Changes in the Investment Promotion Act

The Bulgarian economy suffered a dynamic development in recent years.  Due to the low tax rates, favourable geographical location and the EU membership, Bulgaria has become a preferred destination for investment and development of new industries that were either stagnant over the last two decades, or have been lacking in resources for their development.  With the accession of Bulgaria to the EU and the two-way opening markets, the economy has undergone rapid development, with both abrupt rises and recessions.  However, in the view of the shaky economy in the world, the country currently has one of the smallest deficits in Europe and relatively low external debt to its own GDP.
 
In the past year, the number of the mergers and acquisitions, as well as their size, decreased compared to 2011.  The main transactions were in the areas of agriculture, telecommunications, food and energy.
 
In order to overcome the decrease in the investment activity, the Bulgarian government amended an important law for the foreign investors – the Investment Promotion Act ("IPA").
 
The changes in IPA can be divided into four main groups:
 
Optimisation of the Procedure for Certification through Decentralisation & Extension of the Powers of the Municipalities for Investment Promotion
 
Changes of IPA aim to enable the municipalities to encourage the investments in their own region, taking into account their specific needs.  In this respect, the law enables the mayor to issue a municipal certificate for investment class "C", which threshold for certification is less than the minimum for class "B", for investment projects in the respective municipality.  The incentives for projects with certificate class "C" are:
 

• Individual administrative services including shorter terms for the services provided by the municipalities;
• Providing ownership or limited real rights without tender over real estates which are private municipal property.

 
Entering Of Additional Criteria for Certification of the Class of the Investments – Number of Newly Opened Jobs
 
The amendments to the IPA change the criteria that should be met by an investment project to receive investment class certificate.  In the current legislation there were two criteria that the priority investment projects had to meet cumulatively – the investment amount and the number of new jobs supposed to be opened.  The amendments provide that the two criteria could move in inverse proportion, giving priority to the creation of new jobs – lower investment, but generating higher employment.  This will allow certifying projects in the services sector, where the amount of the investment is not high, but the generated employment is significant. 
 
Introduction Of A New Incentive Measure – Reimbursement Of The Part Of The Obligatory Social Security Payments From The Investors, As Employers For Certain Periods Of Time
 
Another important change is the introduction of an incentive measure, which represents partial reimbursement of investors’ obligatory social security payments for employees occupying new jobs.  It will be applied to high-tech projects, or those implemented in areas with unemployment rates, exceeding the average for the country.  The measure is applicable to small, medium and large enterprises and aims to create long-term employment - at least 3 to 5 years as of receiving of the financial aid. 
 
This measure should be distinguished from similar measures, focused on financial support for construction of public technical infrastructure.  Usually, need for such infrastructure have production companies or industrial investors planning to construct new or to expand existing facilities.  The new measure is primarily targeted towards the service sector, which generates more jobs.  The measures for financial support for construction of public infrastructure and the above described new measures could still be applied to industrial sector projects, but now the investor can take advantage of only one of them, appreciating his own specific needs. 
 
The new measure itself represents free financial support for the investor to the amount of the already paid contributions for each employee appointed at newly created job.  In addition to the criteria for innovation or for a region with a high unemployment rate, the projects should qualify also for investments which can obtain regional aid.  It should be noted, however, that limitations of the maximum amount for financial aid per employee, and the period to which the measure will be applied are provided in the law.
 
In order to recover part of the obligatory social security contributions, the investor must meet cumulatively the following conditions:
 

• the investment is completed on time and the amount is verified through financial statements in accordance with the Accounting Act, certified by a registered auditor;
• the number of the newly opened jobs created is not less than the specified threshold;
• the annual salary of the employees in the enterprise should be higher than the average national salary for the respective business in which the investment project is implemented, according to the National Statistics Institute, etc.;
• the investor has actually paid all due social security contributions, verified by document issued by the National Revenue Agency.

 
Additional Measures Related to the Opportunity for Foreign Investors to Acquire the Right to Stay In Bulgaria & to Obtain Bulgarian Citizenship In Connection With Investment Projects Implemented in the Country
 
Sometimes the possibility for gaining right for temporary or permanent residence in Bulgaria, including the ability to acquire Bulgarian citizenship, proves to be a key element of the investment plan.  The amendments in IPA create a new chapter referring to the Foreigners Act ("FA") and the Bulgarian Citizenship Act ("BCA"), in which chapter additional measures for acquiring residence right in Bulgaria and Bulgarian citizenship in connection with investment projects implemented in the country are provided for foreign investors. 
 
The changes are associated with the expansion of the policy to encourage investments and to create opportunities for: a) equity owners, managers or procurators, key positions employees in case of performance of certified investment project; b) owners of capital (50%) in a Bulgarian company, which have made investments under the IPA and created employment above certain thresholds in certain economic activities when there is no certified investment project; c) individuals who donated at least BGN 200,000 to the National Innovation Fund to be able to acquire long or permanent residence under the FA:
 
There will be also an opportunity for acquiring Bulgarian citizenship under BCA, after assessment of the merits of the candidates in the economic sphere by covering some criteria related to implemented investments and opened new jobs.
 
In general, the new measures aim improving the investment climate in Bulgaria, development of new sectors of the economy, sustainable economic development and addressing the high unemployment in some municipalities.  Investors will be able to enjoy a number of privileges, especially if their country is not a member of the European Union.
 
The expected results are:
 

• Restoring of the levels of the foreign direct investments accounted for before the global economic crisis;
• Economic growth;
• Increasing of the share of the investment as a percentage of GDP
• Maintaining of a strong external financial position of the country;
• Creation of highly qualified employment and sustainable reduction of unemployment;
• Encouragement of the economic activity in slow regions and reduction of the regional differences in the country;
• Enhancing the role of the local government to carry out the policies for investments promotion.

 
Dimitrinka Metodieva is a member of Sofia Bar Association and partner in Gugushev & Partners law office.  She is head of the Corporate Department of the law office and advises clients on wide range of corporate and corporate finance matters.  Her experience includes advice on M&A transactions, private acquisitions and disposals and joint ventures.  Dimitrinka may be contacted at +359 2 815 75 10 or alternatively via email at dmetodieva@gugushev.com
 
Victor Gugushev is an associate in Gugushev & Partners Law Office.  As a member of the corporate department, Victor has been actively involved in acquisitions and investments for national and international clients.  He is regularly counselling clients on the formation, organisation and operation of domestic partnerships, limited liability companies and joint stock companies.  Victor may be contacted at +359 2 815 75 10 or alternatively via email at VGugushev@gugushev.com