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Archive for the ‘! INVEST in BULGARIA’ Category

Работни и почивни дни през 2016 година.

Posted by Active Consult Ltd. - Accounting & Tax в 09/12/2015

За 2016 година има общо 251 работни дни

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Posted in ! INVEST in BULGARIA, Данъци, ЗДДС, ЗДДФЛ, ЗКПО, Законодателство, Здравно, Интрастат, Любопитно, Осигуряване, Пенсионно, Трудово | Leave a Comment »

Taxation in Bulgaria 2015

Posted by Active Consult Ltd. - Accounting & Tax в 15/04/2015

Best tax conditions in Europe and fourth in the world !!!

Conatact us ! Active Consult Ltd e-mail: office@activeconsult.net

 

CORPORATE TAX

Corporate income tax (CIT) is due on the accounting profit after adjustments for tax purposes. The applicable tax rate for the year 2015 is 10%.

Maximum annual depreciation rates for corporate tax purposes

Buildings, facilities, transmitting devices, etc. 4%
Machinery, production equipment, appliances 30%
Vehicles, road and runway surfaces 10%
Computers, software, mobile phones 50%
Automobiles 25%
Tax depreciable tangible and intangible assets with legally restricted term of use Up to 33.33%
All other depreciable assets 15%

Tax loss carry forward
A tax loss can be carried forward for five years. It can be offset against a positive tax result for a subsequent tax year.

Thin capitalization
Thin capitalization rules apply in Bulgaria if the company’s liabilities exceed three times the amount of its equity. Interest expenses are deductible up to an amount equal to the entity’s interest income plus 75% of the profits before interest and tax. Interest expenses on bank loans are not subject to thin capitalization, except in some specific cases.

Transfer pricing
Transfer pricing rules allow the revenue authorities to adjust taxable profits and taxable income arising from transactions which are not carried out on an arm’s length basis.

One-off tax on expenses
One-off tax at the rate of 10% is levied on an annual basis on the following expenses:
• Representation expenses
• Expenses for maintenance and repair of transport vehicles used for management purposes
• Expenses for social benefits provided in kind.

WITHHOLDING TAX (WHT)
Bulgarian entities are obliged to withhold tax at the rate of 10% when they accrue the following types of charges which will be income to foreign persons:
• Capital gains
• Rent, interest, royalties, franchising and factoring fees
• Fees for technical, advisory and management services
• Penalties and indemnities other than those under insurance contracts accrued to legal entities established in jurisdictions with a preferential tax regime.

5% WHT is due on dividends and liquidation quota distributed to foreign entities unless the latter are tax residents of a European Union (EU)/European Economic Area (EEA) Member State in which case no WHT would be due in Bulgaria.
The following types of income are WHT exempt: (i) interest on bonds issued by a local legal entity, the state or municipalities and admitted for trading on a regulated stock exchange in Bulgaria or in an EU/EEA Member State, (ii) interest on loans granted by
a foreign entity which is a resident of an EU/EEA Member State issuing bonds or other debt securities (provided that explicit requirements are met), (iii) interest and royalties when accrued to associated companies tax resident in an EU Member State,
and (iv) interest on non-securitized loans under which the state or municipalities are borrowers.
Foreign companies tax residents in the EU/EEA which may not utilize the WHT paid in Bulgaria as a tax credit in their country of residence may choose an option to recalculate the WHT paid in Bulgaria so that its amount would equal the CIT due if the income were derived by tax residents of Bulgaria. Thus, the tax base of non-residents could be reduced with the expenses that are attributable to the respective income with a Bulgarian source. The difference between the WHT paid and the recalculated CIT due may be reimbursed up to the amount that could not be used as a tax credit by the non-resident abroad.
Double Tax Treaties (DTT) are applied following a specific procedure and have priority over domestic legislation.

VALUE ADDED TAX (VAT)
All taxable persons are subject to a mandatory VAT registration if their taxable turnover of local supplies for a period of
12 consecutive months reaches BGN 50,000 (EUR 25,565). Also, liable to register are taxable persons (i) providing services with a place of supply in another EU Member State, (ii) receiving services from foreign suppliers where the place of supply falls in Bulgaria,
(iii) performing intra-Community acquisitions whose total amount during a calendar year exceeds BGN 20,000 (EUR 10,225), or
(iv) performing other specific supplies. Voluntary registration is applicable on a no-threshold basis.

There are three VAT rates applicable in Bulgaria:

20% Taxable supplies of goods and services Imports
Intra-Community acquisition of goods
9% Accommodation in hotels and similar establishments
0% Intra-Community supplies Exports
and other supplies explicitly listed in the law

Certain supplies are considered VAT exempt, e.g. financial and insurance services, certain educational and health services, property lease for residential purposes, sale of old buildings and non-regulated land plots and others.

Supplies for which local VAT is due by a Bulgarian client through the reverse charge mechanism include:
• Intra-Community acquisitions of goods
• Services provided by a foreign supplier to a Bulgarian taxable person if the place of supply is in Bulgaria
• Supplies of electricity, heat, gas and cooling energy through networks performed by a foreign supplier
• Supplies of goods with installation provided by an EU supplier. Refunds of input VAT incurred by foreign EU entities are available
for purchases made in Bulgaria, provided that input VAT deduction would have been available if the foreign entity were identified for VAT purposes in Bulgaria.

Claims for VAT refund are to be submitted with the Bulgarian revenue authorities through electronic portals set up in the country of establishment of the claimant by 30 September of the year following the year which the claim concerns.

Refunds of input VAT incurred by non-EU entities are available on a reciprocal basis. Bulgaria has reciprocity agreements with Canada, Iceland, Israel, Macedonia, Moldova, Norway, Republic of Korea, Serbia, Switzerland and Ukraine.

EXCISE DUTIES
Excise duties are levied upon the production and importation of certain goods such as alcohol and alcoholic beverages, tobacco products, energy products and electricity. Taxable persons for the purposes of excise duties are licensed warehouse keepers, importers of excisable goods and other designated persons listed in the Excise Duty and Tax Warehouses Act (EDTWA). Different excise rates apply for the above goods. The EDTWA contains special provisions for exemption and suspension of excise duties in certain cases.

INSURANCE PREMIUM TAX (IPT)
IPT is levied on insurance premiums collected under contracts for risks located in Bulgaria. The applicable IPT rate is 2%. Certain insurance contracts are exempt from IPT, e.g. contracts for life insurance, insurance of cargo during international transportation and others.

PAYROLL RELATED TAXES AND SOCIAL SECURITY
Rates
Employment income is levied with a flat rate of 10% personal income tax (PIT). The tax on employment income is withheld by the employer at source on a monthly basis. Non-employment income is also subject to 10% PIT. Generally, the PIT for income under civil contracts is deducted and remitted by the legal entity payer on a quarterly basis (with the exception of the fourth quarter) unless the individual is registered as self-insured for social security purposes or explicitly declares their willingness for tax to be withheld also during the fourth quarter. If that is the case or the entity does not have a withholding obligation, the tax is paid by the recipient of the income on a quarterly basis (with the exception of the fourth quarter).

A different flat tax rate is applied for some other types of income, for example 5% for dividends.
Bulgarian tax resident individuals are those who (i) have a permanent address in Bulgaria or (ii) are present in Bulgaria for more than 183 days in a 12-month period or (iii) are sent abroad by the Bulgarian state, its institutions and/or Bulgarian entities or (iv) individuals whose center of vital interests is located in Bulgaria. Bulgarian resident individuals are subject to PIT on their worldwide income, whereas non-resident individuals are subject to tax only on income derived from Bulgarian sources. Income tax credit may be granted under the domestic law or under DTT provisions (where exemption with progression is also possible).

Exemptions
Some of the available tax exemptions are:
• Gains from disposal of movable and immovable property under certain conditions
• Pensions and other social security benefits received from a Bulgarian or foreign mandatory social security system as well as pensions from voluntary insurance funds situated in Bulgaria or another EU/EEA Member State
• Certain types of compensation as per the Labor Code
• Capital gains from shares traded on the Bulgarian stock market as well as on other regulated markets in an EU/EEA Member State.

Personal income tax allowances
Some of the available tax allowances are:
• Voluntary contributions for pension and unemployment insurance in Bulgarian and EU/EEA funds up to 10% of the annual tax base
• Voluntary health and life insurance contributions in Bulgarian and EU/EEA funds up to 10% of the annual tax base
• Donations to certain qualified beneficiary organizations in Bulgaria and EU/EEA Member States at the amount of 5%, 15% or 50% of the annual tax base
• Interest on mortgages of young families on the first BGN 100,000 (EUR 51,130) of the credit under certain conditions
• Statutory predetermined deductions depending on activity, for example, 25% for income under civil contracts, 10% for rental income and capital gains from sale of immovable property
• Up to BGN 200 (EUR 102) from the annual tax base can be deducted for caring for an underage child (up to and including the third one)
• Up to BGN 2,000 (EUR 1,022) from the annual tax base can be deducted for caring for a disabled child.

Social security and health insurance
Mandatory social security and health insurance contributions are due up to a maximum monthly insurable income of BGN 2,600 (EUR 1,329). Social security contributions are within the range of 22.7% – 23.4%. Health insurance contributions are at the rate of 8%. The pension insurance contributions are split in a ratio 55:45 between employer and employee, while the contributions to all other mandatory insurance funds – 60:40. Mandatory contributions made by individuals in Bulgaria or abroad are tax deductible.
Regulation (EC) No. 883/04 on social security is in force and is applicable to EU and third country nationals as well as nationals of Switzerland and the EEA.

LOCAL TAXES AND FEES
Local taxes and fees are determined and collected by municipalities.
• The real estate tax can be in the range of 0.01% – 0.45% of the assessed value of the property.
• Garbage collection fees are determined at a municipal level.
• Transfer tax in the range of 0.1% – 3% is levied on the value of the transferred real estate property and automobiles.
• Donation tax and inheritance tax in the range of 0.4% – 6.6% of the value of the property is due. There are certain exemptions.
• Motor vehicles tax is due depending on the type of the vehicle and its technical characteristics.

CORPORATE INCOME TAX INCENTIVES
Some of the available tax incentives are listed below:
• Licensed real estate investment trusts, collective investment schemes and national investment funds are exempt from corporate tax.
• Production companies investing in municipalities with unemployment exceeding, by 25%, the average unemployment rate for Bulgaria are entitled to up to 100% corporate income tax retention. The retention is applicable only if it complies with a number of requirements.

FILING DEADLINES
• Annual corporate income tax return – 31 March of the following tax year
• Annual personal income tax return – preliminary deadline: 31 March; final deadline: 30 April of the following year
• Monthly VAT return – by the 14th of the month following the month to which the VAT return relates
• VIES declaration (the Bulgarian equivalent of EC sales list) – by the 14th of the month following the relevant tax period
• Monthly excise return – by the 14th of the month following the month to which the excise return relates.

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Posted in ! INVEST in BULGARIA, Данъци, Данъчна практика, ЗДДС, ЗДДФЛ, ЗКПО, Законодателство, Здравно, Любопитно, Нестоп. дейност, Осигуряване, Пенсионно, Трудово | Leave a Comment »

The lowest taxes in Europe! Invest in Bulgaria!

Posted by Active Consult Ltd. - Accounting & Tax в 15/04/2015


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Posted in ! INVEST in BULGARIA, Любопитно | Leave a Comment »

Foreign direct investment in Bulgaria have increased

Posted by Active Consult Ltd. - Accounting & Tax в 15/10/2014

The Foreign direct investments in Bulgaria for January – August 2014 are EUR 1221.4 million (3% of GDP), according to preliminary data of the Bulgarian National Bank (BNB). During the same period in 2013 the revised data for the FDI was EUR 1173.9 million (2.9% of GDP).

Thus BNB reported an increase of 4% or 47.5 million euro. However, if the data today is compared with the  unrevised data released in October 2013, the growth rate is significantly higher. The reported direct investments are 772.5 million euro, or 1.9 % of GDP.

BNB revised the data in accordance with the calendar of the ECB and in most cases the revisions change the numbers in a positive direction.

Only in August 2014 in the Bulgarian economy have been invested 235.3 million euro, which is a strong increase, compared to the revised data for August 2013 – 103.1 million euro. The unrevised investment volume for August 2013 was – 34.2 million euro.

The biggest investor in the period from January to August this year is Netherlands with 402.5 million euro.

„The increased investment inflow is a result of well planned strategy and excellent teamwork of the institutions attracting investment. Despite the huge efforts, made by the employees of InvestBulgaria Agency, without the support of ambassadors, commercial attaches, the government and the president, the result would be different. This is evidence that joint efforts always pays off“, commented Svetoslav Mladenov, Executive Director of  InvestBulgaria Agency.

The Reinvested earnings for January-August 2014 is estimated at 106.6 million euro, compared to 62.1 million euro for the same period in 2013. The investments in equity decreased in the period from January to August 2014 and reached 223.7 million euro. If they are compared to the revised data for the same period last year, they are 456.5 million euro lesser.

The investments of foreigners in real estate amounts 78.9 million euro, compared to  102.7 million euro for January-August 2013 (revised data).

Foreign direct investment abroad in January – August 2014 amounts 227.8 million euro, compared to 114.9 million euro for January – August 2013. In August 2014 they have increased by 31.9 million euro, compared to an increase of 13.6 million euro in August 2013.

With the reported investments till August 2014 the annual forecast of InvestBulgaria Agency is surpassed. The overall balance of payments is positive. In August, the positive balance amounts 179.6 million euro, compared to negative overall balance of 129.2 million euro for August 2013. The sum of the balance for the first eight months of 2014 was 750.9 million euro compared to EUR -397 million euro for 2013.

Posted in ! INVEST in BULGARIA | Leave a Comment »

Taxation in Bulgaria

Posted by Active Consult Ltd. - Accounting & Tax в 04/06/2013

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Corporate tax

The basic principles for the taxation of business profits are detailed in the Corporate Income Tax Act (CITA). The current taxes and levies imposed by the CITA are:

  •  corporate income tax
  • lump sum tax levied on certain types of expenses accrued by local tax residents
  • withholding tax.

According to the provisions of the CITA currently in effect, the corporate income tax rate is 10 percent. Corporate entities, including subsidiaries of foreign companies incorporated under the Bulgarian Commercial Act are considered Bulgarian tax residents. Upon registration in Bulgaria, these legal entities are subject to tax on their worldwide income, regardless of whether or not it is generated in Bulgaria. There is no withholding tax or income tax on undistributed profits.

Non-resident companies are subject to tax on income and profits derived only from Bulgarian sources.

Taxable income

Generally, a taxpayer’s tax base is the entity’s financial result according to its income statement, further adjusted for corporate income tax purposes. These adjustments represent either items that increase the financial result for tax purposes, usually through an add-back of non-deductible expenses, or items that decrease the financial result for tax purposes. The latter are usually specific income items that are exempt from taxation, or  tax incentives provided by the Government. There are expenses which are permanently non-deductible for tax purposes and expenses which represent a temporary tax difference, and therefore are non-deductible for tax purposes in the year when accrued for accounting purposes but can be claimed in a subsequent period.

Permanent tax differences

The major permanent tax differences include:

  • xpenses not related to the business activity of the company; costs incurred by an entity in favor of employees, managers, shareholders, etc. (private costs), as well as expenses for services that do not benefit the tax liable persons are not recognized for tax purposes
  • service costs and other costs accrued at levels that differ from market levels
  • penalties, fines and other sanctions for violation of the law
  • expenses which are not substantiated with proper documents
  • expenses for VAT charged in relation to items that are not tax deductible
  • expenses for VAT accrued by a supplier or by the revenue authorities with respect to  a performed supply (unless the VAT expense is accrued in relation to an adjustment to the input VAT credit, in relation to supplies for no consideration or supplies performed upon VAT deregistration)
  • expenses classified as hidden distribution of profit
  • expenses for bribery and/or conceiling bribery of a local or foreign public official
  • expenses in relation to waste and shortage of inventory (except when these are due to force majeure, technological losses, expiry of durability term, etc.)
  • expenses in relation to shortage of current and non-current assets (except when those expenses are due to force majeure, certain amount of shortage of goods in commercial outlets with direct physical access of the customers to the merchandise)
  • revenues accrued in relation to waste and shortage of assets up to the amount of the tax non-deductible expenses incurred for the same reason (insurance cover received, receivables in respect of shortage, theft and litigation)
  • income from dividends distributed by Bulgarian tax resident entities and by foreign entities that are tax residents in an EU/EEA Member State
  • expenses for travel and accommodation of shareholders or partners when these are performed by individuals in their capacity of shareholders/partners.

Temporary tax differences

The major temporary tax differences comprise the following:

  • revenue and/or expenses in relation to subsequent revaluation/impairment of assets is taxable, respectively tax deductible, in the year when the respective asset is disposed of, respectively written off
  • expenses in relation to provisions for payables or unused annual paid leave of employees (including salaries and social security and health insurance contributions) are treated as tax non-deductible in the year when accrued, except when they are capitalized as tax depreciable assets in accordance with the applicable accounting legislation. Such expenses are recognized as tax deductible in the year when the payable is settled or when the employees effectively use their paid leaves
  • interest expenses exceeding the threshold established by the thin capitalization rule (see Section “Thin capitalization” below).

Tax depreciation

The total amount of accounting depreciation charged to the income statement of an entity is added back to the entity’s financial result for tax purposes, while the annual depreciation charge as per the Tax Depreciation Schedule (TDS) is reported as a decrease to the entity’s financial result. Hence, only the depreciation charge established under the rules of the TDS will be recognized as an expense for income tax purposes. Specific rules exist for idle assets.

Tax depreciation must be accrued by multiplying the cost of acquisition of the respective depreciable asset by the tax depreciation rate. The CITA sets out the maximum annual tax depreciation rates for groups of assets to be used in the TDS. These maximum allowed annual tax depreciation rates are as follows:

  • for computers, computer peripherals, software and software licences, cell phones: 50 percent
  • for machinery and production equipment: 30 percent. The rate can be increased up to 50 percent for new manufacturing machines and equipment in certain specific cases defined in the law
  • for automobiles: 25 percent
  • for transport vehicles other than automobiles, roads and runways: 10 percent
  • for buildings (including those held as investment properties), facilities, installations, electrical wiring and lines of communication, etc.: 4 percent
  • up to 33.33 percent for long-term intangible and tangible assets where legal or contractual restrictions apply on the term of their use
  • for all other tax depreciable assets where specific rates are not provided: 15 percent.

Thin capitalization

Interest expenses accrued by tax liable persons in relation to certain types of debt finance are tax deductible up to the limits set out in the CITA and known as thin capitalization rules. Certain interest expenses however are not subject to thin capitalization. These include interest in relation to finance lease and bank loans received from non-related lessors/banks (unless the loan is guaranteed or secured by a related party, in which case the interest on them would be subject to thin capitalization). Penalty interest for late payment of taxes, interest expenses capitalized in the value of an asset, in accordance with the accounting legislation or other interest charges that are not tax deductible on other grounds do not count towards the interest expenses subject to thin capitalization.

No thin capitalization would apply where the debt/equity ratio of the tax liable person is smaller than three to one.

The maximum amount of interest expenses subject to thin capitalization that would be tax deductible in the year when accrued is equal to the interest income accrued for the year plus 75 percent of the profits before all interest income and interest expenses. If interest expenses subject to thin capitalization are accrued in excess of this amount, the excess must be added back to the financial result when determining the tax base. This adjustment represents a temporary tax difference and is reclaimable in the following five tax years up to the above-mentioned threshold calculated in those subsequent years.

Tax losses

When calculating their tax financial result, tax liable persons are entitled to subtract  tax losses incurred in previous periods. Tax losses may be subtracted from the positive financial result over the following five years up to the amount of the positive tax financial result in those future periods.

Foreign-source losses can be carried forward solely against foreign-source income deriving from the same operation unless the losses and the income were generated in an EU/EEA Member State and the tax credit method applies or upon termination of the foreign source in another EU/EEA Member State when the exemption with progression method applies.

Lump sum taxes

A lump sum tax at a rate of 10 percent is levied on certain types of expenses accrued by Bulgarian tax resident entities as follows:

  • representation expenses related to the company’s business activity
  • expenses for in-kind benefits provided to the company’s personnel (e.g. subsidized canteen, food allowances, organized holiday, holiday allowances, subsidized vacation facilities, sports and recreational activities, etc.)
  • contributions to voluntary insurance exceeding BGN 60 per month for each hired person
  • vouchers for food provided in accordance with the provisions of the law and exceeding the amount of BGN 60 per month for each hired person (there is a list of requirements, which must be fulfilled by both the persons entitled to receive vouchers for food and the persons acting as operators for issuance and payment with vouchers for food)
  • expenses related to maintenance, repair and exploitation of transport vehicles when these are used for the company’s management activity.

The lump sum tax on expenses is recognized as a tax deductible expense for the company and is paid on an annual basis.

Sources of income

The profits and income of non-resident taxpayers are taxed in Bulgaria provided that they originate or are deemed to originate from Bulgaria. The following types of gains/income derived by foreign entities without a permanent establishment in Bulgaria, when accrued by a local tax resident entity, are considered to have their source in Bulgaria including:

  • interest including interest relating to finance lease
  • royalties
  • fees for technical services, i.e. services of an advisory nature and services for installation and maintenance of tangible assets
  • franchise and factoring fees
  • rent
  • fees for management and control of local legal entities
  • income from securities issued by local legal entities, the Government or municipalities.

Gains of foreign entities without a permanent establishment in Bulgaria from trading in shares and securities issued by local legal entities, the Government or municipalities as well as from transactions with real estate properties in Bulgaria are also considered to have their source in Bulgaria.

Gains made by foreign legal entities from the disposal of property belonging to a permanent establishment of that legal entity in Bulgaria or the permanent establishment itself, are deemed to be of Bulgarian source and, as such, are taxable in Bulgaria.

As of 1 January 2011, the following types of income generated by foreign legal entities established in jurisdictions with a preferential tax regime listed in the CITA (i.e. offshore companies) are also considered to have a Bulgarian source:

  • fees for services or rights unless it is proved that such services or rights have been actually provided by the foreign entity
  • penalties and indemnities of all types, except those accrued under insurance contracts.

Withholding tax

A withholding tax at a rate of 10 percent (5 percent for dividend distributions and liquidation quotas) is to be deducted by the payer when Bulgarian source income (see Section 6.1.3 above) is accrued by a local tax resident entity to non-resident taxpayers without a permanent establishment in Bulgaria, unless a Double Tax Treaty (DTT) provides for lower withholding tax rates. A reduced withholding tax rate of 5 percent is applied on income from interest and royalties when accrued to associated companies tax resident in an EU/EEA Member State (see Section “Interest and royalties” below). No withholding tax is due on dividends and liquidation quotas distributed by local entities to companies that are tax resident in an EU/EEA Member State (see Section 6.1.4.3 below). When foreign entities without a permanent establishment in Bulgaria realize capital gains from trading in Bulgarian securities or real estate properties, a withholding tax of 10 percent is to be levied on the capital gain and remitted to the Bulgarian state budget by the entity realizing the gain, unless a DTT provides for exemption or lower withholding tax rates.

Foreign companies that are tax residents in the EU/EEA, and who may not utilize the withholding tax paid in Bulgaria as a tax credit in their country of tax residence, may choose an option to recalculate the withholding tax paid in Bulgaria so that the amount would equal the corporate income tax due if the income were derived by tax residents  of Bulgaria. Hence, the tax base of non-residents could be reduced by the expenses attributable to the respective income whose source is Bulgarian. The difference between the withholding tax paid and the recalculated corporate income tax due may be reimbursed up to the amount that could not be used as a tax credit by the non-resident in their state of residence. This right is exercised by the foreign tax resident by filing a tax return by 1 December of the year following the tax year when the income was accrued.

Interest and royalties

In accordance with Council Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different EU Member States (the Interest and Royalty Directive), interest or royalty payments arising in an EU Member State are exempt from any taxes imposed on those payments in that state, whether by deduction at source or by assessment, provided that the beneficial owner of the interest or royalties is a company of another EU Member State or a permanent establishment of an EU Member State situated in another EU Member State.

Following the provisions of the Treaty concerning the accession of Bulgaria to the EU, a transitional period for the application of the Interest and Royalties Directive was agreed whereby Bulgaria has reserved its right to tax interest and royalty income arising in the country by applying the maximum withholding tax rate of 5 percent from 1 January 2011 until 31 December 2014. Additional conditions should also be fulfilled by the foreign company in order to be able to benefit from the reduced withholding tax rate.

Capital gains and losses

Generally, capital gains are included in an entity’s profit subject to corporate income tax, except in the following cases:

  • capital gains realized by non-resident taxpayers from the sale of real estate property situated in Bulgaria or from the sale of shares, securities and other long-term financial assets sourced in Bulgaria, that are in turn subject to a 10-percent withholding tax
  • liquidation proceeds attributable to non-resident taxpayers and local individuals exceeding the value of their initial investment, that are taxed at the rate of zero percent for residents of EU/EEA Member States or 5 percent for all other non-residents;
  • and

    • capital gains realized from the sale of shares in collective investment schemes, shares and rights of public companies traded on the Bulgarian or EU stock exchange within the meaning of the Bulgarian Markets in Financial Instruments Act,
    • transactions with financial instruments concluded in accordance with the procedure for redemption by collective investment schemes which have been admitted to public offering in Bulgaria or in another EU/EEA Member State, and
    • transactions with financial instruments concluded according to the procedure for tender offering under the Bulgarian Public Offering of Securities Act, or transactions of a similar type in another EU/EEA Member State which are not subject to tax.

Dividends and liquidation quotas

Dividends and liquidation quotas distributed by local legal entities and unincorporated entities to local individuals, local unincorporated entities and foreign persons are subject to a 5-percent withholding tax, unless an applicable DTT provides for a lower withholding tax rate.

No withholding tax is due in Bulgaria on liquidation quotas and outbound dividends distributed by Bulgarian entities to those tax resident companies in the EU/EEA without any participation or holding requirements, except for cases of hidden profit distribution.

Dividends distributed by local legal and unincorporated entities to local legal entities are tax-exempt except when they fall under the Special Investment Purpose Entities Act. In the case of dividends received as a result of a profit distribution made by such companies, for example a real estate investment trust, the dividend is taxed at the shareholder level  in the same way as any other revenue received – at the corporate income tax rate of 10 percent.

Payment due dates and filing deadlines

Companies subject to corporate income tax must file an annual return for each calendar year together with the company’s annual activity report under the Statistics Act. Annual corporate tax returns must be filed and income tax liabilities must be finally settled by all taxpayers for a calendar year by 31 March of the following year. Tax liable persons who have not performed economic activities and have not reported income or expenses during the fiscal period are relieved from filing annual activity reports.

Advance corporate tax payments are due either on a monthly or on a quarterly basis and are calculated on the basis of the entity’s forecast taxable profit for the current year. Both (i) tax liable persons whose net sales revenue for the previous year does not exceed  BGN 300,000 and (ii) newly established companies (except when the establishment is a result from a corporate restructuring in accordance with the Commercial Act) do not have an obligation to remit advance corporate tax installments. Persons liable for tax with a net sales revenue for the previous year exceeding BGN 3,000,000 are obliged to make monthly advance corporate tax installments.

Advance corporate tax installments for the current year are reported based on the annual corporate tax return of the previous year.Withholding tax is payable by the end  of the month following the calendar quarter in which the income has been accrued or the decision for distribution of dividends/liquidation quotas has been made. The persons obliged to withhold and pay tax have to report the withholding tax due for the relevant calendar quarter by submitting a standard return by the end of the month following the respective quarter. Local companies accruing income to foreign tax resident entities not exceeding BGN 500,000 per year for which a reduced withholding tax rate was applied under an existing DTT should submit to the revenue authorities a standard tax return reporting the amount of income accrued and the withholding tax relief granted. The deadline for submission of the tax return is 31 March of the year following the reporting year.

The lump sum tax on expenses is payable by 31 March of the year following the reporting year.

Relief from tax

Foreign tax credits

Domestic tax law provides unilateral relief to taxpayers whereby a tax credit may be allowed for taxes paid abroad.

Tax treaties

Bulgaria has entered into a number of DTTs with other countries. For a detailed overview of the withholding tax rates applicable under the DTT network, see Appendix B.

Branch vs. subsidiary

Permanent establishments, including branches, are subject to tax on profits derived from Bulgarian sources. Effectively, there is no difference between the taxation of branches and subsidiaries, with respect to business profits.

The repatriation of after-tax profits generated by a branch is not subject to withholding tax.

Grouping/consolidated returns

The concept of a consolidated company tax return is not accepted under the Bulgarian legislation. Companies may not transfer their tax losses to other companies within a corporate group.

Partnerships

Partnerships are treated as incorporated entities for tax purposes. In other words, partnerships are non-transparent entities.

Alternative assessment

When taxable income cannot be reliably determined, it is assessed by the revenue authorities on the basis of a number of factors including the type of activities undertaken, duties and fees paid, bank account transfers, capital, turnover, profits of entities with similar activities, etc.

Instead of being subject to a corporate income tax, state budget enterprises are taxed on their proceeds generated from their activities as well as from leasing of property. Specific taxation rules also apply to gambling companies.

Anti-avoidance measures

Transfer pricing

Transfer pricing rules allow the revenue authorities to adjust the tax base where transactions are not made on an arm’s length basis or where transactions aiming at tax evasion have been performed. Therefore, when the transfer pricing rules are applied by the revenue authorities, additional income may be assessed or an expense may be disallowed.

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations have not been officially adopted for tax purposes in Bulgaria. However, in practice, the Bulgarian transfer pricing methods are to a great extent harmonized with the OECD methods.

This right to adjust profits extends to transactions involving Bulgarian branches and their foreign head offices as well as to foreign tax residents deriving income from a Bulgarian source that is subject to withholding tax in Bulgaria and Bulgarian tax resident entities which incur expenses subject to lump sum taxes in Bulgaria.

In addition, it is the obligation of the taxpayer and not the revenue authorities to prove that the transactions are performed at an arm’s length price. Any deviation from that price must be supported.

Anti-avoidance provisions relating to business transformations

Generally, according to the provisions of the CITA, transposing Council Directive 2009/133/ EC on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States (the Mergers Directive), business transformations between Bulgarian entities or involving entities of other EU Member States must be tax neutral, meaning that no corporate tax effects must arise on the date when the business transformation is performed.

However, the CITA includes certain provisions related to tax avoidance achieved through business combinations. It states that a business transformation will not be considered tax neutral if its purpose is to evade tax payment. Tax avoidance is also considered to exist in cases when the business transformation is not carried out for valid economic reasons or its purpose is to conceal the disposal of assets. In this case, following the general provisions of the CITA, it is possible that taxable gains may be realized upon disposal of the assets at market prices.

Hidden distribution of profits

According to the provisions of the Bulgarian CITA, amounts accrued, paid or distributed in any form by Bulgarian tax resident companies to shareholders, partners or another related party must be evidenced as part of the business activity of the local company. In addition, they must be determined at market levels. If these circumstances are not proven, the respective amount may be classified as a hidden distribution of profits.

Furthermore, interest expenses accrued by taxpayers are considered a hidden distribution of profit provided that at least three of the following four conditions are met:                                                              

  • the amount of the loan facility for which interest expenses are accrued exceeds the equity of the payer of the interest as at 31 December of the previous fiscal year
  • the repayment of the principal as well as the related interest due is not limited in time
  • the repayment of the principal and the related interest or the amount of the interest due is made conditional upon the amount of the profits realized by the borrowing entity
  • the repayment of the principal is made conditional upon satisfying the claims of other creditors or upon distribution of dividends.

If certain amounts accrued, paid or distributed by local taxpayers are considered hidden profit distribution, these would be treated as dividend distribution. The respective amount would not be recognized as deductible for corporate income tax purposes and a penalty could be imposed at a rate of 20 percent of the amount classified as hidden profit distribution. Additionally, a 5-percent withholding tax could be levied if the deemed dividend is distributed to a foreign tax resident entity.

Corporate tax incentives

A corporate income tax incentive is granted to enterprises employing people with disabilities. Agricultural producers are also entitled to a corporate tax rebate up to 60 percent in the form of state aid for profits derived directly from the sale of raw agricultural products. This incentive can be applied until 31 December 2013. The corporate income  tax incentives are granted in two forms – a corporate income tax exemption and/or a tax reduction.

Production companies investing in municipalities with an unemployment rate exceeding the average unemployment rate for Bulgaria by 35 percent, are entitled to up to a 100-percent corporate income tax exemption. In order to benefit from the tax exemption, a number of criteria have to be met.

In addition, a decision by the EU Commission is required for large investment projects where the total amount of tax incentives exceeds EUR 37.5 million.

Other tax incentives include:

  • tax neutral capital gains and/or losses resulting from the disposal of qualifying financial instruments, performed on the Bulgarian stock exchange or on a stock exchange in an EU/EEA Member State
  • reduction of the taxable profit by the wage, social and health insurance payments made by an employer on their behalf for employers who hire persons officially registered as unemployed for a specified period.

Taxation of individuals

Personal income tax

Residence

There are four criteria for determining the residence of an individual in Bulgaria for personal income tax purposes, of which three are mainly of significance for expatriates moving to Bulgaria: the permanent address, the 183-day rule and the center of vital interests.

Individuals who have a permanent address in Bulgaria or who are physically present in Bulgaria for more than 183 days in the course of a 12-month period are considered Bulgarian residents for tax purposes. The respective individual becomes a Bulgarian resident in the calendar year when his/her stay in the country exceeds 183 days. The days of departure and arrival are treated as separate days of physical presence in Bulgaria.

An additional criterion for tax residence is the center of vital interests. Accordingly, individuals who have closer economic and personal relations to Bulgaria than to another country would be considered Bulgarian tax residents regardless of the duration of their physical presence in the country. The personal income tax legislation also specifies that the center of vital interests has priority over the permanent address criterion, i.e. if an individual has a permanent address in Bulgaria but his/her center of vital interests is abroad, he/she must not be considered a Bulgarian resident for tax purposes.

Bulgarian tax resident individuals are subject to tax on their worldwide income whereas non-resident individuals are subject to tax on their income derived from Bulgarian sources. Different residence rules may be provided for in applicable DTTs.

Income subject to tax

Individuals are subject to the following taxes on income:

  • Employment income is levied at a flat 10-percent personal income tax rate. The tax on employment income is withheld by the employer at source on a monthly basis. Certain statutory tax deductions may be claimed against the gross income. (As of 1 January 2008, management income is considered equivalent to employment one for personal income tax purposes.)
  • Income received by partners in a partnership, cooperators and shareholders holding more than 5 percent of a company’s capital in return for their personal involvement/ work in the entity is treated as equivalent to employment income.
  • Non-employment income (e.g. income received under civil contracts) is also subject to a flat 10-percent tax rate. Certain statutory tax deductions may be claimed against gross income (e.g. income received under civil contracts). The due tax is withheld and paid on a quarterly basis by the payer of the income if a legal entity duly registered under Bulgarian law. No tax is to be withheld and paid for the fourth quarter of the year. In certain instances, the remittance obligation may also fall on the individual recipient themselves if (i) the payer is an individual or an entity not registered under Bulgarian law and (ii) the recipient of the income under a civil contract is a self-insured person for social security purposes (in this case, the status of the entity is of no importance). Under this scenario, the personal income tax on that income must be remitted on a quarterly basis.
  • In case of receipt of rental income, no remittance obligation arises for the payer of the income if he/she is an individual. The full responsibility for payment of the due tax charge is borne by the recipient of the income. Advance quarterly personal income tax installments should be made in case of receipt of such income (with the exception of the fourth quarter). The final assessment is performed at year-end with the annual Bulgarian personal income tax return. When the payer of the rental income is an entity or a self-insured person, then they have the obligation to calculate, withhold and remit at source on a quarterly basis  (without the fourth quarter) the due tax charge on the income. This does not waive the obligation of the recipient of income to file an annual Bulgarian personal income tax return at the end of the year. A different treatment is applied in the case of payment of rental income by Bulgarian entities to condominiums. In these circumstances, a final one-off tax will be calculated, deducted and remitted by the payer of the income and no obligation for filing of annual Bulgarian personal income tax arises for the recipient of the income.
  • A 10-percent withholding tax applies to interest, rents, royalties, capital gains, management income, income received under franchise and factoring contracts, leasing installments under contracts according to which the ownership rights over immovable property are transferred, scholarships for studying in Bulgaria and abroad, indemnity  for benefits lost, fees for technical services accrued to non-resident individuals as well as income accrued by local legal entities to foreign sportspeople, scientists and artists. A lower withholding tax rate of 5 percent is levied on dividends paid by Bulgarian entities to non-residents. Should there be an applicable DTT in force, the rate of the withholding tax on the above mentioned types of income may be reduced. The tax base is the gross amount of income received. As of 1 January 2010, Bulgarian legislation allows EU and EEA4 nationals subject to Bulgarian withholding tax to calculate the tax base and the due tax following the same rules applicable to local residents, i.e. the application of deductions from gross income is possible through the filing of an annual Bulgarian personal income tax return. (Except Iceland and Liechtenstein.)
  • A withholding tax of 10 percent is due on interest income accrued on deposit accounts in Bulgarian and EU/EEA-based banks.
  • A one-off tax of 5 percent is levied on Bulgarian individuals receiving dividends from foreign entities.
  • A one-off tax of 10 percent/7 percent is levied on early withdrawal of accrued voluntary social security/insurance contributions depending on the circumstances.

Specific rules apply with regard to taxation of capital gains arising from disposal of movable and immovable property.

It is also specified that no withholding tax is due on payments to residents of other EU Member States regardless of the fact that the types of income may fall in the scope discussed above should this income be exempt for Bulgarian tax residents (e.g. interest on non-deposit accounts).

Deductions

Certain payments decrease an individual’s taxable income, including mandatory health insurance and social security contributions (made both to the local and foreign mandatory insurance systems), as well as personal voluntary pension, life and health insurance contributions to either local insurance funds or those registered under the jurisdiction of other EU and EEA Member States as of 1 January 2009. The deductibility of such voluntary contributions is limited up to certain maximum thresholds.

Statutory deductions are provided for the recipients of different types of non-employment income (e.g. 25 percent for freelancers; 40 percent for royalties, inventions and products of science or art; 10 percent for rental income; 10 percent for capital gains received from the disposal of immovable property).

Deductions for donations to a list of special beneficiary organizations are also allowed provided certain conditions are met. As of 1 January 2010, donations to EU organizations with an equivalent status to those listed in the local legislation will also be deemed tax deductible.

Furthermore, provided that certain conditions are met, individuals may also deduct from their taxable income the value of the mandatory personal social security contributions paid during the year for accumulating additional length of service for pension (up to five years for the period of university education and/or in case of insufficient length of service upon pension).

As of 1 January 2009, the Bulgarian personal income tax legislation introduced a tax allowance for young families who have a mortgage. With this allowance, the total taxable base of the tax liable person may be decreased with the interest installments paid on  the first BGN 100,000 of the mortgage taken. There are certain requirements that have  to be met in order for a young family to qualify for this allowance, e.g. at least one of the spouses must be under the age of 35 when the mortgage is entered into, the property must be the main residence of the family for the tax year and the mortgage agreement  is in the name of at least one spouse. The fulfillment of these criteria must be evidenced with the provision of certain documents. The tax payer is obliged to demonstrate that the necessary conditions have been met within the tax return form and will be responsible if that is not the case.

Exempt income

Exempt income includes bank interest on non-deposit bank accounts, state pensions, scholarships, certain state welfare payments, benefits/income received from the Bulgarian mandatory social security and health insurance system, an equivalent foreign institution or under a voluntary social pension plan, provided that the latter is registered in Bulgaria or in another EU/EEA Member State. Capital gains may also be tax exempt provided certain conditions are met.

Accommodation and daily allowances paid on behalf of the employer/assignor to individuals under employment, management and civil contracts are treated as non-taxable income provided that certain conditions are met.

Relief from tax

A tax credit may be used for foreign taxes paid provided the relevant conditions are met. Relief from tax may also be sought under the provisions of an existing DTT depending on the specific method, i.e. tax credit or tax exemption with progression.

Tax rates and payment dates

The annual general flat tax rate applied for taxation of an individual’s income is 10 percent. Individuals who derive income from sources other than, or in addition to, income under an employment contract for which the employer has performed an annual reconciliation as at the year-end (including dividends received from foreign entities, which are taxed with a one-off tax but have to be reported anyways) must file an annual tax return by 30 April of the following calendar year. A tax return must also be filed if the individual owns shares/ allotment in foreign entities/permanent establishments/immovable property regardless  of whether a transaction has been made with them during the respective tax year. In addition, such tax returns must be prepared by individuals who withdraw accumulated voluntary personal contributions prior to the expiration of the term under an insurance policy as well as in instances where an individual has received/granted a loan from/to non- financial institutions or individuals (where certain conditions are met).

The outstanding personal income tax as reported in the annual Bulgarian personal income tax return, if any, must also be paid within this filing deadline.

If the annual personal income tax return is filed by 10 February of the following calendar year and the tax is paid by that date, a deduction of 5 percent from the outstanding tax liability is granted. Individuals may also be entitled to a 5-percent deduction from their tax liabilities if the tax return is filed electronically (through an electronic signature). However, it should be pointed out that the two deductions are not cumulative, i.e. they may not be applied simultaneously.

Sole traders determine their taxable base and make advance payments in accordance with the rules for corporate taxation. The tax rate applied to this type of income is 15 percent.

Individuals performing certain activities (e.g. hotel accommodation, restaurant services, taxicab transportation, and other services) whose turnover for the previous year is below BGN 50,000 are instead subject to a lump sum license tax which is regulated by the Local Taxes and Fees Act.

Fringe benefits

Certain fringe benefits, such as canteen or food expenses like food vouchers provided to employees/assignees (under certain conditions), transportation cards, use of the employer’s sports facilities or rest/holiday homes, are not taxable in the possession of the employee if provided as a social expense by the employer. However, pension and health insurance contributions are due on the amount of the fringe benefits provided.

Social expenses paid in cash are taxable as part of the individual’s employment income as indicated above.

Other fringe benefits are treated as taxable for personal income tax purposes. The tax treatment of the specific benefit should be considered on a case-by-case basis.

Payroll-related contributions

The burden of payroll-related contributions is not split between the employer and the employee via a single unified ratio. Instead, the ratios vary depending on the fund to which contributions are made and are as follows:

  • 55:45 with respect to pension and additional mandatory pension insurance contributions
  • 60:40 with respect to all other funds (health insurance, unemployment, general illness and maternity).

It is expected that the contributions of both parties and all funds will be equalized, i.e. in a ratio of 50:50. This was planned for the year 2010 but has been delayed for now.

It is an obligation of the employer to withhold from employees’ remuneration and to remit to the state budget the amount of the mandatory social security and health insurance contributions at the general rates presented below.

Contributions On behalf of employees On behalf of the employers Total
Social security contributions 9.70% 13.10%* 22.80%**
Health insurance contributions 3.20% 4.80% 8.00%

The total amount of social security contributions withheld on behalf of employers varies within the range of 13.00-13.7 percent depending on the economic activity being performed by the respective entity.

** 5 percent of the mandatory social security contributions for individuals born after 31 December 1959 are payable to private pension funds licensed to provide additional mandatory pension insurance.

The above contributions are determined as a percentage of the gross employment income, up to the monthly ceiling of BGN 2,200, or BGN 26,400 annually. The minimum monthly insurable income varies depending on the type of economic activity performed by the company and the qualifications of the employee.

EU social security

Following Bulgaria’s EU accession on 1 January 2007, the EU social security regulations (1408/71; 574/72) aimed at enhancing free movement of employees and prevention of double insurance of EU citizens entered into force and have precedence over the provisions of the local social security legislation and the already existing Social Security Agreements with other Member States. As of 1 May 2010, the new social security regulation 883/2004 is applicable in Bulgaria to EU citizens. As of 1 January 2011, it also became applicable to non-EU country nationals in most EU countries and it is currently also applicable with respect to cross-border situations with Switzerland and EEA countries.

Persons and territories covered

The EU social security regulations are applied on the territory of the Member States of the European Union and the EEA, which comprises Iceland, Norway and Liechtenstein, together with Switzerland for cross-border situations with Bulgaria. Furthermore, it should be pointed out that the EU provisions on social security do not apply to all individuals moving within the EU and the EEA. Generally, the following individuals would be covered under the regulations:

  • mployed workers
  • self-employed persons
  • civil servants
  • students
  • pensioners
  • unemployed under certain conditions
  • family members and heirs, regardless of nationality
  • third country nationals

In view of the above, no coverage under the EU social security regulations is provided to persons who are no longer insured under a social security system in any of the Member States and who are not considered immediate family to an employed or self-employed person or a pensioner. These individuals are deemed non-active persons.

Main principles

The main principle of the EU social security regulations is to ensure that individuals fall under the jurisdiction of only one MemberState at a time. Usually, this is the MemberState where the person is physically performing his/her work or where he/she acts as a self-employed person. However, certain exceptions exist in instances where (i) the persons are moving within EU Member States on short-term assignments, (ii) they are simultaneously working in more than one state and (iii) they are simultaneously employed in one state and self-employed in another. In these cases, special rules apply with respect to determining the relevant social security system.

The EU social security regulations also aim to avoid discrimination in social security matters, i.e. individuals temporarily or permanently moving to an EU country for social security purposes must be treated no differently than local citizens of that MemberState.

Property transfer, gift, inheritance and tourist taxes

Local taxes and fees are determined and collected by municipalities within the ranges set in the Local Taxes and Fees Act.

Transfer tax

The tax for the transfer of immovable property and automobiles is in the range of 0.1 – 3 percent and is levied on the value of the property. Transfer tax is also levied upon acquisition of real estate property or limited ownership rights related thereto as a result of the elapse of a prescribed time.

Property tax and garbage collection fees

Owners of immovable property situated in Bulgaria are liable to property tax. The tax is levied on the assessed value of the property, depending on its area in square meters and its location and for non-residential property owned by companies – on the higher of the assessed value and the book value of the property. The tax is levied at a rate within a range of 0.01 – 0.45 percent. A 50-percent tax rebate is allowed if the property is the principal residential property of an individual taxpayer.

Owners of immovable property also pay garbage collection fees. Garbage collection fees are determined by the respective municipality.

Gift and inheritance taxes

Certain individuals inheriting property situated in Bulgaria are subject to inheritance tax. The tax rates depend on the value of the property and the relationship of the beneficiary to the testator or donor. No inheritance tax is levied provided that the beneficiary is a spouse or immediate family member. A gift tax is levied on donated property, as well as on property transferred without consideration. No gift tax is levied on property donated to spouses and immediate family members.

The inheritance and gift tax rates are as follows:

  • in a range of 0.4 – 0.8 percent for property inherited by/donated to brothers, sisters and their children
  • in a range of 3.3 – 6.6 percent for inheritance/gifts (donations) between unrelated persons.

Tourist tax

A tourist tax is effective from 1 January 2011. It is due from suppliers of overnight accommodation services on a monthly basis within the range of BGN 0.20 – 3.00 for each overnight stay. The applicable tourist tax rate is determined by the respective municipality. The deadline for payment of the tourist tax is the 15th of the month following the month when the overnight accommodation has been supplied.

The tourist tax due on an annual basis may not be less than 30 percent of the amount calculated for full capacity of the accommodation facility.

Value added tax

The Bulgarian VAT legislation is generally harmonized with the EU VAT Directives. The current VAT Act became effective on 1 January 2007 and adopted the EU VAT rules based on the general principles of the Sixth VAT Directive and Directive 2006/112/EC. The latest amendments of the VAT Act came into effect on 1 January 2013.

Generally, VAT is due on any supply of goods or services with a place of supply in Bulgaria made by taxable persons in the course of their  economic activities. “Supply” normally means goods or services provided in exchange for consideration. However, certain transactions carried out for no consideration are also considered to be supplies, for example, the private use of business assets.

The following transactions are generally subject to Bulgarian VAT:

  • supply of goods or services with a place of supply in Bulgaria
  • intra-Community acquisition of goods
  • import of goods into Bulgaria.

Tax regime and place of supply of goods

The location of goods at the time of the supply determines the VAT treatment. If the goods are located in Bulgaria, then the supply is subject to 20 percent Bulgarian VAT.

However, if goods are dispatched or transported, the place of supply is the place where the goods are located at the time when dispatch or transport of the goods to the customer begins.

Special rules apply for the supply of electricity, gas, heat or cooling energy which are treated as goods for VAT purposes.

Intra-Community supplies

If a Bulgarian VAT registered person sells goods to a customer who is registered for VAT in another EU Member State and the goods are physically transferred from Bulgaria (either by the supplier or by the customer) to another EU Member State, the supply is regarded as a zero-rated (exempt with credit) intra-Community supply. Documents, as prescribed by law, evidencing  the physical movement of the goods from Bulgaria must be obtained in order to support the zero rating.

Intra-Community acquisitions

The acquisition of goods arriving in Bulgaria from another EU country by a taxable person or by a non-taxable legal entity when the goods are supplied by a taxable person identified for VAT in another EU Member State represents an intra-Community acquisition. VAT registered recipients of intra-Community acquisitions need to reverse charge VAT within the statutory term.

Exports

The export of goods to customers outside the EU is zero-rated, provided that certain transportation and documentation requirements are fulfilled.

Imports

The import of non-Community goods from outside the EU is subject to Bulgarian VAT and is payable by the importer to the customs authorities. Under specific conditions, import VAT may be “reverse charged” if the importer is granted authorization to apply such a regime in connection with the implementation of an investment project.

Supply of goods with installation

Goods coming from other EU Member States and delivered under supply and install arrangement are subject to VAT reverse charge by the Bulgarian recipient if (i) the supplier is established in another MemberState and is not established in Bulgaria, and (ii) the recipient is identified for VAT in Bulgaria.

Place of supply and taxation of services

The place of supply rules with regard to services follow the principles laid down by Directive 2006/112/EC as regards the place of supply of services.

Generally, supplies of services fall into two regimes – B2B services, i.e. services provided by one taxable person to another and B2C services i.e. service provided by a taxable to a non-taxable person. The place of supply under the two regimes is determined by different sets of rules.

B2B regime of services

Under the B2B regime of services, the place of supply follows the place where the recipient is established or has a fixed establishment which receives the services. Thus, for cross-border supplies of services where the supplier is not established in the country of the recipient, VAT is usually due by the recipient through the reverse charge mechanism.

Exceptions to this rule include:

  • The supply of services connected to immovable property is taxable where the property is located.
  • The supply of admission to cultural, artistic, sporting, scientific, educational, entertaining, etc. events is taxable where the event takes place.
  • The supply of services connected to short-term6 hiring of vehicles is taxable in the country where the vehicle is placed at the disposal of the client.

Services provided to taxable persons but used for non-business purposes by the owner or the employees should be treated as services provided to non-taxable persons (B2C).

B2C regime of services

Services provided to non-taxable persons are generally taxed at the place where the supplier is established. As exceptions to this, the following services provided to non- taxable persons are considered to have their place of supply in Bulgaria:

  • services connected to immovable property located in Bulgaria
  • services related to cultural, artistic, sporting, scientific, educational, entertaining, etc. events taking place in Bulgaria
  • services related to valuation, expert examination or work on a movable tangible property taking place in Bulgaria
  • short-term hiring of vehicles if the vehicle is placed at the disposal of the client in Bulgaria
  • electronic communication services, radio and television broadcasting when the supplier is established outside the Community, the recipient is established in Bulgaria and the service is effectively used in the territory of the country
  • electronically supplied services when the supplier is established outside the Community and the recipient is established in Bulgaria
  • transport of goods within the Community, including forwarding, courier and postal services, when the transport begins in Bulgaria
  • intermediary services when the underlying transaction has a place of supply in Bulgaria.

VAT rates

The standard rate of VAT, which applies to most taxable supplies, is 20 percent. Two reduced rates are applicable for specific supplies.

Zero VAT rate

Zero VAT rate applies to specific supplies such as:

  • intra-Community supplies of goods
  • supplies of goods transported or dispatched outside the European Community (exports)
  • international transport of passengers and goods
  • certain supplies related to international transport
  • supplies of non-Community goods placed under a special customs regime (such as temporary warehousing, customs warehousing, inward processing, temporary importation with full exemption from duties)
  • services consisting in work on goods (such as processing or repair) when the recipient of the services is a person established outside the country and the goods are imported within the Community in order to be processed and after that re-exported
  • services rendered by agents, brokers and other intermediaries acting in the name and on behalf of a third person in relation to certain export transactions.

The application of the zero VAT rate needs to be substantiated by certain documents required by the law.

9-percent VAT rate

A reduced rate of 9 percent applies to accommodation in hotels, sheltered housing and other places for accommodation.

Exemptions

Exempt supplies include:

  • supplies related to health care
  • supplies related to welfare and social security
  • supplies related to education, sports and physical education
  • supplies related to culture and religions
  • non-profit activities of eligible institutions
  • certain transfers of land and buildings (with the option of charging VAT)
  • insurance services
  • financial services
  • gambling
  • supply of goods or services for which credit for input tax has not been used because of legislative provisions.

Registration for VAT purposes

VAT can be charged only by VAT registered persons. VAT registration cannot be retrospective, unless it is performed at the initiative of the revenue authorities when the taxpayer fails to submit a registration application on time.

Mandatory VAT registration for local supplies

Mandatory VAT registration applies for taxable persons, local or foreign, who perform taxable supplies with place of supply in Bulgaria (excluding supplies for which the VAT is to be reverse charged by the recipient) exceeding the registration threshold of BGN 50,000 for a period of 12 consecutive months. Zero-rated supplies count toward the VAT registration threshold. The taxable person must complete an application for registration 14 days from the end of the tax period when the registration threshold was reached.

Mandatory VAT registration for providing/receiving of services

Subject to mandatory VAT registration are all taxable persons who (i) receive services from suppliers established abroad or (ii) provide B2B services to another EU Member State. A claim for VAT registration needs to be filed with the revenue authorities not later than 7 days before the tax on the supply becomes due.

The registration for providing/receiving services is a specific registration which does not entitle the taxpayer to deduct input VAT.

Mandatory VAT registration for supply of goods with assembly and installation

A taxable person, registered for VAT purposes in another MemberState who supplies goods with assembly and installation to a non-taxable recipient, is obliged to register 7 days before the chargeable event takes place, irrespective of the threshold reached.

Mandatory VAT registration for intra-Community acquisitions

A taxable person or a non-taxable legal entity that is not VAT registered on other grounds would be subject to mandatory VAT registration when performing intra-Community acquisitions if their total amount during a calendar year exceeds BGN 20,000 (no threshold applies for intra-Community acquisitions of new means of transport and excise goods). The VAT registration needs to be effected no later than 7 days prior to the acquisition with which the threshold is exceeded. The movement of own goods from an EU country where the taxpayer is identified for VAT purposes to Bulgaria creates an identical registration obligation.

Entities that are VAT registered on this ground are obliged to charge and pay output VAT upon the intra-Community acquisition but are precluded to deduct input VAT. Furthermore, entities registered under this regime are not obliged to charge output VAT on the subsequent sale of goods.

Voluntary registration

Any taxable person not meeting the requirements for mandatory VAT registration has the right to register voluntarily without fulfilling threshold requirements.

VAT registration procedure

Persons not registered for general tax purposes in Bulgaria may not register under the VAT Act. The general tax registration for local companies is automatic after registration with  the Commercial Register is obtained. Foreign unestablished persons need to obtain a tax number for this purpose.

In order to register for VAT (under the mandatory or voluntary procedures), an entity must file an application with the relevant territorial directorate of the National Revenue Agency (NRA). The application must state the grounds for registration and must be submitted together with information about the monthly taxable turnover for the preceding 12 consecutive months.

Foreign persons who are obliged to or wish to register might do it only by securing the services of a fiscal representative in Bulgaria. The fiscal representative is jointly and severally liable for the Bulgarian VAT liabilities of the foreign person.

This does not apply for foreign persons from EU countries who may register without appointing a fiscal representative. If, however, they decide to appoint such, the representative would not be jointly liable for the foreign person’s VAT liabilities.

Persons applying for VAT registration need to designate an email address for official communications with the tax office.

Deregistration

Voluntary deregistration following a mandatory registration is possible when, during the last 12 consecutive months before the current month, the taxable turnover of the registered person does not exceed BGN 50,000. However, voluntarily registered persons cannot apply for deregistration before the expiration of 24 months from the beginning of the calendar year following the year of registration.

Mandatory deregistration should be pursued in certain cases.

Obligations of VAT registered persons

Format of the VAT registration number

The format of a Bulgarian VAT registration number for legal entities is as follows:

BG 123456789, where 123456789 represents the unified identification code from the Commercial Register or the general tax number.

Accounting records

VAT registered persons must maintain detailed accounting records which must be adequate for the determination of their VAT liabilities. The VAT Act does not provide for the form or the level of detail of the accounting information that has to be kept. The Accountancy Act, however, regulates this matter for foreign persons that have a permanent establishment in the country.

VAT returns

Each VAT registered person must submit VAT returns accompanied by purchase and sales ledgers. The tax period under the Bulgarian VAT Act is the calendar month.

The purchase and sales ledgers have to be prepared in prescribed formats and include detailed information about all transactions having relevance to VAT. The sales ledger lists all tax documents on the basis of which output VAT is applied or not applied (i.e. includes exempt and zero-rated transactions and reverse charged VAT). The purchase ledger contains all tax documents on the basis of which input VAT is claimed or not claimed (including reverse charged VAT).

The VAT return must be prepared on the basis of the information from the purchase and sales ledgers for the respective month. The deadline for submission of the VAT return  and ledgers is the 14th day of the month following the reference tax period. If, for a given month, either the Sales or the Purchases ledgers contain more than five entries, the VAT records must be submitted electronically with a qualifying electronic signature.

European Sales List – VIES return

VAT registered persons have to file a VIES return if some or all of the following types of sales have been performed in a given month:

  • intra-Community supplies of goods
  • triangulation operations (if the supplier acts as an intermediary)
  • taxable services provided to taxable persons established in other member states (including cases of received advance payments on such services).

A VIES return is to be filed together with the VAT return. The deadline for submission of the VIES return is the 14th day of the month following the relevant tax period. VAT registered entities filing VIES returns must file these electronically along with the VAT return and  Sales and Purchase ledgers using a qualifying electronic signature.

Intrastat Return

The Intrastat system in Bulgaria is regulated by the Intra-Community Trade Statistics Act and applies to the collection of data of intra-Community trade in goods, including the movement of goods as a result of dispatches from and arrivals to the territory of Bulgaria to/from other EU Member States.

Persons registered for VAT purposes in Bulgaria which carry out intra-Community trade with goods have to file an Intrastat return if they have exceeded either of the following thresholds from intra-Community trade:

  • BGN 240,000 for dispatches
  • BGN 240,000 for receipts.

Entities must submit Intrastat returns every month starting from the month when the relevant threshold was exceeded in the current year.

The Intrastat returns are to be filed with the NRA by the 14th of the month following the month when the receipt/dispatch occurred.

Recovery of input VAT

A Bulgarian VAT registered person is entitled to recover input VAT in respect of taxable supplies from another VAT registered person or in respect of imported goods if they are used for the purposes of:

  • taxable supplies liable to Bulgarian output VAT
  • zero-rated (exempt with credit) supplies such as the dispatch of goods to other EU Member States and the export of goods to third countries
  • supplies with place of supply outside Bulgaria, insofar as input VAT would be deductible in relation to such supplies being made in Bulgaria.

The input VAT claim must be supported with an invoice and also with a so-called reverse charge protocol (when the VAT is to be charged by the recipient of a supply) and/or with a Single Administrative Document (SAD) (in the case of import). The invoices and protocols must be issued in compliance with the Bulgarian VAT Act.

A VAT registered person is not generally entitled to recover input VAT on:

  • purchases used for the performance of VAT exempt supplies
  • purchases used for the performance of free-of-charge supplies (there are certain exceptions) or transactions outside the scope of the independent economic activity of the taxable person
  • purchases of passenger cars and motorcycles; fuel, repair and maintenance of such cars and motorcycles; excluding the acquisition of a passenger car or a motorcycle used for certain qualifying activities such as resale, leasing, security and taxi/courier service. If the passenger cars and motorcycles are used not solely for qualifying services, the tax payers should be entitled to full input VAT deduction if the qualifying services represent more than 50 percent of the revenue generated by the tax payer in the last 12 months
  • purchases used for representation or entertainment purposes.

A VAT registered person is entitled to a pro-rata VAT deduction in respect of purchases which are used to perform both supplies qualifying for deduction and exempt supplies. The pro-rata deduction is based on the ratio of taxable supplies to total supplies calculated for the previous calendar year and adjusted on the basis of the current year’s ratio calculated with the December VAT return.

Registered persons may claim a VAT deduction within 12 months from the end of the month in which the output VAT for the supply became chargeable. No specific limitation applies to supplies subject to reverse charge, but notifications to the tax office are needed for deductions claimed after this 12-month period.

Reimbursement of VAT

If, in a given month, the input VAT deduction declared by the registered person exceeds the amount of output VAT charged, the excess amount is subject to reimbursement.

The VAT for reimbursement is offset against VAT payables in the following two months. If, after the two-month period, there is still an outstanding balance for reimbursement, it is due for refund by the revenue authorities within 30 days together with any other VAT for reimbursement declared in the monthly VAT returns in this two-month period.

Accelerated refunds are available to registered persons who, during the last 12 months, have performed the following supplies amounting to 30 percent or more of their total taxable turnover for the same period:

  • zero-rated supplies and
  • the following supplies having their place of supply in another EU Member State where the customer is VAT registered

    • intra-Community transport of goods, forwarding, courier, postal and cargo handling and direct agency services related to such transport
    • valuations of and work on movable goods.

The term for the VAT refund is 30 days from the date of filing the VAT return.

The VAT is usually refunded after a tax review or tax audit by the revenue authorities, which could defer the refund until after the audit is completed. The tax audit could last up to five months. However, refund of VAT is allowed within five days despite any ongoing audit after a collateral in the form of cash deposit, government securities or irrevocable bank guarantee in favor of the revenue authorities. If any refund is postponed until the completion of the audit, the authorities owe interest for the period of delay.

VAT refund to persons identified for VAT in the EU and businesses outside the EU

Bulgaria has implemented the general provisions of the EU Directives in respect of VAT refunds to entities (i) established and registered for VAT purposes in other EU Member States (Directive 2008/9/EC), or (ii) established outside the Community (13th Directive 86/560/EEC).

Refunds of input VAT incurred by foreign EU entities are available for purchases/imports made in Bulgaria, provided that input VAT deduction would have been available if the foreign entity was identified for VAT purposes in Bulgaria.

The maximum period of time for which VAT reclaims can be made cannot exceed one calendar year. The minimum period cannot be less than three months unless this period comprises the remainder of the calendar year.

Refund under the 13th Directive

The 13th Directive refunds are based on reciprocity – the condition is that the country in which the person is established refunds VAT or similar tax to Bulgarian companies.

Bulgaria has reciprocity agreements with the following countries: Canada, Croatia, FYR of Macedonia, Iceland, Norway, Republic of Korea and Switzerland.

Taxable persons have a right to a refund if, during the year for which refund is claimed:

  • they have neither a seat of their business nor a fixed establishment in Bulgaria and
  • during the same period they have not performed transactions with place of supply withinBulgaria except:

    • international transport and ancillary to it services
    • supplies of goods and services for which the tax is due by the recipient.

The application must be made in the Bulgarian language and filed with the authorities by an appointed Bulgarian agent. The name and address of the person has to be written in the official language of the country where the person is established.

Applications must be accompanied by:

  • a declaration that the person claiming refund is not established on the territory of the country
  • a certificate issued by the competent tax authorities from the country in which the person is established, which proves that the person performed the economic activity during the calendar year when the right to reclaim VAT has arisen (this certificate must be translated inBulgarian by a certified translator and legalized)
  • the original invoices/SADs on the basis of which the VAT refund is claimed
  • written power of attorney.

Applications must be sent to the territorial director of the Territorial Directorate of the National Revenue Agency – Sofia, located at 21 Aksakov Street, 1000 Sofia.

The right to reclaim VAT on purchases made in 2012 must be exercised by 30 June 2013.

Refund under Directive 2008/9/EC

Taxable persons have a right to refund of Bulgarian VAT if during the period when VAT was incurred:

  • they have neither a seat of their business nor a fixed establishment in Bulgaria and
  • who during the same period have not performed transactions with a place of supplyBulgaria except:

    • zero-rated supplies
    • transport and ancillary services
    • supplies of goods and services for which the tax is due by the recipient.

Refund is claimed by home state applications filed electronically with the local revenue authorities in the MemberState where the respective person is established.

Applications to refund Bulgarian VAT and all accompanying documents must be completed in Bulgarian or English. Applications must be accompanied by:

  • codified description of the economic activities of the person
  • codified description of the goods and services purchased in Bulgaria
  • copies of invoices and SADs are not required but these should be detailed in the application.

The right to refund is exercised personally or through an authorized representative.

The home state applications are referred to the Bulgarian Revenue Agency which has four months to issue its decision for accepting or denying the claim. If additional documents are requested, the term for issuing the decision is extended by up to eight months from the submission of the claim. Following a positive decision, the claimed VAT must be reimbursed within 10 days to a bank account indicated by the person. The Bulgarian Revenue Agency owes interest for any delay after the 10-day term.

The right to reclaim VAT on purchases made in 2012 must be exercised by 30 September 2013.

Penalties

Penalties can be imposed by the revenue authorities in various cases of non-compliance, most notably for failure to charge output VAT, late charging of output VAT or failure to submit application for VAT registration.

Penalties in these cases are generally set at the amount of the underlying VAT not charged as a result of the failures (except for late charging of VAT – if the delay is within one month, the potential penalty is 25 percent of the underlying VAT).

In addition to this, penalty interest on the unaccrued output VAT liability may be calculated for the period of non-payment. The penalty interest rate varies with the prime rate of the Bulgarian National Bank and is 10.03 percent per year as at the beginning of 2013.

In the case of a failure to apply the reverse charge mechanism, the penalty amounts to 5 percent of the underlying VAT, provided that the taxable person is entitled to input VAT deduction. The penalty is 2 percent of the underlying VAT if the reverse charge mechanism is applied with a one-month delay.

Customs duties

Following Bulgaria’s EU accession, the EU Customs Regulations 2913/92/EEC and 2454/93/EEC became directly applicable in the country. Furthermore, as a member of the European Union, Bulgaria became a part of the Customs Union of the EU, which has two major consequences:

  • non-Community goods imported in Bulgaria from countries or territories not forming part of the customs territory of the EU are generally subject to the same customs duties and formalities as those applicable to goods imported in any other EU Member State
  • Community goods in free circulation in the EU move from Bulgaria to other EU Member States and vice versa without application of customs formalities and without customs duty payment obligations.

Community and non-Community goods

Community goods are:

  • goods fully produced or manufactured within the customs area of the EU
  • goods imported from outside the customs area of the EU and released in the EU customs territory for free circulation
  • goods produced or manufactured within the customs area of the EU from the abovementioned categories of goods.

Non-Community goods are goods that do not meet the criteria for Community goods. If Community goods are exported outside the customs territory of the EU, they lose their Community status. If Community goods are exported and subsequently re-imported within the customs territory of the EU, they will be treated as non-Community goods (i.e. subject to customs duties) unless it is proved that:

  • the goods imported are the same as those previously exported and
  • while outside the EU, the goods were not subject to any operations except for such aimed at preserving their good condition.

Import procedures

General procedures

When entering the customs territory of the EU, all goods must be declared to the customs authorities and assigned a customs-approved treatment or use. If the goods are to be imported, the clearance procedure can be initiated either at the border Customs Office (i.e. where the goods initially enter the EU customs territory) or at the local Customs  Office (i.e. where the goods will be used). In the second case, when entering the customs territory of the EU, the goods must be cleared by a border customs office for transit procedure. Usually, the Bulgarian customs authorities require that the importer is also the owner of the goods subject to import.

Customs value

Usually, the customs value of the goods is their transaction value i.e. the price paid or payable for the goods. Certain adjustments to this price might be necessary (e.g. freight and insurance costs following the entry of the goods into Bulgaria must be excluded from the customs value). Alternative methods may be used, for example, where there is no sale, or where the relationship between the parties influences the sale price (e.g. related party transactions).

Classification of goods

The applicable Integrated Tariff of the European Community (TARIC) is based on the Community Combined Nomenclature and on the international Harmonized System used by many industrialized nations in the world. The respective classification of the goods within the tariff determines the rate of duty applicable upon import and whether any special preferential treatment is available.

Origin of goods

The origin of imported goods and the route they take to the EU have considerable influence on their customs duty liability. If they originate in, and are directly consigned from a country which has a preferential agreement with the EU, the duty rate is reduced significantly or possibly to 0 percent. The EU has such agreements with other country groupings such as the African, Caribbean and Pacific states, Overseas Countries and Territories, Mashreq and Maghreb. Suspension of the full rate of duty may be available from specified countries at certain times of the year for particular goods. Similarly, a quota may be in force which allows predetermined quantities of goods of certain tariff headings to be imported at lower than full duty rates.

Charges at importation

Customs duties are mainly charged on the customs value of the goods (ad valorem), although many agricultural products are also liable to specific duties, assessed according to weight or quantity, under the Common Agricultural Policy of the EU. A few items are subject to compound duties, i.e. a mixture of value-based and specific duties. The rate and type of duty applicable to an item is determined by its classification.

VAT is also charged on import. Any such VAT paid may be recovered as input tax provided that (i) the importer is registered for VAT purposes in Bulgaria, (ii) the goods are for use in their VAT taxable business activities, (iii) the importer has a proper import customs declaration issued in their name which is properly recorded in their VAT ledgers and (iv) the import VAT was effectively paid to the budget.

Export procedures

Goods to be exported must also be declared to the customs authorities. Only persons established on the territory of the EU can be considered exporters for customs purposes.

From a VAT perspective, the export of goods to a destination outside the EU can be zero- rated provided (i) the goods are transported outside the EU by or on behalf of the supplier or by or on behalf of the customer if not established in Bulgaria and (ii) the exporter can produce the necessary evidence for export.

Other procedures with economic impact

A number of other procedures with economic impact including temporary importation  and exportation, inward and outward processing, customs warehousing and processing under customs control cover the movement, warehousing and processing of goods under specific circumstances.

The opening and discharging of the above procedures follows a number of rules and requirements and is administered by the customs authorities.

Excise duties

The Excise Duty and Tax Warehouses Act (EDTWA), which follows the concepts laid down in the EU excise duty legislation, was ratified by the Bulgarian Parliament and became effective on 1 July 2006. The Act was amended several times following Bulgaria’s EU accession, the latest changes came into effect from 1 January 2013.

Taxable persons for the purposes of excise duties are licensed warehouse keepers, importers of excisable goods and other designated persons listed by the EDTWA.

Excise duty is charged on the following goods: alcohol and alcoholic beverages, tobacco products, energy products and electricity. Excise duty is usually charged on the basis of weight, volume and quantity of products. Exceptions are tobacco products for which the excise duty is calculated based on quantity and product or weight (specific duty) and as a percent of the product’s price.

Standard tax rates for various groups of products are explicitly determined in the law. Products for which no tax rate is specified in the law are taxed at the rate of equivalent products.

The excise goods are subject to excise duty at the time they are produced or enter the territory of Bulgaria. The obligation for payment of the duty occurs when the respective goods are released for consumption. The accrual and payment of excise duty can be postponed, if the goods are produced, stored or moved under an excise duty suspension arrangement regime (EDSAR). Usually, the goods are considered eligible for EDSAR if produced or stored in a licensed tax warehouse. At the same time, certain excisable goods (alcohol, tobacco and some energy products) cannot be produced outside the territory of such a warehouse. Furthermore, the goods can move under EDSAR into and out of the territory of Bulgaria in the following cases:

  • movement of excisable goods between Bulgarian tax warehouses
  • movement of excisable goods between Bulgarian and EU tax warehouses
  • movement of excisable goods from a Bulgarian tax warehouse to an exit customs office in case of export
  • imported goods transported to Bulgarian tax warehouse
  • other movements specifically listed in the EDTWA.

The movement of goods under EDSAR within the EU is monitored by the computerized Excise Movement and Control System (EMCS).

Insurance Premium Tax (IPT)

Insurance Premium Tax (IPT) at the rate of 2 percent was introduced in Bulgaria from 1 January 2011. The tax is charged on all insurance premiums covering risks located in Bulgaria with the exception of premiums collected on certain types of life and international transport related premiums. Taxable persons are all local insurers as well as foreign insurers acting in Bulgaria under the right of establishment or the freedom to provide services (FOS insurers).

The tax basis is the gross premium received by the insurer adjusted for certain discounts and/or parafiscal fees. The tax event is the moment when the premium payment is collected by the insurer. IPT should be paid on a monthly basis.

On the reporting side, IPT liabilities are reported by standard tax returns each calendar quarter. In addition, FOS insurers are required to file one additional return for the first month in which they have collected taxable premium income in Bulgaria.

FOS insurers can use a fiscal representative who will be jointly and severally responsible with them. Alternatively, they may settle their IPT liabilities directly or assisted by a local service provider as all reporting documentation is in the Bulgarian language.

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Accounting and Auditing in Bulgaria

Posted by Active Consult Ltd. - Accounting & Tax в 04/06/2013

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Accounting

Introduction

The Bulgarian accounting legislation is aligned with the applicable European directives and almost no changes have taken place in recent years, and this is expected to be the case in the foreseeable future.

Bulgarian accounting rules are governed by the Accountancy Act, developed on the basis of the Fourth Directive of the Council of the European Union as part of the process of harmonizing the country’s statutory accounting legislation with the laws of the European Union. The Commercial Act, the Credit Institutions Act, the Bulgarian National Bank Act, the Insurance Code, the Public Offering of Securities Act and certain other laws also contain regulations applicable to accounting and financial reporting requirements.

Under the Bulgarian Accountancy Act, the applicable accounting standards for all entities except for small and medium-sized entities (as discussed below) in Bulgaria are the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and adopted by the European Union. The requirements of the  Act extend to all business organizations, including branches of foreign organizations, with representative offices being the only exception.

Accounting principles and standards

Enterprises in the Republic of Bulgaria, with the exception of small and medium-sized enterprises, are required to prepare and present their annual financial statements on the basis of the IFRS as adopted by the EU (EU IFRS). SMEs should apply either the National Financial Reporting Standards for Small and Medium-Sized Enterprises (NFRSSME) which are adopted by the Council of Ministers in Bulgaria, or, they may opt to voluntarily apply the EU IFRS. However, once having selected the EU IFRS as an applicable framework, SMEs may not revert to the NFRSSME.

Small and medium enterprises, according to the Accountancy Act, are those that do not exceed at least two of the following criteria in at least one of the previous two reporting periods:

  • average number of personnel for the preceding year: 250 persons
  • annual turnover: BGN 15 million
  • total assets as of 31 December: BGN 8 million.

Newly established entities are considered small and medium-sized in the year of their establishment and they prepare and present their annual financial statements on the basis of the NFRSSME for the year of their establishment and for the year following it. Newly established entities may choose to apply the EU IFRS as the time of their establishment. However, listed entities, credit institutions, insurance and investment companies, pension and health insurance funds and funds managed by these companies have no choice and can only apply the EU IFRS.

The underlying accounting assumptions and principles under the NFRSSME are generally similar to those under the IFRS. The basic principles adopted by the Accountancy Act are going concern and the accrual basis of accounting. The principles of consistency, prudence, matching and substance over form are also incorporated into the Bulgarian accounting practices. The NFRSSME in their current version have been mostly derived from the 2003 version of the IFRS with certain differences, while some of the standards, interpretations and recent changes have not been included in the NFRSSME.

Currently, there is no indication whether the IFRS for SME, which were issued by the IASB in 2009, will be considered for endorsement in Bulgaria.

Financial reporting

All entities are required to prepare annual financial statements with a financial year end of 31 December. The financial statements are the responsibility of the company’s management.

Pursuant to the Accountancy Act, companies prepare individual (non-consolidated) and consolidated financial statements (where required). For sole traders with an annual turnover of less than BGN 100,000, the requirement is only for an annual income statement.

In accordance with the requirements of the Accountancy Act, financial statements (interim, annual and consolidated) may be drawn up only by preparers of financial statements. Any individual or a specialized accounting enterprise can be a preparer of financial statements provided that they meet the requirements of the Accountancy Act for a minimum level of education and relevant professional experience.

Individual financial statements

The financial statements consist of a statement of financial position, statement of comprehensive income, statement of cash flows, statement of changes in equity and disclosure notes to the financial statements.

Entities which in accordance with the requirements of the Accountancy Act are mandatorily subject to audit are additionally required to prepare an annual management report for the annual activity of the Company. This report includes, but is not limited to, information about recent and future developments of the entity, description of the major risks, important subsequent events, description of financial instruments used by the entity and financial risk management.

The statement of financial position and the statement of comprehensive income must be based on, and supported by, bookkeeping records. Comparative figures must be presented.

The prescribed format for the statement of financial position follows the format of the Fourth Directive of the European Union. On that basis, companies have a choice of format for the statement of comprehensive income between the nature of expenses method and the cost of sales (function of expenses) method. The Accountancy Act permits companies to adopt the model which they consider to be the most appropriate to the nature of their business.

Entities under the supervision of the Financial Supervision Commission, such as banks, insurance companies, investment companies, pension and health insurance funds and listed entities, are required to file certain additional reports with the Commission.

Under the Accountancy Act, there are specific accounting rules to be followed by companies in liquidation and bankruptcy.

The disclosure notes should include additional information necessary to give a true and fair view of the financial position and results of the business. This includes an explanation of the accounting policies applied in the accounts and disclosure notes.

Consolidated financial statements

Companies having a majority holding in, or exercising control over subsidiaries must generally prepare consolidated annual financial statements. Consolidated financial statements must present a true and fair view of the group’s transactions with third parties. To this end, all intra-group transactions and balances are eliminated. The consolidated financial statements are prepared and presented on the basis of the accounting standards applied to prepare and present the annual separate financial statements of the parent company.

Under the Accountancy Act, a parent company is not required to prepare consolidated financial statements where the sum of the amounts of the enterprises within the group which are subject to consolidation does not, according to their annual financial statements as of 31 December of the current year, exceed two of the following criteria:

  • total assets as of 31 December: BGN 3 million
  • net sales revenue for the year: BGN 6 million
  • average number of personnel for the year: 80 persons.

However, consolidated financial statements are not required to be prepared by a parent company which has only subsidiary/subsidiaries which is/are immaterial when reviewed individually and together.

This does not apply when an enterprise within the group is an entity with securities which have either been admitted for trading on a regulated market, or is a financial institution, or a joint-stock company.

According to the EU IFRS, a parent company that is a wholly-owned subsidiary need not present consolidated financial statements provided that certain other conditions are met. Such a parent company must disclose the reason why consolidated financial statements have not been presented, together with the basis on which the subsidiaries are accounted for in its separate financial statements.

Where prepared, the consolidated financial statements must comprise a consolidated statement of financial position, a consolidated statement of comprehensive, a consolidated statement of cash flows, a consolidated statement of changes in equity and appropriate disclosure notes. A consolidated management report on the annual activity of the company and its subsidiaries must also be prepared.

Equity requirements

Equity includes share capital, reserves (including revaluation reserves) and retained earnings. Joint-stock companies are required to allocate one-tenth of their after-tax profit to a statutory reserve until the amount of the statutory reserve exceeds one-tenth of the share capital of the company.

In accordance with the requirements of the Commercial Act, a joint-stock company may be dissolved when the net worth of the company (its net assets) becomes less than the amount of the registered share capital.

Filing requirements

All enterprises are required to prepare their annual individual financial statements and annual management reports on activities by 31 March of the following year. Management is responsible for the timely preparation of the financial statements and their content.

Companies that are registered with the Commercial Register (see Section 3.5) are required to file their individual and consolidated financial statements, management reports for the annual activities and auditor’s reports with the Commercial Register. Publicly  traded companies and financial institutions must present their audited individual financial statements and certain additional reports to the Financial Supervision Commission within 90 days after the year end. In addition, such companies must present a financial report to the Financial Supervision Commission on a monthly basis within 30 days of the end of the previous month.

All enterprises are required to file their annual corporate income tax declaration with the tax authorities by 31 March of the following year. This declaration needs to be accompanied by certain statistical summaries as defined in the Statistics Act.

Publication of financial statements

Entities which are not registered with the Commercial Register (e.g. non-profit organizations, foundations, consortiums) have to publish their annual financial statements, together with an audit opinion, in the financial press or on the internet (if free access is granted for a period not less than three years after the date of release) within three months of their approval, but not later than 30 June of the following year.

Auditing

General audit environment

The Bulgarian Accountancy Act requires that financial statements of those entities meeting certain criteria be audited by a registered auditor. The Independent Financial Audit Act in Bulgaria provides for the profession of independent auditors. It requires  that International Standards of Auditing should be applied. The body which regulates the auditors’ practice is the Bulgarian Institute of Certified Public Accountants. Since 2008, the Independent Financial Audit Act has been harmonized with the European legislation and introduced the requirements of Directive 2006/43/EC of the European Parliament and the Council on statutory audits of annual accounts and consolidated accounts.

The auditor gives an opinion on whether the annual financial statements give a true and fair view of the financial position, the results of operations, the statement of cash flows and the movements in equity of the entity, and a summary of significant accounting policies and other explanatory notes in accordance with the Bulgarian accounting legislation. If a management report is required, the audit report also contains a paragraph about the consistency between the annual management report on the activities of the company and the annual financial statements and/or consistency between the consolidated annual management report on the activities of the company and the consolidated financial statements for the period.

The general rule is that the entity subject to audit must appoint an independent auditor. The appointment of auditors is usually done at the General Meeting at which the previous year’s accounts are approved. The selection of the statutory auditor has to be made after a recommendation from the audit committee for those companies required to have such a committee (as discussed below). The independent auditor must be an individual or a specialized audit entity registered with the Institute of Certified Public Accountants (registered auditor). If a specialized audit entity has been appointed auditor, an individual who is a registered auditor must be designated as the auditor responsible for performing the independent financial audit.

The Credit Institutions Act requires that the annual financial statements of banks as well as the supervision reports stipulated by the Bulgarian National Bank be audited and certified by a specialized auditing entity which shall be a registered auditor under the Independent Financial Audit Act. Any bank must coordinate in advance with the BNB the appointment  of an independent auditor.

An important requirement of the Independent Financial Audit Act is that each entity that executes activities of public interest is required to set up an audit committee. Pursuant to this Act, entities executing activities of public interest are:

  • public entities and issuers of securities in the country as well as in another MemberState of the European Union or the European Economic Area
  • credit institutions
  • insurance undertakings, reinsurance undertakings, health insurance and pension insurance companies
  • commercial companies which produce, transfer and sell electricity and thermal power
  • commercial companies which import, transfer, distribute and transit natural gas
  • commercial companies which provide water supply, sewerage and telecommunication services, and Bulgarian State Railways EAD and its subsidiaries.

The audit committee is elected by the General Meeting or the sole owner of the capital of the public-interest entity. The General Meeting or the sole owner of the capital determines the term of office and the number of members of the audit committee. The audit committee is required to perform the following functions:

  • monitor the financial reporting processes in the public-interest entity
  •  monitor the effectiveness of the company’s internal control systems
  •  monitor the effectiveness of the company’s risk management systems
  •  monitor the independent financial audit in the company
  •  review the independence of the registered auditor of the company in accordance  with the requirements of the law and the Code of Ethics of professional accountants, including monitoring the provision of additional services by the registered auditor to the audited entity.

The 2008 changes in the Independent Financial Audit Act have introduced a system for public oversight of registered auditors and the public body which performs these duties is the Commission for Public Oversight over Registered Auditors.

 Audit requirements

 Under the Accountancy Act, the annual financial statements of the following are required to be audited by registered auditors:

  • joint-stock companies and partnerships limited by shares
  • enterprises which are issuers within the meaning of the Public Offering of Securities Act
  • credit institutions, insurance and investment undertakings, companies for additional social security and the funds managed by them
  • enterprises for which this requirement is established by law
  • all enterprises not mentioned in the previous four items, with the exception of enterprises applying a simplified form of financial reporting and budget-funded enterprises. Enterprises applying a simplified form of financial reporting refers to enterprises which, over the current or the previous year, do not exceed two of the following criteria:
    • balance sheet assets as of 31 December: BGN 1.5 million
    • net income from sales for the year: BGN 2.5 million
    • average number of personnel for the year: 50 persons.

 Consolidated financial statements and financial statements included in the consolidation are both subject to an independent financial audit.

 In addition, annual financial statements of non-profit legal entities designated as operating for the public benefit and listed in the Central Register with the Ministry of Justice are subject to an independent financial audit by registered auditors where they exceed one of the following criteria for the current year:

  • total assets as of 31 December: BGN 1 million
  • revenue from for-profit and not-for-profit operations for the current year: BGN 2 million
  • total amount of financing received during the current year and financing received in previous reporting periods not absorbed as of 31 December: BGN 1 million.

The auditor’s report on the annual financial statements has to be issued by 30 June of  the following year because of the requirement to file the audited financial statements and audit report with the Commercial Register by that date.

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Real Estate in BULGARIA

Posted by Active Consult Ltd. - Accounting & Tax в 17/05/2013

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The major legislative acts governing real estate and real estate transactions in Bulgaria are the Bulgarian Constitution, the Ownership Act, the State Property Act, the Municipal Property Act, the Privatization and Postprivatization Control Act, the Civil Procedure Code, the Encouragement of Investment Act, the Territorial Development Act, the Obligations and Contracts Act, the Condominium Ownership Management Act and the Ordinances on its implementation, the Constructors Chamber Act.

Types of ownership over real estate

Ownership of real estate in Bulgaria may be public or private.

Public ownership includes properties of public interest and those designated for public use only and public functions, such as the coastal beach, national roads, forests and parks, streets, squares, museums and schools.

Public properties belong to the state and municipalities and are operated by the respective administrative department. They can be granted for operation to third parties through concession or lease upon satisfying conditions explicitly stated by law. In the latter case, the lease period for public state and municipal properties cannot exceed 10 years, as the granting of the lease in both cases is subject to public tender procedures.

Public properties cannot be disposed of (i.e. by sale purchase, donation, in-kind contribution, exchange) and cannot be acquired on the basis of possession and expired prescription period. However, limited property rights (e.g. construction right) may
be granted for municipal public properties and for state public properties (except for exclusively state owned properties and those related to national security), when provided by the law.

Private properties can belong to individuals, entities, the state and municipalities following the limitations provided for foreigners (see Section “Direct acquisition” below). Private properties can be subject to real estate transactions. The sale and purchase of state and municipal property is usually executed by public tender or as part of a public-private partnership (PPP) project. The exchange of ownership title or construction right over private state and municipal real estate property can be performed only in cases explicitly specified in the law. The lease period for state and municipal private property cannot exceed 10 years and the granting of a lease is subject to public tender procedures or PPP procedures.

When the property belongs to two or more persons, co-ownership is established. The co-owners decide operations by majority and each has a right of first refusal in case of disposal of the property. The co-owners can authorize one of themselves to represent their co-ownership before third parties.

Buildings can represent condominium ownership. In this case, floors or specific units of floors may be exclusively owned by separate persons while condominium ownership areas for all owners in the building are the façade, the roof, the construction and everything which is for common use. Condominium ownership is established when: (i) the building is completed, (ii) the floors in the building are two or more, and (iii) floors or specific units on the floors belong to different owners (see Section “Condominium ownership management” below).
Condominium ownership management

The Condominium Ownership Management Act (COMA) in force as of 1 May 2009 regulates the regime of buildings under condominium ownership, namely the management of common areas, the rights and obligations of the owners and occupants of individual dwelling units or parts thereof, as well as adjacent areas (see Section “Regulation and planning” below) and the technical certificate (see Section “Execution of construction works and entering into exploitation” below).

The COMA shall be applicable to the management of common areas of buildings under condominium ownership, i.e. in case floors or separate units (apartments, shops, restaurants, etc.) of buildings are owned by different owners.

There are two exceptions in which the COMA shall not apply, namely: (i) in case of buildings under condominium ownership with up to three individual units, belonging to more than one owner (in this case the general rules of the Ownership Act shall apply); and (ii) in case of buildings under condominium ownership in closed-type residential complexes, the management of the common areas shall be agreed by written contract with notarized signatures, concluded between the investor and the owners of the individual units.

As per the COMA, condominiums shall be managed by a general assembly of owners and/ or by an association of owners. Unlike the general assembly of owners, the association of owners is a legal entity, which shall be established in accordance with the procedures set out in the COMA. The general assembly of owners or the association of owners may decide to transfer the maintenance of the building by means of contract to a third party – individual or legal entity.

For the purposes of maintenance of the common parts of a building, a special Repairs and Renewal Fund should be created. The general assembly of owners/the association of owners adopts a plan for performance of repair works, reconstructions and reorganizations in the building.

By virtue of the COMA, the municipalities shall establish and maintain public registers of buildings or separate entrances under condominium ownership located on their territory.

Evidence of title

The ownership title and limited property rights over real estate property in Bulgaria are evidenced by ownership title documents (usually in the form of a notary deed). In addition, the law requires that title documents are registered at the Land Registry. By virtue of this registration, the acquisition of the ownership title or limited property rights becomes defendable against third parties.

The register number of the property in the Land Registry is completed on the front page of the title document. The register number, the signature of the Registry official and the stamp of the Land Registry entered on the title document are sufficient to evidence the current owner of the real estate property or the limited property rights over it.

Acquisition of real estate

Direct acquisition

In Bulgaria, foreign citizens and foreign companies can directly acquire buildings, premises within a building and limited property rights (e.g. a construction right, right of use). There are restrictions to foreigners owning land in Bulgaria, except for the cases reflecting the provisions of the Act of Accession of Bulgaria to the EU into the national legislation, as described below.

The Accession Act provides for restrictions for acquisition of land by EU citizens and entities as follows: (i) for land provided for second residence and (ii) for agricultural land, forests and forest land. Since the five-year transition period for second residence expired on 31 December 2011, the EU residents and entities can acquire urban land in accordance with the requirements specified by national law. The Ownership Act, regulating the acquisition of land, does not specify whether the general legislative provisions shall apply to the acquisition of land by EU residents and entities or specific rules should be adopted for such acquisition.

In view of the principles of free movement of goods and services set out in the Treaty on the European Union, it might be assumed that the general provisions concerning transactions with real estate should apply to EU acquirers as well. However, some documents that should be provided by Bulgarian individuals and entities cannot be applied directly to EU acquirers. Therefore, the possibility for introducing specific rules to be applied to EU acquirers cannot be excluded. Considering the significance of the issue discussed, it is expected that the Property Register and the Chamber of the Notaries Public will adopt a unified practice. The above restrictions are not applicable to resident citizens, who are self-employed farmers who wish to settle and reside permanently in the Republic of Bulgaria and who are registered in that capacity in the BULSTAT Register with the Bulgarian Registry Agency. They may acquire ownership title over agricultural and forestry lands for agricultural purposes as from 1 January 2007 – the date of the entry into force of the Act of Accession of Bulgaria to the EU.

Citizens (non-resident citizens) and entities of countries which are not members of the EU and the EEA may acquire ownership title over land under the terms of an international agreement ratified under the terms provided for in the Constitution of the Republic of Bulgaria, which has entered into force.

Foreigners (non-resident or resident citizens) may acquire ownership title over land in case of legal succession. In case of inheritance of agricultural land, forests or forestry land, if the foreigners do not fulfill the conditions provided for in the Act of Accession of Bulgaria to the EU, or when something else is not provided for in an international agreement, they are obliged, within three years following the revealing of the inheritance, to transfer the ownership to persons who have the right to acquire such estates.

Indirect acquisition

The restrictions on the acquisition of land by foreigners do not apply to Bulgarian legal entities involving foreign participation. Therefore, foreign legal entities and individuals can effectively acquire ownership rights over land through the acquisition of shares or an interest in existing Bulgarian companies, or through the establishment of such companies under Bulgarian law. It is possible for such a company to be 100-percent owned by a foreign investor.

Another possibility for indirect acquisition of a real estate in Bulgaria for a foreign company or a foreign citizen is to buy shares in the capital of an already existing Bulgarian company, which then may act as acquirer.

Foreign companies and foreign citizens, furthermore, can acquire the shares in the capital of a Bulgarian company which already owns a real estate in Bulgaria.

Transaction documents

The general rule under Bulgarian law is that transactions involving real estate (e.g. a purchase, exchange, etc.) must be executed with a notary deed before a registered notary public in the region where the real estate is located.

The form of a notary deed is mandatory not only for transactions for transfer of ownership title over real estate properties, but also for establishment of limited property rights over real estate properties (e.g. construction right, right of use, etc.).

After execution of the deed, the notary public is obliged, by law, to register the transaction into the Land Registry in order to make the title of the acquirer defendable against third parties.

For other real estate transactions, such as in-kind contribution, the sale of a commercial enterprise containing real estate properties and a voluntary distribution agreement, notarization of the signatures is sufficient.

A notary deed is not required for the sale of state or municipal property or in privatization transactions where the simple written form is sufficient for a valid title transfer. There are also special rules and procedures governing the acquisition of real estate arising from enforcement, insolvency and similar procedures.

Project development

After the acquisition of the real estate, the owner can commence the project development, since Bulgarian legislation recognizes as an investor the owner of land or the holder of a construction right. However, certain exceptions are provided for the cables and pipelines of the common technical infrastructure, such as electricity cables, water and sewerage pipelines, telecommunication cables, etc.

Determining the feasibility of a real estate project is a complex process. It requires input and knowledge from different areas, such as urban planning; geodesy and geology; structure, installation engineering; etc. The process also considers the potential environmental impact of the project and examines the investor’s ability to financially support the project. Due to the many elements in the project development process and because each project is unique, the process may vary from project to project.

The main stages of development process can be divided into:

• regulation and planning stage
• environmental impact assessment
• permitting construction works and
• execution of the construction works and commencing use.

The major legislation governing the development process in Bulgaria is the Territorial Development Act (TDA), the Chamber of Constructors Act, the Chambers of Architects and Engineers in Investment Design Act, the Development of the Black Sea Coast Act and various sub-legislative acts.

Regulation and planning

The regulation and planning stage comprises approval of a Detailed Development Plan (DDP) or amendment of an existing DDP, applicable when the provisions of the current DDP are not sufficient for the investor. The effective DDP is the first precondition for commencing construction works.

The DDP can consist of a regulation part (plan for regulation) and/or a construction part (plan for construction). The plan for regulation transforms an unregulated land plot into a regulated land plot through determination of its borders (regulating lines) and provides access to the land plot from a street. In relation to the future construction, the construction part of the DDP specifies the construction parameters such as type and height of the building(s), the maximum density and intensity allowed, as well as the minimum green area.

Generally, the DDP is approved by the municipal authorities, but for construction projects of regional or national significance the DDP is approved by the Regional Governor or by the Minister of Regional Development and Public Works.

There are specific rules regarding buildings under condominium ownership introduced by the COMA and the TDA.

Specific requirements to the DDP can be stipulated for leisure and possible land-slide areas, archeological areas and other similar zones. For example, only limited construction activities can be provided in a newly regulated land plot located in an area of 100 meters from a coastal beach. The Cultural Heritage Act, in force as from 10 April 2009, provides for various measures for protection of the immovable cultural heritage, including special rules regarding the territorial planning and development of protected cultural zones.

By virtue of amendments of the TDA (SG, issue 82/26 October 2012) effective from 1 January 2016, new requirements regarding development of construction projects outside urban boundaries were established.

Environmental impact assessments

Environmental impact assessments are required for real estate projects in two cases:

• for projects which are presumed to impact the environment, such as chemical factories, oil refineries, thermal power plant, etc., and
• for projects impacting existing protected areas (reserves, national parks, etc.) or existing and potential protected zones (Natura 2000).

For certain projects, procedures for assessing the need for environmental impact assessment should be performed.

Protected areas are designated to conserve biological diversity in ecosystems and natural processes occurring in them, as well as typical or unusual non-living natural features and landscapes. Protected areas represent national parks, nature reserves, natural monuments, natural parks and protected sites.

Natura 2000 is an ecological system of protected zones in the European Union, namely zones for the conservation of wild birds and zones for the conservation of natural habitats. As an EU Member State, Bulgaria must comply with all relevant EU legislation and directives, including EU Directive 92/43 on the conservation of natural habitats and wild fauna and flora and EU Directive 2009/147 on the conservation of wild birds, which repealed Directive 79/409. The requirements of both directives were implemented in the Bulgarian Biodiversity Act.

Though the protected zones in Bulgaria are still not fully approved, the legislation requires assessment of projects impacting the potential protected zones to be completed.

At present, the Council of Ministers has adopted decisions for approval of 336 protected zones under Natura 2000.

The announcement of other protected Natura 2000 zones is still in process. Interested parties may appeal the draft orders within a one-month term of their publication.

More information on Natura 2000 zones in Bulgaria, including detailed lists and maps, is available on the internet at: http://www.moew.government.bg/ and http://www.natura2000bg.org/.

Permission of construction works

Construction works are permitted on the basis of an effective DDP.

Chronologically, the process starts with the investor’s assignment of a project for execution of an investment design. After that, preliminary contracts between the investor and the utility companies must be concluded and a valuation of the investment design must be obtained. In some cases, coordination with special controlling authorities (e.g. environmental inspection, fire safety department) is required.

The investment design is subject to approval by the respective administrative bodies and it serves as a ground for the issuance of a construction permit.

The investor may apply for the construction permit simultaneously with the submission of the design for approval. If the construction permit is requested separately from the investment design approval, the permit must be issued within seven days of the request.

The construction permit may be issued for the entire project or, predominately for complex infrastructure projects – for different stages of the project which can be executed and used separately.

In general, the investment design is approved and the construction permit is issued by the chief architect of the municipality.

The construction permit issued by the chief architect of the municipality must be announced to interested third parties who are entitled to appeal the construction permit together with the approved investment design before the local department of the National Construction Supervision Directorate (NCSD), where the construction project will be situated. In addition, the NCSD is entitled to perform an ex-officio inspection and to repeal the construction permit within seven calendar days after the NCSD has been notified of the construction permit issued in cases where the construction permit does not comply with the legislative requirements. The NCSD decision is subject to court appeal. After issuance of the court resolution, the construction permit can be deemed valid and the investor can proceed with the preparatory stage of the construction process.

Execution of construction works and entering into exploitation

The next development stage is the execution of the construction works. There is no mandatory term for their completion – it is a matter of agreement between the investor and the contractor.

During the construction works, a number of standard-form acts and protocols have to be compiled. The acts and protocols serve as evidence for the items that are recorded in them and they concern the commencement, execution and completion of the construction works. The participants in the development process who sign these acts and protocols are jointly responsible for the authenticity of the facts included in them.

The completion of the construction works is certified by the execution of a provisional Taking Over Certificate (the so-called Act, sample 15). With it, the participants certify that the works have been executed in compliance with the DDP, the approved design, the legal requirements to the construction works and the terms of the construction contract. Based on the provisional Taking Over Certificate, the construction project enters into exploitation and the construction becomes feasible for use.

In general, before entering into exploitation, a technical passport of the construction works shall be prepared by the respective consultant/technical controller. Depending on the significance of the construction project, its complexity and the associated operational risks, it can enter into exploitation through a:

• permit for exploitation, issued by the director of the National Construction Supervision Directorate if it is a significant construction project, or
• certificate for exploitation, issued by the chief architect of the municipality if it is not a significant construction project.

A permit for exploitation is based on a complex procedure, which includes a protocol signed by a special committee (the so-called Act, sample 16) and a report issued by the construction supervisor. A certificate for exploitation is issued under a simplified procedure, which involves only a desktop review of the documents for the construction project.

Participants in the development process

During the various stages of the development process, the investor enters into relations with other participants, namely: the designer, the contractor, the consultant, the structural engineer, the technical controller and the utility companies. The relations between the participants in the development process must be settled by written contracts.

The designer of the construction works can be an individual with designer capacity, or an entity employing such individuals. Designers are responsible for the preparation of the investment design. They also exercise control to ensure that the construction works comply with the design (the so-called author’s supervision) and are authorized to issue mandatory instructions to the contractor.

According to the Chambers of Architects and Engineers in Investment Design Act, effective from 8 February 2008, foreigners and nationals of EU Member States, the other states of the European Economic Area and Switzerland, whose professional qualification has been recognized according to the Recognition of Professional Qualifications Act, have the right to practice as architects, landscape architects, urban planners or engineers in the field of urban planning and development design in the Republic of Bulgaria.

The constructor is responsible for execution of the works in compliance with the approved design and permits, and the legal requirements applicable to such construction works.

Construction works can be executed only by a constructor that: (i) is a trader duly registered under the Bulgarian legislation or under the legislation in the country of origin, and (ii) is registered in the Central Professional Register at the Bulgarian Construction Chamber. As per amendments to the Constructors Chamber Act, effective from 23 February 2010, the registration of a constructor in a relevant register in a Member State or in part of the European Economic Area, shall be treated as a registration in the Bulgarian Central Professional Constructors Register.

Based on the above amendments, on 9 February 2012 the Bulgarian Construction Chamber adopted a simplified procedure for registration with the Constructors Register of European constructors that execute one-off specific construction projects in Bulgaria.

Exempted from registration are (i) those contractors deemed not to work on significant construction projects, such as villas, residences and mixed buildings with a height of no more than 10 meters, etc., and (ii) foreign contractors which execute construction projects in Bulgaria according to NATO’s program for investment in security.

The consultant is a trader who carries out valuations to ensure that the investment design complies with the regulatory and technical requirements and exercises supervision over construction works.

As construction supervisor, the consultant is responsible for the lawful commencement and execution of the construction works, the assessment of their energy efficiency, as well as for the fitness of the completed works to enter into exploitation. This person is also authorized by law to certify some acts and protocols during the construction works and to issue instructions and orders, which are mandatory for other participants in the development process.

Pursuant to amendments of the TDA, effective from 26 November 2012, the license regime applicable to consultants was revoked and replaced with a registration of consultants at a special register with the NCSD.

On 11 December 2012, a new Ordinance No. RD-02-20-25 for the procedure and terms for issuance of registration certificates to consultants to carry out compliance evaluations of investment designs and/or to exercise construction supervision was promulgated in the State Gazette. The new ordinance provides that, upon registration at the register with the NCSD, the consultant is granted a registration certificate with a five-year term of validity.

Consultants who have been licensed by the Minister of Regional Development and Public Works can conduct their activity until the expiration of their licenses. The certificate for registration should be issued by the head of the NCSD.

No registration is required in case a consultant executes pre-investment researches, preparation for the design process and coordination of the construction process until entering into exploitation of the project.

Activities as a consultant can be rendered by persons having a document, issued by respective competent authority in a Member State or in a state that is part of the European Economic Area , certifying the right to render such activity. In this case, a subsequent certificate issued by the head of the NCSD is required.

Persons who are eligible to carry out compliance evaluations of investment designs and/ or exercise construction supervision in a Member State, but for which the legislation of the Member State provides for no equivalent regime, are temporarily entitled to act as consultants in regard to a one-off specific construction project after issuance of a certificate by the head of the NCSD.

The structural engineer is an individual possessing the special skills to exercise mandatory technical control over the structural parts of the investment design. The structural engineer should be included in a promulgation in the State Gazette list, prepared and updated annually by the Chamber of Engineers in Investment Design. As of 23 February 2010, the activities of the structural engineer can be performed by individuals entered in a relevant list or register kept by a respective competent authority in a Member State or in the European Economic Area.

The technical controller is a civil engineer who manages the execution of the construction works on behalf of the contractor. If the construction works are executed by the investor themselves, the investor is obliged to appoint a technical controller.

The utility companies are the suppliers of electricity, water, sewerage, etc. Prior to issuance of the construction permit, the investor signs preliminary contracts for supply with the utility companies, followed by final contracts. When a construction project requires external connections to the technical infrastructure to be built, the utility companies become involved in the investment design.

Designers, consultants, contractors and structural engineers are obliged to insure their own professional liability for damages that may be caused as a result of unlawful acts or omissions in the course of the fulfillment of their obligations. As the mandatory insurance covers only the minimum liability of the insured under any construction project, the investor may require additional insurance. Extended insurance coverage (e.g. contractor’s-all-risks, employer’s liability, etc.), if required by the investor, has to be agreed contractually, as it is not mandatory under the law.

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Company law in Bulgaria.

Posted by Active Consult Ltd. - Accounting & Tax в 04/02/2013

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Company law

The primary law governing the formation, operation, transformation and termination of companies is the Commercial Act, effective from 1 July 1991.

There are five forms of business association in Bulgaria under the Commercial Act:

• unlimited partnership (sabiratelno druzhestvo – SD)

• limited partnership (komanditno druzhestvo – KD)

• joint-stock company (aktsionerno druzhestvo – AD)

• limited liability company (druzhestvo s ogranichena otgovornost – OOD)

• limited partnership with shares (komanditno druzhestvo s aktsii – KDA)

All types of business association are recognized as legal entities. The founders may participate in one or more companies provided that the law does not prohibit such participation. Irrespective of the nationality of its founders, each type of company is considered to be Bulgarian.

The most usual forms of business association for foreign investors are the limited liability company (OOD) and the joint-stock company (AD).

Rules applicable to all forms of business association

Articles of association

The adoption of the Articles of Association is an initial step in the establishment of a company.

The Articles of Association must contain:

• trade name, seat and address of the company

• scope of the company’s activities

• management and representation of the company

• identity of the partners/shareholders of the company (except for the AD)

• type (cash or in-kind) and amount of partner contributions (for SD and KD), and/or the amount of company’s capital (for OOD, AD and KDA), and

• other matters as regulated by the Commercial Act which may differ for each form of company.

In cases when a partner or a shareholder intends to make an in-kind contribution, the Articles of Association must state the name of the contributor, the full description of the in-kind contribution, its monetary value, and the grounds for the contributor’s rights.

In the case of a limited liability company, a joint-stock company or a limited partnership with shares, the in-kind contribution must be valued by three experts appointed by a registration official from the Registry Agency. The conclusion of the experts must contain a full description of the in-kind contribution, the method of valuation, the valuation and its consistency with the share of the capital or the number, the nominal and issuing value of the shares being subscribed for by the contributor. The monetary value of the in-kind contribution stated in the Articles of Association may not exceed the experts’ valuation.

Registration

A newly established company comes into legal existence with its entry in the Commercial Register with the Registry Agency. The standard registration application form must be filed by the appointed management body. The managers of the company have an obligation to notify the Commercial Register with the Registry Agency, within seven days of any change in the circumstances already registered. If the manager fails to perform his or her duties, he or she is subject to an administrative fine.

Pre-company status

Prior to registration with the Commercial Register, the founders may reach an agreement on the actions that must be taken in preparation for incorporation. The founders’ actions create rights and obligations for the persons who have undertaken the said actions.
The latter are held liable jointly and severally for these obligations. Eventually, with the registration, these obligations are automatically assumed by the newly established company.

Announcement of the annual financial statements

All forms of business associations under the Commercial Act, including sole proprietors, are obliged to present their annual financial statements for the previous financial year to the Commercial Register. The deadline for announcement is different for the different types of associations – by 31 May of the year following the reported year for sole proprietors, by 30 June of the year following the reported year for limited liability companies, and by 31 July of the year following the reported year – for all other forms of business associations.

Termination of business associations

There are several grounds for the termination of a company:

• expiration of the term of the company or other grounds/circumstances provided for in the Articles of Association

• resolution by the shareholders/partners of the company adopted with the qualified majority prescribed by the law or the Articles of Association

• resolution of the respective district court for declaring the company insolvent

• transformation of the company in certain cases

• termination by a resolution of the district court in cases provided by the law (e.g. where the company pursues objectives against the law)

• in the case of an AD company – when the company’s net asset value drops below the amount of the registered capital and within one year the company has not resolved
to reduce its registered capital or to transform the company in accordance with the requirements of the law

• other specific grounds regarding the SD, KD and KDA (e.g. insolvency of a partner, etc.).

When one of the above occurs, the company undergoes liquidation proceedings unless an insolvency procedure has already been initiated. The company loses its legal status being deleted from the Commercial Register.

Transformation of business associations

Chapter 16 of the Commercial Act regulates mergers, consolidation of two or more companies, demergers into two or more companies, the spin-off of certain operations into a new company, and transformations whereby the type of the company changes.

The applicable provisions specify and classify the types of business transformations, the procedure for execution of the transformation, and the rights and obligations of the companies and their partners/shareholders.

Prior to adopting a resolution authorizing a transformation, companies must draft a transformation plan or conclude a transformation agreement, depending on whether initially there is one or more participating company. The transformation agreement/ plan must be in writing and it must be signed before a notary public by the official
representatives of the participating companies. It must specify the terms and conditions of the intended transformation, as well as the obligations of the participating companies with regard to the transformation. The content of the transformation agreement/plan must be in compliance with the mandatory requirements of the Commercial Act.

The transformation agreement/plan must be reviewed by controllers appointed by the management bodies of each of the companies involved in the transformation. Upon a request from the companies involved, an official from the Registration Agency may appoint a joint controller for all companies. The controller must be a registered auditor. The controller must also meet other requirements set in the law, which guarantee the auditor’s independence from the merging companies, e.g. the companies are not allowed to appoint auditors who have audited them during the last two financial years, or who have performed a valuation of an in-kind contribution to the capital of any of the companies. The controller is not allowed to audit any of the merging companies for a period of two years following the date of the merger.

The review of the transformation agreement/plan is not obligatory, if all shareholders of the companies participating in the transformation express their explicit written consent that no audit of the transformation is performed.

The management body of a limited liability company, joint-stock company, or a limited partnership with shares is required to adopt a report on the transformation. The report must contain a detailed economic and legal explanation of the terms and conditions of the transformation, as specified in the transformation agreement/plan.

The report and the transformation agreement/plan must be presented to the Commercial Register at the Registry Agency simultaneously by each participating company and at least 30 days prior to the date of the General Meeting which will vote on the resolution for transformation.

The transformation agreement/plan, as reviewed and approved by the controller, must be approved by the General Meeting of Shareholders of each of the companies involved in the transformation. The resolutions must be adopted by a qualified majority of three- quarters of the capital in the case of an OOD, or respectively of all voting shares in the capital of an AD.

The transformation enters into force from the date of its registration into the Commercial Register at the Registry Agency.

The Commercial Act outlines some simplified transformation procedures, provided that certain conditions are met.

When all participating companies are solely owned and the sole owner of their capital is one and the same person, the transformation is performed on the basis of a resolution adopted by the sole owner. The rules regarding: (i) the appointment of an independent controller, (ii) the reports to be prepared by the management bodies of each participating company, and (iii) the approving resolution by the General Meeting of Shareholders/ Partners do not apply.

Insolvency

A company is considered insolvent when it is unable to meet its monetary obligations or in the case of over-indebtedness. The company’s management body must file an application with the relevant district court for the commencement of insolvency proceedings. The application may also be filed by any creditor of the company.

If there are grounds for an insolvency procedure, a receiver must be appointed by the court. Immediately upon appointment, the receiver represents and manages the current affairs of the company, collects its receivables and converts its assets into cash and subsequently distributes the cash to the company’s creditors.

Liquidation

The liquidation procedure, in contrast to insolvency, is voluntary, except for a liquidation by a court decision in cases provided for by law, and is initiated in the case of expiration of the term of the company as set out in its Articles of Association, or with a resolution of the members/shareholders.

The General Meeting of Shareholders (or the Partners in a SD or KD), must appoint a liquidator. The latter is responsible for inviting the company’s creditors to claim their receivables through announcement at the Commercial Register with the Registry Agency.

After the satisfaction of the creditors’ claims, the remaining assets are distributed to the partners/shareholders, but not before six months have elapsed from the date of announcement of the notice to the creditors at the Commercial Register. When all liabilities of the company have been settled and the remaining assets distributed, the liquidator applies for deletion of the company from the Commercial Register.

Limited liability company (OOD)

The OOD is a commercial company, whose shareholders’ liability is limited to the unpaid portion of their shares1 . An OOD is liable to its creditors only to the extent of its own assets.

This form of enterprise is convenient for small and medium-sized business activities, because of the advantages it offers over the other types of business associations:

• the minimum capital required is relatively low – BGN 2

• shareholders’ personal assets are protected from business debt because their liability is limited to the amount of their contribution into the capital. By contrast, unlimited partnership partners are liable to creditors with their entire property

• the OOD avoids the higher publicity requirements and the complex incorporation procedures applicable to an AD company.

Because of these advantages, the vast majority of foreign-owned companies operate in this legal form.

The Bulgarian OOD resembles the German and Austrian “GmbH” (Gesellschaft mit beschränkter Haftung), the French “Sarl.” and the English private company limited by shares.

The English word “share” does not explain the difference between a share in an OOD and a share in an AD. The most important differences are that the share in an OOD is not freely transferable and is not necessarily of equal value, while the AD can issue only shares of equal value and these are more easily transferable. In addition, the shares of an AD are securities. For simplicity, shares in an OOD will be referred to as an “interest.”

Formation

An OOD can be formed by one or more persons. The Bulgarian Commercial Act does not provide for a minimum or maximum number of shareholders in an OOD. It should be taken into account that a large number of shareholders will make the company’s management cumbersome, since all important decisions must be taken unanimously or with a majority of shareholders representing 75 percent of the OOD’s capital.

The specific formation rules applicable to the OOD are as follows:

• all the capital must be subscribed on incorporation and at least the minimum statutory capital (BGN 2) must be paid in before the standard registration application form is submitted to the Commercial Register

• the founders must appoint Managing Director(s) for the company. The Managing Director does not necessarily have to be an OOD shareholder, Bulgarian citizen or resident

• the company has to be registered in the Commercial Register with the Registry Agency

• in the case of an EOOD (single member limited liability company), an Incorporation Deed must be drawn up instead of Articles of Association.

Capital

The statutory minimum capital of an OOD is BGN 2. The capital of the company is divided into interests and the size of each shareholder’s interest determines his or her rights
and obligations concerning the company. It is possible for the interests of the individual shareholders to be of unequal value. The interests of shareholders in an OOD are not securities.

One of the main characteristics of the OOD is related to the transfer of shareholders’ interests. The transfer of an interest from one shareholder to another is unrestricted but transfer to a third party is subject to a more complex procedure. The new shareholder has to be admitted by the General Meeting of Members of the company following a written application stating that he/she accepts the terms of the Articles of Association. In the case of admittance by the General Meeting of Shareholders, a Transfer of Interest Contract must be notarized and the transfer must be registered in the Commercial Register with the Registry Agency.

Management

The OOD is managed by the General Meeting of Shareholders and by the appointed Managing Director(s).

Each OOD must hold at least one General Meeting of Shareholders each calendar year (Annual General Meeting). It is usually convened at the Managing Director’s discretion, but it can also be convened upon the written request of shareholders whose interests amount to at least one-tenth of the company’s capital.

Apart from the Annual General Meeting, the Managing Director may convene additional meetings commonly referred to as Extraordinary General Meetings. An Extraordinary General Meeting must be called immediately when the losses of the company exceed one-fourth of the registered capital or if the company’s net asset value falls below the amount of the registered capital. There is no limit to the number of General Meetings a company may hold each year.

The General Meeting is the company’s highest management body. It is empowered to make key strategic and executive decisions regarding the company. The shareholders are authorized to decide on the admission and expulsion of shareholders, the appointment of Managing Director(s), a capital increase or reduction, approval of the annual report and balance sheet, the distribution of profits, etc.

The day-to-day management of an OOD is conducted by at least one Managing Director. The Managing Director represents the OOD in court and in dealings with third parties. He/ she is financially liable for damages caused to the company. For example, in the case of over-indebtedness or insolvency, the Managing Director must file an application initiating insolvency proceedings. If the Managing Director does not perform his/her duty, he/she commits a criminal offence and may be held liable for damage to both the company and its creditors.

The Managing Director(s) in an OOD is/are required to have written management contracts executed with the company. The management contract must be signed by a person authorized by the General Meeting of Shareholders or, in the case of an EOOD, by the sole owner of the capital.

In the case of an EOOD, the sole owner of the capital manages and represents the company either personally or through an appointed Managing Director(s). When the owner is a legal entity, the Managing Director of the legal entity or a person designated by him/ her manages the company.

Distribution of profits

Shareholders cannot claim their interest back while the company is in operation. They are only entitled to profits in proportion to their interest, unless otherwise agreed by the shareholders.

Payment of interest on a shareholder’s profits is explicitly prohibited.

Joint-stock company (AD)
A joint-stock company is a company which capital is divided into shares. The AD’s liability to its creditors is limited to the amount of its assets. Foreign investors prefer this type of business association when larger amounts of capital need to be raised, particularly when public capital markets need to be tapped. The Bulgarian AD resembles the French “Societe Anonyme,” the German and Austrian “AG” (Aktiengesellschaft) and is similar to the English public company limited by shares.
Formation

An AD is incorporated by a Constituent Assembly whereby all persons, who have already subscribed for shares into the capital of the new company, decide to constitute the company and adopt its Articles of Association. These resolutions must be unanimous if several legal entities and/or individuals are involved. An AD may also be formed by an individual or legal entity. In the case of a single member joint-stock company, the sole owner decides on the issues otherwise addressed by the Constituent Assembly.

The AD is registered in the Commercial Register with the Registry Agency by filing its Articles of Association and other documents evidencing that:

• its capital is fully subscribed
• a portion of the value of each share stipulated by the Articles of Association, but not less than 25 percent of the nominal or issuing value, has been paid
• the Board of Directors or, respectively, the Managing Board and Supervisory Board have been appointed, and
• the remaining requirements of the law have been fulfilled (e.g. banks, insurance and investment companies have to obtain the necessary licenses granted by the Bulgarian authorities).

Capital

General rules

The statutory minimum capital of an AD is BGN 50,000. A higher statutory minimum is required for credit and financial institutions, investment companies, insurance and health insurance companies.

The capital of the company is divided into bearer or registered shares. Within these two types of shares, the AD may issue ordinary and preference shares. An ordinary share entitles its holder to one vote. Preference shares may provide a guaranteed or additional dividend or a specified share in the company’s assets in the case of liquidation. Non-voting shares cannot represent more than 50 percent of the company’s capital. Multiple voting shares are permitted only if provided for in the Articles of Association. ADs can issue dematerialized2 shares.

The shares in an AD can be traded on the stock exchange if the company is registered as a public company under the Public Offering of Securities Act.

The AD must set up a reserve fund mainly to cover losses. At least one-tenth of the company’s profit must be set aside until the fund’s assets reach at least one-tenth of the company’s registered capital. In addition, any premium over the par value for shares and debentures obtained upon their issuance must be included in the reserve fund.

Dematerialized shares have no physical substance and are issued in a book-entry form.
The Bulgarian Commercial Act has a requirement that regulates the capital-credit ratio of joint-stock companies. The net value of the assets of a joint-stock company, i.e. the
difference between the value of the assets and liabilities of the company according to its balance sheet, cannot fall below the amount of the registered capital of the company. If this ratio is not observed, then the shareholders are obliged to adopt a resolution either to decrease the company’s capital, or to transform the joint stock company into another form of business entity. If this is not done within one year, then a court ruling issued upon the request of the public prosecutor can terminate the company.

Increase of capital

A company’s capital may be increased in one of the following ways:

• issuing new shares

• increasing the nominal value of shares already issued, or

• converting debentures into shares.

The resolution to increase the capital must be taken by the General Meeting of Shareholders.

The Articles of Association may empower the Management Board (Board of Directors) to increase the company’s capital up to a specified amount. Under this provision, new shares may be issued within five years from the date of the company’s incorporation. A resolution which allows for the issue of new shares may also be passed by amending the Articles of Association of the company. If this is done, then the Management Board (or Board of Directors) may increase the company’s capital up to the amount specified in the amending resolution for up to five years from the date of registration of the amendment in the Commercial Register.

Decrease of capital

A company’s capital may be decreased through either of the following:

• reduction in the nominal value of shares, or

• cancellation of shares.

A capital decrease requires shareholder’s approval. The resolution of the General Meeting of Shareholders on the capital decrease should be announced in the Commercial Register. By its announcement it is presumed that the company is committed to secure or repay all creditor claims. Creditor consent is assumed if no written objections are filed within three months from the date of announcement of the resolution for capital decrease with the Commercial Register.

Management

General rules

The joint-stock company’s governing bodies are the General Meeting of Shareholders and the Board of Directors (one-tier system), or the Supervisory Board and the Management Board (two-tier system). There are no requirements regarding the nationality or residence of members of either board. A member of the Management Board may not be a member of the Supervisory Board. The members of the Board of Directors, the Management Board and the Supervisory Board may be shareholders. All Board members are held liable jointly and severally before the company for damages caused in the course of their duties.

In a single member joint-stock company, the owner is empowered to decide on all issues otherwise handled by the General Meeting of Shareholders.

The General Meeting of Shareholders consists of all shareholders entitled to vote. The first General Meeting of Shareholders must be held within 18 months of incorporation. Subsequently, a regular General Meeting of Shareholders must be held at least once a year, not later than 30 June . General Meetings of Shareholders are usually called by the Board of Directors/Management Board or by the Supervisory Board, or upon a request of shareholders representing no less than 10 percent of the company’s capital.

The General Meeting of Shareholders may amend and supplement the Articles of Association, transform and dissolve the company, elect and recall members of the Board of Directors or the Supervisory Board, appoint and dismiss registered auditors, approve the annual financial statements as certified by the appointed registered auditor and resolve other matters which fall into its prerogatives by law or by virtue of the Articles of Association.

Two-tier system

The company’s constituent Supervisory Board must be elected prior to company registration. Subsequent members of the Board are appointed by the General Meeting of Shareholders. The total number of Supervisory Board members may vary from three to seven.

The Supervisory Board does not effectively take part in the management of the company. Its primary function is to represent the company in its relations with the Management Board. The Supervisory Board appoints the members of the Management Board and exercises control over its activities and resolutions. The Management Board must report on its activity to the Supervisory Board quarterly.

Members of the Supervisory Board and the Management Board are required to execute management contracts with the company. Management contracts with members of the Supervisory Board must be signed by a person authorized by the General Meeting of Shareholders or by the sole owner of the capital of the company, in the case of an EAD. All management contracts with members of the Management Board must be executed on behalf of the company by the chairperson of the Supervisory Board or by their authorized representative.

The day-to-day management of an AD with a two-tier management system is carried out by the Management Board under the control of the Supervisory Board. The number of members of the Management Board may not exceed nine and not be less than three. Subject to Supervisory Board approval, the Management Board may effectively delegate company representation to one or several of its members.

If provided in the Articles of Association, certain resolutions of the Management Board may require prior approval from the

Supervisory Board.

One-tier system

One-tier companies are managed and represented by a Board of Directors. It consists of a minimum of three and a maximum of nine persons. The Board of Directors delegates the actual management and representation of the company to one or more of its members who are subsequently designated as executive directors. They serve at the discretion of the Board of Directors and can be replaced at any time. The executive director of a joint- stock company is required to have a written management contract with the company. The management contract must be executed on behalf of the company by the chairperson of the Board of Directors.

Non-executive members of the Board of Directors can conclude management contracts with the company at the company’s discretion.

Other forms of business association

European forms of business association

The European forms of business associations are unions of legal entities, individuals or both, from different Member States of the European Union. The legislation of the EU regulates the following forms of business associations: (i) European company, established as European joint-stock company; (ii) European cooperative society; (iii) European economic interest grouping. In Bulgaria, these entities are mainly regulated by the Commercial Act, the Cooperatives Act and the Commercial Register Act, all in conformity with EU legislation.

Unlimited partnership (SD)

The unlimited partnership is an entity formed by two or more partners who are jointly and severally liable to the entity’s creditors. Their liability for the entity’s debts is unlimited. There is no capital requirement.

The Bulgarian unlimited partnership (unlike the German and Austrian general partnerships for example) is a separate corporate entity from its partners.

Each partner is entitled to take part in the management of the partnership’s business unless the Articles of Partnership have assigned the management to one or several of the partners or to a third party.

Limited partnership (KD)

Limited partnerships include general and limited partners. General partners are fully liable for the company’s debts while the liability of limited partners does not exceed their contribution to the partnership. General partners must manage and represent the entity.

Limited partnership with shares (KDA)

Limited partnerships with shares are formed by at least three limited partners whose liability is limited to the amount of their contributions to the company’s capital. There are also general partners with unlimited liability.

The formation of a KDA is initiated by the unlimited partners. They have the right to select the limited liability partners as subscribers of the company’s capital.

KDAs are managed by a General Meeting of Partners and a Board of Directors. The General Meeting of Partners consists of all partners. Only limited partners have voting rights. The day-to-day management of the partnership is carried out by the Board of Directors which includes only general partners.

Sole proprietor – ednolichen targovets (ET)

A sole proprietor may be any capable individual who has permanent residence in Bulgaria. A person may register only one trade name as a sole proprietor.

The Commercial Register

The Commercial Register Act (CRA) was adopted in April 2006 and came into force on 1 January 2008.

While the Commercial Act regulates the method of incorporation of business associations in Bulgaria, the CRA regulates the registration of business associations as each newly established entity begins its legal existence with entry into the Commercial Register.

The CRA provides for significant changes regarding the registration of business associations. Pursuant to the CRA, company registration and registration of subsequent corporate changes was removed from district courts and instead a centralized electronic register was designed to make the process more timely, transparent and uniform. The registration procedure is assigned to the Registry Agency at the Ministry of Justice which is the registration authority. The Commercial Register is available to the public, including via Internet – http://www.brra.bg. The Registry Agency also manages the reservation of company names and announcement of documents and facts such as annual financial statements, Articles of Association, invitations to shareholders, etc. By virtue of the CRA, the need for promulgation of corporate documents in the State Gazette is replaced by documents being recorded at the Commercial Register.

The CRA determines the registration procedure of all five main forms of business associations namely: unlimited partnership, limited partnership, joint-stock company, limited liability company and limited partnership with shares. Furthermore, the CRA regulates the registration procedure of sole proprietors, cooperatives and branches of foreign companies. It does not apply to partnerships, foundations, NGOs, etc.

According to the CRA, all existing companies had an obligation to apply for re-registration in the Commercial Register with the Registry Agency until 31 December 2011. Sole proprietors and branches of foreign companies that had not re-registered within the statutory term, have been deleted from the Commercial Register as of 1 January 2012.

Meanwhile, as from 1 January 2012, companies and cooperatives that had not re- registered within the statutory term continue to exist, however they cannot conduct any business activity, file claims or initiate execution procedures, nor dispose of any property. The only permitted activities for these companies/cooperatives are payment of due remunerations to their employees and payment of public obligations towards the state or municipalities.

In case of outstanding court disputes and execution procedures involving a non re- registered company/cooperative as a claimant, the competent authority shall suspend the procedure and instruct the claimant to submit an application re-registration and liquidation. Should the claimant not fulfill the above instructions, the court dispute/execution procedure shall be terminated.

By 31 January 2015, any entitled third party can submit an application for re-registration and liquidation of non re-registered companies/cooperatives before the competent district court (the court of last registration of the company/cooperative). The liquidation procedure should be completed within one-year term but not later than 31 January 2017.

After 31 January 2017, the Registry Agency shall delete all companies and cooperatives for which: (i) no re-registration and liquidation procedure is initiated; (ii) the liquidation procedure is not completed; (iii) no bankruptcy procedure is initiated.

Following registration with the Commercial Register, companies obtain a registration number – Unified Identification Code (UIC) that is used for taxation, social security and statistical purposes. Once received, this UIC remains unchanged until termination and/ or cancellation. Upon re-registration, the BULSTAT No of the existing companies is transformed into their UIC.

Apart from the registration of a company, the CRA also regulates subsequent corporate changes such as entry into the Commercial Register of a procurator, pledge of shares, pledge over a commercial enterprise, termination and liquidation of a company, transfer or transformation of a commercial enterprise, change of the company’s representatives, seat or name, etc.

However, the district courts retain their competency regarding insolvency procedures.

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Opportunities for International Investors in Bulgaria

Posted by Active Consult Ltd. - Accounting & Tax в 28/01/2013

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Protection and promotion of foreign investments

National treatment and most favored nation status

The Bulgarian Constitution stipulates that foreign persons (legal entities, individuals or civil partnerships registered in a foreign country) must enjoy equal rights with local persons when conducting economic activities in the Republic of Bulgaria except where otherwise provided by the law (“national treatment”). This principle covers the entire range of economic and legal forms used for business activity.

The Encouragement of Investment Act (“EIA”) provides for equal treatment of local and foreign investors in the Republic of Bulgaria. Foreign investors in Bulgaria can obtain the same assistance and use the same privileges and opportunities as granted by the law to local investors.

If a bilateral treaty, signed and ratified by the Republic of Bulgaria, provides for more favorable investment terms and conditions for international investors, the citizens or legal entities of the respective contracting country will enjoy preferential investor treatment (“most favored nation status”).

Protection of investments

The Republic of Bulgaria is a party to 61 bilateral agreements for mutual protection and encouragement of foreign investment (please refer to Appendix A hereto). It is also a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. In every Bilateral Investment Treaty there is a standard clause, providing that in the case of a dispute between the Republic of Bulgaria and a potential investor, this dispute shall be submitted before the World Bank’s International Center for Settlement of Investment Disputes. On these grounds, every investor in Bulgaria has the opportunity to protect their investment in case of adverse legislation being adopted.

Incentives to investors

The EIA envisages different incentive measures and privileges for local and foreign investors that undertake significant investments in certain economic activities within the territory of Bulgaria. The aim of these measures, financed by the state, is to promote large investments and improve the business environment in the country.

The Regulation for application of the EIA contains all detailed conditions, under which the investors may benefit from the incentive measures.

The EIA and the Regulation for its application are the legislative basis for implementing a scheme for awarding national regional state aid in conformity with EU legislation. Since Bulgaria is already an EU member, all encouragement measures may be implemented by the state only in compliance with EU state aid legislation for granting state resources to private entities. Investors must therefore fulfill the conditions stipulated in the respective EU legislative acts in order to be eligible for receiving state financing.

In this regard, the EIA and the Regulation for application of the EIA were amended in 2009 in compliance with the provisions of Commission Regulation (EC) No 800/2008 of 6 August 2008 declaring certain categories of aid compatible with the common market (“EC Regulation 800/2008”) in application of Articles 87 and 88 of the Treaty (General block exemption Regulation).

In order to benefit from the resources under the state aid scheme, investors must apply for a special certificate for class A or class B investment from the Bulgarian Investment Agency. The application and the supporting documents represent an application for granting of aid with incentive effect only if they are in compliance with the provisions of Article 8, paragraphs 2 and 3 of EC Regulation 800/2008.

Generally, the required minimum investment amounts are as follows:

  • for class A investments – over BGN 20 million
  • for class B investments – over BGN 10 million.

There are exceptions in case of investments in economically disadvantaged regions and in high technology activities in the manufacturing industry, where the minimum investment amounts are BGN 7 million and BGN 4 million, respectively. For investments in high technology activities in the area of computer technologies, research and development, as well as in education and human health care, the minimum investment amounts are over BGN 7 million for class A investments, and over BGN 7 million for class B investments.

The certificates for investment class are issued by the Minister of Economy, Energy and Tourism and entitle the investors to benefit from the following incentive measures, financed by the Sstate:

(a)  Right to purchase state or municipal real estate property or to acquire limited property rights over state or municipal real estate property, located near the investment site, without tender procedures, upon evaluation of the real estate property by at least two licensed independent valuers and upon written consent of the Minster of Economy, Energy and Tourism and the Minister of Regional Development and Public Works  for those real estate properties owned by the State, and approval of the respective Municipality Council for any municipality real estate properties.

In order to take advantage of this incentive measure, the investors must apply to the relevant local authorities by submission of their investment projects and the documents set out in the law. Non-implementation of the investor’s investment project within the implementation term and for the amount of investment, and non-commencing of project works within two years from the date of signing the contract are grounds for termination. The investor may not dispose of the real estate property (or the limited property rights), acquired according to the procedures under the EIA, prior to the expiry of a five-year term as from the date of implementation of the respective investment project.

Buildings and other sites financed with EU funds cannot be subject to the above incentive transactions, unless 10 years have expired from the completion of the construction to submission of the application by the investor.

(b)  Financing of construction of technical infrastructure elements, such as roads, drainage networks and facilities, etc. Investors awarded certificates for class A investment or  at least two or more investors awarded certificates for class investment where the investment is located in an industrial zone are eligible to receive such financing.

This procedure must be executed in accordance with the requirements of the EIA, the Regulation for application of the EIA, the state aid legislation and the EU legislation regarding state aid. The Council of Ministers grants such financing only after a tender is held by the Ministry of Economy, Energy and Tourism for evaluation of all submitted investment projects.

(c)  Financing of professional training of persons, hired by class A and B investors in relation to certified investments, provided that the financing is implemented in accordance with the requirements of the EIA, the Regulation for application of the EIA, and EC Regulation 800/2008. The Council of Ministers grants such financing only after a tender is held by the Ministry of Economy, Energy and Tourism for evaluation of all submitted investment projects.

(d)  Issuance by local or governmental authorities of administrative documents for the realization of the investment project within periods one third shorter than the periods set out in the relevant legislative acts.. The reduced periods for any administrative assistance of the investors contribute to the timely and efficient implementation of their investment projects.

(e)  Individual administrative assistance and service from the Bulgarian Investment Agency, relating to the submission and obtaining of the necessary documents required under Bulgarian legislation for completion of the investment.

Furthermore, investments are encouraged according to the procedures, established by the Corporate Income Tax Act, the Value Added Tax Act and the Employment Promotion Act, provided that they are in compliance with the requirements set out in these acts.

Eligibility for investment incentives

According to the EIA, incentive measures and privileges shall be applied to initial foreign and local investments in tangible and non-tangible fixed assets plus new employment.

The investments must cumulatively fulfill the following conditions in order to be promoted under the EIA:

  • they must relate to the establishment of a new enterprise, extension of an existing enterprise, diversification of the output from an enterprise into new products, or a material change in the overall production process of an existing enterprise
  • they must be implemented in the following economic areas, according to the Statistical Classification of Economic Activities in the European Community (NACE Rev. 2), applicable in Bulgaria as Classification of Economic Activities (in Bulgarian “КИД  2008”), namely:

–      industrial sector: manufacturing; or
–      service sector: high technology activities in computer technology, research and development, education and human health care, as well as storage of goods аnd auxiliary transport services

  • at least 80 percent of the future aggregate income must arise from the products produced by the economic activities above, whose products are specified according to the Classification of Products by Economic Activities in the EC (“CPA”) (with PRODCOM/NACE nomenclature or CPA nomenclature for projects in the service sectors), applicable in Bulgaria as Classification of Products by Economic Activities (in Bulgarian “КПИД-2008”)
  • the period of project implementation, i.e. the period between the commencement and completion of the project, must not exceed three years
  • investment within any single establishment must not be below the minimum amounts specified above (there are incentives for investment in economically disadvantaged regions or high technology activities as cited above)
  • at least 40 percent of the eligible costs for the investment must be financed by the investor’s own or borrowed resources (any resources allocated as state aid or involving an element of state aid, including retained corporation tax, are not considered own or borrowed resources)
  • the jobs created in relation to the investment must be maintained in the relevant region for at least five years in the case of large enterprises and three years in the case of small and medium-sized enterprisesthe investment must be maintained in the relevant region for at least five years in the case of large enterprises and three years in the case of small and medium-sized enterprises, calculated from the date of completion of the investment project. Any other requirements under the effective state aid legislation and EU aid legislation must be met.

Profit and capital repatriation

Foreign investors can freely transfer, and purchase to transfer, foreign currency abroad after the corporate taxes due, including withholding taxes, have been duly paid. The following may be transferred:

  • income generated through an investment
  • compensation against expropriation of investments for state needs
  • liquidation quotas upon termination of the investment
  • proceeds from the sale of an investment
  • sums received as a result of enforcement proceedings.

This right may also be exercised by foreign individuals working in the country with respect to their remuneration, as well as those who have obtained a permanent residence permit and are registered as sole traders or participate in a co-operative, in an unlimited partnership or as unlimited partners in a limited partnership, after the payment of all taxes due.

Establishment of new business entities or acquisition of shares in existing entities

Bulgarian law provides for the establishment of entities with foreign participation or for the acquisition of shares in existing local entities. Such companies must take the  form of entities under the Bulgarian Commercial Act. There is no limitation on the share participation of foreign legal entities and individuals.

Under the Bulgarian Commercial Act, the following entities can be set up and have foreign investor participation:

  • unlimited partnerships
  • limited partnership
  • limited liability companies (solely-owned limited liability companies)
  • joint-stock companies (solely-owned joint-stock companies)
  • limited partnerships with shares
  • sole traders.

Generally, no prior permission from governmental institutions is required for the establishment of an entity of the above types, except for cases involving banking or insurance activities, investment funds, management companies or investment intermediaries, or special concession rights, etc.

Branches

Foreign legal entities or unincorporated entities may register branches in the Republic of Bulgaria, if they have received permission to conduct business activities under the terms and conditions of the laws of their home country. Branches are entered in the Commercial Register at the Registry Agency.

Though part of a foreign company, branches are considered independent and therefore must keep separate accounting books and prepare balance sheets. However, registered capital is not required for the establishment of a branch.

Representative offices

Foreign legal entities and individuals who have received permission to conduct business activities under the terms and conditions of the laws of their home country are allowed to establish representative offices in the Republic of Bulgaria. They are not treated as separate legal entities and are not entitled to conduct business activities as defined in Bulgarian law.

Representative offices are registered at the Bulgarian Chamber of Commerce and Industry and may engage in marketing, informational and promotional activities.

Capital markets

The emergence of capital markets in Bulgaria is a direct result of the structural, economic and social changes in the country since 1989. The legislative basis of the capital market was established in 1991 with the adoption of the Commercial Act. Currently, the legislation comprises numerous laws and regulations, the most important of which are the Markets  in Financial Instruments Act, the Public Offering of Securities Act, the Commercial Act, and ordinances on the activities of investment companies, management companies, investment intermediaries, etc.

Bulgarian stock exchange

The first trading session on the Bulgarian Stock Exchange took place on 21 October 1997 with shares in companies privatized as part of the mass privatization program.

The Bulgarian Stock Exchange (“BSE”) is a joint-stock company. The majority of its shareholders are private local or foreign legal entities and individuals. Its shareholders elect the Board of Directors, which is responsible for the day-to-day operations of the

BSE. More than two-thirds of its private shareholders are credit and financial institutions – banks, financial intermediaries, insurance companies, etc.

Market supervision

The Financial Supervision Commission (“FSC”) is responsible for stock market supervision. The Commission is an independent state authority whose mission is to protect investors’ rights and to enhance the development of a transparent and efficient capital market.

The FSC has the exclusive right of approval in respect of prospectuses for public offerings of securities or take-over announcements. Issuers are obliged to file prospectuses and to register them with the FSC before going public. Once registered, they are required to periodically disclose information about their activities and financial status.

Trading procedures

The BSE operates a continuous order-driven trading system. Orders are matched automatically according to time and price priority. The minimum lot size is currently one share. There are daily limits on share price movements for both the official and the free market.

The BSE’s fully automated trading system is designed to provide market transparency, liquidity and reflect price announcements. The system, launched in 1991, was originally developed by NASDAQ, and has been upgraded continuously since then by RTS-TC (Russian Trading System). The official trading times are Monday to Friday between 9:30am to 1:45pm.

Concessions

The Constitution of the Republic of Bulgaria, promulgated in 1991, states that under the conditions of a separate law the state can grant concessions for certain objects or activities that are exclusive state property or subject to sovereign state rights. These conditions are prescribed in the Concessions Act, effective from 1 July 2006.

The Concessions Act regulates the common terms for granting concessions. There are special rules set out in the Underground Resources Act, governing the terms for granting concessions for mining of underground resources, and the Waters Act, governing the terms for granting concessions for mining of mineral water.

Licensing

Licensing regime in electronic communications

Тhe Electronic Communications Act, effective from 22 May 2007, reflects the need to establish unified rules for regulation of the common European electronic communications market, part of which is Bulgaria.

Under the Electronic Communications Act, electronic communications may be transferred, transmitted or accepted for all kinds of signs, signals, written text, pictures, sounds or information by conductor, radio waves, optical or other electromagnetic means.

Public electronic communications may be provided by any legal entity or individual who meets the general requirements set out in the law, after first notifying the Communications Regulation Commission.

Where legal entities want to use limited resource for the purposes of carrying out electronic communications, they have to obtain permission from the Communications Regulation Commission.

The Communications Regulation Commission may decide to hold a tender procedure for issuing permission for certain cases of use of limited resources.

Permissions may be issued for a period of up to 20 years, which can be extended to a maximum period of 30 years.

Radio and TV broadcasting activities require an individual license. Such licenses are issued by the Media Council, a special body designated under the Radio and Television Act.

The Radio and Television Act also regulates radio and television operators. The Media Council issues licenses to legal entities and individuals registered to perform terrestrial broadcasting. Licenses are issued after a tender process. The license term is up to 15 years and can be extended to a maximum period of 25 years.

Persons intending to create radio and television programs should register with the Media Council.

Licensing regime in the energy sector

The amendments to the Energy Act, effective from 2007, provide the legal conditions for liberalization of the Bulgarian energy market in compliance with the aim of the European Community to create a common liberalized European energy market.

The main regulatory body in the energy and water supply sector is the State Energy and Water Regulatory Commission, which is responsible for the issuance, amendment and withdrawal of licenses for activities in the energy sector.

In general, the law requires an individual license for the specific energy activity, such as generation of electricity and/or heat, transmission of electricity, heat or natural gas, trading of electricity, organization of an electricity market, public supply of electricity, and distribution of electricity or natural gas.

No license is required for generating electricity or heat from persons owning plants with a total installed capacity not exceeding 5 MW, or generating heat for own use.

There are restrictions placed on those entities which have already received licenses for distribution of energy and distribution of natural gas to also be granted licenses for other energy activities.

Any local or foreign legal entity, fulfilling the requirements of the law, is eligible to receive a license for the activities listed above.

Such license may also be granted to an entity registered under the legislation of one of the Member States or country that is party to the European Economic Area Agreement.

For the purposes of issuance of a license, there is no formal requirement for foreign entities to be registered under the Bulgarian Commercial Act.

Licenses are issued for a period up to 35 years. The term may be extended for an additional 35-year period where the licensee performs all obligations and requirements under the license, and has applied for an extension at least one year prior to the expiration of the initial license term.

Renewable energy

Pursuant to Directive 2009/28/EC on the promotion of the use of energy from renewable sources, Bulgaria is required to achieve a 16 percent share of renewable energy of total internal energy consumption by 2020.

Until 3 May 2011, the Energy Act and the Renewable and Alternative Energy Sources and Biofuels Act (“RAESBA”) regulated the production and promotion of renewable energy in Bulgaria. RAESBA did not implement the provisions of Directive 2009/28/EC. In order to implement the provisions of Directive 2009/28/EC on the promotion of the use of energy from renewable sources a new Renewable Energy Act (“REA”) was adopted by the Bulgarian Parliament, promulgated in the State gazette and entered into force on 3 May 2011.

The REA revoked RAESBA.The official purpose of the new REA was to implement the provisions of the new Directive 2009/28/EC. The legislator introduced certain restrictions to the development of renewable projects, in order to restrict the overwhelming development of such projects in the territory of Bulgaria over recent years and to ensure that the new electricity production capacities being built are adequate for the existing grid capacity of the country.

Licensing of renewable energy producers

No electricity production license is required for renewable energy plants with a total installed capacity of up to 5 MW.

National support measures for renewable energy producers

The major part of the REA regulates the development of projects for generation of electricity from renewable sources.

Pursuant to the REA, producers of electricity from renewable energy sources (“RES”) are entitled to the following incentive measures:

  • Privileged connection of the renewable energy plants to the electricity grids
  • Purchase of electricity produced by renewable energy sources at preferential prices, as determined in a feed-in-tariff.

Privileged connection to the electricity grids

The unconditional obligation of grid operators (transmission system operator and distribution system operators) to connect facilities for production of renewable electricity to the grid, as stated in the previously effective legislation (RAESBA), is no longer applicable. The REA introduced mechanisms for limiting the previously uncontrolled grid capacity of new renewable projects, thus attempting to resolve the insufficient grid capacity.

SEWRC should announce annually, by 30 June, on the basis of information provided by the grid operators, the maximum existing grid capacity for connecting new production facilities of electricity from renewable sources for the following twelve-month period. The maximum connection capacities shall be divided by: (a) areas of connection and (b) levels of voltage.

The developers should apply to the respective grid operator for connection to the grid in the area of development of the project. The grid operator shall estimate the admissibility of the relevant application. In general, the principle “first come – first served” shall be applied. If the application is approved (i.e. assessed as admissible), the grid operator should issue a statement on the terms and conditions for connection of the respective project to the grid.

Once the maximum capacity is reached (i.e. the total amount of requested capacity, as per the submitted and approved applications, exceeds the maximum capacity as announced  by the Regulator), any further applications for the respective year shall be rejected.

Upon submission of the application for connection to the grid the applicant should provide participation guarantee at the amount of BGN 5,000 for each MW of intended installed capacity. Another financial filter introduced with the new REA is the requirement that investors should pay, as an advance payment, part of the fee for connection to the grid at an early stage of development of the project, namely upon signing the preliminary agreement for connection to the electricity grid. The amount of the advance is fixed, regardless of the specific conditions for connection of each project, and is as follows: (i) BGN 50,000 for each MW of intended installed capacity for projects with installed capacity above 5 MW, and (ii) BGN 25,000 for each MW of intended installed capacity for projects with installed capacity 5 MW and below.

According to the last amendments of the REA, effective as of 10 April 2012, a new connection procedure shall apply for renewable projects that have reached the stage of signed preliminary grid connection agreement, but do not have a signed final grid connection agreement as at 10 April 2012.

Within three months of 10 April 2012, i.e. by 10 July 2012, the transmission grid operator, respectively the relevant distribution grid operators after coordination with the transmission grid operator, will develop time schedules for connection to the electricity grid of renewable projects with signed preliminary grid connection agreements. The time schedules shall be prepared in accordance with the plans for development of the grid prepared by the respective operator and pursuant to the sequence of signing of the preliminary grid connection agreements.

When the time schedules are ready, the grid operators shall notify the investors of renewable projects of the feasible timetable for connection of each renewable project to the grid. Within one month as of receipt of the above notification, each investor should accept or disagree in writing with the proposed term. If the investor does not grant its explicit written consent or disagree with the proposed term for connection of its projects, the signed preliminary grid connection agreement shall be deemed terminated.

The above schedules for grid connection shall not apply to renewable projects for production of electricity from biomass, which as at 10 April 2012 have reached the stage of signed preliminary grid connection agreement, but do not have a signed final grid connection agreement.

Feed-in-tariff (FIT)

REA retained the feed-in tariff (FIT) as the main operating subsidy for production of electricity from renewable sources. The principle of mandatory off-take of electricity produced from renewable sources on the basis of long-term power purchase agreements has been maintained. The persons obliged to purchase the electricity are the public supplier (National Electricity Company) and the end suppliers of electricity.

The FIT is fixed for the entire period of mandatory off-take of the electricity produced from renewable sources. The Regulator shall determine the FIT levels annually but the new prices shall be applicable to new projects only.

The REA introduced several modifications to the FIT design when compared to the previous regulations, which leads to increased investment risk.

According to the amendments of REA, effective as of 10 April 2012, the FIT shall be fixed not as at the time of signing Act 15 (establishing completion of construction works) for a renewable energy project, but at a later time – as at the date of entry into exploitation of the renewable energy project, i.e. the date of issuance of the permit for use.

This rule shall apply to all renewable energy projects which as at 10 April 2012 have not been entered into exploitation.

When a renewable project is entered into exploitation in stages, the off-take price for electricity produced shall be amended as at the date of entry into exploitation of each subsequent stage (unit). This off-take price shall be calculated as an average price between the FIT applied until the entry into exploitation of the respective stage (unit) and the FIT which applies as of the date of entry into exploitation of this unit, in accordance with a methodology to be adopted by the SEWRC.

REA does not specify a formula according to which the FIT should be calculated. It is at the discretion of the Regulator to decide on the amount of the FIT for electricity produced from different sources and technologies. The REA only specifies the general criteria, which should be considered by the Regulator when determining the FIT. Additional criteria are specified in the Ordinance on regulation of the electricity prices.

The period for mandatory off-take of electricity to be produced from new projects or projects in development was decreased from 25 to 20 years (for solar and geothermal projects) and from 15 to 12 years (for wind projects). Producers of renewable electricity, which are operating and have effective power purchase agreements (PPA) as at the date of entering into force of the REA, shall maintain the validity terms of their PPAs (i.e. 25 years for solar plants and 15 years for wind projects).

Promotion of renewable energy for heating and cooling

RAESBA did not contain specific provisions regarding the promotion of renewable energy produced for heating and cooling purposes, since it implemented Directive 2001/77 on promotion of electricity produced from renewable energy sources.

The REA mentions the promotion of renewable energy for cooling and heating but does not specify the exact measures for promotion. The few provisions regarding the promotion of renewable energy for heating and cooling are of a general nature and do not contain specific requirements or steps to be performed by investors.

Projects for development of local heating distribution networks and small decentralized heating and/or cooling systems shall be subject to incentive measures which are not yet determined in the legislation.

The REA proclaims that in the case of construction of new buildings or basic reconstruction of existing buildings, if technically possible and economically viable, at least 15% of the energy for heating and cooling necessary for the respective building should be produced from renewable sources.

Financing of RES projects

Currently, RES projects are financed predominantly by private investors and commercial banks.

In order to promote RES, the country has implemented the Bulgarian Energy Efficiency and Renewable Energy Credit Line (BEERECL), which has been established to support industrial energy efficiency and small renewable energy projects in the private sector by using funding from the Kozloduy International Fund, created by the EBRD in May 2002.

BEERECL provides funding for small renewable energy projects:

  • Small hydro power plants – up to 10 MW
  • Wind projects – up to 5 MW, and
  • Biomass projects – up to 10 MW.

BEERECL provides grants of up to 15 percent of the disbursed loan principle for RES projects, upon their completion and on the basis of verification by an independent energy expert.

RES projects could alternatively be financed under EU operational programs.

Banking and finance

The commercial activities of credit and financial institutions in Bulgaria are regulated by the Credit Institutions Act (“CIA”), effective from 1 January 2007.

As per the CIA, a Bulgarian bank must be established in the legal form of a joint-stock company, issuing only dematerialized shares and with a fully paid-up minimum registered capital of BGN 10,000,000. Banking activities in Bulgaria may be performed only upon obtaining a bank license, issued by the Bulgarian National Bank (“BNB”).

The CIA envisages two possibilities for a bank, licensed in a Member State or in a country that is part of the European Economic Area (EEA), to carry out banking activities on the territory of the Republic of Bulgaria:

  • through a branch, of which no more than one may be on the territory of Bulgaria, i.e. freedom of establishment
  • directly, after specifying the names and addresses of the persons who will represent it before the BNB, i.e. freedom to provide services.

Member State banks, including banks from the EEA may perform only those activities that are specified in their licenses. Activity can commence upon notification to the BNB by the competent bodies which have issued the license of the bank.

A foreign bank registered in a third country (i.e. not in a Member State or EEA) may perform banking activities in Bulgaria only upon opening a branch in Bulgaria and obtaining a license issued by the BNB.

In addition to banks, electronic money may be issued by companies which have obtained a license by the BNB, or have been granted a license by the competent authorities of a Member State or a country that is part of the EEA, and provide services, directly or through a branch, within the territory of the Republic of Bulgaria.

Financial institutions are legal entities other than credit institutions, for which the main scope of business is carrying out one or more banking activities and/or granting credits with funds which have not been raised from receiving deposits or other repayable funds from the public. Following amendments to the CIA from March 2009, financial institutions are subject to registration in a special register kept by the BNB provided that certain requirements have been met. The financial institution could take the form of a joint stock company, limited liability company or limited partnership with shares. The minimum share capital of the financial institution depends on the services to be carried out and is set at BGN 50,000 or BGN 250,000 for leasing and other services.

Financial institutions having their registered address in a Member State or a country that is part of the EEA are also entitled to carry out commercial activities on the territory of the Republic of Bulgaria directly or through a branch provided that they:

  • are subsidiaries of a bank licensed in a Member State, or
  • are jointly owned by two or more banks, all of which are licensed in a Member State, and
  • meet all requirements explicitly envisaged by the CIA.

The representative office of any bank in the Republic of Bulgaria is obliged to submit to the BNB a copy of the act for its registration with the Bulgarian Chamber of Commerce and Industry within 14 days after the date of issue of the act. Such representative office may not carry out commercial activity in Bulgaria.

International private law

International Private Law Code (“IPLC”)

The rules of the IPLC regulate the terms and conditions concerning the choice of applicable law in private legal relations, which have an international element as well as the recognition and enforcement of foreign court decisions and other official acts in Bulgaria.

Competence of Bulgarian courts and other authorities

The international competence of Bulgarian courts and other authorities is exclusive only if it is explicitly provided for. For example, Bulgarian courts have exclusive competence on lawsuits concerning:

–      ownership title and property rights over real estates situated in Bulgaria

–      legal status of legal entities registered in the Republic of Bulgaria

–      claims regarding industrial property, where the patent has been issued or the registration made in the Republic of Bulgaria.

Where the dispute is outside the exclusive competence of the Bulgarian courts, any such action may be submitted to a foreign court or arbitration by an agreement in writing between the parties.

The Bulgarian enforcement authorities have exclusive competence to take action for compulsory enforcement against entities, individuals and assets located in Bulgaria.

Applicable law

The legal status of legal entities and branches of foreign companies is regulated by the law of the state in which they are registered. Therefore, the legal status of legal entities and branches of foreign companies registered in Bulgaria shall be subject to Bulgarian law.

Since ownership rights over movable and immovable property are regulated by the law of the state within whose territory they are located, Bulgarian law shall be applicable to property located within Bulgaria.

Contracts, including employment contracts, are regulated under the law chosen by the parties.

However, the choice of applicable law for an employment contract must not deprive the employee of the protection under the mandatory rules of the law, which would be applicable in the absence of choice of applicable law. In the absence of choice of applicable law, the employment contract is governed by the law of the state in which the employee usually works, even if he or she is temporarily employed in another state.

Unfair competition and the restriction of competition are regulated by the law of the state in whose territory the interests of competitors or consumers are damaged or may be damaged.

Recognition and enforcement of foreign awards in Bulgaria

Decisions and other acts of foreign courts and authorities, including courts of arbitration, can take legal effect in Bulgaria through their recognition and/or enforcement subject to the terms and conditions of the Bulgarian International Private Law Code (“IPLC”) and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

According to the IPLC, decisions and other acts of the foreign courts and authorities can be recognized and enforced if the foreign court or authority has been competent according to the Bulgarian law to issue the act subject to enforcement, and its recognition and enforcement does not contradict public policy in Bulgaria.

The New York Convention, to which Bulgaria is a party, provides rules for enforcement of foreign arbitration awards in contracting states.

Procedure for enforcement of foreign court decisions and arbitration awards

The procedure for enforcement of a foreign court decision or an arbitration award starts upon the filing of a claim with the Sofia City Court. Attached to the claim must be a copy of the foreign act verified by the court or by the arbitration which has issued it and a certificate of the foreign court or arbitration that the decision has entered into force. These documents must be translated into Bulgarian by a sworn translator and certified by the Consular Department of the Bulgarian Ministry of Foreign Affairs.

The local court examines whether all pre-conditions for recognition and enforcement of the foreign act are fulfilled. However, the Bulgarian court does not review the case on the merits. As an exception, a debtor can make an objection before the Bulgarian court against subsequent payment of the debt after the foreign court decision or arbitration award has entered into force abroad and, in this case, the Bulgarian court will have to consider this fact before enforcement of the act.

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General information for Bulgaria

Posted by Active Consult Ltd. - Accounting & Tax в 25/01/2013

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Geography and climate

Bulgaria is situated in South-Eastern Europe, in the eastern part of the Balkan Peninsula. It borders Romania to the north, the Republic of Serbia to the west, the Former Yugoslav

Republic of Macedonia to the southwest, Greece to the south and Turkey to the southeast. The Black Sea is to the east of the country; it enables direct maritime links with the Russian Federation, Ukraine and Georgia. To the north, the Danube River separates Bulgaria from Romania. Bulgaria is strategically located along key land routes from Europe to the Middle East and Asia.

Bulgaria’s total area is 110,910 sq. km, with 1,808 km of land borders and 354 km of coastline. The country’s terrain is partly mountainous, with lowlands in the north and the southeast. The climate is Continental Mediterranean, it is temperate, with cold, damp winters and hot, dry summers.

Population and language

As per the results of the population census conducted by the National Statistical Institute in February 2011, Bulgaria’s population is approximately 7.36 million. Nearly 73 percent live in urban areas. The capital – Sofia – is by far the largest urban center having nearly 1.20 million inhabitants. Approximately 18 percent of the population is under the age of 19, while 63 percent is between the age of 20 and 64, and 19 percent is over the age of 65.

Ethnic Bulgarians represent almost 85 percent of the population, while ethnic minorities of Turkish and Roma descent make up another 8.8 percent and 4.9 percent respectively according to statistics from the population census in 2011. Smaller ethnic groups in Bulgaria include Russian, Armenian and Jewish among others. Nearly 76 percent of the Bulgarian population is Eastern Orthodox Christian. Another 10 percent of the population state they are Islam. Catholicism and Judaism are also represented.

Since 1990, the country’s net population growth has been negative (an average annual decrease of – 0.7 percent was recorded for the period 2001 – 2011), in part as a result of significant outward migration, but also due to the country’s aging demographics. The trend of increase in the birth rate in the country in the period 2004 – 2009 reversed in 2010 and the birth rate decreased by 6.7% further contributing to the decrease in the population.

 The country’s official language is Bulgarian. Secondary languages closely correspond to ethnic background. English, and to a lesser extent German and French, are used frequently in business.

Infrastructure

Roads and railways

A network of international highways connects Bulgaria to Western Europe, Russia, Asia Minor, the Adriatic, the Aegean, and the Black Sea.

The European corridors No. 4 (from Germany to Istanbul), No. 7 (Rein, Main, Danube), No. 8 (from Durres, Albania to Varna), No. 9 (from Helsinki, Finland to Alexandropoulos, Greece) pass through the territory of Bulgaria.

According to the annual statistics published by the National Statistical Institute, the total length of the country’s road network is 39,512 km, which includes 458 km of designated motorways, 2,970 km of category I roads, 4,030 km category II roads, 12,054 km category III roads and approximately 20,000 km of category IV roads. Road transportation across most of the country relies primarily on two-lane roads. The main transport corridors are Kalotina-Svilengrad linking Serbia to Turkey, Vidin-Sofia-Kulata linking Romania to Greece, and Ruse-Kazanlak-Kardzhali linking Romania to Greece and Turkey.

Development plans focus on upgrades and investments, particularly of motorways, to further integrate the country’s road system into the international network. According to data from the Ministry of Regional Development and Public Works, priority road

infrastructure projects in Bulgaria until 2020 include construction of 778 km of motorways (Trakia, Maritsa, Struma, Sofia-Kalotina, Hemus and Black Sea) and construction/ rehabilitation of 914 km of speedways, two new bridges over the Danube river and the construction of Shipka Tunnel. The total budget for the planned road infrastructure projects listed above (excluding the two bridges) is estimated to amount to EUR 5,696 million until 2020. Financing sources include, Operational Programme Transport and Operational Program Regional Development (EU financing), the State Budget, State investment loans, financing from the European Investment Bank and the World Bank.

During 2012 and 2013, a total of 231 km of motorways are planned for completion, increasing by 50% the current motorways network. In early 2013, the last section of the Trakia motorway is scheduled to be completed, thus becoming the first entirely completed motorway in Bulgaria. Furthermore, the second bridge on the Danube river at Vidin – Kalafat is expected to be completed by the end of 2012.

Bulgaria’s railroad network includes about 4,098 km of railway lines. Some 68.0 percent of them are electrified and 23.6 percent are double-track. The majority of the network is designed to support a running speed of up to 100 km per hour, with only 150 km supporting a speed of up to 130 km per hour.

 The Bulgarian Railway Company has started to implement a program which includes spin- off and sale of the company’s freight businesses, sale of non-core assets and obsolete equipment and a gradual decrease of personnel over the next five years.

Priority railway infrastructure projects in the country until 2020 include rehabilitation, overhaul and modernization works of the existing railway infrastructure and construction of new high-speed railroads in the following directions – Sofia-Plovdiv-Burgas, Sofia-Vidin, Plovdiv-Svilengrad-Turkish border, Sofia-Dragoman, Sofia-Pernik-Radomir, Mezdra-Gorna Oryahovitsa, Sofia intermodal terminal and railroad junction, etc. The total budget for the planned railroad infrastructure projects as listed above is estimated to amount to EUR 4,671 million, which will be financed mainly by EU funds and the State Budget. Some sections of the Sofia-Plovdiv-Burgas and Plovdiv-Svilegrad-Turkish border high-speed railroad lines are due to be completed and lauched by the end of 2012.

The extension of the Sofia first metro diameter is expected to be completed by May 2012. The second metro diameter is planned for completion by August 2012 while the construction of the third metro diameter is planned to begin in 2015.

Ports

Both sea and river routes – the Black Sea and the Danube River – offer reliable shipping transportation to and from the country. The largest Bulgarian seaports are Burgas and Varna on the Black Sea coast. Varna mainly handles containers, grain and bulk goods, while Burgas mainly deals with crude oil and some bulk commodities. A ferry connection from Varna to Odessa (Ukraine), Kavkaz (Russia) and Poti (Georgia) facilitate the transport of goods between the countries.

The Danube River is navigable during most of the year and supports inland water transport. With the Rhine – Maine – Danube canal in use since 1992, Bulgaria has access to the large European ports on the North Sea. The main Bulgarian ports on the Danube River are Ruse, Lom and Vidin.

In June 2011, the Government granted a concession of the port terminal Burgas-East 2  to BMF AD. Furthermore, another call for concession bid is expected to be issued for the Lom port in 2012.

The Ministry of Transport, Information Technology and Communications is currently performing a pre-concession evaluation for Varna port (Varna-East, Varna-West and Ferry complex – Varna) and the concession call is expected to be issued by the end of 2012.

In addition, according to the plans of the Ministry of Transport, Information Technology and Communications, concession calls are also expected for the port terminals Ruse-west, Ruse-center, Vidin-south, Vidin-center, Nessebar, Nikopol, Tutrakan and Bourgas-west.

Airports

 Bulgaria has four operating commercial airports – in Sofia, Plovdiv, Burgas and Varna. They handle both international and domestic flights. A tender for a 35-year concession for the management of Burgas and Varna airports was held in June 2006 and the Government awarded the concession to a consortium between Fraport AG, Germany and a local company, named BM Star.

Furthermore, in response to the demand for cargo transport, the Government has  added the airports in Plovdiv (south-central Bulgaria), Gorna Oryahovitsa (north-central Bulgaria) and Ruse (northern Bulgaria) to the list of airports which accept international air traffic. In 2011, the Government issued calls for concession bids for the airports in Gorna Oryahovitsa and Ruse. Applications should be submitted by April 2012. In relation to Plovdiv airport, the Government is in the process of preparing the concession call for both the passengers and the cargo terminals of the airport.

Sofia airport, which handled about 3.5 million passengers in 2011, has undergone EUR  210 million investments which increased its capacity and provided modern facilities to deal with the increased demand for international air travel. The newly constructed terminal ensures a higher standard of passenger handling and landing of wide-bodied aircrafts.

In March-April 2012, the Government is expected to initiate a procedure for selecting a consultant to assess the feasibility of a concession of the Sofia airport. The purpose of the contemplated concession is to extend the cargo and passenger handling capacity of the airport and modernize its infrastructure.

Communications

Fixed-line communications

The fixed line system is extensive, with an estimated 1.9 million lines in operation in 2011, while the level of equipment used to support the network has significantly improved in recent years. The overall telephone density is estimated at 25.5 percent in 2011, representing a decrease in recent years due to the shift in consumer preferences in favour of mobile phones.

Mobile communications

Three mobile telephone companies currently provide services in Bulgaria: Mobiltel AD, Bulgarian Telecommunication Company AD and Cosmo Bulgaria Mobile EAD – doing business as M-Tel, Vivacom and GloBul – operating under the GSM 900 standard. The market has grown quickly, with the number of mobile subscribtions rising from 8.2 million in 2006 to an estimated 11.5 million in 2011. Based on publicly available information M-Tel has a 48.6% market share, followed by Globul with 35.9% and Vivacom with 15.5%.

Internet

 As at the end of 2011 there are an estimated 4.4 million internet users in the country which represents approximately 60 percent of the population. This is a vibrant market populated by numerous internet service providers (ISPs), whose rates and service quality vary widely. According to a market report issued by the Communications Regulatory Commission, there were 589 firms registered to operate data-transfer services as at the end of 2010. The largest companies which provide such services are BTCnet, Mobiltel (which has acquired Spectrum Net and Megalan in 2010), Blizoo (the new brand for Evrocom and Cabletel) and Net 1.

In 2005, the Bulgarian government granted the first point-to-multipoint wireless network licenses, which allowed operators to upgrade their infrastructure and provide high- speed wireless quality data, voice, video, and multimedia services based on the WiMAX standard. The companies providing WiMAX services were originally five, however, due  to operational difficulties the licenses of Trans Telekom, Carrier BG and Nexcom were revoked, while Mobiltel sold its license to Max Telecom, the only remaining participant in the sector.

Electronic payment methods

Credit and debit card use is gaining popularity, with an increasing number of consumer retailers accepting payments via such payment. Local banks are offering online banking services, debit card services, and various forms of electronic payment for utility and telephone charges.

A number of new electronic services facilitating the payment process are developing on the market i.e. electronic invoice, electronic signature and other. The latter are driven both by changes in regulation and market innovation.

The Bulgarian National Bank has granted a system operator license to System for Electronic Payments Bulgaria AD to develop and maintain a national mobile infrastructure for electronic payments in the country.

Currency

The official currency in Bulgaria is the Bulgarian lev (BGN). The BGN is circulated in notes of BGN 2, BGN 5, BGN 10, BGN 20, BGN 50, and BGN 100, and coins of BGN 0.01, BGN 0.02, BGN 0.05, BGN 0.1, BGN 0.2, BGN 0.5 and BGN 1.

In July 1997, a Currency board was introduced and the lev was pegged to the German mark at the rate of BGN 1 to DEM 1. Presently, the lev is pegged to the euro at a rate of BGN 1.95583 to EUR 1.

Exchange rates for the other currencies are quoted daily by the Bulgarian National Bank for statistical and accounting purposes.

Labor force

Approximately 3.3 million individuals or around 52 percent of the population aged 15  and over, comprised the country’s labor force in 2011. While the Bulgarian labor force is generally highly skilled and well educated, wage levels in the country are significantly lower than those in Western Europe, creating significant upside potential for labor- intensive investments. As per data provided by the Bulgarian National Bank, the average gross monthly salary for 2011 was EUR 362 compared to EUR 331 for 2010.

The overall trend of the annual unemployment rate over the period 2005-2008 was steadily downward, decreasing from 10.7 percent in 2005 to 6.3 percent in 2008. However, due to the negative impact of the economic crisis, unemployment rates in the country increased to 9.1 percent, 9.2 percent and 10.4 percent in 2009, 2010 and 2011, respectively.

Political system Bulgaria is a parliamentary republic. It held its first multiparty elections in 1990 and its current constitution was adopted on 12 July 1991. The national legislative body – a unicameral Parliament – is comprised of 240 members elected by popular vote who serve a four-year term. The president is the head of state and commander-in-chief of the army. The president and the vice-president are elected by a majority vote and serve a five-year term. The current president is Rosen Plevneliev and his term began in 2012. The President cannot initiate legislation but has a qualified power of veto.

Executive power rests with the Government. It is headed by a prime minister, who is appointed by a parliamentary majority. The current Prime Minister is Boyko Borisov, who is also the chairperson of the Council of Ministers. The latest parliamentary elections in Bulgaria were held on 5 July 2009 and won by the centre-right Citizens for European Development of Bulgaria (CEDB) party although lacking a parliamentary majority (it won 116 of 240 seats).

The country is divided into 28 administrative regions headed by regional governors appointed by the Council of Ministers. Bulgaria has 262 municipalities headed by mayors elected every four years. Municipal Councils, the local legislative bodies, determine the mayors’ executive functions.

Opportunities created via EU-funding

Upon accession to the EU on 1 January 2007, Bulgaria became eligible to receive and utilize resources from EU funds aimed at Member States. The funds are the main instrument for implementation of the EU Cohesion Policy and support of the common market of the EU.

Access to EU financial aid is granted by means of implementation of national Operational Programs (“OPs”) funded jointly by the national budget and by EU funds as well as from two national Programmes in the field of agriculture, rural development and fisheries.

The OPs cover the period 2007 – 2013 and are mainly focused on achieving enhanced and stable economic growth, competitiveness, employment, regional and infrastructure development.

 The EU assistance currently available covers the period 2007 – 2013 and amounts to EUR 12 billion from the EU budget, of which approximately EUR 4 billion are targeted at supporting Bulgarian businesses, including agriculture, rural development, fisheries and aquaculture aid measures. The funding opportunities for businesses registered and operating in Bulgaria refer to the following:

  • OP Development of the Competitiveness of the Bulgarian Economy (“Competitiveness”);
  • OP Human Resources Development;
  • Rural Development Programme, and
  • Fisheries Operational Programme.

OP Development of the Competitiveness of the Bulgarian Economy is specifically targeted at supporting the development of private economic operators.

Public aid is provided in the form of grants which are approved following a competitive project selection procedure. The supported activities for 2012 include energy efficiency and renewable energy projects for small and medium enterprises (SMEs), and the setting-up  of regional business incubators.

There are specific measures – such as the EU initiative JEREMIE – which aim at facilitating the access of enterprises to financial resources through the establishment of specialized financial instruments. It envisages EUR 199 million for investment and credit lines distributed among SMEs through guarantee funds, risk capital funds and micro credit funds. EUR 30 million is channeled to start-ups through the risk capital funds and another EUR 120 million is dedicated to growth equity and mezzanine funds. Guaranteed loans to SMEs are also provided under JEREMIE, involving the local commercial banks which take part in the so called “First Loss Portfolio Guarantee”.

OP Human Resources Development provides support to companies aiming at improving their personnel capacity through delivery of trainings. Training may involve:

  • Vocational training for improvement and qualification of employees
  • Training on key competencies, such as foreign languages, communication skills, digital competencies, etc.

Enterprises can also apply with projects for improving working conditions, developing and introducing prevention systems for monitoring and control of risks related to health and safety standards at the working place.

The Rural Development Program envisages the implementation of measures that are aimed at supporting the modernization of agricultural holdings, adding value to agriculture

and forestry products, setting up of producer groups for increasing the production and supply of high-quality products as well as for provision of farmers’ advisory services. The program also supports projects for diversification of farming sector activities, transition  to non-agricultural activities, establishment and development of micro-enterprises to promote entrepreneurship in rural areas. Public aid is also envisaged for projects related to investment in rural tourism activities to create additional income and jobs in rural areas and to preserve the rural heritage. Specific measures are also targeted at food companies aiming to modernize their production/processing facilities.

The Fisheries OP supports projects related to the processing and marketing of fisheries produce, modernization of fisheries ports, rest places and boat shelters. The program also provides grants for investments in aquaculture by financing the construction or modernization of aquaculture manufacturing facilities, as well as of fisheries facilities on the bank of the Danube River.

Bulgaria and NATO

Bulgaria, together with six other East European countries, joined NATO on 29 March 2004.

In order to become a NATO member, Bulgaria undertook a sizable modernization of the army and compulsory military service was abolished.

Economy

The Bulgarian economy continued its recovery from the global economic and financial crisis in 2011, realizing real GDP growth of 1.7 percent compared to a growth of 0.4  percent in 2010. This was mainly driven by export growth, while domestic demand continued to decrease. Despite the export recovery, retail trade, construction and industrial output remain depressed, while credit growth is still low.The International Monetary Fund forecasts real GDP growth of 1.3 percent in 2012. As a result of the rise in oil, electricity and food prices in the last quarter of 2011, the annual inflation rate averaged 4.2 percent in 2011 as compared to 2.4 percent in 2010. The inflationary pressure caused by increasing oil and food prices is expected to keep inflation levels around 3 percent in 2012.

The current account deficit continued to shrink in 2011, resulting in a surplus of 0.9 percent of real GDP in 2011 as compared to 1 percent deficit in 2010. This is mainly due to the strong export performance in 2011 and the rise in commodity prices leading to a reduction in the trade deficit. According to the Economist Intelligence Unit’s forecast, the current account deficit is expected to record a smaller surplus in 2012.

Foreign direct investments (FDI) in the country reached EUR 1,341million in 2011, which comprises an 11 percent increase compared to 2010 but is still far from the peak level of EUR 6,728 million in 2008. This can be attributed to the global financial crisis resulting in decreased investor activity, especially in the real estate sector, and reduced access to external financing.

The Currency board has a key role in sustaining the macroeconomic stability in the country. As a result of prudent government policy in recent years, the gross foreign currency reserves of the Bulgarian National Bank amount to EUR 13,349 million as at the end of 2011 compared to EUR 12,977 million an year earlier.

The table below lists some key Bulgarian macroeconomic indicators:

Indicator 2007 2008 2009 2010 2011
Real sector
GDP (million EUR) 30,772 35,430 34,932 36,052 38,483
GDP per capita (EUR) 4,017 4,648 4,605 4,785 5,189
Private consumption (% of GDP) 85.6% 83.0% 79.5% 79.0% 76.3%
Annual real GDP growth (%) 6.4 6.2 -5.5 0.4 1.7
Inflation (av.) (%) 8.4 12.3 2.8 2.4 4.2
Average monthly wages (EUR) 220 279 311 331 362
Unemployment rate (%) 6.9 6.3 9.1 9.2 10.4
Trade balance, FOB (EUR million) (7,245) 8,598) (4,174) (2,764) (1,975)
Export, FOB (EUR million) 13,512 15,204 11,699 15,561 20,227
Import, FOB (EUR million) 20,757 23,802 15,873 18,325 22,201
Foreign direct investments (EUR

9,052

million)

6,728 2,437 1,208 1,341
Foreign sector
Current account deficit (% of GDP) (25.2) (23.1) (8.9) (1.0) 0.9

Foreign direct investments % (GDP)   29.4     19.0        7.0             3.4            3.5

Source: Bulgarian National Bank and Economist Intelligence Unit

Trade agreements

Framework agreements liberalizing foreign trade between Bulgaria, the European Union, European Free Trade Association (EFTA) and Central European Free Trade Agreement (CEFTA) countries, as well as with Turkey and Macedonia have expanded the market presence of domestic manufacturers. Bulgaria’s major trade agreements are with the following organizations:

WTO

Bulgaria has been a member of the World Trade Organization since 1996.

European Union

In March 1993, Bulgaria and the European Community and its Member States became signatories to the Europe Agreement of Association effective from 1 February 1995 and the Interim Agreement on Trade and Trade Related Matters covering various trade components, effective from 31 December 1993. In accordance with the Agreement of Association, customs duties on industrial goods between Bulgaria and EU countries

phased out by 2007. Since 1998, the EU import of industrial goods of Bulgarian origin has been duty-free. Significant relief for agricultural produce is also provided. The EU accession of Bulgaria and Romania in January 2007 expanded the export opportunities available to Bulgarian producers.

EFTA

According to this 1993 Agreement, trade with EFTA countries (Switzerland, Norway, Iceland and Liechtenstein) enjoys preferential terms and conditions that are almost identical with those in the Europe Agreement of Association.

Bilateral Free Trade Agreements

As of 1 January 2007, the bilateral free trade agreements signed between Bulgaria and other countries in the region were cancelled and the country adopted the preferential  trade agreements of the EU with various countries. Presently, the EU has such agreements with countries from the Mediterranean region (Algeria, Egypt, Israel, Jordan, Lebanon, Morocco, Syria and Tunisia) and, EFTA member countries, Mexico and Chile. The EU has signed Stabilization and Association Agreements with Macedonia, Croatia, Albania, Montenegro, Serbia and Bosnia and Herzegovina.

Foreign investment

According to the Bulgarian National Bank, FDI for 2011 amounted to EUR 1,341 million

(3.5 percent of GDP). The total value of FDI for 2010 was EUR 1,208 million (3.4 percent of GDP), whereas FDI for 2009 was EUR 2,437 million (7.0 percent of GDP).

The estimated top five FDI contributing countries ranked by total FDI flow for 2011 were the Netherlands, Austria, Russia, Cyprus and France.

Based on preliminary data, the top five industries that attracted the largest FDI in 2011 were the transport, storage and communication sector with EUR 498 million (37 percent of total FDI flow), wholesale and retail trade sector with EUR 223 million (17 percent), electricity, gas and water supply sector with EUR 153 million (11 percent), financial intermediation sector with EUR 152 million (11 percent) and hotels and restaurants sector with EUR 56 million (4 percent).

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