BULGARIA 2008 INVESTMENT CLIMATE STATEMENT

UNCLAS SOFIA 000044

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 OPIC USTR BU
SUBJECT: BULGARIA 2008 INVESTMENT CLIMATE STATEMENT

Ref: 07 STATE 158802

SUBJECT: Bulgaria - 2008 Investment Climate Statement.


A. OPENNESS TO FOREIGN INVESTMENT

Bulgaria has a liberal foreign investment regime with a top
government priority to attract foreign investment. Promising
sectors of the economy for foreign investment include: energy,
information technology, transportation, telecommunications, and
agriculture. 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 and relatively low labor costs. Its
geographic position places it at the crossroads of Europe, the
Middle East, and the CIS. Bulgaria joined WTO in December 1996,
NATO in April 2004, and the EU on January 1, 2007.

Investment Trends and Policies
--------------

Sound economic performance and political stability have enhanced
Bulgaria's ability to attract respected international investors.
Gradual convergence with the EU common market and a national
currency pegged to the Euro provide incentives for increased trade
and investment opportunities. While Bulgaria's international credit
rating is stable, Bulgaria's reliance on capital account inflows is
seen as a potential macroeconomic weakness that could undermine the
peg and boost inflation.

The Investment Promotion Act, last amended in May 2007, stipulates
equal treatment of foreign and domestic investors. It 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.

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

Problems most often encountered by foreign investors in Bulgaria
are: government bureaucracy; poor infrastructure; corruption;
frequent changes in the legal framework; and a protracted
privatization process. In addition, a weak judicial system limits
investor confidence in the courts' ability to enforce ownership and
shareholders rights, contracts, and intellectual property rights.

EU accession requirements have led to the adoption of a
constitutional amendment which will, beginning in 2014, allow EU
citizens and entities to acquire real property, while all other
foreigners will be able to do so only on the basis of an
international agreement ratified by the Bulgarian Parliament,
thereby favoring EU investors over those from the United States.
There are no legal restrictions against acquisition of land by
locally registered companies with majority foreign participation.

Privatization
--------------

The Privatization Agency (PA) administers the privatization of all
state-owned companies. The privatization methods include: public
auction, public tender and stock exchange. Foreign companies,
including state-owned ones, may purchase Bulgarian state-owned
firms. Bulgaria sold some of its district heating plants (Plovdiv,
Russe, Varna) in 2007 as part of a major privatization package.
Some of the most attractive companies slated for privatization in
2008 are the district heating plants in the capital city Sofia and
in two other cities (Pernik and Shumen),the Bulgarian Navigation
Fleet, and the military machine building plant in Sopot
(South-Central Bulgaria) which is awaiting a new privatization
strategy. The government's privatization program will close out in
2008, as most significant assets available for privatization have
already been transferred to the private sector.

The 2002 Privatization and Post-privatization Act instituted a
Post-Privatization Control Agency under the authority of the Council
of Ministers tasked to oversee the implementation of privatization
contracts. This body ensures that non-price privatization
commitments (employee retention, technology transfer, environmental
liability and investment) in the privatization selection criteria
are honored. In addition, creditors are no longer required to claim
their receivables within six months from the start of the
privatization.

Concessions
--------------

Under the new 2006 Law on Concessions, the state is authorized, on
the basis of a concession agreement, to grant private investors a
partial monopoly. Concessions are awarded on central and/or local
government property, on the basis of a tender, and are issued for up
to 35 years. The concession period may not be extended beyond this
time limit. There are three main categories of public interest for
concession: construction, services, and mining and exploration.
Potential fields for concessions may therefore include the
construction of roads, ports and airports, power generation and
transmission, mining, petroleum exploration/drilling,
telecommunications, forests and parks, beaches, and nuclear
installations.


B. CONVERSION AND TRANSFER POLICIES

In 1999, Bulgaria replaced much of its outdated and fragmented
foreign currency legislation and liberalized current international
transactions in accordance with IMF Article VIII obligations. Under
amendments to the 1999 Foreign Currency Act, approved by Parliament
in 2003, 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, and only
in the case that public needs cannot be met by other means,
expropriation actions may be undertaken by the Council of Ministers
or the regional Governor, provided that the owner is adequately
compensated. Monetary compensation at market price is the primary
method. No tax is levied on the expropriation transaction.
Expropriation actions of the Council of Ministers can be appealed
directly to the Supreme Court on the basis of the expropriation
action, the property appraisal, or the size of compensation.
Regional Governor's expropriation actions can be appealed to the
local court. In its Bilateral Investment Treaty (BIT) with the
United States, 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. However, the
judiciary has been suffering from systematic flaws, serious backlog
and opaque procedures that hamper the swift and fair administering
of justice. Corruption remains a serious problem with public
opinion polls indicating that bribes are commonly paid in the
justice sector. In 2007, the Bulgarian Parliament passed
Constitutional amendments followed by a new Judicial System Act
aimed at strengthening disciplining of magistrates, increasing the
efficacy of the court system, and preventing corruption in the
justice system. As a result, an Inspectorate was created under the
judiciary's governing body, the Supreme Judicial Council (SJC),
which shall monitor the conduct of magistrates and initiate
disciplinary proceedings. Members of the Inspectorate are elected
with a supermajority by Parliament. At the end of 2007, Parliament
appointed nine of the 11 members of the Inspectorate in a highly
politicized process that attracted wide-spread criticism. It us
unclear whether the Inspectorate will be effective in uncovering
cases of improper magistrates' conduct.

Bulgaria's judicial system includes judges, prosecutors and
investigators. The proposition that prosecutors and investigators
would be more efficient as part of the executive branch has been
widely debated but a Constitutional Court decision found that such
reforms could only be passed through major constitutional amendments
by a Grand National Assembly. The governing body of the judiciary
is a 25-member Supreme Judicial Council that has broad powers to
appoint, discipline and dismiss magistrates.

There are three levels of courts. 117 regional courts exercise
jurisdiction over civil and criminal cases. Above them, 29 district
courts (including the Sofia City Court) have trial-level
jurisdiction in civil cases where claims exceed 10,000 BGN, 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 is the Supreme Court
of Cassation. On issues of law, the Supreme Court of Cassation has
appellate jurisdiction over all civil cases involving claims over
5,000 BGN and criminal cases. The new Administrative Procedure
Code, adopted in April 2006, introduced the establishment of 28
courts throughout the country specialized in reviewing appeals of
administrative acts.

As of March 2007 the administrative courts officially started
receiving complaints. The decisions issued by the administrative
courts can be disputed before the Supreme Administrative Court as a
final appeal. The Supreme Administrative Court also rules on the
legality of acts by the 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.

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.

Bankruptcy
--------------

The 1994 Commercial Code Chapter 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 the 1996 Insurance Act regulates
insurance company failures.

Under Part IV of the Commercial Code, debtors or creditors can
initiate bankruptcy proceedings. The debtor must declare bankruptcy
within 30 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 is unable to perform an
executable obligation, has suspended all payments, 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 a month after the date on which the court approves the list of
debts. The court must grant approval of the plan by the creditors
within seven days. After creditors' approval the court endorses the
plan and terminates the bankruptcy proceeding. The lack of trained
trustees has been a problem in the past. The June 2003 amendments
provided for examinations for individuals applying to become
trustees and obliged the Ministers of Justice and Economy to
organize annual training courses for trustees. A Regulation on the
procedure for appointment, qualification and control over the
trustees, developed by the Ministries of Justice, Economy and
Finance was published in June 2005.

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.

Execution of Judgments
--------------

To execute a judgment, a final ruling must be obtained. The court
of first instance must then be petitioned for a writ of execution
(based on the judgment). On the basis of the writ of execution, a
specialized category of professionals, execution agents, seize the
assets or ensure the performance of the ordered action. The
institutional framework for execution of judgments was improved with
a 2005 law allowing private professionals to act as execution
agents. Since 2006 both private and state execution agents operate
in Bulgaria. Two years after the introduction of private execution
agents, businesses report a dramatic increase in the efficiency of
executive of judgments. Still, Bulgarian and foreign observers
caution that the proceedings for the execution of judgments and
other enforceable claims under the Code of Civil Procedure remain
cumbersome. The new Civil Procedure Code, effective March 2008,
should address some of these deficiencies. 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 United States does
not currently have reciprocity with Bulgaria; 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.

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.

The most experienced arbitration institution in Bulgaria is the
Arbitration Court (AC) of the Bulgarian Chamber of Commerce and
Industry (BCCI). Established more than 110 years ago, the AC had
been competent to hear civil disputes between legal persons, one of
whom must be seated outside Bulgaria. It began to act as a
voluntary arbitration court between natural and/or legal persons
domiciled, respectively seated in Bulgaria since 1989.

Arbitration is regulated by the 1988 Law on International Commercial
Arbitration, which complies with the United Nations Commission on
International Trade Law (UNCITRAL) Model Law. According to the Code
of Civil Procedure not all disputes may be resolved through
arbitration. Thus, disputes regarding rights over real estate
situated in the country, alimony, or individual labor disputes may
only be heard by the courts. Additionally, under the Code of
Private International Law of 2005, Bulgarian courts have exclusive
competence over industrial property disputes regarding patents
issued in Bulgaria.

Regarding arbitration clauses selecting a foreign court of
arbitration, the Code of Civil Procedure mandates that these clauses
would only be admissible 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 the 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.
Arbitral awards are enforced through the judicial system. The
party must petition the Sofia City Court for a writ of execution.
Having obtained a writ however, the creditor needs then to execute
the award using the general framework for execution of judgments in
the country. Foreclosure proceedings may also be initiated.

Bulgaria is a member of the 1958 New York Convention on the
Recognition and Enforcement of Foreign Arbitral Awards and the 1961
European Convention on International Commercial Arbitration.
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. There is a Court of Arbitration --
an ADR center for domestic business disputes -- at the Bulgarian
Industrial Association(BIA).

Mediation --------------

Businesses wishig to use mediation to solve their disputes in
Bugaria may find it difficult to locate experienced ediators.
Mediation as a practice has only recenly begun to develop in the
country following the adoption of the Mediation Act at the end of

2004. BCCI and the American Chamber of Commerce (AmCham) responded
promptly by opening commercial mediation centers. The mediators at
these centers have been trained with USAID assistance.


E. PERFORMANCE REQUIREMENTS/INCENTIVES

Bulgaria does not impose export performance or local content
requirements as a condition for establishing, maintaining, or
expanding an investment. For most categories of expatriate
personnel from countries outside the EU a work permit is required.
Residence permits are often difficult to obtain. A 1:10 ratio
requirement between foreign, non-EU residents and Bulgarian
employees is applied. A June 1999 law regulating gambling imposes
license requirements on foreigners organizing games of chance.

The Invest Bulgaria Agency (IBA) (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 50 million)
are deemed to be priority "Class A" investment projects. At the
request of investors receiving first-class investment certificates,
IBA 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, IBA represents first and
second-class investors "Class B" (investments of USD 28 - 50
million) before all central and territorial executive authorities
and the local self-government authorities, and processes all
administrative documents. The government policy for promotion of
investment is not applicable to investments made pursuant to the
Privatization Law, coal and steel production, shipbuilding,
synthetic production, and fish industry. In 2003, the GOB
introduced tax incentives for investments in regions with high
unemployment. VAT exemption on imports for investment projects over
10 million BGN (about USD 7.5 million) under certain conditions, was
introduced in 2004.


F. RIGHT TO PRIVATE OWNERSHIP/ESTABLISHMENT

The Constitution (Article 19) 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 Intellectual
Property Rights (IPR) legislation is generally adequate - and in
some cases stronger than in other EU countries - with modern patent
and copyright laws and criminal penalties for copyright
infringement, industry representatives believe effective IPR
protection requires stronger enforcement, including stricter
penalties for offenders. In 2006, a major revision of the
IPR-related legal framework was made. The Law on Copyright and
Related Rights, the Law on Patents and Registration of Utility
Models, the Law on Marks and Geographical Indications, the Law on
Industrial Design and the Penal Code were all amended or
supplemented to harmonize with international standards. As a major
step toward improving the work of the judiciary, a completely new
Penal Procedure Code was adopted by Parliament in 2006, while
amendments to the Constitution are still being considered. The
strongly criticized GOB Decree on Border Measures for Protection of
IPRs was replaced by EU Regulation 1383/2003 (customs regulation)
and is now being directly applied.

Additionally, the government still needs to strengthen institutional
capacity, coordination, and in some cases, the will to address
effectively major enforcement problems, especially in combating and
prosecuting organized crime groups. To improve the coordination
among institutions and push for a more proactive dialogue with the
private sector, in January 2006 an inter-ministerial Council for
Protection of IPRs was set up. The Council has since initiated and
supported most of the amendments to the IPR-related legislation, and
promoted better inter-governmental coordination and outreach to
industry. A few industrial groups currently have intellectual
property disputes before the government.

In acknowledgement of the improvements made in IPR field, in April
2006 Bulgaria was removed from the Special 301 Watch List. Although
the sale of pirated optical disc media (ODM) is diminishing,
Internet cyber crimes are turning out to be the greatest challenge
for the GOB and creative industry now. At a rate of 69 percent in
2006, software piracy is pervasive both among the end users and
system builders. The government took good steps in 2007 to address
IP problems, but must continue its efforts to reign in piracy.

Bulgaria is a member of the World Intellectual Property Organization
(WIPO) and a signatory to key international agreements.

Copyrights
--------------

The 1993 Law on Copyright and Related Rights protects literary,
artistic, and scientific works. Article 3 provides a full listing
of protected works including computer programs (which are protected
as literary works). The Law distinguishes between moral and
economic rights. The use of protected works is prohibited without
the author's permission, except in certain instances. Since 2000
the Law has gone through major revision to comply with EU and
international legislation.

The term for protection of copyrighted works was extended from 50 to
70 years after the author's death. 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; and, harmonize Bulgarian legislation with the EU
Association Agreement.

The Copyright Office of the Ministry of Culture is responsible for
copyright matters in Bulgaria. The National Film Center is
responsible for enforcing intellectual property rights with regard
to films and videos. Bulgarian legislation provides for criminal,
civil and administrative remedies against copyright violation, but
because of the small number of court judgments and sentences, law
enforcement is still inadequate.

Patents
--------------

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 Granting of European Patents (European
Patent Convention) in 2002.

Bulgaria grants the right to exclusive use of inventions and utility
models for 20 years from the date of patent application. The term
of validity of a utility model registration is four years as of the
filing date with the Patent Office. It may be extended by two
consecutive three-year periods, but the total term of validity may
not exceed 10 years.

Inventions eligible for patent protection must be new, involve an
inventive step and be applicable for 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 and recorded in the state register.
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.

Disputes arising from the creation, protection or use of inventions
and utility models can be considered and settled under
administrative, court or arbitration procedures. Disputes are
reviewed by specialized panels convened by the President of the
Patent Office and may be appealed to the Sofia Administrative Court
within three months of the panel's decision. Patent infringements
are punishable by administrative fines from 300 up to 20,000 BGN.

In 1996, Parliament approved the Protection of New Types of Plants
and Animal Breeds Act. This Certificate 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. In 1998, Parliament ratified the 1991
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 Drug Law, which took effect in April

2007.

Trademarks
--------------

In 1999, Parliament passed a series of laws on trademarks and
geographical indications, industrial designs and integrated circuits
in accordance with TRIPs requirements and the government's EU
Association Agreement. The Trademarks and Geographical Indications
Act, which was amended in 2005 and 2006 to comply with EU standards,
regulates the establishment, use, suspension, renewal and protection
of rights of trademarks, collective and certificate marks, and
geographic indications.

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 registered or 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. 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 eighteen months of filing a
complete application. Refusals can be appealed before the Disputes
Department at the Patent Office. The decisions of this department
can be appealed before the Sofia Administrative Court within three
months following notification. 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. Bulgarian legislation provides for criminal, civil
and administrative remedies against trademark violation, but due to
the low record of court resolutions and effective sentences, law
enforcement is inadequate. While more draconian measures are
available, such as imprisonment of up to five years, confiscation or
fines of up to 5,000 BGN, their application must be significantly
stepped up.

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
-------------- --
A Treaty for Avoidance of Double Taxation (TADT) between the United
States and Bulgaria was signed in 2007. The Treaty applies to
direct taxes only and excludes indirect levies, such as value-added
and excise taxes, as well as all social contributions. It also
applies to all sources of income that residents of either state have
received "at source" in the other state. Once it is ratified and
enters into force, the TADT is expected to reduce the tax burden for
residents of both states, which will stimulate cross-border trade
and investment.
A flat 10 percent tax rate on income is in place since January 2008,
replacing the old progressive taxation. The new flat income tax
matches up with a corporate and profit tax rate of 10 percent making
Bulgaria one of the EU member states with the lowest direct taxes.
Certain tax incentives, such as an exemption from corporate tax,
apply in regions of high unemployment. Physical persons, but not
legal ones, in certain trades pay a "patent" tax (presumptive tax),
according to a schedule established by Parliament. Since January 1,
2008 the size of the "patent tax" will be determined by and is
payable to the municipal authorities. Dividends (and liquidation
quotas) distributed by a Bulgarian resident company to U.S.
investors are subject to a withholding tax of 5 percent at the
source. A 50 percent depreciation rate is applied on investment in
new machinery and other equipment, computers and computer software.


The changes introduced in 2008 refer to a new monthly ceiling of BGN
2,000 for social contributions. Employers pay 60 percent of the
monthly contributions for social security insurance and health
insurance to an unemployment fund, but their share of contributions
is slated to decline, in phases, to 50 percent 2010. Employers must
contribute for social security insurance and health insurance: 16.3
percent and 3.6 percent of employees' gross salaries, respectively.
Companies also contribute one percent of the total wage cost to an
unemployment fund which also covers accidents at work. 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),except for
some tourist services upon which VAT is levied at seven percent
rate. VAT registration is mandatory for persons with turnover
exceeding BGN 50,000 over a calendar year, while all others can
register voluntarily. A new VAT regime is in place for trade in
goods between Bulgaria and the other EU member countries.

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.
Exporters may claim VAT refunding within a 30-day period. Excise
taxes are levied on tobacco, alcoholic beverages, fuels, certain
types of automobiles, and gambling.

Foreign investors have asserted that widespread tax evasion,
combined with the failure of the authorities to enforce collection,
places them at a disadvantage. However, in conjunction with its IMF
agreement, the government has strengthened tax collection and
limited tax arrears of state-owned enterprises. Another problem
underscored by investors is the frequent revision of tax laws,
sometimes without sufficient notice. After full harmonization of
domestic tax legislation with the EU law, the business environment
is expected to become more transparent and predictable.

Regulatory Environment
--------------

An abundance of licensing and regulatory regimes, combined with
arbitrary interpretation and enforcement by the bureaucracy, and the
incentives thus created for corruption, have long been seen as an
impediment to investment.

In 2003, Parliament passed the Restriction of Administrative
Regulation and Control of Economic Activity Act, which 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 effect 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 these reforms considerably lighten the potential of
regulatory abuse at all levels of government and, when implemented,
should improve the overall business environment. While the law
creates a ground-breaking normative framework, its practical
enforcement is dependent upon movement towards a more flexible
bureaucratic environment.

Energy Regulator
--------------

The Energy Law establishes a transparent and predictable regulatory
environment in the energy sector where the key regulatory
responsibilities are vested with the State Energy and Water
Regulatory Commission - a separate, body with regulatory
authorities, and a high degree of autonomy. In mid-2007 the
electricity market in Bulgaria was fully liberalized to comply with
EU energy legislation. The restructuring of electricity monopolies
provided equal market access and fair competition in the sector.

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 solicitatin of customers" (promotion
through gifts and loteries),which may create difficulties for some
freign enterprises. Monopoly position can be estabished only by
law and for certain categories of activities: railway and postal
services; use of atmic energy; production of radioactive materials;and weapons
production.

The Competition Law wasoverhauled in 2003, introducing important
provisons 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 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 for
corporate governance principles in public companies.

The infrastructure of the stock exchange has been substantially
improved, including the establishment of an official index (SOFIX).
In addition to floating company stock and privatization through the
exchange, the Bulgarian stock exchange also trades in government
bonds, corporate bonds, Bulgarian Depositary Receipts, municipal and
mortgage-backed bonds, and Bulgarian Depository Receipts. Raising
capital has become increasingly attractive, and more competitive,
with the advent of special purpose investment companies (REITs)
which are aggressively investing in the economy. In addition, the
number of initial public offerings (IPOs) is growing, reaching 23 in

2007. Trading has been facilitated by the growing number of
investment brokers and a joint database for secure access in place.
In the first six months of 2007, the Bulgarian stock exchange
recorded a turnover of BGN 2.72 Billion (about 1.9 Billion USD),a
notable 86 percent increase on the year. The market capitalization
of Bulgarian stock exchange reached BGN 20.78 Billion (about 14.7
Billion USD) at the end of June 2007, an increase by 110 percent on
the year. To boost its liquidity, the GOB has announced plans to
sell its share in the Bulgarian stock exchange to a world-renown
capital and stock market.

The Banking System
--------------

The Bulgarian banking system has undergone considerable
transformation since its virtual collapse in 1996 and now
demonstrates both high predictability and client and investor
confidence. There are 30 commercial banks, with total assets of
54.9 billion BGN (about USD 39 billion) and an annual growth of 37.6
percent in November 2007 or 98 percent of the projected 2006 GDP.
Approximately 38.7 percent of bank assets are concentrated in three
banks: Bulbank, State Saving Bank (DSK),and United Bulgarian Bank
(UBB).

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, KBC, National Bank of
Greece, Societe Generale, Bank Austria Creditanstalt, American Life
Insurance Company - Consolidated Eurofinance Holdings, Regent
Pacific Group, and Citibank.

Bulgaria's banking system is highly capitalized. Reflecting
expanded lending in recent years, the average capital adequacy ratio
(capital base to risk-weighted credit exposures) for the banking
system has steadily declined from 43 percent at end-1998 to 13.9
percent in September 2007, but still remains above the Bulgarian
National Bank's requirement of 12 percent.

Government Securities
--------------

The government finances government expenditures by accessing capital
markets. Commercial banks are the primary purchasers of these
instruments, while pension funds and insurance companies participate
mainly in the secondary market. Foreign banks can participate in
the treasury market only through a Bulgarian bank or a 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, and 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 six 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 one of the gravest problems in Bulgaria's
investment climate, despite the Bulgarian government's numerous
advances in laws and legal instruments. Bulgaria ranks 64th among
180 countries included in Transparency International's (TI)
Corruption Perception Index for 2007, down seven places from 2006.

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.
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 1998 Law on Measures against Money Laundering, which
also covers bribery, and in 1998 was one of the first non-OECD
nations to ratify the OECD Anti-Bribery Convention. Bulgaria has
also ratified the Council of Europe Convention on Laundering,
Search, Seizure, and Confiscation of Proceeds of Crime (1994) and
the Civil Convention on Corruption (1999).

The GOB's recent anti-corruption agenda included the adoption of key
international anti-corruption instruments, including:
-- signing and ratifying the UN Convention against Corruption
(2003);
-- withdrawing the reservations made in 2001 at the ratification of
the Criminal Law Convention on Corruption;
-- signing and ratifying the Additional Protocol to the Council of
Europe's Criminal Law Convention on Corruption; Bulgaria was the
second state to ratify this Additional Protocol;
-- signing and ratifying the UN Convention Against Transnational
Organized Crime.

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 February 2007, 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,
Lithuania, Lebanon, Macedonia, Malta, Moldova, Mongolia, Morocco,
Netherlands, Poland, Portugal, Republic of Korea, 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, and finalized the process in January, 2007.


M. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

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 medium-
to long-term funding through direct loans and loan guarantees to
eligible investment projects in developing countries and emerging
markets. OPIC also supports a number of privately owned and managed
equity funds, including a regional fund for Southeast Europe created
in 2005 for investments in companies in Bulgaria and other Balkan
countries. OPIC's Small- and Medium-Size Financing is available for
businesses with annual revenues under 250 Million USD. OPIC's
Structured Financing focuses on U.S. businesses with annual revenue
over 250 Million USD and supports large-scale projects that require
large amount of capital, such as infrastructure, telecommunications,
power, water, housing, airports, hi-tech, financial services, etc.

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 3,550,600 (third quarter
of 2007) highly educated and skilled men (53 percent) and women (47
percent). The adult literacy rate in Bulgaria is 98 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 demand for skilled managers is increasing
with the advent of high technology, innovative and knowledge-based
companies from the EU. 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.

Bulgaria's Constitution recognizes workers' right to join trade
unions and organize. The National Council for Tripartite Cooperation
(NCTC) provides a forum for dialogue among government,
national-level employer organizations, and national-level trade
unions, on issues such as cost-of-living adjustments. The current
government has substantially revitalized the Council improving
relations between management and trade unions. A tri-partite pact
for social and economic development - the first of its kind - until
2009 was signed in 2006.

Bulgaria has two large trade union confederations represented at
national level, the Confederation of Independent Trade Unions of
Bulgaria (CITUB) and Confederation of Labour "Podkrepa" ("Support").
At the end of 2007, the estimated trade union membership is about
200 000 for CITUB and between 70 000-75 000 for CL "Podkrepa".
CITUB, the successor to the trade union integrated with the
Communist Party was reformed and has long since severed its ties to
the socialists, whereas Podkrepa is an independent confederation.
There are very few restrictions on trade union activity and the
confederations operate freely, but the workforce in smaller firms in
the private sector is often not represented by trade unions. In
addition, there are six nationally recognized employer organizations
currently in Bulgaria which target different industry and company
membership.

Under the Labor Code, employer and employee relations are regulated
by employment contracts. The framework of the employment contracts
can be shaped through collective bargaining. Following the Labor
Code, collective agreements (collective labor contracts) can be
concluded at the sectoral level, enterprise level and municipal
level (only for activities financed by the budget). The Labor 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. The idea for establishing so-called "labor
courts" has so far been in deadlock. Neither foreign companies, nor
Bulgarian companies having majority foreign-control are exempt from
the requirements of the Labor Code.

Over the last three 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. The minimum annual paid
leave is 20 days. Effective January 1, 2008, the minimum monthly
salary is 220 BGN.

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 resolutions are
still few - and its work therefore ineffectual - 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 managed by joint stock or state-owned
companies. The government provided land and infrastructure for each
zone.

All forms of production and trade activities and services may take
place in the free zones. Foreign, non-EU 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. With Bulgaria now in
the EU, the export of goods of EU origin via the FTZs has lost its
luster, as the new VAT regime requires full price payment, VAT
inclusive, before selling it into another EU Member State.

EU integration has encouraged regional authorities to attract
outside investors and spur local economic development. In
partnership with the private sector, they provide resources (ground,
infrastructure, etc.) for the development of industrial zones and
parks, which are different from FTZs as they do not provide for any
form of preferential tax treatment. International and local
investors can use the favorable factors, such as low-cost and
educated labor and easy access to the local market, to relocate
their business. Currently, the most advanced projects are the
industrial zones in Sofia, Rakovski, Panagyurishte, Stara Zagora,
Silistra, Pazardzhik, Kardzhali, Dobrich, Varna and Ruse.


P. FOREIGN DIRECT INVESTMENT

Between 1992 and 2006, total cumulative FDI into Bulgaria amounted
to USD 20,199.7 billion (about 64 percent of estimated 2006 GDP).
FDI in Bulgaria totaled $5.1 billion in 2006. Bulgaria's direct
investment abroad was a total of USD 172 million in 2006. In the
period of January through September Bulgaria's direct investment
abroad increased by USD 197 million.

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 969.7
2003 2,096.9
2004 3,443.4
2005 3,861.9
2006 5,171.7
Total 20,199.7
Source: Invest Bulgaria Agency)

FDI by Country of Origin 1992-2006 (millions of USD)

Austria 3,454.1
Netherlands 2,075.3
Greece 1,819.5
U.K. 1,586.3
Germany 1,207.2
Italy 960.4
Hungary 865.4
Czech Republic 851.6
Belgium and Luxemburg 823.1
Switzerland 822.1
USA * 817.6
Cyprus 766.6
Ireland 465.4
France 335.0
Spain 338.2
Russia 371.6
Turkey 273.3
Denmark 193.5
Israel 117.5
Japan 102.0
Sweden 94.3
Malta 78.3
Liechtenstein 57.0
Canada 56.2
Panama 53.6
Slovenia 47.4
Latvia 45.8
Romania 43.3
(Source: Invest Bulgaria Agency)

* Official GOB investment statistics currently rank the United
States as 11th in terms of overall investment in Bulgaria for the
period 1992-2006. While the Central Bank credits the United States
with investments at the rate of USD 40-50 million per year in the
last eight years, this data is incomplete as many U.S. investors
establish European subsidiaries to manage their investments in
Bulgaria.

FDI by Sector 1998-2006 (millions of USD)

Real estate and business activities 3,784.6
Financial activities 3,151.6
Trade and repairs 3,028.5
Electricity, gas and water 1,631.0
Petroleum, chemical, Rubber Plastic 1,209.3
Telecommunications 1,045.2
Construction 888.1
Metallurgy and metal products 859.5
Mineral products (cement, glass) 635.4
Food products 399.6
Textile and clothing 304.1
Hotels and restaurants 259.5
Machine-building 231.7
Wood products, paper 228.1
Electrical eng., electronics, computers 178.3
Transport 126.2
Mining 50.4
Agriculture, forestry and fishing 44.6
Leather and leather products 22.1
Vehicles and other transport equipment 12.6

(Source: Invest Bulgaria Agency)


Selected 2006/2007 Foreign Direct Investments

(Investor, Country, Sector, Bulgarian Firm, USD millions)

-- CEZ, Czech Republic, energy, West electricity distribution, 366
-- OTP, Hungary, finance, DSK Bank, 363.7
-- EVN, Austria, energy, Southeast electricity distribution, 352
--Tishman Property Company, U.S., Sofia Airport, 344
-- E.ON, Germany, energy, Northeast electricity distribution, 183
--OTE, Greece, telecommunications, Cosmo Bulgaria Mobile, 173.9
--Cumerio Med AD, Belgium, copper refinery and smelter Pirdop, 170
--Sisecam, Turkey, glass industry, Greenfield glass plant, 160
--Petromax, Austria, Crude oil refnery Silistra, 152.1
--Carrefour, France, food rtail, Hypermarket Sofia, 103
--Tokushukaial Corp, healthcare, Tokuda Hospital Sofia, 90
--Pireusank, Greece, banking, Evrobank AD, 62.6
-- Miroglio, Italy, textile, Miroglio Bulgaria, 50.2
-- Umcore, Belgium, metals, Umicore Med, 48.1
--Melexs, Belgium, automotive electronics, 38
(Source: Invet Bulgaria Agency)

KARAGIANNIS