BULGARIA COUNTRY COMMERCIAL GUIDE FY2001

INVESTMENT CLIMATE STATEMENT

Factbook.net

Note that local currency is quoted in "new" levs throughout this report. A redenomination of the currency, replacing 1,000 "old" levs with one new lev, took place on July 5, 1999 The lev is pegged to the euro under a currency board arrangement and its value relative to the dollar fluctuates with the value of the euro. The U.S. dollar is worth approximately 2.1 levs as of early July 2000.

A. OPENNESS TO FOREIGN INVESTMENT

Bulgaria has one of the most liberal foreign investment laws in the region. Foreign investment typically assumes one of the following forms: establishing a joint venture with existing companies, state-owned or private; acquiring a company through privatization; setting up a new (green field) venture; or making a portfolio investment. Portfolio investment has been minimal given the relative lack of development and inefficiencies of the capital markets.

The most common type of organization for foreign investors is a limited liability company. Other forms are companies limited by shares (joint stock companies), joint enterprises, business associations, general partnerships, limited partnerships, and sole proprietorships.

The problems most often cited by foreign investors in Bulgaria are: government bureaucracy; poor infrastructure; little advance notice of new laws or regulations as well as frequent changes in the legal framework; low domestic purchasing power; the banking system; the protracted privatization process; and a relatively high tax burden.

The 1997 Law on Foreign Investment establishes the Foreign Investment Agency as the government's coordinating body for foreign investment. The law extends national treatment to foreign investors, guarantees compensation in the event of expropriation, and allows the repatriation of profits. The law explicitly recognizes intellectual property and securities as a foreign investment.

The law does not limit the extent or amount of foreign participation in companies. Foreign companies have the right to open deposit accounts in hard currency and Bulgarian levs

Foreign companies are permitted to engage in various forms of business activity including the acquisition of shares in companies, with some restrictions. Foreign individuals cannot own land (this is a constitutional prohibition which must eventually be changed to comply with European Union accession requirements). However, the Foreign Investment Law removed most restrictions on acquisition of land by locally-registered companies with majority foreign participation. Local companies where foreign partners
have controlling interests must obtain prior approval (licenses) to acquire property in certain geographic areas/zones. Bulgarian officials assert that licensing conditions are nominal and routine.

In the area of arms manufacturing, only firms with over 50 percent Bulgarian participation can be licensed for international trade in arms. In 1998, the government developed a strategy for privatizing the military-industrial complex. The plan allows for the privatization of non-military operations and some defense firms, while ensuring that the government retains a blocking share (34 percent) in strategic arms-producing enterprises to guarantee the country's defense priorities.

The 1992 Law on the Transformation and Privatization of State and Municipal-owned Enterprises, as amended, governs Bulgaria's privatization process. The law permits foreign companies to purchase state-owned firms, and the government has emphasized its openness to foreign capital. However, privatization transaction are often protracted, in part because the Privatization Agency often tries to secure a selling price which the market will not bear. Furthermore, the frequent use of direct negotiations in the privatization process has fostered allegations of corruption and political influence in the sale of state enterprises. Policies on employee retention, technology transfer and environmental liability are not uniform. In some cases, controversies have ensued in the post-privatization phase regarding the terms and conditions of sale. (See also Sections A4 and A11.) Given these problems, many foreign investors have preferred to build new facilities from scratch rather than participate in privatization. Parliament is currently considering draft amendments to the Law on the Transformation and Privatization of State and Municipal-owned Enterprises to waive some procurement, concessions and licensing procedures for state-owned and privatized enterprises when such provisions are contained in privatization contracts.

Under the 1995 Law on Concessions, the state is authorized to give "a particular right of using projects, public and state property, as well as giving permits to carry out activities for which a state monopoly is established by law." Article 4 of the Law lists thirteen sectors in which the state may, on the basis of a concession agreement, grant private investors a partial monopoly in activities normally reserved for the central and/or local governments. These include the construction of roads, ports and airports; power generation and transmission; mining; petroleum exploration/drilling; telecommunications; forests and parks; beaches; and nuclear installations. Concessions are awarded on the basis of a tender and are issued for up to 35 years. Concessions can be extended but shall not exceed 50 years, although the former concession holder can legally be preferred in issuing a new concession for the same object/activity if all other conditions and terms offered by different competitors in the tender are equal or less advantageous.

The law was amended in July 1997 to permit build-operate-transfer deals, give priority for minerals exploitation to the holders of exploration licenses, and reconcile conflicting procedures for privatization and concession. Since 1998, Parliament has passed legislation arranging for concessions in telecommunications, energy, mining, waters, ports, airports, roads and railways.

B. CONVERSION AND TRANSFER POLICIES

Under Article 27 of the Foreign Investment Act, there are no restrictions on the transfer of investment-related funds. The U.S. Embassy has received no complaints from U.S. investors pertaining to transfers and remittances.

In 1999, Bulgaria replaced its outdated and fragmented foreign currency legislation and liberalized current international transactions in line with IMF Article VIII obligations. Transfers are governed by the Foreign Currency Act (1999) effective January 1, 2000, Regulation on the Export and Import of Bulgarian Levs and Foreign Currency in Cash, Precious Metals and Stones (1999), Regulation on Trans-Border Transfers and Payments (1999), and Regulation on Registration by the BNB of Transactions between Residents and Non-residents (1999). Bulgarian citizens as well as foreigners may take Bulgarian Levs and foreign currency of up to BGN 20,000 or its foreign exchange equivalent out of the country without documentation. However, the export of Levs and foreign currency between BGN 5,001 and BGN 20,000 or its foreign exchange equivalent should be declared at customs. Transfers larger than BGN 20,000 must have prior approval of the Bulgarian National Bank (BNB). Foreigners are permitted to export as much currency over the foreign currency equivalent of BGN 20,000 as they have imported into Bulgaria without prior approval.

The law also stipulates that payments abroad made by businesses (or self-employed business people) may be executed only through bank transfers. Transfers over BGN 20,000 for current international payments (imports of goods and services, transportation, interest and principal payments, insurance, training, medical treatment and other purposes defined in Bulgarian regulations) must be supported by documentation showing the need and purpose of such payments.

C. EXPROPRIATION AND COMPENSATION

According to Article 26 of the Foreign Investment Law, property can be expropriated on the grounds of a law "for exceptionally important state purposes." Owners must be compensated with nearby property of equal value at current prices. Monetary compensation is also permitted with the consent of the property's owner. Expropriation actions can be appealed to the Supreme Court with regard to the basis for the expropriation action, property appraisal and method of compensation. There have been no cases of expropriation since enactment of the Foreign Investment Law. In its bilateral investment treaty with the United States, Bulgaria committed itself to international arbitration in the event of expropriation and other investment disputes.

D. DISPUTE SETTLEMENT

1. Investment Disputes

In one recent dispute involving a U.S. investor, a local minority shareholder attempted to seize control of a privatized Bulgarian manufacturing enterprise by replacing the board of directors at an illegally convened shareholders' meeting. The U.S. company, which with the support of other minority shareholders has the controlling interest in the firm, successfully overturned that decision in the Bulgarian court system.

Given the frequent use of direct negotiations in the privatization process, there have been numerous allegations over the last several years of corruption and political influence in the sale of state-owned enterprises. However, relatively few unsuccessful foreign bidders have pursued their complaints in domestic courts or have sought international arbitration. In a minority of these cases, one of which involved a potential American investor, complaints have stopped the disputed sale.

2. Bulgaria's Court System

Bulgaria's Constitution (1991) serves as the foundation of the legal system and creates an independent judicial branch. The judicial system consists of three levels of courts.

On the first level, 124 regional courts exercise jurisdiction over administrative, civil and criminal cases. Cases are brought before one judge and two jurors. The 29 district courts (including the Sofia City Court) are the next higher level, and have original jurisdiction in civil cases where claims exceed 10,000 levs, in serious criminal cases and in other cases as determined by a special law. The district courts are also vested with the authority of appellate review for regional court decisions. District courts are presided over by one judge in most cases, although three judges preside in some others defined by the amended Civil Procedure Code. There are five appellate courts (Sofia, Varna, Burgas, Plovdiv and Veliko Turnovo) which review appeals of first instance decisions of the district courts. On the highest level are the Supreme Court of Cassation and the Supreme Administrative Court. The Supreme Court of Cassation has jurisdiction over all civil and criminal cases, and hears appeals on issues of law. The Supreme Administrative Court rules on the legality of acts by the Council of Ministers and the ministries. Decisions by the Supreme Courts are final and binding.

The Law on the Judicial System established an independent Supreme Judicial Council to determine the composition and organization of the judicial branch. The Council has 22 members, 11 elected by the Parliament and 11 by the judicial branch, plus three ex-officio members --the two chairmen of the supreme courts and the Chief Prosecutor. The Minister of Justice presides over the Council, but without the right to vote.

The Constitution also established the Constitutional Court which stands apart from the Supreme Courts. This court issues binding interpretations of the constitution; rules on challenges regarding the constitutionality of laws and acts; rules on international agreements prior to Parliamentary ratification; and reviews domestic laws to determine consistency with international legal norms. Any law or act found unconstitutional ceases to apply as of the date the ruling comes into force. The Constitutional Court consists of 12 judges: one-third elected by Parliament; one-third, appointed by the President; and one-third appointed by judges in the supreme courts.

3. Execution of Judgments

To execute judgments, a final judgment must be obtained so that the court can order payment; make a judicial request to perform an act or abstain from acting; or order the surrender of possession of property/goods. To obtain payment, complicated foreclosure proceedings must be initiated. The court of first instance must be petitioned for a writ of execution (based on the judgment). The issuance of a writ enables seizure of assets. If the party is seeking a judicial request to act or abstain from acting, the final judgment must be brought before an executive judge. The executive judge has the authority to issue fines of up to 400 levs The judge possesses the authority to resort to the police in instances such as the vacating of property and, possibly, for the surrendering of possessions.

Foreign judgments can be executed in Bulgaria. Execution depends on reciprocity as well as on the basis of bilateral or multilateral agreements, as determined by an official list maintained by the Ministry of Justice. All foreign judgments are handled by the Sofia City Court, which must determine that the judgment does not violates public decrees, standards or morals before the foreign judgment can be executed. There are also cases (real estate issues, binding decision on the same case issued by a Bulgarian court) defined by the Civil Procedure Code in which judgments cannot be executed even if they conform to Bulgarian laws or morals.

In practice, execution of judgments is subject to delays, sometimes resulting from corruption and inefficiency in the judicial system.

4. Bankruptcy Law

The Law on Bankruptcy was passed in 1994 and incorporated into Part IV of the Commercial Code. The law provides for reorganization or rehabilitation of the company, attempts to maximize asset recovery, and provides for fair and equal distribution among all creditors. The law applies to all commercial entities, except public monopolies or state-owned companies established by a special law. However, Chapter 14 of the Law on Banks and Credit Activity regulates bank bankruptcies, so the Commercial Code is applied only when the Law on Banks is not sufficient.

Under Part IV of the Commercial Code, bankruptcy proceedings can be initiated by the debtor or by creditors. The debtor is obliged to declare bankruptcy within 15 days of becoming insolvent. Where insolvency is determined, the court appoints an interim trustee. The trustee is responsible for representing and managing the company, taking inventory of property and assets, identifying the creditors, convening the creditors and developing a recovery plan. At the first meeting of the creditors, a trustee is nominated; in most cases this is simply a reaffirmation by the creditors of the court appointed trustee.

Creditors must declare the debts owed to them within one month of the start of bankruptcy proceedings. The trustee then has 14 days to compile a list of debts. A rehabilitation plan(s) or a scheme of distribution (in cases of liquidation) must be proposed no later than the date the court approves the list of debts. Article 700 specifies the content of proposed plans. The court must rule on admittance of the plan within seven days. If the plan does not comply with Article 700, the proposing party has seven days to modify the plan.

The law establishes the priorities of claims (classes) accorded to creditors in the following order: debts secured by pledge or mortgage; debts subject to foreclosure rights; bankruptcy costs; debts involving employment; social security obligations; tax and other charges and obligations to government; unsecured debts; and other debts. The plan is deemed accepted if approved by a simple majority in each creditor class. A court confirmation of the accepted plan is required. In cases where partial payment is
being proposed, the plan must have been accepted by at least two creditor classes. If agreement is not reached in cases of rehabilitation, the court can order liquidation.

Until 1996, Part IV of the Commercial Code was not widely applied. Given the interwoven relationships between banks and many large state-owned companies, banks were hesitant to initiate proceedings against these companies; the value of the banks' loans could have been impaired with significant adverse impacts on their balance sheets. There has also been an absence of trained professional trustees. The courts have often been unwilling to supervise trustees.

However, the Government of Bulgaria has instituted a number of bankruptcy procedures under Part IV of the Commercial Code in conjunction with IMF- and World Bank-sponsored structural reforms. At the same time, the Bulgarian National Bank has required undercapitalized commercial banks to use aggressive measures to collect non-performing loans. This means that the courts must now apply the law and that trustees are being appointed. Judges and trustees have been trained in implementation of the processes required under Part IV of the Commercial Code through international assistance programs. As a result, there is likely to be more widespread acceptance and utilization of these procedures.

In addition, the American Bar Association's Central and Eastern European Law Initiative (CEELI) has worked with the legal system on application of the law, development of standard forms for initiating bankruptcy proceedings, and organization of seminars with the Bulgarian Trustees Association and the Bulgarian Bar Association.

After some lengthy delays, the courts have also begun to pronounce on bank bankruptcies. The process has taken over two years in some cases, with few assets liquidated and no disbursements to creditors. In June 1999, Parliament approved amendments to the banking law which would strengthen the bankruptcy regime through streamlined liquidation procedures. Parliament is considering draft legislation which would eliminate the judiciary's role in adjudicating future bank failures, making their resolution an administrative issue.

5. International Arbitration

Pursuant to its Bilateral Investment Treaty with the United States, Bulgaria has committed to a range of dispute settlement procedures starting with notification and consultations. Bulgaria accepts binding international arbitration in disputes with foreign investors.

In 1990, the Bulgarian Chamber of Commerce and Industry (BCCI) established the Court of Arbitration (Regulations for the Application of Decree 56 on Business Activity, Articles 144-151). Arbitration is voluntary and regulated by the 1988 Law on International Commercial Arbitration which essentially conforms to the U.N. Commission on International Trade Law (UNCITRAL) Model Law. Contracts with Bulgarian companies typically call for dispute settlement at the Court, although arbitration in a third country is also possible.

Arbitral decisions may also be executed through the judicial system. The party must petition the Sofia City Court for a writ of execution. Foreclosure proceedings may also be initiated.

Bulgaria is a member of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the 1961 European Convention on International Commercial Arbitration. Bulgaria became the 149th signatory of the International Center for Settlement of Investment Disputes (ICSID) convention. On March 21, 2000, Bulgaria signed the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States.

The American Bar Association's Central and East European Law Initiative is working with the Bulgarian Judges Association to introduce Alternate Dispute Resolution (ADR) to the court system. An ADR center for domestic business disputes has been established through the Bulgarian Industrial Association.

6. Laws/Regulations Governing Commercial Transactions

The 1991 Commercial Code, as amended, defines the various forms of economic associations and regulates their foundation, organization, and termination. Revisions in 1996 to the Commercial Code introduced a chapter on equipment leasing. While the Commercial Code regulates commercial and company law, the 1951 Law on Obligations and Contracts, as amended, regulates civil transactions. These laws are generally deemed adequate for commercial transactions.

E. PERFORMANCE REQUIREMENTS/INCENTIVES

Bulgaria does not impose export performance or local content requirements as a condition for establishing, maintaining or expanding an investment. The law does not specifically restrict hiring of expatriate personnel, but residence permits are often difficult to obtain.

However, a June 1999 law regulating gambling imposes additional requirements on foreigners organizing games of chance. Foreigners can receive a license to establish a casino in a hotel only if they satisfy one of the following conditions: 1) purchase or construction of a hotel rated four-star or higher; or 2) investment of at least $10 million and employment of at least 500 workers in economic activities unrelated to gambling.

F. RIGHT TO PRIVATE OWNERSHIP/ESTABLISHMENT

The Constitution (Article 19) states that the Bulgarian economy "shall be based on free economic initiative." The government has created the legal framework in which private entities can establish and own business enterprises engaging in profit-making activities save those expressly prohibited by law. Bulgaria's Commercial Code guarantees and regulates the free establishment, acquisition and disposition of private business enterprises. Competitive equality is the standard applied to private enterprises in competition with public enterprises with respect to access to markets, credit, and other business operations, such as licenses and supplies.

G. PROTECTION OF PROPERTY RIGHTS

Bulgarian law protects the acquisition and disposition of property rights. In practice, the protection of property rights is subject to difficulties in varying degrees.

Bulgarian intellectual property legislation has been strengthened recently, and now includes modern patent and copyright laws and criminal penalties for copyright infringement. Bulgarian legislation in this area is considered to be among the most modern in Central and Eastern Europe.

Until recently, Bulgaria was the largest source of compact-disk and CD-ROM piracy in Europe and was one of the world's leading exporters of pirated goods. For this reason, Bulgaria was placed on the U.S. Trade Representative's Special 301 Priority Watch List in 1998. In 1998, enforcement improved considerably with the introduction of CD-production licensing. In recognition of the significant progress made by the Bulgarian government in improving protection of intellectual property, the U.S. Trade Representative removed Bulgaria from all Special 301 Watch Lists in April 1999.

Bulgaria is a member of the World Intellectual Property Organization (WIPO) and a signatory to the following agreements: the Paris Convention for the Protection of Intellectual Property; the Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcast Organizations; the Geneva Phonograms Convention; the Madrid Agreement for the Repression of False or Deceptive Indications of Source of Goods; the Madrid Agreement on the International Classification and Registration of Trademarks; the Patent Cooperation Treaty; the Universal Copyright Convention; the Bern Convention for the Protection of Literary and Artistic Works; the Lisbon Agreement for the Protection of Appellations of Origin and their International Registration; the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purpose of Patent Protection; the Nairobi Treaty on the Protection of the Olympic Symbol; the Vienna Agreement Establishing an International Classification of the Figurative Elements of Marks; the Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks; the Strasbourg Agreement Concerning the International Patent Classification; and Locarno Agreement Establishing an International Classification for Industrial Designs. On acceding to the World Trade Organization (WTO), Bulgaria agreed to implement the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) without a transitional period.

The 1993 Law on Copyright and Neighboring Rights protects literary, artistic and scientific works. Article 3 provides a full listing of protected works including computer programs (which are protected as literary works). The Law distinguishes between moral and economic rights. The use of protected works is prohibited without the authorization of the author except in those instances enumerated in Article 23. On March 22, 2000 amendments to the law extended the copyright term of protection from 50 years to 70 years after the author's death. The new term of protection is retroactive, i.e., a term of protection that expired at the moment of approval of the amendments was resumed within the frameworks of the 70 year term of protection. For films and other audio-visual works, copyrights are protected during the lives of director, screenplay-writer, cameraman, or the author of dialogue or music plus 70 years. Other amendments to the law enable copyright owners to file civil claims to suspend the activities of pirates, confiscate equipment and pirated materials, enhance border control over pirated material, introduce a new neighboring right for film producers, and harmonize Bulgarian legislation with the Association Agreement with the European Union.

Part II of the law addresses neighboring rights for performers and producers of sound recordings and radio/television programs. Part III of the Law focuses on enforcement.

The Copyright Office of the Ministry of Culture is responsible for copyright matters in Bulgaria. The National Film Center is responsible for enforcing intellectual property rights with regard to films and videos. Remedies for violations are provided in civil law. However, under the Penalty Code, copyright infringement was originally considered only a misdemeanor subject to nominal fines.

Bulgaria's current Law on Patents (the "Patent Law") dates from 1993. Bulgaria grants the right to exclusive use of inventions and utility models for 20 years and 10 years, respectively, from the dates of patent application filings. Inventions eligible for patent protection must be new as a result of innovation and have industrial applications. Article 6 lists items not considered inventions. Utility models are defined as "objects with structural and technological features relating to an improved construction, form and spatial combination of elements of articles, tools, mechanisms, equipment and parts thereof, materials and other items for industrial or home use."

The independent Patent Office is the competent authority with respect to patent matters. Chapter IV of the patent law, Articles 34-53, describe the application procedures and the examination process. Applications are submitted directly to the Patent Office. Compulsory licensing may be ordered under certain conditions: the patent has not been used within four years of filing the patent application or three years from the date of issue; the patent holder is unable to offer good justification for failing to sufficiently supply the national market; or declaration of a national emergency.

Patent infringement is punishable with the imposition of fines of up to 1,000 levs Disputes are reviewed by specialized panels convened by the President of the Patent Office. Parties dissatisfied with the outcome must initiate action in the Sofia City Court within three months of the panel's decision.

On September 19, 1996, Parliament approved the Protection of New Types of Plants and Animal Breeds Act. The Certificate allows for a term of protection of 25 years for annual plants and 30 years for perennial plants and animal breeds. The term of protection starts from its date of issuance by the Patent Office as specified in the law. On April 24, 1998, Parliament ratified the 1991 text of the International Convention for the Protection of New Varieties of Plants (UPOV).

In September 1999, Parliament passed a series of laws on trademarks and geographical indications, industrial designs and integrated circuits in accordance with TRIPs requirements and government's EU Association Agreement. The 1999 Trademarks and Geographical Indications Act, which repealed the 1967 Law on Trademarks and Industrial Designs, regulates the establishment, use, cession, suspension, renewal and protection of rights of trademarks, collective and certificate marks, and geographic indications. Registration is refused or the existing registered trademark is canceled if a trademark constitutes a reproduction, an imitation or creates confusion with a well-known trademark as stipulated by the Paris Convention and the Trademarks and Geographical Indications Act. Applications for registration must be submitted to the Patent Office under specified procedures.

Right of priority, with respect to trademarks that do not differ substantially, is determined based upon application first filed in compliance with information required in Article 32. Right of priority is also established based on the timing of a request made in one of the member countries of the Paris Convention or of the World Trade Organization. To exercise the right of priority, the applicant must file a request within six months of the date of original filing.

A trademark is normally granted within three months of filing of a complete application. Refusals can be appealed in the Sofia City Court within three months of the notification of the decision. The right of exclusive use of a trademark is granted for 10 years from the date of submitting the application. Requests for extension of protection must be filed during the final year of validity but not less than six months from expiration. Failure to use a mark during a five-year period results in protection being terminated.

Infringement of trademarks is a problem in Bulgaria for many U.S. manufacturers. While the law allows for confiscation of offending products, infringement is deemed a misdemeanor under the Penal Code and subject to a nominal fine which does not act as a deterrent to illegal activities. However, the competition law provides for fines of up to 500,000 levs for companies, which use misleading packaging, trademarks or other signs, which injure the interests of competitors.

Protection of Secured Creditors: Difficulties in recovering collateral are often cited as an impediment to commercial lending. A Collateral Loan Law was enacted in October 1996, with the assistance of IRIS (Institutional Reform and the Informal Sector) and the U.S. Agency for International Development. A warehouse receipts program for agricultural commodities is also being implemented with U.S. Government assistance.

H. TRANSPARENCY OF THE REGULATORY SYSTEM

1. Major Taxation Issues Affecting U.S. Business

The 1999 Tax Procedure Code regulates registration procedures of tax liable persons, collection of taxes and state receivables, and tax administration. The General Tax Administration Directorate, along with regional and local tax offices, is vested with the authority to assess liabilities and to collect taxes. The main tax laws govern income and corporate profits taxes.

Personal income tax rates increase progressively from 20 to 40 percent. Foreign individuals residing in Bulgaria are subject to Bulgarian income tax rates on their worldwide income. The basic corporate or profit tax rate is 25 percent, except that a tax rate of 20 percent is applied to companies where annual profits do not exceed 50,000 levs In addition, a municipal tax of 10 percent is levied on profits before the corporate tax is assessed. Individuals and small businesses carrying out certain trades pay a "patent" tax according to a schedule established by Parliament. A withholding tax of 15 percent is assessed on dividends. There is a 15 percent tax on income paid to foreign juridical persons from interest, rent, copyright and license payments, technical services and capital gains, which is levied at the source. The government intends to reduce taxes on profits and personal incomes beginning in 2001.

Employers pay 80 percent of the monthly contributions for social security insurance and health insurance and to an unemployment fund, but their share of contributions is slated to decline in phases to 50 percent by 2007. Employers must contribute for social security insurance and health insurance 28.7 percent and 4.8 percent of employees' gross salaries, respectively. Companies also contribute 3.2 percent of the total wage bill to an unemployment fund. Foreign persons are required to have the same insurance and unemployment compensation packages as Bulgarians.

There is a 20 percent single-rate value-added tax (VAT), reduced from 22 percent by Parliament in late 1998. All goods and services are subject to VAT except: exports; those involved in international transport; and precious metals supplied to the central bank. VAT payments are generally rebated when goods are resold. Excise taxes are levied on tobacco, alcoholic beverages, and other products.

Foreign investors have asserted that widespread tax evasion combined with the failure of the authorities to enforce collection from large state-owned companies places foreign
investors at a disadvantage. Another problem underscored by investors is the frequent revision of tax laws, sometimes without sufficient notice. However, in conjunction with its IMF agreement, the government is strengthening tax collections and limiting tax arrears of state-owned enterprises. Government officials have also indicated their long-term intention to lower marginal rates as tax collection improves.

2. Regulatory Environment

Day-to-day implementation of regulations by the bureaucracy produces frequent impediments to sound commercial practices. Regulations may not make commercial sense, and slow and poor service on applications leads to delays in investments. The government recently completed a major review of existing permit and licensing regimes with the objective of removing obstacles to business formation and development. Some business decisions seem to be made partly on political grounds, and some courts and law enforcement officers may be susceptible to influence (political or economic).

3. Competition Policy

The 1998 Law on the Protection of Competition (the "Competition Law") is intended to foster the establishment and maintenance of a competitive market. The Competition Law forbids monopolies, agreements of companies in restraint of competition, trade restrictive practices, abuse of a dominant market position, and unfair competition, and seeks to promote consumer protection.

Companies are under an obligation to notify the Committee on Protection of Competition of prohibited arrangements within 30 days. Arrangements between companies aimed at restricting competition are allowed if the market share of the companies involved does not exceed five percent. The Competition Law presumes that a company has a dominant position, if that company controls 35 percent or more of the relevant market. A company with a dominant market position is prohibited from: certain pricing practices, limitation of manufacturing development to the detriment of consumers, discriminatory treatment of competing customers, tying contracts to additional and unrelated obligations, and use of economic coercion to cause mergers.

The Competition Law also sets out strict standards and procedures with regard to government subsidies to private businesses.

The Law provides rules concerning mergers and other concentrations of economic power. Transactions, which result in concentrations, may proceed only with the prior consent of the committee, if the transaction will result in the control of more than 20 percent of the relevant market or if the consolidated turnover of the relevant companies exceeded 15 million levs for the previous year.

The Law prohibits four specific forms of unfair competition: misrepresentation with respect to goods or services; misrepresentation with respect to the origin, manufacturer and other features of goods or services; and the use or disclosure of someone else's trade secrets in violation of good faith commercial practices. The law also prohibits "unfair solicitation of customers" (promotion through gifts and lotteries), which may create difficulties for some foreign advertisers.

The Committee enforces the law and may impose penalties on companies up to 500,000 levs and individuals up to 20,000 levs The Committee may advise other agencies to correct decisions violating the law, and may even challenge such decisions in the courts. The Committee is not authorized to consider claims of damages by aggrieved parties, which must be brought to the courts and resolved pursuant to generally applicable rules.

I. Efficiency of Capital Markets/Portfolio Investment

1. Capital Markets
Since October 1997, the Bulgarian Stock Exchange has operated under a license by the Securities and Exchange Commission, pursuant to the 1995 Law on Securities, Stock Exchanges and Investment Companies. The 1999 Law on Public Offering of Securities which repealed the 1995 Law on Securities, Stock Exchanges and Investment Companies currently regulates issuance of securities, securities transactions, stock exchanges, and investment intermediaries.

Bulgarian capital markets are minuscule and other mechanisms for long-term finance (banks, insurance companies, and pension funds) are weak or underdeveloped. The government seeks to encourage voluntary pension funds as part of larger reform of Bulgaria's social safety net. These funds will help develop the country's capital markets, although their portfolios will initially be limited to investments with minimal risk to principal (such as government securities and demand deposits).

The government does finance government expenditures by accessing capital markets. On a weekly basis the Ministry of Finance holds an auction of Treasury bills. The bills are typically short-term (3-month, 6-month and 1-year maturities). Commercial banks are the primary purchasers of these instruments. Foreign banks can participate in the treasury market only through a Bulgarian bank or the branch of a foreign bank which is duly licensed in Bulgaria. The foreign bank transfers the money which is then converted into levs to make the purchase. The foreign bank must open a lev account (referred to as a "custody account") for transactions. This lev account cannot be used as a standard deposit bank account. A foreign currency account can be opened but it is not obligatory.

The Foreign Investment Law defines securities, including treasury bills, with maturities over 6 months as investments. The purchase must be registered with the Ministry of Finance. Investment income from treasury bills is subject to a 15 percent tax. Repatriation of profits is possible after presenting documentation that the taxes have been paid.

2. Description of the Banking System

Bulgaria is predominantly a cash economy. However, several banks have introduced automatic teller machines. Development of services for consumers, such as debit cards, started within the last two years, while personal checks are almost unknown and unused as a method of payment for locals. Checks and credit cards are used mainly by foreigners.

The Bulgarian National Bank (BNB) operates independently of the government and reports directly to Parliament. The BNB regulates the banking system, but, under the Currency Board Arrangement, has no discretion in setting monetary or exchange rate policy. There are 34 commercial banks in Bulgaria; twenty five are fully licensed and authorized to engage in international transactions; two are licensed to conduct domestic operations; and seven are branches of foreign banks in Bulgaria. Citibank is the only U.S. bank with an office in Bulgaria. According to the Bulgarian National Bank, the largest banks in terms of total assets at the end of 1999 were: Bulbank, 2.2 billion levs; DSK Bank (the former State Savings Bank), 1.1 billion levs; and United Bulgarian Bank, 1 billion levs

The government's shares in the state-owned banks Biokhim, and Bulbank are managed by BCC. By Bulgarian law, state-owned banks are permitted to raise capital through new share issues only after approval of the Bank Consolidation Company. The purpose of this rule is to avoid indirect privatization through issuance of new shares. By mid-2000, the BCC has privatized four state-owned banks and selected preferred buyers for Bulbank and Biokhim. In 1999, Express Commercial Bank – Varna and Hebrosbank were privatized by Societe General (SG) and the British Regent Pacific Group, respectively. The GOB has pledged to transform DSK Bank into a commercial bank by the end of 2000.

Bulgaria experienced a severe financial crisis in 1996. BNB closed 18 of the weakest banks, but liquidation has moved slowly. The central bank has enforced compliance with the Basel Accord's 10 percent capital adequacy ratio and a BGN 10 million minimum capital requirement. By the end of 1999, the GOB increased the capital adequacy ratio from 10 to 12 percent.


J. POLITICAL VIOLENCE

There have been no incidents in recent years involving politically motivated damage to projects or installations. Rather, violence in Bulgaria is primarily criminally motivated.

However, in January 1997 a political demonstration in front of Parliament briefly got out of control and part of the crowd broke into the building. Largely peaceful strikes and street blockades in subsequent weeks led the Bulgarian Socialist Party to voluntarily relinquish power to a caretaker government while new elections took place.

K. CORRUPTION

Bulgaria has laws, regulations, and penalties against corruption, including a 1996 Law for Measures against Money Laundering. Bulgaria was one of the first non-OECD nations to ratify the OECD Anti-Bribery Convention. In June, Parliament amended the Penal Code to implement some provisions of the Convention and is considering further amendments to bring Bulgaria into full compliance. Bulgaria has also ratified the Convention on Laundering, Search, Seizure and Confiscation of Proceeds of Crime and the Civil Convention on Corruption. Under the Stability Pact Anti-Corruption Initiative, Bulgaria has committed to: sign, ratify and implement the Council of Europe Criminal Law Convention on Corruption; apply the Twenty Guiding Principles for the fight against corruption by the Committee of Ministers of the Council of Europe; and implement the forty recommendations of the Financial Action Task Force on Money Laundering (FATF).

Bribery is a criminal act under Bulgarian law for both the giver and the receiver. Penalties range from one to fifteen years imprisonment, depending on the circumstances of the case, with confiscation of property added in more serious cases. In very grave cases, the Penal Code specifies prison terms of 10 to 30 years. The 1996 Money Laundering Law also applies to bribes. Bribing a foreign official is a criminal act. There have been trials and convictions of enterprise managers, prosecutors and law enforcement officials for corruption. While Bulgarian tax legislation does not explicitly disallow the deduction of bribes in the computation of domestic taxes, deductions connected with bribery and other illegal activities are not permitted.

Although the Bulgarian government has achieved some successes in the fight against organized crime and corruption, many observers believe that corruption and political influence in business decisionmaking continue to be significant problems in Bulgaria's investment climate. The problems range from the demand for petty bribes for government licenses and permits to nontransparent privatizations of major state enterprises.
However, recent business surveys indicate that foreign investors consider bureaucratic impediments to be a considerably larger problem than corruption.

L. BILATERAL INVESTMENT AGREEMENTS

As of June 2000, Bulgaria has investment promotion and protection treaties/agreements with: Albania, Argentina, Armenia, Austria, Belarus, Belgium, China, Croatia, Cyprus, Denmark, Finland, France, Georgia, Germany, Greece, Hungary, India, Israel, Italy, Kuwait, Lebanon, Macedonia, Malta, Moldova, Morocco, Netherlands, Poland, Romania, Slovakia, Spain, Sweden, Switzerland, Turkey, Ukraine, Uzbekistan, Vietnam, United Kingdom, United States, Yugoslavia.

Bulgaria signed a Bilateral Investment Treaty (BIT) which guarantees national treatment for U.S. investments and creates a dispute settlement process. The BIT also includes a side letter on protections for intellectual property rights.

M. OPIC AND OTHER INVESTMENT INSURANCE

In 1991, the Overseas Private Investment Corporation (OPIC) and the Government of Bulgaria signed an Investment Incentive Agreement, which governs OPIC's operations in Bulgaria. OPIC provides project financing and political risk insurance to U.S. investors making long term investments in emerging markets. OPIC also supports a number of privately owned and managed private equity funds, including a new regional fund for Southeast Europe created as part of the U.S. Southeast Europe Initiative.

OPIC provides project financing through direct loans and loan guaranties that provide medium- to long-term financing to ventures involving significant equity and/or management participation by U.S. businesses.

OPIC offers American investors insurance against currency inconvertibility, expropriation and political violence. OPIC began offering currency inconvertibility coverage in January 1999. During the introductory period, the amount of currency inconvertibility coverage available is limited. OPIC also has specialized insurance programs for financial institutions, leasing arrangements, oil and gas projects, natural resource projects and contractors and exporters projects undertaken by U.S. investors in Bulgaria. Political risk insurance is also available from the Multilateral Investment Guarantee Agency (MIGA), which is a World Bank affiliate, as well as from a number of private U.S. companies.

In the event of an inconvertibility claim made by an OPIC insured investor, OPIC may elect to accept Bulgarian currency to be made available to the U.S. Embassy in Bulgaria. The U.S. Embassy and other U.S. institutions could use up to $3.4 million annually. The Embassy purchases Bulgarian levs at the current market rate. The Currency Board Arrangement fixes the Bulgarian lev to the euro, excluding the possibility of depreciation. A devaluation of the exchange rate over the next year is extremely unlikely.

N. LABOR

Demographics

Factbook.net

Bulgaria's working-age population consists of around 4.8 million highly educated and skilled men (52 percent) and women (48 percent). The literacy rate in Bulgaria is 93 percent. A high percentage of the workforce has completed some form of secondary, technical, or vocational education. Many Bulgarians have strong backgrounds in engineering, medicine, economics and the sciences, but there is a shortage of professionals with Western management skills. The aptitude of workers and the relative low cost of labor are considerable incentives for foreign companies, especially those which are labor intensive, to invest in Bulgaria. Employer tax obligations and benefits (clothing allowance, bonuses, etc.) can add more than 50 percent to the nominal wage.

Bulgaria's 1991 Constitution (Article 49) recognizes workers' right to join trade unions and organize. In theory, the National Tripartite Cooperation Council (NTCC) provides a forum for dialogue among government, management, and trade unions such as cost-of-living adjustments. The current Labor Minister has attempted to revitalize the Council.

Bulgaria has two large trade union confederations, the Confederation of Independent Trade Unions of Bulgaria (CITUB) and Podkrepa ("Support"). CITUB, the successor to the trade union integrated with the former Communist Party, has long since severed its ties to the socialists, whereas Podkrepa is an independent confederation. There are few restrictions on trade union activity and the confederations operate freely, but the workforce in smaller firms and elsewhere in the emerging private sector is often not represented by trade unions.

Under the 1993 Labor Code, employer and employee relations are regulated by employment contracts which may be agreed upon through collective bargaining. The Code extends what some complain are excessive protections for workers. For instance, maternity and post-natal child care requirements dictate that employers hold positions for nearly three years while the employee continues to receive payments from the social security fund. The Code also addresses worker occupational safety and health issues, establishes a minimum wage (determined by the Council of Ministers) and prevents exploitation of workers, including child labor. The Code clearly delineates employer rights, strengthening management's hand in disciplining the workforce. Unresolved disputes between labor and management can be referred to the courts, but resolution is often subject to delays. Parliament is currently considering draft amendments to the Labor Code.

Neither foreign companies nor Bulgarian companies having majority foreign-control are exempt from the requirements of the Labor Code. Articles 29 - 32 of the Foreign Investment Law covers employment relations and social security contributions for Bulgarian and foreign employees.

The Embassy is unaware of significant violations on the part of the Bulgarian Government with respect to ILO Conventions protecting worker rights.

O. FOREIGN TRADE ZONES/FREE PORTS

The Duty Free Trade Zones (FTZs) were established in Bulgaria in 1987 under Decree No. 2242 "On the Duty Free Zones and its Regulations for Application." The Law on Customs, effective January 1999, renamed the six duty-free zones "free zones." The law specifies that the free zones must have access control at fixed entrance and exit points. New construction within the free zones is to be undertaken in conformity with the customs authorities.

Foreign, including U.S., individuals and corporations, and Bulgarian companies with 1 percent or more foreign ownership may set up operations in a free zone. Thus foreign-owned firms have equal or better investment opportunity in the zones as compared to Bulgarian firms.

There are at present six operational "free zones" in Bulgaria: Ruse and Vidin ports on the Danube, Plovdiv, Svilengrad (near the Turkish border), Dragoman (near the Yugoslav border), and Burgas port on the Black Sea. All of them are owned by joint stock or state-owned companies. The government provided land and infrastructure for each zone.

Plovdiv, the only inland free zone, is the most profitable, with 24 investment projects. The Burgas FTZ has the largest warehousing and automotive distribution facilities in Bulgaria, and is used by more than 100 foreign and joint venture companies including Samsung and Daewoo. Limited manufacturing is conducted in both the Plovdiv and Ruse FTZs.

All forms of production and trade activities and services may take place in the free zones. Foreign goods delivered to the free zones with purpose of production, storage, processing or re-export are VAT and duty exempt. Bulgarian goods may also be stored in free zones with permission from the customs authorities. Convertible foreign currency may be used, and revenues can be transferred abroad freely without any restrictions. Administrative procedures relieve the investor's need to contact local authorities directly. Production and labor costs are low with well-trained and highly qualified labor available. All the zones are located on strategic trade rail, road and/or water trade routes.

The free trade zones in Bulgaria have attracted a number of foreign investors to undertake processing and trade activities – Hyundai Co., Daewoo Co., KIA Motors, CITCO, Schawartskopf, Henkel, Landmark Chemicals Ltd., Group Schneider, BINDL Energic Systeme GmbH.

P. FOREIGN DIRECT INVESTMENT

Between 1992 and 1999, foreign direct investment (FDI) into Bulgaria amounted to approximately $2.778 billion (about 22 percent of 1999 GDP). FDI inflows in 1999 are estimated at $755.3 million (about 6.1 percent of GDP). Bulgaria's direct investment abroad was about $5 million in 1999.

sss

Source: Foreign Investment Agency

Source: Foreign Investment Agency

Source: Foreign Investment Agency

Demographics & Economic Situation

Source: Factbook.net

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