EU FDI Legal Framework as applicable in Bulgaria

11 January 2024

Renewable energy, Corporate Clients

The European Union’s foreign direct investment (FDI) landscape shifted significantly with the adoption of the EU FDI Regulation (Regulation) in 2019. This established minimum requirements for Member States on FDI controls, cross-border cooperation in respect of FDI control, and information-sharing among Member States and between them and the European Commission.

EU FDI Regulation Overview

Sensitive Sectors

In force since October 2020, the Regulation is applicable only when there is a risk to security and public order due to a FDI and does not create an EU-level FDI screening regime. The Regulation provides a list of sensitive sectors which the Member States may wish to consider. 

These include: 

  • critical infrastructure (itself encompassing energy, water, health, transport, media, data processing or data storage, aerospace, defence)
  • critical technologies, and
  • dual-use items (i.e., those with both defence and non-defence applications). 

The Regulation does not define critical technologies. However, it provides examples, listing: artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies. It may be that which technologies appear critical will change from one time point to another, but this is not clear from the Regulation.  

Also covered by the regulatory framework of the Regulation are supplies of critical inputs, protections for sensitive data access and control and freedom and pluralism in the media. 

Investments within the sensitive sectors are expected to prompt careful consideration of their impact and whether the foreign investor is government-controlled, which are separate criteria for scrutiny.

The above mentioned list of sensitive sectors is neither exhaustive nor mandatory for the Member States. It is up to each Member State to decide whether they wish to assess the effects of FDIs on all of these sectors, to add further sectors or limit the number of sectors. 

Foreign investor

When assessing the likelihood of an investment to affect security or public order, the Member States and the Commission may take into account whether the foreign investor is directly or indirectly controlled by the government of a third country, including through significant state-backed funding or ownership.

‘Foreign investor’ is defined as any third country natural person or an undertaking of a third country, intending to make or having made a foreign direct investment. ‘Third country’ is EU speak for a state that is not a Member State of the EU (thus including Russia, China, Ukraine, Turkey, but also Japan, Australia, the UK and USA). 

The Regulation does not introduce a qualifying threshold or quantitative factor in regard to the investment, but such thresholds can be introduced at national level (and the Bulgarian legislative proposal described below has proposed size criteria). 

Cooperation mechanism in relation to FDIs

The Regulation introduces a member state cooperation mechanism in relation to FDIs.

Firstly, notification obligations are imposed on Member States, requiring them to inform both the Commission and the other Member States of any ongoing screening of a FDI. 

In instances where a Member State believes that an FDI, either planned or completed in another Member State, has the potential to impact its own security or public order, or possesses relevant information regarding the FDI, it may provide comments to that other Member State. The comments should be sent to the Commission simultaneously.  

Subsequently, the Commission is mandated to inform all other Member States of the provided comments and has the authority to issue its own opinion (in case the FDI is likely to affect security and public order in more than one Member State or the Commission has relevant information relating to the FDI). The Member State which has received the comment(s) and/or opinion is obliged to give them due consideration.

A Member State can request an opinion from the Commission or seek comments from other Member States. The Commission provides an opinion if requested by at least one-third of the Member States.

Commission’s opinion in case of Union interests

The Commission may also issue an opinion if it considers that an FDI is likely to affect projects or programmes of Union interest on grounds of security and public order.  These encompass initiatives with significant EU funding or covered by EU legislation related to critical infrastructure, technologies, or inputs. The Annex of the Regulation lists the projects of ‘Union interest’, amongst others those include European GNSS programmes (Galileo & EGNOS), Horizon 2020, Trans-European Networks for Energy (TEN-E), Trans-European Networks for Telecommunications, etc. Such an opinion should be sent to the other Member States. Member States are obligated to consider these opinions and provide an explanation if the opinion is not followed.

National FDI Screening Processes

Member States have responded to the Regulation by adopting or updating FDI control measures. The Regulation’s influence has extended the duration and complexity of national FDI screening processes, where they might have existed before. As explained above, increased obligations for Member States to consider opinions from the European Commission and other Member States’ comments amplify the scrutiny on security interests.

Bulgaria’s FDI Legislative Amendment Efforts

Bulgaria is working on amending its Investment Promotion Act, to establish an FDI screening system, having previously been entirely open to all investments. The legislative amendment proposal of the Investment Promotion Act (Proposal) is currently in the course of a second parliamentary reading. 

The screening process will be overseen by a newly established national FDI Screening Council (FDI Council). As at the date of this article, the FDI Screening Council will have the authority to allow or refuse an FDI. If the FDI fulfils the below criteria, then such an investment requires approval by the Council: 

  1. The FDI falls within the Regulation sensitive sectors as outlined above. 
  2. The investor will acquire ownership of at least 10 % of the capital of the undertaking which operates in Bulgaria; OR
  3. The investment exceeds EUR 2 million within two years of starting work on the investment project; OR is below the threshold, but is likely to affect security or public order in Bulgaria;
  4. Ownership or board seats of the foreign investor are held by a state outside the EU;
  5. The investment is not in a micro-enterprise, a start-up company with less than ten employees or with an annual turnover in the previous year of less than EUR 2 millions;
  6. The investment is made in a high-technology company, irrespective of the company’s annual turnover, employee number or investment threshold.

The Proposal defines a direct investment as an investment of any kind by a foreign investor, aimed at establishing or maintaining lasting and direct ties between the foreign investor and the entrepreneur or the undertaking to whom or to which the capital is made available in order to carry out economic activity in Bulgaria. This includes investments, which enable effective participation in the management or control of the company carrying out an economic activity. Foreign direct investment is also the expansion of an existing investment. It is unclear whether investments are other than financial capital (eg, human or social capital). 

The Proposal excludes passive/portfolio investments from the definition of FDI.

EU FDI Regulation Review

The European Commission is contemplating revisions to the Regulation.

For any inquiries or legal assistance related to the EU and Bulgarian FDI legal frameworks, the dedicated team at New Balkans Law Office is at your disposal. Reach out to us via our contact form on the website or by sending an email to [email protected].

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