Valentin Bojilov and Vladislav Antonov (Djingov, Gouginski, Kyutchukov & Velichkov) authored this publication

On February 22, 2024, the Bulgarian parliament passed new legislation ("the Law") by virtue of which certain categories of foreign direct investment (FDI) will be subject to screening ( "FDI Screening"). While the Law entered into force on March 12, 2024, the relevant foreign investors' obligation to file for FDI clearance will not become effective until the executive branch will have instituted additional implementing regulations.

Who files?

A foreign investor intending to make a covered FDI must file for the investment's prior clearance from a new inter-agency council (the "Screening Council"). Implementing a covered FDI without first having obtained the clearance exposes the foreign investor to a fine equal to 5 percent of the investment's amount, and in any event not less than BGN 50,000 (approximately €25,000). In such cases, the Screening Council may also impose investment unwinding and other appropriate measures.

In determining whether the filing obligation is applicable, the "foreign investor" and "FDI" defined terms that the Law uses that will be of relevance.

The "foreign investor" concept encompasses the following (each, a "Non-EU Person"):

• Any individual who has made, or intends to make, an FDI in Bulgaria, provided such individual is not a national of an EU Member State
• Any legal entity that has made, or intends to make, an FDI in Bulgaria, provided such legal entity is seated outside an EU Member State

In addition, the following will be treated as "foreign investors":

• Any legal entity (a "Deemed Non-EU Entity") which, although seated in an EU Member State, is controlled by:
  • A Non-EU Person or
  • Another person (not necessarily an incorporated person) organized under the laws of a country that is not an EU Member State
• Any legal entity or other person (not necessarily an incorporated person) which, although seated in an EU Member State:
  • Is affected by a contract or internal rules by virtue of which the relevant investment of that person is directly or indirectly controlled by one or several individuals or legal entities that are established outside the EU or
  • Makes the investment in its own name but for the account of a Non-EU Person or a Deemed Non-EU Entity, by virtue of an agreement

FDI is defined as follows: an investment of any kind made by a foreign investor aimed at establishing or maintaining lasting and direct links between the foreign investor and the entrepreneur or enterprise to which the capital has been made available to carry on business in Bulgaria, including an investment that enables effective participation in the management or control of a company carrying on business. FDI is also the expansion of an existing investment, including the expansion of the capacity of an existing enterprise, the diversification of the production of an enterprise with products that have not been produced before, and the establishment of a new place of business.

The FDI definition clarifies that a portfolio (passive) investment is not a foreign direct investment. "Portfolio (passive) investment," however, is not specifically defined.

The Screening Council may also act of its own motion. Thus, the Screening Council may, of its own motion and by way of exception, commence an FDI Screening with respect to an investment that is possibly covered but in which the investor did not file a clearance application, if the Screening Council:

• Has become aware of new circumstances that justify the opening of an FDI Screening investigation, it being understood that this option is open to the Screening Council within three months of becoming aware of such new circumstances; or
• Has received:
  • An opinion from the European Commission or
  • A notification from an EU Member State that contains sufficient information

In this last scenario, to the extent the European Commission's opinion or the EU Member State's notification relates to an investment that has already been implemented, the Screening Council may not commence an FDI Screening if that investment's implementation has started more than two years before the opinion or notification.
 

Types of deals reviewed

To be subject to FDI Screening, the relevant FDI must:

• Have potential effects in the areas covered by Article 4, para. 1 of EU Regulation 2019/452 (substantive scope) and
• Further reach at least one from among the following three thresholds (quantitative scope):
  • The investment will result in the acquisition of at least 10 percent of the capital of an undertaking that operates in Bulgaria, or the investment's amount will exceed €2,000,000¹ or
  • The investment will result in the acquisition of at least 10 percent of the capital of an undertaking that operates in Bulgaria and performs high-tech activities or
  • The investment qualifies as a "new investment"² whose amount will exceed €2,000,000

The quantitative criteria, however, will be disregarded—so that even small but substantively in-scope investments will trigger FDI Screening—if there is, whether directly or indirectly, non-EU governmental participation in the foreign investor's capital. That extension of the FDI Screening requirement to small investments will not apply where the non-EU governmental participation is linked to such "low-risk" countries as may be designated by the parliament.³

In addition, certain FDIs, which are not covered in the sense just described above, will nevertheless trigger the FDI Screening requirement:

• FDIs by a foreign investor from Russia or Belarus⁴
• FDIs in the production of oil-derived energy products and other oil-derived products at critical infrastructure facilities that are strategically important for national security
• On the initiative of certain national security agencies, FDIs in which such indications exist as may suggest that the relevant FDI may have an impact on security and public order
• At the request of a relevant member of the Screening Council and after consultation with certain national security agencies, investments below the €2,000,000 threshold may also be subjected to FDI Screening
   

Scope of the review

The Law does not set out specific criteria based on which the Screening Council must decide on a clearance application; it merely includes a cross-reference to Article 4 of EU Regulation 2019/452.

The Law, however, provides that the Screening Council will apply the Article 4 criteria in accordance with the terms and procedures to be introduced by way of implementing legislation that the executive branch is mandated to adopt. Accordingly, it may not be excluded that such future regulations will flesh out the applicable criteria.
 

Review process timeline and outcomes

After submission of an FDI clearance application, the relevant authority (Bulgarian Investments Agency) will have three days to check whether the application is incomplete or otherwise not in compliance with the applicable formalities.

If any irregularities in the application must be addressed at this stage, the applicant will be given seven days to do so.

An application, which is technically compliant, will then be forwarded to the Screening Council.

Once the Screening Council is in receipt of the file, it has 45 days (plus up to 30 additional days if the Screening Council so determines) to issue a decision. That decision may be:

• An unconditional clearance
• A conditional clearance, whereby the foreign investor may implement the FDI after having complied with such restrictive measures as the Screening Council may have determined or
• A refusal to grant the clearance

The Law provides for the following restrictive measures:

• Restriction on the shareholding that the foreign investor may acquire in the target: up to 20 percent (or up to 10 percent if the target is involved in high-tech industries)
• Implementation of measures aimed at the protection of personal data, the security of information or otherwise (upon proposal by a relevant regulator)
• Special rights in favor of the state within the shareholders meeting and/or the management of the target (applicable in the context of privatizations only)

If the Screening Council does not deliver a decision within the statutory deadline, the relevant FDI is deemed to have been cleared.

How foreign investors can protect themselves

The decisions of the Screening Council are administrative acts that are subject to legality control by the administrative courts acting at the initiative of the relevant investor.

_{1 While the Law refers to the first threshold as an alternative between (a) 10 percent of the capital and (b) an investment amount of more than €2,000,000, the legislator's actual intent, seen in the context of all the three thresholds, was more probably to require the cumulative satisfaction of (a) and (b).
2 The Law defines "new investment" broadly: (a) initial investment in tangible and intangible assets related to the start of activity of a new undertaking; (b) expansion of the capacity of an existing undertaking; (c) diversification of an undertaking's production through products not previously produced; or (d) a significant change in the general production process of an existing undertaking.
3 These are currently the United States, the United Kingdom, Canada, Australia, New Zealand, Japan, South Korea, the United Arab Emirates and Saudi Arabia.
4 Although the inclusion of this category of FDIs could be justified by the current international environment, it may be problematic against the background of Article 3.1 of EU Regulation 2019/452, which requires that screening mechanisms do not discriminate between third countries.}
 

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