Category: Bulgaria

The strongest forces shaping the dynamics of legal work in Bulgaria, according to Kinstellar Partner Antonia Mavrova, are the country’s recently approved Recovery and Resilience Plan and the branching consequences of the war in Ukraine.

“The RRP will trigger a new wave of projects in the country. It was recently approved at the EU level, with the terms for starting the projects being quite short,” Mavrova begins. She expects that market activity will “very much be influenced by the plan.” The Bulgarian Government has already identified a couple of priorities – renewable energy and infrastructure – with projects to be launched in the second half of the year, she says.

“On renewable energy, we’ve been seeing a lot of M&A deals, recently,” Mavrova says, “as there is obviously increased demand for renewable energy and the acquisition of such assets. The RRP specifically highlights the need for large development projects for power stations, battery storage facilities, and geothermal energy plants.”

And there are significant updates on infrastructure development as well, according to Mavrova. “Remember the Sofia Airport concession deal from last year? Well, now the port of Varna will also go under concession, as will the Danube port of Ruse, with both concession projects set to be launched this year.” The government is considering bringing in external advisors, like the IFC or EBRD, to provide expertise in structuring those concessions, she adds, “with the involvement of such players setting market expectations for a transparent process and real competition between the participants.”

“We’re now closely monitoring the status of projects to be announced by the government, to be proactive and invite over potential bidders interested in the region,” Mavrova says. She expects there might be some returning investors, different arms or teams of those that also bid for Sofia Airport. She says that some of the investors in Bulgaria have been somewhat more conservative on M&A deals these past few months, due to the war and its implications, “but we expect that dynamic to be fully reversed by the RPP.”

The war in Ukraine is also giving rise to other dynamics in Bulgaria, Mavrova points out. The first is the increased demand for the relocation of businesses, “especially from the IT sector from Ukraine, Belarus, or Russia. Bulgaria could become the center of development for their further operations.” She says that global market pressures compound the phenomenon, with companies from Africa and Asia also seeking to relocate into the region: “Bulgaria and Romania are frequently on the radar, as potential hosts, as are the Czech Republic and Hungary, due to their location.”

The second – more of a slow-burn consequence – is increased demand for quality residential assets despite the increasing costs of construction and materials, experienced heavily across other subsectors of real estate. Mavrova highlights ready-to-build, which are upcoming on the market and which will ensure “high-quality units.” There is significant potential for growth in the coming year, she says: “Residential is already very popular and, especially with people being displaced from Ukraine – even more so in the case of Poland – demand for residential real estate should increase and more of these projects will be popping up.”

On January 18, 2022, CEE Legal Matters reported that Tsvetkova Bebov & Partners had advised Dronamics Capital on its IPO and listing on the Beam market of the Bulgarian Stock Exchange. CEE In-House Matters spoke with Svilen Rangelov, Co-Founder and CEO at Dronamics Capital to learn more about the matter.

CEEIHM: To start, tell us a bit about Dronamics Global Limited and Dronamics Capital.

Rangelov: Dronamics Global is the global HQ of the Dronamics group that unites all of our activities and companies – from the R&D and manufacturing in Bulgaria to our Airline entities that are our future operational units. Dronamics Capital is a Special Purpose Vehicle (SPV) founded with the sole purpose to raise EUR 3 million (the limit in Bulgaria) on the Bulgarian Stock Exchange’s SME Market (called “BEAM”) and use the proceeds to invest in a SAFE note into Dronamics Global. The SAFE note (Simple Agreement for Future Equity) is an increasingly popular convertible financing instrument due to its simplicity and balance, and thousands of startups worldwide use it – we have used it exclusively since 2018. As for Dronamics Capital – 90% of the EUR 3 million raised during the IPO on BEAM was invested in Dronamics Global’s SAFE note, with the remaining 10% kept in reserve for the ongoing maintenance of Dronamics Capital.

The key advantage however is that when the time comes for us to list our UK-headquartered parent company on e.g. NYSE or NASDAQ, the retail investors in Dronamics Capital have the option to trade their shares in Dronamics Capital for shares in Dronamics Global and essentially participate in the IPO of a high-growth technology company on a global stock exchange.

CEEIHM: Congratulations on the IPO. What is next for the company now that this step is concluded?

Rangelov: The IPO has allowed us to offer an early opportunity to individual investors to join the company just before we hit our key milestones this year – our upcoming authorization and first commercial flights.

The funds raised through the IPO are just a fraction of what we raised over the past several months, but it was important for us to do it because the same way we aim to democratize air cargo, we wanted to democratize access to high-growth tech investment opportunities.

What we’ve witnessed is that with the influx of capital into VC as an asset class, companies stay private a lot longer, and ordinary retail investors don’t get to invest in tomorrow’s winners at the early stages and so all that value-generation is kept away from the general public. Amazon did an IPO at a USD 400 million valuation, last year’s hot IPOs crossed USD 50 billion valuations, or 100x of value growth that was not accessible to retail investors or pension funds.

On a company level, we’re now focused on scaling our team and financing further the development of the next production units of the Black Swan aircraft, so that we get into a prime position to capture the outstanding customer demand that we are currently seeing with global logistics companies like DHL and Hellmann Logistics on board.

CEEIHM: What part of the process did you find most challenging?

Rangelov: Doing the first-of-its-kind listing of an SPV on the fairly new BEAM market required us to start from scratch with all the documentation and procedures that need to be undertaken by both entities and ensure the needed transparency and clear processes. Striking the right balance between protecting the SPV’s purpose from hostile takeovers via a golden share, and allowing maximum shareholder rights, was a key focus of our work. The SPV has an independent board with three outstanding experts in law, finance, and technology, who are very respected in their fields and are making sure corporate governance is strictly upheld.

The other key focus was on exit planning and making sure that shareholders of the SPV have the right to exchange their shares for the shares of Dronamics Global held by the SPV in the event of an exit, and fully realize the value of the underlying asset’s growth.

CEEIHM: What was Tsvetkova Bebov & Partners’ mandate on the IPO?

Rangelov: Our listing was a first of its kind in Bulgaria and perhaps the world for essentially listing a SAFE note investment on a stock exchange. TBP worked with us and our brokers and advisors at Karoll and turned a crazy idea into a pioneering framework that we hope can be utilized by other start-ups in a similar position.

CEEIHM:  And why did you pick them as your advisors?

Rangelov: We had previously collaborated with the team at TBP and they have always shown an intensely solution-oriented approach to supporting our vision. They are also by far the most experienced capital markets law firm in Bulgaria and they have a great understanding of the mechanisms of a listing and how to make it successful. We chose the team at TBP because they are by far the best capital markets team in Bulgaria and whenever you want to venture on a pioneering journey, you want the best team alongside you. And best of all, they did it in record time and with record results.

The IPO was 4.5 times oversubscribed with almost 1,000 shareholders taking part (for reference – to be included in the main index on the main market of the Bulgarian Stock Exchange you need only 750 shareholders), confirming our thesis that there is tremendous demand for quality investment opportunities in the high-growth technology sector.

Originally reported by CEE In-House Matters.

US-based and other multinational employers with subsidiaries in Bulgaria often include their Bulgarian employees in their equity plans and grant them equity awards. Implementing an international equity plan in Bulgaria for the first time can be challenging for any multinational employer, as they should ensure compliance with Bulgarian laws and regulations. Tax compliance could raise particular concerns, as Bulgarian tax law is silent on many issues and the views of the Bulgarian tax authorities lack consistency throughout the years.

Two tax compliance issues are of utmost importance for any multinational employer implementing an international equity plan in Bulgaria: (1) tax compliance obligations for the local Bulgarian subsidiary and (2) the time of occurrence of the taxable event. These two issues have been controversial over the years and have only recently been settled by the practice of the Bulgarian tax authorities.

Tax Compliance Obligations for Local Subsidiaries

Typically, Bulgarian employees work at the respective local subsidiary of the multinational employers. The equity awards, however, are granted to the Bulgarian employees by the employer’s parent company, located abroad, which is not their direct employer. This has resulted in inconsistent views taken by the Bulgarian tax authorities in several non-binding rulings:

In certain rulings, the Bulgarian tax authorities have accepted that since the Bulgarian employees are engaged by the local subsidiary, the equity awards should be considered as part of their employment income. This means that the Bulgarian subsidiary should report, withhold, and pay (to the Bulgarian tax authorities) any taxes and social security contributions due on the equity awards, while the Bulgarian employees have no obligations in this respect.

In other rulings, the Bulgarian tax authorities have accepted that since the equity awards are granted by the non-Bulgarian parent of the employer, these awards may not be regarded as part of the employment income of the employees, but are either their income from an independent economic activity or a capital gain. In such cases, there is no tax reporting, withholding, and payment obligation for the local subsidiary, but rather the respective employee has the obligation to report and pay any taxes on this income.

In recent rulings, the Bulgarian tax authorities have taken a more reasonable approach based on the International Financial Reporting Standard share-based payment (IFRS 2), which reconciles the previous contradictory interpretations. Under this approach, the equity awards are provided in exchange for employment services by the Bulgarian employees and, therefore, should be considered as employment income. The fact that the equity awards are granted by the employer’s parent company, located abroad, does not change this qualification, as under IFRS 2 the local subsidiary would nevertheless need to report the equity awards as expenses in its books. Therefore, the local subsidiary has an obligation to report, withhold, and pay (to the Bulgarian tax authorities) any taxes and social security contributions due on the equity awards.

Taxable Events

The obligation of Bulgarian subsidiaries to report, withhold, and pay taxes and social security contributions arises only when a taxable event occurs. However, the views of Bulgarian authorities as to when a taxable event occurs have also been inconsistent. In various rulings, the tax authorities have taken the view that the taxable event occurs either at (1) the grant date (based on the argument that the employee becomes entitled to a financial asset), (2) the vesting date (e.g., for restricted stock units, or RSUs), or (3) the exercise date (e.g., for stock options). This has largely caused confusion with employers as to when they need to report and pay the due taxes and social security contributions. The view that the taxable event is on the grant date has been particularly detrimental to multinational employers, as this has resulted in the awards becoming taxable before the respective Bulgarian employees receive the benefit of the award.

However, recent non-binding rulings of the Bulgarian tax authorities seem to eliminate the possibility to tax equity awards on the grant date. As a result, income from equity awards becomes taxable when the benefit of the equity award is actually received by the respective employee. This would be the point of time when the Bulgarian employee acquires the equity, which could be either the vesting date for certain types of awards, such as RSUs, or the exercise date for other types of awards, such as stock options.

By Atanas Mihaylov, Head of Tax, Kinstellar

This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.

Schoenherr and Stuttgart-based Oppenlaender Rechtsanwaelte have advised NTT Data Business Solutions on its acquisition of Business Services and Technologies. Tzvetkova & Partners advised the shareholders of Business Services and Technologies.

NTT Data Business Solutions is a Germany-based IT services company, part of the Tokyo-based NTT Group. Business Services and Technologies is a Bulgarian IT services and consulting firm.

Schoenherr’s team included Partner Alexandra Doytchinova, Attorney Katerina Kaloyanova-Toshkova, and Associate Gergana Roussinova-Ivanova.

Tzvetkova & Partners’ team included Partners Stefan Tzvetkov and Elena Stoilova-Dobreva, Senior Associate Martin Dimitrov, and Associate Neli Poprelkova.

Schoenherr has advised Bulstrad Life Vienna Insurance Group on its brokerage and outsourcing agreements with the Global Benefits Group and the related reinsurance agreement with AXA France Vie.

“GBG will offer clients insurance products in the EU. GBG is to act as an insurance broker and supplier of insurance services with respect to life, health, and disability insurance products offered by Bulstrad Life,” Schoenherr informed. In addition, “Bulstrad Life will reinsure to AXA the risks under the outsourcing and brokerage agreement.”

Founded in 1994, the Bulstrad Life Vienna Insurance Group provides life and health insurance in Bulgaria, with a range of life, health, medical, and disability insurance products for individual and corporate clients.

GBG is a US-based global insurance service company providing health, life, disability, and travel insurance.

Founded in 1985, AXA is a global insurance company present in 64 countries and with nearly 107 million customers.

The Schoenherr team was led by Partner Ilko Stoyanov and included Attorneys-at-Law Milena Gabrovska and Elena Todorova.

Tsvetkova Bebov & Partners has advised James Bergman and other sellers on the sale of the Transact Europe Group to GreenBox POS. Logofetova and Associates advised GreenBox on the deal.

Transact Europe is an e-money institution licensed by the Bulgarian National Bank. GreenBox is a US fintech company listed on NASDAQ.

According to Tsvetkova Bebov & Partners, “the almost USD 28 million transaction closed in early April 2022. The closing followed clearance of the transaction from the Bulgarian National Bank and the Commission for Protection of Competition.”

“We have already seen, over the past few months, the depth and breadth of new merchants and partner opportunities that GreenBox is adding to Transact Europe,” Transact Europe Group Chairman James Bergman commented. “These substantial volumes and excellent margins make it clear [how] successful GreenBox will be in their ownership. We wish them every success.”

The TBP team included Managing Partner Nikolay Bebov, Counsel Maria Karacholova, Managing Associate Eleonora Mateina, and Senior Associates Anastasiya Grunova and Martina Dimitrova.

The Logofetova and Associates team included Managing Partner Iglika Logofetova, Partner Mariyana Ivanova, and Senior Associate Iva Kouzmanova.

Recent cyber-attacks, the emergence of AI services, and a new Ministry of e-Government are among the widely discussed issues in Bulgaria, according to PPG Lawyers Managing Partner Irena Georgieva.

“The war in Ukraine had implications for Bulgaria and led to some data protection and cybersecurity issues,” Georgieva explains. “Offline conflicts have invaded the online world very quickly. Recently, we witnessed cyber-attacks from Russia, China, and North Korea.” According to her, the effect will be even more visible once the war is over. “Considering globalization, a set of issues, such as information security and the safety of online transactions, will be difficult to ensure.”

“We have a new parliament elected not long ago,” Georgieva adds, noting that the parliament has established a new Ministry of e-Government. “This update raises hopes that the new ministry administration will take positive steps with regards to cybersecurity and facilitate procedures related to state institutions as well,” she says.

“Another interesting area is the emergence of artificial intelligence services in Bulgaria. However, it is not always possible to implement reforms without taking into account the risk of ransomware gangs,” Georgieva notes. According to her, this process should not be hasty and all legal requirements and obligations regarding privacy should be considered at the design level. “Also, businesses should focus not only on complying with purely legal requirements but on the moral aspects of using AI as well,” she adds.

According to Georgieva, the recent cyber-attacks have had an impact on the private sector as well. “C-suites in Bulgaria need to adjust to these new perspectives and finally take information security very seriously, not only from a technical but also from a legal perspective,” she points out. “New data protection regulations are yet to come into force. Bulgaria and other member states should center on the EU directives and regulations and implement them into national legislation as well.”

Georgieva highlights that the war has made it evident that many legal regulations related to public procurement, data protection, and competition do not work efficiently during extreme situations. “We need to find a way to fine-tune these very complicated regulations in order to preserve the EU principles, which has proved to be quite challenging during the past few weeks,” she says. “It would be useful if the EU member states cooperated and came up with solutions for this unusual status quo as, otherwise, the law will become an obstacle rather than an instrument for fair and timely decisions.”

“In addition, similarly to other EU states, high inflation rates seem to have a lasting effect in Bulgaria, even after the war’s end,” she adds. “Due to it, the business sector does not feel secure. At the moment, inflation primarily affects food and essential commodity prices, but it will also harm other business sectors quite soon,” Georgieva concludes.

Schoenherr has advised BlackPeak Capital on its EUR 7.5 million equity investment into EUShipments.com and its subsidiary InOut Trade. Wolf Theiss advised the founders of EUShipments.com and InOut Trade.

BlackPeak Capital is a private equity firm focused on investing in Southeast Europe, including Romania, Bulgaria, Slovenia, Croatia, and Serbia. BlackPeak Capital currently manages BlackPeak Fund I and BlackPeak Southeast Growth Equity Fund.

EuShipments.com offers cross-border deliveries and fulfillment services for online stores in over 27 European countries. The company specializes in the process of sending, warehousing, tracking, and delivery of parcels through a proprietary network of local courier operators and warehouse locations in Europe.

“This transaction increases BlackPeak’s investments in Bulgaria and further enhances competition in the courier and logistics sector in this country and the EU,” Schoenherr Partner Ilko Stoyanov commented.

The Schoenherr team was led by Stoyanov and included Attorneys-at-Law Katerina Kaloyanova-Toshkova and Ivelina Vassileva and Associates Gergana Roussinova-Ivanova and Kristina Bozhinova.

The Wolf Theiss team was led by Partner Katerina Kraeva and included Counsel Hristina Dzhevlekova, Senior Associate Jasmina Uzova, and Associate Boryana Filimonova.

Former Counsel Nina Tsifudina has been promoted to Partner at Kinstellar.

Specializing in M&A, labor law, and TMT, Tsifudina has been with the firm since 2014, having first joined as a Senior Associate. She was promoted to Managing Associate in 2016 and to Counsel in 2021. Between 2011 and 2014 she was an Associate with Wolf Theiss, while in 2010 she was an Associate at DLA Piper. Prior to that, she spent over four years at Varadinov & Co, first as a Legal Trainee from 2005 to 2007, and later as an Associate, from 2008 to 2010.

Infrastructure and real estate lawyer Atanas Mihaylov was appointed as Counsel within the same promotion round.

“I congratulate them on this achievement and thank them for their hard work and contribution to the firm,” Kinstellar Managing Partner Patrik Bolf commented. “Both are truly stellar individuals who have consistently demonstrated the highest levels of client service, exceptional skills in winning and managing transactions, dedication, teamwork, and commitment to our values. We look forward to their contribution going forward, and we wish them success in their new leadership roles!”

CMS has advised Toki Power on drafting a sleeving power purchase agreement with a telecommunications company in Bulgaria.

“The first sleeving power purchase deal in Bulgaria is now closed with one of the largest telecoms,” CMS informed. “The sleeving agreement breaks ground for the future of services related to topping up of power supply generated from renewable sources when end consumers need so.”

Toki Power is a Sofia-headquartered digital platform, providing electricity services in Bulgaria.

The CMS team was led by Managing Partner Kostadin Sirleshtov and Associate Elena Yotova-Yordanova.