Category: Bulgaria

CMS Sofia has successfully represented Bezmer Energy in a dispute against the Ministry of Finance of the Republic of Bulgaria involving the country’s feed-In tariff.

According to CMS, Bulgaria’s Supreme Court of Cassation agreed with Bezmer Energy’s claim that it should be compensated for the 20% reduction of the feed-In tariff that was enacted by the Bulgarian legislation in 2013 and then repealed by the Bulgarian Constitutional Court in 2014. Bezmer Energy was also awarded with interest and court costs. According to the firm, the case “establishes an important precedent for all other pending cases related to the feed-In tariff cuts in Bulgaria.”

CMS’s team was led by Sofia Managing Partner Kostadin Sirleshtov and Partner Assen Georgiev and included Consultant Maria Lazarova, Associate Yana Antonova, and Trainee Teodora Peycheva.

As of 1 January 2021, Bulgaria’s Commission for the Protection of Competition (the “CPC“) will be available for pre-notification discussions. To this end, it has also published bylaws (“Rules”) for such contacts (adopted by CPC decision 1005/10 December 2020).

Pre-notification contacts preferably should be initiated at least two weeks before the expected date of notification. The CPC recommends that during the pre-notification contacts the parties provide background information about the transaction, a brief description of the relevant sectors and markets involved, and the likely impact of the transaction on competition in general. The Rules also allow parties to submit a draft notification as a basis for further discussions with the CPC.

On the side of the CPC, the case handlers reviewing the transaction would be present, which seems like an important improvement. At present, discussions with the case handlers are informal and possible only during the formal review process. Also, as a standard policy of the CPC, case handlers currently are reluctant to provide information on the progress of the filing and potential concerns. The parties currently only learn about the CPC’s standpoint through requests for information, which delay the merger control review by at least five to ten business days.

The Rules will provide the notifying parties with the opportunity to discuss proposed remedies still in the notification phase. So far, remedies could only be proposed during an in-depth investigation in Phase II of the merger control proceedings.

Next, the Rules allow the notifying parties to discuss waiving some of the CPC’s mandatory questions that must be answered with the merger filing. This may result in significant bureaucratic relief for transactions involving notifying parties with larger market shares acquiring targets with insignificant market shares. Currently, for all transactions that involve 15 % combined market shares (horizontal overlaps) or 25 % (vertical overlaps) the parties must submit the standard (long-form) merger filing, which is rather burdensome. Such detailed filing seems unnecessary for transactions involving small targets (having less than a 5 % market share), especially when acquirer reaches the 15/25 % market share by itself and the transaction does not have the potential to affect product markets in Bulgaria.

The pre-notification contacts will be held in the office of the CPC, but the Rules also allow for online meetings (in case of urgency or in the current times of social distancing).

In conclusion, we believe that the CPC’s Rules on pre-notification contacts are a step in the right direction in implementing best European practices on merger control. Nevertheless, we have yet to see how practical they would be for the notifying parties and whether they would lead to a shorter review period once the official proceeding is opened and smoother and more effective communication with the case handlers, and whether they could facilitate filings which formally meet the criteria for the standard (long-form filing) despite having an insignificant market effect.

By Galina Petkova, Attorney at Law, Schoenherr

Kinstellar’s Sofia office has advised Allianz Bulgaria on its lease of office space from Park Lane Developments in Sofia.

Financial details of the transaction were not disclosed.

Kinstellar reported that the deal marks Allianz’s consolidation of its operations in one office building: Sofia’s Park Lane Office Center, which is currently under construction and is expected to be completed by mid-2021.

Kinstellar’s team included Partner Antonia Mavrova and Managing Associate Atanas Mihaylov.

On 16 December the Bulgarian Council of Ministers adopted a Decree amending the local Ordinance for exercising the right of access to medical care. It concerns medical activities covered by the National Health Insurance Fund. This is the first attempt at national legislation regulating electronic referrals and prescriptions.

According to the amendments, in case of a state of emergency or an epidemic, primary care physicians (i.e. general practitioners) will be able to issue electronic referrals for medical diagnostic tests to patients from their registry for the purpose of establishing whether infection has occurred. The referrals will be issued without a physical examination of the patient, but after a distance consultation and considering the patient’s medical history. In addition, GPs will be allowed to sign electronic prescriptions.

The electronic referrals and prescriptions will be issued and stored through specialised medical and pharmacy software, which is already available for the medical establishments (medical centres, hospitals, etc.) and pharmacies that have concluded a contract with the National Health Insurance Fund.

The adopted changes will facilitate outpatient and inpatient care as well as the access of people with health insurance to consultations, medical diagnostic tests, medicinal products, medical devices and dietetic foods for special medical purposes.

By Elena Todorova, Attorney at Law, Schoenherr

On 19 November 2020 the Bulgarian Commission for Protection of Competition (“CPC“) fined Olineza Premium OOD (“Olineza“), one of the biggest Bulgarian food producers, BGN 1,479,040 (approx. EUR 700,000) or 4 % of its 2019 turnover. The fine was imposed for the “misleading use” of the word “homemade” stated on the label of a mayonnaise product, and comes after almost three years of administrative and court proceedings.

Background / 2018 Decision and its repeal

The case was initiated before the CPC in 2017 upon request of Olineza’s competitors and concerns the alleged misleading use of the “homemade” statement on the label of a mayonnaise produced by Olineza.

Under Bulgarian competition rules, misleading advertising is a form of unfair competition and could lead to a fine of up to 10 % of the turnover for the last financial year of the infringing entity, with the fines ranging from up to 5 % of the turnover for “mild” breaches, up to 8 % for not very severe breaches and up to 10 % for severe breaches.

In 2018, the CPC issued a decision that Olineza had not breached competition rules.

On appeal, however, the Supreme Administrative Court (“SAC“) repealed the decision of the CPC from 2018 and returned the case to the CPC to impose a fine on Olineza.

According to the SAC, the food label is an advertisement and when a product is labelled “homemade mayonnaise”, the end-consumer is misled about the ingredients from which the product is made.

The SAC explicitly stated that describing all ingredients on the product label (as Olineza did) may not lead to a different conclusion, since end-consumers have expectations that a product labelled “homemade” would contain the ingredients typical for a homemade product. On the contrary, Olineza’s mayonnaise contained “egg powder”, even though it is neither common for homemade production nor easily accessible for end-consumers.

As regards the detailed description of the ingredients on the label, the SAC stated that when end-consumers are choosing a product they would rely on the “homemade” statement and would not compare the labels of the competing products (made with the same ingredients). Therefore, Olineza gained a competitive advantage by using the “homemade” statement, even though its product was neither produced at home nor made according to a home recipe and with “home” ingredients.

2020 Decision

Indeed, the 2020 decision of the CPC adheres to the instructions of the SAC to impose a fine.

We are surprised, however, that the regulator imposed a fine of 4 % of the turnover of the breaching entity (i.e. almost the maximum 5 % fine for a “mild” breach) even though there were some mitigating factors. In 2018 Olineza changed the name of its products to “premium mayonnaise” and notified the CPC accordingly, and the offering of the product was suspended almost two years ago.

It is also questionable whether the fine is proportionate to the character of the breach, especially considering the CPC’s predominant practice of imposing 1 – 2 % for “mild” breaches.

Finally, we are surprised that the CPC used the 2019 turnover to determine the fine for a breach which ended in 2018.

Warning to other advertisers

Regardless of whether the fine imposed by the CPC was correctly determined or not, companies should be extra careful when using bold statements to advertise their products. The CPC already has a well-developed practice in place for sanctioning various “unfair” advertisements (e.g. a “best” or “homemade” product) and it should always be borne in mind whether it is worth using catchy phrases given the high fines and lengthy proceedings they may lead to. 

By Galina Petkova, Attorney at Law, and Elena Todorova, Attorney at Law, Schoenherr

The amendments to the Bulgarian Tax and Social Security Procedure Code in August 2019 relating to mandatory transfer pricing (TP) documentation came into effect on January 1, 2020. Thus 2020 is the first year for which TP documentation, including a local file and a master file, should be prepared.

The new rules are based on the Report on Action 13  “Transfer Pricing Documentation and Country-by-Country Reporting“ of the Base Erosion and Profit Shifting (BEPS) Plan developed by the OECD, as well as on the Code of Conduct on transfer pricing documentation for associated enterprises in the EU. As a result, Bulgaria’s documentation rules are largely unified with the rules of a wide range of countries, which are themselves based on these same sources.

The obligation to prove the arm’s length nature of related-party transactions (controlled transactions) had existed in the law before, but there were no clear rules as to the manner of proving. A number of taxpayers, especially those that were part of multinational groups, chose to prepare TP documentation using the available guidelines.             

The new requirement for preparing TP documentation applies to local legal entities, foreign legal entities that carry out economic activity in Bulgaria through a permanent establishment, and sole traders, but does not apply to all entities and transactions.

Exempt from the requirement to prepare a local file are those taxpayers that, as of December 31 of the previous year, do not exceed at least two of the following thresholds: (i) book value of the assets – BGN 38 million (approximately EUR 19 million), (ii) net sales revenues – BGN 76 million (approximately EUR 38 million), and (iii) average number of personnel for the reporting period – 250 people. The exemption also applies to taxpayers that are not subject to corporate tax or are subject to alternative taxation under the Corporate Income Tax Act. Entities which perform only domestic controlled transactions are also excluded. Furthermore, there is no obligation to prepare a local file for controlled transactions with individuals (save for sole traders). 

The law expressly defines controlled transactions for which a local file should be prepared as those exceeding (on an annual basis): BGN 400,000 (approximately EUR 200,000) for the sale of goods, (ii) BGN 200,000 (approximately EUR 100,000) for other transactions, (iii) BGN 1 million (approximately EUR 500,000) for a loan principal or BGN 50,000 (approximately EUR 25,000) for interest and other income or expenses related with the loan. These thresholds are calculated separately, with an exception made where two or more transactions with one or more related parties are concluded under comparable conditions.

This approach, which keeps the focus on large multinational transactions, is considered justified since the preparation of TP documentation involves additional cost and time for businesses.     

Taxpayers that are part of a multinational group of companies and have an obligation to prepare a local file shall also have a master file prepared by the ultimate parent company or another entity in the group. The deadline for preparing the local file is March 31 of the following year and the deadline for the master file is 12 months thereafter. Furthermore, sanctions for non-compliance with the TP documentation rules may be quite significant.     

While the new rules concerning mandatory TP documentation have a limited scope of application, the obligation of the taxpayers to prove the market-based conditions of their transactions with related parties remains. This also refers to the right of the tax authorities to reclassify the income or adjust the tax base or the due tax, if tax evasion is found to exist. Taking this into account, the new rules increase the level of predictability by giving the taxpayers information about how they can protect the pricing of their transactions and what the tax authorities expect.    

It should also be mentioned that at this point advance pricing agreements are not regulated under Bulgarian law, although Bulgaria can receive issued APAs as part of the automatic exchange of information.     

During recent years transfer pricing has become a priority for the Bulgarian tax authorities and the adoption of the TP documentation rules supports this focus. Accordingly, increased tax control over multinational related-party transactions upon tax audits could be expected moving forward. 

By Daniela Petkova, Head of Corporate and Tax, Gugushev & Partners

This Article was originally published in Issue 7.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Boyanov & Co has helped Ideal Standard Vidima obtain a loan of EUR 65 million, with EUR 45 million coming the DSK Bank and another EUR 20 million from the United Bulgarian Bank. 

According to Boyanov & Co, “the loan was secured mainly by a pledge of Ideal Standard Vidima’s going concern.” 

Ideal Standard Vidima is a part of the Ideal Standard International group, a manufacturer of residential, commercial, and healthcare bathroom solutions. The company employs more than 3,000 people and manages two factories and a distribution center in Bulgaria, among other operations. 

Boyanov & Co’s team consisted of Partner Damian Simeonov, Senior Associate Georgi Drenski, and Associates Svetlana Tzvetkova, Adriana Bakalova, and Deyvid Iliev.

Boyanov & Co did not reply to an inquiry about the deal.

Gugushev & Partners has helped Fr. Lurssen Werft GmbH & Co KG, part of Northern Germany’s Lurssen shipyard group, win a public tender for the supply of two multipurpose modular patrol vessels to the Bulgarian Navy.

According to Gugushev & Partners, the tender was “organized by the Bulgarian Ministry of Defense and, amounting to nearly BGN 1 billion (EUR 500 million), is the second-largest public tender ever conducted in Bulgaria in the area of defense and security. The procedure was finalized on November 12, 2020.”

Gugushev & Partners’ team was led by Managing Partner Stefan Gugushev and Senior Partner Dimitrinka Metodieva.

Boyanov & Co has formed new practice groups in Technology, Corporate Governance and Compliance, and Construction Law. 

The firm describes its new Tech Group, which will be led by Partner Nikolay Zisov, as a “multi-disciplinary practice covering a broad spectrum of legal challenges the innovation and digital transformation imperative is posing on our clients. The team [consists of] professionals with knowledge in different legal fields which allows us to offer strategic and commercially oriented advice on a large range of tech-related legal matters the industry is facing.”

According to Boyanov & Co., the Corporate Governance and Compliance Group, which will be led by Partner Nikolay Kolev, “combines vast experience with extensive regulatory and industry knowledge in providing comprehensive services on corporate governance matters.” According to the firm, “our multidisciplinary and business-focused approach has been relied on by many leading global and local companies.”

Boyanov & Co. reports that the Construction Law Group, which will be led by Senior Associate Georgitsa Petkova, “is dedicated to delivering high-level expertise on all legal aspects of construction.” According to the firm, “in [this] particularly complex industry, we provide our clients with practical and focused advice throughout all project stages – from tender and procurement, risk assessment, and contract drafting through on-project assistance and advice, including contract administration and claim management, up to dispute resolution and settlement.”

Go2Law and Djingov, Gouginski, Kyutchukov & Velichkov have advised Integral Venture Partners on an unspecified “strategic investment” in Bulgarian telecommunications company Bulsatcom. Vedder Price advised selling shareholders Blantyre Capital and the EBRD.

Financial terms of the investment were not disclosed.

Bulsatcom, founded in 2003, was the first pay-TV network on the Bulgarian telecommunications market. The company currently serves approximately one million residential and business subscribers through its direct-to-home satellite television, IPTV, and broadband internet services, and operates its own national fiber back-bone and retail distribution network.

Integral manages institutional private equity and growth capital and is focused on investments in CEE. Integral covers its target market out of hubs in London, Budapest, and Belgrade.

According to an Integral press release, the company “is investing across the capital structure of the company and joining an already existing group of international institutional stakeholders in Bulsatcom including: Blantyre Capital and the European Bank for Reconstruction and Development; and local stakeholders including: the Bulgarian Development Bank and the founder of the business.”

The Go2Law team was led by owner Hugh Owen.

The DGKV team was led by Partner Zdravka Ugrinova and included Counsel Valentin Bojilov

The Vedder Price team was led by Partner Trevor Wood and included Counsel Jon Edgelow and Solicitors Gerry Kelly and Harrison Hutchinson.