Governing Law
Foreign Exchange Rules
Security and Credit Enhancement
Tax Issues
Public Procurement Rules


Project finance is a relatively new practice area in Bulgaria. While the number of project finance transactions is still limited, the area is developing swiftly due to a need for large investment, particularly in capital-intensive sectors. Recent changes in the regulatory framework have increased project-fnance investment within the public sector.

The 1999 Law on Energy and Energy Efficiency (Official Gazette #64, July 16 1999) demonopolized the production of electric energy (including high voltage electricity) and deregulated the operation of coal, gas and water electric power plants. In 1999 several projects were initiated with the aim of repairing, reconstructing and subsequently operating Bulgaria's largest electric power plants on a project-finance basis. The estimated costs of individual projects in the energy sector are as high as $400 million. Sponsors include the US-based Entergy and AES, and the German Rheinbraun AG.

Another large project within the energy sector which took off in 1999 is the construction of three hydroelectric power plants in south Bulgaria at an estimated cost of $300 million. The project, which has been developed on the basis of an agreement between Bulgaria and Turkey, is sponsored by the Turkish-based company Ceylan Holding. The revenue will be partially secured by the export of electricity to Turkey.

Large infrastructure and construction projects also underway include the following:

  • the construction of the Maritza toll highway, which is also sponsored by Ceylan holding. The road will stretch from Central Bulgaria to the Turkish border;

  • the construction of the Sofia Hilton Hotel; and

  • UK-based International Water Limited's concession for the improvement and operation of the Sofia City water supply and waste water system, which was granted by the by the Municipality of Sofia.
The project finance transactions that are now underway may be used as guidelines with regard to issues that arise at the planning or implementation stages of the project.


The projects in progress all involve non-Bulgarian sponsors and lenders. The project companies are Bulgarian special-purpose vehicles established by the sponsor and a Bulgarian partner. The Bulgarian partner is usually a public authority (eg, the state, agency of the state or a municipality) or a state owned company. The Bulgarian partner's equity capital is secured by land, other real estate and assets. In a few instances Bulgarian partners have provided limited debt financing.

The project owner is not legally required to be a Bulgarian company. However, because of certain provisions in Bulgarian law, this is often the only option. For example, Bulgarian property law prohibits the purchase of land by non-Bulgarian entities. Other real estate may only be acquired if the non-Bulgarian person has obtained permission from the minister of finance. In some instances, the concessions or certain licences may not be granted unless the prospective concessionaire or licensee is first incorporated as a Bulgarian company.

Governing Law

Bulgarian law allows the parties to an agreement to choose the governing law. However, this is subject to two conditions. First, this right to choose does not apply to relations that are governed by mandatory rules of Bulgarian law. This category includes the following regulations:

  • foreign investment regulations;

  • securities regulation; and

  • exchange control rules.

Rules that relate to pledges or mortgages apply regardless of the law, which governs the contractual relationship between the pledgor and the pledgee.

Second, Bulgarian law provides that a contractual choice of jurisdiction may not affect mandatory provisions of the law of a particular jurisdiction, if 'all elements' of the contract relate to that law. This includes a broad range of statutory provisions which may not be altered or waived by the parties. It is therefore almost impossible for an agreement between two Bulgarian entities to be governed by foreign law.

Foreign Exchange Rules

Since project-finance ventures are of a cross-border nature, Bulgarian exchange control regulations apply. The Currency Law (Official Gazette #83, September 21 1999), which came into effect on January 1 2000, abolished a number of foreign exchange restrictions and relaxed others.

There are no restrictions on the repatriation of interest payments, proceeds and income from business activity in the country. However, cross-border loans and agreements for the provision of security by Bulgarian entities in favour of foreign entities must be registered with the Bulgarian National Bank. Registration is a precondition for both repayment of the loan and repatriation of the proceeds from the security. It is therefore in the lender's interest to ensure that the foreign exchange rules are observed.

Security and Credit Enhancement

Bulgarian law provides a broad range of methods for the creation of security interest. These include the following:

  • mortgages;

  • pledges (including pledges on going concern, floating pool of assets, accounts receivable and equity securities);

  • guarantees; and

  • assignment of contracts.

Mortgages are traditionaly used to secure real estate. However, they are both expensive and difficult to foreclose. Charges may reach up to 2.5% of the secured amount and foreclosure takes place through an often lengthy court procedure. In contrast, pledges on going concern, floating pool of assets, accounts receivable and equity securities cost little to create, and can be foreclosed by a speedy and effective out-of-court procedure.

The effect of a mortgage can be achieved effectively by a pledge of the project company's going concern, where the real estate is explicitly specified in the deed of charge. In this case the security interest in the collateral is protected if the pledgor loses title over the asset prior to foreclosure.

Pledge of equity shares is also increasingly common. The security provider should be registered as a joint-stock company rather than another form of limited liability company, with book-entry form shares rather than paper-form securities. If the security provider is a limited liability company, foreclosure on pledge of shares may eventually trigger the company's liquidation. While Bulgarian law makes effective provision for the transfer of book-entry-form shares, the security provider's obligation to endorse paper-form shares may not be enforced.

Foreclosure on pledges is carried out through a simple out-of-court procedure. The secured creditor has first priority with respect to the collateral. The foreclosing creditor does not assume the liabilities of either the pledgor or the company whose assets or shares have been pledged. The pledgee is only entitled to sell the pledged collateral. Prior arrangements for acquisition of collateral by the secured creditor are null and void. In some instances, however, a secured transaction may be combined with the execution of an escrow agreement with respect to collateral, providing a title transfer.

'Comfort letters' from regulatory authorities are popular among foreign project-finance participants. However, these should be treated with caution, since they are not binding under Bulgarian law.

The assignment of project documents is routinely practised. Assignment of 'accounts' contracts is only subject to the prior consent of the other original party to the contract. In contrast, concession agreements and the granting of licences and permits are usually subject to anti-assignment statutory rules, which must be addressed early on in the planning stage.

Tax Issues

Unless a treaty for the avoidance of double taxation states otherwise, cross-border loans in Bulgaria are subject to withholding tax. The lender may be taxed on the following:

  • interest income;

  • administration fees;

  • profit sharing; and

  • commitment fees.

However, the lender may minimize its tax liability in Bulgaria by lending from a jurisdiction which has a double taxation treaty with Bulgaria. In this case lenders must ensure that the treaty which exempts them from tax liability in the host jurisdiction has been published in Bulgaria's Official Gazette. This is because the Bulgarian Constitution only recognizes international treaty law if it has been published in the Official Gazette.

Transfer pricing may also become an issue in project financing. This problem may arise where the interest rate levels are set at an excessively high level. Although Bulgarian law recognizes interest payments on loans as expenses for tax purposes, setting excessively high interest rate levels may be considered as transfer pricing and therefore taxed as part of the borrower's tax base.

Public Procurement Rules

Certain activities in the public sector are subject to public procurement rules, which apply regardless of whether the procuring entity is public or private. The Bulgarian law on public procurement does not exempt subsidiaries, affiliates or companies otherwise under the control of the procuring entity from its provisions.

Dispute Resolution

Notwithstanding recent legislative amendments, the Bulgarian judicial process remains slow and ineffective. Arbitration is not always an available alternative. Bulgarian arbitration law prohibits foreign arbitration between Bulgarian entities. Domestic arbitration between the state (or agency of the state) and another Bulgarian party is also prohibited. (The state and its agencies, however, may validly submit to arbitration a dispute with a non-Bulgarian party.)

Therefore, a number of project-related agreements either cannot be arbitrated or are subject to domestic arbitration only. In some instances the restrictions may be effectively overcome by a direct agreement between the lender or other non-Bulgarian entity and the project owner or the Bulgarian partner, which contains an enforceable assignment option in favour of the lender and an arbitration clause.

For more information on this topic please contact Nikolai Gouginski at Djingov, Gouginski, Kyutchukov & Velichkov by telephone (+359 2 980 1358) or by fax (+359 2 980 3586) or by e-mail ([email protected]).
The materials contained on this web site are for general information purposes only and are subject to the disclaimer.