BULGARIA 2006 INVESTMENT CLIMATE STATEMENT

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 40 SOFIA 000083 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/IFD/OIA AND USTR 
TREASURY FOR OASIA 
USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH 
 
E.O. 12958: N/A 
TAGS: EINV, EFIN, ELAB, ETRD, KTDB, EFIN, ELAB, ETRD, KTDB, EFIN, ELAB, ETRD, KTDB, EFIN, ELAB, ETRD, KTDB, BU, OPIC, USTR, BUEINV, OPIC, USTR, BUEINV, OPIC, USTR, BUEINV, OPIC, USTR 
SUBJECT: BULGARIA 2006 INVESTMENT CLIMATE STATEMENT 
 
Ref: 05 STATE 202943 
 

/>generous election promises, has placed a special

emphasis on maintaining the key elements of the

previous government's economic policy, which hinge on

adhering to the Currency Board Arrangement and

conservative fiscal policy.



Bulgaria's relations with the International Monetary

Fund (IMF) are good, and are often described as a

success story. The precautionary Stand-by Arrangement,

which was negotiated in July 2004, expires in September

2006 and is designed to be phased out shortly before

Bulgaria joins the EU.



Continuing economic progress and political stability

have enhanced Bulgaria's ability to attract respected

international investors. The Bulgaria Investment

Agency (BIA) estimates FDI of USD 2.6 billion for 2005

thanks to the expansion of existing foreign investment

as well as the higher number of green-field investment

projects. New foreign direct investment (FDI) in the

period of January through October 2005 increased by

five percent--to USD 1.730 billion--despite the

election related halt in the privatization process.



With more than 10 first class investment certificates

under the investment promotion framework, BIA

recognizes 2005 as "the year of green-field investment

projects." It is a positive sign that the new

Socialist government finalized on December 7, 2005, the

agreement with the U.S. company AES to construct the

Maritsa East 1 (ME1) project, a new 670 MW lignite

based power plant. With a total value of USD 1.4

billion, the project represents the biggest ever green-

field investment in Bulgaria and largest green-field

investment in Southeast Europe for 2005.



The Investment Promotion Act stipulates equal treatment

of foreign and domestic investors. Bulgaria's

investment promotion framework creates conditions for

improved administrative services and includes an

investment incentive package. The law encourages

implementation of investment projects over a period of

up to three years. The law explicitly recognizes

intellectual property and securities as a foreign

investment.



Two leading international rating agencies assigned

first ever investment grade to Bulgaria in 2004,

reflecting the country's positive economic prospects

and prudent fiscal policies. In 2005, the two rating

agencies upgraded Bulgaria's rating due to falling

public debt, continued fiscal prudence and the upcoming

EU accession.



Common Forms of Investment

--------------

The most common type of organization for foreign

investors is a limited liability company. Other

typical forms are joint stock companies, joint

enterprises, business associations, general and limited

partnerships, and sole proprietorships.



The main controlling bodies of law are: the 1991

Commercial Code, which regulates commercial and company

law, including the creation and rights of legal

entities, and the 1951 Law on Obligations and

Contracts, which regulates civil transactions. These

laws are deemed generally adequate and neither limits

foreign participation in legal entities.



The 2003 Law on Special Purpose Investment Companies

allows for public investment companies (SPIC) in real

estate and receivables. Since a SPIC is considered a

pass-through structure, at least 90 percent of its net

income must be distributed to shareholders, who are

taxed on the dividends received. Prospective U.S.

investors should consult appropriate legal counsel for

up-to-date legal information and conduct due diligence

before making any obligations.



Investment Barriers

--------------



Among the problems encountered by foreign investors in

Bulgaria are: government bureaucracy; poor

infrastructure; frequent changes in the legal

framework; low domestic purchasing power; a protracted

privatization process; poor health care and

corruption. In addition, a weak judicial system limits

investor confidence in the courts' ability to enforce

ownership and shareholders rights, contracts, and

intellectual property rights.



The constitutional prohibition against direct ownership

of land by foreign persons remains in force, however,

there are no restrictions against acquisition of land

by locally registered companies with majority foreign

participation, and creation of such a company is a

relatively simple process. Once Bulgaria joins the EU,

all EU citizens and entities will be allowed to acquire

property; all other foreigners must continue to form a

local corporation.



Privatization

--------------

The Privatization Agency (PA) administers the

privatization of all state-owned companies. Foreign

companies, including state-owned ones, may purchase

Bulgarian state-owned firms. The government's stated

privatization goals are to have transparent, quick, and

effective privatization procedures, providing for equal

treatment of all investors. The program is intended to

make the economy more efficient by divesting state-

owned enterprises and to cover the current account

deficit with privatization revenues.



The failure to complete a single major privatization

transaction in 2005, however, underscores the

government's inability to attract respected foreign

investors though privatization and to finalize already

negotiated deals. The ambitious 2005 privatization

program envisioned the sale of the remaining 46 state-

owned enterprises (SOEs) for the equivalent of USD 300

million, including the Navigation Maritime Bulgare, the

national carrier (Bulgaria Air),Boyana Film Studio,

the three thermal power-plants, the tobacco monopoly

and some arm dealers.



The Post-privatization Control Agency, which oversees

the implementation of privatization contracts, attempts

to ensure that non-price privatization commitments

(employee retention, technology transfer, environmental

liability and investment).

Concessions

--------------

Under the 1995 Law on Concessions, the state is

authorized, on the basis of a concession agreement, to

grant private investors a partial monopoly in

activities in thirteen sectors normally reserved for

the central and/or local governments. These include

the construction of roads, ports and airports, power

generation and transmission, mining, petroleum

exploration/drilling, telecommunications, forests and

parks, beaches, and nuclear installations. In order to

streamline the concession procedure, the government

launched a National Concessions Register at the end of

2005. The register is in line with the EU

requirements, and provides detailed information about

the projects, including concessionaire's duties and

responsibilities in implementing the contract.



Concessions are awarded on the basis of a tender and

are issued for up to 35 years. They can be extended,

but shall not exceed 50 years in total. In a new

tender, however, the original concession holder can

again be granted the concession under certain

circumstances. The Concessions Law permits "build-

operate-transfer" deals, giving priority for mineral

exploitation to the holders of exploration licenses,

and reconciles conflicting procedures for privatization

and concession. Since 1998, Parliament has passed

legislation granting concessions in telecommunications,

energy, mining, waters, ports, airports, roads, and

railways.



B. CONVERSION AND TRANSFER POLICIES



Bulgaria replaced much of its outdated and fragmented

foreign currency legislation in 1999 and liberalized

current international transactions in accordance with

IMF Article VIII obligations. Under 2003 amendments to

the 1999 Foreign Currency Act anyone may take up to BGN

25,000 or its foreign exchange equivalent out of the

country without documentation. However, the export of

between BGN 8,000 and BGN 25,000 or its foreign

exchange equivalent must be declared at customs.

Export of amounts larger than BGN 25,000 must be

accompanied by a declaration about the source of these

funds and supported by documents certifying that the

person does not owe taxes. No tax certificate is

required for foreigners exporting the cash equivalent

of BGN 25,000 or greater provided the amount is equal

to the amount declared (or less) when imported. The

import of more than BGN 8,000 or its foreign exchange

equivalent must be declared at customs.



The law also stipulates that payments abroad may be

executed only through bank transfers. Transfers over

BGN 25,000 for current international payments (imports

of goods and services, transportation, interest and

principal payments, insurance, training, medical

treatment, and other purposes defined in Bulgarian

regulations) must be supported by documentation showing

the need and purpose of such payments.



C. EXPROPRIATION AND COMPENSATION



According to Article 17 of the Bulgarian Constitution,

private real property is protected by law. Depending

upon the purpose, expropriation actions may be

undertaken by the Council of Ministers or the regional

Governor, provided that the owner is adequately

compensated. Owners must be compensated in kind with

nearby property of equal value at current prices.

Monetary compensation is also permitted with the

consent of the property's owner. Expropriation actions

can be appealed directly to the Supreme Court on the

basis of the expropriation action, the property

appraisal, or the method of compensation. In its

Bilateral Investment Treaty (BIT) with the U.S.,

Bulgaria committed itself to international arbitration

in the event of expropriation and other investment

disputes.



D. DISPUTE SETTLEMENT



The Judicial System

--------------

Bulgaria's 1991 Constitution serves as the foundation

of the legal system and creates an independent judicial

branch. In 2002, the Bulgarian Parliament passed a

series of amendments to the Judicial Systems Act aimed

at improving the quality of the judiciary, increasing

the efficacy of the court system, and preventing

corruption in the justice system. The Constitutional

Court declared most of the amendments unconstitutional

in December 2002. As a result, judicial reform in

Bulgaria has been delayed and many key issues remain

unaddressed.



Further constitutional changes, passed in 2003, limited

the immunity of the magistrates, extended the period

for getting tenure, and introduced a 5-year term in

office for judicial heads. The March 2004 amendments

to the Judicial Systems Act were intended to increase

further the efficiency of the court system and help

prevent judicial corruption. Nonetheless, corruption

remains a serious problem. Other problems include lack

of transparent and neutral standards for assigning

cases, poor coordination between magistrates,

corruption, and cumbersome procedures.



There are three levels of courts. 117 regional courts

exercise jurisdiction over administrative, civil, and

criminal cases. Above them, 29 district courts

(including the Sofia City Court) have original

jurisdiction in civil cases where claims exceed 10,000

leva, in serious criminal cases, and in other cases as

provided by law. The district courts are also courts

of appellate review for regional court decisions. The

five appellate courts may review the decisions of the

district courts. On the highest level are the Supreme

Court of Cassation and the Supreme Administrative

Court. On issues of law, the Supreme Court of

Cassation has appellate jurisdiction over all civil

cases involving claims over 5,000 leva and criminal

cases. The Supreme Administrative Court rules on the

legality of acts by the state administration including

Council of Ministers and the ministries. The Supreme

Courts hear cases in three-judge panels, whose

decisions may be appealed to a five-judge panel of the

same court. Decisions by the five-judge panels are

final and binding.



The Constitutional Court is not integrated into the

rest of the judiciary. It issues final interpretations

of the constitution, rules on constitutional challenges

to laws and acts, rules on international agreements

prior to Parliamentary ratification, and reviews

domestic laws to determine their consistency with

international legal norms. While the Constitutional

court does not rule ex officio, 1/5 of the MPs (48),

the President, the Government, the Chief Prosecutor and

the two Supreme courts can refer matters to it for

review.



Bulgarian law provides for jurors only in criminal

cases. Under Bulgarian procedural law, first-instance

civil cases are brought before one judge in the

regional or the district court, depending on the case.

Administrative sanctions may be appealed to the

regional courts and one judge reviews such appeals.

Administrative acts are subject to administrative and

court appeal.



Execution of Judgments

--------------

To execute judgments, a final ruling must be obtained

so that the court can order money damages (which then

requires further complicated procedures by the payee)

or an equitable remedy. The court of first instance

must be petitioned for a writ of execution (based on

the judgment),which enables seizure of assets. If the

party is seeking a remedy in equity, the final judgment

must be brought before an executive judge. In 2002, a

number of amendments were made to the Code of Civil

Procedure to close loopholes, shorten deadlines, and

clarify certain provisions. In practice, Bulgarian and

foreign observers caution that the execution of

judgments remained slow and unpredictable and was prone

to corruption and inefficiency in the judicial system.



In a continuing effort to address the execution

problems, the Bulgarian Parliament passed the Private

Enforcement Agents Act in 2005. The new law introduces

the profession of private enforcement agents to whom

the state delegates the collection of enforceable

claims. The law also provides a series of guarantees

that the private enforcement agents' performance will

be closely supervised. This important development was

also recognized by the European Commission's 2005

Comprehensive Monitoring Report, which noted that the

new law "should help improving the functioning of the

judicial system and in particular the conditions for

contract enforcement."



Foreign judgments can be executed in Bulgaria.

Execution depends on reciprocity, as well as bilateral

or multilateral agreements, as determined by an

official list maintained by the Ministry of Justice.

The U.S. does not currently have reciprocity with

Bulgaria, so Bulgarian courts are not obliged to honor

decisions of U.S. courts. All foreign judgments are

handled by the Sofia City Court, which must determine

that the judgment does not violate public decrees,

standards, or morals before it can be executed. There

are also cases defined by the Civil Procedure Code

(certain real estate issues and Bulgarian precedents),

in which judgments cannot be executed even if they

conform to Bulgarian laws and morals.



Bankruptcy

--------------

The 1994 Law on Bankruptcy provides for reorganization

or rehabilitation of a legal entity, attempts to

maximize asset recovery, and provides for fair and

equal distribution among all creditors. The law

applies to all commercial entities, except public

monopolies or state-owned companies established by a

special law. Bank bankruptcies are regulated under the

Bank Bankruptcy Act, while insurance company failures

are regulated by the 1996 Insurance Act.



Under Part IV of the Commercial Code, the debtor or

creditors can initiate bankruptcy proceedings. The

debtor must declare bankruptcy within 15 days of

becoming insolvent. Once insolvency is determined, the

court appoints an interim trustee to represent and

manage the company, take inventory of property and

assets, identify and convene the creditors, and develop

a recovery plan. At the first meeting of the creditors

a trustee is nominated; usually this is just a

reaffirmation of the court appointed trustee.



Non-performance of a money obligation must be

adjudicated (res judicata) before the bankruptcy court

can determine whether the debtor is insolvent.

Additionally, amendments passed in 2003 add a

presumption of insolvency when the debtor has not

performed an obligation within 60 days of maturity or

when the debtor can only pay the claims of certain

creditors.



Creditors must declare all debts owed to them within

one month of the start of bankruptcy proceedings. The

trustee then has seven days to compile a list of

debts. A rehabilitation plan or a scheme of

distribution (in cases of liquidation) must be proposed

no later than the date on which the court approves the

list of debts. The court must rule on approval of the

plan within seven days.



The lack of trained trustees has been a problem in the

past. The 2003 amendments provided for examinations

for individuals applying to become trustees, but

implementation of this requirement is contingent on the

adoption by several ministries of a special

regulation. The amendments also provide for annual

training courses for trustees.



The methods of liquidating assets were also revised by

the June 2003 amendments. The main objective was to

establish a legal framework for selling assets that

accounts for the character of bankruptcy proceedings,

thus avoiding the need to apply the Civil Procedure

Code. The new regime includes rules requiring a

greater degree of publicity for asset sales. The

amendments limited the rights to appeal judicial

decisions made during bankruptcy proceedings.



International Arbitration

--------------



Pursuant to its Bilateral Investment Treaty (BIT) with

the United States, Bulgaria has committed to a range of

dispute settlement procedures starting with

notification and consultations. Bulgaria accepts

binding international arbitration in disputes with

foreign investors.



There are opportunities for international arbitration

in Bulgaria. The Code of Civil Procedure mandates that

a foreign court of arbitration is possible only if at

least one of the parties has its seat or residence

abroad. As a result, foreign-owned, Bulgarian-

registered companies having a dispute with a Bulgarian

entity can only have arbitration in Bulgaria. However,

under the Law on International Commercial Arbitration,

the arbitrator himself could be a foreign person. Under

the same act, the parties can agree on the language to

be used in the arbitration proceedings. The major and

most experienced arbitration institution is the

Arbitration Court of the Bulgarian Chamber of Commerce

and Industry (BCCI).



Not all disputes, however, may be resolved through

arbitration. Disputes regarding rights over real estate

properties in the country or labor disputes can only be

heard by the courts. Additionally, Bulgarian courts

have exclusive competence over industrial property

disputes regarding patents issued in Bulgaria.



Bulgaria is a party to the Convention on the

Recognition and Enforcement of Foreign Arbitral Awards

(the New York Convention),which facilitates

enforcement of foreign arbitral awards, and is a member

of the 1961 European Convention on International

Commercial Arbitration. However, having gone through

the enforcement proceedings before the Bulgarian

courts, the creditor needs then to execute the award

using the general framework for execution of judgments

in the country, which is inefficient. Bulgaria is also

a signatory of the International Center for Settlement

of Investment Disputes (ICSID) convention and the

Convention on the Settlement of Investment Disputes

Between States and Nationals of Other States.



Mediation

--------------



Businesses wishing to use mediation to solve their

disputes in Bulgaria may find it hard to select

experienced mediators. This service has just started to

develop in the country following the adoption at the

end of 2004 of the Mediation Act. BCCI and the American

Chamber of Commerce (AmCham) responded promptly by

opening commercial mediation centers. The mediators at

these centers have been trained with US assistance but

at this point lack sufficient experience to be able to

provide high quality mediation services.



E. PERFORMANCE REQUIREMENTS/INCENTIVES



Bulgaria does not impose export performance or local

content requirements as a condition for establishing,

maintaining, or increasing an investment. The law does

not specifically restrict hiring of expatriate

personnel, but residence permits are often difficult to

obtain. A June 1999 law regulating gambling imposes

license requirements on foreigners organizing games of

chance.



The Bulgaria Investment Agency (BIA)

(www.investbg.government.bg),the government's

coordinating body for investment, provides information

services, individual administrative services and

assessment of qualification to receive investment

incentives. First-class investments (investments over

70 million BGN, about USD 44 million) are deemed to be

priority investment projects. At the request of

investors receiving first-class investment

certificates, BIA can recommend that the competent

authorities grant them free real estate (either state

or municipal property). For first-class investments,

the Council of Ministers may provide state financing

for critical infrastructure deemed necessary for the

investment plan's implementation. Additionally, BIA

represents first and second-class investors

(investments of USD 25-44 million) before all central

and territorial executive authorities and the local

self-government authorities, and processes all

administrative documents. Third-class investors

(investments of USD 6-25 million) receive customized

information services.



The government policy for promotion of investment is

not applicable to banks and other financial

institutions, insurance companies, investment

companies, companies with special investment purpose,

pension and health insurance companies, gambling

companies, or investments made pursuant to the

Privatization Law.



The GOB introduced in 2003 tax incentives for

investments in regions with high unemployment. VAT

exemption on imports for investment projects over 10

million BGN (about USD 6.25 million),to be implemented

over a two-year period, was introduced in 2004.



F. RIGHT TO PRIVATE OWNERSHIP/ESTABLISHMENT



The Constitution states that the Bulgarian economy

"shall be based on free economic initiative." Private

entities can establish and own business enterprises

engaging in any profit-making activities, unless

expressly prohibited by law. Bulgaria's Commercial

Code guarantees and regulates the free establishment,

acquisition, and disposition of private business

enterprises. Competitive equality is the standard

applied to private enterprises in competition with

public enterprises with respect to access to markets,

credit, and other business operations, such as licenses

and supplies.



G. PROTECTION OF PROPERTY RIGHTS



Bulgarian law protects the acquisition and disposition

of property rights. In practice, the protection of

property rights is subject to difficulties of varying

degrees. Although Bulgarian IPR legislation is

generally adequate, with modern patent and copyright

laws and criminal penalties for copyright infringement,

industry representatives believe effective IPR

protection requires improvements to the legislation,

including to the Optical Disc Media (ODM) Legislation,

the Penal Code and the Penal Procedure Code.

Additionally, the government still lacks sufficient

institutional capacity, coordination, and the political

will to address effectively major enforcement problems,

especially in combating and prosecuting organized crime

groups. Many industrial groups currently have

intellectual property disputes before the government.



In May 2004, Bulgaria was placed on the Special 301

Watch List for the first time in five years. The 2005

US government inter-agency review retained Bulgaria on

the Watch List. There has been a steady resurgence of

piracy, mainly in the sale of pirated ODM and illegal

downloading of copyrighted material over the past few

years.



The US government has formulated an action plan, which

will assist in focusing attention on immediate and

effective implementation of the new Optical Disk Media

(ODM) Law and the amended Copyrights and Related Rights

legislation, enforcement actions and ministerial-level

coordination, designing training programs, and

improving efforts to address counterfeiting of U.S.

spirits and apparel.



Bulgaria is a member of the World Intellectual Property

Organization (WIPO) and a signatory to key

international agreements.



Copyrights

--------------



Parliament passed on November 25, 2005, amendments to

the 1993 Law on Copyrights and Related Rights, which

aligns Bulgaria's copyright legislation with the

European requirements. In particular, the amendments

implement two directives of the EU in the area of

copyrights: Directive 2001/84/EC of the European

Parliament and of the Council on the resale right for

the benefit of the author of an original work of art;

and Directive 2004/48/EC of the European Parliament and

of the Council on the enforcement of intellectual

property right ("the Enforcement Directive"). Also,

the amendments will establish the mechanism regulating

the administration of the newly-established database

and copyright information sharing system sponsored by

the EU.



The copyright term of protection was extended from 50

to 70 years after the author's death in 2000. The new

term of protection is retroactive, i.e., a term of

protection that expired at the moment of approval of

the amendments is revived within the framework of the

70-year term of protection. For films and other audio-

visual works, copyrights are protected during the lives

of director, screenplay-writer, cameraman, or the

author of dialogue or music, plus 70 years. Other

amendments to the law enable copyright owners to file

civil claims to suspend the activities of pirates;

provide for confiscation of equipment and pirated

materials; enhance border control over pirated

material; introduce a new neighboring right for film

producers.



Parliament approved in September 2005 the long awaited

Law on Administrative Control over the Manufacture and

Distribution of ODM, which now requires SID codes on

blank optical discs (OD) produced in Bulgaria and

strengthens the import/export regime for raw materials

and equipment involved in ODM production. However, the

new law does not allow industry representatives or

rights holders to participate in inspections and

excludes goods in transit from the registration regime.



The Copyright Office of the Ministry of Culture is

responsible for copyright matters in Bulgaria. While

civil law provides remedies for violations, under the

Penal Code, copyright infringement is only a

misdemeanor, subject to nominal fines.



Patents

--------------

The Bulgarian patent law has been harmonized with EU

law in the areas of application for European patents

and utility models. Bulgaria joined the Convention on

the Grant of European Patents (European Patent

Convention) on July 1, 2002 and has obtained observer

status in the Administrative Council of the European

Patent Organization.



Bulgaria grants the right to exclusive use of

inventions and utility models for 20 years and 10

years, respectively, from the dates of patent

application filings. Inventions eligible for patent

protection must be both new as a result of innovation

and have industrial applications. Article 6 lists

items not considered inventions and utility models are

specifically defined.



The independent Patent Office is the competent

authority with respect to patent matters. The patent

law describes the application procedures and the

examination process. Applications are submitted

directly to the Patent Office. Compulsory licensing

may be ordered under certain conditions: the patent has

not been used within four years of filing the patent

application or three years from the date of issue; the

patent holder is unable to offer justification for not

adequately supplying the national market; or,

declaration of a national emergency.



Patent infringement is punishable by fines of up to

1,000 BGN. Disputes are reviewed by specialized panels

convened by the President of the Patent Office and may

be appealed to the Sofia City Court within three months

of the panel's decision.



The 1996 Protection of New Types of Plants and Animal

Breeds Act allows for a term of protection of 25 years

for annual plants and 30 years for perennial plants and

animal breeds, which starts from its date of issuance

by the Patent Office. Parliament ratified in 1998 the

International Convention for the Protection of New

Varieties of Plants (UPOV).



Data Exclusivity

--------------

Responding to long-standing industry concerns, the GOB

included a provision to provide data exclusivity

(protection of confidential data submitted to the

government to obtain approval to market pharmaceutical

products) in its new Drug Law, which took effect in

2003. The law, however, links data protection to a

valid patent.



Trademarks

--------------



The 1999 Trademarks and Geographical Indications Act

regulates the establishment, use, cession, suspension,

renewal and protection of rights of trademarks,

collective and certificate marks, and geographic

indications in accordance with TRIPs requirements and

the government's EU Accession Agreement. The August

2005 amendments to the Law on Trademarks and

Geographical indications and the Law on Industrial

Design further incorporated TRIPs requirements.



Registration is refused, or an existing registered

trademark is cancelled, if a trademark constitutes a

reproduction or an imitation or if it creates confusion

with a well-known trademark, as stipulated by the Paris

Convention and the Trademarks and Geographical

Indications Act. Applications for registration must be

submitted to the Patent Office under specified

procedures.



Right of priority, with respect to trademarks that do

not differ substantially, is given to the application

that was filed in compliance with Article 32 first.

Right of priority is also established on the basis of a

request made in one of the member countries of the

Paris Convention or of the World Trade Organization.

To exercise the right of priority, the applicant must

file a request within six months of the date of

original filing.



A trademark is normally granted within 12 months of

filing a complete application. Refusals can be

appealed in the Sofia City Court within three months of

notification of the decision. The right of exclusive

use of a trademark is granted for ten years from the

date of submitting the application. Requests for

extension of protection must be filed during the final

year of validity, but not less than six months prior to

expiration. Protection is terminated if a mark is not

used for a five-year period.



Trademark infringement is a problem in Bulgaria for

many U.S. manufacturers. Its categorization as a

misdemeanor, subject to a nominal fine, is not a

sufficient deterrent to illegal activities. While more

draconian measures are available, such as confiscation

or fines of up to 500,000 BGN, they are rarely levied

or enforced.



U.S. businesses have noted significant difficulties in

obtaining relief against trademark infringement. Even

if courts understand the law and issue orders, the

entities charged with enforcement often cannot be

relied upon to carry out the court judgment. Under

Bulgarian law, legal entities cannot be held criminally

liable. Therefore, the criminal penalties for copyright

infringement and willful trademark infringement are

limited.



In Bulgaria, trademark and service-mark rights and

rights to geographic indications are only protected

pursuant to registration with the Bulgarian Patent

Office or an international registration mentioning

Bulgaria; they do not arise simply with "use in

commerce" of the mark or indication. Under Bulgarian

law, legal entities cannot be held criminally liable.

Similarly, criminal penalties for copyright

infringement and willful trademark infringement are

limited, compared to enforcement mechanisms available

under U.S. law.



H. TRANSPARENCY OF THE REGULATORY SYSTEM



Major Taxation Issues Affecting U.S. Businesses

-------------- --

Bulgaria and the U.S. have not signed an Avoidance of

Double Taxation Treaty (DTT),despite strong interest

by the Bulgarian government.



Personal income tax rates increase progressively from

20 to 24 percent. There are three income brackets,

with a non-taxable personal monthly income of 180 BGN.

The corporate and profit tax rates are 15 percent.

Certain tax incentives apply in regions of high

unemployment. Individuals and small businesses in

certain trades pay a "patent" tax (presumptive tax)

according to a schedule established by Parliament.

Dividends (and liquidation quotas) distributed by a

Bulgarian resident company to U.S. investors are

subject to a withholding tax of 15 percent. While

Bulgarian residents face a withholding tax of 7

percent, a tax resident in an EU member state is not

subject to a withholding tax.



Employers pay 65 percent of the monthly contributions

for social security insurance, health insurance and an

unemployment fund, but their share of contributions is

slated to decline, in phases, to 50 percent by 2009.

In 2006, employers and employees will contribute 23.5

percent and 12.4 percent, respectively, of a given

salary, to social security insurance, unemployment and

health insurance. Foreign persons are required to have

the same insurance and unemployment compensation

packages as Bulgarians.



There is a 20 percent single-rate value-added tax

(VAT). Legal persons with a taxable income of 75,000

BGN are obliged to register for VAT purposes. VAT

registration is voluntary for persons with taxable

income of between 25,000 and 75,000 BGN. All goods and

services are subject to VAT except exports,

international transport, and precious metals supplied

to the central bank. VAT payments are generally

rebated when goods are resold. The 45-day refund

period for exporters was reduced to 30 days in 2005.

Excise taxes are levied on tobacco, alcoholic

beverages, fuels, certain types of automobiles,

gambling equipment, coffee, and tea.



Foreign investors have asserted that widespread tax

evasion, combined with the failure of the authorities

to enforce collection from large state-owned companies,

places them at a disadvantage. Another problem

underscored by investors is the frequent revision of

tax laws, sometimes without sufficient notice.

However, in conjunction with its IMF agreement, the

government is strengthening tax collection and limiting

tax arrears of state-owned enterprises.



The government launched the National Revenue Agency

(NRA) on January 1, 2006. The NRA, which unifies the

collection of taxes and social security contributions,

is expected to enhance expenditure control and

transparency and. Government officials have also

indicated their long-term intention to lower marginal

rates as tax collection improves.



Regulatory Environment

--------------



The multiplicity of Bulgarian licensing and regulatory

regimes and the arbitrary interpretation and

enforcement of them by the bureaucracy continues to

create incentives for corruption and has long been seen

as an impediment to investment, private business

development and market entry.



The 2003 Restriction of Administrative Regulation and

Control of Economic Activity Act establishes a general

and systematized set of rules for simplifying and

implementing administrative regulations. The law

defines 39 operations that must be licensed and

introduces two other simplified regimes, i.e.,

registration and permit regimes.



From the perspective of regulatory relief, this law is

a milestone. It sets forth firm market principles of

regulation, such as that regulation at all levels of

government must be justified by defined need (in terms

of national security, environmental protection, or

personal and material rights of citizens) and cannot

impose restrictions unnecessary to the stated

purposes of the regulation. The law also requires that

the regulating authority take account of the compliance

costs to be borne by business and that no national

level law can be passed without an impact analysis on

the law's economic affect on the regulated activity.

In addition, the law eliminates bureaucratic discretion

in granting applications for routine economic

activities and provides for "silent consent" when the

government has not acted upon an application in the

allotted time. All of these reforms considerably

lighten the potential of regulatory abuse at all levels

of government, business environment will be improved

once the law is fully implemented.



Energy Regulator

--------------



The Energy Law enacted in 2003 established a

transparent and predictable regulatory environment in

the energy sector where the key regulatory

responsibilities are vested with the State Energy

Regulatory Commission (SERC) - a separate body with

regulatory authorities and a high degree of autonomy

and accountability.



Competition Policy

--------------



The 1998 Law on the Protection of Competition (the

"Competition Law") is intended to establish and

maintain a competitive market. The Competition Law

forbids monopolies, restraining agreements, trade

restrictive practices, abuse of a dominant market

position, and unfair competition, and seeks to promote

consumer protection. A company is deemed to have a

dominant position if it controls 35 percent or more of

the relevant market. A company with a dominant market

position is prohibited from: certain pricing practices;

limiting manufacturing development to the detriment of

consumers; discriminatory treatment of competing

customers; tying contracts to additional and unrelated

obligations; and the use of economic coercion to cause

mergers. The Law prohibits five specific forms of

unfair competition: damaging competitors' goodwill;

misrepresentation with respect to goods or services;

misrepresentation with respect to the origin,

manufacturer, or other features of goods or services;

the use or disclosure of someone else's trade secrets

in violation of good faith commercial practices; and

"unfair solicitation of customers" (promotion through

gifts and lotteries),which may create difficulties for

some foreign enterprises.



The Competition Law was overhauled in 2003, introducing

important provisions that expand the competency of the

Commission for Protection of Competition (CPC),define

the prohibition on misuse of an oligopoly, and impose a

single criterion for assessing the significance of

planned concentration: the aggregate turnover of the

enterprises affected by the concentration.



I. EFFICIENCY OF CAPITAL MARKETS/PORTFOLIO INVESTMENT



Since 1997, the Bulgarian Stock Exchange (BSE) has

operated under a license from the Securities and Stock

Exchange Commission (SSEC). The 1999 Law on Public

Offering of Securities regulates issuance of

securities, securities transactions, stock exchanges,

and investment intermediaries. Comprehensive

amendments to this Law (99 in number),which were

promulgated in June 2002, establish significant rights

for minority shareholders of publicly-owned companies

in Bulgaria. In addition, they create an important

foundation for the adoption of international best

practices and corporate governance principles in public

companies.



The infrastructure of the stock exchange has been

substantially improved, including the establishment of

an official index (SOFIX). New trading instruments

(government bonds, corporate bonds, Bulgarian

Depositary Receipts, municipal and mortgage-

backed bonds, and privatization through the stock

exchange) have been introduced. As a result of

appreciation of nearly all of the most actively traded

issues on the Bulgarian Stock Exchange, its

capitalization more than doubled from 4 billion BGN

(USD 2.5 billion) in 2004 to 8.4 billion BGN (USD 5.3

billion) or 20 percent of GDP. Nonetheless, the stock

exchange generally lacks attractive securities and

faces low liquidity.

The Banking System

--------------



The Bulgarian banking system has undergone considerable

transformation since its virtual collapse in 1996 and

continues to mature. There are 34 commercial banks,

with total assets of 30.5 billion BGN (USD 19.1

billion) or 73 percent of the estimated 2005 GDP. Bank

intermediation, measured by total bank assets to GDP,

has doubled over the past five years.



Bulgaria has completed the privatization of its state-

owned banks, attracting some strong foreign banks as

strategic investors. Foreign investors drawn to the

Bulgarian banking industry, include UniCredito Italiano

SpA (UCI),BNP PARIBAS, National Bank of Greece,

Societe Generale, Bank Austria Creditanstalt, and

Citibank.



Because of Bulgaria's future EU membership and EU

policy of attaining a high degree of geographic

integration, smaller commercial banks owned by local

companies have been searching for opportunities to

establish partnership with larger European banks. Once

Bulgaria joins the EU the concept of the "single

passport" will allow any financial institution which is

duly authorized and supervised in its Member State of

origin to do business throughout the EU.





Reflecting expanded lending, the average capital

adequacy ratio (capital base to risk-weighted credit

exposures) for the banking system moved closer to

Bulgarian National Bank's requirement of 12 percent.

The capital adequacy ratio stood at 17 percent in the

first half of 2005 and is likely to stay at this level

given the BNB's measures to retain the credit growth

rate. The growth rate in non-government sector credit

slowed to 32.5 percent in the period between January-

November 2005.



Government Securities

--------------



The government finances expenditures by accessing

capital markets. On a weekly basis, the Ministry of

Finance holds an auction of Treasury bills. The bills

are typically short-term (3-month, 6-month and 1-year

maturities). Commercial banks are the primary

purchasers of these instruments. Foreign banks can

participate in the treasury market only through a

Bulgarian bank or the branch of a foreign bank, which

is licensed in Bulgaria. The foreign bank transfers

the money, which is then converted into leva to make

the purchase, which must be registered with the

Ministry of Finance. The foreign bank must open a lev

account (a "custody account") for transactions. This

lev account cannot be used as a standard deposit bank

account. A foreign currency account can be opened, but

it is not obligatory.



The Investment Promotion Act defines securities,

including treasury bills, with maturities over 6 months

as investments. Repatriation of profits is possible

after presenting documentation that taxes have been

paid.



J. POLITICAL VIOLENCE



There have been no incidents in recent years involving

politically motivated damage to projects or

installations. Rather, violence in Bulgaria is

primarily criminally motivated.



K. CORRUPTION



Corruption is still perceived to be one of the gravest

problems in Bulgaria's investment climate, despite the

Bulgarian government's numerous advances in laws and

legal instruments. Bulgaria ranks 55th among 159 states

included in Transparency International's (TI)

Corruption Perception Index for 2005.



The government has taken some initial steps to root out

corruption in certain agencies, like customs. In

December the Interior Ministry dismantled a ring of

customs agents and civil agents, who were falsifying

documents for the illegal import of Chinese goods.

In reality, however, the established human trafficking,

narcotics, and contraband smuggling channels that

contribute to corruption in Bulgaria have yet to be

broken, and serious efforts and political will are

still needed to carry out much-needed reforms to

address inefficiencies in the judicial system. The

Bulgarian public generally holds the police, the

judiciary, customs officials, and political parties in

low regard due to their perceived corruption.



Bribery is a criminal act under Bulgarian law for both

the giver and the receiver. Penalties range from one

to fifteen years' imprisonment, depending on the

circumstances of the case, with confiscation of

property added in more serious cases. In very grave

cases, the Penal Code specifies prison terms of 10 to

30 years. The 1996 Money Laundering Law also applies

to bribes. Bribing a foreign official is a criminal

act. There have been trials and convictions of

enterprise managers, prosecutors, and law enforcement

officials for corruption. While Bulgarian tax

legislation does not explicitly prohibit the deduction

of bribes in the computation of domestic taxes,

deductions connected with bribery and other illegal

activities are not allowed under the tax code.



Bulgaria has a 1996 Law for Measures against Money

Laundering and in 1998 was one of the first non-OECD

nations to ratify the OECD Anti-Bribery Convention.

Bulgaria has also ratified the Convention on

Laundering, Search, Seizure, and Confiscation of

Proceeds of Crime and the Civil Convention on

Corruption.



The GOB's recent anti-corruption agenda included the

adoption of key international anti-corruption

instruments, including:

-- signing the UN Convention against Corruption;

-- withdrawing the reservations made in 2001 at the

ratification of the Criminal Law Convention on

Corruption;

-- ratifying and signing the Additional Protocol to the

Council of Europe's Criminal Law Convention on

Corruption; Bulgaria was the second state to ratify

this Additional Protocol.



Although the Bulgarian government has achieved some

successes in the fight against organized crime and

corruption, many observers believe that corruption and

political influence in business decision-making

continue to be significant problems in Bulgaria's

investment climate.



L. BILATERAL INVESTMENT AGREEMENTS



As of December 2005, Bulgaria has foreign investment

promotion and protection treaties or agreements with

Albania, Algeria, Argentina, Armenia, Austria, Belarus,

Belgium-Luxembourg, China, Croatia, Cuba, Cyprus, Czech

Republic, Denmark, Egypt, Finland, France, Georgia,

UNCLASSIFIED



SIPDIS

PROG 01/19/06

A/DCM: BFREDEN

POLEC: IDRENOVICHKI

POLEC: MJ, CM, FCS:JR, USAID:MF, USDA:BG, DOJ: TP

POLE CONS SIPDIS



AMEMBASSY SOFIA

SECSTATE WASHDC

INFO DEPT OF COMMERCE WASHINGTON DC

CIMS NTDB WASHDC

DEPT OF TREASURY WASHINGTON DC



STATE FOR EB/IFD/OIA AND USTR

TREASURY FOR OASIA

USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH



E.O. 12958: N/A

TAGS: EINV, EFIN, ELAB, ETRD, KTDB, OPIC, USTR, BU

SUBJECT: BULGARIA 2006 INVESTMENT CLIMATE STATEMENT



Ref: 05 STATE 202943



1. Bulgaria - 2006 Investment Climate Statement.



A. OPENNESS TO FOREIGN INVESTMENT



Bulgaria has a liberal foreign investment regime and

attracting foreign investment, especially American, is

one of the new administration's top priorities. The

government is focused on developing promising sectors

of the economy for foreign investment, including

energy, tourism, information technology,

transportation, telecommunications, agriculture and

consumer goods (food & beverage and healthcare).

Bulgaria provides considerable incentives for job

creation. Many municipalities are prepared to grant

concessions or other favorable treatment for

significant investments. Bulgaria has a well-educated

workforce, low labor costs, and its geographic position

places it at the crossroads of Europe, the Middle East,

and the CIS. Bulgaria joined NATO in April 2004 and

completed EU accession negotiations in June 2004. The

EU Accession Treaty was signed on April 25, 2005,

allowing Bulgaria to join in 2007, but a "safeguard

clause" could allow the EU to delay Bulgaria's entry by

a year.



Investment Trends and Policies

--------------



Despite the many problems that remain in Bulgaria, the

country is heading in the right direction -- in large

part due to the EU Accession process, which is the

government's number one priority. The pace of EU

reforms suffered during the summer due to protracted

negotiations over forming a new government, but the

coalition has been working overtime to pass EU-related

legislation.



The new Socialist-led government recognizes that

foreign investment is essential to the future of

Bulgaria and has sought ways to reassure investors of

its prudent economic policies. Prime Minister

Stanishev, who could not deliver on many of his party's

generous election promises, has placed a special

emphasis on maintaining the key elements of the

previous government's economic policy, which hinge on

adhering to the Currency Board Arrangement and

conservative fiscal policy.



Bulgaria's relations with the International Monetary

Fund (IMF) are good, and are often described as a

success story. The precautionary Stand-by Arrangement,

which was negotiated in July 2004, expires in September

2006 and is designed to be phased out shortly before

Bulgaria joins the EU.



Continuing economic progress and political stability

have enhanced Bulgaria's ability to attract respected

international investors. The Bulgaria Investment

Agency (BIA) estimates FDI of USD 2.6 billion for 2005

thanks to the expansion of existing foreign investment

as well as the higher number of green-field investment

projects. New foreign direct investment (FDI) in the

period of January through October 2005 increased by

five percent--to USD 1.730 billion--despite the

election related halt in the privatization process.



With more than 10 first class investment certificates

under the investment promotion framework, BIA

recognizes 2005 as "the year of green-field investment

projects." It is a positive sign that the new

Socialist government finalized on December 7, 2005, the

agreement with the U.S. company AES to construct the

Maritsa East 1 (ME1) project, a new 670 MW lignite

based power plant. With a total value of USD 1.4

billion, the project represents the biggest ever green-

field investment in Bulgaria and largest green-field

investment in Southeast Europe for 2005.



The Investment Promotion Act stipulates equal treatment

of foreign and domestic investors. Bulgaria's

investment promotion framework creates conditions for

improved administrative services and includes an

investment incentive package. The law encourages

implementation of investment projects over a period of

up to three years. The law explicitly recognizes

intellectual property and securities as a foreign

investment.

Two leading international rating agencies assigned

first ever investment grade to Bulgaria in 2004,

reflecting the country's positive economic prospects

and prudent fiscal policies. In 2005, the two rating

agencies upgraded Bulgaria's rating due to falling

public debt, continued fiscal prudence and the upcoming

EU accession.



Common Forms of Investment

--------------

The most common type of organization for foreign

investors is a limited liability company. Other

typical forms are joint stock companies, joint

enterprises, business associations, general and limited

partnerships, and sole proprietorships.



The main controlling bodies of law are: the 1991

Commercial Code, which regulates commercial and company

law, including the creation and rights of legal

entities, and the 1951 Law on Obligations and

Contracts, which regulates civil transactions. These

laws are deemed generally adequate and neither limits

foreign participation in legal entities.



The 2003 Law on Special Purpose Investment Companies

allows for public investment companies (SPIC) in real

estate and receivables. Since a SPIC is considered a

pass-through structure, at least 90 percent of its net

income must be distributed to shareholders, who are

taxed on the dividends received. Prospective U.S.

investors should consult appropriate legal counsel for

up-to-date legal information and conduct due diligence

before making any obligations.



Investment Barriers

--------------



Among the problems encountered by foreign investors in

Bulgaria are: government bureaucracy; poor

infrastructure; frequent changes in the legal

framework; low domestic purchasing power; a protracted

privatization process; poor health care and

corruption. In addition, a weak judicial system limits

investor confidence in the courts' ability to enforce

ownership and shareholders rights, contracts, and

intellectual property rights.



The constitutional prohibition against direct ownership

of land by foreign persons remains in force, however,

there are no restrictions against acquisition of land

by locally registered companies with majority foreign

participation, and creation of such a company is a

relatively simple process. Once Bulgaria joins the EU,

all EU citizens and entities will be allowed to acquire

property; all other foreigners must continue to form a

local corporation.



Privatization

--------------

The Privatization Agency (PA) administers the

privatization of all state-owned companies. Foreign

companies, including state-owned ones, may purchase

Bulgarian state-owned firms. The government's stated

privatization goals are to have transparent, quick, and

effective privatization procedures, providing for equal

treatment of all investors. The program is intended to

make the economy more efficient by divesting state-

owned enterprises and to cover the current account

deficit with privatization revenues.



The failure to complete a single major privatization

transaction in 2005, however, underscores the

government's inability to attract respected foreign

investors though privatization and to finalize already

negotiated deals. The ambitious 2005 privatization

program envisioned the sale of the remaining 46 state-

owned enterprises (SOEs) for the equivalent of USD 300

million, including the Navigation Maritime Bulgare, the

national carrier (Bulgaria Air),Boyana Film Studio,

the three thermal power-plants, the tobacco monopoly

and some arm dealers.



The Post-privatization Control Agency, which oversees

the implementation of privatization contracts, attempts

to ensure that non-price privatization commitments

(employee retention, technology transfer, environmental

liability and investment).



Concessions

--------------

Under the 1995 Law on Concessions, the state is

authorized, on the basis of a concession agreement, to

grant private investors a partial monopoly in

activities in thirteen sectors normally reserved for

the central and/or local governments. These include

the construction of roads, ports and airports, power

generation and transmission, mining, petroleum

exploration/drilling, telecommunications, forests and

parks, beaches, and nuclear installations. In order to

streamline the concession procedure, the government

launched a National Concessions Register at the end of

2005. The register is in line with the EU

requirements, and provides detailed information about

the projects, including concessionaire's duties and

responsibilities in implementing the contract.



Concessions are awarded on the basis of a tender and

are issued for up to 35 years. They can be extended,

but shall not exceed 50 years in total. In a new

tender, however, the original concession holder can

again be granted the concession under certain

circumstances. The Concessions Law permits "build-

operate-transfer" deals, giving priority for mineral

exploitation to the holders of exploration licenses,

and reconciles conflicting procedures for privatization

and concession. Since 1998, Parliament has passed

legislation granting concessions in telecommunications,

energy, mining, waters, ports, airports, roads, and

railways.



B. CONVERSION AND TRANSFER POLICIES



Bulgaria replaced much of its outdated and fragmented

foreign currency legislation in 1999 and liberalized

current international transactions in accordance with

IMF Article VIII obligations. Under 2003 amendments to

the 1999 Foreign Currency Act anyone may take up to BGN

25,000 or its foreign exchange equivalent out of the

country without documentation. However, the export of

between BGN 8,000 and BGN 25,000 or its foreign

exchange equivalent must be declared at customs.

Export of amounts larger than BGN 25,000 must be

accompanied by a declaration about the source of these

funds and supported by documents certifying that the

person does not owe taxes. No tax certificate is

required for foreigners exporting the cash equivalent

of BGN 25,000 or greater provided the amount is equal

to the amount declared (or less) when imported. The

import of more than BGN 8,000 or its foreign exchange

equivalent must be declared at customs.



The law also stipulates that payments abroad may be

executed only through bank transfers. Transfers over

BGN 25,000 for current international payments (imports

of goods and services, transportation, interest and

principal payments, insurance, training, medical

treatment, and other purposes defined in Bulgarian

regulations) must be supported by documentation showing

the need and purpose of such payments.



C. EXPROPRIATION AND COMPENSATION

UNCLASSIFIED



SIPDIS

PROG 01/19/06

A/DCM: BFREDEN

POLEC: IDRENOVICHKI

POLEC: MJ, CM, FCS:JR, USAID:MF, USDA:BG, DOJ: TP

POLE CONS SIPDIS



AMEMBASSY SOFIA

SECSTATE WASHDC

INFO DEPT OF COMMERCE WASHINGTON DC

CIMS NTDB WASHDC

DEPT OF TREASURY WASHINGTON DC



STATE FOR EB/IFD/OIA AND USTR

TREASURY FOR OASIA

USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH



E.O. 12958: N/A

TAGS: EINV, EFIN, ELAB, ETRD, KTDB, OPIC, USTR, BU

SUBJECT: BULGARIA 2006 INVESTMENT CLIMATE STATEMENT



places it at the crossroads of Europe, the Middle East,

and the CIS. Bulgaria joined NATO in April 2004 and

completed EU accession negotiations in June 2004. The

EU Accession Treaty was signed on April 25, 2005,

allowing Bulgaria to join in 2007, but a "safeguard

clause" could allow the EU to delay Bulgaria's entry by

a year.



Investment Trends and Policies

--------------



Despite the many problems that remain in Bulgaria, the

country is heading in the right direction -- in large

part due to the EU Accession process, which is the

government's number one priority. The pace of EU

reforms suffered during the summer due to protracted

negotiations over forming a new government, but the

coalition has been working overtime to pass EU-related

legislation.



The new Socialist-led government recognizes that

foreign investment is essential to the future of

Bulgaria and has sought ways to reassure investors of

its prudent economic policies. Prime Minister

Stanishev, who could not deliver on many of his party's

generous election promises, has placed a special

emphasis on maintaining the key elements of the

previous government's economic policy, which hinge on

adhering to the Currency Board Arrangement and

conservative fiscal policy.



Bulgaria's relations with the International Monetary

Fund (IMF) are good, and are often described as a

success story. The precautionary Stand-by Arrangement,

which was negotiated in July 2004, expires in September

2006 and is designed to be phased out shortly before

Bulgaria joins the EU.



Continuing economic progress and political stability

have enhanced Bulgaria's ability to attract respected

international investors. The Bulgaria Investment

Agency (BIA) estimates FDI of USD 2.6 billion for 2005

thanks to the expansion of existing foreign investment

as well as the higher number of green-field investment

projects. New foreign direct investment (FDI) in the

period of January through October 2005 increased by

five percent--to USD 1.730 billion--despite the

election related halt in the privatization process.



With more than 10 first class investment certificates

under the investment promotion framework, BIA

recognizes 2005 as "the year of green-field investment

projects." It is a positive sign that the new

Socialist government finalized on December 7, 2005, the

agreement with the U.S. company AES to construct the

Maritsa East 1 (ME1) project, a new 670 MW lignite

based power plant. With a total value of USD 1.4

billion, the project represents the biggest ever green-

field investment in Bulgaria and largest green-field

investment in Southeast Europe for 2005.



The Investment Promotion Act stipulates equal treatment

of foreign and domestic investors. Bulgaria's

investment promotion framework creates conditions for

improved administrative services and includes an

investment incentive package. The law encourages

implementation of investment projects over a period of

up to three years. The law explicitly recognizes

intellectual property and securities as a foreign

investment.



Two leading international rating agencies assigned

first ever investment grade to Bulgaria in 2004,

reflecting the country's positive economic prospects

and prudent fiscal policies. In 2005, the two rating

agencies upgraded Bulgaria's rating due to falling

public debt, continued fiscal prudence and the upcoming

EU accession.



Common Forms of Investment

--------------

The most common type of organization for foreign

investors is a limited liability company. Other

typical forms are joint stock companies, joint

enterprises, business associations, general and limited

partnerships, and sole proprietorships.



The main controlling bodies of law are: the 1991

Commercial Code, which regulates commercial and company

law, including the creation and rights of legal

entities, and the 1951 Law on Obligations and

Contracts, which regulates civil transactions. These

laws are deemed generally adequate and neither limits

foreign participation in legal entities.



The 2003 Law on Special Purpose Investment Companies

allows for public investment companies (SPIC) in real

estate and receivables. Since a SPIC is considered a

pass-through structure, at least 90 percent of its net

income must be distributed to shareholders, who are

taxed on the dividends received. Prospective U.S.

investors should consult appropriate legal counsel for

up-to-date legal information and conduct due diligence

before making any obligations.



Investment Barriers

--------------



Among the problems encountered by foreign investors in

Bulgaria are: government bureaucracy; poor

infrastructure; frequent changes in the legal

framework; low domestic purchasing power; a protracted

privatization process; poor health care and

corruption. In addition, a weak judicial system limits

investor confidence in the courts' ability to enforce

ownership and shareholders rights, contracts, and

intellectual property rights.



The constitutional prohibition against direct ownership

of land by foreign persons remains in force, however,

there are no restrictions against acquisition of land

by locally registered companies with majority foreign

participation, and creation of such a company is a

relatively simple process. Once Bulgaria joins the EU,

all EU citizens and entities will be allowed to acquire

property; all other foreigners must continue to form a

local corporation.



Privatization

--------------

The Privatization Agency (PA) administers the

privatization of all state-owned companies. Foreign

companies, including state-owned ones, may purchase

Bulgarian state-owned firms. The government's stated

privatization goals are to have transparent, quick, and

effective privatization procedures, providing for equal

treatment of all investors. The program is intended to

make the economy more efficient by divesting state-

owned enterprises and to cover the current account

deficit with privatization revenues.



The failure to complete a single major privatization

transaction in 2005, however, underscores the

government's inability to attract respected foreign

investors though privatization and to finalize already

negotiated deals. The ambitious 2005 privatization

program envisioned the sale of the remaining 46 state-

owned enterprises (SOEs) for the equivalent of USD 300

million, including the Navigation Maritime Bulgare, the

national carrier (Bulgaria Air),Boyana Film Studio,

the three thermal power-plants, the tobacco monopoly

and some arm dealers.



The Post-privatization Control Agency, which oversees

the implementation of privatization contracts, attempts

to ensure that non-price privatization commitments

(employee retention, technology transfer, environmental

liability and investment).

Concessions

--------------

Under the 1995 Law on Concessions, the state is

authorized, on the basis of a concession agreement, to

grant private investors a partial monopoly in

activities in thirteen sectors normally reserved for

the central and/or local governments. These include

the construction of roads, ports and airports, power

generation and transmission, mining, petroleum

exploration/drilling, telecommunications, forests and

parks, beaches, and nuclear installations. In order to

streamline the concession procedure, the government

launched a National Concessions Register at the end of

2005. The register is in line with the EU

requirements, and provides detailed information about

the projects, including concessionaire's duties and

responsibilities in implementing the contract.



Concessions are awarded on the basis of a tender and

are issued for up to 35 years. They can be extended,

but shall not exceed 50 years in total. In a new

tender, however, the original concession holder can

again be granted the concession under certain

circumstances. The Concessions Law permits "build-

operate-transfer" deals, giving priority for mineral

exploitation to the holders of exploration licenses,

and reconciles conflicting procedures for privatization

and concession. Since 1998, Parliament has passed

legislation granting concessions in telecommunications,

energy, mining, waters, ports, airports, roads, and

railways.



B. CONVERSION AND TRANSFER POLICIES



Bulgaria replaced much of its outdated and fragmented

foreign currency legislation in 1999 and liberalized

current international transactions in accordance with

IMF Article VIII obligations. Under 2003 amendments to

the 1999 Foreign Currency Act anyone may take up to BGN

25,000 or its foreign exchange equivalent out of the

country without documentation. However, the export of

between BGN 8,000 and BGN 25,000 or its foreign

exchange equivalent must be declared at customs.

Export of amounts larger than BGN 25,000 must be

accompanied by a declaration about the source of these

funds and supported by documents certifying that the

person does not owe taxes. No tax certificate is

required for foreigners exporting the cash equivalent

of BGN 25,000 or greater provided the amount is equal

to the amount declared (or less) when imported. The

import of more than BGN 8,000 or its foreign exchange

equivalent must be declared at customs.



The law also stipulates that payments abroad may be

executed only through bank transfers. Transfers over

BGN 25,000 for current international payments (imports

of goods and services, transportation, interest and

principal payments, insurance, training, medical

treatment, and other purposes defined in Bulgarian

regulations) must be supported by documentation showing

the need and purpose of such payments.



C. EXPROPRIATION AND COMPENSATION



According to Article 17 of the Bulgarian Constitution,

private real property is protected by law. Depending

upon the purpose, expropriation actions may be

undertaken by the Council of Ministers or the regional

Governor, provided that the owner is adequately

compensated. Owners must be compensated in kind with

nearby property of equal value at current prices.

Monetary compensation is also permitted with the

consent of the property's owner. Expropriation actions

can be appealed directly to the Supreme Court on the

basis of the expropriation action, the property

appraisal, or the method of compensation. In its

Bilateral Investment Treaty (BIT) with the U.S.,

Bulgaria committed itself to international arbitration

in the event of expropriation and other investment

disputes.



D. DISPUTE SETTLEMENT



The Judicial System

--------------

Bulgaria's 1991 Constitution serves as the foundation

of the legal system and creates an independent judicial

branch. In 2002, the Bulgarian Parliament passed a

series of amendments to the Judicial Systems Act aimed

at improving the quality of the judiciary, increasing

the efficacy of the court system, and preventing

corruption in the justice system. The Constitutional

Court declared most of the amendments unconstitutional

in December 2002. As a result, judicial reform in

Bulgaria has been delayed and many key issues remain

unaddressed.



Further constitutional changes, passed in 2003, limited

the immunity of the magistrates, extended the period

for getting tenure, and introduced a 5-year term in

office for judicial heads. The March 2004 amendments

to the Judicial Systems Act were intended to increase

further the efficiency of the court system and help

prevent judicial corruption. Nonetheless, corruption

remains a serious problem. Other problems include lack

of transparent and neutral standards for assigning

cases, poor coordination between magistrates,

corruption, and cumbersome procedures.



There are three levels of courts. 117 regional courts

exercise jurisdiction over administrative, civil, and

criminal cases. Above them, 29 district courts

(including the Sofia City Court) have original

jurisdiction in civil cases where claims exceed 10,000

leva, in serious criminal cases, and in other cases as

provided by law. The district courts are also courts

of appellate review for regional court decisions. The

five appellate courts may review the decisions of the

district courts. On the highest level are the Supreme

Court of Cassation and the Supreme Administrative

Court. On issues of law, the Supreme Court of

Cassation has appellate jurisdiction over all civil

cases involving claims over 5,000 leva and criminal

cases. The Supreme Administrative Court rules on the

legality of acts by the state administration including

Council of Ministers and the ministries. The Supreme

Courts hear cases in three-judge panels, whose

decisions may be appealed to a five-judge panel of the

same court. Decisions by the five-judge panels are

final and binding.



The Constitutional Court is not integrated into the

rest of the judiciary. It issues final interpretations

of the constitution, rules on constitutional challenges

to laws and acts, rules on international agreements

prior to Parliamentary ratification, and reviews

domestic laws to determine their consistency with

international legal norms. While the Constitutional

court does not rule ex officio, 1/5 of the MPs (48),

the President, the Government, the Chief Prosecutor and

the two Supreme courts can refer matters to it for

review.



Bulgarian law provides for jurors only in criminal

cases. Under Bulgarian procedural law, first-instance

civil cases are brought before one judge in the

regional or the district court, depending on the case.

Administrative sanctions may be appealed to the

regional courts and one judge reviews such appeals.

Administrative acts are subject to administrative and

court appeal.



Execution of Judgments

--------------

To execute judgments, a final ruling must be obtained

so that the court can order money damages (which then

requires further complicated procedures by the payee)

or an equitable remedy. The court of first instance

must be petitioned for a writ of execution (based on

the judgment),which enables seizure of assets. If the

party is seeking a remedy in equity, the final judgment

must be brought before an executive judge. In 2002, a

number of amendments were made to the Code of Civil

Procedure to close loopholes, shorten deadlines, and

clarify certain provisions. In practice, Bulgarian and

foreign observers caution that the execution of

judgments remained slow and unpredictable and was prone

to corruption and inefficiency in the judicial system.



In a continuing effort to address the execution

problems, the Bulgarian Parliament passed the Private

Enforcement Agents Act in 2005. The new law introduces

the profession of private enforcement agents to whom

the state delegates the collection of enforceable

claims. The law also provides a series of guarantees

that the private enforcement agents' performance will

be closely supervised. This important development was

also recognized by the European Commission's 2005

Comprehensive Monitoring Report, which noted that the

new law "should help improving the functioning of the

judicial system and in particular the conditions for

contract enforcement."



Foreign judgments can be executed in Bulgaria.

Execution depends on reciprocity, as well as bilateral

or multilateral agreements, as determined by an

official list maintained by the Ministry of Justice.

The U.S. does not currently have reciprocity with

Bulgaria, so Bulgarian courts are not obliged to honor

decisions of U.S. courts. All foreign judgments are

handled by the Sofia City Court, which must determine

that the judgment does not violate public decrees,

standards, or morals before it can be executed. There

are also cases defined by the Civil Procedure Code

(certain real estate issues and Bulgarian precedents),

in which judgments cannot be executed even if they

conform to Bulgarian laws and morals.



Bankruptcy

--------------

The 1994 Law on Bankruptcy provides for reorganization

or rehabilitation of a legal entity, attempts to

maximize asset recovery, and provides for fair and

equal distribution among all creditors. The law

applies to all commercial entities, except public

monopolies or state-owned companies established by a

special law. Bank bankruptcies are regulated under the

Bank Bankruptcy Act, while insurance company failures

are regulated by the 1996 Insurance Act.



Under Part IV of the Commercial Code, the debtor or

creditors can initiate bankruptcy proceedings. The

debtor must declare bankruptcy within 15 days of

becoming insolvent. Once insolvency is determined, the

court appoints an interim trustee to represent and

manage the company, take inventory of property and

assets, identify and convene the creditors, and develop

a recovery plan. At the first meeting of the creditors

a trustee is nominated; usually this is just a

reaffirmation of the court appointed trustee.



Non-performance of a money obligation must be

adjudicated (res judicata) before the bankruptcy court

can determine whether the debtor is insolvent.

Additionally, amendments passed in 2003 add a

presumption of insolvency when the debtor has not

performed an obligation within 60 days of maturity or

when the debtor can only pay the claims of certain

creditors.



Creditors must declare all debts owed to them within

one month of the start of bankruptcy proceedings. The

trustee then has seven days to compile a list of

debts. A rehabilitation plan or a scheme of

distribution (in cases of liquidation) must be proposed

no later than the date on which the court approves the

list of debts. The court must rule on approval of the

plan within seven days.



The lack of trained trustees has been a problem in the

past. The 2003 amendments provided for examinations

for individuals applying to become trustees, but

implementation of this requirement is contingent on the

adoption by several ministries of a special

regulation. The amendments also provide for annual

training courses for trustees.



The methods of liquidating assets were also revised by

the June 2003 amendments. The main objective was to

establish a legal framework for selling assets that

accounts for the character of bankruptcy proceedings,

thus avoiding the need to apply the Civil Procedure

Code. The new regime includes rules requiring a

greater degree of publicity for asset sales. The

amendments limited the rights to appeal judicial

decisions made during bankruptcy proceedings.



International Arbitration

--------------



Pursuant to its Bilateral Investment Treaty (BIT) with

the United States, Bulgaria has committed to a range of

dispute settlement procedures starting with

notification and consultations. Bulgaria accepts

binding international arbitration in disputes with

foreign investors.



There are opportunities for international arbitration

in Bulgaria. The Code of Civil Procedure mandates that

a foreign court of arbitration is possible only if at

least one of the parties has its seat or residence

abroad. As a result, foreign-owned, Bulgarian-

registered companies having a dispute with a Bulgarian

entity can only have arbitration in Bulgaria. However,

under the Law on International Commercial Arbitration,

the arbitrator himself could be a foreign person. Under

the same act, the parties can agree on the language to

be used in the arbitration proceedings. The major and

most experienced arbitration institution is the

Arbitration Court of the Bulgarian Chamber of Commerce

and Industry (BCCI).



Not all disputes, however, may be resolved through

arbitration. Disputes regarding rights over real estate

properties in the country or labor disputes can only be

heard by the courts. Additionally, Bulgarian courts

have exclusive competence over industrial property

disputes regarding patents issued in Bulgaria.



Bulgaria is a party to the Convention on the

Recognition and Enforcement of Foreign Arbitral Awards

(the New York Convention),which facilitates

enforcement of foreign arbitral awards, and is a member

of the 1961 European Convention on International

Commercial Arbitration. However, having gone through

the enforcement proceedings before the Bulgarian

courts, the creditor needs then to execute the award

using the general framework for execution of judgments

in the country, which is inefficient. Bulgaria is also

a signatory of the International Center for Settlement

of Investment Disputes (ICSID) convention and the

Convention on the Settlement of Investment Disputes

Between States and Nationals of Other States.



Mediation

--------------



Businesses wishing to use mediation to solve their

disputes in Bulgaria may find it hard to select

experienced mediators. This service has just started to

develop in the country following the adoption at the

end of 2004 of the Mediation Act. BCCI and the American

Chamber of Commerce (AmCham) responded promptly by

opening commercial mediation centers. The mediators at

these centers have been trained with US assistance but

at this point lack sufficient experience to be able to

provide high quality mediation services.



E. PERFORMANCE REQUIREMENTS/INCENTIVES



Bulgaria does not impose export performance or local

content requirements as a condition for establishing,

maintaining, or increasing an investment. The law does

not specifically restrict hiring of expatriate

personnel, but residence permits are often difficult to

obtain. A June 1999 law regulating gambling imposes

license requirements on foreigners organizing games of

chance.



The Bulgaria Investment Agency (BIA)

(www.investbg.government.bg),the government's

coordinating body for investment, provides information

services, individual administrative services and

assessment of qualification to receive investment

incentives. First-class investments (investments over

70 million BGN, about USD 44 million) are deemed to be

priority investment projects. At the request of

investors receiving first-class investment

certificates, BIA can recommend that the competent

authorities grant them free real estate (either state

or municipal property). For first-class investments,

the Council of Ministers may provide state financing

for critical infrastructure deemed necessary for the

investment plan's implementation. Additionally, BIA

represents first and second-class investors

(investments of USD 25-44 million) before all central

and territorial executive authorities and the local

self-government authorities, and processes all

administrative documents. Third-class investors

(investments of USD 6-25 million) receive customized

information services.



The government policy for promotion of investment is

not applicable to banks and other financial

institutions, insurance companies, investment

companies, companies with special investment purpose,

pension and health insurance companies, gambling

companies, or investments made pursuant to the

Privatization Law.



The GOB introduced in 2003 tax incentives for

investments in regions with high unemployment. VAT

exemption on imports for investment projects over 10

million BGN (about USD 6.25 million),to be implemented

over a two-year period, was introduced in 2004.



F. RIGHT TO PRIVATE OWNERSHIP/ESTABLISHMENT



The Constitution states that the Bulgarian economy

"shall be based on free economic initiative." Private

entities can establish and own business enterprises

engaging in any profit-making activities, unless

expressly prohibited by law. Bulgaria's Commercial

Code guarantees and regulates the free establishment,

acquisition, and disposition of private business

enterprises. Competitive equality is the standard

applied to private enterprises in competition with

public enterprises with respect to access to markets,

credit, and other business operations, such as licenses

and supplies.



G. PROTECTION OF PROPERTY RIGHTS



Bulgarian law protects the acquisition and disposition

of property rights. In practice, the protection of

property rights is subject to difficulties of varying

degrees. Although Bulgarian IPR legislation is

generally adequate, with modern patent and copyright

laws and criminal penalties for copyright infringement,

industry representatives believe effective IPR

protection requires improvements to the legislation,

including to the Optical Disc Media (ODM) Legislation,

the Penal Code and the Penal Procedure Code.

Additionally, the government still lacks sufficient

institutional capacity, coordination, and the political

will to address effectively major enforcement problems,

especially in combating and prosecuting organized crime

groups. Many industrial groups currently have

UNCLASSIFIED



SIPDIS

PROG 01/19/06

A/DCM: BFREDEN

POLEC: IDRENOVICHKI

POLEC: MJ, CM, FCS:JR, USAID:MF, USDA:BG, DOJ: TP

POLE CONS SIPDIS



AMEMBASSY SOFIA

SECSTATE WASHDC

INFO DEPT OF COMMERCE WASHINGTON DC

CIMS NTDB WASHDC

DEPT OF TREASURY WASHINGTON DC



STATE FOR EB/IFD/OIA AND USTR

TREASURY FOR OASIA

USDOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH



E.O. 12958: N/A

TAGS: EINV, EFIN, ELAB, ETRD, KTDB, OPIC, USTR, BU

SUBJECT: BULGARIA 2006 INVESTMENT CLIMATE STATEMENT



Ref: 05 STATE 202943



1. Bulgaria - 2006 Investment Climate Statement.



A. OPENNESS TO FOREIGN INVESTMENT



Bulgaria has a liberal foreign investment regime and

attracting foreign investment, especially American, is

one of the new administration's top priorities. The

government is focused on developing promising sectors

of the economy for foreign investment, including

energy, tourism, information technology,

transportation, telecommunications, agriculture and

consumer goods (food & beverage and healthcare).

Bulgaria provides considerable incentives for job

creation. Many municipalities are prepared to grant

concessions or other favorable treatment for

significant investments. Bulgaria has a well-educated

workforce, low labor costs, and its geographic position

places it at the crossroads of Europe, the Middle East,

and the CIS. Bulgaria joined NATO in April 2004 and

completed EU accession negotiations in June 2004. The

EU Accession Treaty was signed on April 25, 2005,

allowing Bulgaria to join in 2007, but a "safeguard

clause" could allow the EU to delay Bulgaria's entry by

a year.



Investment Trends and Policies

--------------



Despite the many problems that remain in Bulgaria, the

country is heading in the right direction -- in large

part due to the EU Accession process, which is the

government's number one priority. The pace of EU

reforms suffered during the summer due to protracted

negotiations over forming a new government, but the

coalition has been working overtime to pass EU-related

legislation.



The new Socialist-led government recognizes that

foreign investment is essential to the future of

Bulgaria and has sought ways to reassure investors of

its prudent economic policies. Prime Minister

Stanishev, who could not deliver on many of his party's

generous election promises, has placed a special

emphasis on maintaining the key elements of the

previous government's economic policy, which hinge on

adhering to the Currency Board Arrangement and

conservative fiscal policy.



Bulgaria's relations with the International Monetary

Fund (IMF) are good, and are often described as a

success story. The precautionary Stand-by Arrangement,

which was negotiated in July 2004, expires in September

2006 and is designed to be phased out shortly before

Bulgaria joins the EU.



Continuing economic progress and political stability

have enhanced Bulgaria's ability to attract respected

international investors. The Bulgaria Investment

Agency (BIA) estimates FDI of USD 2.6 billion for 2005

thanks to the expansion of existing foreign investment

as well as the higher number of green-field investment

projects. New foreign direct investment (FDI) in the

period of January through October 2005 increased by

five percent--to USD 1.730 billion--despite the

election related halt in the privatization process.



With more than 10 first class investment certificates

under the investment promotion framework, BIA

recognizes 2005 as "the year of green-field investment

projects." It is a positive sign that the new

Socialist government finalized on December 7, 2005, the

agreement with the U.S. company AES to construct the

Maritsa East 1 (ME1) project, a new 670 MW lignite

based power plant. With a total value of USD 1.4

billion, the project represents the biggest ever green-

field investment in Bulgaria and largest green-field

investment in Southeast Europe for 2005.



The Investment Promotion Act stipulates equal treatment

of foreign and domestic investors. Bulgaria's

investment promotion framework creates conditions for

improved administrative services and includes an

investment incentive package. The law encourages

implementation of investment projects over a period of

up to three years. The law explicitly recognizes

intellectual property and securities as a foreign

investment.



Two leading international rating agencies assigned

first ever investment grade to Bulgaria in 2004,

reflecting the country's positive economic prospects

and prudent fiscal policies. In 2005, the two rating

agencies upgraded Bulgaria's rating due to falling

public debt, continued fiscal prudence and the upcoming

EU accession.



Common Forms of Investment

--------------

The most common type of organization for foreign

investors is a limited liability company. Other

typical forms are joint stock companies, joint

enterprises, business associations, general and limited

partnerships, and sole proprietorships.



The main controlling bodies of law are: the 1991

Commercial Code, which regulates commercial and company

law, including the creation and rights of legal

entities, and the 1951 Law on Obligations and

Contracts, which regulates civil transactions. These

laws are deemed generally adequate and neither limits

foreign participation in legal entities.



The 2003 Law on Special Purpose Investment Companies

allows for public investment companies (SPIC) in real

estate and receivables. Since a SPIC is considered a

pass-through structure, at least 90 percent of its net

income must be distributed to shareholders, who are

taxed on the dividends received. Prospective U.S.

investors should consult appropriate legal counsel for

up-to-date legal information and conduct due diligence

before making any obligations.



Investment Barriers

--------------



Among the problems encountered by foreign investors in

Bulgaria are: government bureaucracy; poor

infrastructure; frequent changes in the legal

framework; low domestic purchasing power; a protracted

privatization process; poor health care and

corruption. In addition, a weak judicial system limits

investor confidence in the courts' ability to enforce

ownership and shareholders rights, contracts, and

intellectual property rights.



The constitutional prohibition against direct ownership

of land by foreign persons remains in force, however,

there are no restrictions against acquisition of land

by locally registered companies with majority foreign

participation, and creation of such a company is a

relatively simple process. Once Bulgaria joins the EU,

all EU citizens and entities will be allowed to acquire

property; all other foreigners must continue to form a

local corporation.



Privatization

--------------

The Privatization Agency (PA) administers the

privatization of all state-owned companies. Foreign

companies, including state-owned ones, may purchase

Bulgarian state-owned firms. The government's stated

privatization goals are to have transparent, quick, and

effective privatization procedures, providing for equal

treatment of all investors. The program is intended to

make the economy more efficient by divesting state-

owned enterprises and to cover the current account

deficit with privatization revenues.



The failure to complete a single major privatization

transaction in 2005, however, underscores the

government's inability to attract respected foreign

investors though privatization and to finalize already

negotiated deals. The ambitious 2005 privatization

program envisioned the sale of the remaining 46 state-

owned enterprises (SOEs) for the equivalent of USD 300

million, including the Navigation Maritime Bulgare, the

national carrier (Bulgaria Air),Boyana Film Studio,

the three thermal power-plants, the tobacco monopoly

and some arm dealers.



The Post-privatization Control Agency, which oversees

the implementation of privatization contracts, attempts

to ensure that non-price privatization commitments

(employee retention, technology transfer, environmental

liability and investment).



Concessions

--------------

Under the 1995 Law on Concessions, the state is

authorized, on the basis of a concession agreement, to

grant private investors a partial monopoly in

activities in thirteen sectors normally reserved for

the central and/or local governments. These include

the construction of roads, ports and airports, power

generation and transmission, mining, petroleum

exploration/drilling, telecommunications, forests and

parks, beaches, and nuclear installations. In order to

streamline the concession procedure, the government

launched a National Concessions Register at the end of

2005. The register is in line with the EU

requirements, and provides detailed information about

the projects, including concessionaire's duties and

responsibilities in implementing the contract.



Concessions are awarded on the basis of a tender and

are issued for up to 35 years. They can be extended,

but shall not exceed 50 years in total. In a new

tender, however, the original concession holder can

again be granted the concession under certain

circumstances. The Concessions Law permits "build-

operate-transfer" deals, giving priority for mineral

exploitation to the holders of exploration licenses,

and reconciles conflicting procedures for privatization

and concession. Since 1998, Parliament has passed

legislation granting concessions in telecommunications,

energy, mining, waters, ports, airports, roads, and

railways.



B. CONVERSION AND TRANSFER POLICIES



Bulgaria replaced much of its outdated and fragmented

foreign currency legislation in 1999 and liberalized

current international transactions in accordance with

IMF Article VIII obligations. Under 2003 amendments to

the 1999 Foreign Currency Act anyone may take up to BGN

25,000 or its foreign exchange equivalent out of the

country without documentation. However, the export of

between BGN 8,000 and BGN 25,000 or its foreign

exchange equivalent must be declared at customs.

Export of amounts larger than BGN 25,000 must be

accompanied by a declaration about the source of these

funds and supported by documents certifying that the

person does not owe taxes. No tax certificate is

required for foreigners exporting the cash equivalent

of BGN 25,000 or greater provided the amount is equal

to the amount declared (or less) when imported. The

import of more than BGN 8,000 or its foreign exchange

equivalent must be declared at customs.



The law also stipulates that payments abroad may be

executed only through bank transfers. Transfers over

BGN 25,000 for current international payments (imports

of goods and services, transportation, interest and

principal payments, insurance, training, medical

treatment, and other purposes defined in Bulgarian

regulations) must be supported by documentation showing

the need and purpose of such payments.



C. EXPROPRIATION AND COMPENSATION



According to Article 17 of the Bulgarian Constitution,

private real property is protected by law. Depending

upon the purpose, expropriation actions may be

undertaken by the Council of Ministers or the regional

Governor, provided that the owner is adequately

compensated. Owners must be compensated in kind with

nearby property of equal value at current prices.

Monetary compensation is also permitted with the

consent of the property's owner. Expropriation actions

can be appealed directly to the Supreme Court on the

basis of the expropriation action, the property

appraisal, or the method of compensation. In its

Bilateral Investment Treaty (BIT) with the U.S.,

Bulgaria committed itself to international arbitration

in the event of expropriation and other investment

disputes.



D. DISPUTE SETTLEMENT



The Judicial System

--------------

Bulgaria's 1991 Constitution serves as the foundation

of the legal system and creates an independent judicial

branch. In 2002, the Bulgarian Parliament passed a

series of amendments to the Judicial Systems Act aimed

at improving the quality of the judiciary, increasing

the efficacy of the court system, and preventing

corruption in the justice system. The Constitutional

Court declared most of the amendments unconstitutional

in December 2002. As a result, judicial reform in

Bulgaria has been delayed and many key issues remain

unaddressed.

Further constitutional changes, passed in 2003, limited

the immunity of the magistrates, extended the period

for getting tenure, and introduced a 5-year term in

office for judicial heads. The March 2004 amendments

to the Judicial Systems Act were intended to increase

further the efficiency of the court system and help

prevent judicial corruption. Nonetheless, corruption

remains a serious problem. Other problems include lack

of transparent and neutral standards for assigning

cases, poor coordination between magistrates,

corruption, and cumbersome procedures.



There are three levels of courts. 117 regional courts

exercise jurisdiction over administrative, civil, and

criminal cases. Above them, 29 district courts

(including the Sofia City Court) have original

jurisdiction in civil cases where claims exceed 10,000

leva, in serious criminal cases, and in other cases as

provided by law. The district courts are also courts

of appellate review for regional court decisions. The

five appellate courts may review the decisions of the

district courts. On the highest level are the Supreme

Court of Cassation and the Supreme Administrative

Court. On issues of law, the Supreme Court of

Cassation has appellate jurisdiction over all civil

cases involving claims over 5,000 leva and criminal

cases. The Supreme Administrative Court rules on the

legality of acts by the state administration including

Council of Ministers and the ministries. The Supreme

Courts hear cases in three-judge panels, whose

decisions may be appealed to a five-judge panel of the

same court. Decisions by the five-judge panels are

final and binding.



The Constitutional Court is not integrated into the

rest of the judiciary. It issues final interpretations

of the constitution, rules on constitutional challenges

to laws and acts, rules on international agreements

prior to Parliamentary ratification, and reviews

domestic laws to determine their consistency with

international legal norms. While the Constitutional

court does not rule ex officio, 1/5 of the MPs (48),

the President, the Government, the Chief Prosecutor and

the two Supreme courts can refer matters to it for

review.



Bulgarian law provides for jurors only in criminal

cases. Under Bulgarian procedural law, first-instance

civil cases are brought before one judge in the

regional or the district court, depending on the case.

Administrative sanctions may be appealed to the

regional courts and one judge reviews such appeals.

Administrative acts are subject to administrative and

court appeal.



Execution of Judgments

--------------

To execute judgments, a final ruling must be obtained

so that the court can order money damages (which then

requires further complicated procedures by the payee)

or an equitable remedy. The court of first instance

must be petitioned for a writ of execution (based on

the judgment),which enables seizure of assets. If the

party is seeking a remedy in equity, the final judgment

must be brought before an executive judge. In 2002, a

number of amendments were made to the Code of Civil

Procedure to close loopholes, shorten deadlines, and

clarify certain provisions. In practice, Bulgarian and

foreign observers caution that the execution of

judgments remained slow and unpredictable and was prone

to corruption and inefficiency in the judicial system.



In a continuing effort to address the execution

problems, the Bulgarian Parliament passed the Private

Enforcement Agents Act in 2005. The new law introduces

the profession of private enforcement agents to whom

the state delegates the collection of enforceable

claims. The law also provides a series of guarantees

that the private enforcement agents' performance will

be closely supervised. This important development was

also recognized by the European Commission's 2005

Comprehensive Monitoring Report, which noted that the

new law "should help improving the functioning of the

judicial system and in particular the conditions for

contract enforcement."



Foreign judgments can be executed in Bulgaria.

Execution depends on reciprocity, as well as bilateral

or multilateral agreements, as determined by an

official list maintained by the Ministry of Justice.

The U.S. does not currently have reciprocity with

Bulgaria, so Bulgarian courts are not obliged to honor

decisions of U.S. courts. All foreign judgments are

handled by the Sofia City Court, which must determine

that the judgment does not violate public decrees,

standards, or morals before it can be executed. There

are also cases defined by the Civil Procedure Code

(certain real estate issues and Bulgarian precedents),

in which judgments cannot be executed even if they

conform to Bulgarian laws and morals.



Bankruptcy

--------------

The 1994 Law on Bankruptcy provides for reorganization

or rehabilitation of a legal entity, attempts to

maximize asset recovery, and provides for fair and

equal distribution among all creditors. The law

applies to all commercial entities, except public

monopolies or state-owned companies established by a

special law. Bank bankruptcies are regulated under the

Bank Bankruptcy Act, while insurance company failures

are regulated by the 1996 Insurance Act.



Under Part IV of the Commercial Code, the debtor or

creditors can initiate bankruptcy proceedings. The

debtor must declare bankruptcy within 15 days of

becoming insolvent. Once insolvency is determined, the

court appoints an interim trustee to represent and

manage the company, take inventory of property and

assets, identify and convene the creditors, and develop

a recovery plan. At the first meeting of the creditors

a trustee is nominated; usually this is just a

reaffirmation of the court appointed trustee.



Non-performance of a money obligation must be

adjudicated (res judicata) before the bankruptcy court

can determine whether the debtor is insolvent.

Additionally, amendments passed in 2003 add a

presumption of insolvency when the debtor has not

performed an obligation within 60 days of maturity or

when the debtor can only pay the claims of certain

creditors.



Creditors must declare all debts owed to them within

one month of the start of bankruptcy proceedings. The

trustee then has seven days to compile a list of

debts. A rehabilitation plan or a scheme of

distribution (in cases of liquidation) must be proposed

no later than the date on which the court approves the

list of debts. The court must rule on approval of the

plan within seven days.



The lack of trained trustees has been a problem in the

past. The 2003 amendments provided for examinations

for individuals applying to become trustees, but

implementation of this requirement is contingent on the

adoption by several ministries of a special

regulation. The amendments also provide for annual

training courses for trustees.



The methods of liquidating assets were also revised by

the June 2003 amendments. The main objective was to

establish a legal framework for selling assets that

accounts for the character of bankruptcy proceedings,

thus avoiding the need to apply the Civil Procedure

Code. The new regime includes rules requiring a

greater degree of publicity for asset sales. The

amendments limited the rights to appeal judicial

decisions made during bankruptcy proceedings.



International Arbitration

--------------



Pursuant to its Bilateral Investment Treaty (BIT) with

the United States, Bulgaria has committed to a range of

dispute settlement procedures starting with

notification and consultations. Bulgaria accepts

binding international arbitration in disputes with

foreign investors.



There are opportunities for international arbitration

in Bulgaria. The Code of Civil Procedure mandates that

a foreign court of arbitration is possible only if at

least one of the parties has its seat or residence

abroad. As a result, foreign-owned, Bulgarian-

registered companies having a dispute with a Bulgarian

entity can only have arbitration in Bulgaria. However,

under the Law on International Commercial Arbitration,

the arbitrator himself could be a foreign person. Under

the same act, the parties can agree on the language to

be used in the arbitration proceedings. The major and

most experienced arbitration institution is the

Arbitration Court of the Bulgarian Chamber of Commerce

and Industry (BCCI).



Not all disputes, however, may be resolved through

arbitration. Disputes regarding rights over real estate

properties in the country or labor disputes can only be

heard by the courts. Additionally, Bulgarian courts

have exclusive competence over industrial property

disputes regarding patents issued in Bulgaria.



Bulgaria is a party to the Convention on the

Recognition and Enforcement of Foreign Arbitral Awards

(the New York Convention),which facilitates

enforcement of foreign arbitral awards, and is a member

of the 1961 European Convention on International

Commercial Arbitration. However, having gone through

the enforcement proceedings before the Bulgarian

courts, the creditor needs then to execute the award

using the general framework for execution of judgments

in the country, which is inefficient. Bulgaria is also

a signatory of the International Center for Settlement

of Investment Disputes (ICSID) convention and the

Convention on the Settlement of Investment Disputes

Between States and Nationals of Other States.



Mediation

--------------



Businesses wishing to use mediation to solve their

disputes in Bulgaria may find it hard to select

experienced mediators. This service has just started to

develop in the country following the adoption at the

end of 2004 of the Mediation Act. BCCI and the American

Chamber of Commerce (AmCham) responded promptly by

opening commercial mediation centers. The mediators at

these centers have been trained with US assistance but

at this point lack sufficient experience to be able to

provide high quality mediation services.



E. PERFORMANCE REQUIREMENTS/INCENTIVES



Bulgaria does not impose export performance or local

content requirements as a condition for establishing,

maintaining, or increasing an investment. The law does

not specifically restrict hiring of expatriate

personnel, but residence permits are often difficult to

obtain. A June 1999 law regulating gambling imposes

license requirements on foreigners organizing games of

chance.



The Bulgaria Investment Agency (BIA)

(www.investbg.government.bg),the government's

coordinating body for investment, provides information

services, individual administrative services and

assessment of qualification to receive investment

incentives. First-class investments (investments over

70 million BGN, about USD 44 million) are deemed to be

priority investment projects. At the request of

investors receiving first-class investment

certificates, BIA can recommend that the competent

authorities grant them free real estate (either state

or municipal property). For first-class investments,

the Council of Ministers may provide state financing

for critical infrastructure deemed necessary for the

investment plan's implementation. Additionally, BIA

represents first and second-class investors

(investments of USD 25-44 million) before all central

and territorial executive authorities and the local

self-government authorities, and processes all

administrative documents. Third-class investors

(investments of USD 6-25 million) receive customized

information services.



The government policy for promotion of investment is

not applicable to banks and other financial

institutions, insurance companies, investment

companies, companies with special investment purpose,

pension and health insurance companies, gambling

companies, or investments made pursuant to the

Privatization Law.

The GOB introduced in 2003 tax incentives for

investments in regions with high unemployment. VAT

exemption on imports for investment projects over 10

million BGN (about USD 6.25 million),to be implemented

over a two-year period, was introduced in 2004.



F. RIGHT TO PRIVATE OWNERSHIP/ESTABLISHMENT



The Constitution states that the Bulgarian economy

"shall be based on free economic initiative." Private

entities can establish and own business enterprises

engaging in any profit-making activities, unless

expressly prohibited by law. Bulgaria's Commercial

Code guarantees and regulates the free establishment,

acquisition, and disposition of private business

enterprises. Competitive equality is the standard

applied to private enterprises in competition with

public enterprises with respect to access to markets,

credit, and other business operations, such as licenses

and supplies.



G. PROTECTION OF PROPERTY RIGHTS



Bulgarian law protects the acquisition and disposition

of property rights. In practice, the protection of

property rights is subject to difficulties of varying

degrees. Although Bulgarian IPR legislation is

generally adequate, with modern patent and copyright

laws and criminal penalties for copyright infringement,

industry representatives believe effective IPR

protection requires improvements to the legislation,

including to the Optical Disc Media (ODM) Legislation,

the Penal Code and the Penal Procedure Code.

Additionally, the government still lacks sufficient

institutional capacity, coordination, and the political

will to address effectively major enforcement problems,

especially in combating and prosecuting organized crime

groups. Many industrial groups currently have

intellectual property disputes before the government.



In May 2004, Bulgaria was placed on the Special 301

Watch List for the first time in five years. The 2005

US government inter-agency review retained Bulgaria on

the Watch List. There has been a steady resurgence of

piracy, mainly in the sale of pirated ODM and illegal

downloading of copyrighted material over the past few

years.



The US government has formulated an action plan, which

will assist in focusing attention on immediate and

effective implementation of the new Optical Disk Media

(ODM) Law and the amended Copyrights and Related Rights

legislation, enforcement actions and ministerial-level

coordination, designing training programs, and

improving efforts to address counterfeiting of U.S.

spirits and apparel.



Bulgaria is a member of the World Intellectual Property

Organization (WIPO) and a signatory to key

international agreements.



Copyrights

--------------



Parliament passed on November 25, 2005, amendments to

the 1993 Law on Copyrights and Related Rights, which

aligns Bulgaria's copyright legislation with the

European requirements. In particular, the amendments

implement two directives of the EU in the area of

copyrights: Directive 2001/84/EC of the European

Parliament and of the Council on the resale right for

the benefit of the author of an original work of art;

and Directive 2004/48/EC of the European Parliament and

of the Council on the enforcement of intellectual

property right ("the Enforcement Directive"). Also,

the amendments will establish the mechanism regulating

the administration of the newly-established database

and copyright information sharing system sponsored by

the EU.



The copyright term of protection was extended from 50

to 70 years after the author's death in 2000. The new

term of protection is retroactive, i.e., a term of

protection that expired at the moment of approval of

the amendments is revived within the framework of the

70-year term of protection. For films and other audio-

visual works, copyrights are protected during the lives

of director, screenplay-writer, cameraman, or the

author of dialogue or music, plus 70 years. Other

amendments to the law enable copyright owners to file

civil claims to suspend the activities of pirates;

provide for confiscation of equipment and pirated

materials; enhance border control over pirated

material; introduce a new neighboring right for film

producers.



Parliament approved in September 2005 the long awaited

Law on Administrative Control over the Manufacture and

Distribution of ODM, which now requires SID codes on

blank optical discs (OD) produced in Bulgaria and

strengthens the import/export regime for raw materials

and equipment involved in ODM production. However, the

new law does not allow industry representatives or

rights holders to participate in inspections and

excludes goods in transit from the registration regime.



The Copyright Office of the Ministry of Culture is

responsible for copyright matters in Bulgaria. While

civil law provides remedies for violations, under the

Penal Code, copyright infringement is only a

misdemeanor, subject to nominal fines.



Patents

--------------

The Bulgarian patent law has been harmonized with EU

law in the areas of application for European patents

and utility models. Bulgaria joined the Convention on

the Grant of European Patents (European Patent

Convention) on July 1, 2002 and has obtained observer

status in the Administrative Council of the European

Patent Organization.



Bulgaria grants the right to exclusive use of

inventions and utility models for 20 years and 10

years, respectively, from the dates of patent

application filings. Inventions eligible for patent

protection must be both new as a result of innovation

and have industrial applications. Article 6 lists

items not considered inventions and utility models are

specifically defined.



The independent Patent Office is the competent

authority with respect to patent matters. The patent

law describes the application procedures and the

examination process. Applications are submitted

directly to the Patent Office. Compulsory licensing

may be ordered under certain conditions: the patent has

not been used within four years of filing the patent

application or three years from the date of issue; the

patent holder is unable to offer justification for not

adequately supplying the national market; or,

declaration of a national emergency.



Patent infringement is punishable by fines of up to

1,000 BGN. Disputes are reviewed by specialized panels

convened by the President of the Patent Office and may

be appealed to the Sofia City Court within three months

of the panel's decision.



The 1996 Protection of New Types of Plants and Animal

Breeds Act allows for a term of protection of 25 years

for annual plants and 30 years for perennial plants and

animal breeds, which starts from its date of issuance

by the Patent Office. Parliament ratified in 1998 the

International Convention for the Protection of New

Varieties of Plants (UPOV).



Data Exclusivity

--------------

Responding to long-standing industry concerns, the GOB

included a provision to provide data exclusivity

(protection of confidential data submitted to the

government to obtain approval to market pharmaceutical

products) in its new Drug Law, which took effect in

2003. The law, however, links data protection to a

valid patent.



Trademarks

--------------



The 1999 Trademarks and Geographical Indications Act

regulates the establishment, use, cession, suspension,

renewal and protection of rights of trademarks,

collective and certificate marks, and geographic

indications in accordance with TRIPs requirements and

the government's EU Accession Agreement. The August

2005 amendments to the Law on Trademarks and

Geographical indications and the Law on Industrial

Design further incorporated TRIPs requirements.



Registration is refused, or an existing registered

trademark is cancelled, if a trademark constitutes a

reproduction or an imitation or if it creates confusion

with a well-known trademark, as stipulated by the Paris

Convention and the Trademarks and Geographical

Indications Act. Applications for registration must be

submitted to the Patent Office under specified

procedures.



Right of priority, with respect to trademarks that do

not differ substantially, is given to the application

that was filed in compliance with Article 32 first.

Right of priority is also established on the basis of a

request made in one of the member countries of the

Paris Convention or of the World Trade Organization.

To exercise the right of priority, the applicant must

file a request within six months of the date of

original filing.



A trademark is normally granted within 12 months of

filing a complete application. Refusals can be

appealed in the Sofia City Court within three months of

notification of the decision. The right of exclusive

use of a trademark is granted for ten years from the

date of submitting the application. Requests for

extension of protection must be filed during the final

year of validity, but not less than six months prior to

expiration. Protection is terminated if a mark is not

used for a five-year period.



Trademark infringement is a problem in Bulgaria for

many U.S. manufacturers. Its categorization as a

misdemeanor, subject to a nominal fine, is not a

sufficient deterrent to illegal activities. While more

draconian measures are available, such as confiscation

or fines of up to 500,000 BGN, they are rarely levied

or enforced.



U.S. businesses have noted significant difficulties in

obtaining relief against trademark infringement. Even

if courts understand the law and issue orders, the

entities charged with enforcement often cannot be

relied upon to carry out the court judgment. Under

Bulgarian law, legal entities cannot be held criminally

liable. Therefore, the criminal penalties for copyright

infringement and willful trademark infringement are

limited.



In Bulgaria, trademark and service-mark rights and

rights to geographic indications are only protected

pursuant to registration with the Bulgarian Patent

Office or an international registration mentioning

Bulgaria; they do not arise simply with "use in

commerce" of the mark or indication. Under Bulgarian

law, legal entities cannot be held criminally liable.

Similarly, criminal penalties for copyright

infringement and willful trademark infringement are

limited, compared to enforcement mechanisms available

under U.S. law.



H. TRANSPARENCY OF THE REGULATORY SYSTEM



Major Taxation Issues Affecting U.S. Businesses

-------------- --

Bulgaria and the U.S. have not signed an Avoidance of

Double Taxation Treaty (DTT),despite strong interest

by the Bulgarian government.



Personal income tax rates increase progressively from

20 to 24 percent. There are three income brackets,

with a non-taxable personal monthly income of 180 BGN.

The corporate and profit tax rates are 15 percent.

Certain tax incentives apply in regions of high

unemployment. Individuals and small businesses in

certain trades pay a "patent" tax (presumptive tax)

according to a schedule established by Parliament.

Dividends (and liquidation quotas) distributed by a

Bulgarian resident company to U.S. investors are

subject to a withholding tax of 15 percent. While

Bulgarian residents face a withholding tax of 7

percent, a tax resident in an EU member state is not

subject to a withholding tax.

Employers pay 65 percent of the monthly contributions

for social security insurance, health insurance and an

unemployment fund, but their share of contributions is

slated to decline, in phases, to 50 percent by 2009.

In 2006, employers and employees will contribute 23.5

percent and 12.4 percent, respectively, of a given

salary, to social security insurance, unemployment and

health insurance. Foreign persons are required to have

the same insurance and unemployment compensation

packages as Bulgarians.



There is a 20 percent single-rate value-added tax

(VAT). Legal persons with a taxable income of 75,000

BGN are obliged to register for VAT purposes. VAT

registration is voluntary for persons with taxable

income of between 25,000 and 75,000 BGN. All goods and

services are subject to VAT except exports,

international transport, and precious metals supplied

to the central bank. VAT payments are generally

rebated when goods are resold. The 45-day refund

period for exporters was reduced to 30 days in 2005.

Excise taxes are levied on tobacco, alcoholic

beverages, fuels, certain types of automobiles,

gambling equipment, coffee, and tea.



Foreign investors have asserted that widespread tax

evasion, combined with the failure of the authorities

to enforce collection from large state-owned companies,

places them at a disadvantage. Another problem

underscored by investors is the frequent revision of

tax laws, sometimes without sufficient notice.

However, in conjunction with its IMF agreement, the

government is strengthening tax collection and limiting

tax arrears of state-owned enterprises.



The government launched the National Revenue Agency

(NRA) on January 1, 2006. The NRA, which unifies the

collection of taxes and social security contributions,

is expected to enhance expenditure control and

transparency and. Government officials have also

indicated their long-term intention to lower marginal

rates as tax collection improves.



Regulatory Environment

--------------



The multiplicity of Bulgarian licensing and regulatory

regimes and the arbitrary interpretation and

enforcement of them by the bureaucracy continues to

create incentives for corruption and has long been seen

as an impediment to investment, private business

development and market entry.



The 2003 Restriction of Administrative Regulation and

Control of Economic Activity Act establishes a general

and systematized set of rules for simplifying and

implementing administrative regulations. The law

defines 39 operations that must be licensed and

introduces two other simplified regimes, i.e.,

registration and permit regimes.



From the perspective of regulatory relief, this law is

a milestone. It sets forth firm market principles of

regulation, such as that regulation at all levels of

government must be justified by defined need (in terms

of national security, environmental protection, or

personal and material rights of citizens) and cannot

impose restrictions unnecessary to the stated

purposes of the regulation. The law also requires that

the regulating authority take account of the compliance

costs to be borne by business and that no national

level law can be passed without an impact analysis on

the law's economic affect on the regulated activity.

In addition, the law eliminates bureaucratic discretion

in granting applications for routine economic

activities and provides for "silent consent" when the

government has not acted upon an application in the

allotted time. All of these reforms considerably

lighten the potential of regulatory abuse at all levels

of government, business environment will be improved

once the law is fully implemented.



Energy Regulator

--------------

The Energy Law enacted in 2003 established a

transparent and predictable regulatory environment in

the energy sector where the key regulatory

responsibilities are vested with the State Energy

Regulatory Commission (SERC) - a separate body with

regulatory authorities and a high degree of autonomy

and accountability.



Competition Policy

--------------



The 1998 Law on the Protection of Competition (the

"Competition Law") is intended to establish and

maintain a competitive market. The Competition Law

forbids monopolies, restraining agreements, trade

restrictive practices, abuse of a dominant market

position, and unfair competition, and seeks to promote

consumer protection. A company is deemed to have a

dominant position if it controls 35 percent or more of

the relevant market. A company with a dominant market

position is prohibited from: certain pricing practices;

limiting manufacturing development to the detriment of

consumers; discriminatory treatment of competing

customers; tying contracts to additional and unrelated

obligations; and the use of economic coercion to cause

mergers. The Law prohibits five specific forms of

unfair competition: damaging competitors' goodwill;

misrepresentation with respect to goods or services;

misrepresentation with respect to the origin,

manufacturer, or other features of goods or services;

the use or disclosure of someone else's trade secrets

in violation of good faith commercial practices; and

"unfair solicitation of customers" (promotion through

gifts and lotteries),which may create difficulties for

some foreign enterprises.



The Competition Law was overhauled in 2003, introducing

important provisions that expand the competency of the

Commission for Protection of Competition (CPC),define

the prohibition on misuse of an oligopoly, and impose a

single criterion for assessing the significance of

planned concentration: the aggregate turnover of the

enterprises affected by the concentration.



I. EFFICIENCY OF CAPITAL MARKETS/PORTFOLIO INVESTMENT



Since 1997, the Bulgarian Stock Exchange (BSE) has

operated under a license from the Securities and Stock

Exchange Commission (SSEC). The 1999 Law on Public

Offering of Securities regulates issuance of

securities, securities transactions, stock exchanges,

and investment intermediaries. Comprehensive

amendments to this Law (99 in number),which were

promulgated in June 2002, establish significant rights

for minority shareholders of publicly-owned companies

in Bulgaria. In addition, they create an important

foundation for the adoption of international best

practices and corporate governance principles in public

companies.



The infrastructure of the stock exchange has been

substantially improved, including the establishment of

an official index (SOFIX). New trading instruments

(government bonds, corporate bonds, Bulgarian

Depositary Receipts, municipal and mortgage-

backed bonds, and privatization through the stock

exchange) have been introduced. As a result of

appreciation of nearly all of the most actively traded

issues on the Bulgarian Stock Exchange, its

capitalization more than doubled from 4 billion BGN

(USD 2.5 billion) in 2004 to 8.4 billion BGN (USD 5.3

billion) or 20 percent of GDP. Nonetheless, the stock

exchange generally lacks attractive securities and

faces low liquidity.



The Banking System

--------------



The Bulgarian banking system has undergone considerable

transformation since its virtual collapse in 1996 and

continues to mature. There are 34 commercial banks,

with total assets of 30.5 billion BGN (USD 19.1

billion) or 73 percent of the estimated 2005 GDP. Bank

intermediation, measured by total bank assets to GDP,

has doubled over the past five years.



Bulgaria has completed the privatization of its state-

owned banks, attracting some strong foreign banks as

strategic investors. Foreign investors drawn to the

Bulgarian banking industry, include UniCredito Italiano

SpA (UCI),BNP PARIBAS, National Bank of Greece,

Societe Generale, Bank Austria Creditanstalt, and

Citibank.



Because of Bulgaria's future EU membership and EU

policy of attaining a high degree of geographic

integration, smaller commercial banks owned by local

companies have been searching for opportunities to

establish partnership with larger European banks. Once

Bulgaria joins the EU the concept of the "single

passport" will allow any financial institution which is

duly authorized and supervised in its Member State of

origin to do business throughout the EU.





Reflecting expanded lending, the average capital

adequacy ratio (capital base to risk-weighted credit

exposures) for the banking system moved closer to

Bulgarian National Bank's requirement of 12 percent.

The capital adequacy ratio stood at 17 percent in the

first half of 2005 and is likely to stay at this level

given the BNB's measures to retain the credit growth

rate. The growth rate in non-government sector credit

slowed to 32.5 percent in the period between January-

November 2005.



Government Securities

--------------



The government finances expenditures by accessing

capital markets. On a weekly basis, the Ministry of

Finance holds an auction of Treasury bills. The bills

are typically short-term (3-month, 6-month and 1-year

maturities). Commercial banks are the primary

purchasers of these instruments. Foreign banks can

participate in the treasury market only through a

Bulgarian bank or the branch of a foreign bank, which

is licensed in Bulgaria. The foreign bank transfers

the money, which is then converted into leva to make

the purchase, which must be registered with the

Ministry of Finance. The foreign bank must open a lev

account (a "custody account") for transactions. This

lev account cannot be used as a standard deposit bank

account. A foreign currency account can be opened, but

it is not obligatory.



The Investment Promotion Act defines securities,

including treasury bills, with maturities over 6 months

as investments. Repatriation of profits is possible

after presenting documentation that taxes have been

paid.



J. POLITICAL VIOLENCE



There have been no incidents in recent years involving

politically motivated damage to projects or

installations. Rather, violence in Bulgaria is

primarily criminally motivated.



K. CORRUPTION



Corruption is still perceived to be one of the gravest

problems in Bulgaria's investment climate, despite the

Bulgarian government's numerous advances in laws and

legal instruments. Bulgaria ranks 55th among 159 states

included in Transparency International's (TI)

Corruption Perception Index for 2005.



The government has taken some initial steps to root out

corruption in certain agencies, like customs. In

December the Interior Ministry dismantled a ring of

customs agents and civil agents, who were falsifying

documents for the illegal import of Chinese goods.

In reality, however, the established human trafficking,

narcotics, and contraband smuggling channels that

contribute to corruption in Bulgaria have yet to be

broken, and serious efforts and political will are

still needed to carry out much-needed reforms to

address inefficiencies in the judicial system. The

Bulgarian public generally holds the police, the

judiciary, customs officials, and political parties in

low regard due to their perceived corruption.



Bribery is a criminal act under Bulgarian law for both

the giver and the receiver. Penalties range from one

to fifteen years' imprisonment, depending on the

circumstances of the case, with confiscation of

property added in more serious cases. In very grave

cases, the Penal Code specifies prison terms of 10 to

30 years. The 1996 Money Laundering Law also applies

to bribes. Bribing a foreign official is a criminal

act. There have been trials and convictions of

enterprise managers, prosecutors, and law enforcement

officials for corruption. While Bulgarian tax

legislation does not explicitly prohibit the deduction

of bribes in the computation of domestic taxes,

deductions connected with bribery and other illegal

activities are not allowed under the tax code.



Bulgaria has a 1996 Law for Measures against Money

Laundering and in 1998 was one of the first non-OECD

nations to ratify the OECD Anti-Bribery Convention.

Bulgaria has also ratified the Convention on

Laundering, Search, Seizure, and Confiscation of

Proceeds of Crime and the Civil Convention on

Corruption.



The GOB's recent anti-corruption agenda included the

adoption of key international anti-corruption

instruments, including:

-- signing the UN Convention against Corruption;

-- withdrawing the reservations made in 2001 at the

ratification of the Criminal Law Convention on

Corruption;

-- ratifying and signing the Additional Protocol to the

Council of Europe's Criminal Law Convention on

Corruption; Bulgaria was the second state to ratify

this Additional Protocol.



Although the Bulgarian government has achieved some

successes in the fight against organized crime and

corruption, many observers believe that corruption and

political influence in business decision-making

continue to be significant problems in Bulgaria's

investment climate.



L. BILATERAL INVESTMENT AGREEMENTS



As of December 2005, Bulgaria has foreign investment

promotion and protection treaties or agreements with

Albania, Algeria, Argentina, Armenia, Austria, Belarus,

Belgium-Luxembourg, China, Croatia, Cuba, Cyprus, Czech

Republic, Denmark, Egypt, Finland, France, Georgia,

Germany, Greece, Great Britain and Northern Ireland,

Hungary, India, Indonesia, Iran, Israel, Italy, Jordan,

Kazakhstan, Kuwait, Latvia, Lebanon, Libya, Macedonia,

Malta, Moldova, Mongolia, Morocco, Netherlands, Poland,

Portugal, Romania, Russia, Singapore, Slovakia,

Slovenia, Spain, Sweden, Switzerland, Syria, Thailand,

Tunisia, Turkey, Ukraine, the United States,

Uzbekistan, Vietnam, Yemen, and Yugoslavia.



Bulgaria has a Bilateral Investment Treaty (BIT) with

the United States, which guarantees national treatment

for U.S. investments and creates a dispute settlement

process. The BIT also includes a side letter on

protections for intellectual property rights. The

Governments of Bulgaria and the United States exchanged

notes in 2003 to make Bulgaria's obligations under the

BIT compatible with its EU obligations.



M. OPIC AND OTHER INVESTMENT INSURANCE



In 1991, the Overseas Private Investment Corporation

(OPIC) (www.opic.gov) and the GOB signed an Investment

Incentive Agreement, which governs OPIC's operations in

Bulgaria. OPIC provides project financing to U.S.

investors making long-term investments in emerging

markets. OPIC also supports a number of privately

owned and managed private equity funds, including a

regional fund for Southeast Europe created as part of

the U.S. Southeast Europe Initiative.



OPIC provides project financing through direct loans

and loan guarantees that provide medium- to long-term

financing to ventures involving significant equity

and/or management participation by U.S. businesses.

OPIC offers American investors insurance against

currency inconvertibility, expropriation, and political

violence. Political risk insurance is also available

from the Multilateral Investment Guarantee Agency

(MIGA),which is a World Bank affiliate, as well as

from a number of private U.S. companies.



N. LABOR



Bulgaria's workforce officially consists of 3,411,000

(53 percent male and 47 percent female. The literacy

rate in Bulgaria is 93 percent. A high percentage of

the workforce has completed some form of secondary,

technical, or vocational education. Many Bulgarians

have strong backgrounds in engineering, medicine,

economics, and the sciences, but there is a shortage of

professionals with Western management skills. The

aptitude of workers and the relative low cost of labor

are considerable incentives for foreign companies,

especially those that are labor intensive, to invest in

Bulgaria. Employer tax obligations and benefits

(clothing allowance, bonuses, etc.) can add more than

50 percent to the nominal wage.



Bulgaria's Constitution recognizes workers' right to

join trade unions and organize. The National Tripartite

Cooperation Council (NTCC) provides a forum for

dialogue among government, management, and trade

unions, such as cost-of-living adjustments. The

current government has substantially revitalized the

Council.



Bulgaria has two large legitimate representative trade

union confederations, the Confederation of Independent

Trade Unions of Bulgaria (CITUB) and Podkrepa

("Support"). The 2004 trade union membership census

indicates that CITUB has about 400,000 members and

Podkrepa has about 110,000 members. CITUB, the

successor to the trade union integrated with the

Communist Party, has long since severed its ties to the

socialists, whereas Podkrepa is an independent

confederation. There are few restrictions on trade

union activity and the confederations operate freely,

but the workforce in smaller firms and elsewhere in the

emerging private sector is often not represented by

trade unions. In 2004, the Bulgarian government

recognized Promyana to be Bulgaria's third legitimate

representative trade union.



Under the Labor Code, employer and employee relations

are regulated by employment contracts, which may be

agreed upon through collective bargaining. The Code

addresses worker occupational safety and health issues,

establishes a minimum wage (determined by the Council

of Ministers),and prevents exploitation of workers,

including child labor. The Code clearly delineates

employer rights, strengthening management's hand in

disciplining the workforce. Disputes between labor and

management can be referred to the courts, but

resolution is often subject to delays.



Over the last couple of years, the Labor Code has been

amended to address labor market rigidities and bring

labor legislation into compliance with the EU social

policy and employment requirements. The amendments to

the Labor Code simplify additional work procedures,

restrict mandatory leaves, and relax procedures for

implementing collective redundancies. However,

collective labor contracts at the sectoral or branch

level remain binding for all enterprises of the sector

or branch. The minimum annual paid leave is 20 days.



Neither foreign companies, nor Bulgarian companies

having majority foreign-control, are exempt from the

requirements of the Labor Code. During 2002-2003, the

Ministry of Labor formed the new "National Institute

for Conciliation and Arbitration" (NICA),which

developed a framework for collective labor dispute

mediation and arbitration. NICA includes

representatives from labor, employers, and the

Government, as does the roster of mediators and

arbitrators. Although NICA-sponsored collective labor

dispute resolution has not yet started, a number of the

appointed mediators received basic mediation skills

training from the U.S. Federal Mediation and

Conciliation Service.



O. FOREIGN TRADE ZONES/FREE TRADE ZONES

The 1999 Customs Act renamed the six duty-free zones

"free zones." Foreign, including U.S., individuals and

corporations, and Bulgarian companies with 1.0 percent

or more foreign ownership may set up operations in a

free zone. Thus, foreign-owned firms have equal or

better investment opportunities in the zones compared

to Bulgarian firms.



There are at present six operational "free zones" in

Bulgaria: Ruse and Vidin ports on the Danube; Plovdiv;

Svilengrad (near the Turkish border); Dragoman (near

the Yugoslav border); and, Burgas port on the Black

Sea. They are all owned by joint stock or state-owned

companies. The government provided land and

infrastructure for each zone.

-- Plovdiv, the only inland free zone, is the most

profitable, with 24 investment projects.

-- The Burgas FTZ has the largest warehousing and

automotive distribution facilities in Bulgaria and is

used by more than 100 foreign and joint venture

companies including Samsung.

-- Limited manufacturing is conducted in both the

Plovdiv and Ruse FTZs.



All forms of production and trade activities and

services may take place in the free zones. Foreign

goods delivered to the free zones for production,

storage, processing, or re-export are VAT and duty

exempt. Bulgarian goods may also be stored in free

zones with permission from the customs authorities.

Convertible foreign currency may be used and revenues

can be transferred abroad freely without any

restrictions. Administrative procedures relieve the

investor from needing to contact local authorities

directly. Production and labor costs are low, with

well-trained and highly qualified labor available. All

the zones are located on strategic trade rail, road,

and/or water trade routes.



The free trade zones in Bulgaria have attracted a

number of foreign investors, including Hyundai, KIA

Motors, Schwartskopf, Henkel, Landmark Chemicals Ltd.,

Group Schneider, and BINDL Energic Systeme GmbH.



P. FOREIGN DIRECT INVESTMENT



Between 1992 and September 2005, total cumulative

foreign direct investment (FDI) into Bulgaria amounted

to approximately USD 11.831 billion (about 45 percent

of estimated 2005 GDP). The Bulgaria Investment Agency

(BIA) estimates FDI of USD 2.6 billion for 2005.

Bulgaria's direct investment abroad was USD 298 million

in 2005, a tenfold increase relative to 2004.



FDI by Year (millions of U.S. dollars)



1992 34.4

1993 102.4

1994 210.9

1995 162.6

1996 256.4

1997 636.2

1998 620.0

1999 818.8

2000 1,001.5

2001 812.9

2002 904.7

2003 2,096.9

2004 2,487.5

2005 1,685.4*

Total 11,830.6



*January through September 2005;

(Source: InvestBulgaria Agency)



FDI by Country of Origin 1992- Sept 2005

(millions of USD)



Austria 2,210.9

Greece 1,187.6

Germany 943.0

Italy 779.9

Netherlands 771.7

Cyprus 603.3

USA 1) 586.0

Switzerland 571.0

Hungary 535.0

U.K. 532.8

Belgium 520.6

Czech Republic 441.3

France 228.3

Russia 211.6

Turkey 159.8

Spain 155.9

Ireland 116.8

Denmark 92.5

Sweden 78.4

Israel 51.3

Canada 50.1

Liechtenstein 46.5

Japan 43.1

Slovenia 39.5

Malta 28.0

Panama 24.0

Lebanon 19.4

Lithuania 19.1

Romania 9.4

China 7.8

Slovakia 6.7

Korea 3.5

(Source: InvestBulgaria Agency)



1) Official GOB investment statistics rank the U.S. as

7th in terms of overall investment in Bulgaria for the

period 1992-Sept 2005. This data, however, is

misleading as many US investors establish European

subsidiaries to manage their investments in Bulgaria.

For example, in 2005 Austria ranked as the largest

investor country largely due to Delaware-based Advent

International using its Austrian Viva Ventures

subsidiary to buy 65% of former state-owned

telecommunications company BTC. Also, there are two

major investments in Bulgaria by US-based agricultural

firms for oil, sweeteners and starches and sunflower

oil crushing operations valued at $50-60 million, which

are described as Belgian and Swiss investments.



Other investment projects negotiated in 2005 involving

US companies not included in the above figures include:

-- AES, energy, USD 1.4 billion;

-- GE Capital, real estate, USD 48 million;

-- Tishman International, real estate, USD 84 million;

and

-- mark Group Industries, electrical equipment, USD 2

million.



FDI by Sector 1992-Sept. 2005 (millions of USD)



Finance 2,168.9

Trade 1,580.8

Telecommunications 1,116.9

Electricity, Gas and Water 1,078.5

Real Estate 709.4

Petroleum, chemical 654.1

Mineral products 489.4

Construction 317.7

Food Products 293.9

Textile&Clothing 253.0

Wood products, paper 190.0

Tourism 185.4

Machine building 178.1

Metallurgy and metal products 166.3

Transport 123.2

Electrical engineering, electronics 122.6

Mining 70.1

Agriculture 38.2

Leather and leather products 22.3

Publishing 12.2

Vehicles and other transport equipment 9.8

(Source: InvestBulgaria Agency)



U.S. Investment in Bulgaria Greater Than USD 1,000,000

(Investor, Sector, Bulgarian Firm, millions USD)



-- Advent International (through Viva Ventures

Austria),telecommunications, BTC, 342.5

-- American Standard, manufacturing, Ideal Standard,

Vidima AD, 217.7

-- Alico/CEN, banking, Bulgarian Post Bank, 111.2

-- Bulgarian American Enterprise Fund, finance; real

estate, Bulgarian American Credit Bank; Bulgarian-

American Property Management; Obzor development

Company, 104.9

-- Coca Cola (through Softbul Investments, Cyprus),

beverages, Coca Cola Hellenic Bottling, 42.5

-- Entergy Power Group, electric power, Maritsa East

III, 36.3

-- Kraft Foods International, food industry, Kraft

Foods Bulgaria, 35.9

-- Socotab, tobacco processing, Socotab Bulgaria, 27.3

-- Soros Funds, cable TV/banking, Eurocom

Cable/Procredit Bank, 25.2

-- McDonald's, food industry, McDonald's Bulgaria, 23.2

-- News Inc., television, bTV, 22.8

-- Rila Holding, software

development/trade/education/real estate, Rila

Solutions/AUBG, Mirad, Slasa, Nord, 10

-- Eurotech, wood processing; business services,

Pirinska Moura; Ameta Holding, 9.7

-- Small Enterprise Assistance Fund (SEAF),finance;

plastics manufacturing, TransBalkan Bulgaria Fund,

Kapitan Dyado Nikola, 8.8

-- Marsdale Int'l LLC, lubricants, Prista Oil, 7.5

-- Motorola, electronics, Motorola Bulgaria, 7.0

-- Michigan Magnetics Inc., electronics, Magnetic Head

Technologies, 6.1

-- Premium Asset Management, business services/trade,

Stroy Consult/Ecomarket, 5.4

-- DTS, trade, Superabraziv, 5.3

-- Interinvestments Corp., trade, Buhal, 5

-- Osteotech, healthcare, OsteoCentre Bulgaria, 3

-- IBM World Trade Corp., trade, IBM Bulgarian, 2.8

-- Jovanda International Ltd. Delaware, hotel industry,

Duni Hotel, 2.7

-- Microsoft, IT, Microsoft Bulgaria, 2.5

-- AIG Group Inc, insurance, AIG Bulgaria, 2.5

-- Dunkin Donuts, food industry, Samex, 1.7

-- Croyden Chemical, trade/construction, Terachim

97/NIKMI, 2.9

-- American Life Insurance, insurance, AIG Life

Bulgaria, 1.3

-- Arus, chemical industry, Sviloza, 1.2

-- Daval Holding, advertising, Polytrade, 1.1

-- AMI Semiconductor, R&D electronics, AMI

Semiconductor Bulgaria, 1

(Source: InvestBulgaria Agency)



Top five 2005 Foreign Direct Investments (Investor,

Country, Sector, Bulgarian Firm, USD millions)



-- Telekom Austria, Austria, telecom, Mobiltel, 1,888;

-- Lukoil, Russia, petrochemicals, Neftochim Burgas,

242;

-- Sisecam, Turkey, glass, Trakya Glass Bulgaria, 220

-- E.ON, Germany, electricity distribution, Northeast

electricity distribution, 218;

-- Montupet, France, Autoparts, Greenfield, 94.4;

(Source: InvestBulgaria Agency)

BEYRLE