Transparency of the Regulatory System
In general, the regulatory environment in Bulgaria is characterized by complexity, lack of transparency, and arbitrary or weak enforcement. These factors create incentives for public corruption. Bulgarian law defines 38 operations that must be licensed, including registration and permit regimes. The law requires all regulations to be justified by defined need (in terms of national security, environmental protection, or personal and material rights of citizens), and prohibits restrictions incidental to the stated purposes of the regulation. The law also requires the regulating authority perform a cost-benefit analysis of any proposed regulation. This requirement, however, is often ignored when Parliament reviews draft bills. With few exceptions, all draft bills are made available for public comment, both on the central government web site and the respective agency’s web site and interested parties are given 30 days to submit their opinions. The government is not obligated to incorporate the comments raised publicly into the final legislation. In addition, the law eliminates bureaucratic discretion in granting requests for routine economic activities, and provides for silent consent when the government does not respond to a request in the allotted time. Local companies in which foreign partners have controlling interests may be requested to provide additional information or meet mandatory requirements in order to engage in certain licensed activities, including production and export of arms and ammunition, banking and insurance, and the exploration, development, and exploitation of natural resources.
International Regulatory Considerations
Bulgaria became a member of the World Trade Organization in December 1996.
Under the provisions of Article 207 of the Treaty on the Functioning of the European Union (Lisbon Treaty), common EU trade policies are exclusively the competence of the EU and the European Commission, which coordinates them with the 28 member states.
Legal System and Judicial Independence
The 1991 Constitution serves as the foundation of the legal system and creates an independent judicial branch comprised of judges, prosecutors, and investigators. In December 2015, Parliament adopted constitutional amendments aimed at promoting judicial independence and transparent selection of magistrates. The results from the implementation of this and other reform efforts are yet to be seen. The government has drafted several comprehensive reform plans, but their implementation has been limited. The judiciary continues to be the least trusted institution in the country, with widespread allegations of corruption and undue political and business influence. The busiest courts in Sofia suffer from serious backlogs, limited resources, and inefficient procedures that hamper the swift and fair administration of justice.
There are three levels of courts. Bulgaria's 113 regional courts exercise jurisdiction over civil and criminal cases. Above them, 29 district courts (including the Sofia City Court and the Specialized Court for Organized Crime) serve as courts of appellate review for regional court decisions and have trial-level (first-instance) jurisdiction in serious criminal cases and in civil cases where claims exceed BGN 25,000 (USD 13,440), excluding alimony, labor disputes, and financial audit discrepancies, or in property cases where the property’s value exceeds BGN 50,000 (USD 26,880). Six appellate courts review the first-instance decisions of the district courts. The Supreme Court of Cassation is the court of last resort for criminal and civil appeals. There is a separate system of 28 specialized administrative courts which rule on the legality of local and national government decisions, with the Supreme Administrative Court serving as the court of final instance. The Constitutional Court, which is separate from the rest of the judiciary, issues final rulings on the compliance of laws with the Constitution.
Bulgaria has adequate means of enforcing property and contractual rights under local legislation. The government’s handling of investment disputes has been slow, and often requires an intervention at the highest level. There are no outstanding investment disputes before Bulgarian courts involving U.S. companies although several property-related challenges exist against a U.S. investor. Investors sometimes perceive that jurisprudence is inconsistent and that national legislation is used to deter competition from foreign investors.
Laws and 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 most common form of PPPs presently is concessions, which include the lease of government property for private use for up to 35 years.
Foreign investors must comply with the 1991 Commercial Code, which regulates commercial and company law, and 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 Invest Bulgaria Agency (IBA), the government’s investment coordinating body, provides information, administrative services, and incentive assessments to prospective foreign investors. Its web site http://www.investbg.government.bg/ contains relevant information for foreign investors.
Competition and Anti-Trust Laws
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 that 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 BGN 10,000 (USD 5,434), 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. In 2017, the Commission over-ruled a proposal to require supermarkets to stock mandatory quotas of Bulgarian-grown or produced food on the grounds that it would contravene EU laws and restrict market choice. The Commission argued that, if adopted, the proposal would increase prices, lower quality, and cause food shortages. 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.
Expropriation and Compensation
Private real property rights are legally protected by the Bulgarian Constitution. Only in the case where a public need cannot be met by other means, the Council of Ministers or a regional governor may expropriate land provided that the owner is compensated at fair market value. Expropriation actions of the Council of Ministers can be appealed directly to the Supreme Administrative Court on the legality of the action itself, the property appraisal, or the amount of compensation. A regional governor's expropriation can be appealed in the appropriate local administrative court. In the Bilateral Investment Treaty (BIT) with the United States, Bulgaria committed to international arbitration in the event of expropriation and other investment disputes.
ICSID Convention and New York Convention
Bulgaria is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York convention) and the 1961 European Convention on International Commercial Arbitration. Bulgaria is a member state to the International Centre for the Settlement of Investment Disputes (ICSID).
Investor-State Dispute Settlement
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 Arbitration Court hears civil disputes between legal persons, one of whom must be located outside Bulgaria. It began to act as a voluntary arbitration court between natural and/or legal persons domiciled in Bulgaria in 1989.
Arbitration is regulated by the 1988 Law on International Commercial Arbitration, which is based on 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. Disputes regarding rights over domestic real estate, alimony, or individual labor disputes may only be heard by the courts.
International Commercial Arbitration and Foreign Courts
Arbitral awards, both foreign and domestic, 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 then must execute the award using the general framework for execution of judgments in the country. Foreclosure proceedings may also be initiated.
Duration of Dispute Resolution – Local Courts
Bulgarian law instructs courts to act on civil litigation cases within three months after the case is filed. However, in practice, dispute settlement can take several months and up to a few years. Courts in Sofia are typically slower than those outside the capital city and may rule on a case several years after the case has been filed. In courts outside Sofia, it takes anywhere from several months up to a year for a case to be completed. Bankruptcy cases are the most complicated and resolution may take years.
The 1994 Commercial Code Chapter on Bankruptcy provides for reorganization or rehabilitation of a legal entity, maximizes 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 enterprises (SOEs) established by a special law. The 2005 Insurance Code regulates insurance company failures while bank failures are regulated under the 2002 Bank Insolvency Act and 2006 Credit Institutions Act. The 2014 bankruptcy of the country’s fourth largest bank, Corporate Commercial bank, was a test case that showed serious deficiencies in ensuring that bank assets are adequately recovered and preserved during bankruptcy proceedings. In 2016, Parliament approved legislative amendments intended to allow bank trustees to better manage assets while at the same time increasing their accountability.
Non-performance of a monetary obligation must be adjudicated before the bankruptcy court can determine whether the debtor is insolvent. There is a presumption of insolvency when the debtor is unable to perform an executable obligation under a commercial transaction or public debt or related commercial activities, has suspended all payments, or is able to pay only the claims of certain creditors. The debtor is deemed over-indebted if its assets are insufficient to cover its short-term monetary obligations.
Bankruptcy proceedings may be initiated on two grounds: the debtor’s insolvency, or the debtor’s excessive indebtedness. Under Part IV of the Commercial Code, debtors or creditors, including state authorities such as the National Revenue Agency, can initiate bankruptcy proceedings. The debtor must declare bankruptcy within 30 days of becoming insolvent or over-indebted. The 2010 amendments to the Commercial Code increased protection for creditors in bankruptcy proceedings by prohibiting a debtor from falsifying the date of insolvency to avoid claims after a certain date. Despite this, cases involving bankruptcy frauds, including through transfer of capital to U.S.-registered shell companies, have increased in recent years. The application for bankruptcy submitted by the debtor is published in the Commercial Register, thus providing all creditors and contractual partners with information about the bankruptcy proceedings. Should any creditor or contractual partner file a request for bankruptcy in court, such a claim is heard in the presence of both the creditor and the debtor.
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 interim trustee.
Bankruptcy proceedings supersede other court proceedings initiated against the debtor except for labor cases, enforcement proceedings, and cases related to receivables securitized by third parties’ property. Such cases may be initiated even after bankruptcy proceedings begin. Third parties with securities seeking protection against a debtor’s unfair activities may appeal the court decision to initiate a bankruptcy proceeding when securities have been entered in public registers before the date of the claim which started the bankruptcy procedure. Bulgaria dropped one place to a ranking of 38 for “Resolving Insolvency” in the World Bank's 2015 Doing Business Report (out of 189 surveyed countries).
Creditors must declare to the trustee 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 must be proposed within one month after publication of the list of debts in the Commercial Register. The 2010 amendments to the Commercial Code limit the application of the rehabilitation plan to debts approved up to the moment of submission of the rehabilitation plan.
After creditors’ approval, the court endorses the rehabilitation plan, terminates the bankruptcy proceeding, and appoints a supervisory body for overseeing the implementation of the rehabilitation plan. The court must endorse the plan within seven days and put it forward to the creditors for approval. The creditors shall convene to discuss the plan within a period of 45 days. The court may renew the bankruptcy proceedings if the debtor does not fulfill its obligations under the rehabilitation plan. The methods of liquidating assets were also revised by the June 2003 legislation 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.
In the World Bank’s 2017 Doing Business Report, Bulgaria declined one spot to 48 for ease of “resolving insolvency.”