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10SOFIA39
2010-01-19 07:32:00
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Embassy Sofia
Cable title:  

BULGARIA: 2010 INVESTMENT CLIMATE STATEMENT

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UNCLAS SECTION 01 OF 14 SOFIA 000039 

STATE FOR EUR/CE TKONDITI, EB/IFD/OIA DJAHN and TJWALSH STATE
PLEASE PASS TO USTR

SIPDIS

E.O. 12958: N/A
TAGS: EINV EFIN ELAB ETRD KTDB OPIC USTR BU
SUBJECT: BULGARIA: 2010 INVESTMENT CLIMATE STATEMENT

REF: 09 STATE 124006

SOFIA 00000039 001.2 OF 014


UNCLAS SECTION 01 OF 14 SOFIA 000039

STATE FOR EUR/CE TKONDITI, EB/IFD/OIA DJAHN and TJWALSH STATE
PLEASE PASS TO USTR

SIPDIS

E.O. 12958: N/A
TAGS: EINV EFIN ELAB ETRD KTDB OPIC USTR BU
SUBJECT: BULGARIA: 2010 INVESTMENT CLIMATE STATEMENT

REF: 09 STATE 124006

SOFIA 00000039 001.2 OF 014



1. Bulgaria - 2010 Investment Climate Statement.


A. OPENNESS TO FOREIGN INVESTMENT

Bulgaria has put in place a liberal foreign investment regime,
including low, flat corporate and income taxes and competitive
incentives to attract high levels of foreign investment. Promising
sectors for foreign investors include: energy (including renewable
and clean energies),information technology, transportation,
telecommunications, environmental (including water and waste water
infrastructure) and agriculture. EU integration has opened new
markets for Bulgarian-produced goods and services. Bulgaria's labor
market is generally well-educated and the cost of labor is the
lowest in the European Union. The country's geographic position
places it at the crossroads of Europe, the Middle East, and the
former Soviet Union. A stable U.S. ally, Bulgaria is a member of
NATO, the EU and the WTO.

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

Sound economic performance and political stability have enabled
Bulgaria to attract leading foreign investors. Gradual convergence
with the EU common market, fiscal prudence, and a national currency
pegged to the Euro have all provided stability and incentives for
increased trade and investment. After several years of solid
growth, the global financial crisis is being felt in Bulgaria
through decreasing levels of foreign direct investment (FDI). In
2009, FDI decreased by over 50 percent. The economy remains
vulnerable due to a decline in external demand and tightening of
credit. Growth forecasts for 2010 range from a -2.5% contraction to
a nominal increase.

The Investment Promotion Act stipulates equal treatment of foreign
and domestic investors. It creates conditions for improved
administrative services and includes an investment incentive
package. The law encourages investment in manufacturing and
renewable energy, in high-technology, as well as in education and
human resource development. The law explicitly recognizes
intellectual property and securities as foreign investments.

Common Forms of Investment
--------------

The most common type of organization for foreign investors is a
limited liability company. Effective January 1, 2010, the fee to
register a limited liability company has been reduced to one Euro.
Other typical corporate entities include joint stock companies,
joint ventures, business associations, general and limited
partnerships, and sole proprietorships.


Foreign investors must comply with the 1991 Commercial Code, which
regulates commercial and company law and the 1951 Law on Obligations
and Contracts, which regulates civil transactions. These laws
generally do not limit foreign participation in legal entities.

The 2003 Law on Special Purpose Investment Companies (SPIC) allows
for public investment companies in real estate and receivables,
essentially real estate investment trusts (REITs). Since a SPIC is
considered a pass-through structure for corporate income tax
purposes, at least 90 percent of its net income must be distributed
to shareholders as taxable dividends. A SPIC must apply for an
operational license from the Financial Supervision Commission within
six months of registration.

Investment Barriers
--------------

Foreign investors often encounter the following problems: a sluggish
government bureaucracy, poor infrastructure, corruption, frequent
changes in the legal framework, and pre-determined public tenders.
In addition, a weak judicial system limits investor confidence in
the courts' ability as an enforcement mechanism.

EU accession requirements have led to the adoption of a
constitutional amendment which, beginning in 2014, will 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 real property acquisition by
locally-registered, majority foreign-owned companies, which is the
method most foreigners use to purchase property in Bulgaria.

Privatization

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

In 1992, the Law on Transformation and Privatization of State and
Municipal Enterprises established the Privatization Agency to
administer the privatization of all state-owned companies.
Privatization methods include: public auctions, public tenders, and
public offerings. Foreign companies, including state-owned ones,
may purchase Bulgarian state-owned firms. Bulgaria completed its
major privatization in the 1990s and early 2000s, and the
privatization program is gradually phasing out. In 2010, the
Bulgarian government plans to privatize two district heating plants,
two military factories, three free trade zones, the state tobacco
company, and up to 15 percent of the Bulgarian Energy Holding.

The 2002 Privatization and Post-Privatization Act established a
Post-Privatization Control Agency 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 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. The decision for awarding a concession may be appealed
before the Competition Protection Commission. There are three main
concession categories: 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.

Third-party Rankings
--------------

Index Year Ranking

TI Corruption Perception 2009 71(out of 180)

Heritage Economic Freedom 2009 56 (out of 179)

World Bank Doing Business:
Overall 2010 44 (out of 183)

World Bank Doing Business:
Starting a Business 2010 50 (out of 183)

World Bank Doing Business:
Dealing with Licenses 2010 119 (out of 183)

World Bank Doing Business:
Employing Workers 2010 53 (out of 183)

World Bank Doing Business:
Registering Property 2010 56 (out of 183)

World Bank Doing Business:
Getting Credit 2010 4 (out of 183)

World Bank Doing Business:
Protecting Investors 2010 41 (out of 183)

World Bank Doing Business:
Paying Taxes 2010 95 (out of 183)

World Bank Doing Business:
Trading Across Borders 2010 106 (out of 183)

World Bank Doing Business:
Enforcing Contracts 2010 87 (out of 183)

World Bank Doing Business:
Closing a Business 2010 78 (out of 183)


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. The

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2007 amendments to the 1999 Foreign Currency Act stipulate that
anyone may import or export up to EUR 10,000 (USD 13,970) or its
foreign exchange equivalent without making a customs declaration.
Importing or exporting over EUR 10,000 or its foreign exchange
equivalent must be declared. Exporting over BGN 25,000 (USD 17,850)
in cash 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 or less than the amount declared when imported.
Bulgarian law requires all international payments over BGN 25,000 to
be executed via bank transfer with supporting documentation
detailing the purpose of the transaction.


C. EXPROPRIATION AND COMPENSATION

Private real property rights are legally protected by the Bulgarian
Constitution. Only in the case where a public need cannot be met by
other means, the Council of Ministers or a regional governor may
expropriate land provided that the owner is compensated at fair
market value. No taxes are levied on the expropriation transaction.
Expropriation actions of the Council of Ministers can be appealed
directly to the Supreme Court on the legality of the action itself,
the property appraisal, or the amount of compensation. A regional
governor's expropriation can be appealed in the appropriate 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
--------------

The Bulgarian Constitution serves as the foundation of the legal
system and creates an independent judicial branch comprised of
judges, prosecutors, and investigators. Despite reform efforts, the
judiciary suffers from serious backlogs and overly formalistic
procedures that hamper the swift and fair administration of justice.
Corruption remains a serious problem. Public opinion polls
indicate that bribes are commonly paid in the judicial sector and
some courts are beholden to business ties and political influence.

There are three levels of courts. The 117 regional courts exercise
jurisdiction over civil and criminal cases. Above them, 29 district
courts (including the Sofia City Court) serve as courts of appellate
review for regional court decisions and have trial-level
(first-instance) jurisdiction in serious criminal cases and in civil
cases where claims exceed BGN 25,000 (USD 17,850) ?r in property
cases where the property's value exceeds BGN 50,000 (USD 35,700).
Five appellate courts review the first-instance decisions of the
district courts. The Supreme Court of Cassation is the court of
last resort for criminal and civil appeals. The Supreme Court of
Administration rules on local and national government decisions and
the Constitutional Court, which is a separate from the rest of the
judiciary, issues final rulings on constitutional questions and
challenges.

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

The 1994 Commercial Code Chapter on Bankruptcy provides for
reorganization or rehabilitation of a legal entity, maximizes 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 monetary obligation must be adjudicated before
the bankruptcy court can determine whether the debtor is insolvent.
In addition, legislation passed in 2003 adds 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

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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
legislation provided for examinations for individuals applying to
become trustees and obliged the Ministers of Justice and Economy to
organize annual training courses for trustees. In June 2006, the
ministries of Justice, Economy and Finance published a regulation on
the procedure for appointment, qualification and control over the
trustees.

The methods of liquidating assets were also revised by the June 2003
legislation. 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 also 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. Businesses report a dramatic increase in the
efficiency of execution of judgments after the introduction of
private execution agents. A new Civil Procedure Code, effective
since March 2008, introduced new terms and practices aimed to
streamline civil procedures, including the execution of judgments.
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 hears
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. Disputes regarding rights over real estate situated in
the country, alimony, or individual labor disputes may only be heard
by the courts. In addition, 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 that select a foreign court of
arbitration, the Code of Civil Procedure mandates that these clauses
are only valid if at least one of the parties maintains its
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

SOFIA 00000039 005.2 OF 014


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 1996 Convention on the
Settlement of Investment Disputes between States and Nationals of
Other States. There are arbitration courts at the Bulgarian
Industrial Association (BIA),the Bulgarian Stock Exchange, the
Bulgarian Maritime Chamber, the Commercial Banks Association and
several other organizations.

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

Mediation was first introduced in Bulgaria in 2004 with the adoption
of the Mediation Act. The Bulgarian Chamber of Commerce and Industry
and the American Chamber of Commerce (AmCham) opened commercial
mediation centers with USAID-trained mediators. Several other
mediation centers continue to operate and train new mediators.
Mediation, however, is still not widely used due to the limited
public awareness and judges' reluctance to recommend alternative
dispute resolution.


E. PERFORMANCE REQUIREMENTS AND INCENTIVES

Bulgaria does not impose export performance or local content
requirements as a condition for establishing, maintaining, or
expanding an investment. Employment visas and permits are required
for most expatriate personnel from non-EU countries. Permanent
residence permits are often difficult to obtain. Private companies
cannot exceed a 1:10 ratio of non-EU residents to Bulgarian
employees. A June 1999 law regulating gambling imposes licensing
requirements on foreigners organizing games of chance.

The Invest Bulgaria Agency (IBA),the government's investment
coordinating body, provides information, administrative services,
and incentive assessments to prospective foreign investors. Foreign
investments over BGN 32 million, (about USD 23 million) are deemed
to be priority "Class A" investment projects. At the request of
investors receiving Class A investment certificates, IBA can
recommend that the competent authorities grant them free real estate
(either state or municipal property). Class A investments are also
eligible to apply for state financing for critical infrastructure
deemed necessary for the investment plan's implementation.
Additionally, IBA represents "Class B" investment projects (over BGN
16 million, or USD 11.5 million) before government authorities, and
assists with processing all administrative documents. The
government policy for investment promotion is not applicable to
investments in coal mining, steel production, shipbuilding,
synthetic production, agriculture, and fisheries. In addition, the
Investment Promotion Act recognizes Class A and Class B investors
for investments in high-technology manufacturing and services, or in
regions with an unemployment rate equal to or higher than the
country average. A two-year VAT exemption on equipment imports
applies to investment projects over EUR 5 million (USD 7 million),
provided that the project creates at least 50 new jobs.


F. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

Article 19 of the Constituton states that the Bulgarian economy
"shall be bsed on free economic initiative." Private entitie can
establish and own business enterprises engaging in any profit-making
activities, unless expresly prohibited by law. Bulgaria's
Commercial Coe guarantees and regulates the free establishment,
acquiition, and disposition of private businessenterprises.
Competitive equality is the standardapplied to private enterprises
in competition wih public enterprises.


G. PROTECTION OF PROPERTYRIGHTS

Bulgarian law protects the acquisition ad disposition of property
rights. In practice, he protection of property rights is subject
to vaious difficulties. Although Bulgarian intellectua property
rights (IPR) legislatio is generally adequate - and in some cases
stronger than in other EU countries - industry representatives
believe effective IPR protection requires stronger enforcement,
including stricter penalties for offenders. In 2006, Parliament
passed legislation to strengthen Bulgaria's IPR-related legal
framework. 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 harmonized with international standards. As a major

SOFIA 00000039 006.2 OF 014


step toward improving the work of the judiciary, Parliament adopted
a completely new Penal Procedure Code in 2006. Bulgaria is a member
of the World Intellectual Property Organization (WIPO) and a
signatory to key international agreements, including WIPO Internet
treaties.
Recognizing Bulgaria's IPR improvements, the United State Trade
Representative (USTR) removed Bulgaria from the Special 301 Watch
List in April 2006. Although the sale of pirated optical disc media
is diminishing, Internet piracy is turning out to be the greatest
challenge for the Bulgarian government and rights holders. The
software piracy rate for end users and businesses was 69 percent in

2008. The Bulgarian legal system has not kept pace with new
Internet-based technologies. As a result, very few IPR cases were
successfully prosecuted in 2009.

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 undergone major revisions to comply with EU and international
legislation.

The term for protection of copyrighted works is 70 years after the
author's death. 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 copyright law enabled copyright owners to file
civil claims to terminate infringing activity, provided for
confiscation of equipment and pirated materials, enhanced border
control over pirated material, strengthened copyright protection for
film producers, and harmonized Bulgarian legislation with the EU
Association Agreement. The Copyright Office in 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 the patent protection in
general. Bulgaria joined the Convention on the Granting of European
Patents (European Patent Convention) in 2002. Bulgaria grants the
right to exclusive use of inventions for 20 years from the date of
patent application, subject to payment of annual fees. Innovations
can also be protected as utility models ("small inventions"). 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 capable of industrial application. Article 6
of the Law on Patent and Utility Model Registration lists items not
regarded as inventions, and Article 7 lists the so-called exceptions
to patentability. With regard to utility models, no registration
shall be granted for methods and objects in the field of
biotechnology.

Located in the Ministry of Economy, Energy and Tourism, the
independent Patent Office is the competent authority with respect to
patent matters. The patent law describes patent application
procedures and the examination process. Patent applications are
submitted directly to the Patent Office and recorded in the state
register. Compulsory licensing may be ordered under certain
conditions: if the patent has not been used within four years of
filing the patent application or within 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 heard and settled
under administrative, civil, 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 BGN 300 to 20,000 (USD
214-14,280).


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Pursuant to the 1996 Protection of New Types of Plants and Animal
Breeds Act, the Patent Office can issue a certificate which protects
new types of plants and animal breeds for between 25 and 30 years.
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 Bulgarian
government 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. As of January 1, 2007, Bulgaria
grants supplemental protection certificates for pharmaceutical
products and plant protection products under the EU Regulations.
This protection is similar to that provided in the U.S.

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 (TGIA),as 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
TGIA. Applications for registration must be submitted to the Patent
Office. Under the TGIA, well-known trademarks can now be entered
into a special state register by the Patent Office or the Sofia
Administrative Court. In addition, Bulgaria is a member of the
Lisbon Agreement for the Protection of Appellations of Origin and
their International Registration.

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 of the TGIA. 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 to the Disputes
Department of the Patent Office. The decisions of this department
can be appealed to the Sofia Administrative Court within three
months of the decision. The right of exclusive use of a trademark
is granted for ten years from the date of submitting the
application. Extension requests must be filed during the final year
of validity, but not less than six months prior to expiration.
Protection is terminated if a trademark 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. Although
severe punishments (up to five years in prison) are available, in
practice court rulings are rare and sentencing is lenient.

In Bulgaria, trademark and service-marks 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.

Industrial Designs
--------------

Under Bulgarian law, industrial designs which are new and original
can be granted certificates and entered in a state register. The
term of protection is 10 years, which is renewable to up to 25
years. The procedures and conditions for enforcement of industrial
design rights are similar to those provided for trademarks.


H. TRANSPARENCY OF THE REGULATORY SYSTEM

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

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In general, the regulatory environment in Bulgaria is characterized
by complex regulations, lack of transparency, and arbitrary or weak
enforcement. These factors create incentives for public corruption
and, as a result, foreign investors may experience a cumbersome
investment climate.

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 42
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 was a milestone. It sets
forth firm market principles of regulation, requires all regulations
to be justified by defined need (in terms of national security,
environmental protection, or personal and material rights of
citizens),and prohibits incidental restrictions to the stated
purposes of the regulation. The law also requires that the
regulating authority perform a cost-benefit analysis of any proposed
regulation. In addition, the law eliminates bureaucratic discretion
in granting requests for routine economic activities, and provides
for "silent consent" when the government does not respond to a
request in the allotted time. All these reforms considerably
lighten the potential of regulatory abuse at all levels of
government. While the law creates a ground-breaking normative
framework, its implementation and consistent enforcement has yet to
be fully realized.

Major Taxation Issues Affecting U.S. Businesses
-------------- --

Bulgaria has one of the lowest tax rates in the EU. In 2007 and
2008, the government moved from a progressive tax system to a flat
10-percent tax on corporate income and individual income. Certain
tax incentives, such as an exemption from corporate tax, apply in
regions of high unemployment. Physical persons, but not legal ones,
in certain industries, pay a "patent" tax (presumptive tax),
according to a schedule established by Parliament. Since January 1,
2008, the size of the "patent tax" is determined by and 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. A 50-percent
depreciation rate is applied on investment in new machinery and
other equipment, computer hardware, and computer software.

The Treaty for Avoidance of Double Taxation (TADT) between the
United States and Bulgaria was signed in February 2007 and entered
into force on January 1, 2009. The Treaty applies only to direct
taxes 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. The TADT is designed to reduce the tax
burden for residents of both states, which will stimulate
cross-border trade and investment.

Foreign employees are required to have the same insurance and
unemployment compensation packages as Bulgarian employees.
Employers must contribute 12.0 and 4.8 percent of employees' gross
wages for social security and health insurance respectively.
Employers must also pay 60 percent social security and health
insurance contributions to an unemployment fund. Companies
contribute one percent of gross wages to a workers compensation
fund. In 2010, the monthly maximum for social contributions is set
at BGN 2,000 (USD 1,420).

Bulgaria has a 20 percent single-rate value-added tax (VAT),except
for some tourist services upon which VAT is levied at seven percent.
VAT registration is mandatory for companies with turnover exceeding
BGN 50,000 (USD 35,700) for a period not exceeding 12 consecutive
months, while all others can register voluntarily. A different 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 refunded when goods are resold.
Exporters may claim VAT refunds within a 30-day period. Excise
taxes are levied on tobacco, alcoholic beverages, fuels, certain
types of automobiles, and gambling. Investors are entitled to VAT
refunds on locally-purchased goods within 10 days if they meet
certain investment criteria.

Foreign investors have asserted that widespread tax evasion,
combined with weak enforcement, place them at a disadvantage.
Another problem underscored by investors is the frequent revision of
tax laws, sometimes without sufficient notice.

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Energy Regulation
--------------

The Energy Law establishes a predictable regulatory environment in
the energy sector where the key regulatory responsibilities are
vested with the State Energy and Water Regulatory Commission - an
independent body. In mid-2007, the electricity market in Bulgaria
was 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 2008 Law on the Protection of Competition (the "Competition
Law") is intended to implement EU rules which promote competition
and consumer protection. The Competition Law forbids monopolies,
restrictive trade practices, abuse of market power, and unfair
competition. Companies are prohibited from: direct or indirect
pricing practices; distribution of market shares and supply sources;
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 certain 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. Monopolies can only be established by law for
certain categories of activities: railway and postal services; use
of atomic energy; production of radioactive materials; and weapons
production. The Competition Law expands the competency of the
Commission for Protection of Competition (CPC),defines the
prohibition on misuse of an oligopoly, and imposes a single
criterion for assessing the significance of planned concentration:
the aggregate turnover of the enterprises affected by the
concentration.


I. EFFICIENT CAPITAL MARKETS AND 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 the 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 BSE's infrastructure has substantially improved in recent years,
including the establishment of an official index (SOFIX),an
Internet-based trading system, and a growing number of brokers.
Investors access the BSE to trade corporate stock government bonds,
corporate bonds, Bulgarian Depositary Receipts, municipal bonds, and
mortgage-backed bonds.

In 2008, the BSE lost almost 60 percent of its market capitalization
as global financial crisis forced large foreign institutional
investors to reduce their exposure. The BSE declined another 51
percent to BGN 10.83 billion (USD 8 billion) through June 2009.
Following an 80 percent decline in 2008, the large-cap SOFIX index
declined 0.54 percent in the first half of 2009, and then by 11
percent in the third quarter of 2009. In the first half of 2009,
the BSE reported 44 percent lower trading volume (BGN 926 million,
USD 700 million) compared to the same period in 2008, and the
overall number of individual transactions also fell by 58 percent.
The Bulgarian government is planning to sell its 43% share in the
BSE to a major stock exchange.

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 (24 subsidiaries and 5
branches),with total assets of BGN 69.7 billion (about USD 53.5
billion) and an annual growth of 1.3 percent in November 2009 or 105
percent of the projected 2009 GDP. Approximately 39.6 percent of
bank assets are concentrated in three banks: Bulbank, DSK Bank, and
United Bulgarian Bank (UBB).


SOFIA 00000039 010.2 OF 014


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, Raiffeisen
International, OTP Group, American Life Insurance Company -
Consolidated Eurofinance Holdings, 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 17.4
percent in September 2009, but still remains above the Bulgarian
National Bank's requirement of 12 percent. Domestic banks have
responded to the global financial crisis by reducing risk exposure
through increased interest rates on both deposits and loans.

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

The Bulgarian government finances some of its expenditures by
issuing bonds in capital markets. Commercial banks are the primary
purchasers of these instruments, while pension funds and insurance
companies participate mainly in the secondary market. EU-based
banks are also eligible to be primary dealers of Bulgarian
government bonds.

In order to acquire Bulgarian government bonds, a foreign bank must
register with the Ministry of Finance and open a "custody account"
in Bulgarian Leva.

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 criminal in nature.


K. CORRUPTION

Despite numerous advances in laws and legal instruments, corruption
is still one of the gravest problems in Bulgaria's investment
climate. Bulgaria ranks 71st among 180 countries in Transparency
International's (TI) Corruption Perception Index for 2009, up one
place from 2008.

The established human trafficking, narcotics, and contraband
smuggling channels that contribute to corruption in Bulgaria have
yet to be broken. The Bulgarian public generally holds the police,
the judiciary, customs officials, and politicians 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). Bulgaria has signed and
ratified the UN Convention against Corruption (2003); the Additional
Protocol to the Council of Europe's Criminal Law Convention on
Corruption; and the UN Convention Against Transnational Organized
Crime.

The new Bulgarian government, elected in July 2009 on an
anti-corruption platform, indicted four former ministers and
dismissed several other ex-government officials for corruption. The
government has initially demonstrated strong political will to
restore public trust, but has yet to show sustained progress in the
fight against organized crime and corruption.


L. BILATERAL INVESTMENT AGREEMENTS

SOFIA 00000039 011.2 OF 014



As of 2010, 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, Hungary, India, Indonesia, Iran, Israel, Italy, Jordan,
Kazakhstan, Kuwait, Latvia, Lithuania, Lebanon, Libya, Macedonia,
Malta, Moldova, Mongolia, Montenegro, Morocco, Netherlands, Poland,
Portugal, Qatar, Republic of Korea, Romania, Russia, Serbia,
Singapore, Slovakia, Slovenia, Spain, Sweden, Switzerland, Syria,
Thailand, Tunisia, Turkey, Ukraine, the United Kingdom of Great
Britain and Northern Ireland, the United States, Uzbekistan,
Vietnam, and Yemen.

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) and the
Bulgarian government 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 USD 250 million. OPIC's
structured financing focuses on U.S. businesses with annual revenue
over USD 250 million and supports large capital-intensive projects
such as infrastructure, telecommunications, power, water, housing,
airports, hi-tech, and financial services.

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 3,280,000 (third quarter
of 2009) well-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 an influx 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.

The Bulgarian Constitution recognizes workers' rights to join trade
unions and organize. The National Council for Tripartite
Cooperation (NCTC) provides a forum for dialog among government,
employer organizations, and trade unions on issues such as
cost-of-living adjustments. An established practice each year of
negotiating the so-called "social security thresholds" between trade
unions and the employers organizations helps determine the minimum
monetary basis for calculating the relative amount of employer and
employee social security contributions.

Bulgaria has two large trade union confederations represented at the
national level, the Confederation of Independent Trade Unions of
Bulgaria (CITUB) and Confederation of Labor "Podkrepa" ("Support").
Currently, the estimated trade union membership is about 350,000 for
CITUB and over 150,000 for Podkrepa. CITUB, the successor to the
trade union integrated with the Communist Party, has been 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, but employees in smaller
private are 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 Bulgarian Labor Code, employer-employee relations are
regulated by employment contracts. The framework of the employment
contracts can be shaped through collective bargaining. Collective

SOFIA 00000039 012.2 OF 014


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 labor 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 majority foreign-owned Bulgarian
companies are exempt from the requirements of the labor code.

Over the last five years, the labor code has been amended to address
labor market rigidities and bring labor legislation into compliance
with EU requirements. In 2008, the Parliament passed changes in the
labor legislation to increase fines to EUR 15,000 (USD 21,000) for
labor code violations. The minimum annual paid leave is 20 days.
As of January 2010, the minimum wage is BGN 240 (USD 171) per month.


During 2002-2003, the Ministry of Labor formed the National
Institute for Conciliation and Arbitration (NICA),which developed
framework for collective labor dispute mediation and arbitration.
NICA includes representatives from labor, employers, and government.
NICA-sponsored collective labor dispute resolutions are still few
in number. A number of the appointed mediators received basic
mediation skills training from the U.S. Federal Mediation and
Conciliation Service. As of April 2009, there are 36 appointed
mediators.


O. FOREIGN-TRADE ZONES/FREE-TRADE ZONES

There are six duty-free zones in Bulgaria: Ruse and Vidin ports on
the Danube; Plovdiv; Svilengrad (near the Turkish border); Dragoman
(near the Serbian 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.

Foreign individuals and corporations, and Bulgarian companies with
1.0 percent or more foreign ownership may operate in a duty-free
zone. Thus, foreign-owned firms have equal or better investment
opportunities in the zones compared to Bulgarian firms. All forms
of economic activity are permissible in duty-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 duty-free zones no
longer apply tax and duty exemptions to exports from Bulgaria to
other EU countries.

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 duty-free zones in that they do not
provide for any form of preferential tax treatment. Currently,
there are a total of 39 industrial zones at various stages of
development.


P. FOREIGN DIRECT INVESTMENT STATISTICS

Between 1992 and 2008, total cumulative FDI into Bulgaria amounted
to USD 43,574.7 billion (94 percent of GDP in 2008). FDI in 2008
totaled USD 8.9 billion (19 percent of GDP). Bulgaria's direct
investment stock abroad was a total of USD 661.9 million in 2008.

Total FDI in Bulgaria
--------------

Year USD in millions

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 1,005.0
2001 812.9
2002 969.7
2003 2,099.0
2004 3,443.4
2005 3,916
2006 7,799

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2007 11,756
2008 8,932

Total 43,574.7

(Source: Bulgarian National Bank; Invest Bulgaria Agency)

FDI by Country of Origin (1996-2008)
--------------

Country USD in millions

Austria 7320.9
Netherlands 5,654.2
Greece 4,193.1
U.K. 3,696.1
Germany 3,040.6
Cyprus 2,354.3
Belgium and Luxemburg 2,198.6
USA* 1,753.7
Hungary 1,597.5
Italy 1,507.6
Russia 1,372.3
Ireland 1,385.6
Czech Republic 1,290.1
Spain 1,233.1
Switzerland 1,228.4
France 979.8
Turkey 492.8
Denmark 406.8
Israel 315.9
Slovenia 215.6
Latvia 207.4

(Source: Bulgarian National Bank; Invest Bulgaria Agency)

* Owing to methodological quirks, not all data accurately reflect
investment rankings. Official investment statistics currently rank
the United States 8th in terms of overall investment in Bulgaria for
the period 1992-2007. While the Bulgarian Central Bank credits the
United States with investments at the rate of $40-$50 million per
year in the last eight years, this data does not capture a large
share of U.S. FDI in Bulgaria, because it is channeled through
European subsidiaries of American parent companies.

FDI by industry (1998-2008)
--------------

Industry USD in millions

Real estate and business activities 10,176.2
Financial activities 8,836.2
Manufacturing 8,525.1
Trade and repairs 7,504.7
Construction 3,063.4
Electricity, gas and water 2,633.8
Telecommunications and transport 2,406.8
Hotels and restaurants 720.5
Agriculture, forestry and fishing 248.6
Mining 180.9
Education 19.4

(Source: Bulgarian National Bank)

Selected Foreign Direct Investments (2007-2009)
-------------- --

(Investor Country, Sector, Bulgarian Firm, USD/mil.)

--Enel, Italy, power generation, Maritza Iztok Three, 312.7

--AES Geo Energy, U.S./Germany, renewable energy, AES Geo Energy,
252.8

--Wind Energy 2007, Japan, renewable energy, Wind Energy 2007,
218.2

--Alpic Group, Switzerland, renewable energy, Vetrocom, 115.8

--Electrawinds, Belgium, renewable energy, Electrawinds Bulgaria,
75.6

--Solvay, Belgium, manufacturing, Solvay Sodi, 71

--Wienerberger Solvay Group, Austria/Belgium, manufacturing,
Pipelife Bulgaria, 45.3


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--Yazaki, Japan, manufacturing, Yazaki Bulgaria, 31.5

(Source: Invest Bulgaria Agency)


Q. WEB RESOURCES

Embassy of the United States in Sofia, Bulgaria
http://bulgaria.usembassy.gov/

Overseas Private Investment Corporation
http://www.opic.gov

Export-Import Bank of the United States
http://www.exim.gov

United States Trade and Development Agency
http://www.ustda.gov

Invest Bulgaria Agency
http://www.investbg.government.bg

The Bulgarian Investment and Business Network
http://www.investnet.bg/

SUTTON

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