A key factor in the business development in Bulgaria over the last few years has been the international investments both in the start-up sector, and in the expansion of the capacity of more stable companies with a stronger position in the market.
The following article provides a brief analysis of the Foreign direct investments screening mechanism, introduced for the first time in Bulgaria. The mechanism was introduced by the amendments to the Investment Promotion Act“(“IPA”; “the Act”), in accordance with the EU FDI Screening Regulation 2019/452 (“Regulation 2019/452″).
The mechanism aims to guarantee protection of the independence of Bulgarian business against investments that could possibly threaten the public order of the national security.
Briefly – the mechanism requires prior approval for certain categories of foreign investors and foreign investment before making a new investment in Bulgaria. The new regime shall be applied for foreign investors, who are persons outside of the European Union (“EU”) or companies, that are controlled by a person registered in a non-EU country.
More detailed information regarding the new mechanism can be found below.
Which investments fall under the scope of the new regime?
Not all categories of investments fall under the scope of the new screening mechanism, but only the so-called “foreign direct investments”.
What is a “foreign direct investment”?
According to the Investment Promotion Act a foreign direct investment (“FDI”) is an investment of any kind, made by a foreign investor, that aims to:
- Establish or maintain lasting and direct links between the foreign investor and the entrepreneur or the undertaking to whom/which the capital is provided in order to carry out business activity in Bulgaria;
- Enable effective participation in the management or the control of the company that is carrying out business activity;
- Expand an existing investment, that could include the expansion of the capacity of an existing enterprise, the diversification of an enterprise’s production with products that have not been previously produced, and the establishment of a new place of carrying out business activity;
- Increase the capital of the investment target, provided that the shares are acquired by the foreign investor.
Based on the laid-out definition of FDI, it can be seen that in its first part it repeats the definition given in Regulation 2019/452. The second part of the definition however expands the scope of the term, including the expansion of investments that are already made.
The Act explicitly states that passive (portfolio) investments are not foreign direct investments.
Who is a “foreign investor” for the purposes of FDI screening?
A definition of “foreign investor” is given in Para. 1a, Item 1 of the Supplementary Provisions (“SP”) of the Investment Promotion Act. It defines the range of investors that are subject to the screening in accordance with the Act. There are three separate cases of a foreign investor according to the legislation:
- A person who is not an EU national or a legal entity, whose registered seat is not located in a EU Member State, who/which has made or intends to make a foreign direct investment in Bulgaria;
- A legal entity, the registered seat of which, is in a EU Member State, intending to make or having made a FDI in Bulgaria, in which control in exercised directly or indirectly by:
- One or more natural persons who is/are not EU national(s);
- One or more legal entity(ies) whose registered seat is not in a EU Member State;
- Any other legal entity or legal establishment, the registered seat of which is in a EU Member State, which has made or intends to make a FDI in Bulgaria, in which, by virtue of an agreement or internal rules, one or more natural or legal persons established in non-EU countries have direct or indirect control over the specific investment, or which, by virtue of an agreement or a multilateral transaction, makes a FDI falling within the scope of the Investment Promotion Act, on its own name, but on behalf of the person hereinabove.
Exceptions for “low-risk” jurisdictions
The purpose of the amendments in the Act is protection of the public and economic security from investments made by investors in countries outside of the EU. As far as it has been established that some of these countries would not pose a threat to national security, the Investment Promotion Act provides that the screening mechanism shall not be applied to:
- The United States of America, the United Kingdom, Canada, Australia, New Zealand, Japan, South Korea, the United Arab Emirates and Saudi Arabia. For these countries the same screening rules shall be applied as those for EU Member States;
- Non-EU countries, included in a list, adopted by the National Assembly, considered low-risk countries for the purposes of applying the screening mechanism.
Which areas of foreign investments are subject to control?
The Investment Promotion Act introduces general criteria that must be met before the investment is subject to prior screening (item 3.1 below), along with certain special conditions under which an investment, although not covered by the general criteria, shall have to obtain a prior approval before its execution (item 3.2 below).
General criteria
The general criteria can be divided into two groups of sub-criteria: The first one concerns certain areas, in which shall fall the investment (listed in item 3.1.1 below). The second one concerns certain thresholds which shall be exceeded (listed in item 3.1.2 below). In order for the FDI to be subject to screening, it shall cover both groups of sub-criteria.
The foreign direct investment must have as its object the following areas of activity, as listed in art. 4, para. 1 of Regulation 2019/452:
- Critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure.
- Critical technologies and items: including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies.
- Supply of critical inputs, including energy or raw materials, as well as food security.
- Access to sensitive information, including personal data, or the ability to control such information.
- The freedom and pluralism of the media.
In addition to the criteria above, the investment must meet one of the following conditions:
- The FDI exceeds the threshold of EUR 2,000,000 or their equivalent in BGN or at least 10% of the capital of a target operating in the country will be acquired; OR
- At least 10% of the capital of a target, which operates in the country and is engaged in high-tech activities, will be acquired; OR
- A new investment is made which exceeds the threshold of EUR 2,000,000 or their equivalent in BGN.
Conclusion: If a foreign direct investment is made by an investor, that meets the conditions , it is envisioned for the investment to be made in some of the areas, and it exceeds the threshold , it is mandatory to obtain a prior approval before its execution.
Categories of investments that do not meet the general criteria, but are subject to mandatory prior approval
The Act provides that a certain range of investments, even despite not meeting the general criteria, can only be made after prior approval. Such are the following:
- Investments, related to the production of petroleum energy products and products of petroleum origin at sites, forming parts or adjacent to critical infrastructure.
- Investments by Russian or Belarusian investors.
- Investments, made by investors that has a direct or indirect public participation in its capital from a non-EU country, including significant financing by a public authority.
- Cases in which the “ex officio” criteria is applied;
The Investment Promotion Act provides for certain cases, in which a foreign direct investment could be subject to screening upon decision of the authority that issues the approvals – namely, the Interdepartmental Council on FDI Screening. In this cases, it is irrelevant whether they fulfil the general criteria for the investment concerned. Among these cases are:
- Certain investments made upon proposal of a member of the Interdepartmental Council on FDI Screening, competent in the relative area in which the investment is to be made, in coordination with representatives of the National Security State Agency and the State Intelligence Agency.
- In cases where a motivated request has been submitted by the National Security State Agency and the State Intelligence Agency when there is evidence that a foreign direct investment may have an impact on the national security and the public order, the investment shall be subject to screening by the Interdepartmental Council on FDI Screening.
Despite not being completely clear, according to the wording of the Act, the ex officio powers of the Interdepartmental Council on FDI Screening to review FDIs due to national security reasons can be exercised either before or after the investment has been completed. No time limit for exercising this ex officio power has been laid down in The Investment Promotion Act.
More on the procedure for verification of foreign direct investments and the relative administrative sanctions provided for can be read here.
