Foreign natural or juridical persons are free to invest in equity in Bulgarian companies. The existing types of companies are joint stock companies, companies limited by shares, limited liability companies, limited partnerships and general partnership. To become a general partner in a company, however, a foreign natural person must have acquired permanent residence in Bulgaria. The relative share in a company's equity owned by a foreign person is not limited. No prior authorizations are required for making, transforming or liquidating an equity investment.
 Real Estate
Direct foreign ownership of real estate is provided for in a diversified manner. Foreign persons may not own land. However, foreign persons may become the owners of buildings without owning the land on which a building is constructed. Foreign persons also may acquire the "right to use" land or buildings which is similar to a leasehold, for a limited term or as long as the "user" exists as an individual or entity. Such a leasehold, however, is non-transferable and does not entitle its beneficiary to develop the "used" property. A foreign person may also acquire the right to develop land and thus become the owner of buildings constructed in exercising its right, without receiving title to the underlying land. The right to develop is transferable. So is the building acquired by exercising the right to develop. A foreign person may acquire ownership of real estate or the right to use or develop real estate only after prior permission by the Minister of Finance. Same permission is required before rights so acquired are transferred to a third party.
An entirely different concept governs indirect holding of real estate rights by a foreign person. A foreign person may become the sole, majority or minority owner of a locally registered company. Regardless of whether a foreign person is the sole, majority or minority shareholder in a local company, such a company is not in any way restricted in acquiring and transferring title to land or buildings or rights to use or develop real estate. The underlying theory is that the constitutional and other legal restrictions apply only to foreign persons, which a local subsidiary of a foreign person is not. As a consequence, no permissions are needed for a local company (partly) owned by foreigners for it to engage in any real estate transactions.
Securities
Bulgarian law allows securities to be purchased by local or foreign investors on an equal footing. In addition to equity securities, the market in Bulgaria also offers corporate debt securities and government debt instruments in a broad variety. A special right attached to a number of government securities is the option for their holder to use them as a payment instrument in privatization, thereby achieving substantial discounts. However, the new Law on Foreign Investments imposes restrictions for the repatriation of proceeds from debt securities investments, when the object of the investment is a debt security which at the time of investment has residual period to maturity less than six months.
Intellectual Property Rights
Bulgarian law recognizes both industrial property rights and copyrights. Patents and copyrights are provided for by modern legislation. Trademark law reform is underway, but current law still offers sufficient protection to trademark owners. Bulgaria is also a member of the major multilateral conventions governing industrial property and copyrights.
Lending and Financial Leasing
The law does not prohibit lending or leasing to local borrowers on an off-shore basis. Foreign lenders must be advised, however, that a foreign person may lend to a local person after the Ministry of Finance has approved the loan agreement between the parties. Failure to obtain Ministry of Finance approval (which approval is normally granted without difficulty) results in the invalidity of the loan transaction. In case of invalidity the "lender" may still claim its money on the basis of the unjust enrichment doctrine but all security of the "loan" is rendered invalid by the invalidity of the underlying transaction. This procedure does not apply to the financial leasing on an off-shore basis.
Securitization
Foreign investors enjoy the same access to securitization vehicles, as do local investors. Debt may be secured with a mortgage on real estate granted by the debtor or a third party. A mortgage is created by way of executing a notary deed between the mortgagor and the mortgagee and recording the mortgage in the relevant real estate registry. A mortgage authorizes the mortgagee to cause the judicial sale of mortgaged property and provides the mortgagee with priority on the proceeds, after claims for judicial expenses. In a bankruptcy setting, a mortgage ensures a first priority on the proceeds, even before bankruptcy expenses. To create a mortgage one must pay fees functional from the value of the secured debt.
A creditor may decide to secure its debt with a pledge (security interest) in personal tangible property, accounts receivable, or the debtor's enterprise in its capacity as a going concern. The creation of a floating security interest on a changing pool of assets is also authorized by law. Debtor need not transfer possession of the pledged assets to creditor or a third party. A pledge is registrable in a Central Pledges Registry. Registration establishes the priority of security interests in the same pledged property. A pledgee enjoys the same priorities on proceeds, as does a mortgagee. What makes a pledge especially attractive is the possibility for non-judicial foreclosure by way of sale of pledged property directly by the creditor. A pledge costs very little to create: a flat fee in the range between 18 to 30 USD is payable, depending on the number of pages filed for registration.
Concessions
A concession is a special arrangement between a private contractor and the central or a municipal government, whereunder the private investor acquires the right to utilize certain natural resources or real estate, otherwise in the exclusive domain of the government, or to engage in certain activities on which otherwise the government has a monopoly.
A concession on behalf of the State is granted by the Council of Ministers for a term not to exceed 35 years, or total 50 years pursuant to extension. The possible objects of a concession are: underground resources, as regards identification, exploration and extraction thereof; the sea shore beach; the biological, mineral and energy resources of the continental shelf and the exclusive economic zone in the sea, as regards exploration, development, extraction and utilization thereof; the radio frequency spectrum and the geo-stationary orbit positions assigned to Bulgaria by international treaties; national post and telecommunications networks; the national road network, ports used for public transportation and civil airports; waters, inclusive of mineral waters, which have a national significance; irrigation and water supply systems and facilities, provided they are in the exclusive domain of the state; power plants for the production of electric and heat energy, distribution or transit electric networks, main pipelines for the transit of energy resources and products, provided they are in the government domain; forests and parks of national importance; nuclear facilities; natural and archeological reserves.
A concession on behalf of a municipality is granted by the municipal council for a term not to exceed 15 years, or 25 years by way of extension. The objects of municipal concessions are defined by law.
Banking
Banking is one of the industries where the principle
of freedom of the market is combined with strict
regulatory procedures. Banking activities may be
conducted only by a bank registered in Bulgaria
or by a Bulgarian branch of a foreign bank. Only
joint stock companies may register as banks. A banking
license is granted by the Bulgarian National Bank,
pursuant to detailed procedures provided for by
the law. Minority ownership in the equity of banks
not exceeding 3% is not subject to disclosure. Ownership
in excess of 5% of the equity may be acquired by
one person with the approval of the Bulgarian National
Bank. Banks may issue only registered shares. The
law treats local and foreign ownership of banks
on an equal footing. |
Insurance
The insurance industry is regulated in a fashion similar to banking. Insurance activities may be conducted only by an insurance company registered in Bulgaria or by a Bulgarian branch of a foreign insurance company. Only joint stock companies may register as insurance companies. Licenses for insurance activity are granted by the National Insurance Council pursuant to detailed procedures provided for by the law. Minority ownership in the equity of insurance companies not exceeding 1% is not subject to disclosure. A single person may acquire ownership in excess of 5% of the equity of an insurance company only with the approval of the National Insurance Council. Insurance companies may issue only registered shares. The law treats local and foreign ownership of insurance companies on an equal footing.
Securities Trading
A third industry of relatively high degree of regulation is securities trading. Securities trading as a dealer or broker may be carried out only by licensed investment intermediaries. Investment intermediary capacity may be acquired by a Bulgarian joint stock company or limited liability company. A license for investment intermediary activities is granted by the Securities and Stock Exchange Commission, pursuant to detailed procedures provided for by the law.
Minority ownership in the equity of insurance companies not exceeding 10% is not subject to disclosure. Investment intermediaries may issue only registered shares. The law treats local and foreign ownership of investment intermediaries on an equal footing.
Investment intermediary activities may be carried out by Bulgarian banks or Bulgarian branches of foreign banks, provided the banking license issued by the Bulgarian National Bank, provides for securities trading.
The Judicial Process
The judicial process in Bulgaria, as of these days, is still slow and not always inefficient. Obtaining a final court judgment in Bulgaria usually takes years. If a foreign person would decide, or have to, submit its dispute to the jurisdiction of the local courts, such a litigating foreign person will enjoy the same rights and protections in court, as would do a local party to the procedure.
Arbitration
Bulgarian law recognizes the rights of any two parties to enter into an arbitration agreement, thereby excluding the jurisdiction of Bulgarian courts and submitting their potential dispute for resolution by an institutional or ad hoc court of arbitration. However, disputes involving rights in real estate, labor contract rights, or matrimony or child support are not arbitrable. In general, disputes over rights which do not have an economic or property dimension, such as disputes over internal corporate governance matters, are not arbitrable either.
Any two parties may submit their dispute for resolution to an arbitration court with a place of arbitration in Bulgaria. Where one of the parties is a foreign person, the arbitration agreement may provide for arbitration with a place outside Bulgaria.
Recognition and Enforcement of Court Decisions and Arbitral Awards
A final Bulgarian court decision is directly enforceable without any need for recognition. The courts would issue a writ of execution based on any such final court decision. It is the writ of execution that unlocks the judicial foreclosure process to a prevailing litigant.
Where a party has been able to produce a final foreign court decision, it must go through the process of recognition of same decision by Bulgarian courts. Recognition is slow and uncertain, for Bulgarian law is based on the principle of mutuality of recognition of other nation's court decisions. Mutuality may easily be found to not exist. Still, where the courts would take the position that recognition is admissible in principle, they would not reexamine the position of the foreign court. The defendant may only raise objections that subsequent facts have terminated defendant's obligation or that the foreign decision has formal defects. Once a foreign court decision is recognized, enforcement follows the procedures for enforcing Bulgarian court decisions.
A Bulgarian arbitral award is subject to immediate enforcement, just like a Bulgarian court decision. The courts would issue a writ of execution just based on the fact that there is an arbitration agreement based on which a court of arbitration has issued an arbitral award.
Foreign arbitral awards are easy to enforce, for their recognition in Bulgaria is governed by the New York Convention on the Recognition of Arbitral Awards. That makes recognition quick, standardized and certain, should there not exist any of the few grounds for refusal defined in the New York Convention. A recognized foreign arbitral award is enforced in the same manner, as a Bulgarian court decision or arbitral award.
Foreclosure
Foreclosure in Bulgaria, as a general rule, is performed through the court system. Foreclosure is open to any creditor who has obtained a writ of execution based on a final Bulgarian court decision, a Bulgarian arbitral award, or a recognized foreign arbitral award or court decision. In addition, secured creditors may commence foreclosure after obtaining a writ of execution just based on their mortgage or pledge agreement, or based on a notarized contract providing for specific monetary obligations. Commercial paper, such as cheques, promissory notes or bills of exchange, is also the basis for issuance of a writ of execution and may be collected on by way of immediate foreclosure. Regardless of what entitled a creditor to commence foreclosure, it, like any court process in Bulgaria, is slow and extremely inefficient. Foreclosure costs a lot in judicial fees and might easily just fade away after years of useless effort.
Where a creditor has secured its debt by way of a registered pledge, such a creditor has accomplished a lot towards collection of its owed amounts. Upon default, a creditor is entitled to obtain possession of the pledged property and sell it in a commercially reasonable manner. Where the debtor would not surrender collateral, the creditor is entitled to assistance by the court enforcement officers which would forcefully take possession and turn it over to secured creditor. Thus, creditors might avoid a lot of costs for judicial fees and certainly are not held hostage to anyone's unwillingness or inability to act.
Foreign-Investor-Specific Rights
Bulgarian law is liberal in defining foreign investment. Under the law a foreign investment is any investment by a foreign person in: (i) equity in commercial companies; (ii) ownership of buildings or any other rights in real estate; (iii) ownership of tangible personal property held as long term assets; (iv) ownership of debt securities with a residual period to maturity exceeding six months and equity securities, or derivatives thereof; (v) a loan extended to a local person for a term not less than twelve months; (vi) intellectual property rights; (vii) rights under concession contracts; (viii) rights under management contracts. However, there are still certain objects of foreign investment that are defined by the law in a more restricted way. For example, ownership of debt securities with less than six months to maturity or a loan for a term of less than twelve months are not recognized as foreign investment. As a matter of fact, the bilateral treaties to which Bulgaria is a party, broaden the domestic-law-given definition of a foreign investment.
Foreign investment is not subject to any special registration requirements, other than the national statistics reporting requirements which would apply to Bulgarian investors, as well.
Once an investment qualifies as a "foreign investment", it entitles the investor to (convert into hard currency and) repatriate abroad: (i) the income/profit from the investment; and (ii) the proceeds from the sale/liquidation of the investment. Repatriation is done by commercial banks which are under the obligation to control whether the foreign investor has paid all taxes associated with repatriated amounts. To accomplish that, banks require formal statements by the competent tax authorities. The new Law on Foreign Investment provides for severe penalties for banks, in case they repatriate their clients' monies without complying with the rules provided for by the said law. |
INVESTMENT REGULATORY FRAMEWORK
