On 15 June 2016 the Bulgarian Parliament adopted long discussed amendments to the so called “Act on Economic and Financial Relations with Companies Registered in Jurisdictions with Preferential Tax Treatment, their Related Parties and Actual Owners” (the “Offshore Companies Act”, or the “Act”).
The Act was adopted in 2014 and aimed to prohibit participation, direct or indirect, of companies registered in certain “tax haven jurisdictions” (i.e. “offshore companies”) in the most important public economic sectors in Bulgaria, such as: insurance, banking, pension funds, telecommunications, energy and others. Further, the Act prohibited offshore companies from entering public procurement and public private partnership contracts and applying for certain concession rights and mining licences.
The newly adopted amendments are supposed to relax the prohibitions of the Offshore Companies Act. The amendments respond to EU concerns that the measures breach certain freedoms of European and international law and are not proportionate to their purposes.
Of note, the Act’s prohibitions no longer apply to companies that are merely “related parties” to companies registered in a tax haven jurisdiction. Instead, the restrictions now apply only if the company itself is registered in a tax haven or is controlled by a company registered in such jurisdiction.
Additionally, the Act now allows direct or indirect participation of offshore companies in the public sectors concerned if their participation is less than 10%. This means, for example, that an energy production licensee could be owned by offshore companies if their joint holding is less than 10%. However, the 10% allowance does not apply to public procurement contracts. Further, the amendments increase the number of applicable exceptions to the prohibitions to account for various freedoms of trade provided under trade agreements entered into by Bulgaria, such as the WTO Agreement on Government Procurement, the Decision for the association of the overseas countries and territories and the WTO General Agreement on Trade in Services.
Finally, offshore companies must still disclose their ultimate beneficial owners and the amended Act specifies that an ultimate beneficial owner is a person who owns, directly or indirectly, more than 25% of the share capital of the company. Under this definition, a high management officer could qualify as an ultimate beneficial owner if others are unknown.
The business community and foreign investors are concerned that the amendments will affect existing investments in the public sectors covered by the Act. Under the 2014 version of the Act, companies who had obtained public rights before the Act entered into force were not affected by its restrictions because the restrictions applied only to new grants of public rights. However, some controversial amendments suggest that all companies who already have any of the public rights covered by the Act must ensure they comply with all provisions of the Act. This means that such grandfathered-in offshore companies will have to examine whether they fall under any of the exemptions under the Act in order to avoid losing their public rights. Further, they will have to register the offshore company and its ultimate beneficial owners. The question is what happens if there is no exemption applicable. Would the investment be expropriated in such case by the State?
The amended Act will enter into force in July 2016, and the Minster of Justice will have to issue instructions on its application within a month.