of BGN 2 by chief of the army. The president and the a coin of the same nominal value began. vice-president are elected by a majority vote and serve a five-year term. The current In July 1997, a Currency Board was president is Rumen Radev and his term introduced and the lev was pegged to the began in 2017. The President cannot initiate German mark at the rate of BGN 1 to legislation but has a qualified power DEM 1. Presently, the lev is pegged to the of veto.

Executive power rests with the OP Innovations and Competitiveness government. It is headed by a prime and OP SME Initiative are managed by the minister, who is appointed by a Ministry of Economy and are specifically parliamentary majority. The current prime targeted at supporting the development of minister is Boyko Borisov, who is also the private economic operators. chairperson of the Council of Ministers. The Public aid under OP Innovations and latest parliamentary elections in Bulgaria Competitiveness is provided in the form were held on 26 March 2017 and won by of grants which are approved following a the center-right Citizens for a European competitive project selection procedure. Development of Bulgaria (CEDB) party with The supported activities will include 32.65% of the votes. The party did not support for introduction of innovative receive enough votes for a parliamentary products, creation and development majority (it won 95 out of 240 seats) and, in of thematically focused laboratories, April, it was announced that CEDB would promotion of small and medium-sized form a coalition with the United Patriots, enterprises (SMEs) entrepreneurship, whose share of the popular vote was implementation of energy efficiency 9.07%, to form a new government which measures in large enterprises, increasing stepped into power on 4 May 2017. resource efficiency in business through the The country is divided into 28 development and implementation of new administrative regions headed by regional solutions, techniques and methods. governors appointed by the Council of OP SME Initiative is a joint financial Ministers. Bulgaria has 262 municipalities instrument of the European Commission headed by mayors elected every four years. through Horizon 2020, the European Municipal Councils, the local legislative Investment Bank and the Bulgarian bodies, determine the mayors’ Government. Its aim is to facilitate SME executive functions. access to finance by providing guarantees Beginning in January 2018, Bulgaria took through a joint instrument blending up the EU presidency for a half year with Horizon 2020, COSME and European its priorities set on the future of Europe Regional Development Fund (ERDF) and young people, the Western Balkans, resources, in cooperation with the security and stability, and digital economy. European Investment Bank/European Investment Fund and with the aim of Opportunities created via EU funding generating additional lending to SMEs.

EU funding opportunities will continue to OP Human Resources Development be available for businesses established and is managed by the Ministry of Labor operating in Bulgaria. and Social Policy. It provides support to Access to EU support is granted by means companies hiring interns, for health and of implementation of national Operational safety at work and vocational training of Programs (OP) funded jointly by the personnel. national budget and EU funds as well as OP Transport and Transport Infrastructure from two national programs in the field of is managed by the Ministry of rural development and fisheries. Transport, Information Technology and

Communications and is aimed at the provides support for investment in scientific development of a sustainable transport research and technology development, system. It envisages the completion of life-long learning, and improving the major national and pan-European transport quality of education. Among the main routes on the territory of Bulgaria. beneficiaries are the Ministry of Education and Science, universities, the Bulgarian The Rural Development Program is Academy of Science, schools, professional managed by the Ministry of Agriculture organizations and municipalities. and Food. It provides funding for the implementation of measures aimed Cross-border Cooperation (CBC) at supporting knowledge transfer and programs are jointly managed and advisory services for the agriculture and coordinated by neighboring countries. forestry sectors, farm management and CBC programs support initiatives that farm relief services and cooperation. aim to foster cooperation and tackle The Program also supports investments common challenges identified jointly of agricultural holdings and forestry between neighboring regions of Bulgaria companies, as well as start-ups in farming. and the Former Yugoslav Republic of Financial aid is available for the food- Macedonia, Serbia, Romania, Turkey and chain organization, including processing Greece. The programs offer assistance and marketing of agricultural products, to bodies governed by public law, non- animal welfare and risk management in governmental organizations (NGOs) and agriculture. Another priority of the Program SMEs in a number of different fields, such is conversion to and maintenance of as small-scale infrastructure in border organic farming, forest-environmental and regions, environmental protection, culture climate activities, and forest conservation. and education, business development, Public aid is also envisaged for renewable innovations and cooperation between energy production, energy efficiency in the entities on both sides of the borders. agricultural sector and food processing, Specialized financial instruments are as well as for diversification into non- also available across OPs to support agricultural activities. businesses through loans, guarantees, OP Maritime and Fisheries is managed and venture and equity capital. During by the Executive Agency of Fisheries the 2014-2020 programming period, and Aquaculture. The program provides all financial instruments are managed assistance for reconstruction and and implemented through the newly modernization of the fishing fleet and established Fund Manager of Financial infrastructure, protection and restoration Instruments in Bulgaria (Fund of Funds). of biodiversity, production of biological Businesses may also benefit through and environmentally friendly aquaculture, the Investment Plan for Europe, the so- as well as partnerships with research called Juncker Plan, a joint initiative of the organizations and development of European Commission and the European innovations in the sector. Investment Bank Group, aimed at creating OP Science and Education for Smart jobs and improving living standards by Growth is a new program managed by targeting risk profile projects. the Ministry of Education and Science. It

Bulgaria and NATO for 28.3% of GDP, services – 67.4% and Bulgaria, together with six other East agriculture – 4.3%. European countries, joined the North According to the Ministry of Finance, Atlantic Treaty Organization (NATO) on the economy is set to grow by 3.9% in 29 March 2004. 2018. The Economist Intelligence Unit In order to become a NATO member, forecasts an average real GDP growth Bulgaria undertook a sizable modernization of 3% between 2018 and 2022. In 2017, of the army and compulsory military inflation rose to 2.1% from -0.8% in 2016, service was abolished. a deflation driven by the plummeting oil prices and the decrease in international Economy grain prices. For 2018 and 2019, the inflation rate is expected to rise to 1.4% In 2017, the Bulgarian economy grew and 1.5% respectively, fueled by higher by 3.6% compared to the previous year income and household expenditure and the and reached EUR 51 billion. The fast expectation of rising oil prices. GDP growth is based on the real estate, energy, outsourcing and IT sectors, while The budget surplus in 2017 was the professional services and government equivalent of 1.1% of GDP compared to spending increased slightly compared to a surplus of 0.03% in 2016. The current the 2016 levels. In total, industry accounted account surplus in 2017 was the equivalent

Bulgarian key macroeconomic indicators

Indicator 2013 2014 2015 2016 2017

Real sector

GDP (million EUR) 42,011 42,761 45,286 48,128 50,429

GDP per capita (EUR) 5,783 5,919 6,309 6,752 7,099

Private consumption (% of GDP) 79 80 79 77 78

Annual real GDP growth (%) 0.9 1.3 3.6 3.9 3.6

Inflation (av.) (%) 0.9 -1.4 -0.1 -0.8 2.1

Average monthly wages (EUR) 396 420 449 485 542

Unemployment rate (%) 11.8 10.7 10.0 8.0 7.1

Foreign sector

Current account deficit/surplus (% of GDP) 1. 3 0.1 0.0 5.3 3.9

Trade balance, FOB (EUR million) -2,933 -2,777 -2,622 -984 -2,041

Export, FOB (EUR million) 21,218 21,026 21,919 23,104 25,818

Import, FOB (EUR million) 24,151 23,803 24,542 24,088 27,859

Foreign direct investments (EUR million) 1,384 1,161 2,476 660 902

Foreign direct investments % (GDP) 3.3 2.7 5.5 1. 4 1. 8

Source: Bulgarian National Bank

© 2018 KPMG Bulgaria EOOD, 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. 16 | Investment in Bulgaria 2018 of 3.9% of GDP, or EUR 1,980 million, components, effective from 31 December which represented a decrease from 5.3% 1993. In accordance with the Agreement of of GDP surplus from 2016, or EUR 2,561. Association, customs duties on industrial Foreign direct investments (FDI) in the goods between Bulgaria and EU countries country increased to EUR 902 million from phased out by 2007. Since 1998, the EU EUR 660 million in 2016, which is still far import of industrial goods of Bulgarian from the peak level of EUR 6,728 million origin has been duty-free. Significant in 2008. The Currency Board has a key role relief for agricultural produce is also in sustaining the macroeconomic stability provided. The EU accession of Bulgaria and in the country. As a result of prudent Romania in January 2007 expanded the government policy in recent years, the export opportunities available to Bulgarian gross foreign currency reserves of the producers. Bulgarian National Bank decreased by EUR 1,229 million in 2016, reaching EFTA EUR 21,739 million at the end of 2017, According to this 1993 Agreement, which represents a 5% decrease of the trade with EFTA countries (Iceland, foreign reserves compared to Liechtenstein, Norway and Switzerland) EUR 22,968 million at the end of 2016. enjoys preferential terms and conditions that are almost identical with those in the Trade agreements Europe Agreement of Association. Framework agreements liberalizing foreign trade between Bulgaria, the Bilateral Trade Agreements European Union, European Free Trade As of 1 January 2007, the bilateral trade Association (EFTA) and Central European agreements signed between Bulgaria Free Trade Agreement (CEFTA) countries, and other countries in the region were as well as with Turkey and Macedonia cancelled and the country adopted the have expanded the market presence of preferential trade agreements of the EU domestic manufacturers. Bulgaria’s major with various countries. Presently, the trade agreements are with the following EU has such agreements with countries organizations: from the Mediterranean region (Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, WTO Palestinian Authority, Syria and Tunisia) Bulgaria has been a member of the and EFTA member countries, Mexico and World Trade Organization since 1996. Chile, Ivory Coast, Madagascar, Mauritius, the Seychelles, Zimbabwe, CARIFORUM European Union States, Singapore and South Korea. The EU In March 1993, Bulgaria and the European has signed Stabilization and Association Community and its Member States Agreements with Albania, Bosnia and became signatories to the Europe Herzegovina, Kosovo, Macedonia, Agreement of Association effective from Montenegro and Serbia. As part of the 1 February 1995 and the Interim European Union, Bulgaria participates in Agreement on Trade and Trade Related the EU Customs Union, which includes Matters covering various trade Andorra, San Marino and Turkey.

In February 2016, a Free Trade Agreement Restrictions with regard to with Vietnam was signed and, in October offshore companies 2016, a Comprehensive Economic and The Act on the Economic and Financial Trade Agreement (CETA) with Canada was Relations with Companies Registered signed, both of which are not yet applied. in Preferential Tax Regime Jurisdictions, On 21 September 2017, CETA entered into the Persons Related to Them and Their force provisionally and as such most of the Beneficial Owners (the “Act”) imposes agreement now applies. The agreement a prohibition for companies, registered would make it easier to export goods in preferential tax regime jurisdictions, and services, and is beneficial both to and the persons controlled by them to be Canada and the EU. On 8 December 2017, directly and/or indirectly involved in the negotiations between the EU and Japan following activities: for an Economic Partnership Agreement were finalized. Additionally, at the same • Procedures for obtaining licenses time the EU is also negotiating a Strategic for credit institutions, insurance and Partnership Agreement with Japan. re-insurance companies, pension insurance companies, payment Another agreement in focus for the EU is institutions, mobile operators under the EU-Mercosur association agreement, the Electronic Communications Act, which is negotiating a deal with the four rendering of activities and services founding Mercosur states - Argentina, under the Financial Instruments Markets Brazil, Paraguay and Uruguay. The Act and Collective Investment Schemes agreement is intended to remove barriers and Other Undertakings for Collective before smaller EU exporters. Investments Act and others, as well as participation in such companies Foreign investment • Procedures for obtaining concessions According to the Bulgarian National Bank, and permits for exploration and FDI in 2017 amounted to EUR 902 million research of mineral resources, public (1.8% of GDP), which is an increase from procurement, concessions, public- the FDI in 2016, that stood at private partnerships and others EUR 660 million (or 1.4% of GDP). • Participation in privatization transactions, The estimated top six FDI contributing as well as in companies with state countries ranked by the total FDI inflow for or municipal ownership, companies 2017 were the Netherlands, Switzerland, carrying out activities under the Germany, Italy, Greece and Turkey. The Independent Financial Audit Act, the Netherlands retains the first position Independent Valuators Act and the from the prior year, as the other countries Renewable Energy Act were not present in the top six in 2016. Outsourcing of business services and IT • Acquisition of state or municipal sectors attracted the larger part of the new property, as well as ownership over land investments, while traditionally strong and forests from the state forest fund. investment in the real estate sector shrank.

The companies registered in preferential tax regime jurisdictions are not 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 and Register of Non-Profit Legal Entities (the “Commercial Register”).

Protection and promotion of Protection of investments foreign investments The Republic of Bulgaria is a party to 64 bilateral agreements for mutual National treatment and most favored protection and encouragement of nation status foreign investment (for a list please The Bulgarian Constitution stipulates that refer to Appendix A). It is also a party foreign persons (legal entities, individuals to the Convention on the Settlement of or civil partnerships registered in a foreign Investment Disputes between States and country) must enjoy equal rights with Nationals of Other States. Every Bilateral local persons when conducting economic Investment Treaty has a standard clause activities in the Republic of Bulgaria except providing that, in the case of a dispute where otherwise provided by the law between the Republic of Bulgaria and (“national treatment”). This principle covers a potential investor, this dispute shall the entire range of economic and legal be submitted before the World Bank’s forms used for business activity. International Center for Settlement of The Encouragement of Investment Act Investment Disputes. On these grounds, (EIA) provides for equal treatment of local every investor in Bulgaria has the and foreign investors in the Republic of opportunity to protect their investment if Bulgaria. Foreign investors in Bulgaria adverse legislation is adopted. can obtain the same assistance and use the same privileges and opportunities as Incentives to investors granted by the law to local investors. The EIA envisages different incentive measures and privileges for local and If a bilateral treaty, signed and ratified by foreign investors who undertake significant the Republic of Bulgaria, provides for more investments in certain economic activities favorable investment terms and conditions within the territory of Bulgaria. The aim of for international investors, the citizens or these measures, financed by the state, is legal entities of the respective contracting to promote large investments and improve country will enjoy preferential investor the business environment in the country. 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 are issued by the Minister of Economy and Investment 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 EU The investor may not dispose of the real Regulation 651/2014. The Council of estate property (or the limited property 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

© 2018 KPMG Bulgaria EOOD, 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. 22 | Investment in Bulgaria 2018 the incentive measure provided that: Added Tax Act, the Employment Promotion Act and the Agricultural Land Ownership • They comply with all cumulative and Use Act provided that they are in requirements set out in the law and compliance with the requirements set out • The newly opened job positions are in these acts. occupied by Bulgarian citizens, citizens of EU Member States, EEA states or Eligibility for investment incentives Switzerland or by persons residing in According to the EIA, incentive measures Bulgaria on the legal grounds stipulated and privileges shall be applied to initial in the Employment Promotion Act. foreign and local investments in tangible Municipal councils and mayors of and non-tangible fixed assets plus new municipalities may encourage significant employment. investment projects realized on the territory The investments must cumulatively fulfill of their municipalities where the amount of the following conditions in order to be investment does not exceed the minimum promoted under the EIA: amount for class B investment. • They must relate to the establishment The municipal council of each municipality of a new enterprise, extension of an shall determine the terms and conditions existing enterprise, diversification of for encouragement of projects with the output from an enterprise into new municipal significance and for issuance of a products, or a material change in the certificate for class C investment. overall production process of Investors awarded with certificates for an existing enterprise class C investment shall be entitled to • They must be implemented in the benefit from the following incentive following economic areas, according to measures: the Statistical Classification of Economic • Provision of administrative services Activities in the European Community by the respective municipality within (NACE Rev. 2), applicable in Bulgaria as periods shorter than the usual ones Classification of Economic Activities (in Bulgarian “КИД 2008”), namely: • Individual administrative assistance and service from the municipality and - Industrial sector: manufacturing (with certain exceptions); or • Right to purchase municipal real estate property or to acquire limited property - Service sector: high technology rights over municipal real estate activities in computer technology, property, located near the investment R&D, accounting, tax and audit site, without tender procedures, upon services, education and human evaluation of the real estate property health care, as well as storage of by at least two licensed independent goods valuers and approval of the respective • At least 80% of the future aggregate municipal council. income must arise from the products Furthermore, investments are encouraged produced by the economic activities according to the procedures established above by the Corporate Income Tax Act, the Value

• The period of project implementation, must take the form of entities under the i.e. the period between the Bulgarian Commercial Act. There is no commencement and completion of the limitation on the share participation of project, must not exceed three years foreign legal entities and individuals.

• The investment amount per project Generally, no prior permission from must not fall below the minimum governmental institutions is required for amounts specified in the Regulation on the establishment of a legal entity, except the Implementation of the EIA for cases involving banking or insurance activities, investment funds, management • At least 40% of the eligible costs for companies or investment intermediaries, or the investment must be financed by the special concession rights and others. investor’s own or borrowed resources (any resources allocated as state aid Branches or involving an element of state aid, including retained corporation tax, Foreign legal entities or unincorporated are not considered own or borrowed entities may register branches in the resources) Republic of Bulgaria if they have received permission to conduct business activities • The jobs created in relation to the under the terms and conditions of the investment must be maintained in the laws of their home country. Branches are relevant region for at least five years in entered in the Commercial Register. the case of large enterprises and three years in the case of SMEs Though part of a foreign company, branches are considered independent and • The investment must be maintained therefore must keep separate accounting in the relevant region for at least five books and prepare balance sheets. years in the case of large enterprises However, registered capital is not required and three years in the case of SMEs, for the establishment of a branch. calculated from the date of completion of the investment project Representative offices • Any long-term tangible and intangible Foreign legal entities and individuals who assets acquired shall be new and have received permission to conduct purchased under market conditions business activities under the terms from third parties independent from and conditions of the laws of their the investor. home country are allowed to establish representative offices in the Republic of Any other requirements under the effective Bulgaria. They are not treated as separate state aid legislation must be met. legal entities and are not entitled to conduct business activities as defined in Establishment of new business Bulgarian law. entities or acquisition of shares in existing entities Representative offices are registered at The Bulgarian law provides for the the Bulgarian Chamber of Commerce and establishment of entities with foreign Industry and may engage in marketing, participation or for the acquisition of shares informational and promotional activities. in existing local entities. Such companies

Capital markets Trading procedures The legislation regulating the capital The BSE operates a continuous order- markets comprises numerous laws driven trading system. Orders are matched and regulations, the most important of automatically according to time and price which are the new Markets in Financial priority. The minimum lot size is currently Instruments Act (recently adopted and one share. There are daily limits on share implementing MiFID II requirements), price movements for both the official and the Public Offering of Securities Act, the free market. the Commercial Act, and ordinances on The BSE’s fully automated trading system the activities of investment companies, is designed to provide market transparency, management companies, investment liquidity and reflect price announcements. intermediaries and others. Concessions Bulgarian Stock Exchange The Constitution of the Republic of The Bulgarian Stock Exchange (BSE) Bulgaria states that under the conditions is a joint-stock company. The majority of a separate law the state can grant of its shareholders are private local or concessions for certain objects or activities foreign legal entities and individuals. Its that are exclusive state property or subject shareholders elect the Board of Directors, to sovereign state rights. These conditions which is responsible for the day-to-day are prescribed in the Concessions Act, operations of the BSE. More than two- effective from 1 January 2018, which thirds of its private shareholders are credit transposes Directive 2014/23/EU of the and financial institutions – banks, financial European Parliament and of the Council intermediaries, insurance companies and of 26 February 2014 on the award of others. concession contracts.

Capital market supervision The Concessions Act regulates the The Financial Supervision Commission common terms for granting concessions. (FSC) is responsible for capital market There are special rules set out in the supervision. The FSC is an independent Underground Resources Act, governing state authority whose mission is to protect the terms for granting concessions for investors’ rights and to enhance the extraction of underground resources, and development of a transparent and efficient the Waters Act, governing the terms for capital market. granting concessions for extraction of mineral water. The FSC has the exclusive right of approval in respect of prospectuses for Licensing public offerings of securities or take-over announcements. Issuers are obliged to file Licensing regime in electronic prospectuses and to register them with the communications FSC before going public. Once registered, The Electronic Communications Act they are required to periodically disclose reflects the need to establish unified rules information about their activities and for regulation of the common European financial status. electronic communications market, part of

The Radio and Television Act also regulates • Transmission of heat from persons radio and television operators. The Media owning transmission networks to which Council issues licenses to legal entities and plants with a total installed capacity not individuals registered to perform terrestrial exceeding 10 MW have been connected broadcasting. Licenses are issued after or a tender process. The license term is up to 15 years and can be extended to a • Generating electricity and heat for maximum period of 25 years. own use.

No license is required for trading with trading licenses without having to establish natural gas. entities in Bulgaria increased the overall number of market participants and, hence, There are restrictions placed on those market competition. entities which have already received licenses for distribution of energy and The Energy Act and the Electricity Trading distribution of natural gas to also be Rules establish clear terms and conditions granted licenses for other energy activities. for a switch of electricity suppliers, The entities which are licensed as providing an opportunity to electricity distributors of natural gas on a particular consumers to change their supplier and territory may also be licensed as end optimize their electricity costs. As a result suppliers of natural gas provided that the of the regulations, in the recent years, customers connected to the distribution a large number of industrial electricity network are less than 100,000. consumers have changed the end suppliers with electricity traders offering lower Any local legal entity, fulfilling the electricity prices. requirements of the law, is eligible to receive a license for the activities listed Established in 2014, the Independent above, as well as to perform gas trading Bulgarian Energy Exchange (IBEX) activities. Such license or the right to is licensed for the organization of an perform gas trading activities may also be exchange electricity market. In 2015 and granted to an entity registered under the 2016, the IBEX launched the day ahead legislation of one of the Member States market and the centralized market for or a country that is party to the European bilateral contracts. Economic Area Agreement. On the basis of the last amendments in the Electricity Trading Rules from Energy and gas regulations 2017, the IBEX is expected to launch the The regulations on the economic activities intraday market segment in 2018 providing in the energy and gas sector are set out additional opportunities for trading close to in the Energy Act and in the respective delivery and thus reducing the balancing secondary legislation. costs of market participants.

The regulations on the production and The Energy Act provides that, as of promotion of renewable energy are set 1 January 2018, all electricity producers out mainly by the Energy Act and the with a total installed capacity over 5 MW Renewable Energy Act (REA), the latter must conclude transactions at freely implementing the provisions of Directive negotiated prices only on the exchange 2009/28/EC. electricity market.

Latest developments in the energy Latest developments in the renewable sector regulations energy sector regulations The Bulgarian energy sector has been Producers of electricity from renewable rapidly developing towards liberalization energy sources (RES) are entitled to the in the recent years. The opportunity of following incentive measures: EU electricity traders to obtain electricity

• Privileged connection of the renewable 60% of the used biomass represents energy plants to the electricity grids animal fertilizer and meets some mandatory criteria, and (ii) 500 kW • Purchase of electricity produced when using vegetable biomass which is by renewable energy sources at their own production. The gratis period preferential prices, as determined in a for these biomass projects is until feed-in-tariff (FIT). The FIT is fixed for 1 January 2016 – all such biomass the entire period of mandatory off-take projects which have entered into of the electricity produced from RES, exploitation after 1 January 2016 shall which is different depending on the type be subject to the above restriction. of the renewable energy project (e.g. 20 years for solar, geothermal and biomass For the purpose of covering of the costs of projects, 12 years for wind projects and the public supplier arising from the long- 15 years for hydropower projects with a term contracts for purchase of electricity total installed capacity up to 10 MW and from electricity producers, including RES other renewable energy projects). producers, the Electric Power Grid Security Fund was established in 2015. According to the second National Report for the progress of Bulgaria in the As of 24 July 2015, all electricity producers stimulation and the usage of energy from and traders importing electricity in Bulgaria renewable sources, the national target of are obliged to pay monthly contributions a 16% share of renewable energy of total to the Electric Power Grid Security internal energy consumption was achieved Fund amounting to 5% of their monthly by 27 December 2013. Thus, the above revenues from generated, respectively incentive measures will not apply for RES imported and sold electricity, VAT excluded. producers who apply for connection to the electricity grid after 27 December 2013. Latest developments in the gas sector regulations According to amendments of the Energy Act, the electricity produced by RES The gas supply sector has been dominated projects which entered into exploitation for years by the Bulgarian public gas after 6 March 2015 shall not be purchased provider - Bulgargaz EAD which imports at preferential prices on the basis of long- over 80% of the Bulgarian natural gas term agreements except for: supplies from Russia on the basis of long- term take-or-pay agreement with Gazprom. • RES projects with a total installed capacity not exceeding 30 kW which In the last five years, many amendments shall be constructed over roofs and/ in the gas sector regulations have been or walls of buildings located within adopted transposing the requirements of urbanized territories, and the Third Energy Package. The purpose of these amendments is to open the • Biomass projects with a combined cycle gas market to competition. Despite of and indirect usage of biomass which the formal changes in the legislation shall be constructed within urbanized providing an easy access of EU traders to zones, agricultural sites or production the Bulgarian gas market (no licensing is zones and a total installed capacity not required), only a modest number of gas exceeding: (i) 1.5 MW when at least traders have entered the market, mainly

For the purpose of overcoming those • Through a branch, i.e. freedom of constraints, new gas infrastructure establishment projects have been launched or are in • Directly, after specifying the names process of negotiation by the Bulgarian and addresses of the persons who gas transmission network operator – will represent it before the BNB, i.e. Bulgartransgaz EAD. freedom to provide services or Currently, ICGB, a joint Bulgarian and • Through a tied agent whose seat Greek project company, is developing a is on the territory of Bulgaria – only new gas interconnector linking Greece and with regard to investment services/ Bulgaria, with a transportation capacity activities, including the ancillary of approximately 3 bNcm/y of natural gas investment services. from Greece to Bulgaria. Meanwhile, Bulgartransgaz EAD is also researching Member State banks, including banks from the opportunities for construction of gas the EEA, may perform only those activities interconnectors linking Bulgaria with Turkey that are specified in their licenses. Activity and Serbia. can commence upon notification to the BNB by the competent bodies which have The development of the new gas issued the license of the bank. infrastructure is expected to diversify the gas supply sources and to open the gas A foreign bank registered in a third country market to competition. (i.e. not in a Member State or the EEA) may perform banking activities in Bulgaria Banking and finance only upon opening a branch in Bulgaria and The commercial activities of credit and obtaining a license issued by the BNB. financial institutions in Bulgaria are Financial institutions are legal entities regulated by the Credit Institutions Act. other than credit institutions for which As per the Credit Institutions Act, a the main scope of business is carrying Bulgarian bank must be established in the out one or more banking activities and/ legal form of a joint-stock company, issuing or granting credits with funds which have only dematerialized shares and with a fully not been raised from receiving deposits or paid-up minimum registered capital of other repayable funds from the public and/ BGN 10,000,000. Banking activities in or acquisition of shareholdings in credit Bulgaria may be performed only upon institutions or other financial institutions. obtaining a bank license issued by Financial institutions are subject to the BNB. registration in a special register kept by the BNB provided that certain requirements The Credit Institutions Act envisages the have been met. following possibilities for a bank, licensed in a Member State or in a country that is Financial institutions having their registered part of the European Economic Area, to address in a Member State or a country that is part of the EEA are also entitled

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. Articles of Association There are five forms of business The adoption of the Articles of Association association in Bulgaria under the is an initial step in the establishment of a Commercial Act: company. • Unlimited partnership The Articles of Association must contain: (sabiratelno druzhestvo – SD) • Trade name, seat and address of the • Limited partnership company (komanditno druzhestvo – KD) • Scope of the company’s activities • Joint-stock company (aktsionerno druzhestvo – AD) • Management and representation of the company • Limited liability company (druzhestvo s ogranichena • Identity of the partners/shareholders of otgovornost – OOD) the company (except for the AD)

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

Registration taken in preparation for incorporation. A newly established company comes The founders’ actions create rights into legal existence with its entry in the and obligations for the persons who Commercial Register with the Registry have undertaken the said actions. The Agency. The standard registration latter are held liable jointly and severally application form must be filed by the for these obligations. Eventually, with appointed management body or by a the registration, these obligations are proxy, duly authorized by the latter. The automatically assumed by the newly managing directors of the company have established company. an obligation to notify the Commercial Register within seven days, of any change Announcement of the annual financial in the circumstances already registered. If statements the managing director fails to perform their All forms of business associations under duties, they are subject to an the Commercial Act, including sole administrative fine. proprietors who are subject to statutory independent financial audit and branches On 31 March 2018, a new Measures of foreign entities, as well as non-profit against Money Laundering Act came into legal entities, performing activity in the force in Bulgaria, which partially transposes public benefit, which performed business the provisions of Directive (EU) 2015/849 activity during the previous financial of the European Parliament and of the year, are obliged to present their annual Council of 20 May 2015 on the prevention financial statements for the said year to of the use of the financial system for the Commercial Register. The deadline the purposes of money laundering or for announcement is 30 June of the year terrorist financing. Pursuant to this new following the reporting year. act, all Bulgarian legal entities and other establishments, including those acting Together with their annual financial in their capacity as trustees of trusts, statements, the limited liability companies, foundations and legal arrangements joint-stock companies and limited similar to trusts, are required to publish partnerships with shares that are classified information about their beneficial owners, as medium and large entities or public as well as about the persons that directly interest entities are required to publish or indirectly control them. The information information about the proposal of the should be published under the file of the respective company’s management body respective entity/establishment in the for profit distribution or coverage of losses, Commercial Register, respectively the as well as about the resolution adopted in BULSTAT Register. this regard.

All other enterprises are required to publish Pre-company status their annual financial statements for the Prior to registration with the Commercial previous financial year in an economic Register, the founders may reach an magazine or on the internet by 30 June of agreement on the actions that must be the year following the reporting year.

Termination of business associations Transformation of business associations There are several grounds for the Pursuant to the Bulgarian Commercial Act, termination of a company: there are five types of transformations of business associations, namely: • Expiration of the term of the company or other grounds/circumstances • Merger provided for in the Articles of • Consolidation of two or more Association companies • Resolution by the shareholders/partners • Demerger in two or more companies of the company adopted with the qualified majority prescribed by the law • Spin-off of part of the property of one or the Articles of Association company into another company (a newly established company or an already • Resolution of the respective district existing one), and court for declaring the company insolvent • Transformation whereby the legal form of the company changes. • Transformation of the company in certain cases The Commercial Act regulates the procedure for execution of transformations, • Termination by a resolution of the their legal effects and the rights and district court in cases provided by the obligations of the companies and their law (e.g. where the company pursues partners/shareholders. objectives against the law) The Commercial Act also outlines simplified • In the case of an AD – when the transformation procedures, provided that company’s net asset value drops below certain conditions are met. the amount of the registered capital and, within one year, the company has Insolvency not resolved to reduce its registered capital or to transform the company in Insolvency proceedings in Bulgaria are accordance with the requirements of opened with regard to companies which the law have been declared insolvent (e.g. companies which are unable to meet • Other specific grounds regarding the their monetary obligations, or have not SD, KD and KDA (e.g. insolvency filed for announcement in the Commercial of a partner). Register their annual financial statements When one of the above occurs, for the preceding three years, etc.) or over- the company undergoes liquidation indebted (i.e. the assets of the company proceedings unless insolvency proceedings are not sufficient to cover its liabilities) by have already been initiated. The company the competent district court. loses its legal status being deleted from The company’s management body must the Commercial Register. file an application with the competent district court for opening of insolvency

An essential part of the stabilization Limited liability company (OOD) proceedings is the stabilization plan prepared by the trader, containing the The OOD is a commercial company whose terms and conditions with regard to shareholders’ liability is limited to the 1 payment to its creditors, as well as the unpaid portion of their shares . An OOD is extent of their satisfaction. liable to its creditors only to the extent of its own assets. The stabilization proceedings give the trader the possibility to reach an This form of enterprise is convenient for agreement with its creditors, to negotiate small and medium-sized business activities

1The 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.” © 2018 KPMG Bulgaria EOOD, 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. 34 | Investment in Bulgaria 2018 because of the advantages it offers over have to be a shareholder, Bulgarian the other types of business associations: citizen or resident

• The minimum capital required is • In the case of an EOOD (single relatively low – BGN 2 member limited liability company), an Incorporation Deed must be drawn up • Shareholders’ personal assets are instead of Articles of Association. protected from business debt because their liability is limited to the amount Capital of their contribution into the capital. By contrast, unlimited partnership partners The statutory minimum capital of an OOD are liable to creditors with their is BGN 2. The capital of the company entire property is divided into interests and the size of each shareholder’s interest determines • The OOD avoids the higher publicity their rights and obligations concerning requirements and the complex the company. It is possible for the incorporation procedures applicable to interests of the individual shareholders an AD company. to be of different value. The interests of Because of these advantages, the vast shareholders in an OOD are not securities. majority of foreign-owned companies in One of the main characteristics of the OOD Bulgaria operate in this legal form. is related to the transfer of shareholders’ The Bulgarian OOD resembles the German interests. The transfer of an interest from and Austrian “GmbH” (Gesellschaft mit one shareholder to another is unrestricted, beschränkter Haftung), the French “Sarl.” while the transfer to a third party is subject and the English private company to a more complex procedure. In both limited by shares. cases, a Share Purchase Agreement must be signed before a notary public and the Formation transfer must be registered in the Commercial Register with An OOD can be formed by one or more the Registry Agency. persons. The Bulgarian Commercial Act does not provide for a minimum or As per the latest amendments to the maximum number of shareholders in Commercial Act, shares from the capital an OOD. of an OOD may not be transferred if the respective company or the person owning The specific formation rules applicable to the shares subject to the transfer has the OOD are as follows: unpaid obligations related to payment • All the capital must be subscribed on of employment remuneration or social incorporation and at least the minimum security contributions. statutory capital (BGN 2) must be paid in before the standard registration Management application form is submitted to the The OOD is managed by the General Commercial Register Meeting of Shareholders (the sole owner • The founders must appoint managing in case of an EOOD) and by the appointed director(s) of the company. The managing director(s). managing director does not necessarily

Each OOD must hold at least one General Joint-stock company (AD) Meeting of Shareholders each calendar A joint-stock company is a company whose year (Annual General Meeting). capital is divided into shares. The AD’s The General Meeting is empowered to liability to its creditors is limited to the make key strategic and executive decisions amount of its assets. Foreign investors regarding the company, including the prefer this type of business association admission and expulsion of shareholders, when larger amounts of capital need to the appointment of managing director(s), be raised, particularly when public capital a capital increase or reduction, approval markets need to be tapped. The Bulgarian of the annual report and balance sheet, AD resembles the French “Societe distribution of profits and others. Anonyme,” the German and Austrian “AG” (Aktiengesellschaft) and is similar to the The day-to-day management of an OOD English public company limited by shares. is conducted by at least one managing director. The managing director represents Formation the OOD before third parties. They are An AD is incorporated by a Constituent financially liable for damages caused to the Assembly whereby all persons who company. For example, in the case of over- subscribe shares into the capital of the new indebtedness or insolvency, the managing company adopt its Articles of Association. director must file an application initiating An AD may also be formed by an individual insolvency proceedings. If the managing or legal entity. director does not perform their duty, they commit a criminal offence and may be held The AD is registered in the Commercial liable for damages to both the company Register with the Registry Agency by and its creditors. filing its Articles of Association and other documents evidencing that: In the case of an EOOD, the sole owner of the capital manages and represents • Its capital is fully subscribed the company either personally or through • A portion of the value of each share an appointed managing director(s). When stipulated by the Articles of Association, the owner is a legal entity, the managing but not less than 25% of the nominal or director of the legal entity or a person issuing value, has been paid designated by them manages the company. • The Board of Directors or, respectively, Distribution of profits the Managing Board and Supervisory Shareholders cannot claim their interest Board have been appointed, and back while the company is in operation. • The remaining requirements of the They are only entitled to receive profits law have been fulfilled (e.g. banks, in proportion to their interest, unless insurance and investment companies otherwise agreed by the shareholders. have to obtain the necessary licenses Payment of interest on a shareholder’s granted by the Bulgarian authorities). profits is explicitly prohibited.

Capital • Increasing the nominal value of shares already issued, or General rules • Converting debentures into shares. The statutory minimum capital of an AD is BGN 50,000. A higher statutory The resolution to increase the capital minimum is required for credit and financial must be taken by the General Meeting of institutions, investment companies, Shareholders/sole owner of the capital. insurance and health insurance companies. The Articles of Association may empower The capital of the company is divided the Management Board (Board of into bearer or registered shares. Within Directors) to increase the company’s these two types of shares, the AD may capital up to a specified amount. Under this issue ordinary and preference shares. provision, new shares may be issued within An ordinary share entitles its holder to five years from the date of the company’s one vote. Preference shares may provide incorporation. a guaranteed or additional dividend or a specified share in the company’s assets in Decrease of capital the case of liquidation. Non-voting shares An AD may decrease its capital through cannot represent more than 50% of the either of the following: company’s capital. Multiple voting shares are permitted only if provided for in the • Reduction in the nominal value of Articles of Association. ADs can issue shares, or dematerialized shares. • Cancellation of shares.

The shares in an AD can be traded on A capital decrease requires shareholders’ the stock exchange if the company is approval. The resolution of the General registered as a public company under the Meeting of Shareholders/sole owner of Public Offering of Securities Act. the capital on the capital decrease must The AD must set up a reserve fund mainly be announced in the Commercial Register. to cover losses. At least one-tenth of the By its announcement, it is presumed that company’s profit must be set aside until the company is committed to secure or the fund’s assets reach at least one-tenth repay all creditor claims. Creditor consent of the company’s registered capital. In is assumed if no written objections are addition, any premium over the par value filed within three months from the date of for shares and debentures obtained upon announcement of the resolution for capital their issuance must be included in the decrease with the Commercial Register. reserve fund. Management Increase of capital General rules The capital of the AD may be increased in The joint-stock company’s governing one of the following ways: bodies are the General Meeting of • Issuing new shares Shareholders and the Board of Directors (one-tier system), or the Supervisory

Board and the Management Board (two- Two-tier system tier system). There are no requirements The Supervisory Board consists of three regarding the nationality or residence of to seven board members, appointed by members of either board. A member of the the General Meeting of Shareholders. The Management Board may not be a member Supervisory Board does not effectively take of the Supervisory Board. The members of part in the management of the company. the Board of Directors, the Management Its primary function is to represent Board and the Supervisory Board may the company in its relations with the be shareholders. All Board members are Management Board. The Supervisory Board held liable jointly and severally before the appoints the members of the Management company for damages caused in the course Board and exercises control over its of their duties. activities and resolutions. The Management In a single member joint-stock company, Board must report on its activity to the the owner is empowered to decide on all Supervisory Board quarterly. issues otherwise handled by the General The day-to-day management of an AD with Meeting of Shareholders. a two-tier management system is carried The General Meeting of Shareholders out by the Management Board under the consists of all shareholders entitled to vote. control of the Supervisory Board. The The first General Meeting of Shareholders number of members of the Management must be held within 18 months of Board may not exceed nine and not be incorporation. Subsequently, a regular less than three. Subject to Supervisory General Meeting of Shareholders must be Board approval, the Management Board held at least once a year, not later than may effectively delegate the company 30 June. General Meetings of Shareholders representation to one or several of are usually called by the Board of Directors/ its members. Management Board or by the Supervisory If provided in the Articles of Association, Board, or upon a request of shareholders certain resolutions of the Management representing no less than 5% of the Board may require prior approval from the company’s capital. Supervisory Board. The General Meeting of Shareholders may amend and supplement the Articles of One-tier system Association, transform and dissolve the One-tier system companies are managed company, elect and recall members of and represented by a Board of Directors. the Board of Directors or the Supervisory It consists of a minimum of three Board, appoint and dismiss registered and a maximum of nine persons. The auditors, approve the annual financial Board of Directors delegates the actual statements as certified by the appointed management and representation of the registered auditor and resolve other company to one or more of its members matters which fall into its prerogatives who are subsequently designated as by law or by virtue of the Articles of executive directors. They serve at the Association. discretion of the Board of Directors and can be replaced at any time.

Commercial Register Following registration with the Commercial While the Commercial Act regulates the Register, entities obtain a registration method of incorporation of business number – Unified Identification Code associations in Bulgaria, the Commercial (UIC) which is used for taxation, social Register and the Register of Non-Profit security and statistical purposes. Once Legal Entities Act (CRRNPLAA) regulates received, this UIC remains unchanged until the registration of business associations termination and/or cancellation. as each newly established entity begins Apart from the registration of an entity, its legal existence with its entry into the the CRRNPLAA also regulates subsequent Commercial Register. corporate changes such as entry into The Bulgarian Commercial Register is the Commercial Register of a procurator, a centralized electronic register where pledge of shares, pledge over a commercial all mandatory registration matters with enterprise, termination and liquidation, regard to Bulgarian traders, foreign entity initiation of insolvency or stabilization branches, non-profit legal entities and proceedings, transfer or transformation of branches of foreign non-profit legal entities a commercial enterprise, change of the are kept. company’s representatives, seat or name and others. The registration procedure is assigned to the Registry Agency at the Ministry of District courts retain their competency Justice which is the registration authority. regarding insolvency and stabilization The Commercial Register is available to the procedures. public, including via the internet – The Bulgarian Registry Agency provides www.brra.bg. The Registry Agency also free SMS notifications to traders, branches manages the reservation of company of foreign companies, non-profit legal names and announcement of documents entities and branches of foreign non-profit and facts such as annual financial legal entities when an application for statements, Articles of Association, registration of changes has been submitted invitations to shareholders and others. to the Commercial Register. The CRRNPLAA 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 CRRNPLAA regulates the registration procedure of sole proprietors, cooperatives, branches of foreign companies, non-profit legal entities and branches of foreign non-profit legal entities. It does not apply to partnerships, foundations and others.

The major legislative acts governing real (except for properties related to national estate and real estate transactions in security and state defense), when provided Bulgaria are the Bulgarian Constitution, the by the law. Ownership Act, the State Property Act, Private properties can belong to individuals, the Municipal Property Act, the Agricultural entities, the state and municipalities. Land Ownership and Use Act, the Civil Private properties can be subject to real Procedure Code, the Encouragement of estate transactions. The sale and purchase Investment Act, the Territorial Development of state and municipal property is usually Act, the Obligations and Contracts Act, the executed by public tender or as part of a Condominium Ownership Management Act public-private partnership (PPP) project. The and the Ordinances on its implementation. exchange of ownership title or construction right over private state and municipal real Types of ownership over real estate estate property can be performed only in Ownership of real estate in Bulgaria may cases explicitly specified in the law. The be public or private. lease period for state and municipal private Public ownership includes properties property cannot exceed 10 years and the of public interest and those designated granting of a lease is subject to public for public use only and public functions, tender procedures. such as the coastal beach, national roads, By virtue of amendments to the Act to forests and parks, streets, squares, Supplement the Ownership Act, the museums and schools. statutory prescription period for acquiring Public state and municipal properties private state and municipal properties has can be granted for operation to third been stopped to run by 31 December 2022. parties through concession, public-private This means that currently private state and partnership or lease upon satisfying municipal properties cannot be acquired on conditions explicitly stated by law. the basis of expired prescription period.

Public properties cannot be disposed of When the property belongs to two or more (i.e. by sale purchase, donation, in-kind persons, co-ownership is established. The contribution, exchange) and cannot be co-owners decide operations by majority acquired on the basis of possession and and each has a right of first refusal in case expired prescription period. However, of disposal of the property. The co-owners limited property rights (e.g. construction can authorize one of themselves to right) may be granted for municipal public represent their co-ownership before third properties and for state public properties parties.

Buildings can represent condominium registers of buildings or separate entrances ownership. In this case, floors or specific under condominium ownership located on units of floors may be exclusively owned their territory. by separate persons while condominium ownership areas for all owners in the Evidence of title building are the façade, the roof, the The ownership title and limited property construction and everything which is for rights over real estate property in common use. Condominium ownership Bulgaria are evidenced by ownership title is established when: (i) the building is documents (usually in the form of a notary completed, (ii) the floors in the building are deed). In addition, the law requires that two or more, and (iii) floors or specific units title documents are registered at the Land on the floors belong to different owners Registry. By virtue of this registration, the (see Section “Condominium ownership acquisition of the ownership title or limited management” below). property rights becomes defendable against third parties. Condominium ownership management Acquisition of real estate The Condominium Ownership Management Act (COMA) regulates the Direct acquisition regime of buildings under condominium In Bulgaria, foreign citizens and foreign ownership. companies can directly acquire buildings, premises within a building and limited There are two exceptions in which the property rights (e.g. a construction right COMA shall not apply, namely: (i) in case and right of use). There are restrictions to of buildings under condominium ownership foreigners owning land in Bulgaria. with up to three individual units, belonging to more than one owner; and (ii) in case of EU residents and entities can acquire urban buildings under condominium ownership land, agricultural land, forest and forest in closed-type residential complexes, the land in accordance with the requirements management of the common areas shall be specified by national law. agreed by written contract with notarized Citizens (non-resident citizens) and entities signatures, concluded between the of countries which are not members of the investor and the owners of the EU and the EEA may acquire ownership title individual units. over land under the terms of an international As per the COMA, condominiums shall agreement ratified under the terms provided be managed by a general assembly of for in the Constitution of the Republic of owners and/or by an association of owners. Bulgaria, which has entered into force. The general assembly of owners or the Foreigners (non-resident or resident association of owners may decide to citizens) may acquire ownership title over transfer the maintenance of the building land in case of legal succession. In case of by means of contract to a third party – inheritance of land by citizens and entities of individual or legal entity. countries which are not members of the EU By virtue of the COMA, the municipalities and the EEA, if not otherwise provided for in have established and maintain public an international agreement, they are obliged,

• Companies whose shareholder(s) are The major legislation governing the non-EU individuals and/or non-EU legal development process in Bulgaria is made entities, or whose shareholders are up of the Territorial Development Act citizens of/have their registered seat at a (TDA), the Constructors Chamber Act, the country, which is not a party to the EEA Chambers of Architects and Engineers in agreement, as well as sole proprietors, Investment Design Act, the Development incorporated by such individuals/legal of the Black Sea Coast Act and various sub entities legislative acts.

• Joint-stock companies which have issued bearer shares.

Regulation and planning For certain projects, procedures for The regulation and planning stage assessing the need for environmental comprises approval of a Detailed impact assessment need to be performed. Development Plan (DDP) or amendment of an existing DDP, applicable when the Permission of construction works provisions of the current DDP are not Construction works are permitted on the sufficient for the investor. The effective basis of an effective DDP. DDP is the first precondition to commence The investment design is subject to construction works. approval by the respective administrative The DDP can consist of a regulation part bodies and it serves as a ground for the (plan for regulation) and/or a construction issuance of a construction permit. part (plan for construction). The plan for The construction permit may be issued regulation transforms an unregulated land for the entire project or, predominately plot into a regulated land plot through for complex infrastructure projects – for determination of its borders (regulating different stages of the project which can be lines) and provides access to the land executed and used separately. plot from a street. In relation to the future construction, the construction part of the In general, the investment design is DDP specifies the construction parameters approved and the construction permit is such as type and height of the building(s), issued by the chief architect the maximum density and intensity of a municipality. allowed, as well as the minimum green area. Execution of construction works and entering into exploitation Generally, the DDP is approved by the municipal authorities, but for construction The next development stage is the projects of regional or national significance execution of the construction works. The the DDP is approved by the Regional law provides that the construction permit Governor or by the Minister of Regional shall lose legal effect unless construction Development and Public Works. has commenced within three years after the said permit has become effective Environmental impact assessments or unless the rough construction work, including the roof of the building, has Environmental impact assessments are been completed within five years after required for real estate projects in the said permit has become effective two cases: and, applicable to physical-infrastructure • For projects which are presumed line projects, unless the construction is to impact the environment, such as completed within ten years after the said chemical factories, oil refineries, thermal permit has become effective. power plants and others, and During the construction works, a number • For projects impacting existing of standard-form acts and protocols have to protected areas (reserves, national be compiled. parks and others) or existing and potential protected zones (Natura 2000).

The completion of the construction works The designer of the construction works is certified by the execution of a provisional may be an individual with designer Taking Over Certificate (the so-called Act, capacity, or an entity employing such sample 15). With it, the participants certify individuals. Designers are responsible for that the works have been executed in the preparation of the investment design. compliance with the DDP, the approved They also exercise control to ensure that design, the legal requirements to the the construction works comply with the construction works and the terms of the design (the so-called author’s supervision), construction contract. and are authorized to issue mandatory instructions to the contractor. Depending on the significance of the construction project, its complexity and the The constructor is responsible for associated operational risks, it can enter execution of the works in compliance with into exploitation through a: the approved design and permits, and the legal requirements applicable to such • Permit for exploitation issued by the construction works. NCSD director if it is a significant construction project, or The consultant is a trader who carries out valuations to ensure that the construction • Certificate for exploitation issued by the work complies with the investment design chief architect of a municipality if it is and exercises supervision over construction not a significant construction project. works. The consultants are subject to A permit for exploitation is based on a registration at a special register with the complex procedure which includes a NCSD and they are granted certificates protocol signed by a special committee with a five-year term of validity. (the so-called Act, sample 16) and a report The technical controller is a civil issued by the construction supervisor. A engineer who manages the execution of certificate for exploitation is issued under the construction works on behalf of the a simplified procedure which involves only contractor. If the construction works are a desktop review of the documents for the executed by the investor themselves, the construction project. investor is obliged to appoint a technical controller. Participants in the development process During the various stages of the development process, the investor enters into relations with other participants, namely: the designer, the contractor, the consultant, the structural engineer, the technical controller and the utility companies. The relations between the participants in the development process must be settled by written contracts.

Accounting International Financial Reporting The Bulgarian accounting requirements Standards (IFRS) adopted by the are governed by the Accountancy Act European Union, or (AA) effective from 1 January 2016 which National Accounting Standards (NAS) transposes the requirements of Directive • Mandatory preparation of additional 2013/34/EU. The Commercial Act, the reports for certain entities Credit Institutions Act, the Bulgarian National Bank Act, the Social Security • Criteria for statutory financial audit Code, the Insurance Code, the Public • Preparation of consolidated financial Offering of Securities Act and certain other statements (CFS) laws also contain regulations applicable to accounting and financial reporting • Deadlines for publication of the annual requirements. financial statements and other reports.

The requirements of the AA extend to Categories of entities and groups 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 the AA as different requirements will apply only exception. on the basis of the categories, e.g. the Overview of the requirements of the AA: preparation of additional reports for some 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 • Criteria for application of either 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 meaning of the Collective Investment that the categories of groups of entities Schemes and Other Undertakings for may be further defined on the basis of the Collective Investments Act which are sum of the values of the indicators in the large enterprises as defined in the AA separate annual financial statements of the • Financial institutions within the meaning companies in the group, prepared as of of the Credit Institutions Act which are 31 December of the current reporting large enterprises as defined in the AA period. In this case, in determining the category of the group, the thresholds • Holding Bulgarian State Railways EAD of the criteria for the carrying value of and its subsidiaries; National Railway assets and the net sales revenue shall be Infrastructure Company increased by 20%. • Commercial entities whose primary A change in the category is made when, for business activity is to produce and/ the last two reporting periods, the group or transfer and/or sell electricity and/ does no longer meet two of the three or thermal power and which are large criteria for the respective category. The enterprises as per the AA category is changed from the beginning of • Commercial entities whose primary following reporting period. business activity is to import and/ or transmit and/or distribute and/or Public interest entities (PIEs) transit natural gas and which are large Every PIE must have an audit committee in enterprises as per the AA accordance with the requirements of the Independent Financial Audit Act and these • Water supply and sewage operators entities are required to publish additional under Article 2, paragraph 1 of the reports together with the annual financial Law on the Regulation of the Water statements. Supply and Sewage Services which are medium or large entities. The public interest entities in accordance with the AA are listed below: Preparation of annual financial • Entities whose transferrable securities statements (AFS) are admitted to trading on a regulated All entities are required to prepare annual market of a European Union financial statements with a financial Member State year end of 31 December. The financial statements are the responsibility of the • Credit institutions company’s management. • Insurance and reinsurance undertakings Pursuant to the AA, companies prepare • Pension insurance companies and funds stand-alone (non-consolidated) and managed by them consolidated financial statements (where required). In accordance with • Investment intermediaries which are the requirements of the AA, financial large enterprises as defined in the AA statements (interim, annual and • Collective investment schemes and consolidated) may be drawn up only by management companies within the preparers of financial statements. Any

Depending on their classification (micro, Stand-alone financial statements small, medium, large or PIE), the entities apply different criteria or may apply certain The financial statements consist of a exemptions for the preparation of a full set statement of financial position, statement of annual financial statements. of profit or loss and other comprehensive income, statement of cash flows, Applicable financial reporting framework statement of changes in equity and disclosure notes to the Public interest entities are required to financial statements. prepare and present their annual financial statements on the basis of the IFRS as Entities, with certain exceptions, are adopted by the EU. Entities other than PIEs additionally required to prepare an annual apply the National Accounting Standards management report for the annual activity which are adopted by the Council of of the company. This report includes, but Ministers of Bulgaria but they may opt is not limited to, information about recent to voluntarily apply IFRS. Once having and future developments of the entity, a selected IFRS as an applicable framework, description of the major risks, analysis of entities could not revert to NAS. financial and non-financial key performance indicators, ecological and human resources Non-profit legal entities, regardless of their matters, important subsequent events, a classification, prepare AFS in accordance description of financial instruments used by with NAS. the entity and financial risk management. The underlying accounting principles The statement of financial position and under NAS are generally similar to those the statement of profit or loss and other under IFRS in their 2002 version. The comprehensive income must be based on, basic principles adopted by the AA are and supported by, bookkeeping records. going concern and the accrual basis of Comparative figures must be presented. accounting. The principles of consistency, prudence, matching and substance Entities under the supervision of the over form are also incorporated into the Financial Supervision Commission, such as Bulgarian accounting practices. banks, insurance companies, investment companies, pension and health insurance Currently, the IFRS for SMEs which were funds and listed entities, are required to issued by the International Accounting file certain additional reports with the Standards Board (IASB) in 2009 are not Commission on a monthly basis. endorsed in Bulgaria. Under the AA, there are specific accounting Effective from 1 January 2018, the AA rules to be followed by companies in clarifies that if an enterprise’s applicable liquidation and bankruptcy. financial reporting framework is IFRS,

The disclosure notes must include reporting period, exceed the criterion for additional information necessary to give a average number of employees during true and fair view of the financial position the financial year – 500 employees and results of the business. This includes • Corporate governance declaration (in an explanation of the accounting policies accordance with the Public Offering applied in the accounts and of Securities Act, see also section disclosure notes. “Reporting requirements as per the Public Offering of Securities Act Consolidated financial statements (CFS) (POSA)” below) – required for: Companies having a majority holding in, or exercising control over subsidiaries, must - Entities whose transferrable securities generally prepare consolidated annual are admitted to trading on a regulated financial statements. The consolidated market of a European Union Member financial statements must present a true State and fair view of the group’s transactions - Credit institutions with third parties. To this end, all intra-group transactions and balances are eliminated. - Insurance and reinsurance The consolidated financial statements are undertakings. prepared and presented on the basis of the Exemption from preparation of activity accounting standards applied to prepare report for micro and small enterprises is and present the annual separate financial envisaged in certain circumstances. This statements of the parent company. exemption is not available for investment CFS are prepared by a parent company in enterprises and financial holding enterprises accordance with the rules and requirements classified as micro or small enterprises. of the applicable accounting standards – NAS or IFRS. CFS may not be prepared by a Equity requirements parent company of a small group, unless at Equity includes share capital, reserves least one PIE is part of the group. (including revaluation reserves) and retained earnings. Joint-stock companies are required Additional mandatory reports for certain to allocate one-tenth of their after-tax profit entities to a statutory reserve until the amount of Certain mandatory reports are to be the statutory reserve exceeds one-tenth of prepared and published together with the the registered share capital of the company. AFS in addition to the annual report In accordance with the requirements of the on activities: Commercial Act, a joint-stock company may • Report on payments to governments – be dissolved when the net worth of the required from large enterprises and all company (its net assets) becomes less than PIEs active in the extractive industry or the amount of the registered share capital. the logging of primary forests Filing requirements • Non-financial declaration – required All entities publish their AFS, CFS and from large enterprises which are PIEs the additional annual reports (if required) and which, as at 31 December of the

© 2018 KPMG Bulgaria EOOD, 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. 48 | Investment in Bulgaria 2018 approved by the General Meeting of By 31 July of the current year, the Registry Shareholders or by the respective Agency provides to the National Revenue committee; for all traders within the Agency electronically a list of the entities meaning of the Commercial Act, this is done which failed to publish their annual financial through filing with the Commercial Register statements for the previous year within the before 30 June of the following year. Certain time limit stipulated above. By the exceptions are envisaged for enterprises 30 September of the current year, the that have not performed activities during National Revenue Agency undertakes the the reporting period. The definition of an necessary measures for reviews and for enterprise which has not performed an determining the violations. activity during the reporting period is given Listed entities and financial institutions must in the AA. Management is responsible present their audited stand-alone financial for the timely preparation of the financial statements and certain additional reports statements and their content. to the Financial Supervision Commission An amendment effective from 2018 within 90 days after the year end. In stipulates that a parent entity, which is a addition, such companies must present a subsidiary at the same time (intermediate financial report to the Financial Supervision parent) and which is not obliged to prepare Commission on a monthly basis within CFS according to the applicable financial 30 days of the end of the previous month. reporting standards, publishes in Bulgarian All enterprises are required to file their the audited CFS and annual reports of its annual corporate income tax declaration parent entity together with the auditor’s with the tax authorities by 31 March of report within three months from the the following year. This declaration needs mandatory deadline for publication of the to be accompanied by certain statistical CFS by its parent entity. summaries as defined in the Statistics Act. Non-profit legal entities designated for public benefit have to file their annual Auditing and reporting financial statements, together with an audit opinion (if required), with the Central General audit environment Register at the Ministry of Justice. Effective A new Independent Financial Audit Act from 1 January 2018, non-profit legal entities (IFAA) was promulgated in the State Gazette designated for public benefit shall publish on 29 November 2016. The Act became their financial statements by filing to the effective on 2 December 2016. The IFAA Central Register of Non-profit Legal Entities, transposes the provisions of Directive managed by the Registry Agency by 30 2006/43/EC, amended by Directive 2014/56/ June of the following year. EU, as well as Regulation (EU) No. 537/2014. It introduces significant changes in relation Entities other than traders and non-profit to the obligations of the audit committees legal entities designated for public benefit and in relation to the audit of PIEs. The IFAA publish their financial statements in the lays down new major principles such as financial press or on the internet (if free joint audit, mandatory rotation of registered access is granted for a period of not less auditors, prohibition of the provision of than three years after the date of release) particular services and restrictions on the not later than 30 June of the following year.

© 2018 KPMG Bulgaria EOOD, 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 2018 | 49 fees for non-audit services. Audit committees is a registered auditor must be designated will be supervised by the Commission as the auditor responsible for performing for Public Oversight of Statutory Auditors the independent financial audit. KPMG Audit (CPOSA). The changes are expected to OOD can be appointed auditor as it is an influence significantly the PIEs. audit company registered with the Institute of Certified Public Accountants. The AA requires that financial statements of those entities meeting certain criteria An important requirement of the IFAA is be audited by a registered auditor. The that each entity which performs activities of IFAA in Bulgaria provides for the profession public interest (PIE) is required to set up an of independent auditors. It requires that Audit Committee. PIEs are defined in the AA the International Standards of Auditing (see section “Public interest entities (PIEs)” be applied. The body which regulates the above). auditors’ practice is the Bulgarian Institute The members of the Audit Committee are of Certified Public Accountants. The public appointed by the General Meeting of the oversight over the registered auditors is Shareholders or the Partners upon a proposal implemented by CPOSA. by the chairperson of the Board of Directors The auditor issues an opinion on whether or the Supervisory Board or the Managing the annual financial statements give a true Director of the entity. Members may be and fair view of the financial position of the chosen from among the members of the entity as at the year end, and of its financial supervisory or management bodies of the performance and its cash flows for the year entity who are not executive members of in accordance with the applicable financial the management body. The General Meeting reporting framework. The annual financial of the shareholders or partners approves statements usually include also a summary a statute of the Audit Committee in which of significant accounting policies and other its functions, rights and responsibilities in explanatory notes in accordance with the respect to the financial audit, internal control Bulgarian accounting legislation. and internal audit, as well as in respect to its relations with the management bodies, The general rule is that the entity subject to are stipulated. The Audit Committee’s main audit must appoint an independent auditor. functions and obligations are to: Auditors are usually appointed at the General Meeting at which the previous year’s • Supervise the fees received by the accounts are approved. The selection of registered auditor of the PIE, including the statutory auditor has to be made after a supervision over the cap of the recommendation from the Audit Committee permitted non-audit services for those companies required to have such • Supervise the process through which a committee (as discussed below). The the registered auditor assesses the independent auditor must be an individual provision of permitted non-audit or an audit company registered with the services, ensuring that particular Institute of Certified Public Accountants requirements regarding the permitted (“registered auditor”). If an audit company services are met has been appointed auditor, an individual who

• Assess the threats to independence Audit requirements and the safeguards applied to mitigate Under the Accountancy Act, the following those threats before approval of non- reports are required to be audited by audit services. All permitted services registered auditors: require preliminary approval by the Audit Committee • AFS and CFS of PIEs and of medium- sized and large enterprises and groups, • Provide guidelines and appropriate as well as groups with at least one PIE policies regarding the services which can be permitted • AFS and CFS of joint-stock companies and limited partnerships with shares, • Recommend the prolongation of except for the cases where these the audit engagement only if it is companies have not performed activities appropriate. The maximum initial during the reporting period 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 - Carrying amount 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 exempt from statutory audit. Consolidated its 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 - Carrying amount of assets as of audit committees of PIEs. 31 December: BGN 1 million

- Revenue from for-profit and non-profit responsible for the audit, the restrictions operations for the current year: encompass 4 consecutive years after BGN 2 million which they may not perform the role for 3 years after their withdrawal. There is no - Total amount of financing received possibility for extension of the maximum during the current year and financing deadline through a tender procedure (unlike received in previous reporting periods the possibilities set out in Regulation not absorbed as of 31 December: (EU) No. 537/2014). BGN 1 million. The initial date for calculation of the audit The auditor’s report on the annual and on duration starts from the year when the the consolidated financial statements has first audit engagement for a statutory to be issued by 30 June of the following financial audit for the respective period is year because of the requirement to file the undertaken. audited financial statements and audit report with the Commercial Register by that date. Prohibited non-audit services

Joint audit Certain non-audit services may not be provided by the auditor of the PIE under The new IFAA introduces the requirement the regulations of the new IFAA. of a joint audit. Insurance, reinsurance, pension insurance companies and funds Cap on fees for non-audit services and credit institutions will be required to provided to PIEs be jointly audited by two audit companies and the auditors will be appointed When the registered auditor provides to after preliminary coordination with the the audited PIE entity, its parent company appropriate regulator, the Financial or its subsidiaries, for a period of three or Supervision Committee or the Bulgarian more consecutive financial years, permitted National Bank. The criteria for coordination non-audit services, the total fees for such regarding the appointment of the auditors services shall be limited to no more than are accepted by the respective regulator, 70% of the average of the fees paid in the Financial Supervision Committee or the the last three consecutive financial years Bulgarian National Bank, in coordination for the statutory audit(s) of the audited with the CPOSA. entity and, where applicable, of its parent company, of its subsidiaries and of the Mandatory rotation of the registered consolidated financial statements of that auditors of PIEs group. The restriction shall not apply to non- audit services which are different from the The IFAA implements the mechanism prohibited ones and are required by law. of mandatory rotation of the registered auditors of PIEs. Namely, a registered Reporting requirements as per the auditor carrying out a statutory audit of a Public Offering of Securities Act (POSA) PIE withdraws after 7 consecutive years and may not carry out audit engagements Entities within the scope of the POSA for that PIE for a period of 4 years after the are required to disclose specific withdrawal. For an individual registered financial information before the Financial auditor assigned by the audit company as Supervision Commission every 3 months.

Furthermore, these entities have to disclose additional information in their management report for the annual activities.

It is important to note that the requirements of the POSA for disclosure of information concern all public entities, as well as certain other entities (see section “Additional mandatory reports for certain entities” above).

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 The major temporary tax differences VAT 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 Such expenses are recognized as tax the 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

© 2018 KPMG Bulgaria EOOD, 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 2018 | 55 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 in certain specific cases defined hree to one. in the 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 where calculated in those subsequent years. specific rates are not provided: 15%. Tax losses Thin capitalization When calculating their tax financial result, Interest expenses accrued by tax liable tax liable persons are entitled to subtract persons in relation to certain types of tax losses incurred in previous periods. Tax debt finance are tax deductible up to the losses may be subtracted from the positive limits set out in the CITA and known as financial result over the following five

© 2018 KPMG Bulgaria EOOD, 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 2018 years up to the amount of the positive tax contracts, unless the amounts are financial result in those future periods. treated as taxable income for personal income tax purposes. The lump sum Foreign-source losses can be carried tax on expenses is recognized as a tax forward solely against foreign-source deductible expense for the company income deriving from the same operation and is paid on an annual 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 in The profits and income of non-resident another EU/EEA Member State when the taxpayers are taxed in Bulgaria provided exemption with progression that they originate or are deemed to method 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 • Income from securities issued by the law and exceeding the amount local legal entities, the Government or of 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). Expenses with real estate properties in Bulgaria are in kind in relation to personal use of also considered to have their source company assets by personnel and in Bulgaria. individuals assigned under management

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

• 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 in • Income from interest payments on a 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 in accordance with the procedure for Member 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 (iv) transactions with financial are borrowers. instruments concluded according to the procedure for tender offering under the Capital gains and losses Bulgarian Public Offering of Securities Generally, capital gains are included in an Act, or transactions of similar type in entity’s profit subject to corporate income another EU/EEA Member State. tax, except in the following cases which are not subject to tax:

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

from the use of or the right to use of branches and subsidiaries with respect immovable property. to business profits.

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 length basis or where transactions aiming

© 2018 KPMG Bulgaria EOOD, 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 2018 | 61 at tax evasion have been performed. the date when the business transformation Therefore, when the transfer pricing rules is performed. are applied by the revenue authorities, However, the CITA includes certain additional income may be assessed or an provisions related to tax avoidance expense may be disallowed. achieved through business combinations. The Transfer Pricing Guidelines for It states that a business transformation will Multinational Enterprises and Tax not be considered tax neutral if its purpose Administrations of the Organization for is to evade tax payment. Tax avoidance is Economic Cooperation and Development also considered to exist in cases when the (OECD) have not been officially adopted business transformation is not carried out for tax purposes in Bulgaria. However, for valid economic reasons or its purpose in practice, the Bulgarian transfer is to conceal the disposal of assets. In this pricing methods are, to a great extent, case, following the general provisions of harmonized with the OECD methods. the CITA, it is possible that taxable gains may be realized upon disposal of the assets The right to adjust profits extends to at market prices. transactions involving Bulgarian branches and their foreign head offices as well as Hidden distribution of profits to foreign tax residents deriving income from a Bulgarian source that is subject to According to the provisions of the withholding tax in Bulgaria and Bulgarian Bulgarian CITA, amounts accrued, paid tax resident entities which incur expenses or distributed in any form by Bulgarian subject to lump sum taxes in Bulgaria. tax resident companies to shareholders, partners or another related party must be In addition, it is the obligation of taxpayers evidenced as part of the business activity and not the revenue authorities to prove of the local company. In addition, they that the transactions are performed at must be determined at market levels. If an arm’s length price which must be these circumstances are not proven, the supported with documents. respective amount may be classified as a hidden distribution of profits. Anti-avoidance provisions relating to business transformations Furthermore, interest expenses accrued 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, transfers of assets and exchanges of • The amount of the loan facility for which shares concerning companies of different interest expenses are accrued exceeds Member States (“the Mergers Directive”), the equity of the payer of the interest as business transformations between at 31 December of the previous Bulgarian entities or involving entities fiscal year 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 that no corporate tax effects are to arise on limited in time

• The repayment of the principal and the The tax relief for registered farmers can be related interest or the amount of the applied for each of the years in the period 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 corporate tax return for the respective year. of the tax relief as compatible with state Additionally, a 5% withholding tax could be aid regulation issued on 14 September levied if the deemed dividend is distributed 2015. Retention of tax is allowed only if an to a foreign tax resident entity. order/approval is issued by the Bulgarian Investment Agency (BIA) certifying the Corporate tax incentives maximum allowed amount of the state aid The corporate income tax incentives are (the retained tax), the intensity and term granted in two forms – a corporate income of the aid (the tax periods for which the tax retention and/or a tax reduction. 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 the initial investment project. Taxable persons registered as farmers are 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.

In addition, a positive decision by the separate days of physical presence European Commission is required for in Bulgaria. large investment projects where the total An additional criterion for tax residence is amount of tax incentives exceeds the center of vital interests. Accordingly, EUR 37.5 million (or EUR 18.75 million for individuals who have closer economic projects in the Southwestern region). and personal relations to Bulgaria than Other tax incentives include: to another country would be considered Bulgarian tax residents regardless of the • Tax neutral capital gains and/or losses duration of their physical presence in the resulting from the disposal of qualifying country. The personal income tax legislation financial instruments, performed on the also specifies that the center of vital Bulgarian stock exchange or on a stock interests has priority over the permanent exchange in an EU/EEA Member State address criterion, i.e. if an individual has • 50% retention of the corporate income a permanent address in Bulgaria but tax of social security and health their center of vital interests is abroad, insurance funds, established by a law, they must not be considered a Bulgarian for their business activity which is resident for tax purposes. directly related or auxiliary to their main Bulgarian tax resident individuals are activity, provided that the retained tax is subject to tax on their worldwide income invested in the main activity by the end whereas non-resident individuals are of the following year. subject to tax on their income derived from Bulgarian sources. Different residence rules Taxation of individuals may be provided for in applicable DTTs. Personal income tax Income subject to tax Residence Individuals are subject to the following There are four criteria for determining taxes on income: the residence of an individual in Bulgaria • Employment 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 Individuals who have a permanent address gross income. 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% of Bulgarian residents for tax purposes. The 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 stay in the country exceeds 183 days. The employment income. days of departure and arrival are treated as

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

accrued to non-resident individuals Deductions as well as income accrued by local Certain payments decrease an individual’s legal entities to foreign sportspeople, taxable income, including mandatory health scientists and artists. A lower insurance and social security contributions withholding tax rate of 5% is levied (made both to the local and foreign on dividends paid by Bulgarian entities mandatory insurance systems), as well as to non-residents. Should there be an personal voluntary pension, life and health applicable DTT in force, the rate of the insurance contributions to either local withholding tax on the above mentioned insurance funds or those registered under types of income may be reduced. the jurisdiction of other EU/EEA Member The tax base is the gross amount of States. The deductibility of such voluntary income received. As of 1 January 2010, contributions is limited up to certain Bulgarian legislation allows EU and maximum thresholds. EEA nationals subject to Bulgarian withholding tax to calculate the tax base Statutory deductions are provided for and the due tax following the same the recipients of different types of non- rules applicable to local residents, i.e. employment income (e.g. 25% for free the application of deductions from gross lancers; 40% for royalties, inventions and income is possible through the filing of products of science or art; 10% for rental an annual Bulgarian personal income; 10% for capital gains received income tax return. from the disposal of immovable property).

• A withholding tax of 8% is due on Deductions for donations to a list of special interest income accrued on all types of beneficiary organizations are also allowed bank accounts. provided that certain conditions are met. As of 1 January 2010, donations to • A one-off tax of 5% is levied on EU organizations with an equivalent status Bulgarian individuals receiving dividends to those listed in the local legislation are from foreign entities. also deemed tax deductible.

• A one-off tax of 10/7% is levied on Furthermore, provided that certain early withdrawal of accrued voluntary conditions are met, individuals may also social security/insurance contributions deduct from their taxable income the value depending on the circumstances. of the mandatory personal social security Specific rules apply with regard to taxation contributions paid during the year for of capital gains arising from disposal of accumulating additional length of service movable and immovable property. for pension (up to five years for the period of university education and/or in case of It is also specified that no withholding tax insufficient length of service upon pension). is due on payments to residents of other EU Member States regardless of the fact As of 1 January 2009, the Bulgarian that the types of income may fall in the personal income tax legislation introduced scope discussed above should this income a tax allowance for young families who be exempt for Bulgarian tax residents. have a mortgage. With this allowance,

As of 1 January 2015, two further Exempt income includes state pensions, deductions are available: a child tax scholarships, certain state welfare allowance with a decrease of the tax payments, benefits/income received from base by up to BGN 200 annually for the the Bulgarian mandatory social security first three children and a tax allowance and health insurance system, an equivalent for a disabled child with an annual foreign institution or under a voluntary deduction of up to BGN 2,000 from the social pension plan, provided that the latter tax base. Taxpayers may benefit from is registered in Bulgaria or in another these allowances through the annual EU/EEA Member State. Capital gains may reconciliation of employment income also be tax exempt provided that certain performed by the employer at year end or conditions are met. through the filing of an annual Bulgarian Accommodation and daily allowances personal income tax return. paid on behalf of the employer/assignor As of 1 January 2017, a new tax relief to individuals under employment, has been introduced, namely for the management and civil contracts can be performance of cashless payments. It treated as non-taxable income depending allows taxpayers to reduce their total on the type of business trip, the destination annual tax liability by 1% but no more than country as well as certain conditions such BGN 500 should the following conditions as documentary substantiation of the be met: business trip and the expenses occurred.

Relief from tax deduction of 5% limited to BGN 500 from A tax credit may be used for foreign taxes the outstanding tax liability is granted. The paid provided that the relevant conditions outstanding tax must also be remitted by are met. Relief from tax may also be 31 January. sought under the provisions of an existing As of 1 January 2017, the legislation DTT depending on the specific method, provides for the possibility to file a one-off i.e. tax credit or tax exemption corrective tax return should a mistake in with progression. the return already filed be discovered. This should be done by 30 September of the Tax rates and payment dates year following the respective tax year. The annual general flat tax rate applied for Sole proprietors determine their taxable taxation of an individual’s income is 10%. base and make advance payments in Individuals who derive income from accordance with the rules for corporate sources other than, or in addition to, taxation. The tax rate applied to this type of income under an employment contract income is 15%. for which the employer has performed Individuals performing certain activities an annual reconciliation as at the year- (e.g., hotel accommodation, restaurant end (including dividends received from services, taxicab transportation, and other foreign entities which are taxed with a services) whose turnover for the previous one-off tax) must file an annual tax return year is below BGN 50,000 are instead by 30 April of the following calendar subject to a lump sum license tax which is year. A tax return must also be filed if regulated by the Local Taxes and Fees Act. the individual owns shares/allotment in foreign entities/permanent establishments/ Fringe benefits immovable property regardless of whether a transaction was made with them during Certain fringe benefits, such as canteen or the respective tax year. In addition, such food expenses like food vouchers provided tax returns must be prepared by individuals to employees/assignees (under certain who withdraw accumulated voluntary conditions), transportation cards, use of the personal contributions prior to the employer’s sports facilities or rest/holiday expiration of the term under an insurance homes, are not taxable in the possession policy as well as in instances where an of the employee if provided as a social individual has received/granted a loan from/ expense by the employer. However, social to non-financial institutions or individuals security and health insurance contributions (where certain conditions are met). are due on the amount of the fringe benefits provided as applicable for standard The outstanding personal income tax as employment income. reported in the annual Bulgarian personal income tax return, if any, must also be paid Social expenses paid in cash are taxable as within this filing deadline. part of the individual’s employment income as indicated above. If the annual personal income tax return is filed electronically by 31 January of Other fringe benefits are treated as taxable the following calendar year and the for personal income tax purposes. The tax individual does not have any outstanding treatment of the specific benefit is to be public liability subject to enforcement, a considered on a case-by-case basis.

Payroll-related contributions EU social security The burden of payroll-related contributions Following Bulgaria’s EU accession on is not split between the employer and the 1 January 2007, the EU social security employee via a single unified ratio. Instead, regulations (1408/71; 574/72) aimed at the ratios vary depending on the fund to enhancing free movement of employees which contributions are made and are as and prevention of double insurance of follows: EU citizens entered into force and have precedence over the provisions of the local • 55:45 with respect to pension and social security legislation and the already additional mandatory pension insurance existing Social Security Agreements with contributions other Member States. As of 1 May 2010, • 60:40 with respect to all other funds Regulation (EC) No. 883/2004 is applicable (health insurance, unemployment, in Bulgaria to EU citizens. As of 1 January general illness and maternity). 2011, it became applicable to non-EU country nationals in most EU countries and It is an obligation of the employer to it is currently also applicable with respect withhold from employees’ remuneration to cross border situations with Switzerland and to remit to the state budget the and EEA countries. amount of the mandatory social security and health insurance contributions at the Persons and territories covered general rates presented below. The EU social security regulations are The contributions below are determined applied on the territory of the Member as a percentage of the gross employment States of the European Union and the EEA, income, up to the monthly ceiling of which comprises Iceland, Norway and BGN 2,600, or BGN 31,200 annually. Liechtenstein, together with Switzerland The minimum monthly insurable income for cross border situations with Bulgaria. varies depending on the type of economic Furthermore, it should be pointed out that activity performed by the company and the the EU provisions on social security do not qualifications of the employee. apply to all individuals moving within the EU and the EEA. Generally, the following

Contributions On behalf of On behalf of Total employees employers

Social security contributions 10,58% 14,22%* 24,80%**

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 14.12-14.82% 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.

• 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 the EU social security regulations is Finance 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 (i) the residential property owned by companies persons are moving within EU Member – on the higher of the assessed value and States on short-term assignments, (ii) they the book value of the property. The tax is are simultaneously working in more than levied at a rate within the range of 0.01 – one state and (iii) they are simultaneously 0.45%. A 50% tax rebate is allowed if the employed in one state and self-employed in property is the principal residential property another. In these cases, special rules apply of an individual taxpayer. with respect to determining the relevant social security system. Owners of immovable property also pay garbage collection fees. Garbage collection

As from 1 January 2015, municipalities A tourist tax is due from suppliers of must notify tax liable persons of any tax overnight accommodation services on a liabilities by 1 March of the year in which monthly basis within the range of they are due. BGN 0.20 – BGN 3.00 for each overnight stay. The applicable tourist tax rate is Transport vehicles tax determined by the respective municipality. The deadline for payment of the tourist Owners of transport vehicles, including tax is the 15th of the month following the motor vehicles, ships and aircraft registered month when the overnight accommodation in Bulgaria, are liable to transport vehicles was supplied. tax. Various criteria are used for calculation of the tax depending on the type of the Value added tax transport vehicle, e.g. engine power, load-carrying capacity, number of seats, The Bulgarian VAT legislation is generally and maximum take-off weight. The tax is harmonized with the EU VAT Directives and payable in two equal installments by adopted the EU VAT rules based on the 30 June and 30 October of the year in general principles of Directive 2006/112/EC. which it is due. The latest amendments to the VAT Act came into effect on 1 January 2018.

Gift and inheritance taxes Generally, VAT is due on any supply of goods Certain individuals inheriting property or services with a place of supply in Bulgaria situated in Bulgaria are subject to made by taxable persons in the course of inheritance tax. The tax rates depend on the their economic activities. “Supply” normally value of the property and the relationship of means goods or services provided in the beneficiary to the testator or donor. No exchange for consideration. However, certain inheritance tax is levied provided that the transactions carried out for no consideration beneficiary is a spouse or immediate family are also considered to be supplies, for member. A gift tax is levied on donated example, the private use of certain property, as well as on property transferred business assets. without consideration. No gift tax is levied The following transactions are generally on property donated to spouses and subject to Bulgarian VAT: immediate family members. • Supply of goods or services with a place The inheritance and gift tax rates are as of supply in Bulgaria follows: • Intra-Community acquisition of goods • In the range of 0.4 – 0.8% for property inherited by/donated to brothers, sisters • Import of goods into Bulgaria. and their children

Tax regime and place of supply of goods Exports The location of goods at the time of the The export of goods to customers outside supply determines the VAT treatment. If the EU is zero-rated, provided that the goods are located in Bulgaria, then the certain transportation and documentation supply is subject to 20% Bulgarian VAT. requirements are fulfilled.

However, if goods are dispatched or Imports transported, the place of supply is the place where the goods are located at the The import of non-Community goods from time when dispatch or transport of the outside the EU is subject to Bulgarian goods to the customer begins. VAT and is payable by the importer to the customs authorities. Under specific Special rules apply for the supply of conditions, import VAT may be “reverse electricity, gas, heat or cooling energy charged” if the importer is granted which are treated as goods for VAT authorization to apply such a regime in purposes. connection with the implementation of an investment project. Intra-Community supplies If a Bulgarian VAT registered person sells Supply of goods with installation goods to a customer who is registered Goods coming from other EU Member for VAT in another EU Member State and States and delivered under supply and the goods are physically transferred from install arrangement are subject to VAT Bulgaria (either by the supplier or by the reverse charge by the Bulgarian recipient customer) to another EU Member State, if (i) the supplier is established in another the supply is regarded as a zero-rated EU Member State and is not established in (exempt with credit) intra-Community Bulgaria, and (ii) the recipient is identified supply. Documents, as prescribed by law, for VAT in Bulgaria. evidencing the physical movement of the goods from Bulgaria must be obtained in Place of supply and taxation of services order to support the zero rating. The place of supply rules with regard to services follow the principles laid down by Intra-Community acquisitions Directive 2006/112/EC as regards the place The acquisition of goods arriving in of supply of services. Bulgaria from another EU country by a taxable person or by a non-taxable legal Generally, supplies of services fall into entity when the goods are supplied by a two regimes – B2B services, i.e. services taxable person identified for VAT in another provided by one taxable person to another, EU Member State represents an intra- and B2C services, i.e. services provided Community acquisition. VAT registered by a taxable to a non-taxable person. The recipients of intra-Community acquisitions place of supply under the two regimes is need to reverse charge VAT within the determined by different sets of rules. statutory term.

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 ort has a fixed • Services connected to immoveable establishment which receives the services. property located in Bulgaria Thus, for cross-border supplies of services 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 entertaining and other events taking charge mechanism. place in Bulgaria

Exceptions to this rule include: • Services related to valuation, expert examination or work on a movable • The supply of services connected to tangible property taking place in Bulgaria immoveable property is taxable where the property is located (including hotel • Short-term hiring of vehicles if the and accommodation services) vehicle is placed at the disposal of the client in Bulgaria • The supply of admission to cultural, artistic, sporting, scientific, educational, • Telecommunication, broadcasting and entertaining and other events is taxable electronic services when the recipient where the event takes place is established, has their permanent address or usually resides in Bulgaria • The supply of passenger transport is taxable in the place where the transport • Transport of goods within the takes place, proportionate to the Community, including forwarding, distance covered courier and postal services, when the transport begins in Bulgaria • The supply of services connected to short-term hiring of vehicles is taxable • Intermediary services, when the in the country where the vehicle is underlying transaction has a place of placed at the disposal of the client supply in Bulgaria

• The place of supply of restaurant and VAT rates catering services is taxable where the The standard rate of VAT, which applies to services are physically carried out. most taxable supplies, is 20%. Two reduced Services provided to taxable persons but rates are applicable for specific supplies. used for non-business purposes by the owner or the employees are to be treated Zero VAT rate as services provided to non-taxable persons Zero VAT rate applies to specific supplies (B2C). such as:

B2C regime of services • Intra-Community supplies of goods Services provided to non-taxable persons • Supplies of goods transported or are generally taxed at the place where the dispatched outside the European supplier is established. As exceptions to Community (exports)

• International transport of passengers • Supplies related to education, sports and goods and physical education

• Certain supplies related to international • Supplies related to culture and religions transport • Non-profit activities of eligible • Supplies of non-Community goods institutions 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 processing, temporary importation with • Insurance services full exemption from duties) • Financial services • Services consisting in work on goods (such as processing or repair) when the • Gambling recipient of the services is a person • Valid postage stamps established outside the country and the goods are imported within the • Supply of goods or services for which Community in order to be processed credit for input tax has not been used and after that re-exported because of legislative provisions.

• 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 • Import related services (such as initiative of the revenue authorities when commission, transportation and the taxpayer fails to submit a registration packaging) when their value is included application on time. in the customs value.

The application of the zero VAT rate needs Mandatory VAT registration for local to be substantiated by certain documents supplies required by the law. Mandatory VAT registration applies for taxable persons, local or foreign, who 9% VAT rate perform taxable supplies with a place of A reduced rate of 9% applies to supply in Bulgaria (excluding supplies for accommodation in hotels, sheltered which VAT is to be reverse charged by housing and other places for the recipient) exceeding the registration accommodation. threshold of BGN 50,000 for a period of 12 consecutive calendar months. Exemptions Zero-rated supplies count toward the VAT registration threshold as well. The taxable Exempt supplies include: person must submit an application for • Supplies related to health care registration within 7 days from the end of the tax period when the registration • Supplies related to welfare and social threshold was reached. security

If the taxable turnover of BGN 50,000 Mandatory VAT registration for intra- is reached for a period not exceeding Community acquisitions two consecutive months (including the A taxable person or a non-taxable legal current one), the application is to be entity not VAT registered on other grounds submitted within 7 days from exceeding is subject to mandatory VAT registration the turnover. If the taxpayer fails to submit when performing intra-Community the application within this time limit and acquisitions if their total amount during the revenue authorities proceed with VAT a calendar year exceeds BGN 20,000 (no registration ex officio, the person will be threshold applies for intra-Community liable to pay VAT on the taxable supplies acquisitions of new means of transport and with which the turnover of BGN 50,000 is excise goods). The VAT registration needs exceeded until the date of the registration to be effected not later than 7 days prior to by the revenue authorities. the acquisition with which the threshold is exceeded. The movement of own goods Mandatory VAT registration for providing/ from one EU Member State where the receiving services taxpayer is identified for VAT purposes to Subject to mandatory VAT registration Bulgaria creates an identical are all taxable persons who (i) receive registration obligation. services from suppliers established abroad Entities which are VAT registered on these or (ii) provide B2B services to another EU grounds are obliged to charge and pay Member State. A claim for VAT registration output VAT upon the intra-Community needs to be filed with the revenue acquisition but are precluded to deduct authorities not later than 7 days before the input VAT. Furthermore, entities registered tax on the supply becomes due. under this regime are not obliged to charge The registration for providing/receiving output VAT on the subsequent sale services is a specific registration which of goods. does not entitle the taxpayer to deduct input VAT. Mandatory registration for supply of telecommunication, broadcasting and Mandatory VAT registration for supply of electronic services goods with assembly and installation Any taxable person who is not A taxable person established for VAT established in Bulgaria and provides purposes in another EU Member State telecommunications, broadcasting and who is not established in Bulgaria and electronic services to non-taxable persons supplies goods assembled and installed who are established, have their permanent by them or on their account in the country address or usually reside in Bulgaria is is obliged to register 7 days before the obliged to register in Bulgaria if chargeable event takes place, irrespective • They are not registered for the of the threshold reached. This does not application of the “mini one-stop shop” apply if the recipient is registered for VAT special scheme in Bulgaria or in another purposes in Bulgaria. EU Member State

• They are not registered for VAT registration with the Commercial purposes on mandatory, supply-and- Register is obtained. Foreign persons not install, distance sales and voluntary established in Bulgaria need to obtain a tax grounds. number for this purpose.

The application for the VAT registration In order to register for VAT (under the must be filed not later than the 10th day mandatory or voluntary procedures), of the month following the month in an entity must file an application with which the taxable event of the first supply the relevant territorial directorate of occurred. the National Revenue Agency (NRA). The application must state the grounds Voluntary registration for registration and must be submitted Any taxable person not meeting the together with information about the requirements for mandatory VAT monthly taxable turnover for the preceding registration has the right to register 12 consecutive calendar months. voluntarily without fulfilling threshold Foreign persons who are obliged to or requirements. wish to register may do it only by securing the services of a fiscal representative in “Mini one-stop shop” (MOSS) special Bulgaria. The fiscal representative is jointly registration and reporting scheme and severally liable for the Bulgarian VAT Taxable persons established and liabilities of the foreign person. registered for VAT in Bulgaria and providing This does not apply for foreign persons telecommunications, broadcasting and from EU Member States who may register electronic services to non-taxable persons without appointing a fiscal representative. established in another EU Member State If, however, they decide to appoint such, may register voluntarily for MOSS the representative will not be jointly liable in Bulgaria. for the foreign person’s VAT liabilities. Non-EU taxable persons providing Persons applying for VAT registration need telecommunications, broadcasting and to designate an email address for official electronic services to non-taxable persons communications with the tax office. established in the EU, including Bulgaria, may register voluntarily for MOSS in Deregistration Bulgaria if they are not registered for MOSS in another EU Member State. Voluntary deregistration following a mandatory registration is possible when, Registration for MOSS can be performed during the last 12 consecutive months electronically through a dedicated web- before the current month, the taxable based application available on the website turnover of the registered person does not of the National Revenue Agency. exceed BGN 50,000. However, voluntarily registered persons cannot apply for VAT registration procedure deregistration before the expiration of 24 Persons not registered for general tax months from the beginning of the calendar purposes in Bulgaria may not register under year following the year of registration. the VAT Act. The general tax registration Mandatory deregistration must be pursued for local companies is automatic after in certain cases.

Obligations of VAT registered persons return and ledgers is the 14th day of the month following the reference tax period. Format of the VAT registration number Taxable persons registered for MOSS in The format of a Bulgarian VAT registration Bulgaria must file quarterly VAT returns by number for legal entities is as follows: the 20th day of the month following the BG 123456789, where 123456789 represents reference calendar quarter. The VAT return the unified identification code from the must be filed electronically through a Commercial Register or the general dedicated web-based application available tax number. on the NRA website.

Accounting records European Sales List – VIES return VAT registered persons must maintain VAT registered persons have to file a VIES detailed accounting records which must return if some or all of the following types be adequate for the determination of their of sales have been performed in a given VAT liabilities. The VAT Act does not provide month: for the form or the level of detail of the accounting information that has to be kept. • Intra-Community supplies of goods The Accountancy Act, however, regulates • Triangulation operations (if the supplier this matter for foreign persons that have a acts as an intermediary) permanent establishment in the country. • Taxable services provided to taxable VAT returns persons established in other Member Each VAT registered person must submit States (including cases of received VAT returns accompanied by purchase and advance payments on such services) sales ledgers. The tax period under the A VIES return is to be filed together with Bulgarian VAT Act is the calendar month. the VAT return. The deadline for submission The purchase and sales ledgers have to of the VIES return is the 14th day of the be prepared in prescribed formats and month following the relevant tax period. include detailed information about all The VAT return, the VIES return and the VAT transactions having relevance to VAT. The ledgers must be submitted electronically sales ledger lists all tax documents on the only by using a qualifying electronic basis of which output VAT is applied or not signature. applied (i.e. includes exempt and zero-rated transactions and reverse charged VAT). The Intrastat Return purchase ledger contains all tax documents The Intrastat system in Bulgaria is on the basis of which input VAT is claimed regulated by the Intra-Community Trade or not claimed (including reverse Statistics Act and applies to the collection charged VAT). of data of intra-Community trade in goods, The VAT return must be prepared on the including the movement of goods as a basis of the information from the purchase result of dispatches from and arrivals to and sales ledgers for the respective month. the territory of Bulgaria to/from other EU The deadline for submission of the VAT Member States.

Persons registered for VAT purposes in Special rules apply in respect to input Bulgaria which carry out intra-Community VAT deductions in case taxpayers apply trade with goods have to file an Intrastat the cash accounting scheme. Specifically, return if they have exceeded either of the eligible taxable persons applying this following thresholds from intra-Community scheme can deduct input VAT once trade: they have paid for the goods/services received. The input VAT deduction must • BGN 260,000 for dispatches be supported, in addition to the supplier’s • BGN 430,000 for arrivals. invoice, with a payment document and a special protocol issued by the supplier if Entities must submit Intrastat returns every the latter also applies the cash accounting month starting from the month when the scheme, or by themselves if the supplier relevant threshold was exceeded in the does not apply the cash accounting current year. scheme. The Intrastat returns are to be filed with the The right to input VAT of taxable persons NRA by the 14th of the month following receiving invoices from suppliers applying the month when the arrival/dispatch the cash accounting scheme will arise occurred. when they have paid for the goods/services received. In order to deduct input VAT on Recovery of input VAT such invoices, the recipient needs to have, A Bulgarian VAT registered person is apart from the invoice, also a payment entitled to recover input VAT in respect document and a special protocol issued by of taxable supplies from another VAT the supplier. registered person or in respect of imported goods, if they are used for the purposes of: A VAT registered person is not generally entitled to recover input VAT on: • Taxable supplies liable to Bulgarian output VAT • Purchases used for the performance of VAT exempt supplies • Zero-rated (exempt with credit) supplies such as the dispatch of goods to other • Purchases used for the performance of EU Member States and the export of free-of-charge supplies (there are certain goods to third countries exceptions) or transactions outside the scope of the independent economic • Supplies with a place of supply outside activity of the taxable person Bulgaria, insofar as input VAT would be deductible in relation to such supplies • Purchases of passenger cars made in Bulgaria. and motorcycles; fuel, repair and maintenance of such cars and The input VAT claim must be supported motorcycles; excluding the acquisition with an invoice and also with a so-called of a passenger car or a motorcycle used reverse charge protocol (when the VAT for certain qualifying activities such is to be charged by the recipient of a as resale, leasing, security and taxi/ supply) and/or with a Single Administrative courier service. If the passenger cars Document (SAD) (in the case of import). and motorcycles are not used solely for The invoices and protocols must be issued qualifying services, the taxpayers will be in compliance with the Bulgarian VAT Act.

entitled to full input VAT deduction if the “Non-current assets” for VAT purposes qualifying services represent more than includes (i) immovable property, (ii) vehicles 50% of the revenue generated by the and (iii) goods and services which qualify or taxpayer in the last 12 months would qualify as non-current assets within the meaning of the Bulgarian Corporate • Purchases used for representation or Income Tax Act with a tax base upon their entertainment purposes. acquisition of BGN 5,000 or more. A VAT registered person is entitled to The proportional input VAT deducted initially pro-rata VAT deduction in respect of should be adjusted on a yearly basis upon purchases which are used to perform changes in the use of the assets. both supplies qualifying for deduction and exempt supplies. The pro-rata deduction is Reimbursement of VAT based on the ratio of taxable supplies to total supplies calculated for the previous If, in a given month, the input VAT calendar year and adjusted on the basis deduction declared by the registered of the current year’s ratio calculated with person exceeds the amount of output VAT the December VAT return. Taxpayers charged, the excess amount is subject are allowed to calculate the partial VAT to reimbursement. deduction for goods and services which are The VAT for reimbursement is offset different from non-current assets by using against VAT payables in the following two an alternative to the pro-rata coefficient months. If, after the two-month period, method. there is still an outstanding balance for Registered persons may claim a VAT reimbursement, it is due for refund by the deduction within 12 months from the end revenue authorities within 30 days together of the month in which the output VAT for with any other VAT for reimbursement the supply became chargeable. No specific declared in the monthly VAT returns in limitation applies to supplies subject to this two-month period. reverse charge, but notifications to the tax Accelerated refunds are available to office are needed for deductions claimed registered persons who during the last after this 12-month period. 12 months have performed the following supplies amounting to 30% or more of Input VAT deduction on personal use of their total taxable turnover for the business assets same period: Proportional input VAT deduction is • Zero-rated supplies, and applicable upon the acquisition of non- current assets used for both business and • The following supplies having their place private purposes. The business-to-private of supply in another EU Member State proportion is to be determined on the basis where the customer is VAT registered of a reasonable criterion which should - Intra-Community transport of goods, guarantee the correct calculation of the forwarding, courier, postal and cargo amount of the input VAT to be deducted handling and direct agency services taking into account the nature related to such transport 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 The VAT is usually refunded after a Bulgarian companies. tax review or tax audit by the revenue authorities, which could defer the refund Bulgaria has reciprocity agreements with until after the audit is completed. The the following countries: Canada, FYR tax audit could last up to five months. 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 owe interest for the period of delay. in 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 of the input VAT deduction would have been the country where the person available if the foreign entity was identified is 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 • Codified description of the goods and economic activity during the calendar services purchased in Bulgaria year when the right to reclaim VAT arose • Copies of invoices and SADs are not (this certificate must be translated into required but these need to be detailed Bulgarian by a certified translator in the application. and legalized) The right to refund is exercised personally • The original invoices/SADs on the basis or through an authorized representative. of which the VAT refund is claimed The home state applications are referred to • Written power of attorney. the NRA which has four months to issue Applications must be sent to the territorial its decision to accept or deny the claim. If director of the NRA Territorial Directorate – additional documents are requested, the Sofia, located at 21 Aksakov Street, term for issuing the decision is extended 1000 Sofia. by up to eight months from the submission of the claim. Following a positive decision, The right to reclaim VAT on purchases made the claimed VAT must be reimbursed within in 2017 must be exercised by 30 June 2018. 10 days to a bank account indicated by the person. The NRA owes interest for any Refund under Directive 2008/9/EC delay after the 10-day term. Taxable persons have a right to refund Bulgarian VAT if during the period when VAT The right to reclaim VAT on purchases made was incurred they: in 2017 must be exercised by 30 September 2018. • Had neither a seat of their business, nor a fixed establishment in Bulgaria and Penalties • Did not perform transactions with a Penalties can be imposed by the revenue place of supply Bulgaria except: authorities in various cases of non- compliance, most notably for failure to - Zero-rated supplies charge output VAT, late charging of output - Transport and ancillary services VAT or failure to submit application for VAT registration. - Supplies of goods and services for which the tax is due by the recipient. Penalties in these cases are generally set at the amount of the underlying VAT not Refund is claimed by home state charged as a result of the failures (except applications filed electronically with the for late charging of VAT – if the delay is local revenue authorities in the Member within six months the potential penalty is State where the respective person 5% of the underlying VAT and if the delay is is established. more than six months but within Applications to refund Bulgarian VAT 18 months the potential penalty is 10% of and all accompanying documents must the underlying VAT). be completed in Bulgarian or English. In addition to this, penalty interest on Applications must be accompanied by: the unaccrued output VAT liability may be • Codified description of the economic calculated for the period of non-payment. activities of the person The penalty interest rate varies with

In the case of a failure to apply the reverse Union and non-Union goods charge mechanism, the penalty amounts to 5% of the underlying VAT, provided Union goods are: that the taxable person is entitled to • Goods fully produced or manufactured input VAT deduction. The penalty is 2% of within the customs area of the EU the underlying VAT if the reverse charge mechanism is applied with a • Goods imported from outside the one-month delay. customs area of the EU and released in the Union customs territory for Customs duties free circulation • Goods produced or manufactured within New European and Bulgarian customs the customs area of the EU from the legislation abovementioned categories of goods. The currently applicable EU customs legislation entered into force in the Non-Union goods are goods which do not EU Member States, including Bulgaria, as meet the criteria for Union goods. of May 2016. If Union goods are exported outside the In this regard, Regulation 952/2013 or the customs territory of the EU, they lose Union Customs Code (UCC) is the main their Union status. At the same time, legal act in the field of customs matters. in case Union goods are exported and In accordance with the provisions of the subsequently re-imported within the Lisbon Treaty, the UCC is implemented customs territory of the EU, they will be through secondary legislation, namely treated as non-Union goods (i.e. subject Regulation 2015/2446 (the Delegated to customs duties) unless it is proven that Act) and Regulation 2015/2447 (the the imported goods are the same as those Implementing Act). These acts, along previously exported and, while outside with Regulation 2016/341 specifying the EU, they have not been subject to transitional rules for certain provisions of any operations except for such aimed at the UCC, currently constitute the regulatory preserving their good condition. foundation of the Union customs policies. As a member of the European Union, The Union Customs Code aims to gradually Bulgaria applies the EU customs policies introduce improvements in the existing toward third countries with the following customs procedures at the European level main consequences: as well ensure transition to an electronic EU customs environment by • Non-Union goods imported in Bulgaria 31 December 2020. from countries or territories not forming part of the customs territory of the On the domestic level, the customs EU are generally subject to the same issues are addressed with the Bulgarian customs duties and formalities as those Customs Act (CA) as well as additional sub applicable to goods imported in any legislative acts aimed to clarify operational other EU Member State

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

Classification of goods Domestic VAT is also charged on import. Any such VAT paid may be recovered as The applicable Integrated Tariff of the input tax provided that (i) the importer is European Community (TARIC) is based on registered for VAT purposes in Bulgaria, the Community Combined Nomenclature (ii) the goods are intended for use in his and on the international Harmonized VAT taxable business activities, (iii) the System used by many nations in the world. importer has an import customs declaration The respective classification of the goods issued in his name which is properly

© 2018 KPMG Bulgaria EOOD, 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 2018 | 83 recorded in the VAT ledgers and (iv) the Directives 2008/118/EC and 2003/96/EC. import VAT was effectively paid to the Taxable persons for the purposes of excise budget. duties are authorized warehouse keepers, importers of excisable goods and other Export procedures designated persons listed in the EDTWA. Goods to be exported must be declared to the customs authorities. In the general Excise duty is charged on the following case, the exporter is an EU established goods: energy products and electricity, person who, at the time when the customs alcohol and alcoholic beverages, tobacco declaration is accepted, holds the contract products (including the heat-not-burn with the consignee in the non-EU country tobacco products introduced on the local and has the power for determining that the market during the second half of 2017). goods are to be brought outside the Union. Excise duty is usually charged on the basis of weight, volume and quantity of From a VAT perspective, the export of products. Exceptions are cigarettes for goods to a destination outside the EU can which the excise duty is calculated as a be zero-rated provided that (i) the goods are combination of specific duty (based on transported outside the EU by or on behalf number of pieces) and ad valorem duty (as of the supplier or by or on behalf of the a percentage of the sales price). customer not established in Bulgaria and (ii) the exporter can produce the necessary Standard tax rates for various groups of evidence for export. products are explicitly determined in the law. Energy products for which no tax rate Special procedures is specified in the law are taxed at the rate of equivalent products. In accordance with the EU-wide rules, for customs purposes goods may be placed The excise goods are subject to excise under special customs procedures allowing duty at the time when they are produced for suspension and/or reduction of the or enter the territory of Bulgaria. The generally applicable customs duties and obligation for payment of the duty occurs VAT. These procedures include external when the respective goods are released for and internal transit, customs warehousing, consumption. The accrual and payment of free zones, temporary admission, end- excise duty can be postponed, if the goods use, inward and outward processing. are produced, stored or moved under an The operation and monitoring of the excise duty suspension regime. Usually, special procedures in Bulgaria follows the goods are eligible for duty suspension if provisions of the UCC and is administered produced or stored in a tax warehouse. by the Bulgarian customs authorities. At the same time, certain excisable goods (alcohol, tobacco and some energy Excise duties products) cannot be produced outside the The main regulatory act in Bulgaria in the territory of such a warehouse. Furthermore, area of excise duties is the Excise Duty the goods can move under duty and Tax Warehouses Act (EDTWA). The suspension within and out of the territory EDTWA follows the concepts laid down in of Bulgaria in the following cases: the main EU excise duty legislation such as

• Movement of excisable goods between IPT liabilities are reported in standard tax Bulgarian tax warehouses returns each calendar quarter. IPT returns must be filed by the end of the month • Movement of excisable goods between following the respective calendar quarter. Bulgarian and EU tax warehouses Registration of FOS insurers in Bulgaria • Movement of excisable goods from is made on the basis of the first quarterly a Bulgarian tax warehouse to an exit submitted IPT return in Bulgaria. customs office in case of export FOS insurers can appoint a fiscal • Imported goods transported to a representative who will be jointly and Bulgarian tax warehouse severally liable with them. Alternatively, • Other movements specifically listed in they may settle their IPT liabilities directly the EDTWA. or assisted by a local service provider as all reporting documentation is in the Bulgarian The movement of goods under duty language. suspension within the EU is monitored by the computerized Excise Movement and Control System (EMCS).

Insurance premium tax (IPT) Bulgarian insurance premium tax (IPT) of 2% 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 “freedom-of-establishment’” principle and foreign insurers established in the EEA and acting by way of the “freedom-of-services” principle (FOS). The tax basis is the gross premium received by the insurer adjusted for certain discounts and/or fees. The tax event is the moment when the premium payment is collected by the insurer. IPT must be paid on a quarterly basis by the end of the month following the reference calendar quarter.

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

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

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, company (temporary employer) has the including employment remuneration, right to temporarily employ an employee working hours/week, overtime work, (temporary employee) of another company official holidays, annual paid leave, travel (temporary work agency). Temporary expenses, 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 working hours under an employment right to sign with their employees only contract in Bulgaria. The regular working two types of employment contracts: (i) week is 40 hours, five working days of 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 and supervision. The total number of hours within the working day and week temporary employees may not exceed in order to protect the rights of the 30% of the total number of employees of employees and to prevent an employer the temporary employer. from imposing 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 of each employee and some of the determined by the Council of Ministers, documents may be created and stored in are entitled to extended holidays and/or electronic form. additional holidays. The current data privacy legislation, The employee is entitled to use annual paid applicable also to the rights and obligations leave at one time or in parts during the of the parties to an employment relation, calendar year for which the leave applies is now supplemented by Regulation upon a written approval by the employer. 2016/679 of the European Parliament and of the Council on the protection of natural The use of the annual paid leave may persons with regard to the processing of be postponed due to important reasons personal data and on the free movement of related to the business activities of the such data (“GDPR”). employer. In such cases, the latter is to give the employee the opportunity to use The GDPR applicable as of 25 May no less than half of the annual paid leave 2018 sets out new and more extensive due for the respective year. Employees regulation on various aspects of processing may also postpone the use of the annual of personal data, including consent for paid leave, when they use other types of processing, right to access and information, leave or upon their request and consent of means of protection of personal data, the employer. notifications in cases of breach, etc. Accordingly, employers must implement In case the leave is postponed and is not appropriate technical and organizational used within the calendar year for which it is measures and keep proper documentation due, the employer is obliged to ensure the evidencing at all times that they process use of the leave not later than six months the personal data of their employees in from the end of the year for which it is due. compliance with the new legislation. Upon termination of the employment The sanctions for breaches of the GDPR relationship, the employee is entitled to depend on the circumstances of each monetary compensation for the unused individual case and amount up to part of the annual paid leave, the right of EUR 20,000,000. In the case of a legal use of which has not been terminated due entity, the sanction may also be up to 4 % to expiry of the prescription period of two of the total worldwide annual turnover of years. the preceding financial year, whichever is The official holidays are listed in the higher. Labor Code. The Council of Ministers can designate additional official holidays. Medical check-ups All employees must undergo periodical Personal data of employees medical check-ups. Their frequency As per the law, employers collect certain depends on the labor category, working information and keep documents related to conditions and the employees’ age, as the establishment, existence, amendment determined by the Minister of Health. The and termination of the employment associated expenses shall be incurred by relationships. The respective documents the employer. must be kept in the employment file

Healthy and safe working fines in case of non-compliance with the conditions rules and the standards for healthy and safe One of the main obligations of the conditions. employer is to provide healthy and safe The Labor Code empowers the Minister of working conditions. The law aims to secure Labor and Social Policy to issue regulations greater protection of the employee’s life, regarding work-related health and safety health and working capacity by holding the conditions. These regulations may also employer responsible for the conditions be drawn up jointly with other ministries. under which employees have to carry out Employers shall act in compliance with their employment obligations. these regulations.

The labor legislation sets forth strict The Labor Code provides for a fine of obligations of the employer in relation to between BGN 1,500 to BGN 15,000 for the provision and maintenance of healthy employers and a fine of BGN 1,000 to and safe working conditions, which include BGN 10,000 to the responsible persons but are not limited to: at the employer company for each case of • An assessment of risks to the health non-performance of obligations to provide and safety of employees, which is healthy and safe working conditions. to be performed by an independent specialized company Posting or sending of employees from Bulgaria to EU/EEA/ • Development of an overall and annual Switzerland in the framework program to achieve the required healthy of provision of services and safe working conditions based on As per the Ordinance for the conditions and the risk assessment procedure for posting of employees within • Planning and performance of measures the framework of provision of services necessary for the prevention of effective as of 10 January 2017, Bulgarian possible risks, including but not limited employers are obligated to conclude an to: constant technical maintenance additional agreement with employees prior of equipment, provision of collective to their posting to another Member State and personal protective means for of the EU/EEA/Switzerland. The Ordinance employees, informing employees of defines a range of matters which must possible risks, providing protective be regulated by the additional agreement. food and/or antidotes for employees The additional agreement shall amend the who work under unhealthy and harmful employment relationship for the duration of conditions the posting.

• Providing special training for employees The legal provisions obligate each employer on healthy and safe conditions. to ensure that the minimum working conditions are at least those applicable in The due performance of the above the host country where the employees obligations by employers is subject to shall be posted (including minimum rates inspection and control by the competent of pay), provided that these conditions authorities, which are entitled to impose shall not be less favorable for the posted

© 2018 KPMG Bulgaria EOOD, 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 2018 employee. The employers must notify • To initiate consultations with employees every employee to be sent or posted in order to mitigate or avoid the regarding the minimum working conditions consequences of redundancy of the receiving country. For the term of • To notify the Employment Agency the posting the employers shall not owe and to participate in teams comprised daily and accommodation allowances. by representatives of employees, The above rules are not applicable in the municipal authorities and the the cases of posting of employees to Employment Agency for the purposes third countries (outside the EU, EEA and of training of employees, initiating Switzerland). own business by the employees, participation of employees in alternative Termination of employment employment programs. contracts According to the Labor Code, a fine of Employment contracts may be terminated BGN 1,500 to BGN 5,000 will be imposed on general or specific termination grounds on an employer and a fine of BGN 250 which may or may not require an advance to BGN 1000 will be imposed upon the notice. No notice is required if employment responsible official of the employer for contracts are terminated by either party on each case of non-performance of any of the one or more of the explicit grounds listed in above obligations on notification the Labor Code. to the employees. When a notice is required for termination of the employment, the notice period may Foreign nationals working vary from 30 days up to three months. If in Bulgaria the required notice period is not observed, In most cases, foreign nationals seeking a compensation is due. employment in Bulgaria must obtain work permits and their employment In certain cases of unilateral termination contracts are fixed-term. Also their of employment by the employer when employment contracts must contain the number of dismissed employees provisions which regulate accommodation is to exceed the one provided by the expenses, medical treatment, insurance, Labor Code, a procedure for collective transportation costs to and from the redundancy must be observed. This country of permanent residence and procedure is applicable in case of others. For a discussion of work permits, liquidation, staff reduction, decrease of the please refer to Chapter 8. workload and other grounds for termination of employment by the employer. The procedure for collective redundancy includes mandatory obligations for the employer such as:

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

Legislative framework and general as well as by the applicable Acts of the principles EU legislation.

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

Under the Bulgarian law, foreign nationals Member States over the age of 18 must are restricted in exercising the have a long-term or permanent residence following rights: status in Bulgaria and must have resided in the respective municipality for at least six Ownership rights: Foreign nationals do months preceding the date of elections, not have the right to acquire ownership title and they must not be exempt from the over land except: (i) under the terms of an right to vote in another EU Member State, international agreement ratified under the including Bulgaria. In addition, they must terms provided for in the Constitution of express their will to vote in writing. the Republic of Bulgaria, which has been 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 councilor provided that they meet the Since the seven-year transitional period following conditions: (i) do not have from the date of accession of Bulgaria to citizenship in a non-Member State, the European Union expired on (ii) have a long-term or permanent 31 December 2013, the citizens of EU/EEA residence status in Bulgaria, (iii) have Member States, regardless of whether resided in the respective municipality for they reside in Bulgaria or not, can acquire at least six months before the date of the ownership title over agricultural land, elections, (iv) have not been deprived of forests and forestry land in Bulgaria. 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 There is a general rule that foreign rights over immovable property. This nationals are obliged to observe Bulgarian regime does not differ for citizens of laws and the established legal order, that EU/EEA Member States and citizens of they must be loyal to the Bulgarian state, other counties. 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 same civil, administrative and penal the president. responsibilities as Bulgarian citizens, unless otherwise provided for under a special law, Pursuant to Article 42, paragraph 3 of the or an international agreement to which the Bulgarian Constitution, the terms and Republic of Bulgaria is a party. conditions for participation of citizens of EU Member States in local elections in Visas Bulgaria are set forth in a special law. According to the effective Bulgarian As from the date of Bulgaria’s accession legislation, foreigners who are citizens of to the EU, citizens of EU Member States certain countries must obtain a visa before are entitled to vote for municipal councilors entering the territory of the Republic of and mayors in Bulgaria. In order to take Bulgaria. The visa is a clearance, issued part in the elections, the citizens of EU

© 2018 KPMG Bulgaria EOOD, 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 2018 | 93 to foreigners, for entry and stay on the The holders of such types of documents territory of the Republic of Bulgaria for a may enter and stay short term in Bulgaria certain period of time. without needing to have a Bulgarian short-stay visa. The Ordinance on the Terms and Procedure for Issuing Visas and Determination of the Foreigners who are exempt from the Visa Regime, referring to Council Regulation requirement for obtaining a visa can enter 539/2001 of 15 March 2001 /L81/2001, and and stay in the Republic of Bulgaria without the relevant Regulations for its amendment a visa for up to 90 days within a period determine the list of those countries whose of six months. The entry and the short- nationals must be in possession of a visa term residence in Bulgaria of holders of when crossing the borders of the Republic Schengen visas and/or residence permits of Bulgaria and those whose nationals is limited to the period and the entries are exempt from that requirement. In allowed in the respective visa/permit, but in addition, there are certain countries whose any case holders of such documents may nationals are exempt from the requirement not reside in Bulgaria for more than 90 days of possession of a visa when crossing in any six-month period. This also applies to the borders of the Republic of Bulgarian holders of national short-stay and/or long- by virtue of agreements concluded stay visas and residence permits issued by between the European Union and the said Croatia, Cyprus and Romania. countries for granting exemption from the A valid visa is not a guarantee of entry into visa requirement. For foreign nationals Bulgaria. The border control officers are of certain countries, the exemption from entitled to determine whether a foreigner the requirement of possession of a visa meets the requirements for admission. If when crossing the borders of the Republic the border control officers establish that a of Bulgaria depends on the holding of a foreigner does not meet the requirement of special type of a passport the law, then the foreigner may be refused (e.g., a biometric passport). entry in the Republic of Bulgaria. On the grounds of a resolution of the The Foreign Nationals in the Republic of Bulgarian Council of Ministers, until the Bulgaria Act provides for the following main date of Bulgaria’s full accession to the visa categories: air transit visa, short-stay Schengen zone, Bulgaria shall unilaterally visa and long-stay visa. apply a visa-free system for holders of valid Schengen visas and residence permits, An air transit visa is issued to a foreigner and thus Bulgaria shall apply the Schengen who travels by aircraft from a certain acquis. Effective from 31 January 2012, country and stays in the international holders of Schengen visas and/or residence transit zone of an airport on the territory permits shall be allowed to enter and reside of the Republic of Bulgaria with the aim short term in the Republic of Bulgaria of continuing their travel with the first without needing to have a Bulgarian short- next flight to a different country. Air transit stay visa. visa allows a foreigner one, two or, as an exception, multiple entries in the territory Bulgaria unilaterally recognizes short-stay of Bulgaria. An air transit visa can be with and long-stay visas and residence permits a validity term of up to three months from issued by Croatia, Cyprus and Romania.

© 2018 KPMG Bulgaria EOOD, 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. 94 | Investment in Bulgaria 2018 date of issuance. A foreigner traveling with posted on behalf of a foreign employer for an air transit visa is treated as not admitted performing specific tasks related to control to the territory of the Republic of Bulgaria. and coordination of the implementation of a tourist services contract, foreigners A short-stay visa is issued to a foreigner for posted on behalf of a foreign employer for the purposes of transit or planned stay on making investments in accordance with the territory of the Republic of Bulgaria. The the Encouragement of Investment Act and short-stay visa can be issued as one-entry, others). two-entry or multiple-entry visa. The term of validity of the short-stay visa and the The long-stay visa allows its holder multiple allowed period of stay are determined on entries into the territory of the Republic of the basis of examination of the conditions Bulgaria within its validity term. of entry and risk assessment during the All visa applications must be submitted examination of the visa application. The to the respective Bulgarian diplomatic term of validity of the short-stay visa missions and consular departments around cannot exceed five years. the world. In case there is no diplomatic A short-stay visa for transit allows a mission or consular department in a certain foreigner who is on their way from one country, visa applications can be submitted country to another to enter and stay in the to such authorities of an EU Member State territory of the Republic of Bulgaria for a with which Bulgaria has an agreement period of up to two days, unless otherwise for representation in acceptance of visa provided in an international agreement. The applications and issuance of visas. In total length of stay of a holder of a short- exceptional cases (e.g., the state’s interest stay visa for transit may not exceed three or extraordinary circumstances), border months within every six-month period. control officers can issue single short-stay visas for transit visits with an allowed A short-stay visa for planned stay allows a period of stay not exceeding two days, foreign national single or multiple entries unless an international agreement provides into Bulgaria for up to 90 days within a otherwise, and single short-term visas period of six months. This type of visa is for a planned stay of up to 15 days. The issued to foreigners who wish to enter and State Agency for National Security shall stay in Bulgaria for the purpose of short- be immediately notified of the issuance of term personal, business or other related such visas. visits. The purpose of the visits is usually proved with written invitations. An application for issuance of a long-stay visa is submitted only to the Bulgarian A long-stay visa allows a foreigner to enter embassy or consular office in the country into Bulgaria and thereafter to apply for a where the applicant permanently resides, residence permit in order to stay long-term or to such diplomatic missions and consular in the country. The validity of the long-stay departments, which are accredited for the visa is six months and it allows its holder a respective country. In exceptional cases stay up to 180 days. For certain categories (humanitarian reasons or extraordinary of foreigners, the validity of the long-stay circumstances), the application for issuance visa is up to one year and allows the holder of a long-stay visa can be submitted to to stay up to 360 days (e.g. foreigners Bulgarian diplomatic missions and consular conducting scientific research, foreigners

© 2018 KPMG Bulgaria EOOD, 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 2018 | 95 departments in other countries. longer than three months, must be granted residence permits and obtain Bulgarian An important condition upon applying for a residence document (residence permit or visa is for the applicant’s passport to be in residence card). compliance with certain requirements of 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 (iii) the citizens themselves, are issued by the passport is issued within the past 10 years. Migration Directorate at the Ministry of the 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 reside in Bulgaria for a period of up to three The Foreign Nationals in the Republic of months starting from the date of their Bulgaria Act provides for three types of first entry without the need to obtain any residence permits: permits or certificates. • Extended residence permits – with a Foreigners who are family members of term of validity of up to one year and European citizens may enter and leave the the option of renewal after submission territory of the Republic of Bulgaria with a of an application 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 residence card issued by an • Permanent residence permits – for an EU Member State. indefinite period of time. 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: 90 days within each six-month period) are issued a residence permit. • A foreigner who wishes to perform work after obtaining a permit from the European citizens who intend to stay in Bulgarian Employment Agency Bulgaria longer than three months are issued residence certificates. • A foreigner is a member of the management or supervisory body of Family members of European citizens, a Bulgarian company, provided that who are not European citizens themselves, such company for each foreigner has who wish to reside in Bulgaria for a period

employed at least 10 Bulgarian nationals term EU residence permit does not result on full-time employment contracts, in losing the long-term resident status. maintained throughout the period of Permanent residence permits are issued residence of the foreigner in Bulgaria to foreigners: • A foreigner is a trade representative • Of Bulgarian descent of a representative office of a foreign company registered with the Bulgarian • Who have been married for more Chamber of Commerce and Industry than five years to a foreigner with after verification and assessment of a permanent residence status in the submitted documents regarding Bulgaria and have resided legally and the activity and tax compliance of the continuously on the territory of Bulgaria company, and regarding the planned for a period of five years (unless activities of the representative office exempted from the requirement for extended residence) The application for obtaining an extended residence permit with the supporting • Minor or underage children of a documents must be filed before the foreigner with a permanent residence Migration Directorate not later than 14 days status in Bulgaria, who are not married prior to the expiration of the term of the • Members of the family of a Bulgarian respective visa. Generally, applications are citizen if they have resided continuously considered and reviewed within 14 days of on the territory of the Republic of their submission. Bulgaria in the last five years The extended residence permit can be • Who have invested in Bulgaria over renewed if the grounds for issuance still BGN 1 million or increased their exist at the time of the renewal. investment with such amount, through Once the foreigner is granted an extended acquisition of shares in Bulgarian residence permit, he/she may live, reside companies which are traded on the and travel in the Republic of Bulgaria while Bulgarian stock exchange, through the permit is valid. The foreigner may acquisition of rights under concession freely choose and change his/her place of agreements on the territory of the residence, or leave the country and Republic of Bulgaria, or through enter it again. acquisition of other securities or rights explicitly provided by the law Foreigners who have been granted status of a long-term resident in the Republic of • Who have invested in Bulgaria over Bulgaria can obtain long-term EU residence BGN 6 million in the capital of a permits. Long-term resident status can Bulgarian company whose shares are be granted to foreigners who have not traded on the Bulgarian resided legally and continuously stock exchange (i.e. uninterruptedly) on the territory of the • Who are shareholders, representatives Republic of Bulgaria for five years prior or employees occupying key or to the submission of the application for controlling position in a Bulgarian obtaining a long-term residence status. The company which conducts business expiration of the validity term of a long-

activity in Bulgaria and obtained • A European citizen has enrolled in a a special certificate for class A school/college/university in Bulgaria for investment, class B investment or study, including professional training, priority project from the Bulgarian and has medical insurance and suffi- Investment Agency cient financial resources to cover their expenses and that of family members • Who invested over BGN 500,000 without being a burden to the Bulgarian through a Bulgarian company in which social security system. the foreigner has invested the amount as capital, and as a result the company In order to obtain a long-term residence acquired fixed tangible and intangible certificate, the European citizen must assets amounting to BGN 500,000 submit an application to the Migration and has employed at least 10 Bulgarian Directorate at the Ministry of the Interior nationals for the term of the foreigner’s within three months of their first entry in residence in Bulgaria, etc. the Republic of Bulgaria.

The extended, long-term or permanent Applications are considered and reviewed residence status of a foreigner is evidenced and the certificate must be issued on by the issuance of a Bulgarian personal the day of submitting the application. document (residence permit) evidencing The certificate contains the person’s full the right of residence in the Republic name and the registration date. Upon of Bulgaria. their request, the applicant may receive a long-term residence certificate in the form Residence certificates of an ID card with their photo and personal European citizens are issued two types of number on it. residence certificates: Permanent residence certificates are • Long-term residence certificates – with issued to European citizens who have a term of validity of up to five years, and resided continuously in the Republic of Bulgaria for a period of five years or who • Permanent residence certificates – for meet other special requirements set forth an indefinite period of time. in the law. In order to apply for a permanent The grounds for issuance of long-term residence certificate, the European citizen residence certificates are: must submit an application to the Migration Directorate at the Ministry of the Interior • A European citizen is employed or enclosing documents evidencing the self-employed in the Republic necessary circumstances. of Bulgaria

• A European citizen has medical insur- Residence cards ance and sufficient financial resources Family members of European citizens, who to cover the expenses for their resi- are not European citizens themselves, and dence and that of their family members who accompany or live with a European without being a burden to the Bulgarian citizen, are entitled to receive an extended social security system, or or permanent residence permit in the

Republic of Bulgaria, on the basis of their such company for each foreigner has relationship with the European citizen. employed at least 10 Bulgarian nationals on full-time employment contracts, A foreigner, who received an extended or maintained throughout the period of permanent residence permit in Bulgaria, residence is issued a Bulgarian residence document (residence card) evidencing their right of • A foreigner is a trade representative residence in the Republic of Bulgaria. of a representative office of a foreign company registered with the Bulgarian Work permits Chamber of Commerce and Industry after verification and assessment of General rules the submitted documents regarding The main rules and procedures regarding the activity and tax compliance of the the access to the labor market of company, and regarding the planned foreigners are arranged in the Labor activities of the representative office. Migration and Labor Mobility Act (LMLMA), European citizens may be employed, effective from 21 May 2016 (as amended self-employed or posted and may work in from time to time), and the Regulation on Bulgaria without restrictions and without the Application of LMLMA, effective from the need of work permits. 30 September 2016. Additionally, the following main categories In general, foreigners may work in Bulgaria of foreigners are not required to receive a only after being granted access to the labor resolution for access to the Bulgarian labor market, unless otherwise stipulated market in order to perform work in Bulgaria: by the law. • Foreigners granted a long-term or The LMLMA sets forth the following permanent residence status in Bulgaria grounds for obtaining access to the and members of their families Bulgarian labor market: • Family members of a European citizen • A foreigner signs an employment contract with a Bulgarian employer • Family members of a Bulgarian citizen.

• A foreigner is posted to Bulgaria in the Except for the cases where the foreigner framework of provision of services will perform activities as a self-employed individual, the access to the labor market • A foreigner is seconded in the is requested by a local employer and a framework of an intra-corporate transfer resolution for granting access is issued • A foreigner is performing activity by the Bulgarian Employment Agency. as a self-employed individual. In these cases, a number of legal requirements must be fulfilled for the The following main categories of foreigners access to be granted. Among them are: who have received residence permits on the respective grounds cannot receive • Limitation on the number of foreign access to the Bulgarian labor market: employees: There is a mandatory legal requirement, pursuant to which • A foreigner is a member of the the number of the foreign employees management or supervisory body of directly employed by the Bulgarian a Bulgarian company, provided that

employer may not exceed 35% for less than 250 employees and 20% for small and medium-sized enterprises other types of enterprises of the average with less than 250 employees and number of Bulgarian nationals and EU/ 20% for other types of enterprises of EEA/Swiss nationals at the employer’s the average number of the Bulgarian enterprise is to be observed as well. nationals and EU/EEA/Swiss nationals After a resolution for access to the market and other categories of foreign nationals has been granted, the foreigner shall apply employed by the local employer over for the single work and residence permit in the last twelve months. a uniform procedure before the Migration • Performance of a market search: When Directorate at the Bulgarian Ministry of the a local employer hires foreign nationals Interior. The permit consists the resolution who are not EU/EEA/Swiss nationals, for granting access to the labor market. the employer is obliged to perform a The single work and residence permit shall market search before submission of be valid for the period of the employment an application for granting access to contract but for not more than 12 months. the market. The purpose of the search The term of validity of the permit can be is to prove that there are no qualified extended if the terms and conditions for and suitable candidates – Bulgarian its issuance are still valid, but the total or EU/EEA/Swiss nationals – for the duration may not exceed three years. relevant position. The exceptions to this requirement are exhaustively provided “EU Blue Card” residence and for in the law. work permit

Bulgarian employers must report signed The EU Blue Card gives foreigners the labor contracts with foreigners and right to reside and work in Bulgaria, European citizens at the National Revenue provided that they have higher professional Agency within three days from qualifications. their signing. Applying for an EU Blue Card also requires an employment contract to be concluded Single work and residence permit with the local employer. The main A single work and residence permit shall precondition for a foreigner to obtain an be issued to the foreigners who apply EU Blue Card is that the foreigner has a to reside in Bulgaria for the purpose of university degree for at least a three-year work or who have already obtained a valid educational course. residence permit for purposes other There is no requirement for the local than work. company to perform market search, neither In such cases, the foreigner concludes to observe the rule according to which an employment contract with the local the number of foreigners hired may not employer. For access to the labor market exceed 35% for small and medium-sized to be granted, the local employer shall enterprises with less than 250 employees perform market search as specified and 20% for other types of enterprises of above. The requirement for the number the average number of Bulgarian nationals of foreigners hired not to exceed 35% for and EU/EEA/Swiss nationals at the local small and medium-sized enterprises with enterprise.

The law requires the gross salary of The intra-corporate transfer permit shall foreigners applying for and holding an EU be issued by the Migration Directorate at Blue Card to be at least 1.5 times higher the Bulgarian Ministry of the Interior and it than the average salary in the country incorporates the right under the resolution as per the official statistical data for the for granting access to the labor market of previous 12 months. the Employment Agency.

The EU Blue Card residence and work A foreigner transferred in the framework of permit shall be issued by the Migration an intra-corporate transfer may work and Directorate at the Bulgarian Ministry of the reside in the country for: Interior and it incorporates the rights under • Up to three years for managers the resolution for granting access to the and specialists labor market of the Employment Agency. The permit is granted for a term of validity • Up to one year for trainee employees. not less than 12 months and for up to 4 years. Seasonal employment permit Another development in the Bulgarian Intra-corporate transfer permit legislation is the establishment of Intra-corporate transfer is the temporary procedures that facilitate the entry of secondment of a foreigner for work or foreigners for performance of seasonal training purposes from an undertaking work. As per the LMLMA, seasonal work having its registered seat and address is the activity dependent on the passing of outside of the territory of Bulgaria, and the seasons which is tied to a certain time to which the foreigner is bound by an of the year by a recurring event or pattern employment contract prior to and during of events linked to seasonal conditions the transfer, to an entity belonging to during which required labor levels are the undertaking or to the same group significantly above those necessary for of undertakings which is established usually ongoing operations. in Bulgaria. The intra-corporate transfer Seasonal work permits shall be issued applies only in case of relocation of only for the activities enumerated in the managers, specialists and list of the economic sectors with activities trainee employees. dependent on the passing of the seasons There is no requirement for the local approved by the Minister of Labor and company to perform market search, neither Social Policy. to observe the rule according to which For seasonal work, a foreigner shall the number of foreigners hired may not conclude a fixed-term employment exceed 35% for small and medium-sized contract with the local employer. There is enterprises with less than 250 employees no requirement for the local employer to and 20% for other types of enterprises of perform market search, neither to observe the average number of Bulgarian nationals the rule according to which the number and EU/EEA/Swiss nationals at of foreigners hired may not exceed 35% the local enterprise. for small and medium-sized enterprises with less than 250 employees and 20% for

The work permit is issued for a term of maximum one year. The term may be extended for a new period of up to 12 months only by exception, when the respective activity requires prolongation of the initial term.

In case of short-term assignment, i.e. up to 3 months within a period of 12 months, instead of work permit, one-off registration is required.

Public procurement • Supply of goods

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

Main participants Documents evidencing the fulfillment Public procurement procedures involve of certain selection criteria have to be many stakeholders, among which are the presented also by the subcontractors of contracting authorities/entities, candidates the candidates/tenderers depending on the and/or tenderers (depending on what stage activities which the subcontractors of the public procurement they participate), will perform. contractors and subcontractors. The criterion for selection of the successful Contracting authorities/entities participant in the public procurement procedure is the economically most The contracting authorities/entities are advantageous tender. divided into public contracting authorities and sector contracting entities. Contractors and subcontractors

The public contracting authorities include Upon completion of the public procurement the representatives of governmental procedure and selection of a contractor, a and municipal authorities, judicial public procurement contract is concluded and prosecution authorities, public between the contracting authority/entity organizations and medical companies, state and the contractor. or municipal ownership or where over half If the selected contractor has declared in of their revenues come from the state and/ the public procurement procedure that it or municipal budget, etc. will use subcontractor(s), a subcontracting The sector contracting entities are the contract is concluded between the representatives of entities performing contractor and subcontractor(s). activities in the sectors of natural gas, heat, Notwithstanding the use of subcontractors, electricity, water supply, transportation, the contractor assumes the entire exploitation of geographical area and responsibility for the implementation of the postal services. public procurement contract.

Candidates/tenderers Types of public procurement procedures Any Bulgarian and foreign legal entities and The public procurement procedures set out individuals, as well as any combinations of in the PPA are as follows: them, and any entities entitled to execute • Open procedure – in which all interested works or to supply goods or to render candidates may submit an offer. services under their national legislation, may participate in public procurement • Restricted procedure – a two-stage procedures and be awarded public procedure in which short-listed procurement contracts. candidates invited by the contracting authority/entity may submit an offer. The application process usually requires provision of many corporate and financial • Competitive procedure with negotiation documents by the candidates/tenderers – a two-stage procedure in which the to the contracting authorities/entities, contracting authority holds negotiations certifying the fulfillment of certain with invited short-listed candidates. The conditions, called selection criteria. procedure may be conducted only if the

grounds explicitly listed in the and conditions of the agreement. The PPA are met. procedure may be conducted only if the grounds explicitly listed in the • Competitive dialogue – a three-stage PPA are met. procedure in which the contracting 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 terms and conditions of the agreement. PPA are met. The procedure may be conducted only if the grounds explicitly listed in the • Negotiated procedure with a prior PPA are met. invitation for participation – a two-stage procedure in which the contracting • Negotiated procedure without entity holds negotiations with short- publication of a prior notice – which can listed candidates invited to be conducted only in the cases explicitly submit offers. listed in the PPA and if the subject of the public procurement is related to the • Negotiated procedure with a prior defense and security sector. notice – a procedure applicable for procurements in the defense and • Design contest – a procedure in which security sector in which the contracting the contracting authority/entity acquires authority holds negotiations with invited a plan or design in specific fields (e.g. short-listed candidates. The negotiations architecture, engineering) selected may be held in consecutive steps, by an independent jury following in order to decrease the number of a competition with or without the reviewed offers, by applying the awarding of prizes. The design contest award criteria. may be open or restricted.

• Innovation partnership – a new two- • Public competition – in which all stage procedure used where the interested candidates may submit an contracting authority/entity needs offer. The procedure is conducted with innovative goods, services or works. At regard to procurements of low value. the first stage, short-listed candidates • Direct negotiation – in which the are invited to submit final offers. After contracting authority/entity holds negotiations held with the candidates, negotiations with one or more persons an innovation partnership agreement is for the purpose of determining the concluded with the selected candidate. terms and conditions of the agreement. • Negotiated procedure without prior The procedure is conducted with regard notice – in which the contracting to procurements of low value only if the authority holds negotiations with one grounds explicitly listed in the or more persons selected by it for PPA are met. the purpose of determining the terms

The above public procurement procedures the new Concessions Act, effective from are described generally. Some of them 2 January 2018, transposing Directive may be applied by the public contracting 2014/23/EU of the European Parliament and authorities, while others – by the sector of the Council of 26 February 2014 on the contracting entities as explicitly award of concession contracts. specified in the PPA. The concessions for extraction of underground resources are awarded Appeal of public procurement pursuant to the Underground Resources procedures Act, while the terms for award of mineral The decisions, actions or omissions of water extraction concessions are set out in the contracting authorities in a public the Waters Act. procurement procedure until conclusion of the contract or the framework agreement The concession is a public-private may be appealed by the interested parties partnership under which a public authority before the Commission for assigns to an economic operator the the Protection of Competition. execution of construction or the provision/ management of a service whereby the The resolutions of the Commission for the economic operator receives the right to use Protection of Competition are subject to the construction, respectively to receive appeal before the Supreme Administrative the revenues from the service by assuming Court. The resolutions of the court the operational risk. shall be final. Objects of concession agreements Public Procurement Agency and Public The objects of concessions is property Procurement Register which is state or municipal ownership. The Public Procurement Agency is the The objects of works and service authority which is responsible for the state concessions may be ownership also of the policy in the area of public procurement. concessionaire or of a third party. It exercises various types of control over public procurements. The types of concessions are:

The Public Procurement Agency also • Works concession – for design and keeps the Public Procurement Register implementation, or only implementation which contains certain documents and of a construction project and information with regard to each public exploitation of the completed procurement, such as the decisions for construction initiation of public procurement procedures, • Service concession – for provision or notices of public procurement procedures, management of a service notices of the completion of public procurement contracts, etc. • Concession for use of public state or municipal ownership - for performing Concessions economic activities with public state or municipal property against a The conditions and procedure for award, remuneration without execution of implementation and termination of works or provision/management concessions in Bulgaria are regulated by of a service.

Participants in concession procedures The type of the procedure depends on the The contracting authorities under state practical complexity of the concession. concessions are the competent ministers, The concessionaires in concessions while the contracting authorities under without transnational interest, including municipal concessions are the respective works and service concessions below the mayors of municipalities. European threshold and in concessions for Any Bulgarian or foreign individual, use, are selected only through an legal entity, or another formation, or a open procedure. partnership among them, which meet The tenders and applications submitted by the legal requirements set out in the candidates and tenderers are evaluated by Concessions Act and in the concession an evaluation committee appointed by the documentation may participate in a contracting authority. The award criterion concession procedure and be awarded with applied by the evaluation committee is a concession. the economically most advantageous The concession agreement is concluded tender at the best price-quality ratio. The with the participant which is selected as maximum term of the works and service a concessionaire in the procedure. Upon concessions under the Concessions Act requirement of the contracting authority, or is 35 years, while the maximum term of upon a request of the concessionaire, the the concessions for use of public state or concession agreement may be concluded municipal ownership is 25 years. The term with a project company established can be extended for a period which shall be by the concessionaire. The contracting no longer than one-third of the initial term authority may also require the concession of the agreement. agreement to be concluded with a public-private company established by the Appeal of concession procedures participant selected as a concessionaire The decisions, actions or omissions of and the contracting authority. the contracting authorities in concession procedures may be appealed by the Concession procedures interested parties before the Commission The concessionaires in concessions of for the Protection of Competition. transnational interest, i.e. works and The resolutions of the Commission for the service concessions having a value Protection of Competition are subject to exceeding the threshold set out in the appeal before the Supreme Administrative applicable regulation of the European Court. The resolution of the court Commission, may be selected through one shall be final. of the following three procedures:

• Open procedure Concessions Register The Council of Ministers keeps a public • Competitive procedure with Concessions Register which contains negotiation and information on each concession procedure • Competitive dialogue. from its initiation until the termination of the concession agreement.

Competition and antitrust Any such claims may be filed before the regulations competent Bulgarian courts under the The major competition and antitrust terms of the Civil Procedure Code. The legislation in Bulgaria is the Protection of effective decisions of the Commission Competition Act (PCA). for the Protection of Competition and of the Supreme Administrative Court The PCA applies to all enterprises engaged for establishment of an infringement of in activities in or outside Bulgaria if they competition law shall be binding for the prevent, restrict or distort competition civil courts for the fact of the infringement within the country, or if they create risk and of the infringer. to prevent, restrict or distort competition, as well as in cases of abuse of dominant Prohibited agreements, decisions and position when negotiating. concerted practices An independent state authority, the The PCA expressly prohibits and declares Commission for the Protection of void all types of agreements between Competition (“the Commission”), undertakings, decisions by associations monitors the compliance of the actions of of undertakings, as well as concerted enterprises, carrying out activities on the practices of two or more enterprises territory of the country, with competition having as their object or effect the rules. prevention, restriction or distortion of competition, which: The Commission is empowered to impose sanctions in cases of prohibited • Directly or indirectly fix prices or other agreements, decisions and concerted trading conditions practices, unfair competition, abuse of • Share markets or sources of supply monopoly or dominant market position and abuse of superior bargaining power. • Limit or control production, trade, technical development or investments The Commission is also responsible for issuance of authorization of concentration • Apply dissimilar conditions to equivalent of economic activities (e.g., mergers, transactions with other trading parties, acquisition of control, joint ventures). thereby placing them at a competitive disadvantage The PCA has implemented Directive 2014/104/EU of the European Parliament • Make the conclusion of contracts and of the Council of 26 November 2014 on subject to acceptance by the other certain rules governing actions for damages party of additional obligations or to the under national law for infringements of conclusion of additional contracts. the competition law provisions of the The Commission can initiate proceedings in Member States and of the European case the undertakings conclude and apply Union. Therefore, it regulates the terms and such agreements, decisions or concerted procedure for claiming by individuals and practices upon its decision, upon request legal entities of compensation for the harm of an interested party or request of suffered by infringements of the prosecutor. competition law.

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 monopoly or Abuse of superior bargaining position dominant position The PCA prohibits any act or omission by The PCA generally prohibits granting of an undertaking with a stronger bargaining a monopoly position to any enterprise position during negotiations which is except in cases where such a position is contrary to good faith business practice authorized by the state by virtue of the law and harms or may harm the interests of the in accordance with the Constitution of the weaker negotiating party and consumers. Republic of Bulgaria. The superior bargaining position shall be The PCA does not prohibit acquisition assessed by reference to the structure of and holding of a dominant position on a the relevant market and the specific legal relevant market; however, certain actions relationship between the undertakings of enterprises, enjoying a monopoly or concerned, taking into account the level of dominant position, are deemed abuse and economic dependency between them, the therefore are prohibited by the law, namely: nature of their activity and its difference in scale, the availability of alternative • Imposing directly or indirectly purchase commercial partner, including the existence or sale prices or other unfair trading of alternative sources of supply, distribution conditions channels and/or clients. • Limiting production, trade and technical The abuse of superior bargaining position development to the prejudice of is penalized with a sanction of up to 10% consumers of the turnover of the infringer generated • Applying different conditions to identical from sales of the respective product in the types of contracts with regard to certain preceding financial year. The sanction shall partners, thereby placing them at a be of an amount not exceeding competitive disadvantage BGN 10,000. If the company which committed the infringement has not • Concluding contracts subject to generated turnover, the Commission shall acceptance by the other party of be entitled to impose a sanction ranging additional obligations or concluding from BGN 10,000 to BGN 50,000. additional contracts

• Unjustified refusal to supply a good or Control on concentration of economic to provide a service to an existing or activities prospective client, aimed at hindering Concentration of economic activities may the economic activities performed by it. have the following forms:

• Merger or takeover of two or more doubts that the concentration will result in independent enterprises the creation or strengthening of a dominant 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 • Creation of a joint venture that performs period of four months in order to further all functions of an autonomous investigate the consequences of the economic entity on a lasting basis. concentration.

The law imposes on the enterprises Prohibition of unfair competition participating in the concentration an obligation for a prior notification to the The PCA establishes a general prohibition Commission, where the aggregate turnover for unfair competition, which represents of the enterprises realized in Bulgaria in the any act or omission which is contrary to preceding financial year exceeds good faith business practice and harms or BGN 25 million and provided that at least threatens to harm competitors’ interests. one of the following conditions has Prohibited are also the specific forms been met: of unfair competition, such as harming • The turnover of each of at least two of competitors’ reputation, deliberate the participants in the concentration misleading, misleading and comparative realized in Bulgaria in the preceding advertising, imitation, unfair soliciting of financial year exceeds BGN 3 million, or customers and disclosure of industrial and trade secrets. • The turnover of the enterprise – subject to acquisition realized in Bulgaria in the Infringements constituting unfair preceding financial year exceeds competition are penalized with a sanction BGN 3 million. of up to 10% of the turnover of the undertaking which has committed the If the participants in the concentration fail infringement for the preceding to notify the Commission, although they financial year. have the obligation to do it, a sanction may be imposed on them of up to 10% Supervision of the Bulgarian of the turnover of the participants for the National Bank over the activities preceding financial year. of credit and financial institutions In a simplified procedure, the Commission The Bulgarian National Bank is the state authorizes the concentration within body which exercises supervision over 25 business days from initiation of the banks and financial institutions and the concentration proceedings, provided that compliance of their activities with the rules the concentration does not result in the established by the Credit Institutions Act creation or strengthening of a dominant and the respective ordinances of the BNB. position that would significantly impede In cases of violation of provisions of the effective competition on the market. law or other acts, the BNB is empowered Where the Commission identifies in the to impose certain measures on banks, simplified procedure that there are serious such as: issuance of written warnings and

© 2018 KPMG Bulgaria EOOD, 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. 110 | Investment in Bulgaria 2018 orders to eliminate violations, prohibition provided for in the law. This restriction does of certain transactions, prohibition on not apply to credit institutions, licensed foreign banks to carry out activities on the to perform activities as an investment territory of Bulgaria and the appointment of intermediary by the Bulgarian National Bank. conservators for a certain period. As a final Foreign investment intermediaries having and exceptional measure, the BNB also has their seat in a Member State, which have the right to withdraw banks’ licenses or obtained licenses for performing such other permits. activities by the competent authorities in The BNB supervision also covers those the respective Member State, may provide activities of Bulgarian banks carried services as investment intermediaries in out abroad, as well as local activities of Bulgaria. The activity can commence only branches of banks from Member States or after the Bulgarian Financial Supervision third countries. In exercising its supervisory Commission obtains the necessary powers, the BNB shall cooperate with information from the competent home the relevant supervision authorities of the state authorities. Member States/countries concerned. In the course of performing activities in Bulgaria, investment intermediaries must Investment intermediaries comply with the Bulgarian legislation, in Bulgaria provides to the Financial Supervision The activities of investment intermediaries Commission and publish all required in Bulgaria and the supervision exercised documents and information with regard over them by the Financial Supervision to their activities in Bulgarian language. Commission are regulated by the Markets Investment intermediaries must also in Financial Instruments Act. inform the National Revenue Agency about In order to comply with the legislation, any transactions concluded by them with investment intermediaries must meet the regard to the acquisition of shares in the following requirements before starting capital of public companies by companies their activities: registered in preferential tax jurisdictions, as well as by their beneficial owners. • Be registered as a joint-stock company or a limited liability company with a seat The new Markets in Financial Instruments and registered address in Bulgaria Act, which entered into force on 20 February 2018, introduces the figure of • Be granted a license by the Bulgarian the tied agent – an individual or legal entity, Financial Supervision Commission which, against remuneration, provides and • Have an initial paid-in capital, at an performs a limited scope of investment amount depending on the type of services/activities, on behalf of and for the services to be offered. account of an investment intermediary. One tied agent may act on behalf of no Investment intermediaries may not conduct more than one investment intermediary. any other commercial activity as a regular occupation or business on a professional The performance of activities as a tied basis, save for certain exceptional cases, as agent is subject to preapproval by the FSC.

Tied agents are not prohibited from out insurance intermediation against performing another commercial activity remuneration. A mandatory requirement as long as the latter does not harm the for performing insurance intermediation investment services they provide. activities is registration of the broker/agent into a special register maintained by the Insurance companies and insurance Financial Supervision Commission. intermediaries in Bulgaria Insurance activity in Bulgaria, including Limitations on cash payments the requirements for performing insurance Limitations on cash payments are imposed activity by insurers from Member States by the Cash Payments Act to ensure that and third countries on the local market payments are recorded in their is regulated by the Insurance Code (IC), real amounts. which transposes the insurance directives As a result of its enactment, all payments of the European Union, including Solvency in Bulgaria of an amount equal to or II Directive. exceeding BGN 10,000 must be executed Pursuant to the provisions of the IC, an only via transfer or deposit to a payment insurance company licensed in a Member account. The same rule shall be applied to State may carry out activity in Bulgaria on cases where the payment is of an amount the basis of the freedom of establishment lower than BGN 10,000, but represents or the freedom to provide services part of a monetary obligation under an principles, provided that this activity is agreement whose total amount is equal covered by its license. Before commencing to or exceeds BGN 10,000. The limitations activity, the insurer must perform a are also applicable for payments in a regulatory procedure which involves foreign currency equal to or exceeding notification to the Bulgarian regulator – the equivalent of BGN 10,000 as per the the Financial Supervision Commission. Bulgarian National Bank’s exchange rate as The notification must be performed by of the date of payment. the home Member State regulator upon The scope of the Cash Payments Act request of the insurer. excludes cash withdrawals/deposits from/ Insurers from third countries to personal payment accounts (including (non-EU countries) may perform insurance from/to personal payment accounts of activities in Bulgaria by registering a spouses, lineal relatives, legally incapable local branch, which needs to receive individuals or individuals with limited an insurance license by the Financial capability), as well as payments of Supervision Commission. This scope of employment remuneration due as per the the license to be granted to such a branch Labor Code and cash transactions with may not exceed the scope of the insurance foreign currency carried out by license of the respective third-country an exchange bureau. insurer which registered the branch. Foreign exchange regime Pursuant to the IC, an insurance intermediary may be an insurance broker Generally, the foreign exchange regime or an insurance agent, who carries in Bulgaria is regulated by the Foreign

Exchange Act and regulations, issued by entities other than banks, called “payment the BNB, the Minister of Finance institutions,” to act as providers of payment and others. services. Pursuant to the Payment Services and Payment Systems Act, a payment Registration regime institution is a joint-stock company or Generally, the foreign exchange regime limited liability company, conducting in Bulgaria is regulated by the Foreign one or more payment services under a Exchange Act and regulations, issued by license issued by the Bulgarian National the BNB, the Minister of Finance Bank. Depending on the type of payment and others. services offered, the initial share capital could vary between BGN 40,000 and International payments and transfers BGN 250,000. Certain types of transactions have to be Pursuant to the provisions of the Payment declared at the Bulgarian National Bank Services and Payment Systems Act, a not later than 15 days after their execution. payment institution licensed in a Member These include: State is entitled to carry out activities in Bulgaria included in its license through a • Granting of loans between local entities branch, representative or directly, provided and foreign entities/individuals that the BNB has been notified by the • Remitting securities abroad by a local relevant Member State regulator. entity and/or purchasing securities without the assistance of a local Customs foreign exchange register investment intermediary Customs authorities are obliged to keep • Opening of a bank account abroad, registers of commercial credits, financial regardless of the amount of money leasing between local and foreign persons, transferred to the account and of export and import of Bulgarian levs, foreign currency in cash and bearer • Making initial direct investments of payment instruments which are subject local persons abroad, regardless of the to declaration. amount of the investment. Local and foreign individuals may import International payments and transfers and export unlimited amounts of Bulgarian levs, foreign currency in cash and bearer Commercial banks in Bulgaria may execute payment instruments, provided that they cross border bank transfers and payments observe the requirements established by local persons to foreign persons from under the Foreign Exchange Act. a third country (a country which is neither an EU Member State nor part of the EEA) If the imported/exported currency amount only after being presented with documents is less than EUR 10,000 or its equivalency evidencing the purpose of the transfer and in another currency, no customs declaration a declaration in a prescribed template. is required. In case the amount is EUR 10,000 or more and shall be imported/ The Payment Services and Payment exported to a country which is not part Systems Act provides for the possibility of the European Union, the individual

© 2018 KPMG Bulgaria EOOD, 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 2018 | 113 is obliged to declare the owner and the the account numbers, their holders and receiver of the amount, its kind, value, the persons having disposal rights over origin and purpose, as well as the transport the accounts, as well as the deposit box vehicle and route. If currency at the amount holders and the persons authorized equal to or exceeding EUR 10,000 shall be by them. imported/exported to an EU country, the Bulgarian banks have the obligation to declaration is necessary only upon request report the above information with regard to from the customs authorities. the accounts opened at them and deposit In cases of export of amounts equal to or boxes kept by them to the Bulgarian exceeding BGN 30,000 in cash, local and National Bank at least once a month. foreign individuals are obliged to declare before the customs authorities the amount Reporting to the Bulgarian National Bank and origin of such cash and bearer payment Local companies and sole proprietors are instruments included, by presenting required to report the following to the a certificate issued by the respective Bulgarian National Bank on a quarterly territorial directorate of the National basis: (i) operations and changes in the Revenue Agency, certifying that they do not amount of a financial loan, received by or have any outstanding or overdue liabilities. granted to a foreign person, in case the In the latter case, if the amount is exported loan is equal to or larger than by a foreign individual and does not exceed BGN 500,000, or its foreign currency the amount of currency imported and equivalent; (ii) operations with and current declared by them, only the amount and balances of bank accounts opened abroad; type of cash bearer payment instruments (iii) receivables from and obligations to must be declared. foreign persons with regard to commercial The export and import of Bulgarian levs loans and other transactions, which are not and foreign currency in cash by mail is financial loans, which exceed forbidden, except for mailings of declared BGN 200,000 or its foreign currency value. This limitation does not apply to the equivalent; (iv) operations with foreign BNB and commercial banks. persons, related to services, remunerations and gratuitous revenues and payments, The Foreign Exchange Act also includes in case a written request by the Deputy specific requirements regarding the Governor in charge of the Banking production, processing and trading of Supervision Department, or a person precious metals and gemstones, and their authorized by them, has been introduced. import and export. Local companies and sole proprietors are Register of the bank accounts and safe required to report on an annual basis: deposit boxes (i) the operations, residues and other changes in the amount of the received/ The Bulgarian National Bank maintains an granted financial loans, whose amount is electronic Register of the bank accounts between BGN 50,000 and BGN 500,000 or and safe deposit boxes, containing its foreign currency equivalent, and information about all bank accounts and (ii) direct investments in real estate abroad. safe deposit boxes opened by/kept at Bulgarian commercial banks, namely

Local individuals must provide the BNB with annual reports on their receivables from, and liabilities to, foreign parties for financial credits, their receivables under bank accounts opened abroad, as well as investments in securities, which have been made without a local investment intermediary, provided that the total amount of the said receivables, bank accounts and investments in securities is equal to or exceeds BGN 50,000 as of 31 December of the previous calendar year.

The following must be reported to the BNB on a monthly basis:

• Real estate transactions between local and foreign persons, where the statistical forms must be submitted by the notaries who recorded the deeds

• Information for any securities owned by local legal entities, which belong to the Financial Corporations sector (within the meaning of Regulation (EU) No. 549/2013, for example credit and financial institutions, insurers, investment companies and others).

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* 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

State Dividends (%) Interest (%) Royalties (%) 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 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 Tunisia Turkey (for pensions only) Ukraine Yugoslavia**

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

KPMG in Bulgaria

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