Attitude toward Foreign Direct Investment
Bulgaria’s geographic position places it at the crossroads of Europe, the Middle East, and the former Soviet Union. Promising sectors for foreign investors include: back-office/ process outsourcing and information technology, telecommunications, environmental technology (including water and waste water infrastructure), healthcare, biomass, and agriculture (including the beverage/processed foods industry). Infrastructure projects that are coming online and may further improve the investment environment include rail, motorways, tunnels, ports, and tourism resorts.
The government oversaw healthy economic growth in 2015 of 2.9 percent – the highest since 2008 - at the cost of new debt and in the absence of new investment and sufficient private demand. The nominal increase of 23 percent of the 2015 FDI was due in large part to counting intracompany debt transfers, company stock acquisition, and real estate operations as FDI. As a member of the EU, Bulgaria has access to significant EU funds, which in the recent years have replaced FDI as a major growth catalyst. EU money in Bulgaria has typically supported the development of human capital, economic competitiveness and innovation, public administrative capacity, road construction, water and waste-water infrastructure; and agriculture sector modernization. Exports are the traditional growth engine; these were diminished in 2015 by negative global trends, including the Russia-Ukraine conflict and the resulting sanctions and the slow recovery of the Eurozone. EU exports nonetheless drove 2.9 percent growth in GDP in 2015, rising by just over 7 percent on the year. Unemployment fell below 10 percent in 2015, but the possibility for new job creation continues to be limited by labor market factors.
At present, there are no general limits on foreign ownership or control of firms, nor is there screening or restricting of foreign investment in Bulgaria. Companies with more than 10 percent offshore participation are banned from doing business in Bulgaria across 28 specific activities, but certain exemptions are available. There are pending amendments to the Offshore Act, which aim to ban companies with more than 10 percent offshore participation from government procurement competition.
In 2016, the government unveiled a list of measures for improving the business climate and attracting new investors. The 85 measures include cutting the time for VAT registration and for real property tax assessment, as well as establishing a one-stop shop for issuing construction permits.
While Bulgaria generally affords national treatment to foreign investors, we have received reports of discrimination against U.S. investors by government officials. Investors more often cite general problems with corruption, rule of law, frequently changing legislation, and weak law enforcement. Transparency International's (TI) Corruption Perception Index for 2015 ranked Bulgaria 69th out of 168 countries surveyed -- the lowest ranked EU member state. Government direct procurement has earned a reputation for concentrating corruption and strong oligarchic interest. The government has professed a commitment to root out corruption and organized crime. In February 2016, the government cancelled several large tenders, citing the need for greater transparency in public procurement.
The IPR regime is challenged by widespread online piracy, through peer-to-peer (P2P) downloading and direct streaming, and inadequate enforcement of laws on copyrights, patents, and trademarks. For this reason, in 2015 Bulgaria remained for a third consecutive year on USTR’s Watch List of countries not doing enough to enforce an effective IPR regime. In 2014, the government entered into voluntary agreements with some of the most egregious pirate sites, which marked a step ahead in the fight against online piracy of music and films after many years of little or no results. Together with industry, the government is reducing business software piracy, which, while decreasing, remains high.
Other Investment Policy Reviews
No major international economic organization has conducted an Investment Policy Review of Bulgaria in recent memory.
Laws/Regulations on Foreign Direct Investment
The 2004 Investment Promotion Act stipulates equal treatment of foreign and domestic investors. The law encourages investment in manufacturing and high-technology, as well as in education and human resource development. It creates investment incentives by helping investors purchase land, providing state financing for basic infrastructure and training new staff, and facilitating tax incentives and opportunities for public-private partnerships (PPPs) with the central and local government. PPPs offer an area with potential for private company involvement in supporting and developing public infrastructure and social programs. The government outlined the procedure for establishing a PPP in the 2016 enacted amendments to the 2013 PPP act. The most common form of PPPs presently is concessions, which include the lease of government property for private use for up to 35 years. A new draft law on concessions intends to increase the period over which public (municipal and central government) property can be leased on concession.
Foreign investors must comply with the 1991 Commercial Code, which regulates commercial and company law, and with the 1951 Law on Obligations and Contracts, which regulates civil transactions.
The 2003 Law on Special Purpose Investment Companies (SPIC) allows for public investment companies in real estate and receivables, essentially real estate investment trusts (REITs). Since a SPIC is considered a pass-through structure for corporate income tax purposes, at least 90 percent of its net income must be distributed to shareholders as taxable dividends. A SPIC must apply for an operational license from the Financial Supervision Commission within six months of registration.
The most common type of organization for foreign investors is a limited liability company. The required minimum for registering a limited liability company is one Euro. Other typical corporate entities include joint stock companies, joint ventures, business associations, general and limited partnerships, and sole proprietorships. Bulgaria has dropped six places in the World Bank’s 2015 Doing Business ranking in terms of starting a new business. The report indicates it takes a minimum of 18 days for a new business (a limited liability company) to register, going through four major procedures: company database registration (four days), tax registration (12 days), notary certification (one day) and opening a bank account (one day). Company registration can be done also electronically at: https://public.brra.bg/Internal/Registration.ra?0
Typically, a new business is expected to register an account in the government social security institute and, in some cases, with the local municipality as well. The above procedure applies to local as well as foreign owned business in Bulgaria.
The Invest Bulgaria Agency (IBA), the government’s investment coordinating body, provides information, administrative services, and incentive assessments to prospective foreign investors.
The Bulgarian Small and Medium Business (SME) Act defines a company as a medium sized entity when it has less than 250 employees and its annual revenues do not exceed 97.5 million BGN (55 million USD), and/or assets are valued at less than 84 million BGN (47 million USD). Small business is defined as having less than 50 employed workers and annual revenues at less than 19.5 million BGN (11 million USD), and/or its assets are valued at less than 19.5 million BGN. Micro business is defined as having less than 10 employed workers, less than 3.9 million (2.2 million USD) in annual revenues and less than 3.9 million BGN in assets. The government supports SME development by budgeting money for the implementation of national and local SME plans. Article 7 of the law stipulates that the government SME agency should support any foreign or domestic investor interested in Bulgarian SMEs.
Bulgaria typically supports small and medium business creation and development through strategies focused on EU co-funded innovation and competitiveness measures and programs. Export promotion takes priority, allowing the domestic economy to take advantage of its relatively low labor costs. However, the increasing need for technology upgrades and for skilled labor in many sectors could increase costs in the mid-to-long term.
Limits on Foreign Control and Right to Private Ownership and Establishment
Generally, there are no existing limits for foreign and domestic private entities to establish and own a business in Bulgaria. Foreign investors, however, often cite the following problems: a sluggish government bureaucracy, poor infrastructure, corruption, frequent changes in the legal framework, lack of transparency, and pre-determined public tenders. In addition, a weak judicial system limits investor confidence in the courts' ability to serve as an enforcement mechanism.
The 2014 Offshore Company Act lists 28 activities banned for business by companies registered in offshore jurisdictions with more than 10 percent offshore participation. The law, however, allows those companies to do business if the physical owners of the parent company are Bulgarian citizens and known to the public, if the parent company’s stock is publicly traded, or if the parent company is registered in a jurisdiction with which Bulgaria enjoys a treaty for the avoidance of double taxation (such as the United States).
U.S. music, software, pharmaceutical, and other industries report continuing intellectual property rights (IPR) concerns in Bulgaria, particularly with respect to internet piracy, ineffective prosecution of IPR cases, and delays and conflicts of interest in enforcing trademark and patent protection. In 2014, the government brokered voluntary agreements between rights-holders and online pirates, and rights-holders reported an increase in the purchase of rights to broadcast legitimate content. Current Bulgarian legislation effectively bans all biotech crop trials and production. Food legislation imposes voluntary standards that restrict the use of soy protein in processed meat products.
Bulgaria completed its major privatizations in the 1990s and early 2000s. All state-owned property is eligible for privatization, with the exception of a specific list of companies including water management companies, state hospitals, and state sports facilities. State-owned military manufacturers can be privatized after approval by Parliament. Municipally-owned property is considered for privatization upon decision by a municipal council, or authorized body and upon publication of the municipal privatization list in the State Gazette. Privatization methods include: public auctions, public tenders, and public offerings. Foreign companies, including state-owned ones, may purchase Bulgarian state-owned firms. The 2010 Privatization and Post-Privatization Act created a single Privatization and Post-Privatization Agency which makes privatization decisions regarding: hospitals; equity and shares in companies 50 percent or more owned by the state; state-owned property valued at between 10,000 Bulgarian Leva (BGN) (USD 5,500) and BGN 500,000 (USD 277,000), following approval from the Minister of Regional Development and Public Works and the Minister of Finance; and state-owned property valued at over BGN 500,000 (USD 277,000), following approval from the Council of Ministers.
The Privatization and Post-Privatization Agency also oversees the implementation of privatization contracts and ensures that non-price privatization commitments (employee retention, technology transfer, environmental liability, and investment) in the privatization selection criteria are honored. The privatization deals that could attract significant foreign investor interest in 2016 are the sale of the freight division of the Bulgarian Railways company (BDZ) and of the government’s minority stake in Plovdiv International Fair. The current Minister of Economy has publicly opposed the sale of the government owned military plant VMZ and arms trader Kintex. The government will likely attract world’s top operators to bid for 35-year concession of the Sofia airport, the nation’s largest passenger terminal. The proceeds will be used to pay the deficits in the Bulgarian state passenger railways. Pursuant to government plans, the airport in the second largest city of Plovdiv will be bid out on concession in 2016.
Screening of FDI
There is no screening of FDI presently taking place in Bulgaria.
The Commission for Protection of Competition (the “Commission”) oversees market competition and enforces the Law on the Protection of Competition (the “Competition Law”). The 2008 enacted law is intended to implement EU rules which promote competition and consumer protection. The Competition Law forbids monopolies, restrictive trade practices, abuse of market power, and unfair competition. Companies are prohibited from: direct or indirect abusive pricing practices; distribution of market shares and supply sources; limiting manufacturing development to the detriment of consumers; discriminatory treatment of competing customers; tying contracts to additional and unrelated obligations; and use of economic coercion to cause mergers. Since 2015 the law has prohibited the demonstration of “significant negotiating power” between companies, which is manifested through “…the unreasonable refusal to supply or purchase goods and services, the enforcement of unreasonably heavy or discriminatory conditions or the unreasonable suspension of contractual relations.” The minimum penalty set for noncompliance is 10,000 BGN (5,500 USD), but the fine can amount to up to 10 percent of the annual sales of the respective good. Foreign investors have opposed this provision as increasing government control over their business with local suppliers. The Competition Law prohibits certain 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; use or disclosure of someone else's trade secrets in violation of good faith commercial practices; and according to Art. 33 in the Competition Law, "unfair solicitation of customers" (i.e., promotion through gifts and lotteries). Monopolies can only be legally established for certain categories of activities: railway and postal services, atomic energy, production of radioactive materials, and weapons production. The Commission defines market concentration of 15 percent or more as potentially damaging to competition. It also defines market concentration of 25 percent or more as potentially damaging to competition if the companies involved are operating in different markets (and are not competitors). In practice, the Competition Law has been inconsistently applied, and the Competition Commission has been subject to influence, or has overstepped its mandate.