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Debt Conversion Program: Guidelines for Bulgaria

1. Definition of foreign person
 

V. LEGAL FRAMEWORK FOR DEBT CONVERSION PROGRAM

There is no law on securities in Bulgaria yet and the active legislation does not contain any systematic provisions for their acquisition. The possibilities and procedures for acquisition of securities by foreign persons are envisaged in the Law on Economic Activity of Foreign Persons and on Protection of Foreign Investment [(LEAFPPFI) State Gazette, Number 8, January 28, 1992 )]. Governing are also certain texts of the Law on Banking and Credit Activities, some Regulations of the Bulgarian National Bank, some Ordinances of the Ministry of Finance, etc.

Given the lack of complete and systematic legal framework and principles for acquisition of shares and government securities by foreign legal and natural persons, it is necessary to review the legislation that is in place today in order to clarify the governing basis for debt for equity conversions.

  • According to Art. 2 of LEAFPPFI the legal definition of foreign person is as follows: a legal person registered abroad; a partnership which is not a legal person and is registered abroad; a natural person who is a foreign citizen with permanent residence abroad; a Bulgarian citizen who holds another citizenship and has chosen to be treated as a foreign person under the foregoing law.
  • It should be noted that there are also other normative documents which define the term foreign person in a more or less different manner from the above mentioned. The definition contained in the Transactions with Currency Valuables and Currency Control Act ( TCVCCA ) could also be relevant, but only in the event of foreign currency transactions. According to Art. 3 (E) of the TCVCCA, Bulgarian securities are treated as foreign currency valuables, when subjected to export or import. Applicable to such cases could be the broader definition of foreign person contained in the TCVCCA, Art. 5, para 2, (A and B), which is treating as foreign persons also all persons that left the country more than six months ago or did so with the intention to settle abroad, the foreign embassies, consulates, trade agencies, etc. , international organizations, the members of these institutions, their families and foreign employees.
  • The general principle of the law is that all transactions and actions with currency valuables are subject to control by the Ministry of Finance and the Bulgarian National Bank, and in order to carry out such activities, persons should be licensed by the Ministry of Finance unless otherwise provided by a law or decree of the Council of Ministers. This is a good reason to consider LEAFPPFI to be the governing law as of the moment of acquisition of shares and government securities by foreign legal and natural persons, and to apply also the TCVCCA in the event of their export or import.

2. Definition of foreign investment

  • The legal definition of foreign investment contained in Art. 9 of LEAFPPFI refers to any investment by a foreign person, including a sole proprietor or a branch, or by a firm with foreign participation exceeding 50 percent " in stock and interests in commercial firms, in bonds, treasury bonds and other negotiable instruments issued by the State or Bulgarian juridical persons.

3. Foreign participation in privatization

  • Article 17, para 1 of the Law on Banking and Credit Activity (related to Ordinance #7 of the Bulgarian National Bank (BNB), para 1, item 4 of the Additional Provisions, which define business-related persons) provides the general regulations for Bulgarian citizens and local persons, which is also applicable to foreign persons with certain restrictions and additional requirements. Local or foreign persons as well as business-related persons - spouses or relatives, direct or lateral to third degree inclusive - cannot acquire, directly or indirectly, shares in a local bank which give them over 5% of the total votes in the general meeting of shareholders.
  • Although the size of the foreign participation in newly established or existing companies is not subject to limitations ( Art. 3, para 3 of the LEAFPPFI), Art. 5, para 3 of the same law stipulates that foreign persons or companies in which the participation of a foreign person (directly or through other companies with foreign participation), is sufficient to provide majority in the decision-making or to prevent the decision-making, shall apply for permission in certain cases.
  • Foreign persons can participate also in the privatization of state-owned and municipal companies, including acquisition of shares owned by the state or the municipalities as per the Law on Transformation and privatization of State and Municipal Enterprises (State Gazette #38/1992, amended #51/1994). The law explicitly provides that all legal and natural persons can participate on equal basis in the privatization process, except for the cases provided by Art. 5, para 1. Foreign persons are not explicitly envisaged but according to the provisions of the above mentioned law they are excluded from the list of persons enjoying preferential participation, namely Bulgarian citizens with permanent residents in the country (Art. 5, par. 2, 3). They are also excluded from the privatization through investment vouchers, provided by Chapter VIII of the law. The right to such vouchers is given only to Bulgarian citizens with permanent residence in the country and over 18 years of age as of the registration deadline for the vouchers (Art. 47, para 1). The law does not envisage the possibility for transfer of the vouchers as registered securities. Perhaps with the adoption of an ordinance of the Council of Ministers and a law on the privatization investment funds, the regulation of privatization through investment funds would be made more precise. For the time being there are no concise legal provisions on this matter.

4. Foreign exchange regime for foreign persons According to Art. 15 of LEAFPPFI a foreign person can open bank account and make deposits in foreign exchange and in leva , dispose of shares, bonds and other securities. Transactions of a foreign person, carried out through a branch or as a sole trader, are subjected to the same regulation as for the local persons.

Furthermore, according to Art. 13, para 1, for the repatriation of investment income, received in leva, foreign persons have the right to purchase foreign exchange from Bulgarian commercial banks (Para 1). The repatriation is possible after submission of a tax deduction declaration (Para 2).

Decree #15 of the Council of Ministers of February 8, 1991 on the changes of the foreign exchange regime and its latest amendments stipulate for all payments on the territory of the country to be carried out in leva (Art. 1, para 1) and imposes some restrictions on the payments and remittances of local and foreign persons abroad in the event of indirect investment ( the term "indirect investment" itself is to be clarified). These transactions can be carried out only by permission from the Bulgarian National Bank, concurrent with the Ministry of Finance, and when the payer is a state company or a company with more than 50% state participation, concurrent also with the relevant body executing the right of the state as an owner of the capital (Art.3, para 3, item 1 and para 4)In the event of export or import of securities, applicable is the foregoing definition of a foreign person as per the TCVCCA, namely that in such cases transactions are subject to foreign exchange control.

5. Acquisition of non-registered securities

  • Acquisition and payment of non-registered securities (treasury bonds and long-term bonds) is regulated by Ordinance #5 of the Ministry of Finance and the Bulgarian National Bank. The ordinance does not specify whether foreign persons can participate on the primary market, where public securities are acquired at auctions organized by the Bulgarian National Bank. Since Art.3, para 6 envisages as possible participants both concrete institutions (like State Insurance Institute - DZI, State Savings Bank -DSK, the commercial banks) and financial institutions (financial houses and brokers that meet the requirements of the Ordinance), it could be assumed that foreign persons are also included. Furthermore, the definition of foreign investment includes also investment in other securities issued by the Bulgarian state or by Bulgarian legal persons. However, since non-registered securities are auctioned by the Bulgarian National Bank on behalf and for the account of the state and on the basis of a contract with the Ministry of Finance, the latter, as an issuer, shall grant special permission to foreign persons to participate on the primary market.
  • The ordinance does not contain any special provision or a ban on the acquisition of public securities by foreign persons on the secondary market, so following its regulations, it is possible to transfer public securities to foreign legal and natural persons. In this way public securities can be acquired through commercial banks, financial and brokerage houses and on the First Bulgarian Stock Exchange - the commission on the exchange is 0.002% of the transaction cost, with a minimum transaction amount of 5000 leva.

6. Taxation

  • The Law on Taxation stipulates that foreign persons that receive income in the country shall also register for taxation (Art.5, item 3). They register with the tax office on the territory where the income was generated or the investment was made (Art.6).
  • Taxation of incomes from commercial and public securities is applied pursuant to Decree #56 on Economic Activity. As provided by the latest amendments of Art. 109, para 1, income from shares, dividends, interests, etc., derived by foreign persons on the territory of the country, is levied at 15%. Para 2 of the same text provides the possibility of tax exemption in the cases when the dividend drawn is used to purchase shares or bonds in the country. At the same time, companies with foreign participation that receive dividends from shares and income from equity participation as provided by the above mentioned decree, shall pay profit tax equal to 10% of the gross amount of the dividends received.
  • Foreign persons performing independent business are taxed at 40% (Art.108 of Decree #56 on Economic Activity ). Under the Law on Interests, Taxes, Charges and Other Similar State Receivable unrequited taxes are charged with interests in the amount of 1/360 of the base interest rate for the period plus 0.05% for every day of default.

 7. Registration of foreign investment

  • All foregoing cases are liable to the regime of obligatory registration of foreign investment and the changes that occurred within 30 days of their performance, which is done at the Ministry of Finance in a manner provided by Art.11 of LEAFPPFI and Instruction #1 of the Ministry of Finance on registration of foreign investment - published in State Gazette #43/1992. The instruction stipulates that any foreign person failing registration of his investment or presenting false information at registration shall be fined to the extent of 1/10 of the unregistered investment.
  • Though the LEAFPPFI eliminates the requirement for government approval of most foreign investments, registration with the Ministry of Finance is required. It is imposed primarily to facilitate administration of the special foreign exchange repatriation rights provided for foreign investors under Art. 13. If foreign investment were not registered, it would be difficult to ascertain whether a particular foreign person or firm was entitle to purchase and transfer abroad foreign exchange under the Law. However, foreign investors may face other registration requirements imposed by other laws on domestic and foreign investors alike. This is the case with respect to the Law on Commerce - sole proprietors, partnerships and companies, including branch offices, must register with the District Court. Registration involves filing an application with the Court and receiving permission to operate under the proposed form of organization.

9. Competent authorities

  • The Law on transformation and privatization of the state and municipal enterprises of 23 April 1992 (SG No38 of 1992, amended SG No51 of 1994) defines the authorities that are empowered to carry out privatization transactions.
  • State-owned enterprises are under the jurisdiction of the Agency of privatization, while the municipal ones - under the respective municipalities.

The competency varies depending on the book value of the fixed assets of the enterprise: when it is more than Lev 70 mn - the decision for privatization and the transaction are under the authority of the Agency for Privatization; when it is less - it is the respective branch ministry.

 

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