The New Act
A new law (the Limits to Cash Payments Act 2011 (“LCPA”)) was enacted on February 22, 2011, and is already in force. LCPA mandates that payments must be made either by bank transfer, or by a deposit into a payment services provider’s account followed by an onward payment from that provider’s account to the intended beneficiary.
The LCPA applies to all payments in excess of Lv 15,000 (some €7,670) or their equivalent in another currency.
The prohibition is intended to catch also series of contractually linked payments (eg, a series of instalments of the purchase price of a property, or a series of monthly rental payments on a property). Although each payment may itself be below the threshold, when together they exceed Lv 15,000 (€7,670) the payments are caught by the LCPA. All payments under the contract would need to be made in the prescribed manner, starting with the first of the instalments.
The following are expressly exempted:
- withdrawals and deposits of cash out of/into one’s own current bank account(s) as well as accounts held by certain dependants or persons in the care of the drawer/depositor (payments in and out of the bank account of any other persons need to be made by bank transfer from another bank account);
- transactions by those trading in foreign currency;
- certain transactions with the Bulgarian State;
- employment and related remuneration;
- payments by cheque or payments in lieu (datio in solutum).
The stated aim of the Act is to channel into the formal economy payments now in the grey economy. By encouraging transparency in respect of transactions, the government also hopes to increase tax revenue. (See the Directions issued by the Ministry of Finance on the application of the Act (in Bulgarian only).
The penalties for breach of the new rules are staggering: 25% of the amount transacted where the offender is an individual, and 50% of the amount where legal persons are concerned, with the fine doubled for second and subsequent violations.
The penalty is borne by the payor and/or by any person who permits a breach to occur (it remains to be seen how far the courts would recognise accessory liability for those that may be said to have merely permitted by not facilitated a breach).
An overseas seller/buyer of a Bulgarian property would be affected by the new Act in relation to the purchase money where the purchase money is paid entirely within Bulgaria. Because of the requirement of Bulgarian property law that property transactions be completed at local notary offices, this would generally apply to purchase monies, except where the buyer and seller agree to exchange it outside of Bulgaria (before or exceptionally, immediately after, the property sale).
However, rent paid in cash by a renter of a Borovetz chalet to its owner at a meeting in Birmingham would not be affected by the Act.
Payments due to anyone who is not an employee within the terms of the Bulgarian Labour Code (eg, a shareholder receiving a dividend) must, going forward, be transacted through the banking system where they are deemed to have occurred in Bulgaria. Companies would need to ensure they are compliant when remunerating staff or distributing to shareholders.
The practical effect of the Act is yet to be assessed. In residential and holiday property transactions, a large percentage of which used to see the bulk of the purchase price exchanged in cash, the law is likely to have a noticeable effect and may have the welcome consequence of providing better quality data on this market and increasing tax compliance. However, buyers and especially sellers bent on avoidance have historically used a number of avoidance techniques which may now be revived/adopted widely. These may have the further effect of raising the legal transactional risks (eg, a part of the price being paid as a fee to an offshore entity).
As with similar proscriptive initiatives, the LCPA may have a moderate effect given the persistence of the culture it attempts to change, while in the meantime generating substantial work for businesses and individuals looking to ensure compliance.
The Act would possibly make the enforcement and verification tasks of National Revenue Agency officials easier – taxpayers would no longer easily be able to plead loans, consultancy fees and similar (at least where said to have been paid domestically) as means of explaining income or outgoings – at the risk of a steep fine for failing to evidence these through banking transactions.
Stopping the improper use of insolvency proceedings
A client of our dispute resolution team (led by Kamen Shoylev and Yordan Neshkov) was recently the subject of an indirect claim by a Bulgarian bank with which this client has been engaged in a multi-stage dispute. Unusually, the bank acted through a vehicle registered in an African state, which made an unfounded claim in the tens of millions of euros against our client and sought the commencement of judicial insolvency proceedings against this client. The offshore vehicle was chosen to isolate the bank from liability and create certain evidential difficulties for our client's representation.
NBLO succeeded in terminating the insolvency proceedings, with direct loss fully awarded to our client. A second claim to recover our client's indirect losses is currently under way.
Where targeted in this way through insolvency proceedings, a company may be prevented from trading properly (e.g., by suffering restrictions on its financing or being unable to participate in public procurement).
Through our considerable experience in insolvency litigation, both entirely domestic and where there are European and cross-border elements, we are ideally placed to assist clients in resisting such attacks and recovering the real and considerable losses that may be suffered.
© New Balkans Law Office 2018