Foreign Investments in Bulgaria

In recent years Bulgaria has become a very desirable destination for foreign investors.

According to a survey published in May 2008 by KPMG Bulgaria, direct foreign investments in the country reached approximately EUR 6,109 million in 2007, which comprises a 40% increase compared to 2006. It is believed that such a positive result can be attributed to the increasing investor’s confidence in the Bulgarian economy coupled with a rate of return on domestic investments exceeding that of other EU countries.
The legal frame of investments and economic activities of foreign entities in Bulgaria consists of both international and domestic rules. The main home legal sources regulating the investments and the economic activities of the foreign entities in Bulgaria are the Constitution of the Republic of Bulgaria and the Encouragement of Investments Act.
Bulgaria has also signed a number of multiparty and bilateral agreements in the area of foreign investments such as: the Convention for the Creation of an Agency for Multiparty Warrantees of the Investments, the Convention for Settlement of Investment Disputes between Countries and Citizens of Different Countries; the Constituent Contract of the International Financial Corporation; the Agreement for the creation of the World Trade Organization, as well as some bilateral contracts for mutual encouragement and protection of investments and Double Taxation Avoidance Agreements.

Article 19 of the Constitution of the Republic of Bulgaria outlines the key principles of the economic life in the country which are following:

1. The principle of free economic initiative;
2. The provision of legal guarantees and equal footage for the implementation of economic activities by all the citizens and legal entities.

Further general and special legal provisions regulating the investments and economic activity of the legal subjects can be also found in the Bulgarian Commercial Act, the Corporate Tax Act, the Income Tax for Individuals Act, the Accountancy Act , the Currency Act and others.

Foreign investment is each investment or an increase of the investment of a foreign entity or its branch specified in any of the following forms:

1. Shares or allotments in trade companies;
2. Right of ownership over buildings and restricted rights over real estates;
3. Right of ownership and restricted rights over chattels with a nature of fixed tangible assets;
4. Right of ownership over differentiated parts of trade companies with more than 50 per cent of state or municipal participation in the capital within the meaning of the Privatisation Act and the post- privati s ation control;
5. Securities, inclusive of bonds and treasury bills as well as instruments derivative from them issued by the state, the municipalities or other Bulgarian legal persons with a residual term to maturity not later than 6 months;
6. Credits inclusive under the form of financial leasing for a term not shorter than 12 months;
7. Intellectual property – objects of the copyrights and neighbouring rights, patent related inventions, useful models, trademarks, brands for services and industrial design;
8. Rights under concession contracts and contracts for assignment of management.

Foreign investments and economic activities of the foreign citizens and foreign legal entities in Bulgaria are protected by Article 19, paragraph 3 of the Constitution of the Republic of Bulgaria where is explicitly enacted that the protection of the investments and the economic activity of the Bulgarian and foreign citizens and legal entities, may be finally developed solely in an act of the ranking of a law but not in a by-law source. The protection principle is re-confirmed in Art. 1 of the Encouragement of Investments Act.
For the effective implementation of the principle for protection of the foreign investments the Bulgarian legislation anticipates a system of guarantees: provision of a national regime, provision of a regime of the most favoured nation, supremacy of the international law over the domestic law, protection against subsequent changes in the legislation, protection against the expropriation of the subject of the investment, a possibility for transfer of the income abroad ensuing from the investment, alleviated procedure for the settlement of investment disputes and others. This encourages the investors to trust the national legislation.
A very important role in the investment process and economic activities in Bulgaria plays the Bulgarian Investment Agency (BIA). BIA is an executive agency with the Minister of Economy and Energy, whose structure and functions is regulated in its structure regulations – Structure Regulations of the Bulgarian Investments Agency. BIA renders assistance to the Minister of Economy and Energy for the implementation of the state policy in the sphere of encouragement of investments by:

1. performing information and individual administrative servicing of the investors;
2. conducting marketing and other studies at the expense of the investors;
3. performing investment marketing, presenting and advertising abroad the possibilities for investment in the country;
4. preparing an annual report on the investments in the country and abroad and on the conditions for their encouragement. BIA maintains a unified information system with data about the investments in the country.

The Encouragement of Investments Pursuant to the Encouragement of Investments Act equalized the regime of the investments made by local and foreign persons and introduces a system of measures for the encouragement of the investments in conformity with their value.
The investments which are encouraged according to the procedure established by the Encouragement of Investments Act, must meet the following requirements.

1. They must be for the acquisition of fixed assets aimed at the creation of a new or expansion or modernization of existing production of goods and/or services;
2. They must create working positions and the term for the realization of the investments must be up to three years.

In accordance with the procedure established by the Encouragement of Investments Act no investments in banks, financial institutions, insurance companies, investment intermediaries, investment companies and companies with a special investment goal, managing companies, pension and health insurance companies, for investments in gambling activities shall be encouraged as well as with regard to the investments made in execution of privatization contracts under the Privatization Act and post-privatization control, respectively under the repealed Transformation and Privatization of State-Owned and Municipal-Owned Enterprises.
With regard to their value, the investments are divided into three classes, for which the Executive Director of BIA or a person authorised by him issues a certificate:

1. First class – investments of over 100 million BGN ( 50million EUR) ;
2. Second class – investments from 50 million BGN to 100 million BGN (25-50 million EUR) inclusive;
3. Third class – investments from 10 to 50 million BGN (5-25 million EUR) inclusive;

For more information and further assistance please contact Neli Norrish on e-mail: neli.norrish@psi-law.com

Marketing and Management Contracts

In recent years Bulgaria has become a very attractive destination for foreign investors, most of which invest in real estates. Reputable market researchers has described Bulgaria’s property market as one that has made a return for 2014 and more precisely the winter sports resorts that the country is becoming increasingly famous for.

According to latest researches, Bulgaria’s ski resorts such as Bansko and Borovets are now amongst the most affordable in Europe and therefore very popular. Moreover, with the credit crunch and high inflation in whole Europe, the affordability of Bulgaria makes it extremely tempting for tourists. Moreover, there are still undiscovered tourist and property investment destinations here such as Purshevitsa in the Vratsa Mountains (in the West-North Old Mountains Chain) as well as Berkovitsa and Belogradchik, which compare to areas such as Bansko and Borovets winter resorts, Black Sea resorts and the capital Sofia are still very cheap.

Most of the foreign investors who have already bought investment properties in Bulgaria expect to be able to rent them out and receive a good annual return on their investment. There are also such investors who have merely purchased properties with the intention of selling them in a few years time and receive a profit on their investment capital. Nevertheless, owning a property in a foreign country has its downsides and could sometimes be a discouraging experience for buyers in case that they do not obtain a good legal advice and professional assistance.

Therefore, if you are looking to invest in a Bulgarian property you should obtain a legal advice before signing any preliminary agreement as this could save you a lot of trouble later.

On the other hand, if you have already bought an investment property in Bulgaria and you are looking to rent it out, you can either let it out yourself or use a management company to do the work for you. If you choose the second option, you must use an independent Bulgarian solicitor who will draft a comprehensive management contract and maintenance agreement for you, or carefully check the clauses of the contracts proposed by your chosen management company.

There are two types of standard management contracts that are usually used by management companies and owners.

The first type is a management contract, under which terms the management company acts as a tenant of the owner and sublets the property to third parties. In this case, the owners usually get a guaranteed rental income from the management company. On the other hand, any rental arrangements between the management company and third parties to whom the company sublet the property are not subject to the management contract in question.

The second type of standard management contract consist of such terms that require the management company to rent the property out to third parties on behalf of the buyer in return for a percentage based commission on the received rental money. In such event the owners get as much income as it is received from renting of the property minus the agreed with the management company commission.

An important thing which the owners should think about, is the maintenance of the property. A maintenance agreement can be either concluded with the management company or with a different company but in such case the terms of the maintenance contract has to interact with the terms of the management agreement.

For further information and assistance with Management and Maintenance contracts please contact Neli Norrish on neli.norrish@psi-law.com