When will the FDI screening rules become applicable?
On 08.03.2024 amendments to the Bulgarian Investment Promotion Act (“IPA”) were promulgated in the State Gazette, introducing criteria for foreign direct investments in Bulgaria, which will be subject to preliminary screening. However, the FDI screening will not yet be applicable in practice until the Council of Ministers adopts Rules of Procedure of the ISC (Interdepartmental Screening Council) and until it amends the Implementation Regulation to the IPA so as to determine the rules under which notifications of upcoming investments will be submitted and assessed for approval. The act requires these regulations to be adopted within 6 months of its entry into force, i.e. no later than on 12.09.2024. Investments that have begun implementation before the adoption of the regulations will not be subject to screening.
Why are the FDI screening rules being introduced?
The FDI screening rules are a mechanism for protection of the national security and public order and such regimes have already been implemented in most EU Member States. They are structured according to common rules set out by Regulation (EU) 2019/452, but Member States have the freedom to expand the scope of investments subject to screening at national level. Bulgaria has exercised this option and will apply the regime to both direct and indirect participation by a foreign investor and under a broader definition of the term “foreign direct investment”, which includes not only the acquisition of an interest, control, or establishment of a new business, but also the expansion of an existing investment. Moreover, investments by persons from certain countries or in certain industries will be subject to preliminary authorisation regardless of the general size and industry criteria they fall in, while the Interdepartmental Screening Council, the State Agency for National Security and the State Agency for Intelligence will also have the right to propose other investments for screening.
The FDI screening regimes in other Member States have undergone changes already to overcome initial shortcomings, so after applying the national regime in practice, the Bulgarian institutions will also have the opportunity to propose changes. In the future, changes in screening regimes in the EU are also expected because at the beginning of this year the European Commission proposed a new draft Regulation to replace Regulation (EU) 2019/452 and further harmonise EU rules on FDI screening.
What is a foreign direct investment?
A foreign direct investment is any kind of investment, insofar it aims to establish or maintain lasting and direct connections between the foreign investor and the enterprise to which the capital is provided in order to carry out economic activity in Bulgaria, including an investment that allows for effective participation in the management or control of the company carrying out economic activity.
Direct foreign investment 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, as well as the creation of a new location for carrying out the activity or the increase of the capital under the condition that the shares are acquired by the foreign investor.
The portfolio (passive) investment, i.e. a purely financial investment that is not intended to affect the management and control of the enterprise, is not considered a foreign direct invesment.
Which foreign direct investments will be subject to screening?
Subject to screening are foreign direct investments that meet the following cumulative criteria:
- Will be carried out by a person or legal entity based outside the European Union (EU) or the low-risk countries designated within the screening mechanism, i.e. a person or legal entity:
- who is not a national of an EU Member State or a low-risk country; or
- whose registered office is not located in an EU Member State or a low-risk country; or
- even if it has its registered office in an EU Member State or a low-risk country, (i) it is controlled, directly or indirectly, by natural persons who are not EU nationals/low-risk nationals or legal entities based outside the EU/low-risk country; or (ii) the specific investment is controlled directly or indirectly (including by contract or internal rules) by natural persons who are not EU nationals/low-risk countries or legal entities that are based outside the EU/low-risk country.
The law defines the following low-risk countries for the purposes of the screening mechanism: the United States of America, the United Kingdom, Canada, Australia, New Zealand, Japan, the Republic of Korea, the UAE, and Saudi Arabia. It is not clear what criteria have been used to define these countries and why are some countries that generate a large volume of investments in Bulgaria absent from the list (e.g. Switzerland and Liechtenstein). The list of low-risk countries can be expanded by the National Assembly based on a proposal from the Council of Ministers, but the criteria for assessing the proposals are not set out in the law, which creates a prerequisite for stronger political influence on the decisions to include new low-risk countries.
2. They have as their object the areas of activity referred to in art. 4(1) of Regulation (EU) 2019/452, which include (but are not limited to):
- critical infrastructure (physical or virtual), incl. related to energy, transport, water, health, communications, media, data processing or storage, aviation, defence, electoral or financial infrastructure, sensitive facilities, as well as land and real estate, which are critical for the use of such infrastructure;
- critical technologies and dual-use items as defined in point (1) of Article 2 of Council Regulation (EC) No 428/2009, including artificial intelligence, robotics, semiconductors, cybersecurity, aviation and defence technologies, energy storage technologies, quantum and nuclear technologies, as well as nanotechnologies and biotechnology;
- the supply of critical resources, including energy or raw materials, and on food security;
- access to sensitive information, including personal data, or the ability to control such information; or
- freedom and pluralism of the media.
3. Meet the criteria for the amount of investment, i.e.:
- through the implementation of the investment, ownership of at least 10% of the capital of an enterprise operating in the country is acquired, or the value of the investment exceeds the threshold of EUR 2 000 000 or their BGN equivalent; or
- through the implementation of the investment, ownership of at least 10% of the capital of an enterprise operating in the country and carrying out high-tech activities is acquired;
- a new investment is carried out that exceeds the threshold of EUR 2 000 000 or their BGN equivalent. A new investment is an initial investment in tangible and intangible assets related to the commencement of the activity of a new enterprise, the expansion of the capacity of an existing enterprise, the diversification of the production of an enterprise through products that have not previously been produced, or a substantial change in the overall production process of an existing enterprise.
Which direct foreign investments will be screened, regardless of their size?
Regardless of their size, direct foreign investments can be screened:
- At the proposal of a member of the Interdepartmental Screening Council having competence in the relevant sector in which the investment will be realized, in coordination with the representatives of the State Agency for National Security and the State Agency for Intelligence.
- At the reasoned request of the State Agency for National Security and the State Agency for Intelligence, when there is evidence that it may have an impact on security and public order.
- When there is a direct or indirect state participation from a country outside the European Union or low-risk countries in the capital of the foreign investor, including significant funding from a state authority. Where the foreign investor is a company, whose shares are traded on a regulated market, the direct or indirect participation of a country outside the European Union in the company’s capital should be higher than 5%.
- In sites and activities by persons who carry out activities for the production of energy products from oil and products of petroleum origin in sites part of or adjacent to critical infrastructure under the Law on Administrative Regulation of Economic Activities Related to Petroleum and Petroleum Products.
- With a foreign investor from Russia or the Republic of Belarus, i.e.: (a) a natural person who is a citizen of Russia or the Republic of Belarus; (b) a legal person having its registered office in Russia or the Republic of Belarus which has made or intends to make a direct foreign investment in Bulgaria; (c) a legal person whose registered office is in a State outside Russia and the Republic of Belarus which has made or intends to make a foreign direct investment in Bulgaria, in which at least 25 % of the ownership belongs to one or more natural persons who are citizens of Russia or the Republic of Belarus, one or more legal persons whose registered office is in Russia or the Republic of Belarus, or to another legal entity organised under the legislation of Russia or the Republic of Belarus.
How will the FDI screening be carried out?
The control over foreign direct investments will be exercised through a Interdepartmental Screening Council. Prior to making the investment, the foreign investor shall submit through the Bulgarian Investment Agency (BIA) an application for its authorization in Bulgarian and English. After the initial examination of the application by BIA and the elimination of potential deficiencies, BIA sends it for consideration by the Interdepartmental Screening Council, which should decide on the authorization of the foreign direct investment within 45 days. This period may be extended by further 30 days and suspended pending an opinion from the European Commission if one is required in relation to projects or programmes of interest to the European Union. The absence of a ruling by the Interdepartmental Screening Council in time is considered as a deemed approval to proceed with the investment.
What are the powers of the Interdepartmental Screening Council to control the execution of the investment?
The Interdepartmental Screening Council has the right to authorize or refuse to authorize a direct foreign investment in Bulgaria, depending on whether the investment affects security or public order and is likely to affect projects or programmes of interest to the European Union.
The Interdepartmental Screening Council may also instruct for preliminary conditions for the foreign direct investment, e.g.: a) limiting the right to acquire up to 20% of the capital of a company or up to 10% of a company in the high-tech sector; b) giving instructions for the protection of personal data, for maintaining the security of information or others – under a proposal of a competent regulatory authority; c) preservation of special rights in favor of the state in making decisions within the competence of the general meeting and management of capital commercial companies (the so-called “golden share”), in the cases of transactions carried out under the Privatization and Post-privatization Control Act.
What are the penalties for failure to obtain preliminary authorisation of the foreign direct investment?
The implementation of a foreign direct investment, which requires screening, without prior authorization from the Interdepartmental Screening Council is subject to a penalty of 5% of the value of the investment, but not less than BGN 50,000. The same sanction is imposed in case of violation of a conditional permission, as well as in case of providing incorrect or incomplete data in the screening procedure.
The content of the present article is for informational purposes only and does not constitute legal advice.
For further information contact:
Iva Georgieva, Managing Associate
iva.georgieva@kdp-law.com
