On February 22, 2024, Bulgaria, previously one of the few remaining EU countries without foreign direct investment (FDI) controls, introduced a new FDI screening regime in accordance with the EU FDI Screening Regulation 2019/452 (the “EU FDI Screening Regulation”).
The Act to Amend and Supplement the Investment Promotion Act (the “FDI Screening Act”) [1] now requires prior review and approval on national security grounds for foreign direct investments (“FDI”) in certain key areas of interest for national security.
The regime will apply to investors controlled by non-EU shareholders or themselves constituting non-EU individuals or entities.
Indirect investments – such as those occurring via an EU-based holding company – and changes to such investments, are also caught by the new FDI regime.
This Note aims to provide a brief outline.
Investments caught by the new FDI approval regime
What is a “foreign direct investment”?
According to the FDI Screening Act:
– Foreign Direct Investment (FDI) means an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in Bulgaria, including investments which enable effective participation in the management or control of a company carrying out an economic activity. A FDI is also the expansion of an existing investment, including the expansion of the capacity of an existing enterprise, the diversification of an enterprise’s production with products not previously produced and the establishment of a new place of carrying out commercial activity or the increase of the capital of the investment target, provided that the shares are acquired by the foreign investor. A portfolio (passive) investment is not a FDI.
The first part of the definition closely follows the definition of FDI under the EU FDI Screening Regulation. It, no doubt, covers investments leading to positions of control or to the ability to participate in the management of a local target.
What other investments (that come short of control or ability to participate in management) will be caught will likely be made clear in the subsequent secondary legislation. The screening thresholds provide a lower-end threshold of 10% of the capital of the target for some investments, which may serve as a safe harbor.
In the general case passive (portfolio) investments, that entail no influence on the target, are not caught.
In contrast to the EU FDI Screening Regulation, the local definition also catches expansions of an existing investment. The list of possible scenarios is broad and clearly not exhaustive, but arguably the expansion needs to result from a financial input by the foreign investor.
Who is a “foreign investor” for the purposes of FDI screening?
According to the FDI Screening Act:
– Foreign investor means:
(a) a person who is not an EU national or an entity whose registered seat is not located in a Member State, who/ which has made or intends to make a FDI in Bulgaria;
(b) a legal entity, the registered seat of which, according to its constituent act, is in a EU Member State, intending to make or having made a FDI in Bulgaria, in which control is exercised directly or indirectly by: one or more natural persons who is/ are not an EU national(s), one or more legal entity(ies) whose registered seat is not in a EU Member State, or another legal entity existing under the laws of a state which is not a EU Member State;
(c) a legal entity or other legal establishment, the registered seat of which, according to its constituent act, is in a EU Member State, which has made or intends to make a FDI in Bulgaria, in which, by virtue of a contract or internal rules, one or more natural or legal persons established in non-EU countries have direct or indirect control over the specific investment, or which, by virtue of a contract or multilateral transaction, makes a FDI falling within the scope of the FDI Screening Act, on its own
name, but on the behalf of the person under points “a” and “b” above.
In addition to non-EU established investors, the FDI Screening Act expands the definition of a foreign investor to include FDIs by a legal entity registered in an EU-country, which (or the particular FDI) is directly or indirectly controlled by a legal entity registered in a non-EU country. This approach appears contrary to the Judgement of the European Court of Justice on Case C-106/22 (Xella Judgement)2, which ruled against systematic screening of investments originating from EU holdings of non-EU ultimate parents, but seems in line with the European Commission’s proposal for a new FDI Regulation, whose scope also intends to include investments by EU investors that are ultimately controlled by individuals or entities from a non-EU country.
Low-risk jurisdictions
Certain non-EU countries, which will be additionally approved by the national parliament, along with the United States, the United Kingdom, Canada, Australia, New Zealand, Japan, South Korea, the United Arab Emirates and Saudi Arabia will be considered low-risk countries and enjoy the same screening rules as those for EU Member States for the purposes of applying the screening mechanism. The expected secondary regulation should make clear to what extent preferential treatment will be afforded to investments originating from these jurisdictions.
Which industries and fields are controlled? What are the screening thresholds?
A. General criteria, which trigger a mandatory filling
Investments in the fields of activity listed in Article 4(1) of the EU FDI Screening Regulation:
- critical infrastructure (for example, FDIs related to energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and others);
- critical technologies and dual use items (for example, FDIs related to AI, robotics, semiconductors, cybersecurity, quantum and nuclear technologies, and others);
- supply of critical inputs, including energy or raw materials, as well as food security;
- access to sensitive information, including personal data, or the ability to control such information; or
- the freedom and pluralism of the media;
which meet one or more of the following conditions:
(i) the FDI exceeds the threshold of EUR 2,000,000 or at least 10% of the capital of a target operating in the country will be acquired; OR
(ii) at least 10% of the capital of a target, which operates in the country and is engaged in high-tech activities, will be acquired; OR
(iii) a new investment is made which exceeds the threshold of EUR 2,000,000
should be notified in advance and cleared by the new Interdepartmental Council on FDI Screening.
In addition, a FDI made by аn investor that has a direct or indirect public participation in its capital from a country outside the EU, including significant financing by a public authority, would also be subject to a prior mandatory notification obligation and clearance as per the general criteria above, without, however, taking regard to the investment threshold.
In the latter case, a minimum shareholding of 5% by the non-EU country would be required if the foreign investor is a company whose shares are traded on a regulated market.
Low-risk jurisdictions (see above) will be excluded from this special case. It remains to be seen, whether they will also be excluded from the general notification obligation under the common thresholds above.
The FDI Screening Act introduces a suspensive screening regime in respect of investments crossing the thresholds above. It consists of an obligation for the foreign investor to notify its planned investment, and a prohibition to undertake the investment until it has received clearance. The notification will be reviewed under a two-step procedure, subject to specific deadlines, which will end in an express conditional or unconditional clearance, a tacit unconditional clearance, or an express prohibition. This procedure is discussed in more detail below.
FDIs caught in all cases
Certain investments may be caught by the new screening regime in all cases – i.e. irrespective of whether the above thresholds are met.
Where these investments have triggered the notification obligation, they should be completed after clearance is obtained.
However, they may still be screened even where they have not triggered the notification obligation, either because they are below the thresholds, or because they were completed before the notification obligation came into effect. In that case, the FDI Screening Act provides, neither an obligation to notify, nor a voluntary notification regime allowing to obtain legal certainty in respect of such investments:
B. FDIs by Russian and Belarusian Investors. FDIs in petroleum and petroleum products
FDIs by a foreign investor from Russia or the Republic of Belarus, as well as all FDIs related to the production of energy products from petroleum and products of petroleum origin at sites forming part of the critical infrastructure of the country according to Article 2, para. 1, item 8 of the Administrative Regulation of Economic Activities Related to Petroleum and Petroleum Products Аct, fall within the scope of the FDI screening regime, irrespective of value.
C. “Ex officio” criteria
The new Interdepartmental Council on FDI Screening has also ex officio powers to review FDIs in the following exceptional cases:
(i) New investments or FDIs that do not exceed the threshold of EUR 2,000,000 upon proposal of a member of the Council, in cooperation with the national security authorities;
(ii) A FDI that may have an impact on security or public order at the initiative of the national security authorities, regardless of whether the general criteria above have been triggered or not;
(iii) Based on the оpinion of the European Commission or a notification from an EU Member-State, where no FDI filing has been made and the FDI has commenced within 2 years prior the receipt of the opinion or the report.
Despite not being completely clear, according to the wording of the FDI Screening Act the ex officio powers of the Interdepartmental Council on FDI Screening to review FDIs due to national security reasons under B or C above may be exercised either before or after the investment has been completed. No time limit for exercising this ex officio power has been laid down in the FDI Screening Act. Upcoming secondary regulation may provide more clarity.
It remains an open question whether these powers can be exercised in respect of investments which have occurred prior to the entry of the FDI Screening Act into effect. The Act contains nothing to prevent exercise of the screening powers in respect of such investments, even if it does not explicitly state that these powers can be applied to such prior investments.
What is the screening procedure for FDIs, which trigger the notification obligation?
A foreign investor who intends to make a FDI, which triggers the notification obligation based on the general criteria under item 2.3, p. (A) above, is obliged to apply for a prior clearance. The screening procedure has a suspensory effect for such FDIs and the FDI is prohibited before obtaining an explicit or tacit clearance.
Тhe deciding body will be the new Interdepartmental Council on FDI Screening (the “Council”), which will be comprised of representatives of various Ministries, regulators and other authorities related to the national security. The Bulgarian Agency on Investment Promotion will be responsible to administer the application procedure, including in respect declaring the notification complete.
The Council will have to adopt its decision within 45-days following the filing or the correction of any deficiencies in the notification requested by the Agency. This term may be extended once, for up to 30 days. The absence of any decision in the initial or the extended term will be considered tacit unconditional clearance, permitting the FDI.
Express clearance may be issued with conditions attached.
The Council may also reject the application.
The decision of the Council will be subject to judicial review in two court instances.
Assessment criteria
When assessing the applications for a FDI clearance or reviewing FDIs within its ex officio powers, the Interdepartmental Council on FDI Screening needs to apply the criteria, set out in Article 4 of Regulation (EU) 2019/452:
(i) whether there is any interference by a government of a third country;
(ii) whether the foreign investor has already been involved in activities affecting security or public order in a Member State; or
(iii) whether there is a serious risk that the foreign investor engages in illegal or criminal activities.
The assessment criteria may be further specified in the Regulation for application of the FDI Screening Act.
Sanctions for infringements of the FDI Screening Regime
According to the FDI Screening Act a foreign investor may incur a fine amounting to 5% of the value of the investment, but not less than BGN 50 000 (c.a. EUR 25 000) for failure to comply with the regime. In addition to the fine, the Interdepartmental Council on FDI Screening may also impose on the foreign investor restrictive measures necessary to ensure security or public order, including change of control, change and/or suspension of activity, termination of the FDI and other appropriate measures.
Next steps
The FDI Screening Act provides for a 6-month period, during which the government needs to adopt or bring the secondary legislation in line with the FDI Screening Act. During this transitional period the notification obligation will not apply, but the relevant investments may still be subject to ex-post screening.
By Peter Petrov, Partner, and Stoyan Surguchev, Associate, Boyanov & Co.
