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The Published Law on Amendment and Supplementation of the Law on the Economic and Financial Relations with Companies Registered in Jurisdictions with Preferential Tax Regime, therewith Associated Persons and Their Beneficial Owners

July 14, 2016

Law on Amendment and Supplementation of the Law on the Economic and Financial Relations with Companies Registered in Jurisdictions with Preferential Tax Regime, therewith Associated Persons and Their Beneficial Owners (hereinafter referred to as “the Law”) has been published in State Gazette No 48 of 24 June 2016.

The reason for the changes is an opinion of the European Commission according to reference for a ruling No 6765/14/MARK regarding the compatibility of the provisions of the Law with the EU law as well as commitment taken by the Bulgarian government for elimination of some incompatibilities with the European legislation. Virtually, the Law that was effective before 1 July 2016 was exterritorial and it covered companies registered in jurisdictions with preferential tax regimes (JPTR) when they participate directly or through companies controlled by them in a company or activity falling within the scope of the law as well as companies that have little relation or are not related at all with companies that perform activity in Bulgaria.

The changes aim to exclude from the scope of the Law the cases of minimum participations of a company registered in JPTR or its beneficial owners cannot effectively control the Bulgarian company or the activity in Bulgaria.

The most significant changes of the Law could be summarised:

1. Changes have been introduced in the subjects to which the Law applies. The definition “related parties” and “relation” have been replaced by the terms “persons controlled by them” and with “control”

After the changes effective from 01.07.2016 within the scope of the Law fall the companies registered in JPTR, the persons controlled by them and their beneficial owners. In regard to the definition of “control” the Law refers to §1”c” of the additional provisions (AP) of the Commerce Act (CA). Except for the listed forms of control in the mentioned provision, it has been provided that control exists also when companies registered in JPTR participate directly or indirectly in the management of the capital of another entity or other entities and between them conditions that are different from the customary ones are negotiated. Virtually, the changes narrow the scope of the Law insofar as before it was applied in regard to all related parties (according to § 1 of AP of the CA) with a company registered in JPTR regardless of the level and type of the relation.

2. The scope of the prohibitions has been changed in regard to the companies to which the Law applies (Art.3)

The law effective before 01.07.2016 prohibited companies registered in JPTR and their related parties to participate in procedures for obtaining license and for participation in a number of institutions under specific laws (the Credit Institutions Act, Insurance Code, Social Security Code, Markets in Financial Instruments Act, Payment Services and Payment Systems Act, etc.) regardless of the percentage of participation and the number of stocks or shares that the company wishes to obtain.

With the amendments effective after 01.07.2016 thresholds have been introduced under which the prohibitions for performance of the activities specified in the Law will not apply. In particular, an offshore participation has been permitted in a company that performs an activity under specific laws, e.g. bank institutions, insurance institutions, pension insurance companies, etc. if the participation does not exceed the foreseen statutory threshold.

The introduced thresholds are “qualifying holding” within the meaning of the respective specific laws or a threshold of 10 percent depending on the business activity. In other words, the prohibitions will apply if the participation rate of the company registered in JPTR is a qualifying holding or the participation rate is 10 percent or exceeds 10 percent. This aims to avoid a withdrawal of license for exercising the respective activity because of a minimal participation of a company registered in JPTR in a bank, insurance company, pension insurance company.

The law also provides an anti-abuse rule and according to which in case of participation of two or more than two companies registered in JPTR and/or persons controlled by them under Art. 3 of the Law the threshold of 10 percent or qualifying holding shall be applicable in general and cannot be exceeded.

3. Expansion of the excluded from the scope of the restrictions (Art. 4 of the Law)

In comparison to the previously acting law, according to the amendments effective after 01.07.2016 the prohibitions under Art.3 of the Law shall not be applicable to larger number of companies registered in JPTR. The exclusions from the scope of the restrictions of the Law shall also be applicable to:

a) a company registered in JPTR that is a resident for tax purposes of a country which is a party to the Government Procurement Agreement of the World Trade Organization (WTO) and of countries with which EU has concluded agreements on access to the public procurement market within EU in case their beneficial owners - individuals are entered in the Commercial Register.

The exclusion shall only apply to the activities for which the respective agreement has been concluded. It refers to Liechtenstein, Andorra, Monaco, San Marino, etc in order not to restrict the access to the public procurement in Bulgaria and to comply with the measures for closer economic cooperation with these countries.

b) a company registered in JPTR that is a resident for tax purposes of an overseas country or territory in accordance with the Council decision 2013/755/EU of 25 November 2013 on the association of the overseas countries and territories with the EU and its beneficial owners - individuals are entered in the Commercial Register.

The exclusion concerns companies that are registered in overseas countries or territories (the British Virgin Islands, Anguilla, Cayman Islands, Montserrat, etc.) and will only apply to the activities for which the Overseas Association Decision is applicable.

c) a company registered in JPTR that is a resident for tax purposes or a company that is part of a group whose parent company is a resident of a country with which Bulgaria has concluded international trade and/or economic agreement, including obligations laid down in the General Agreement on Trade in Services of the WTO and on condition its beneficial owners – individuals are listed in the Commerce Register.

4. Changes in the definition of JPTR have been introduced

The definition of JPTR excludes Gibraltar and the countries - parties to the Agreement on the European Economic Area.

Gibraltar is part of EU and the European legislation is applicable to it. In particular, its EU status lies in the fact that it is excluded from some areas of the EU policy: Customs Union, Common Commercial Policy, Common Agricultural Policy, Common Fisheries Policy and the requirement for application of VAT. Considering the fact that the provisions of Directive 2011/16/EU on administrative cooperation in the field of taxation are transposed in the domestic legislation of Gibraltar and based on these provisions is performed the effective exchange of information with all EU Member States, according to the amendments of the Law effective after 01.07.2016 Gibraltar will not be considered as JPTR.

5. Changes in the provisions concerning the entry of the circumstances and data for the companies registered in JPTR

The changes aim to provide an opportunity for establishment to the beneficial owners registered in JPTR. Until 30.06.2016 the law demanded entry of data in the Commercial Register of a company registered in JPTR (legal form under the national law, national register number, company seat and registered address, lawful representatives), as well as identification details of the beneficial owners – individuals.

The adopted additional circumstances shall be entered in the Commercial Register as follows:

• data concerning the entities controlled by the company registered in JPTR that directly or indirectly participate in the capital of the respective country under Art.3, including its business name, national register number, legal form under the national law, company seat and registered address as well as lawful representatives and
• changes in the circumstances subject to entry.

The entry is provided to be carried out in the batch of the company that is controlled by a company registered in JPTR which perform or will perform activity that fall within the scope of the Law (Art.3). The above mentioned circumstances shall be entered separately in the Commercial Register when the company registered in JPTR performs or will perform activity directly or through unregistered in the Commercial Register entity according to Art.3.

6. Instructions on the implementation of the Law

There has been provided that the Minister of Finance together with the Minister of Economy and the Minister of Justice to issue instructions for the purpose of unified application of the Law. The instructions shall be published on the websites of the Ministry of Finance, Ministry of Economy and Ministry of Justice.

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