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Bulgaria with a mechanism for screening of foreign direct investments

The adoption in March 2019 of Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union ("Regulation 2019/452" or "the Regulation") introduced a framework for coordination of EU Member States' actions in the field of foreign investment. The main objective is to ensure the strategic objectives of the European Union ("EU") and support European companies, employees/workers and citizens. The provisions of Regulation 2019/452 apply from 11 October 2020.

As defined in the Regulation, 'screening' means a procedure allowing to assess, investigate, authorize, condition, prohibit or unwind foreign direct investments.

Member States may maintain, amend or adopt their screening mechanisms and decide whether to have such screening mechanisms in place to meet the requirements of the Regulation. Certain obligations are laid down for Member States. They must submit to the European Commission ("EC") annually by 31 March detailed information on foreign direct investment in their territory during the previous calendar year. Member States also need to appoint contact points to implement the legislation in the same way as the EC.

Pursuant to Article 4 (1) of the Regulation, screening may be carried out in relation to foreign direct investments that have an impact on: (i) physical and virtual infrastructure of critical importance; (ii) technologies and dual-use items of utmost importance, e.g. artificial intelligence, robotics, energy storage and biotechnology; (iii) goods of the utmost importance, such as energy or raw materials and food security; (iv) critical supplies including energy or raw materials, and food security; (v) access to, or ability to, control sensitive information, including personal data; or (vi) freedom and pluralism of the media.

In addition, according to the Regulation, other factors may be taken into account in assessing whether a screening of a foreign direct investment should be carried out, in particular: (i) whether the foreign investor is directly or indirectly controlled by the government, including state bodies or armed forces, of a third country, including through ownership structure or significant funding; (ii) whether the foreign investor has already been involved in activities affecting security or public order in a Member State; or (iii) whether there is a serious risk that the foreign investor engages in illegal or criminal activities.

An obligation has been introduced for the Member State screening a foreign direct investment to notify the EC and the other Member States. In certain cases, other Member States may submit comments if they consider that foreign direct investment may affect their security or public order.

The EC may issue an opinion if it considers that foreign direct investment could affect security or public order in more than one Member State. The EC must inform other Member States when comments are submitted, or an opinion issued.

On 8 March 2024, adopted changes in the Bulgarian Investment Promotion Act ("IPA") were promulgated, introducing a national mechanism for screening of foreign direct investments. An Interdepartmental Council for Screening of Foreign Direct Investments ("Interdepartmental Council") related to security or public order has been established at the Bulgarian Council of Ministers, which is a permanent collective body and examines the received applications for execution of foreign direct investments. The Council of Ministers shall adopt rules for organization and activity for the Interdepartmental Council.

The Interdepartmental Council will also perform the functions of a contact point under art. 11 of the Regulation and will communicate with the EC and other EU Member States.

The Interdepartmental Council may adopt decisions approving, denying or provisionally authorizing investments in compliance with the restrictive measures set out in the IPA. The decisions of the Interdepartmental Screening Council on the application for issuance of a foreign direct investment permit are individual administrative acts, they are communicated to the foreign investor and can be appealed under the Bulgarian Administrative Procedure Code. The relevant investment can be made after a permit has been issued by the Interdepartmental Council. The Interdepartmental Council shall have the power to carry out ex officio screening of investments in the presence of the circumstances specified in the IPA.

Before making the investment, the respective investor is obliged to submit an application through the Bulgarian Investment Agency to the Interdepartmental Council. This application shall be submitted at the same time as an application for the issuance of an authorisation, licence or entry in a register provided for in another law.

Which foreign direct investments are subject to mandatory screening?

According to the newly adopted provisions in the IPA, those foreign direct investments that have an impact on the sectors described above under Article 4(1) of the Regulation are subject to screening, as well as meeting the conditions of the IPA. These conditions are: (i) through the implementation of the investment, the ownership of at least 10% of the capital of an enterprise operating in Bulgaria is acquired, or the value of the investment exceeds the threshold of EUR 2 000 000 or their BGN equivalent; (ii) through the implementation of the investment, the ownership of at least 10% of the capital of an enterprise operating in Bulgaria and carrying out high-tech activities is acquired; (iii) a new investment is made which exceeds the threshold of EUR 2 000 000 or their BGN equivalent.

According to the IPA, as an exception, foreign direct investments that are new investments or do not exceed the threshold of EUR 2 000 000 or their BGN equivalent may be subject to consideration and permission by the Interdepartmental Council. This is done on the proposal of a member of the collective body with competence in the relevant sector in which the investment will be realized, coordinated with the representatives of the State Agency for National Security (“SANS”) and the State Intelligence Agency (“SIA”).

Subject to screening are foreign direct investments in sites and activities by persons who carry out activities in the production of energy products from oil and products of petroleum origin in sites part of or adjacent to critical infrastructure. All foreign direct investments with a foreign investor from the Russian Federation or the Republic of Belarus are also subject to screening.

At the reasoned request of SANS and SIA, a foreign direct investment is subject to screening by the Interdepartmental Screening Council, regardless of the criteria for the size of the investment or the amount of acquired capital of a Bulgarian enterprise, when there is evidence that it may have an impact on security and public order.

Foreign direct investment is subject to screening, regardless of investment threshold limits, where there is a direct or indirect participation of a non-EU country in the capital of the foreign investor, as well as in the case of significant funding by a government authority. When the foreign investor is a company whose shares are traded on a regulated market, screening is carried out if there is a direct or indirect participation of a non-EU country in the company's capital greater than 5%.

The order described in the previous paragraph does not apply to non-EU countries that are included in a list adopted by the Bulgarian National Assembly, which are characterized by low risk for the purpose of implementing the screening mechanism. For these countries, as well as for the United States, the United Kingdom, Canada, Australia, New Zealand, Japan, the Republic of Korea, the United Arab Emirates and the Kingdom of Saudi Arabia, screening rules for EU Member States apply.

Are persons who fail to comply with the new national regime for screening of foreign direct investments subject to sanctions?

Administrative and criminal liability is provided for investors who do not comply with the IPA regime. A fine or a pecuniary sanction of 5% of the value of the planned investment, but not less than BGN 50,000, may be imposed on an investor in case of an investment without a permit issued by the Interdepartmental Council, provides inaccurate, incomplete, or misleading information in an application for investment authorization, etc.

The Interdepartmental Council may, notwithstanding the fine or pecuniary sanction, impose on the foreign investor restrictive measures to ensure security or public order, including a change in control, change and/or cessation of activity, termination of direct foreign investment and other appropriate measures.

In summary, Bulgaria already has its own mechanism for screening foreign direct investments, which is in line with European legislation. The screening rules are defined in the Investment Promotion Act, and the newly formed Interdepartmental Council at the Council of Ministers has been designated as a competent state body. The Interdepartmental Council authorizes (in whole or in part) or denies the execution of foreign direct investments in certain sectors. Administrative and criminal liability is provided for investors who make an investment in violation of the national investment screening regime under the Investment Promotion Act.

 

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Author: 

Att. Kristian Nemtsov, Senior Associate, Deloitte Legal Law Firm

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