AML contact person + new declaration for companies in Bulgaria (foreign-owned)

Money laundering – through banks, real estate, nominees or other schemes – is a crime according to Bulgarian Criminal Code as it is all over the world.  In connection to this in 2018 Bulgaria launched a new Law on Measures Against Money Laundering which totally repealed the previous one in force. The new law fully complies with European standards and in particular with Directive (EC) 2015/849 on the Prevention of the Use of the Financial System for Money Laundering or Terrorist Financing. The changes are mainly related to the imposition of new obligations to those who are defined as “obliged entities” – these are all natural and legal persons, who are committed to the observance and implementation of the anti-money laundering and anti-terrorist financing measures referred to in the same law.

One of the main obligations under the new Bulgarian Anti-Money Laundering Act is related to all companies, including branches of foreign commercial companies registered in Bulgaria. When entering into business relations with their clients / contractors obliged entities must apply measures for comprehensive check of their client, including identification of the beneficial owner of their clients – legal entities. By virtue of this law “a client” is any natural or legal person or other legal entity that enters into business relations or performs a random business transaction with an obliged person. In case a client appears not personally, but through a nominee, in order to be able to perform this identification, the obliged person must consult the relevant Bulgarian register (Trade Register, BULSTAT register) as well as to obtain an official document (contract, certificate or other) showing who the beneficial owner is.

The new Anti-Money Laundering Act requires that legal entities  submit to the relevant public register (Commercial Register, BULSTAT Register) a specific declaration about their beneficial  owner. The declaration is required to be presented by the legal representative / the manager of the company. It is this particular declaration and its submission that is a subject of the most discussions. At first glance, it appears that all companies must submit a declaration to the relevant registry, regardless of the form of their company. But as you read the law, you can see that this declaration is not necessarily needed for natural persons. This means that  a Ltd. company, which has a natural person registered as the sole owner of the capital, is not obliged to declare and prove again that this person is the real owner of the respective commercial company. This is not the case, however,  if the owner of the company is not a physical person, but another legal entity, whether Bulgarian or foreign. In this case the respective national public register does not show directly who the primary beneficial owner is and therefor the submission of a declaration in this case is mandatory.

When it comes to a Limited Liability Partnership, the obligation for declaration of the actual owner is more logical as there are at least two partners (natural or legal persons). For a company in which we have, for example, two associate natural persons holding 50% of the capital each there isn’t a obligation for declaration of a beneficial owner as the names of both are disclosed and are visible in the register. When there are more partners – physical persons in the association, some of which hold less than 25% of the capital, the latter shall not be declared as beneficial owners. If the minority partners with shareholding less 25 % are legal entities, however, their beneficial owners should be declared regardless of the fact that their share is minoritary.

Along with the declaration of a beneficial owner, the new law introduces another obligation for all Bulgarian companies. Every company shall declare a contact person (sort of AML officer) for communication with tax and state authorities which person must be permanently residing in Bulgaria. This is a practical problem for all Bulgarian companies founded by foreign shareholders.  Additional difficulty to foreign company owners will be the fact that the contact person must express his consent by a special notary certified statement. Upon giving such statement, a number of obligations will arise for the contact person, such as an obligation to receive, dispose of and provide appropriate and accurate information and data about the beneficial owners. The contact person  can be fined  between BGN 100 to BGN 1,000 for non-fulfillment of this obligation, and in case of a repeated violation – the fine shall be from BGN 200 to BGN 2,000.

According to the new law, the deadline for filing the declaration of the beneficial owner and contact person of the legal entity is February 1, 2019. However, information appeared in the media that this period may be extended as the Regulation on Application of Anti-Money Laundering Measures is not ready yet and some of the forms have not been published. For the moment, however, there is no clear and accurate information whether this will happen.  

Doing business in Bulgaria from abroad

Doing business in Bulgaria has never been easier. Company incorporation as well as all possible forms of starting business in Bulgaria are entirely covered by the modern and sophisticated corporate legislation adopted by The Republic of Bulgaria which consisting of Codes, Acts, Ordinances, etc. Generally speaking all available applicable laws in force allow miscellaneous commercial and other real life business activities under many various forms. The major and most important of the above mentioned and described acts that do regulate the entire complicated process of doing business in Bulgaria are the Constitution, the Commercial Code, and the Act on Contracts and Obligations. There also exist other acts and laws but they are applicable in specific cases – for example if some type of business requires licensing. Bulgarian economy is very liberal and licenses apply to a very limited number of business activities (for example weapons, gambling, etc.).

If you are a foreign national, permanently living abroad, and you have already appreciated the big benefits of doing business by running a Bulgarian company, then maybe you have already asked yourself the question whether it is possible to incorporate a company in Bulgaria and then run it from abroad or you still have to come to Bulgaria personally.

If you have the option for coming to Bulgaria, no matter the reason why, the best option would be to act personally while setting up your business in Bulgaria. This of course does not mean to prepare all required paperwork and other required documents personally. It means that you will have to sign all related documents that someone, usually a trustworthy Bulgarian business lawyer, has already drafted on your behalf. If all documents have already been exchanged by post or e-mail and certainly approved by the owner/s or respectively shareholder/s, then the latter will only have to sign the documents, some of which before a notary public. All this takes from a couple of minutes to an hour.

If however you are not planning an initial business trip to Bulgaria, then you should bear in mind that there is an option for your new Bulgarian company to be incorporated without your physical presence in the country. In this case you can have the documents posted or e-mailed to you – which, upon receipt, you will sign and post back to your Bulgarian company representative (e.g. a corporate attorney etc.).

The only problem in the above described scenario is the necessity of witnessing some of the documents. As explained earlier, there is an option for these papers to be witnessed by a notary, even a notary abroad. A common problem for many investors who want to do business in Bulgaria is that Bulgarian commercial laws do not allow solicitors to witness signatures on documents as it is in many countries around the world – and only notaries are allowed to carry out this job. Notarizing documents abroad is a little but more difficult because once notarized, the papers then have to be legalized. Which means a little more time and expenses. An exception to this rule are countries Bulgaria has singed legal assistance treaties with – in which case documents get automatically recognized without being legalized. The last option in this regard, which is preferred by foreign citizens, is the company documents to be witnessed in any Bulgarian embassy around the world. Even if you live in Russia, you can still go to the Bulgarian embassy in London, UK, and do this job successfully.

Following the Bulgarian company registration process successful end, owners or shareholders start actively doing business in Bulgaria (as this what they have established the company for after all).

The first question in this regard is related to the scope of business activities of commercial companies in Bulgaria. They can do virtually any kind of business they wish. Or do no business at all – something that is not prohibited but even allowed. In the latter case the company pays no taxes, nor any other sort of contributions to the state. The only expenses on account of the LLC or other type of corporate body are the accounting and / or legal charges which are due annually for filing nil returns.

Upon registration Bulgarian companies declare their business activities with the Trade Register. But are they restricted with the exact activities that they have stated at the time of initial incorporation? No, they are definitely not. Even if a company, at the time of the business start-up, declares production of some sort of goods, later on it can start doing other type of business in Bulgaria, EU or around the world, e.g. dealing with distribution of goods even if this is not explicitly mentioned in the official companies register. But aren’t there any limitations after all? Yes, there are limitations for doing business in Bulgaria of course but they are related to some sectors which are monopolized by the state – e.g. military production, etc. Some other specific commercial activities could be subject to initial licensing – for example production of drugs, etc.

To summarize things up – almost all of the things described above can be done either personally by foreign businessmen who are doing business in Bulgaria or from abroad via proxies – trustworthy lawyers, managers, etc. Many things can also be done over the internet – e-banking, real time business monitoring, etc. Having in mind this, may foreign investors have already developed a successful business in Bulgaria without their physical presence in the country.

Publication of annual financial statements in Bulgaria

Although the obligation for publication of annual financial reports of companies is a common rule in almost all European countries, there are numerous differences among the legislation of the member states. In most countries this obligation is only for companies that match certain criteria – certain activity throughout the fiscal year, annual turnover, type of company, etc.

That is probably the reason why many entrepreneurs that have set up companies in Bulgaria make the mistake not to publish their annual financial statements wrongly assuming that they do not fall among the entities that have this obligation. According to Art. 40 of Bulgarian Accounting Act enterprises are obliged to publish their annual financial statements and their annual management reports as adopted by the General Meeting of partners / shareholders.

All merchants in the meaning of the Bulgarian Commercial Act, namely: limited liability companies (single member limited liability companies and limited liability partnerships), joint stock companies, general partnerships or sole traders, are obliged  to file and submit their annual reports in Bulgarian Commercial Register by 30 June every year. This obligation is applicable even for companies which have had no activity throughout the fiscal year and for dormant companies.

Fines ranging from EUR 250 to EUR 1500 are imposed to all who fail to fulfill their obligation of submitting the information with the Commercial Register in Bulgaria within the specified deadline. In the event of a second violation of this rule fines are double.

The announcement of the reports shall follow a strict procedure rules set in the Bulgarian Commercial Register Act. Announcement is made by filing an application form (available only in Bulgarian language) together with the financial reports, minutes of the General Meeting of shareholders or the relevant body confirming the adoption the annual financial statements and a few mandatory declarations. Applicant can be either the Bulgarian company manager or a lawyer with an explicit Power of Attorney or the company accountant again with an explicit Power of Attorney. Application can be made either on line with an electronic signature or at the local offices of the Registry Agency. Sending your application by post is not acceptable.

Company types in Bulgaria

Company types are more or less different around the world.When speaking about specifics of any desired corporate entity to be set up, investors should know that there are half dozen of different types of companies in The Republic of Bulgaria and the main criteria is the active trading quality – its lack or availability. The major possible forms of business entities in Bulgaria can and should be further divided into two main big groups: a) traders and b) non-traders. Traders who are involved in active deals or any other commercial activities can be divided into another further two groups (depending on the special relevant legal act regarding their business status): A1) Traders registered under the Commerce Act; and A2) Traders who are subject to regulation by specific laws. The forms of opening a company and running an active business outlined below might be divided once again into two groups: 1.  Commercial trading companies and 2. Other legal entities. There is also another group in which corporations are split into ‘normal’ (with two or more members) and single member trading companies.

Any type of Bulgarian company is duly established legal entity in which two, three or more physical or judicial persons who have come together and join forces to do business with common monetary or other resources. A corporation may also be set up by a sole trader in all cases stipulated in the applicable legal instruments. In order for a trading company to be incorporated in Bulgaria, it needs to be duly recorded with the only competent Trade Register in compliance with the regulatory Act on the Commercial Register.

Founders of established companies described in the above paragraphs should be legally capable foreign or Bulgarian individuals (physical persons) or legal entities (judicial entities). Anyone of them has the excellent change to start up and run as many business corporations as he likes insofar as the laws do not explicitly prohibit this. Where a Bulgarian registered company takes part in another duly formed corporation, its rights as a partner, shareholder or single shareholder-owner should be exercised by a person specially authorized in writing and announced in the public register to do this.

The absolutely total number of Bulgarian companies that could legally be incorporated under the applicable Bulgarian laws is five and they are exactly the following ones:

  • Joint Stock Company (AD – Aktsionerno Druzhestvo or EAD – Ednolitchno Aktsionerno Druzhestvo)
  • Limited Liability Company (OOD – Druzhestvo s Ogranichena Otgovornost or EOOD – Ednolitchno Druzhestvo s Ogranichena Otgovornost)
  • General Business Partnerships (SD – Sabiratelno Druzhestvo)
  • Commanditte Business Partnership (KD – Komanditno Druzhestvo)
  • Commanditte Business Partnerships Limited by Shares (KDA – Komanditno Druzhestvo s Aktsii)
  • read more

    Insolvency in Bulgaria – bankruptcy laws & proceedings

    Bulgarian bankruptcy / insolvency proceedings are regulated by Bulgarian Commercial Act. The first thing one should bear in mind is that bankruptcy and insolvency in Bulgaria are synonyms and mean absolutely one and the same thing from legal point of view.

    There are two legal grounds for opening bankruptcy proceedings in Bulgaria – insolvency or over-indebtedness (the second rule applies only to limited liability companies, stock corporations or companies limited by shares). According to Bulgarian Commercial Act insolvent shall be deemed merchants who are unable to meet outstanding capital obligation under a commercial transaction or public duty to the state and the municipalities related to the merchant’s commercial activities, or private state obligation. The insolvency shall be assumed when the debtor has stopped his payments. Insolvency may be present also when the debtor has paid or is in position to pay partially or in full only the claims of individual creditors. An interesting detail is that bankruptcy proceedings shall be deemed automatically opened as well as for any unlimited partner in an insolvent company in Bulgaria. Bankruptcy proceedings can also be opened for deceased or even deregistered merchant – physical person if before his death or deregistration from Bulgarian Commercial Register he has been insolvent.

    Bankruptcy proceedings in Bulgaria get opened when the debtor files for bankruptcy with the respective Bulgarian court. Other parties who are also authorized to file for insolvency are: liquidator of the company (if a liquidation procedure has been initiated), any creditor of the debtor under a commercial transaction, as well as the National Revenue Agency for public obligations to the state or any municipality.

    In most cases there are no state or court fees due at the moment of the initiation of the insolvency proceedings in Bulgaria. No preliminary state fees are collected in case the debtor files for bankruptcy. Such fees are collected out of the bankruptcy estate at the time of the distribution of the assets.

    In the general case when insolvency or respectively over-indebtedness is found by the court, the judge in his ruling shall officially declare insolvency or over-indebtedness and determine the initial date thereof, open the bankruptcy proceedings, appoint a provisional receiver, allow injunctions or other security measures and finally appoint a date for the first meeting of creditors, not later than one month following the issuance of his judgment (decision, ruling). But this is not the only option. The court could also reject the bankruptcy petition in case the debtor’s financial difficulties are only temporary or if he has enough assets to meet the obligations, protecting the creditors’ interests. Or even more – when the request of a creditor for opening bankruptcy proceedings is rejected the debtor shall be entitled to receiving compensations if the creditor has acted deliberately or by gross negligence.

    One of the most important questions is regarding the assets which are included in the bankruptcy estate. These are: property rights of the debtor towards and after the date of the judgment for opening of bankruptcy proceedings, as well as half of all chattels (movable properties), rights on chattels and capital deposits of debtors – sole entrepreneurs or unlimited partners – that have been acquired during their marriage under common martial regime.

    Once bankruptcy proceedings get initiated, there are some very short terms (usually 1 month) in which all claims against the company gone bankrupt (insolvent) must be filed – otherwise these claims could NOT be made later and all amounts are irrevocably lost (even if there is a writ of execution issued by court). The creditors are NOT notified about the bankruptcy proceedings and have to keep a close watch on them alone – a job typically undertaken by Bulgarian insolvency and bankruptcy attorneys on behalf of their clients.

    Upon opening of bankruptcy proceedings the debtor continues to carry out his commercial activities under the supervision of the receiver in bankruptcy and he can conclude new transactions only by preliminary approval of the receiver in bankruptcy, and in compliance with the measures, determined in the court’s ruling. From this moment on all court or arbitration civil or commercial proceedings, as well as execution proceedings based on a writ of execution and handled by a bailiff, against the debtor get automatically stopped.

    The main objectives in the remaining part of Bulgarian bankruptcy proceedings are aimed towards effective investigation and discovery of assets of the debtor, conversion of the assets into cash and the final distribution between all creditors which is a typical job for experienced Bulgarian bankruptcy / insolvency lawyers.

    Dormant companies registration in Bulgaria

    A dormant Bulgarian company is an inactive company that does not trade and hence does not have any accounting transactions recorded at all. Then why should anyone need such a company?

    Well, the reasons for keeping such a company registered in Bulgaria may be different. A good reason to use a dormant Bulgarian company is if you have a trademark or a brand name that you wish to protect. In other cases, if you have an active Bulgarian company, but business is not doing well and you need a break, you can make your company dormant so as to reduce expenses to minimum and until waiting for a suitable moment to start trading again.

    In Bulgaria, dormant companies have been broadly used by foreign investors to buy real properties into the name of a company as Bulgarian law prohibited land purchase by foreigners. This law has been changed recently and now all EU citizens do not need a Bulgarian company to own land, so normally all this company owners now wonder what to do with their Bulgarian companies since they no longer need them. In such cases it is reasonable to file for liquidation and to stop the existence of their company. Although liquidation process is relatively slow (typically 6-12 months) and connected to expenses, in long-term aspect, it is more cost-effective to liquidate the company, because administration of a dormant company in Bulgaria is also connected to expenses.

    Even a dormant company must have a seat and registered address for receiving official notifications by authorities and any third parties. Any change in the address of registration or in the company management or any other change in the articles of associations must be duly registered with Bulgarian Trade Register (Commercial or Company Register) of the Registry Agency.

    Under Bulgarian tax laws, all limited companies in Bulgaria are liable to submit annual tax returns with the National Revenue Agency (NRA), and even if your company may be dormant, you are obliged to file a zero tax return. Dormant companies are also subject of control by Tax Authorities (NRA) and not submitting a tax declaration within the deadlines under Bulgarian tax laws may incur significant fines to the company shareholders.

    In addition all dormant companies must prepare annual balance sheets and financial statements and file them with Bulgarian Trade Register. Preparation of annual accounts, tax returns and balance sheets can be made only by chartered accountants who usually offer full scale accounting services for dormant companies for fees ranging from 100 to 300 euro per year. Therefore, one should consider all pros and cons before deciding whether to form a Bulgarian dormant company.

    Costs for opening a cheap company in Bulgaria

    How much does it cost to open a cheap Bulgarian company? – is maybe one of the first questions many foreign investors ask. And the answer is that the company formation procedure in Bulgaria involves different types of costs.

    The first group of expenses represents the administrative ones. In other words all state fees fall into this category. The main expense here is the company registration tax which is in all cases due to the Bulgarian Commercial Register. One should also know and bear in mind that if this tax is paid electronically over the internet, then it is in lower amount. The other condition is that all paperwork is also submitted to the aforementioned register electronically. This task is very hard to achieve for foreign investors who are not in good command of Bulgarian language since the Trade Register’s interface in only in Bulgarian language.

    Notary related expenses fall into other group of company incorporation costs. Even if the owner/s or shareholder/s in the company speak perfect Bulgarian, there is always at least one document which has to be notarized and this is the specimen of the signature of the Bulgarian company’s manager. In case there are more than one managers – then all of them should do this job. However this expense is in a very low amount at least in Bulgaria – less than 10 Euros per signature. Other documents for the incorporation procedure can also be notarized but this is not strictly mandatory according to Bulgarian company laws. Unfortunately in many cases the registration process gets slowed down if more documents are not certified by a notary public.

    The last main group of set up expenses includes cheap service fees. For example remuneration of the lawyers who are in charge of the company establishment. The lawyers’ fees in Bulgaria vary but there is a minimum amount set by Bulgarian Law Society (the Bar Association). However in some case foreign investors could find service fees even lower than this minimum amount – and typically this is the case where Bulgarian paralegals or even non-lawyers (for example accountants, etc.) make such sorts of tempting cheap offers which are hard to resist, at least at first sight. But every investor in Bulgaria should keep in mind that these ‘specialists’ are doing no legal service but are rather selling a bunch of documents with absolutely equal content (where only names are changed). And the risks here are very high – incomplete work, violations of the legislation and all associated fines or even ruined business.