Bulgaria2007 Investment Climate Statement – Bulgaria
Openness to Foreign Investment Return to topBulgaria has a liberal foreign investment regime; a top government priority is to attract foreign investment, especially American. The government focuses on developing promising sectors of the economy for foreign investment, including energy, information technology, transportation, telecommunications, and agriculture. Bulgaria provides considerable incentives for job creation. Many municipalities are prepared to grant concessions or other favorable treatment for significant investments. Bulgaria has a well-educated workforce, low labor costs, and its geographic position places it at the crossroads of Europe, the Middle East, and the CIS. Bulgaria joined NATO in April 2004 and joined the EU on January 1, 2007. Investment Trends and Policies ------------------------------------------ Continuing economic progress and political stability have enhanced Bulgaria’s ability to attract respected international investors. The precautionary Stand-by Arrangement with the IMF, which expires in March 2007, signaled to foreign investors that the Bulgarian government would pursue a responsible economic policy in the run-up to EU membership. Bulgaria's international credit rating is stable and improving, reflecting the country’s positive economic prospects and prudent fiscal policies. The Investment Promotion Act, last amended in August 2006, stipulates equal treatment of foreign and domestic investors. It creates conditions for improved administrative services and includes an investment incentive package. The law encourages implementation of investment projects over a period of up to three years. The law explicitly recognizes intellectual property and securities as a foreign investment. Common Forms of Investment ---------------------------------------- The most common type of organization for foreign investors is a limited liability company. Other typical forms are joint stock companies, joint enterprises, business associations, general and limited partnerships, and sole proprietorships. The main controlling bodies of law are: the 1991 Commercial Code, which regulates commercial and company law, including the creation and rights of legal entities, and the 1951 Law on Obligations and Contracts, which regulates civil transactions. These laws are deemed generally adequate and neither limits foreign participation in legal entities. The 2003 Law on Special Purpose Investment Companies allows for public investment companies (SPIC) in real estate and receivables. Since a SPIC is considered a pass-through structure, at least 90 percent of its net income must be distributed to shareholders, who are taxed on the dividends received. Prospective U.S. investors should consult appropriate legal counsel for up-to-date legal information and conduct due diligence before making any obligations. Investment Barriers -------------------------- Problems most often encountered by foreign investors in Bulgaria are: government bureaucracy; poor infrastructure; corruption; frequent changes in the legal framework; low domestic purchasing power; and a protracted privatization process. In addition, a weak judicial system limits investor confidence in the courts’ ability to enforce ownership and shareholders rights, contracts, and intellectual property rights. EU accession requirements have led to the adoption of a constitutional amendment which will allow EU citizens and entities to acquire real property, while all other foreigners will be able to do so only on the basis of an international agreement ratified by the Bulgarian Parliament, thereby favoring EU investors over those from the US. However, there are no legal restrictions against acquisition of land by locally registered companies with majority foreign participation. Privatization ----------------- The Privatization Agency (PA) administers the privatization of all state-owned companies. The privatization methods include: public auction, public tender and stock exchange. Foreign companies, including state-owned ones, may purchase Bulgarian state-owned firms. The government’s stated privatization goals are to establish transparent, quick, and effective privatization procedures, providing for equal treatment of all investors. The program is intended to make the economy more efficient by divesting state-owned enterprises and to cover the current account deficit with privatization revenues. Three major privatization deals were concluded in 2006: the sale of Boyana Film Studios, Bulgaria Air, Yuri Gagarin BT tobacco plant and Thermo Power Plant in Varna. The government's privatization will continue though most of the significant assets available for privatization have already been transferred to the private sector The 2002 Privatization and Post-privatization Act instituted a Post-privatization Control Agency under the authority of the Council of Ministers tasked to oversee the implementation of privatization contracts. This body will attempt to ensure that non-price privatization commitments (employee retention, technology transfer, environmental liability and investment) in the privatization selection criteria are honored. In addition, creditors are no longer required to claim their receivables within six months from the start of the privatization. While the government maintains that the six-month period had discriminated between creditors, the new policy could endanger the successful development of privatized companies and lead to lower privatization prices. However, no such problems have yet appeared. Concessions ------------------ Under the new 2006 Law on Concessions, the state is authorized, on the basis of a concession agreement, to grant private investors a partial monopoly. Concessions are awarded only on central and/or local government property. While the law does not mention specific activities for which concessions can be granted, it determines three main subject categories: construction, services, and mining and exploration. Potential fields for concessions may therefore include the construction of roads, ports and airports, power generation and transmission, mining, petroleum exploration/drilling, telecommunications, forests and parks, beaches, and nuclear installations. Concessions are awarded on the basis of a tender and are issued for up to 35 years. The concession period may not be extended beyond this time limit. The new Concessions Law permits “build-operate-transfer” deals, giving priority for mineral exploitation to the holders of exploration licenses, and reconciles conflicting procedures for privatization and concession. Conversion and Transfer Policies Return to topIn 1999, Bulgaria replaced much of its outdated and fragmented foreign currency legislation and liberalized current international transactions in accordance with IMF Article VIII obligations. Under amendments to the 1999 Foreign Currency Act, approved by Parliament in 2003, anyone may take up to BGN 25,000 or its foreign exchange equivalent out of the country without documentation. However, the export of between BGN 8,000 and BGN 25,000 or its foreign exchange equivalent must be declared at customs. Export of amounts larger than BGN 25,000 must be accompanied by a declaration about the source of these funds and supported by documents certifying that the person does not owe taxes. No tax certificate is required for foreigners exporting the cash equivalent of BGN 25,000 or greater provided the amount is equal to the amount declared (or less) when imported. The import of more than BGN 8,000 or its foreign exchange equivalent must be declared at customs. The law also stipulates that payments abroad may be executed only through bank transfers. Transfers over BGN 25,000 for current international payments (imports of goods and services, transportation, interest and principal payments, insurance, training, medical treatment, and other purposes defined in Bulgarian regulations) must be supported by documentation showing the need and purpose of such payments. Expropriation and Compensation Return to topAccording to Article 17 of the Bulgarian Constitution, private real property is protected by law. Depending upon the purpose, expropriation actions may be undertaken by the Council of Ministers or the regional Governor, provided that the owner is adequately compensated. Monetary compensation at market price is the primary method. No tax is levied on the expropriation transaction. Expropriation actions of the Council of Ministers can be appealed directly to the Supreme Court on the basis of the expropriation action, the property appraisal, or the size of compensation. Regional Governor's expropriation actions can be appealed to the local court. In its Bilateral Investment Treaty (BIT) with the U.S., Bulgaria committed itself to international arbitration in the event of expropriation and other investment disputes. Dispute Settlement Return to topThe Judicial System Bulgaria’s 1991 Constitution serves as the foundation of the legal system and creates an independent judicial branch. However, the judiciary has been suffering from systematic flaws, serious backlog and opaque procedures that hamper the swift and fair administering of justice, In 2002, the Bulgarian Parliament passed a series of amendments to the Judicial Systems Act aimed at improving the quality of the judiciary, increasing the efficacy of the court system, and preventing corruption in the justice system. The Constitutional Court declared most of the amendments unconstitutional in December 2002. As a result, judicial reform in Bulgaria has been delayed and many key issues remained un-addressed. In a new effort to strengthen judicial independence and accountability the Parliament passed in 2003 amendments to the Constitution which limited the immunity of the magistrates, extended the period for getting tenure, and introduced a 5-year term in office for judicial heads. Further Constitutional changes, aimed at implementing judicial reform, were passed in March 2006, though, concerns remained that some of the provisions' ambiguity might impact the independence of the judiciary. Parliament is currently considering another set of constitutional revisions as well as a new Judicial Systems Act, intended to increase further the efficiency of the court system and help prevent judicial corruption. Corruption remains a serious problem with public opinion polls indicating that bribes are most commonly paid in the justice sector. There are three levels of courts. 117 regional courts exercise jurisdiction over administrative, civil, and criminal cases. Above them, 29 district courts (including the Sofia City Court) have original jurisdiction in civil cases where claims exceed 10,000 BGN, in serious criminal cases, and in other cases as provided by law. The district courts are also courts of appellate review for regional court decisions. The five appellate courts may review the decisions of the district courts. On the highest level are the Supreme Court of Cassation and the Supreme Administrative Court. On issues of law, the Supreme Court of Cassation has appellate jurisdiction over all civil cases involving claims over 5,000 BGN and criminal cases. The Supreme Administrative Court rules on the legality of acts by the Council of Ministers and the ministries. The Supreme Courts hear cases in three-judge panels, whose decisions may be appealed to a five-judge panel of the same court. Decisions by the five-judge panels are final and binding. The Constitutional Court is not integrated into the rest of the judiciary. It issues final interpretations of the constitution, rules on constitutional challenges to laws and acts, rules on international agreements prior to Parliamentary ratification, and reviews domestic laws to determine their consistency with international legal norms. Bulgarian law provides for jurors only in criminal cases. Under Bulgarian procedural law, first-instance civil cases are brought before one judge in the regional or the district court, depending on the case. Administrative sanctions may be appealed to the regional courts and one judge reviews such appeals. Administrative acts are subject to administrative and court appeal. The new Administrative Procedure Code, adopted in April 2006, introduced the establishment of 29 courts throughout the country specialized in reviewing appeals of administrative acts. Bankruptcy The 1994 Commercial Code Chapter on Bankruptcy provides for reorganization or rehabilitation of a legal entity, attempts to maximize asset recovery, and provides for fair and equal distribution among all creditors. The law applies to all commercial entities, except public monopolies or state-owned companies established by a special law. Bank bankruptcies are regulated under the Bank Bankruptcy Act, while the 1996 Insurance Act regulates insurance company failures. Under Part IV of the Commercial Code, the debtor or creditors can initiate bankruptcy proceedings. The debtor must declare bankruptcy within 30 days of becoming insolvent. Once insolvency is determined, the court appoints an interim trustee to represent and manage the company, take inventory of property and assets, identify and convene the creditors, and develop a recovery plan. At the first meeting of the creditors a trustee is nominated; usually this is just a reaffirmation of the court appointed trustee. Non-performance of a money obligation must be adjudicated (res judicata) before the bankruptcy court can determine whether the debtor is insolvent. Additionally, amendments passed in 2003 add a presumption of insolvency when the debtor is unable to perform an executable obligation, has suspended all payments or when the debtor can only pay the claims of certain creditors. Creditors must declare all debts owed to them within one month of the start of bankruptcy proceedings. The trustee then has seven days to compile a list of debts. A rehabilitation plan or a scheme of distribution (in cases of liquidation) must be proposed no later than a month after the date on which the court approves the list of debts. The court must grant approval of the plan by the creditors within seven days. After creditors' approval the court endorses the plan and terminates the bankruptcy proceeding. The lack of trained trustees has been a problem in the past. The June 2003 amendments provided for examinations for individuals applying to become trustees and obliged the Ministers of Justice and Economy to organize annual training courses for trustees. A Regulation on the procedure for appointment, qualification and control over the trustees, developed by the Ministries of Justice, Economy and Finance was published in June 2005. The methods of liquidating assets were also revised by the June 2003 amendments. The main objective was to establish a legal framework for selling assets that accounts for the character of bankruptcy proceedings, thus avoiding the need to apply the Civil Procedure Code. The new regime includes rules requiring a greater degree of publicity for asset sales. The amendments limited the rights to appeal judicial decisions made during bankruptcy proceedings. Execution of JudgmentsTo execute judgments, a final ruling must be obtained. The court of first instance must then be petitioned for a writ of execution (based on the judgment). On the basis of the writ of execution, a specialized category of professionals, execution agents, seize the assets or ensure the performance of the ordered action. In practice, Bulgarian and foreign observers caution that the proceedings for the execution of judgments and other enforceable claims under the Code of Civil Procedure remain slow and unpredictable. A new draft of Civil Procedure Code is currently being debated in Parliament, which should address these deficiencies. Also, the civil servants who are currently responsible for carrying out execution are viewed as extremely inefficient. Thus, problems are procedural, as well as systemic. In May 2005, Bulgaria addressed the systemic issues by adopting the Private Execution Agents Act, which created a profession of private execution agents to parallel the state one. Hopes are that these private professionals will actively seek to protect the creditor’s interest. The new profession became operational in 2006 though it has so far been unable to effectively address the current problems. In addition, procedural impediments to execution of judgments still remain to be addressed through amendments to the Civil Procedure Code. Foreign judgments can be executed in Bulgaria. Execution depends on reciprocity, as well as bilateral or multilateral agreements, as determined by an official list maintained by the Ministry of Justice. The U.S. does not currently have reciprocity with Bulgaria; so Bulgarian courts are not obliged to honor decisions of U.S. courts. All foreign judgments are handled by the Sofia City Court, which must determine that the judgment does not violate public decrees, standards, or morals before it can be executed. There are also cases defined by the Civil Procedure Code (certain real estate issues and Bulgarian precedents), in which judgments cannot be executed even if they conform to Bulgarian laws and morals. International Arbitration Pursuant to its Bilateral Investment Treaty (BIT) with the United States, Bulgaria has committed to a range of dispute settlement procedures starting with notification and consultations. Bulgaria accepts binding international arbitration in disputes with foreign investors. The most experienced arbitration institution in Bulgaria is the Arbitration Court (AC) of the Bulgarian Chamber of Commerce and Industry (BCCI). Established more than 110 years ago, the AC had been competent to hear civil disputes between legal persons at least one of them being seated outside Bulgaria. It began to act as a voluntary arbitration court between natural and/or legal persons domiciled, respectively seated in Bulgaria since 1989. Arbitration is regulated by the 1988 Law on International Commercial Arbitration, which complies with the United Nations Commission on International Trade Law (UNCITRAL) Model Law. According to the Code of Civil Procedure not all disputes may be resolved through arbitration. Thus, disputes regarding rights over real estates situated in the country or individual labor disputes may only be heard by the courts. Additionally, under the Code of Private International Law of 2005, Bulgarian courts have exclusive competence over industrial property disputes regarding patents issued in Bulgaria. As regards arbitration clauses selecting a foreign court of arbitration, the Code of Civil Procedure mandates that these clauses would only be admissible if at least one of the parties has its seat or residence abroad. As a result, foreign-owned, Bulgarian-registered companies having a dispute with a Bulgarian entity can only have arbitration in Bulgaria. However, under the Law on the International Commercial Arbitration, the arbitrator himself could be a foreign person. Under the same act, the parties can agree on the language to be used in the arbitration proceedings. Arbitral awards are enforced through the judicial system. The party must petition the Sofia City Court for a writ of execution. Having obtained a writ however, the creditor needs then to execute the award using the general framework for execution of judgments in the country, which, as discussed above, is rather inefficient. Foreclosure proceedings may also be initiated. Bulgaria is a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the 1961 European Convention on International Commercial Arbitration. Bulgaria is also a signatory of the International Center for Settlement of Investment Disputes (ICSID) convention and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. There is a Court of Arbitration -- an ADR center for domestic business disputes -- at the Bulgarian Industrial Association (BIA). MediationBusinesses wishing to use mediation to solve their disputes in Bulgaria may find it difficult to locate experienced mediators. Mediation as a practice has only recently begun to develop in the country following the adoption of the Mediation Act in the end of 2004. BCCI and the American Chamber of Commerce (AmCham) responded promptly by opening commercial mediation centers. The mediators at these centers have been trained with USAID assistance. Performance Requirements and Incentives Return to topBulgaria does not impose export performance or local content requirements as a condition for establishing, maintaining, or increasing an investment. For most categories of expatriate personnel from countries outside the EU a work permit is required. Residence permits are often difficult to obtain. A 1:10 ratio requirement between foreign, non-EU residents and Bulgarian employees is applied. A June 1999 law regulating gambling imposes license requirements on foreigners organizing games of chance. The Invest Bulgaria Agency (IBA) (www.investbg.government.bg), the government’s coordinating body for investment, provides information services, individual administrative services and assessment of qualification to receive investment incentives. First-class investments (investments over 70 million BGN, about USD 47 million) are deemed to be priority investment projects. At the request of investors receiving first-class investment certificates, IBA can recommend that the competent authorities grant them free real estate (either state or municipal property). For first-class investments, the Council of Ministers may provide state financing for critical infrastructure deemed necessary for the investment plan’s implementation. Additionally, IBA represents first and second-class investors (investments of USD 27 - 47 million) before all central and territorial executive authorities and the local self-government authorities, and processes all administrative documents. Third-class investors (investments of USD 6.7 – 27 million) receive customized information services. The government policy for promotion of investment is not applicable to banks and other financial institutions, insurance companies, investment companies, companies with special investment purpose, pension and health insurance companies, gambling companies, or investments made pursuant to the Privatization Law. Under the latest draft amendments to the law, real estate and tourism sectors are also excluded from government's investment promotion policies. In 2003, the GOB introduced tax incentives for investments in regions with high unemployment. VAT exemption on imports for investment projects over 10 million BGN (about USD 6.65 million), which was introduced in 2004, is still in effect for non-EU companies. Right to Private Ownership and Establishment Return to topThe Constitution (Article 19) states that the Bulgarian economy "shall be based on free economic initiative." Private entities can establish and own business enterprises engaging in any profit-making activities, unless expressly prohibited by law. Bulgaria's Commercial Code guarantees and regulates the free establishment, acquisition, and disposition of private business enterprises. Competitive equality is the standard applied to private enterprises in competition with public enterprises with respect to access to markets, credit, and other business operations, such as licenses and supplies. Protection of Property Rights Return to topBulgarian law protects the acquisition and disposition of property rights. In practice, the protection of property rights is subject to difficulties of varying degrees. Although Bulgarian Intellectual Property Rights (IPR) legislation is generally adequate - and in some cases stronger than in other EU countries - with modern patent and copyright laws and criminal penalties for copyright infringement, industry representatives believe effective IPR protection requires stronger enforcement, including stricter penalties for offenders. In 2006, a major revision of the IPR-related legal framework was made. The Law on Copyright and Related Rights, the Law on Patents and Registration of Utility Models, the Law on Marks and Geographical Indications, the Law on Industrial Design and the Penal Code were all amended or supplemented to harmonize with international standards. As a major step toward improving the work of the judiciary, a completely new Penal Procedure Code was adopted by Parliament in 2006, while amendments to the Constitution are still being considered. The strongly criticized GOB Decree on the Measures for Protection of IPRs was replaced by EU Regulation 1383/2003 (customs regulation) and is now being directly applied. Additionally, the government still lacks sufficient institutional capacity, coordination, and in some cases, the will to address effectively major enforcement problems, especially in combating and prosecuting organized crime groups. To improve the coordination among institutions and push for a more proactive dialogue with the private sector, in January 2006 an inter-ministerial Council for Protection of IPRs was set up. The Council has since initiated and supported most of the amendments to the IPR-related legislation, and promoted better inter-governmental coordination and outreach to industry. A few industrial groups currently have intellectual property disputes before the government. In May 2004, Bulgaria was placed on the Special 301 Watch List for the first time in five years and remains on that list. Although the sale of pirated optical disc media (ODM) is still an issue, Internet cyber crimes are turning out to be the greatest challenge for the GOB and creative industry now. At a rate of 71 percent for a third consecutive year, software piracy is pervasive both among the end users and system builders. The government took good steps in 2006 to address IP problems, but must continue its efforts to reign in piracy. Bulgaria is a member of the World Intellectual Property Organization (WIPO) and a signatory to key international agreements. Copyrights The 1993 Law on Copyright and Related Rights protects literary, artistic, and scientific works. Article 3 provides a full listing of protected works including computer programs (which are protected as literary works). The Law distinguishes between moral and economic rights. The use of protected works is prohibited without the author’s permission, except in certain instances. In 2000, the Bulgarian Parliament adopted amendments to the law extending the copyright term of protection from 50 to 70 years after the author’s death. The new term of protection is retroactive, i.e., a term of protection that expired at the moment of approval of the amendments is revived within the framework of the 70-year term of protection. For films and other audio-visual works, copyrights are protected during the lives of director, screenplay-writer, cameraman, or the author of dialogue or music, plus 70 years. Other amendments to the law enable copyright owners to file civil claims to suspend the activities of pirates; provide for confiscation of equipment and pirated materials; enhance border control over pirated material; introduce a new neighboring right for film producers; and, harmonize Bulgarian legislation with the EU Association Agreement. The Copyright Office of the Ministry of Culture is responsible for copyright matters in Bulgaria. The National Film Center is responsible for enforcing intellectual property rights with regard to films and videos. Bulgarian legislation provides for criminal, civil and administrative remedies against copyright violation, but because of the small number of court judgments and sentences, law enforcement is still inadequate. Patents The Bulgarian patent law has been harmonized with EU law in the areas of application for European patents and utility models. Bulgaria joined the Convention on the Grant of European Patents (European Patent Convention) in 2002. Bulgaria grants the right to exclusive use of inventions and utility models for 20 years from the date of patent application. The term of validity of a utility model registration is 4 years as of the filing date with the Patent Office. It may be extended by two consecutive three-year periods, but the total term of validity may not exceed 10 years. Inventions eligible for patent protection must be new, involve an inventive step and be applicable for industrial applications. Article 6 lists items not considered inventions and utility models are specifically defined. The independent Patent Office is the competent authority with respect to patent matters. The patent law describes the application procedures and the examination process. Applications are submitted directly to the Patent Office and recorded in the state register. Compulsory licensing may be ordered under certain conditions: the patent has not been used within four years of filing the patent application or three years from the date of issue; the patent holder is unable to offer justification for not adequately supplying the national market; or, declaration of a national emergency. Patent infringement is punishable by imprisonment of up to 2 years or fines from BGN 100 to BGN 300. Disputes arising from the creation, protection or use of inventions and utility models can be considered and settled under administrative, court or arbitration procedures. Disputes are reviewed by specialized panels convened by the President of the Patent Office and may be appealed to the Sofia City Court within three months of the panel's decision. In 1996, Parliament approved the Protection of New Types of Plants and Animal Breeds Act. This Certificate allows for a term of protection of 25 years for annual plants and 30 years for perennial plants and animal breeds, which starts from its date of issuance by the Patent Office. In 1998, Parliament ratified the 1991 International Convention for the Protection of New Varieties of Plants (UPOV). Data Exclusivity Responding to long-standing industry concerns, the GOB included a provision to provide data exclusivity (protection of confidential data submitted to the government to obtain approval to market pharmaceutical products) in its new Drug Law, which took effect in 2003. Trademarks In 1999, Parliament passed a series of laws on trademarks and geographical indications, industrial designs and integrated circuits in accordance with TRIPs requirements and the government’s EU Association Agreement. The Trademarks and Geographical Indications Act, which was amended in 2006 to comply with EU standards, regulates the establishment, use, suspension, renewal and protection of rights of trademarks, collective and certificate marks, and geographic indications. Registration is refused, or an existing registered trademark is cancelled, if a trademark constitutes a reproduction or an imitation or if it creates confusion with a well-known trademark, as stipulated by the Paris Convention and the Trademarks and Geographical Indications Act. Applications for registration must be submitted to the Patent Office under specified procedures. Right of priority, with respect to trademarks that do not differ substantially, is given to the application that was filed in compliance with Article 32 first. Right of priority is also established on the basis of a request made in one of the member countries of the Paris Convention or of the World Trade Organization. To exercise the right of priority, the applicant must file a request within six months of the date of original filing.
Trademark infringement is a problem in Bulgaria for many U.S. manufacturers. Its categorization as a misdemeanor, subject to a nominal fine, is not a sufficient deterrent to illegal activities. While more draconian measures are available, such as imprisonment of up to 5 years, confiscation or fines of up to 5,000 BGN, their enforcement must be significantly stepped up. In Bulgaria, trademark and service-mark rights and rights to geographic indications are only protected pursuant to registration with the Bulgarian Patent Office or an international registration mentioning Bulgaria; they do not arise simply with “use in commerce” of the mark or indication. Under Bulgarian law, legal entities cannot be held criminally liable. Similarly, criminal penalties for copyright infringement and willful trademark infringement are limited, compared to enforcement mechanisms available under U.S. law. Transparency of Regulatory System Return to topMajor Taxation Issues Affecting U.S. Businesses Bulgaria and the U.S. negotiated a bilateral Treaty to Avoid Double Taxation in December 2006, which is expected to be signed early in 2007. This treaty will help spur bilateral economic relations and increase investor confidence. Personal income tax rates increase progressively from 22 to 24 percent. There are three income brackets, with a non-taxable personal monthly income of 200 BGN. The corporate and profit tax rate is 10 percent, the lowest in the EU. Certain tax incentives, such as an exemption from corporate tax, apply in regions of high unemployment. Physical persons, but not legal ones, in certain trades pay a "patent" tax (presumptive tax), according to a schedule established by Parliament. Dividends (and liquidation quotas) distributed by a Bulgarian resident company to U.S. investors are subject to a withholding tax of 15 percent. While Bulgarian residents face a withholding tax of 7 percent, a tax resident in an EU member state is not subject to a withholding tax. A 50 percent depreciation rate is applied on investment in new machinery and other equipment, computers and computer software. Employers pay 65 percent of the monthly contributions for social security insurance and health insurance to an unemployment fund, but their share of contributions is slated to decline, in phases, to 50 percent 2010. Employers must contribute for social security insurance and health insurance: 19.4 percent and 3.9 percent of employees’ gross salaries, respectively. Companies also contribute 1.95 percent of the total wage cost to an unemployment fund. Foreign persons are required to have the same insurance and unemployment compensation packages as Bulgarians. There is a 20 percent single-rate value-added tax (VAT), except for some tourist services where VAT is levied at 7 percent rate. VAT registration is mandatory for persons with turnover exceeding BGN 50,000 over a calendar year, while all others can register voluntarily. A new VAT regime has been introduced for trade in goods between Bulgaria and the other EU member countries. All goods and services are subject to VAT except exports, international transport, and precious metals supplied to the central bank. VAT payments are generally rebated when goods are resold. Exporters may claim VAT refunding within a 30-day period. Excise taxes are levied on tobacco, alcoholic beverages, fuels, certain types of automobiles, gambling equipment, coffee, and tea. Foreign investors have asserted that widespread tax evasion, combined with the failure of the authorities to enforce collection from large state-owned companies, places them at a disadvantage. However, in conjunction with its IMF agreement, the government has strengthened tax collection and limited tax arrears of state-owned enterprises. Another problem underscored by investors is the frequent revision of tax laws, sometimes without sufficient notice. After full harmonization of domestic tax legislation with the EU law, the business environment is expected to become more transparent and predictable. Regulatory Environment An abundance of licensing and regulatory regimes, combined with arbitrary interpretation and enforcement by the bureaucracy, and the incentives thus created for corruption, have long been seen as an impediment to investment. In 2003, Parliament passed the Restriction of Administrative Regulation and Control of Economic Activity Act, which establishes a general and systematized set of rules for simplifying and implementing administrative regulations. The law defines 39 operations that must be licensed and introduces two other simplified regimes, i.e., registration and permit regimes. From the perspective of regulatory relief, this law is a milestone. It sets forth firm market principles of regulation, such as that regulation at all levels of government must be justified by defined need (in terms of national security, environmental protection, or personal and material rights of citizens) and cannot impose restrictions unnecessary to the stated purposes of the regulation. The law also requires that the regulating authority take account of the compliance costs to be borne by business and that no national-level law can be passed without an impact analysis on the law’s economic effect on the regulated activity. In addition, the law eliminates bureaucratic discretion in granting applications for routine economic activities and provides for "silent consent" when the government has not acted upon an application in the allotted time. All of these reforms considerably lighten the potential of regulatory abuse at all levels of government and, when implemented, should improve the overall business environment. While the law creates a ground-breaking normative framework, its practical enforcement is dependent upon movement towards a more flexible bureaucratic environment. Energy Regulator The new Energy Law enacted in 2003 established a transparent and predictable regulatory environment in the energy sector where the key regulatory responsibilities are vested with the State Energy Regulatory Commission - a separate body with regulatory authorities, with a high degree of autonomy and accountability. Competition Policy The 1998 Law on the Protection of Competition (the "Competition Law") is intended to establish and maintain a competitive market. The Competition Law forbids monopolies, restraining agreements, trade restrictive practices, abuse of a dominant market position, and unfair competition, and seeks to promote consumer protection. A company is deemed to have a dominant position if it controls 35 percent or more of the relevant market. A company with a dominant market position is prohibited from: certain pricing practices; limiting manufacturing development to the detriment of consumers; discriminatory treatment of competing customers; tying contracts to additional and unrelated obligations; and, the use of economic coercion to cause mergers. The Law prohibits five specific forms of unfair competition: damaging competitors’ goodwill; misrepresentation with respect to goods or services; misrepresentation with respect to the origin, manufacturer, or other features of goods or services; the use or disclosure of someone else's trade secrets in violation of good faith commercial practices; and, "unfair solicitation of customers" (promotion through gifts and lotteries), which may create difficulties for some foreign enterprises. The Competition Law was overhauled in 2003, introducing important provisions that expand the competency of the Commission for Protection of Competition (CPC), define the prohibition on misuse of an oligopoly, and impose a single criterion for assessing the significance of planned concentration: the aggregate turnover of the enterprises affected by the concentration. Efficient Capital Markets and Portfolio Investment Return to topSince 1997, the Bulgarian Stock Exchange (BSE) has operated under a license from the Securities and Stock Exchange Commission (SSEC). The 1999 Law on Public Offering of Securities regulates issuance of securities, securities transactions, stock exchanges, and investment intermediaries. Comprehensive amendments to this Law (99 in number), which were promulgated in June 2002, establish significant rights for minority shareholders of publicly-owned companies in Bulgaria. In addition, they create an important foundation for the adoption of international best practices corporate governance principles in public companies. The infrastructure of the stock exchange has been substantially improved, including the establishment of an official index (SOFIX). New trading instruments (government bonds, corporate bonds, Bulgarian Depositary Receipts, and privatization through the stock exchange, municipal and mortgage-backed bonds, and Bulgarian Depository Receipts) have been introduced. As a result of appreciation of nearly all of the most actively traded issues on the Bulgarian Stock Exchange, its capitalization more than doubled reaching 8.4 billion BGN (about USD 5.5 billion) in 2005. In the first six months of 2006 BSE's market capitalization increased further reaching 9.9 billion BGN (about USD 6.7 billion). While the stock exchange has become more attractive to investors – fed by prospects of EU membership - it is still facing low liquidity. To boost its liquidity, the GOB has announced plans to sell BSE to a world-renown capital and stock market. The Banking System The Bulgarian banking system has undergone considerable transformation since its virtual collapse in 1996 and now demonstrates both high predictability and client and investor confidence. There are 33 commercial banks, with total assets of 39.9 billion BGN (about USD 26.6 billion) and an annual growth of 31.3 percent in November 2006 or 87 percent of the projected 2006 GDP. Approximately 34 percent of bank assets are concentrated in three banks: Bulbank, State Saving Bank (DSK), and United Bulgarian Bank (UBB). Bulgaria has completed the privatization of its state-owned banks, attracting some strong foreign banks as strategic investors. Foreign investors drawn to the Bulgarian banking industry, include UniCredito Italiano SpA (UCI), BNP PARIBAS, National Bank of Greece, Societe Generale, Bank Austria Creditanstalt, American Life Insurance Company - Consolidated Eurofinance Holdings, Regent Pacific Group, and Citibank. Bulgaria’s banking system is highly capitalized. Reflecting expanded lending in recent years, the average capital adequacy ratio (capital base to risk-weighted credit exposures) for the banking system has steadily declined from 43 percent at end-1998 to 15.21 percent in September 2006, but still remains above the Bulgarian National Bank’s requirement of 12 percent. Government Securities The government finances government expenditures by accessing capital markets. In 2006, the Ministry of Finance held only three auctions of Treasury bills - in January, March and September. The bills are typically short-term (3-month, 6-month and 1-year maturities). Commercial banks are the primary purchasers of these instruments, while pension funds and insurance companies participate mainly in the secondary market. Foreign banks can participate in the treasury market only through a Bulgarian bank or the branch of a foreign bank, which is licensed in Bulgaria. The foreign bank transfers the money, which is then converted into leva to make the purchase, which must be registered with the Ministry of Finance. The foreign bank must open a lev account (a "custody account") for transactions. This lev account cannot be used as a standard deposit bank account. A foreign currency account can be opened, but it is not obligatory. The Investment Promotion Act defines securities, including treasury bills, with maturities over 6 months as investments. Repatriation of profits is possible after presenting documentation that taxes have been paid. Political Violence Return to topThere have been no incidents in recent years involving politically motivated damage to projects or installations. Rather, violence in Bulgaria is primarily criminally motivated. Corruption Return to topCorruption is still perceived to be one of the gravest problems in Bulgaria’s investment climate, despite the Bulgarian government’s numerous advances in laws and legal instruments. Bulgaria ranks 57th among 159 countries included in Transparency International’s (TI) Corruption Perception Index for 2006, down two places from 2005. In reality, the established human trafficking, narcotics, and contraband smuggling channels that contribute to corruption in Bulgaria have yet to be broken, and serious efforts and political will are still needed to carry out much-needed reforms to address inefficiencies in the judicial system. The Bulgarian public generally holds the police, the judiciary, customs officials, and political parties in low regard, due to their perceived corruption. Bribery is a criminal act under Bulgarian law for both the giver and the receiver. Penalties range from one to fifteen years’ imprisonment, depending on the circumstances of the case, with confiscation of property added in more serious cases. In very grave cases, the Penal Code specifies prison terms of 10 to 30 years. The 1996 Money Laundering Law also applies to bribes. Bribing a foreign official is a criminal act. There have been trials and convictions of enterprise managers, prosecutors, and law enforcement officials for corruption. While Bulgarian tax legislation does not explicitly prohibit the deduction of bribes in the computation of domestic taxes, deductions connected with bribery and other illegal activities are not allowed under the tax code. Bulgaria has a 1998 Law on Measures against Money Laundering and in 1998 was one of the first non-OECD nations to ratify the OECD Anti-Bribery Convention. Bulgaria has also ratified the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of Proceeds of Crime (1994) and the Civil Convention on Corruption (1999). The GOB’s recent anti-corruption agenda included the adoption of key international anti-corruption instruments, including: -- signing the UN Convention against Corruption (2003); -- withdrawing the reservations made in 2001 at the ratification of the Criminal Law Convention on Corruption; -- signing and ratifying the Additional Protocol to the Council of Europe’s Criminal Law Convention on Corruption; Bulgaria was the second state to ratify this Additional Protocol. Although the Bulgarian government has achieved some successes in the fight against organized crime and corruption, many observers believe that corruption and political influence in business decision-making continue to be significant problems in Bulgaria’s investment climate. Bilateral Investment Agreements Return to topAs of December 2006, Bulgaria has foreign investment promotion and protection treaties or agreements with Albania, Algeria, Argentina, Armenia, Austria, Belarus, Belgium-Luxembourg, China, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Georgia, Germany, Greece, Great Britain and Northern Ireland, Hungary, India, Iran, Israel, Italy, Jordan, Kazakhstan, Kuwait, Lebanon, Macedonia, Malta, Moldova, Mongolia, Morocco, Netherlands, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Syria, Tunisia, Turkey, Ukraine, the United States, Uzbekistan, Vietnam, Yemen, and Yugoslavia. Bulgaria signed a Bilateral Investment Treaty (BIT) with the United States, which guarantees national treatment for U.S. investments and creates a dispute settlement process. The BIT also includes a side letter on protections for intellectual property rights. The Governments of Bulgaria and the United States exchanged notes in 2003 to make Bulgaria’s obligations under the BIT compatible with its EU obligations, and finalized the process in January, 2007. OPIC and Other Investment Insurance Programs Return to topIn 1991, the Overseas Private Investment Corporation (OPIC) (www.opic.gov) and the GOB signed an Investment Incentive Agreement, which governs OPIC’s operations in Bulgaria. OPIC provides project financing to U.S. investors making long-term investments in emerging markets. OPIC also supports a number of privately owned and managed equity funds, including a regional fund for Southeast Europe created in 2005 for investments in companies in Bulgaria and other Balkan countries. OPIC provides project financing through direct loans and loan guaranties that provide medium- to long-term financing to ventures involving equity and/or management participation by U.S. businesses. OPIC offers American investors insurance against currency inconvertibility, expropriation, and political violence. Political risk insurance is also available from the Multilateral Investment Guarantee Agency (MIGA), which is a World Bank affiliate, as well as from a number of private U.S. companies. Labor Return to topBulgaria’s workforce officially consists of 3,281,600 highly educated and skilled men (53 percent) and women (47 percent). Adult literacy rate in Bulgaria is 98 percent. A high percentage of the workforce has completed some form of secondary, technical, or vocational education. Many Bulgarians have strong backgrounds in engineering, medicine, economics, and the sciences, but there is a shortage of professionals with Western management skills. The demand for skilled managers will increase with the advent of high technology, innovative and knowledge-based companies from EU. The aptitude of workers and the relative low cost of labor are considerable incentives for foreign companies, especially those that are labor intensive, to invest in Bulgaria. Employer tax obligations and benefits (clothing allowance, bonuses, etc.) can add more than 50 percent to the nominal wage. Bulgaria's Constitution recognizes workers' right to join trade unions and organize. The National Tripartite Cooperation Council (NTCC) provides a forum for dialogue among government, management, and trade unions, such as cost-of-living adjustments. The current government has substantially revitalized the Council. A tri-partite pact for social and economic development until 2009 was signed in 2006. Bulgaria has two large legitimate representative trade union confederations, the Confederation of Independent Trade Unions of Bulgaria (CITUB) and Podkrepa ("Support"). The 2004 trade union membership census indicates that CITUB has over 350,000 members and Podkrepa has about 110,000 members. CITUB, the successor to the trade union integrated with the Communist Party, has long since severed its ties to the socialists, whereas Podkrepa is an independent confederation. There are few restrictions on trade union activity and the confederations operate freely, but the workforce in smaller firms and elsewhere in the emerging private sector is often not represented by trade unions. Under the Labor Code, employer and employee relations are regulated by employment contracts, which may be agreed upon through collective bargaining. The Code addresses worker occupational safety and health issues, establishes a minimum wage (determined by the Council of Ministers), and prevents exploitation of workers, including child labor. The Code clearly delineates employer rights, strengthening management's hand in disciplining the workforce. Disputes between labor and management can be referred to the courts, but resolution is often subject to delays. Over the last three years, the Labor Code has been amended to address labor market rigidities and bring labor legislation into compliance with the EU social policy and employment requirements. The amendments to the Labor Code simplify additional work procedures, restrict mandatory leaves, and relax procedures for implementing collective redundancies. However, collective labor contracts at the sectoral or branch level remain binding for all enterprises of the sector or branch. The minimum annual paid leave is 20 days. Neither foreign companies, nor Bulgarian companies having majority foreign-control are exempt from the requirements of the Labor Code. During 2002-2003, the Ministry of Labor formed the new “National Institute for Conciliation and Arbitration” (NICA), which developed a framework for collective labor dispute mediation and arbitration. NICA includes representatives from labor, employers, and the Government, as does the roster of mediators and arbitrators. Although NICA-sponsored collective labor dispute resolutions are still few, a number of the appointed mediators received basic mediation skills training from the U.S. Federal Mediation and Conciliation Service. Foreign-Trade Zones/Free Ports Return to topThe 1999 Customs Act renamed the six duty-free zones “free zones.” Foreign, including U.S., individuals and corporations, and Bulgarian companies with 1.0 percent or more foreign ownership may set up operations in a free zone. Thus, foreign-owned firms have equal or better investment opportunities in the zones compared to Bulgarian firms. There are at present six operational “free zones” in Bulgaria: Ruse and Vidin ports on the Danube; Plovdiv; Svilengrad (near the Turkish border); Dragoman (near the Yugoslav border); and, Burgas port on the Black Sea. They are all managed by joint stock or state-owned companies. The government provided land and infrastructure for each zone. -- Plovdiv, the only inland free zone, is the most profitable, with 24 investment projects. -- The Burgas FTZ has the largest warehousing and automotive distribution facilities in Bulgaria and is used by more than 100 foreign and joint venture companies including Samsung. -- Limited manufacturing is conducted in both the Plovdiv and Ruse FTZs. All forms of production and trade activities and services may take place in the free zones. Foreign, non-EU goods delivered to the free zones for production, storage, processing, or re-export are VAT and duty exempt. Bulgarian goods may also be stored in free zones with permission from the customs authorities. Exports will become less attractive for EU exporter companies as the new VAT regime requires full price payment, VAT inclusive, before selling it into another EU Member State. Convertible foreign currency may be used and revenues can be transferred abroad freely without any restrictions. Administrative procedures relieve the investor from needing to contact local authorities directly. Production and labor costs are low, with well-trained and highly qualified labor available. All the zones are located on strategic trade rail, road, and/or water trade routes. Free trade zones in Bulgaria have attracted a number of foreign investors, including Hyundai, KIA Motors, Schwartskopf, Henkel, Landmark Chemicals Ltd., Group Schneider, and BINDL Energic Systeme GmbH. EU integration has encouraged regional authorities to attract outside investors and spur local economic development. In partnership with the private sector, they provide resources (ground, infrastructure, etc.) for the development of industrial zones and parks, which are different from FTZs as they do not provide for any form of preferential tax treatment. International and local investors can use the favorable factors, such as low-cost and educated labor and easy access to the local market, to relocate their business. Currently, the most advanced projects are the industrial zones in Sofia, Rakovski, Panagyurishte, Stara Zagora, Silistra, Pazardzhik and Ruse. Foreign Direct Investment Statistics Return to topBetween 1992 and Sept. 2006, total cumulative FDI into Bulgaria amounted to USD 17.602 billion (about 55 percent of estimated 2006 GDP). FDI in Bulgaria already exceeded $3.5 billion in Sept 2006. Bulgaria’s direct investment abroad was a total of USD 258 million at end-September 2006. In the period of January through September Bulgaria's direct investment abroad increased by USD 58 million. FDI by Year (millions of U.S. dollars) 1992 34.4 1993 102.4 1994 210.9 1995 162.6 1996 256.4 1997 636.2 1998 620.0 1999 818.8 2000 1,001.5 2001 812.9 2002 969.7 2003 2096.9 2004 3443.4 2005 2,883.7 2006 3,552.2 (Jan-Sep) Total 17,602.0(Source: Invest Bulgaria Agency) FDI by Country of Origin 1992-2006 (Jan-Sep) (millions of USD) Austria 3,018.1 Netherlands 1,845.4 Greece 1,598.2 U.K. 1,350.3 Germany 1,206.3 Belgium and Luxemburg 898.1 Italy 892.3 USA * 782.9 Hungary 778.7 Cyprus 704.0 Czech Republic 576.1 Switzerland 527.9 Ireland 355.2 France 310.1 Spain 277.1 Russia 232.1 Turkey 225.8 Denmark 176.4 Sweden 104.7 Israel 95.7 Japan 61.5 Liechtenstein 60.1 Malta 59.1 Canada 56.1 Panama 45.9 Slovenia 43.9 Romania 38.7 (Source: Invest Bulgaria Agency) * Official GOB investment statistics currently rank the U.S. as 8th in terms of overall investment in Bulgaria for the period 1992-2006 (Jan-Sep). While the Central Bank credits the U.S. with investments at the rate of $40-$50 million per year in the last eight years, this data is incomplete as many US investors establish European subsidiaries to manage their investments in Bulgaria. FDI by Sector 1998-2005 (millions of USD) Financial activities 2,287.2 Trade and repairs 1,695.7 Telecommunications 1,621.1 Electricity, gas and water 1,033.4 Real estate and business activities 832.8 Petroleum, chemical, Rubber Plastic 612.4 Mineral products (cement, glass) 536.8 Construction 373.6 Food products 282.9 Textile and clothing 253.7 Wood products, paper 191.8 Hotels and restaurants 191.8 Machine-building 191.8 Metallurgy and metal products 166.3 Transport 131.8 Electrical eng., electronics, computers 135.4 Mining 84.3 Agriculture, forestry and fishing 23.6 Leather and leather products 22.4 Publishing 16.5 Vehicles and other transport equipment 9.8 (Source: Invest Bulgaria Agency) Selected 2005 Foreign Direct Investments (Investor, Country, Sector, Bulgarian Firm, USD millions) -- CEZ, Czech Republic, energy, West electricity distribution, 366 -- OTP, Hungary, finance, DSK Bank, 363.7 -- EVN, Austria, energy, Southeast electricity distribution, 352 -- E.ON, Germany, energy, Northeast electricity distribution, 183 --OTE, Greece, telecommunications, Cosmo Bulgaria Mobile, 173.9 -- Sisecam, Turkey, glass industry, Greenfield glass plant, 160 --Pireusbank, Greece, banking, Evrobank AD, 62.6 -- Miroglio, Italy, textile, Miroglio Bulgaria, 50.2 -- Umicore, Belgium, metals, Umicore Med, 48.1 (Source: Invest Bulgaria Agency) Web Resources Return to topwww.investbg.government.bg (Invest Bulgaria Agency) |
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