V. LEGAL FRAMEWORK
FOR DEBT CONVERSION PROGRAM
There is no law on securities in Bulgaria yet and the active
legislation does not contain any systematic provisions for their
acquisition. The possibilities and procedures for acquisition of
securities by foreign persons are envisaged in the Law on Economic
Activity of Foreign Persons and on Protection of Foreign Investment
[(LEAFPPFI) State Gazette, Number 8, January 28, 1992 )]. Governing
are also certain texts of the Law on Banking and Credit Activities,
some Regulations of the Bulgarian National Bank, some Ordinances of
the Ministry of Finance, etc.
Given the lack of complete and systematic legal framework and
principles for acquisition of shares and government securities by
foreign legal and natural persons, it is necessary to review the
legislation that is in place today in order to clarify the
governing basis for debt for equity conversions.
- According to Art. 2 of LEAFPPFI the legal definition of foreign
person is as follows: a legal person registered abroad; a
partnership which is not a legal person and is registered abroad; a
natural person who is a foreign citizen with permanent residence
abroad; a Bulgarian citizen who holds another citizenship and has
chosen to be treated as a foreign person under the foregoing
law.
- It should be noted that there are also other normative
documents which define the term foreign person in a more or less
different manner from the above mentioned. The definition contained
in the Transactions with Currency Valuables and Currency Control
Act ( TCVCCA ) could also be relevant, but only in the event of
foreign currency transactions. According to Art. 3 (E) of the
TCVCCA, Bulgarian securities are treated as foreign currency
valuables, when subjected to export or import. Applicable to such
cases could be the broader definition of foreign person contained
in the TCVCCA, Art. 5, para 2, (A and B), which is treating as
foreign persons also all persons that left the country more than
six months ago or did so with the intention to settle abroad, the
foreign embassies, consulates, trade agencies, etc. , international
organizations, the members of these institutions, their families
and foreign employees.
- The general principle of the law is that all transactions and
actions with currency valuables are subject to control by the
Ministry of Finance and the Bulgarian National Bank, and in order
to carry out such activities, persons should be licensed by the
Ministry of Finance unless otherwise provided by a law or decree of
the Council of Ministers. This is a good reason to consider
LEAFPPFI to be the governing law as of the moment of acquisition of
shares and government securities by foreign legal and natural
persons, and to apply also the TCVCCA in the event of their export
or import.
2. Definition of foreign investment
- The legal definition of foreign investment contained in Art. 9
of LEAFPPFI refers to any investment by a foreign person, including
a sole proprietor or a branch, or by a firm with foreign
participation exceeding 50 percent " in stock and interests in
commercial firms, in bonds, treasury bonds and other negotiable
instruments issued by the State or Bulgarian juridical
persons.
3. Foreign participation in privatization
- Article 17, para 1 of the Law on Banking and Credit Activity
(related to Ordinance #7 of the Bulgarian National Bank (BNB), para
1, item 4 of the Additional Provisions, which define
business-related persons) provides the general regulations for
Bulgarian citizens and local persons, which is also applicable to
foreign persons with certain restrictions and additional
requirements. Local or foreign persons as well as business-related
persons - spouses or relatives, direct or lateral to third degree
inclusive - cannot acquire, directly or indirectly, shares in a
local bank which give them over 5% of the total votes in the
general meeting of shareholders.
- Although the size of the foreign participation in newly
established or existing companies is not subject to limitations (
Art. 3, para 3 of the LEAFPPFI), Art. 5, para 3 of the same law
stipulates that foreign persons or companies in which the
participation of a foreign person (directly or through other
companies with foreign participation), is sufficient to provide
majority in the decision-making or to prevent the decision-making,
shall apply for permission in certain cases.
- Foreign persons can participate also in the privatization of
state-owned and municipal companies, including acquisition of
shares owned by the state or the municipalities as per the Law on
Transformation and privatization of State and Municipal Enterprises
(State Gazette #38/1992, amended #51/1994). The law explicitly
provides that all legal and natural persons can participate on
equal basis in the privatization process, except for the cases
provided by Art. 5, para 1. Foreign persons are not explicitly
envisaged but according to the provisions of the above mentioned
law they are excluded from the list of persons enjoying
preferential participation, namely Bulgarian citizens with
permanent residents in the country (Art. 5, par. 2, 3). They are
also excluded from the privatization through investment vouchers,
provided by Chapter VIII of the law. The right to such vouchers is
given only to Bulgarian citizens with permanent residence in the
country and over 18 years of age as of the registration deadline
for the vouchers (Art. 47, para 1). The law does not envisage the
possibility for transfer of the vouchers as registered securities.
Perhaps with the adoption of an ordinance of the Council of
Ministers and a law on the privatization investment funds, the
regulation of privatization through investment funds would be made
more precise. For the time being there are no concise legal
provisions on this matter.
4. Foreign exchange regime for foreign persons
According to Art. 15 of LEAFPPFI a foreign person can open bank
account and make deposits in foreign exchange and in leva , dispose
of shares, bonds and other securities. Transactions of a foreign
person, carried out through a branch or as a sole trader, are
subjected to the same regulation as for the local persons.
Furthermore, according to Art. 13, para 1, for the repatriation
of investment income, received in leva, foreign persons have the
right to purchase foreign exchange from Bulgarian commercial banks
(Para 1). The repatriation is possible after submission of a tax
deduction declaration (Para 2).
Decree #15 of the Council of Ministers of February 8, 1991 on
the changes of the foreign exchange regime and its latest
amendments stipulate for all payments on the territory of the
country to be carried out in leva (Art. 1, para 1) and imposes some
restrictions on the payments and remittances of local and foreign
persons abroad in the event of indirect investment ( the term
"indirect investment" itself is to be clarified). These
transactions can be carried out only by permission from the
Bulgarian National Bank, concurrent with the Ministry of Finance,
and when the payer is a state company or a company with more than
50% state participation, concurrent also with the relevant body
executing the right of the state as an owner of the capital (Art.3,
para 3, item 1 and para 4)In the event of export or import of
securities, applicable is the foregoing definition of a foreign
person as per the TCVCCA, namely that in such cases transactions
are subject to foreign exchange control.
5. Acquisition of non-registered securities
- Acquisition and payment of non-registered securities (treasury
bonds and long-term bonds) is regulated by Ordinance #5 of the
Ministry of Finance and the Bulgarian National Bank. The ordinance
does not specify whether foreign persons can participate on the
primary market, where public securities are acquired at auctions
organized by the Bulgarian National Bank. Since Art.3, para 6
envisages as possible participants both concrete institutions (like
State Insurance Institute - DZI, State Savings Bank -DSK, the
commercial banks) and financial institutions (financial houses and
brokers that meet the requirements of the Ordinance), it could be
assumed that foreign persons are also included. Furthermore, the
definition of foreign investment includes also investment in other
securities issued by the Bulgarian state or by Bulgarian legal
persons. However, since non-registered securities are auctioned by
the Bulgarian National Bank on behalf and for the account of the
state and on the basis of a contract with the Ministry of Finance,
the latter, as an issuer, shall grant special permission to foreign
persons to participate on the primary market.
- The ordinance does not contain any special provision or a ban
on the acquisition of public securities by foreign persons on the
secondary market, so following its regulations, it is possible to
transfer public securities to foreign legal and natural persons. In
this way public securities can be acquired through commercial
banks, financial and brokerage houses and on the First Bulgarian
Stock Exchange - the commission on the exchange is 0.002% of the
transaction cost, with a minimum transaction amount of 5000
leva.
6. Taxation
- The Law on Taxation stipulates that foreign persons
that receive income in the country shall also register for taxation
(Art.5, item 3). They register with the tax office on the territory
where the income was generated or the investment was made
(Art.6).
- Taxation of incomes from commercial and public
securities is applied pursuant to Decree #56 on Economic Activity.
As provided by the latest amendments of Art. 109, para 1, income
from shares, dividends, interests, etc., derived by foreign persons
on the territory of the country, is levied at 15%. Para 2 of the
same text provides the possibility of tax exemption in the cases
when the dividend drawn is used to purchase shares or bonds in the
country. At the same time, companies with foreign participation
that receive dividends from shares and income from equity
participation as provided by the above mentioned decree, shall pay
profit tax equal to 10% of the gross amount of the dividends
received.
- Foreign persons performing independent business are
taxed at 40% (Art.108 of Decree #56 on Economic Activity ). Under
the Law on Interests, Taxes, Charges and Other Similar State
Receivable unrequited taxes are charged with interests in the
amount of 1/360 of the base interest rate for the period plus 0.05%
for every day of default.
7. Registration of foreign investment
- All foregoing cases are liable to the regime of
obligatory registration of foreign investment and the changes that
occurred within 30 days of their performance, which is done at the
Ministry of Finance in a manner provided by Art.11 of LEAFPPFI and
Instruction #1 of the Ministry of Finance on registration of
foreign investment - published in State Gazette #43/1992. The
instruction stipulates that any foreign person failing registration
of his investment or presenting false information at registration
shall be fined to the extent of 1/10 of the unregistered
investment.
- Though the LEAFPPFI eliminates the requirement for
government approval of most foreign investments, registration with
the Ministry of Finance is required. It is imposed primarily to
facilitate administration of the special foreign exchange
repatriation rights provided for foreign investors under Art. 13.
If foreign investment were not registered, it would be difficult to
ascertain whether a particular foreign person or firm was entitle
to purchase and transfer abroad foreign exchange under the Law.
However, foreign investors may face other registration requirements
imposed by other laws on domestic and foreign investors alike. This
is the case with respect to the Law on Commerce - sole proprietors,
partnerships and companies, including branch offices, must register
with the District Court. Registration involves filing an
application with the Court and receiving permission to operate
under the proposed form of organization.
9. Competent authorities
- The Law on transformation and privatization of the
state and municipal enterprises of 23 April 1992 (SG No38 of 1992,
amended SG No51 of 1994) defines the authorities that are empowered
to carry out privatization transactions.
- State-owned enterprises are under the jurisdiction
of the Agency of privatization, while the municipal ones - under
the respective municipalities.
The competency varies depending on the book value of the fixed
assets of the enterprise: when it is more than Lev 70 mn - the
decision for privatization and the transaction are under the
authority of the Agency for Privatization; when it is less - it is
the respective branch ministry.
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