Bulgaria is still seen by many investors as an attractive investment destination with government incentives for new investment. Bulgaria continues to offer some of the least expensive labor in EU, with low and flat corporate and income taxes. There are no legal limits on foreign ownership or control of firms. With some exceptions, foreign entities are given the same treatment as national firms and their investments are not screened or otherwise restricted. There is strong growth in software development, business process outsourcing, and building services for technical maintenance. The IT and back office outsourcing sectors have attracted a number of U.S. and European companies to Bulgaria, and many have established global and regional service centers in the country. U.S. and foreign investors have also been attracted to the automotive sector in recent years, and USD 120 million was invested in the sector overall in 2018. EU multi-year funds support economic growth in the form of grants for selected infrastructure projects.
There are, however, emerging challenges. A shortage of skilled labor, due to out-migration and an aging population, is becoming more pronounced and driving labor cost increases in selected sectors. Foreign investors remain concerned about rule of law in Bulgaria. Corruption is endemic, particularly on large infrastructure projects and in the energy sector. Investors cite other problems impeding investment, such as unpredictability due to frequent regulatory and legislative changes and a slow judicial system. As of early 2019, there are questions as to the government’s commitment to upholding its contracts, including with major U.S. investors. In another example, a U.S. company has faced extended regulatory obstacles in its attempts to enter the energy market.
Foreign Direct Investment (FDI) has continued to decline, remaining far below peak levels in the wake of Bulgaria’s entry into the EU in 2007. Structural funds from the European Union have helped sustained growth, filling in the gaps left by the declining FDI.
Bulgaria’s economy grew by 3.1 percent in 2018, driven mainly by domestic consumption, government procurement, EU funds and, to a lesser extent, exports. Official unemployment dropped to 5.2 percent in 2018, and the economy is near its full-employment level. The shortage of skilled labor in many sectors has led to wage increases far above gains in labor productivity, putting pressure on Bulgaria’s competitiveness. The wage gains have driven inflation up to 2.8 percent in 2018, putting an end to a three-year deflationary period between 2015 and 2017.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||77 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2019||59 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||37 of 126||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2017||$848||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2017||$7,860||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
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. However, while Bulgaria generally affords national treatment to foreign investors, there are reports of discrimination against U.S. investors by government officials. Two major U.S. investors in Bulgaria have been subjected to open criticism by government officials as “American” companies responsible for high energy costs in Bulgaria. The government continues to threaten to have the companies’ long-term contracts abrogated. In another case, a U.S. company has faced bureaucratic hurdles in its efforts to compete in the energy sector with a monopolistic state-owned Russian incumbent. More often, investors cite general problems with corruption, rule of law, frequently changing legislation, and uneven law enforcement. Transparency International’s (TI) Corruption Perception Index for 2018 ranked Bulgaria 77th out of 180 surveyed countries, down six places from last year’s 71st, and scoring 42 on a 100-point scale, well below the EU average of 66. The Invest Bulgaria Agency (IBA), the government’s investment promotion body, provides information, administrative services, and incentive assessments to prospective foreign investors. Its website contains general information for foreign investors.
Limits on Foreign Control and Right to Private Ownership and Establishment
With a few exceptions, there are no limits for foreign and domestic private entities to establish and own a business in Bulgaria. The Offshore Company Act lists 28 activities (including government procurement, natural resource exploitation, national park management, banking, insurance) banned for companies registered in offshore jurisdictions, with more than 10 percent foreign 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 (including the United States). Despite the EU creation of a national security investment review framework, Bulgaria currently has no specific law or established mechanism in place for screening individual foreign investments for potential national security risks. Nonetheless, investments can be scrutinized on an ad hoc basis or through the Law on the Measures against Money Laundering.
Other Investment Policy Reviews
Bulgaria typically supports small and medium business creation and development in conjunction with EU-funded innovation and competitiveness programs and with a special emphasis on export promotion and small- and medium-sized enterprise (SME) development. Typically, a new business is expected to register an account with the state social security agency and, in some cases, with the local municipality as well. Electronic company registration is available at: . Women receive equitable treatment to men, and the Bulgarian law protects minorities from discrimination.
Bulgaria ranked overall 59th (out of 190 surveyed economies worldwide) in the World Bank’s 2019 Doing Business report; 99th in Starting a New Business, and 147th place in the ‘Getting Electricity’ category.
There is no government agency for outward investment promotion; no restrictions exist for any local business to invest abroad.
3. Legal Regime
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 lists 38 operations subject to licensing. 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 merely incidental to the stated purposes of the regulation. The law also requires the regulating authority to 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 website and the relevant agency’s website, and interested parties are given 30 days to submit their opinions. The government maintains a web platform, , on which it posts draft 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 to meet additional 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. Bulgarian government licenses exports of dual-use goods and bans the export all goods under international trade sanctions lists. The Bulgarian government’s budget is assessed as transparent and in accordance with international standards and principles. Data on government debt is publicly available but data on the debt accrued by state-owned companies is not.
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 27 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. 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 and High Level Corruption) 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 14,500), excluding alimony, labor disputes, and financial audit discrepancies, or in property cases where the property’s value exceeds BGN 50,000 (USD 29,000). 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 that 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. In practice, however, the government’s handling of investment disputes has been slow, and intervention at the highest level is often required. Investors sometimes perceive that jurisprudence is inconsistent, and that national legislation is used to deter competition by 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 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. The most common PPPs are in the form of 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.
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 Competition Law, enacted in 2008, is intended to implement EU rules that promote competition. Monopolies can only be established in enumerated categories of strategic industries. The law forbids restrictive trade practices, abuse of market power, and certain forms of unfair competition. In practice, the Competition Law has been applied inconsistently, and the Competition Commission has been seen as lacking impartiality.
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 by the Council of Ministers or by regional authorities can be appealed at a local administrative court. The U.S.-Bulgaria Bilateral Investment Treaty (BIT) commits both parties to prompt, adequate, and effective compensation in the event of expropriation.
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 of the World Bank-based International Centre for the Settlement of Investment Disputes (ICSID).
Investor-State Dispute Settlement
Bulgaria accepts binding international arbitration in disputes with foreign investors. 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 and then execute the award according to the general framework for execution of judgments. Foreclosure proceedings may also be initiated.
International Commercial Arbitration and Foreign Courts
There are more than 20 arbitration institutions in Bulgaria, with the Arbitration Court of the Bulgarian Chamber of Commerce and Industry (BCCI) being the oldest. Bulgarian law instructs courts to act on civil litigation cases within three months after a claim is filed. In practice, however, dispute settlement can take several months and up to a few 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). The 2015 Insurance Code regulates insurance company failures, while bank failures are regulated under the 2002 Bank Insolvency Act and the 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 the process of recovery and preservation of bank assets during bankruptcy proceedings.
Non-performance of a financial 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. 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.
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. 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 must 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 Bulgarian National Bank may revoke the operating license of an insolvent bank when the bank’s own capital is negative and the bank has not been restructured according to the procedure defined in Article 51 in the Law on the Recovery and Resolution of Credit Institutions and Investment Firms. In the World Bank’s 2019 Doing Business Report, Bulgaria ranked 59th for ease of “resolving insolvency,” ahead of three EU peers (Luxembourg, Greece, and Malta).
Bribery is a criminal act under Bulgarian law for both the giver and the receiver. Individuals who mediate and facilitate a bribe are also held accountable. However, widespread corruption continues to be one of the most difficult problems in Bulgaria’s investment climate. Human trafficking, narcotics, and contraband smuggling channels contribute to corruption in Bulgaria. Bulgaria has laws, regulations, and penalties on the books to combat corruption, but its law enforcement capacity remains limited and the authorities mainly prosecute easy-to-prove, low-level cases. As a result, Bulgaria has seen few cases of high public interest, such as instances involving alleged siphoning of millions from the state coffers or EU funds, or involving public tenders for large energy and infrastructure projects. The high-profile prosecutions that do take place are often seen as selective or politically motivated. Bulgaria ranks 77th out of 180 countries in Transparency International’s Corruption Perception Index for 2018, in last place among EU members.
In early 2018, the Center for Prevention and Countering Corruption and Organized Crime became the umbrella agency incorporating previously independent bodies combating corruption.
Bulgaria has ratified the OECD Anti-Bribery Convention and is a participating member of the OECD Working Group on Bribery. Bulgaria has also ratified the Council of Europe’s Convention on Laundering, Search, Seizure, and Confiscation of Proceeds of Crime (1994) and Civil Convention on Corruption (1999). Bulgaria has signed and ratified the UN Convention against Corruption (2003); the Additional Protocol to the Council of Europe’s Criminal Law Convention on Corruption; and the UN Convention against Transnational Organized Crime. In 2018, the Bulgarian Parliament adopted the Anti-Money Laundering Act, which transposes the 2015 EU Directive on the prevention of the use of the financial system for the purposes of money laundering and terrorist financing.
Resources to Report Corruption
Organizations or agencies responsible for reporting on or combating corruption:
- Mr. Plamen Georgiev, Chairman
Commission on Corruption Prevention and Illegal Assets Forfeiture
112 Rakovski Blvd, Sofia, 1000
- Mr. Ognyan Minchev, Board President
Transparency International Bulgaria
50 Sandor Petofi Str., Sofia