The liability of individuals under the Bulgarian Prevention of Money Laundering Act

Introduction

This Note is aimed at:

  • in-house legal counsel/legal teams
  • directors/senior management
  • other persons with compliance responsibilities.

It analyses the potential liability of the individuals connected to obliged entities (within the meaning of the EU money laundering directives) but does not deal with so-called regulated entities (banks, advisors, intermediaries and other professionals tasked with enforcement duties in AML terms).

Executive Summary

This Note discusses certain liabilities for individuals in connection with anti-money laundering (AML) legislation in Bulgaria, including the Prevention of Money Laundering Act 2018 (PMLA). We examine four groups of potentially affected individuals:

  • Obliged entity beneficial owners
  • Entity directors or managers
  • Senior management officials specified in lieu of beneficial owners
  • Local contact persons

Under PMLA, obliged entities must acquire and file information on their “beneficial owners”. Notably, this category may include those who are legally not owners at all.

In our view, the duties of acquiring and filing information on beneficial ownership belong to the obliged entities themselves and are not duties of the “beneficial owners” themselves. However, once an entity is found in breach, its director(s) or other manager(s) may also incur liability for the entities’ failures.

Where the obliged entity has not been able to identify with sufficient certainty a beneficial owner, the default obligation of the entity is to nominate a “senior management official” whose details are filed instead. We feel that such officials are likely to be immune from liability (but note some risk and advise that developments in this area need to be monitored).

Entities must also appoint local contact persons where none of the directors are permanently resident in Bulgaria. These are individuals who do assume duties and are subject to certain liabilities as described in more detail below.

The question of personal liability

The PMLA implemented in Bulgaria the EU’s Fourth Anti-money Laundering Directive (MLD4). The PMLA imposes a number of obligations on companies and certain other entities collectively referred to as “obliged entities”. These include identifying an entity’s own “beneficial owners” and collecting and filing certain information. We deal with the obligations of the enties in a separate Note.

The question arises what, if any, is the personal liability of the various types of individuals connected to obliged entities or whom the obliged entities nominate as local contact persons (as they are obliged to in some cases)?

Obliged entities vs regulated entities

In the MLD4 framework and therefore in the PMLA, various duties are imposed on entities referred to as “regulated entities” and defined in s 4 PMLA. These include banks and other regulated financial providers; notaries; lawyers; real estate agents, and multiple other categories. Multiple provisions of the PMLA (both in its Chapter 10 and elsewhere) expressly create liabilities for certain individuals connected to regulated entities in the event of their non-compliance.

It is unlikely that this statutory liability would be applied by analogy to individuals involved in obliged entities.  In the first place, regulated entities are generally given a much bigger role in MLD4’s scheme and tasked with AML enforcement. They report suspicious activity observed in the course of their business and/or professional activities and must comply with certain standards of conduct. The duties of the obliged entities are instead more modest – focused on the collection, maintenance of, and filing of information about themselves. Having said this, we examine specific categories of individuals connected to obliged entities in more detail.

As to the obligations of regulated entities, we address these elsewhere. For the avoidance of doubt, we also do not here consider the duties regulated entities may have as obliged entities.

Is a director of an obliged entity personally liable to identify and disclose the beneficial owner?

S. 61 of PMLA states that obliged entities and contact persons are obliged to receive, avail themselves of and make available appropriate, current and accurate information regarding the individuals who are “their owners”. Strictly this is an obligation for the entities and contact persons and not for directors or other management. However, the liability of Directors may potentially be engaged as a director may be personally liable for violations which he/she has ordered or permitted to take place (known as допустителство). S.116 PMLA, dealing with penalties for non-compliance, includes not only failure to comply but also the act of allowing a violation to occur. 

One filter for the extent of this duty is the established case law principle that the main duty bearer (here, the obliged entity) must be held liable before the director is.

What is the liability of a ‘beneficial owner’?

Do beneficial owners need to assist the obliged entities in identifying them as the beneficial owners? If so, do they owe a duty that is parallel to the duty of the company or other entity to be identified? In our view, the answers to these questions must be in the negative.

The PMLA does not require the beneficial owner to identify him- or herself. Rather, the duty to identify is that of the company or entity. For all intents and purposes, the beneficial owners are not directly involved in the operation of anti-money laundering law. While their ownership or control or other status as beneficial owner(s) are published as a result, they are not directly required to take steps to create this transparency.

May the beneficial owners be indirectly obligated to provide necessary information to the obliged entity to enable it to perform its own disclosure duties? It seems to us that at least a public law duty of this sort cannot be read into the PMLA.

It may be very inconvenient for the obliged entity not to have the necessary information, and if the entity is exposed to liability, that may indirectly affect the interests of the beneficial owner or controller who is presumably indirectly benefitting from the success of the entity. Yet, this liability may not always suffice to motivate a beneficial owner to cooperate in disclosure. To qualify as a beneficial owner, an individual may hold a very small percentage of the economic interest in an entity (e.g. where they hold via a chain of companies).

It may be another matter whether the beneficial owner can be said to owe a duty in delict (or tort) to the company they are a beneficial owner of, to not unreasonably cause it harm but failing to provide information. Nevertheless, at least while the company remains solvent, such duties (if they exist) would generally remain inchoate and theoretical if the beneficial owner genuinely controls the equity and in the absence of a doctrine of unfair prejudice by one shareholder against another.

Are “senior management officials” (where they are identified in lieu of beneficial owners) liable?

Is it different where the entity is unable to identify anyone who sufficiently fits within the statutory definition of beneficial owner and so is required instead to disclose a senior management official in accordance with § 2(5) of the Additional Provisions of the PMLA?

In our view, once again, the answer is in the negative.

The senior management official in this situation does not voluntarily assume liability, and does not do so as a practical matter (e.g., there is no requirement that they consent to their being indicated in the filing); like a beneficial owner they may be remote both physically and practically from the obliged entity.

What may help the opposite conclusion would be an ellision between the concept of ‘senior manager’ and that of ‘senior management official’ (both are contained in MLD4). According to Article 3(12) of MLD4, a senior manager may in the alternative be someone with a special responsibility for AML compliance at a parent entity. If the two concepts are very similar, the fact that a senior manager/senior management official is a person with AML compliance duties would appear to support an argument that such an official has a duty for AML enforcement and is therefore liable for non-compliance. However, selecting such as a senior management official someone with a separate (AML) compliance role is optional: the company may instal another senior official who has no prior responsibilities or involvement in AML matters and thus presumably is less duty bound ex ante.

This is in our view an area of law which ought to be closely watched for developments.

What are the duties and liability of a local contact person?

There is a further category of individual whose details may be the subject of a filing under the PMLA, where the obliged entity does not have a Bulgarian-resident individual as a director or other lawful representative.

Unlike a beneficial owner (whether owner proper or senior management official appointed in lieu of one), the contact person must consent to acting as such.

S 118(5) of the PMLA states that a contact person who fails to ‘perform his or her obligations pursuant to sections 61 or 62’ may be fined between €50-€500 on the first and between €100 to €1,000 on any subsequent occasion. Indeed, s 61 imposes on contact persons greater duties than on directors of the obliged entities since the contact person is obliged to ‘receive, avail themselves of and to make available appropriate, current and accurate information regarding the individuals who are “their” owners including detailed information on the rights held by them’.

Secondary obligations include providing information regulated entities are entitled to demand to them and to law enforcement agencies.

At first sight, it is unclear how a duty to receive relevant information may in fact be fulfilled. Would it be sufficient for the contact person to remain open to receiving this information (but not to take steps to source it) or do they need to solicit the information and if so - how effective must their efforts be? Is a contact person required to communicate anything to the company or its beneficial owners?  The latter does not appear to be a specifically imposed duty but on the other hand appears implicitly to be the point - the company needs a local person in order for the company to be contacted by the authorities which have a responsibility for AML. If so, a contact person may be required to demonstrate that he or she is communicating to their appointing entity any enquiries or requests made by law enforcement. It is questionable to what degree of proof and disclosure of transmission they may be placed.

Criminal offences

The PMLA contains an express reservation for criminal offences which may separately arise in respect of money laundering, but are outside it.

Keep under review

This is a fast-developing area of law and we would recommend to both obliged entities and to contact persons and other individuals who may be affected to keep aware of new developments and in particular the evolving practice and the position taken by the courts. NBLO is involved in advising in this area and we are at your disposal to advise.

If you wish to know more or have any questions, please contact us at: sofia@newbalkanslawoffice.com



New Anti-money laundering legislation in Bulgaria

Summary

In March 2018, Bulgaria adopted a new anti-money laundering (AML) statute (Zakon za Merkite sreshtu Izpiraneto na Pari, Закон за мерките срещу изпирането на пари or Prevention of Money Laundering Act) (Act), implementing the Fourth EU Money Laundering Directive (MLD4). The new Act came in effect on 31 March 2018, however certain of its key implementation will not be in place until at least October 2018.

While previous European and Bulgarian AML legislation already covered certain of the ground covered in MLD4, one of the key innovations in MLD4 and in consequence in the Act is the obligation to collect and file information on what are referred to as ultimate beneficial owners (UBOs) of companies and other entities.

Businesses operating in Bulgaria now therefore need to identify and disclose such information about themselves and international businesses must appoint local nominated contacts for the purpose. Identifying single or multiple UBOs in a given situation may be complex.

Disclosure about UBOs is likely to be required by banks, notaries, lawyers and other “obliged entities”. Listed entities may in certain circumstances be exempt.

Certain ambiguities in the text of the transposition will likely encourage an overzealous application. In anticipation of the rollout of register of beneficial ownership in Bulgaria, it is likely that businesses will in any event carefully examine their positions and prepare for the practicalities of compliance.

1. The recent Prevention of Money Laundering Act 

Bulgaria recently transposed the Fourth European Union Money Laundering Directive (MLD4) adopted in May 2015. In common with other member-states of the EU (e.g., Ireland), Bulgaria implemented MLD4 after the EU-wide deadline of 26 June 2017 had passed.

Although the Act came into effect on 31 March 2018, as we explain below further steps are needed and expected later in 2018 before MLD4 is effectively implemented.

Just as MLD4 had superseded the previous generation of EU AML legislation, the Third Money Laundering Directive, the new Prevention of Money Laundering Act (Act) substitutes in Bulgaria the previous statute of the same name dating from 1998.

As AML policy has been an active area of international and EU legislative interest, the Fifth EU Money Laundering Directive (MLD5) is already in place. This requires member-state implementation by [date].

In this Note we take the perspective of businesses generally (Regulated Entities in the MLD4 jargon). Some of the information we provide may be of help to obliged entities, defined as a now expanded list of public and private service providers including financial institutions, pension funds, investment brokers, accountants, auditors, certain government bodies and many others (Obliged Entities).

Our update focuses on beneficial ownership and the obligations connected to identifying “beneficial owners” (such  persons are commonly referred in the EU MLD jargon as UBOs), which is a key focus of strengthening disclosure obligations.

2. The obligations in respect of beneficial ownership information

Duty to collect and publish information on beneficial ownership

Post-MLD4, Obliged Entities must understand who ultimately owns and/or controls their customers.

This information must now be made available to Obliged Entities via a central register (but may also be required from a Regulated Entity by certain government agencies (FIUs)). The information on beneficial ownership helps form the basis of overall understanding of one's customers for Obliged Entities – it is presumably easier to know your customer and its activities if you know who controls or owns them – but it is also made available for enforcement as necessary.

MLD4 is a ‘minimum harmonisation’ directive, and as such member states may impose stricter requirements. Certain member states (e.g., the UK) have decided to make the disclosure available to the public through the central registers (see below).

Who collects UBO information?

In order for Obliged Entities to comply with their information gathering obligations, they must (in the absence of other sources) obtain it from their Regulated Entity customers. Regulated Entities collect and supply the information to a “central register”. In the Bulgarian case, more than one such register is provided for.

The Central Registers

Depending on the type of the Regulated Entity, the respective Central Register in Bulgaria may be:

  1. The Company Register (for companies);
  2. The Register for Not-for-Profits (for certain registered not-for-profits);
  3. The “Bulstat” Register (a residual register catering for other legal persons and certain entities lacking legal personality).

The Act requires from both Regulated Entities and from their nominated persons (see below), to obtain, hold and provide “appropriate, precise and current” information relating to their UBOs including as to the rights held and/or enjoyed by the UBOs in the Regulated Entity.

3. Definition of a UBO in the Bulgarian AML legislation

A “beneficial owner" or “UBO” is defined in § 2(1) of the Additional Provisions of the Act as someone who ultimately owns or controls a legal person or another entity, or a person or persons on whose behalf a transaction, activity or operation is carried out, subject to detail in respect of certain classes of person. The definition was intended to transpose article 3(6)(a)(i) of MLD4 verbatim. 

That an entity (e.g., a subsidiary) may be ultimately owned by a person seems understandable where this person owns or controls the parent of the subsidiary, and the parent owns 100% of the capital of the subsidiary. In practice, Obliged Entities are likely to apply this more widely – e.g., to parents who own less than 100% of a subsidiary (and to their owners in turn).

The third limb of the definition – on whose behalf an activity (or even a one-off event such as a transaction or operation) is carried out – seems vague. This is unlikely to be of practical significance though given that the first two limbs of the test are as wide as they are.

MLD4 exempts from the obligation to file with the Central Register in a number of situations. However, as the Act is unclear on the subject, the exemptions are unlikely to be as widely applicable.

One such instance of potential exemption concerns UBOs of the Bulgarian subsidiaries of listed multinationals.

The more sensible interpretation of MLD4 (which appears in the English text of MLD4), is that a Regulated Entity need not identify its UBO(s) where the UBO exercises control via an exempt listed entity. These listed entities include ones whose shares are admitted to trading on EU regulated markets or certain equivalent international ones (e.g., NYSE).

However, in the Bulgarian version of the text of MLD4 and in the Act, a different (even if counterintuitive) interpretation seems just as possible – that it is the Regulated Entity itself which would need to be admitted to trading on a relevant regulated market before it is exempt from providing the details of its UBO(s).

As a result, at least sometimes in Bulgaria, businesses may find themselves faced with demands by banks, notaries, government service providers, and competent government agencies to disclose the details of UBOs even where they ought to be exempt.

This likely unintentional divergence suggests there may be further areas of unexpected overregulation. The emerging practice of the authorities and of service gate-keeping Obliged Entities would need to be carefully observed. However, all of these are likely to err on the side of demanding more information rather than less.

Definition of control

In the scheme of the Act, someone is a UBO not only if they own a significant share of an entity (directly or indirectly) but also if they control that entity.

To define control, the Act refers to § 1c(1) of the Additional Provisions of another statute – the Commerce Act where control is what is exercised by a person (legal or natural) (“a Controlling Party”), where the Controlling Party:

  1. Holds more than 50% the voting rights in another entity; or
  2. May appoint more than half of the members of the managing or supervising body of another entity and is also a shareholder; or
  3. Has the right to influence another entity as a result of an agreement or of the articles of  association of the entity; or
  4. Is a shareholder in another entity and holds more than half of the voting rights as a result of an agreement with the rest of the shareholders.

In addition, all opportunities to influence decisively key decisions of a Regulated Entity are also treated as control (§ 2(3)).

What if no UBOs can be identified?

Regulated Entities may well be aware of the identity of the person or persons who control(s) them or they (or rather their directors and staff) may have no means of knowing.

Making enquiries with direct, known shareholders and in public sources would seem obvious approaches and may be sufficient. However, it may be that such efforts are ultimately fruitless – or that there is simply no person or persons who may be said to exercise control and therefore be UBOs within the meaning of Act.

If, after having exhausted all possible means, no person is identified, or if there is doubt that the person identified is a UBO, the natural person(s) who hold(s) the position(s) of senior manager(s) must be deemed to be UBO(s) of the Regulated Entity and then must be listed as if they are UBOs.

The legislation is silent on the situation where one individual has been positively identified as a UBO and further  individuals may be within the definition. Will the Regulated Entity in such a case still be obliged to list senior managers? Maximal compliance would appear to require this but on the other hand the purpose of such substitution seems to be to ensure that the obligation to list UBOs is not entirely avoided.

4. Nominated persons

In the different scenario where a Regulated Entity has no Bulgarian-resident directors, it must appoint a person who is a registered permanent resident of Bulgaria or a Bulgarian citizen to represent it for the purposes of its compliance obligations within the jurisdiction (Nominated Person). As we set out below, there is an associated obligation to keep the details of such a local contact person up-to-date in the Central Registers.

5. What information must be filed

The beneficial ownership information needed to be procured, held and filed with the relevant Central Register by a Regulated Entity is as follows:

1.   Information relating to UBOs who are natural persons:

  • full names;
  • nationality(ies) held;
  • (in the case of Bulgarian citizens) national ID number(s) incorporating their date of birth and for non-Bulgarian nationals - their date of birth only;
  • the country of residence for UBOs, if this is neither Bulgaria or their country of declared citizenship.

2.  Information about the legal persons or other entities through which direct or indirect control is exercised over the Bulgarian entity, i.e., the intermediate entities in the chain of beneficial ownership or control.

This includes:

  • name;
  • registered number in any national register;
  • legal form in accordance with the law of the place of registration
  • address of the corporate seat and address of management;
  • the details required of UBOs as above, in relation to corporate “representatives”.

3.   With respect to each Nominated Person, the personal details as above, except the information in 1e).

4.  All required information must be kept up to date.

5.  As above, the information gathering obligation includes details of the beneficial interests and/or rights held. There is no express obligation for this information to be filed with the Central Registers, however such obligation may be introduced in future in implementing regulations.

6.  Because of the objective of risk based regulation under MLD4 (and the Act), the information to be collected (and respectively supplied on enquiries, etc) may be wider in scope than that described in points 1-5 above.

7.  The Regulated Entity and Nominated Person may also be asked to supply further information (e.g., by an FIU).

6. Deadline for initial (and subsequent) compliance

The date on which the first filing is due is not yet set as the Act remains to be further implemented and consequential amendments in other legislation and the adoption of regulations pursuant to the Act are outstanding. The Additional Provisions of the Act envisage Central Register facilities to be made available by 1 October 2018. The implementing regulations are expected to be adopted by 31 August 2018.

The UBO information must be updated whenever it changes but there no obligation to confirm its continuing accuracy.

7. Consequences of non-compliance

Breaches on the obligation to maintain information can result in sanctions to the Obliged Entities which are considerable in quantum. The financial penalties go up to EUR 25,000 with further ramp-up for repeated or systematic violations to the range of millions of euros.

New Balkans Law Office regularly advises clients on the application of the Act.

Contact us for assistance and more information on the new legislation.

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CFC rules in Bulgaria

International tax legislation, also known as CFC (Controlled Foreign Company) rules, is applied by a number of countries as a means against the reduction of tax payments.

The various rules against tax evasion practices that directly affect the functioning of the domestic markets are outlined in Council Directive (EU) 2016/1164, also known as the Taxation Directive or the Anti Tax Avoidance Directive, that was adopted on July 12, 2016.

In Europe, CFC rules are widely applicable in the UK, Germany, Russia, France, and in various other places.

On November 11, 2018, the Bulgarian Parliament adopted changes to the Corporate Income Tax Act as per Directive (EU) 2016/1164.

The mechanism of CFC operation is as follows:

A taxpayer with a CFC company must include the company’s income when calculating the relevant tax base for the current year and pay the applicable tax in the country of which he or she is resident.

This company is considered to be a CFC, if the taxpayer, together with related parties, has a direct or indirect controlling participation in the capital, has voting rights or can share in the profit of the company; or when the tax paid by CFC is lower than the established by the legislation threshold.

Once a company is considered a CFC, fundamentally any revenue from that company should be included in the tax base of the taxpayer.

In order to avoid double taxation, states can allow the taxpayer to pay a tax credit for taxes paid by the CFC, or reduce the tax base of the taxpayer by the amount of distributed revenue from the CFC.

CFC rules will not be widely applicable in Bulgaria

Some experts identify two main problems with the functioning of the CFC rules in Bulgaria.

The first is that CFC rules do not apply to taxes of individuals. If the company is controlled by a physical person who is a Bulgarian tax resident, the Bulgarian CFC rules do not matter.

The second problem is that if a potential CFC is not subject to corporate tax in its jurisdiction, it will not be considered a CFC, and the new rules will not affect it.

If you would like more information, please contact us at sofia@newbalkanslawoffice.com



The EU citizenship option

At times when you have cause for concern over your and/or your family’s future, having a second citizenship can alleviate the pressure on you and your loved ones and create new options. Stabler parts of the world such as the European Union (EU) are associated in the early 21st century with freedom and security.

The European Union is a collection of 28 states of various sizes, bound by a body of laws which have been taking shape now for more than 60 years.  Being a citizen of one makes you automatically a European citizen and gives you equal rights to being a citizen of any.

The EU is the world’s biggest trading bloc (it accounts for just over 30% of global trade), the birthplace of the rule of law and a place with diverse culture and a pleasant lifestyle.

An investment of HK$ 4.5M in Bulgarian sovereign bonds allows investors to obtain permanent residence in Bulgaria. A second investment of the same amount after 1 year makes a permanent resident immediately eligible to become a European citizen and live anywhere in the EU 28, EEA and Switzerland.

An investment in such bonds is generally considered low-risk especially compared to stocks/shares and real estate projects in smaller markets. Government bonds are liquid and traded on international exchanges. Bulgaria has an investment grade credit rating and a debt-to-GDP ratio of 19.6%, one of the lowest in Europe. We provide this by way of information but you may wish to seek advice and to carefully consider your financial position, experience and affordability.

Bulgarian law allows for the spouse of the investor and his/her children (regardless of age) to also obtain Bulgarian citizenship.

Contact NBLO to learn more about Bulgarian citizenship by investment. Call us on: +359 2 950 6239 or +44 20 7183 0262 for more information, to request advice or to start your application process now. We are available Monday to Friday between 08:00 and 16:00 UTC/GMT and by e-mail cbi@newbalkanslawoffice.com.

You may also wish to review our explanatory notes:

Download our brochure.

Download a simplified timeline of the process.



Setting up a company in Bulgaria

In common with other EU Member States and Central and Eastern European economies, Bulgaria has a fairly simple and straightforward process for registering a company. It is a strategic place for international business ventures which is in the upper third globally for ease of doing business. As an EU Member State, it offers financial, monetary and investment stability and low legal and political risk.

Incorporators are not required to be in Bulgaria in person as registration can be completed using a power of attorney.

New Balkans Law Office has extensive experience assisting foreign private and corporate clients to expand in Bulgaria by establishing a range of Bulgarian entities which would allow them to benefit from the advantageous tax regime (10% income tax; 5% tax on dividends) and from the dynamic and reliable business environment.

Here we outline the most important steps one needs to consider when setting up a company in Bulgaria

Choosing the legal form of the company

  • Limited Liability Company - EOOD (an entity with a single shareholder) or OOD (an entity with two or more shareholders)
  • Public Liability/Joint Stock Company - EAD (an entity incorporated with a single shareholder) or AD (an entity incorporated with two or more shareholders)

If required, entities can convert from one legal form into another after they are registered.

Limited Liability Company - EOOD or OOD

A limited liability company in Bulgaria can be incorporated with a single or multiple shareholders and a single or multiple directors. Shareholder(s) and Director(s) can be of any nationality and are not required to reside in Bulgaria.

The minimum capital required for setting up an E/OOD company is just ~EUR 1.

The E/OOD is also the most commonly chosen legal form used by foreign nationals to start a business in Bulgaria.

Public Liability/Joint Stock Company - EAD or AD

A public liability/joint stock company can be incorporated with a single or multiple shareholders. There are several requirements which are more stringent than with a regular E/OOD company that need to be met before incorporation. Those are:

  • The initial share capital is a minimum of EUR 25,500, 25% of which (EUR 6,375) must be paid up on incorporation
  • A board of directors comprising of at least 3 members must be appointed

An E/AD company generally is both a more sophisticated and more prestigious form which allows to raise capital more easily. It also is a prerequisite to a listing on a regulated securities market in Bulgaria or elsewhere in the EU.

What NBLO can do for you

We will be able to prepare the requisite corporate documents and help you design a structure that will fit your purposes.

A Bulgarian company may be the ideal vehicle for your business growth. For more information please contact us at sofia@newbalkanslawoffice.com.

Please note that the New Balkans Law Office team provides company incorporation services in the UK as well. For more information please contact us at london@newbalkanslawoffice.com.



Draft amendments to Bulgaria’s citizenship by investment programme

Background

On Friday, 22 March 2019, the Bulgarian Government published a draft Bill with proposed changes relating to Bulgaria’s citizenship by investment (CBI) programme.

The draft may change significantly before it is final, or may be rejected, leaving the law as is. We comment on the proposals as they are.

The legislative process in the Bulgarian Parliament takes from a few weeks to several months, and as above, some bills are ultimately rejected. Our view is that the Government proposals will be very likely to make their way in the final draft of the law, but at least some additional options will be added in later. We expect that the scope of eligible investments that will ultimately be in place may be wider than the initial draft.

Fast track citizenship by investment to stay

If the current proposals pass, citizenship by investment will be preserved (the Government had at one point announced that citizenship by investment would no longer be possible). There will continue to be Standard and Fast Tracks, too. What will change are the investments which will be permitted.

Eligible Fast Track investments

The investments proposed to be eligible for the Fast Track from now on will make Bulgarian CBI similar to the US EB-5 visa programme.

The minimum investment will be approximately €1 million of which half may be in government bonds, equities and other currently eligible instruments and the other half - in the priority certified investment projects. A further alternative of narrower application will be available for smaller projects, where up to 8 investors per project will qualify.

What projects have been previously certified?

Since 2004, more than 130 projects have been certified by the Bulgarian Government, of which 7 are priority certified projects.

We are endeavouring to identify and to be in a position to inform potential clients of a range of current and upcoming projects. We will not be directly able to advise you on your investment decisions ourselves, but will hope to be able to inform you of and refer to all known projects and help you carry out due diligence.

Summary

If you have already submitted your citizenship application or submit before any amended law comes into effect, you should be dealt with on the basis on which you originally started. The Government has confirmed you will not be affected.

If you have permanent residence status, but are not near your citizenship application yet and the law changes before you arrive at that point, you will likely wish to consider the new opportunities.

Progress of legislation

We will gladly advise you on this further and will comment on important developments as they become known to us. Please do not hesitate to contact us via
cbi@newbalkanslawoffice.com or on +359 2 950 6239

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Why Bulgaria should retain its citizenship by investment scheme

Background

On 22.01.2019 and 23.01.2019, the Government of Bulgaria (GoB) announced intended amendments to Bulgaria’s citizenship law. These will, if passed in Parliament, abolish investment citizenship and align Bulgaria with the 17 EU member-states which the European Commission in its simultaneous report (Report) classifies as offering solely investment residence. GoB intends to introduce a draft Bill to Parliament as soon as the end of this month. It is as yet unclear when it is intended for the change to take effect.

Commissioner Jourová, sponsor of the Report, has welcome the policy turnaround.

GoB has expressly stated that this policy change is the result of an internal review carried out over 11 months by a working group convened for this reason (Working Group) and denied that it was forced by the Report. The policy change is explained as part of a drive for administrative simplification in home affairs and it is said that investment has been more anaemic than expected.

There has unfortunately been no transparency on the activities of the Working Group, its composition; evidence it has heard or used; and whether it has conducted any form of external consultation.

Bulgaria has to date allowed investment citizenship through investments in government bonds, listed shares, private companies and intellectual property since 2013.

More generally, reported problems in the area of grant of citizenship in Bulgaria have exclusively concerned completely different processes: mainly citizenship on the basis of origin through which more than 100,000 have become Bulgarian citizens.

Bulgaria’s current process

As Bulgarian legal service providers specialising in private client matters, New Balkans Law Office wish to clarify the following.

  • In Bulgaria, citizenship-by-investment applicants are subjected to much more rigorous checks than other applicants for naturalisation. Applicants are thoroughly vetted by over 15 state bodies and agencies, including the Ministry of Interior’s State Agency for National Security and the General Directorate for Combatting Organised Crime – which are specialised in financial crime including money laundering, and organised crime. Applicants pass through at least 4 stages of vetting and are interviewed by officials at least twice. The process typically takes just over 2 years giving the authorities sufficient time to perform security checks and for information on their backgrounds to be sourced.
  • According to statistical data released previously by the Ministry of Justice there are around 40 new Bulgarian citizen-investors as of mid 2018.
  • There are about 300 investors granted permanent residence.
  • To date, GoB has not invested in promoting or popularising these routes to citizenship.
  • Applicants make investments of at least EUR 512,000 each, and some double their investment to fast-track their citizenship process to 2 years.
  • Bulgaria has received investments of between EUR 150,000,000 and EUR 200,000,000 since 2014, against the background of minimal GoB effort.
  • Residence and/or citizenship by investment is offered by 20 out of the 28 Member States of the European Union and worldwide by developed economies such as the USA, Canada, Australia and Singapore.
  • It is clear that applicant due diligence functions well. If there have been only 40  approvals, this is partly due to cautious processing and to refusals for some of the candidates. There have been reported cases of individuals identified as a threat to the national security, who have been denied citizenship despite making the requisite investment.

The Report’s findings and Bulgaria

  • While covering both CBI and RBI schemes, the Report focuses on CBI in Malta, Cyprus and Bulgaria.
  • It does not call for the termination of citizenship-by-investment schemes but recommends generally robuster controls during the application process.
  • The Report correctly accepts that granting citizenship is a matter of sovereign national competence – citizenship is outside the remit of EU law.
  • Perhaps the main significant to Bulgaria finding in the Report is that the process of citizenship is insufficiently transparent - it is unclear what weight is placed on various factors in deciding to grant or deny citizenship or why certain applications take more time to process. However, this is a complaint that may be levied against all work in administering nationality and immigration matters and is not specific to CBI/RBI.
  • The complaints on the basis of particular or special risks of money laundering or organised crime appear to us unfounded and counterintuitive: investor-applicants are exposed to much more and longer scrutiny than others (see above). E.g. those forced to flee armed conflict and admitted in a humanitarian hurry or non-EU citizens joining a recently married spouse cannot be subjected to as much scrutiny as they cannot be delayed.
  • It is unclear that affluent applicants are more likely to participate in economic crime or organised crime than those who are economically disadvantaged.
  • Given the above and given that the route to citizenship has been of significant net benefit to Bulgaria, it is unclear what if anything the country has to gain from offering a concession that it has not been and cannot be requested to make.

Benefits to Bulgaria from the investment citizenship route

  • Bulgaria has received investments of between EUR 150,000,000 and EUR 200,000,000 since 2014 against the background of minimal GoB effort.
  • Some of the investors (in our experience as much as 25%) have actively explored or started new business ventures in Bulgaria alongside their investment in Government bonds. The bonds serve as a low risk, taster investment as all investors visit Bulgaria and are able to explore its business opportunities.
  • An important intangible benefit is that the programme advertises Bulgaria to investors and entrepreneurs who would not otherwise associate with the country and diversifies Bulgaria’s investment base.
  • All investors and their family members pay state fees. The 400 investors to date have contributed around BGN 2,000,000 in fees to the GoB budget.
  • Investors are also required to make health insurance contributions, although they rarely draw down on the national health insurance fund. This is a direct surplus to the national health care system that helps other Bulgarians.
  • The government bonds which are currently the favoured investment instrument choice allow Bulgaria to raise funds more advantageously in the international markets. The funds thus raised can feed projects designed to bolster the economy including (if so desired) manufacturing (e.g., through training schemes, infrastructure funding (within the limits of state aid rules)).

Who are the typical investor-citizens?

According to GoB data, about 45% of investors are Russian or Russian-speaking citizens of the former USSR.

In our experience and understanding, these people are not wealthy oligarchs, most are entrepreneurs. Investing in government bonds is a way to save money while planning for the future and for their children and avoiding the difficulties of travel on a low-prestige passport.

Passport desirability as a resource?

The Bulgarian passport has only recently become desirable and given that Bulgaria boasts relatively fewer natural resources, it seems to us that given that security requirements are maintained, a viable CBI scheme can only help increase Bulgaria’s attractiveness.

Equally, if Bulgaria is perceived to respond to general Report recommendations by  urgently renouncing its national policy, there is a risk of loss of prestige including among its European partners.

At the same time, it seems to us right for Bulgaria to optimise and adjust its CBI law as its economic circumstances change. If the move by the GoB helps open an informed discussion of what form of investments are best and how they are best utilised, this would be welcome.

If you have any enquiries about the topic, please write to us at CBI@newbalkanslawoffice.com or via our Contact Us page.



200 applicants to obtain Bulgarian citizenship by investment

Bulgaria’s citizenship by investment programme was introduced in its current form in late 2013. In domestic terms, the key innovation was to permit permanent residence leading to citizenship based on an investment of BGN 1,000,000 (approx €512,000) and expedited processing of 2 years where an investment of BGN 2,000,000 (approx €1.02m) was made.

While highly competitive compared to other EU citizenship routes, Bulgarian citizenship by investment has not been promoted by the Government of Bulgaria.

This slowed take-up but there is now evidence of organic and likely sustained demand growth and of an adequate administrative capacity to process applications.

As of September 2018, the cumulated total of applications for citizenship by investment in Bulgaria stood at 193. 95 of these were Standard Track and 98 – Fast Track.

Since the Standard Track requires applicants to hold a residence permit for at least 5 years, most standard applications are only beginning to be eligible.

An average of 18 applications were submitted via Fast Track annually between 2013-2017. In 2018 the annual application rate doubled to 35 on an annualised basis.

Applicants from the Middle East and the ex-USSR make 77% of the Fast Track applications, with most applicants being from Russia. This may be connected to the close cultural connection between the two countries and Bulgaria’s familiarity to Russians.

Around 64% of all Fast Track applications made have been approved by the Ministry of Justice so far.  The majority of the remaining Fast Track applications were filed in 2018 and cannot be expected to have reached approval.

The final checkpoint in the process, the Vice Presidential decree, has been passed by 50% of the applications approved by the Ministry of Justice. In another positive sign about improved administrative capacity and procedural familiarity, the data shows that so far in 2018, the Vice President’s office has granted as many citizenships as in the previous 4 years combined.

This information tends to demonstrate that the Bulgarian citizenship by investment is highly competitive compared to other EU countries.

Comparing to Malta, EU citizenship can be obtained within roughly the same timeframe, but with a significantly lower cost. This also applies to Cyprus, where the typical outlay is on an investment in real estate. While the Bulgarian route is not as rapid as the Cypriot one, avoiding the volatility of real estate and the bias accompanying the selection of qualifying real estate by investing in government bonds is highly attractive.

Our team has already successfully assisted a large number of ultra high-net worth, high net worth and affluent applicants, and our clients have so far had a 100% success rate.

If you would like more information, please feel free to contact us at cbi@newbalkanslawoffice.com.

Related publications:

EU Citizenship and Residence by Investment in Bulgaria

FAQs about Bulgaria’s Citizenship by Investment Program



The partial claim device in Bulgarian court proceedings

Court fees in Bulgarian proceedings: general principles

The starting point in Bulgarian civil proceedings is that in claims with an identifiable monetary value, the court fees for the issue of a claim are calculated as a percentage of the value of the claim, namely 4 %. Certain categories of claim (which we list below) are excluded from the operation of the rule, but it applies in the majority of cases.

To take an example, a contractual claim for €100,000 brought to a Bulgarian court would attract a court fee of €4,000 (payable in the Bulgarian currency), while a tort claim for $10,000,000 would involve a fee of $400,000, once again payable in Bulgarian lev.

The court fee is a single fee and is payable entirely by the claimant(s).

Such a court fee is payable at the commencement of a claim or within a short period (typically 7 days from the date of a court order requiring a non-paying claimant to conform with the requirement), on penalty of a stay of the claim and a resumption of accrual of limitation.

Of course, the approach has a potential effect of putting at a disadvantage claimants who cannot afford fees which are high in absolute terms, and may be unfair to claimants in situations where the chances of success are difficult to gauge before the proceedings are fully developed.

Once a claim fee is paid, Bulgarian civil proceedings do not generally involve the payment of further court fees.  E.g. there are no fees specific to the conduct of hearings or to the passing of certain stages in such proceedings.  However, appeals involve the payment of further court fees, typically set at half of the court fee due for the origination of a claim and in addition, all parties should be prepared for the possibilities of being required to pay experts’ fees (via a payment into court) or to deposit further sums into court on the order of the court (e.g., as a potential compensatory fund for the addressee of a freezing order).

What is a partial claim?

As a response to the potential issues of access to justice and management of litigation risk we outline above, Bulgarian proceedings commonly feature the making of a claim for a part of the total potential value in dispute, termed partial claims.

To adapt the first of our examples above, the claimant may choose to bring in the first place only a claim for €25,000 out of the total potential claim value of €100,000. This reduces the court fee fourfold to €1,000 expressed in Bulgarian levs.

The claimant remains able to expand the claimed amount either within the same proceedings or to bring a separate claim for the previously unclaimed part subject to the constraints and otherwise as we describe below.

Categories of claims to which the partial claim is inapplicable

Certain claims deemed to have no monetary value and are therefore not relevant to a discussion of partial claims, or are otherwise expressly excluded from the partial claim rule.

The following categories of claim are examples:

- Claims for state and municipal liability under the State and Municipal Liability Act;
- Collective claims;
Applications for the division of title.

How to choose the amount to claim in a partial claim?

A claimant may bring any part of its potential claim at any stage, subject to the time limits and considerations we describe below.

While the choice of level of claim is always very specific to the facts of a case, our general recommendation to clients considering partial claims is to bring claims initially at or slightly above the value threshold required for the claim to be justiciable to the District Courts (okruzhen or gradski sud), rather than the lower-level Local Courts (rayonen sud).

Currently, the threshold for allocation to the District Court as a first instance court is BGN 25,000 (approximately €12,500), implying a court fee of approximately €500.

A procedural advantage of starting a claim in the District Court is that if the claimant wished to increase the amount of their claim, there would be no need for transfer between courts after increasing the claim amount, which saves time and expense.

How does a partial claim help manage risk?

Partial claims allow claimants to test the prospects of success in complex cases. During the disclosure stage of the proceedings the claimant will be able to evaluate the strength of the defendant’s case, their evidence and the attitude of the court towards allowing expert witnesses. 

A further possible advantage is the minimisation of possible instances of appeal by the defendant.

Depending on the amount of the partial claim (if below BGN 5,000 in civil cases and BGN 10,000 in what are technically termed commercial cases), there may be only a single instance of appeal. A partial claim of below these thresholds would tend to thus save time and costs in comparison to the three-stage proceedings involved with a claim for the full possible amount or at any rate one brought above the threshold.

Additionally, after an effective judgment, the claimant may wish to proceed to enforcement. Successful enforcement of a part of the claim might help the applicant fund the pursuit of the balance of the claim.

Disadvantages of the partial claim

The partial claim device is not without its downsides. Two of these are the need to consider limitation and the way in which a partial claim may interact with the availability of freezing orders.

Interaction with limitation

To prevent limitation from accruing to any part of a claim, it needs to be commenced. Bringing a partial claim has this effect in respect of the part of the total value of the potential claim that is brought, but does nothing in respect of the part which is not.

Reduced or no availability of freezing orders and other forms of defendant asset protection

Bulgarian courts are generally more likely than those in other jurisdictions (e.g., England) to grant freezing orders either before proceedings are issued or after issue. Freezing a defendant’s assets is a very effective and powerful means of securing a claim and one that claimants generally find appealing.

By bringing a partial claim only, a claimant reduces his or her chances of obtaining a freezing order over an asset (e.g., land) of a higher value, since the disproportionality between the claim size and the asset value widens.

At the same time, until an asset is charged, an unscrupulous defendant remains free to dispose of it.

Losing a partial claim is a bar to a separate claim on the balance

Once a partial claim has been decided and an effective judgment is entered against the claimant, the reminder cannot be pursued.

Increasing the claim up to its maximum potential size

It is generally possible for a claimant to raise the claim size and pay any shortfall in the adjusted fee, calculated as 4% of the new claim value.

This may be done until the first open hearing in the proceedings and in rare cases, later on.

Once a set of proceedings is past the end of the first hearing in the case, bringing the remainder of the claim can be done only by way of a separate claim.

Do you have any further questions about pursuing a claim in Bulgaria and how to minimise your risks in civil litigation?

The litigation team at New Balkans Law Office is available to respond to your questions. Please feel free to contact us at any time.



FAQs about Bulgaria’s Citizenship by Investment Program

We wish to provide all interested investors with the relevant information so that they can rest assured that choosing Bulgaria’s Citizenship by Investment Program will be the best option.

The following is a recopilation of our clients’ frequently asked questions.

For more information, please contact us at sofia@newbalkanslawoffice.com or by our Contact Form.

Frequently Asked Questions:

 

General Questions

  • Who can apply for the Immigrant Investor Programme in Bulgaria?
    Any foreign citizen of legal age and with a clean criminal record who is not considered a threat to national security and can invest a minimum of 1,000,000 BGN, thus making him or her eligible to apply for Bulgarian citizenship.
    As of September 2018, almost 200 people applied to obtain Bulgarian citizenship on the basis of an investment.
     
  • Am I required to be able to speak Bulgarian?
    No. Speaking Bulgarian is not required.
     
  • What’s the difference between the Standard Track Application and the Fast Track Application?
    On the Standard Track, the applicant can acquire permanent residence after making the investment, and would hold the investment for a period of 5 years. At the end of the 5 years the applicant can apply for citizenship. On the Fast Track, the applicant can make an additional investment of 1,000,000 BGN (approximately 513,000 EUR) one year after the initial investment and he/she is immediately eligible to apply for citizenship.
     
  • Can my spouse and children obtain citizenship as well?
    Spouses and children of the applicant are eligible to acquire permanent residence. Though, they will not be granted citizenship at the same time as the applicant.
     
  • Do I ever have to travel to Bulgaria?
    Yes, but only for 2 times.
    The applicant will have to travel only to apply for his Permanent Residence Permit, and later to apply and obtain his ID card, which can be done in a short trip of 4 business days to apply and obtain it 3 days later.
    The applicant can apply for citizenship at a consulate abroad.
     
  • Am I required to have previous business management experience?
    No. No previous business management experience is required.
     
  • Are there any minimum educational requirements?
    No. There is no minimum educational requirement.
     
  • Are any job creation requirements like for the US EB-5 Investment Programme?
    No. There is no requirement for job creation, like the US EB-5 Investment Programme.
     

About the Investment

  • What’s the minimum investment amount?
    The minimum investment size is relatively low - 1,000,000 BGN (approximately 513,000 EUR).
     
  • What kind of investment profiles are there?
    There are a number of different qualifying investments, including but not limited to: government bonds, shares of a corporation admitted to trading on the Sofia stock exchange, investments in the capital of unquoted companies (a higher threshold applies).
     
  • What is the safest investment profile?
    Government bonds are usually seen as a low-risk safe investment.
     
  • Can the investment be financed by borrowing?
    Yes. The investment can be financed by borrowing. However, evidence of source of funds might be required.
     
  • How long do I have to wait for the investment verification?
    The investment verification usually takes 14 working days.
     

About the Process

  • How long will it take me to obtain Bulgarian citizenship?
    Depending on the track chosen the time varies. The Standard Track qualifies an applicant for naturalization after 5 years of holding a permanent residence permit. Citizenship under the Standard Track can be obtained after appoximately 6 years. The Fast Track qualifies an applicant for citizenship immediately after making a second eligibile investment provided that the applicant has held the permanent residence permit for at least one year. Citizenship under the Fast Track can be obtained in as fast as 2 years.
  • What's the difference between the Standard Track Application and the Fast Track Application?
    On the Standard Track, the applicant can acquire permanent residence after making the investment, and would hold the investment for a period of 5 years. At the end of the 5 years the applicant can apply for citizenship. On the Fast Track, the applicant can make an additional investment of 1,000,000 BGN (approximately 513,000 EUR) one year after the initial investment and he/she is immediately eligible to apply for citizenship.
     
  • When do I have to enter the country after obtaining the visa?
    The validity of the visa is 6 months after the date of issue. The applicant can enter the country when he or she wishes within this 6 months.
     
  • How long is the permanent residence permit ID card valid for?
    The permanent residence permit ID card is valid for 5 years. In case the validity of the applicant's passport is less than 5 years then the ID card has the same validity as the passport.
  • Should I apply for a permanent residence permit, ID card and citizenship in Bulgaria or at a Bulgarian diplomatic mission abroad?
    The applicant must apply for a permanent residence permit and ID card in Bulgaria. If eligible, the investor can apply for citizenship in Bulgaria or at a Bulgarian consulate abroad.
     
  • After obtaining a permanent residence permit, do I have to reside in Bulgaria for the whole process?
    No. Applicants are not required to be in Bulgaria during the whole process. However, when applying for a permanent residence permit and ID card the investor is required to be present in Bulgaria.
     
  • What kind of documents do I have to prepare?
    There are a number of documents that have to be prepared and legalized including, but not limited to, criminal record certificate, marriage license, proof of funds, etc.
     
  • Are there any additional legal fees or application fees?
    Standard application fees include visa fees (approximately 130 EUR), residence permit and ID card application fees (approximately 650 EUR), legalisation fees, etc.
     
  • How long do I have to wait for my citizenship application to be approved?
    The citizenship application is usually approved within a period of 8 months, but additional background checks and due diligence can lengthen the process a bit.
     


For more information, please contact us at sofia@newbalkanslawoffice.com or by our Contact Form.



Recent work:

Asset tracing and fraud: Use of evidence from parallel criminal proceedings in a civil trial

Over the last year, we have assisted the victims of a multi-million dollar large-scale international fraud. Certain of the scheme’s operations were embedded in Bulgaria’s thriving business process outsourcing (BPO) ecosystem.

As part of our representation for clients, we have pursued a claim in a regional Bulgarian court (the organisers of the fraudulent scheme having transferred the registration of the relevant entity to a disused building in that location). We were pleased to obtain a very helpful intervention from the court at first instance including an order to append files containing a substantial amount of evidence generated through a criminal investigation into the fraud to the civil case. This provides rich evidential pickings for proceedings which are either already being conducted or are being contemplated in a range of international jurisdictions as well as Bulgaria.

Read more

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