Foreign direct investment screening mechanism in Bulgaria: New frontiers

Bulgaria has introduced a draft law amending the Investment Promotion Act, with which the country will implement a foreign direct investment mechanism. With the draft law, Bulgaria recognizes that establishing a robust and effectively coordinated system to scrutinize foreign investments is paramount in order to foster economic growth while ensuring that national security and other vital public interests are not compromised. The proposed piece of legislation closely adheres to the provisions of Regulation (EU) 2019/452, which has proven to effectively strike a balance between promoting foreign investments and protecting the EU’s strategic interests.
The Bulgarian government’s move towards creating a framework to govern foreign direct investment demonstrates the country’s efforts to maintain economic stability. Once the draft law is approved (which is expected to happen before the end of the year), any investment by a foreign investor which aims to establish or maintain lasting and direct links between the foreign investor, on the one hand, and the entrepreneur to whom or the undertaking to which the capital is made available, on the other, in order to carry on an economic activity in Bulgaria will need to comply with certain requirements. This will include investments which enable effective participation in the management or control of a company carrying out an economic activity.
The draft law envisages the establishment of an Interinstitutional FDI Screening Council, which would act as a contact point for the implementation of the Regulation. The Council would be supported by the Bulgarian Investment Agency, whereas the Minister of Innovation and Growth will issue the rules for the Council’s operation. The Council will also be responsible for issuing authorizations with respect to foreign direct investments if they cumulatively meet the following two conditions: 

• They have a subject matter in a field of activity listed in Article 4, paragraph 1 of the Regulation, in particular:

1. critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;
2. critical technologies and dual use items, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, as well as nanotechnologies and biotechnologies;
3. supply of critical inputs, including energy or raw materials, as well as food security;
4. access to sensitive information, including personal data, or the ability to control such information; or
5. the freedom and pluralism of the media;

• they have a value exceeding EUR 1,000,000, or its equivalent in BGN (BGN 1,955,830).

The draft law includes an exception to the general authorization regime, specifying that even if an investment does not surpass the EUR 1 million threshold, it may still be subject to scrutiny and approval by the Council if it is deemed to have the potential to affect or pose a risk to security or the public interest. 
Foreign investors who fall under the above-mentioned conditions will be required to apply to the Council for approval of the investment. The application itself would need to be initially submitted with the Bulgarian Investment Agency, which must issue an opinion on the application’s compliance with the Regulation within ten days of its submission. Following this, the Bulgarian Investment Agency would forward the application to the Council, which must issue a decision on the investment within 45 days of notification by the investor. In its decision, the Council may approve the foreign direct investment, or issue conditional approval of the foreign direct investment contingent upon the investor’s adherence to specific actions or structural requirements, or prohibit the investment.
Foreign direct investments which fall within the scope of the Investment Promotion Act and are not approved by the Council are strictly prohibited. In the event an investment is made without such authorization, it will be subject to an administrative fine equal to 5% of the investment’s value, but not less than BGN 50,000 (approx. EUR 25,565). Irrespective of the administrative fine, the Council may also impose corrective measures in terms of actions or structural changes with the objective of addressing concerns related to security or public order.

European level 

On 12 July 2023, the Foreign Subsidies Regulation (FSR) entered into force. The FSR empowers the European Commission to address distortive effects of non-EU subsidies on the EU market.
The FSR established a new mechanism for reviewing mergers and acquisitions, separate from the existing merger control and foreign direct investment rules. Under the new regime, companies involved in transactions that have received financial support from non-EU governments may need to notify and gain approval from the European Commission before finalizing their deals. The FSR also includes a procedure to screen public tenders involving foreign-subsidized entities and gives the European Commission the authority to investigate any commercial activity within the European Union that might be influenced by foreign subsidies, whether related to a deal or not.
Under the FSR, companies must make a mandatory notification if they are involved in concentrations where the turnover of the target company, the joint venture, or one of the merging companies is EUR 500 million or more, and the companies involved in the deal have received EUR 50 million or more in financial contributions from non-EU countries.
There is also a mandatory notification requirement for public tenders with an estimated contract value of EUR 250 million or more if the bid includes financial contributions of at least EUR 4 million per non-EU country.
In addition, by virtue of the FSR, the European Commission has vested power to perform ex officio reviews of other market cases if they are suspected of having a distortive effect on the EU’s internal market. This means that even if they do not fall within the M&A or public procurement tools, they can still be investigated. This catch-all tool has a retroactive effect, allowing the European Commission to investigate subsidies granted up to five years prior to the FSR’s entry into force, i.e. after 12 July 2018.

What is next

Bulgaria has embarked on the road to establishing a robust foreign direct investment screening mechanism. While foreign direct investments bring numerous economic benefits, they also carry potential risks that need to be carefully managed. In addition, with the FSR, companies operating outside the European Union will need to assess the financial support they have received from non-EU countries in order to determine if the support itself qualifies as a subsidy, and if there are any notification requirements.
For further information and to stay up-to-date on forthcoming developments, contact your usual CMS contact or our local CMS Sofia experts, Ivan Gergov and Berdzh Draganov.