Category: Bulgaria

Kinstellar has advised Silversmith Capital Partners, a Boston-based growth equity firm, on Appfire’s acquisition of Botron Software, a Bulgaria-based provider of tools that enable enterprise-level change and configuration management within the Jira software platform.

According to Kinstellar, “the deal is part of a recent USD 49 million strategic investment by Silversmith into Appfire, a global authority in the Atlassian software ecosystem. Botron Software’s set of powerful apps will help Appfire fulfil their vision of enabling enterprises to drive digital transformation. Botron’s entire 32-person team will continue to work out of the company’s headquarters in Sofia and will focus on bringing new features and apps to market faster.”

Kinstellar’s team in Sofia was led by Managing Associate Nina Tsifudina and included Senior Associate Zornitsa Georgieva, Of Counsel Anton Petrov, and Associate Gabriela Ivanova.

Kinstellar did not reply to our inquiry on the matter.

The team of Georgiev, Todorov & Co. Law Offices is constantly monitoring the measures to deal with the economic consequences of the coronavirus pandemic in the country. Our legal adviser Vili Datsov prepared detailed information in connection with the latest amendments to the Value Added Tax Act.

On June 19, 2020, the amendments to the Value Added Tax Act (VAT Act) were published in the State Gazette, which reduced the tax rate to 9% for part of the restaurant and catering services, as well as for certain supplies related to book publishing and baby food. The new rules are in force from July 1, 2020 and aim to support some of the areas which are most affected by the COVID-19 pandemic. On June 29, 2020, the National Revenue Agency (“NRA”) issued an “Opinion on the application of the reduced value added tax rate of nine percent, according to the provision of Art. 66, para. 2 ” (the ‘Opinion’), which is in line with the practice of the public authority to issue explanations and practical interpretations of tax issues of essential public importance.

The rate of 9 percent is not a novelty in the legislation, Art. 66, para. 2 of the VAT Act provided that 9% was taxed only on “accommodation provided in hotels and similar establishments, including the provision of holiday accommodation and rental of places for camping sites or caravans”. The amendments in the same subparagraph create new cases for which the rate is now 9% instead of 20%.

• Restaurant and catering services

Art. 66, para. 2, item 3 of the VAT Act already stipulates that the rate is 9% for restaurant and catering services, consisting of food delivery.

The restaurant services are defined in item 62 of § 1 of the Additional Provisions of the VAT Act. They consist of the provision of food and / or beverages for consumption on the premises of the supplier, followed by sufficient support services to enable the immediate consumption. The definition of “Catering services” is in item 61 of § 1 of the Additional Provisions of the VAT Act. According to it, those services are ‘a set of characteristics and actions in which services predominate and in which the supply of food and / or beverages is only one component. The predominant services are mainly the same as restaurant services, but the delivery takes place outside the supplier’s premises. ‘These descriptions correspond to the case law of the Court of Justice of the European Union (“CJEU”).

1. Catering, restaurant service or ordinary delivery of goods / food?

Many situations that we perceive in life as a restaurant / catering service do not actually fall into the definitions and will continue to be taxed at 20%

According to the Opinion of NRA, if, after reviewing the VAT Act, we remain uncertain whether a particular supply is a restaurant, catering or ordinary food supply, we should look for the answer in EU law and especially in the practice of the CJEU, which states the criteria on the basis of which the supply of a service is distinguished from the supply of a good.

In order for food to be taxed at a rate of 9%, it must be accompanied by ancillary services, and these services must be the main thing that the customer seeks for.

Thus, according to Art. 6 of Council Implementing Regulation (EU) № 282/2011 for restaurant and catering services the supply of food and/or beverages for consumption is accompanied by sufficient ancillary services to be able to be consumed directly. The delivery of the food / drink itself is only one component of the whole service in which ancillary services play a greater role. The difference between the two types of services is that in the case of restaurant services the delivery is made in the restaurant of the supplier, and in the case of catering it is done outside the premises.

In Case C-231/94, the CJEU held that restaurant transactions were a fixed set in which the supply of food was only a part and in which services mainly dominated. It is different when the transaction is related to take-away and is not accompanied by services designed to support its consumption on the spot and in an appropriate setting.

The CJEU provides a number of guidelines in its judgment of Joined Cases C-497/09, C-499/09, C-501/09 and C-502/09. According to the latter, in restaurant services, the provision of ready-to-eat meals and drinks is conditioned by a number of services, such as providing premises, furniture and utensils, advising customers, explaining food and drink, communication between the waiter and the chef, preparing the dishes, serving them on a plate, providing utensils and their arrangement and after consumption the tables are cleaned.

When delivering food or meals for immediate consumption (in this case, the CJEU has specifically discussed providing them from stands, caravans or cinema lobbies), we must analyze the whole transaction and assess whether it is dominated by ancillary services. NRA’s website explicitly states that “The sale of food from a pavilion, shop or vending machine, as well as home deliveries, remain under the current 20% tax regime“. Subsequently, the opinion of the NRA confirmed this statement, arguing that in these cases the provision of food is not actually accompanied by other services.

2. How the assessment is made?

The NRA refers to the practice of the CJEU and points out that when assessing whether ancillary services dominate, we must take into account the point of view of the average consumer and make a comprehensive assessment of both quantitative and qualitative significance of the elements of comparison services with the elements related to the delivery of goods.

When services supporting the delivery and immediate consumption of food are absent or insignificant to the consumer’s purpose, we have only a simple delivery of goods.

3. Which is not a catering or restaurant service?

The legislator explicitly states in item 62 of § 1 of the Additional Provisions of the VAT Act hypotheses that do not constitute catering or restaurant services, namely:

– ordinary food delivery (e.g. home delivery from restaurants, supermarkets and the like)
– delivery of cooked food and the food delivery at home from restaurants;
– delivery consisting of the preparation and delivery of food and / or beverages without other ancillary service

The provision is in line with Implementing Regulation (EU) 282/2011, according to which the supply of food / beverages, whether or not transport is included but without any other ancillary services, is not considered to be a restaurant or catering service.

4. Practical cases

We should keep in mind that if we only order food to be delivered to us at a certain place (home or office), the rate will be 20%.

It will be the same when we visit a restaurant and wish to have the food prepared for us and packaged on the spot so that we can consume it outside or at home.

If we visit a shopping center and buy food to be consumed in the separate dining areas, the rate will be 9%, but if we tell the seller to pack it for us for takeaway, the rate will be 20%. The opinion of the NRA explicitly states the so-called Food Courts.

When we visit a cafe with a cozy atmosphere, sit down at a table and order coffee, which the waiter serves with a smile to us in a beautiful cup and then takes it from the table, the rate will be 9%. However, if we visit the same cafe and because we are in a hurry, we ask them to serve the coffee in a cardboard cup for takeaway, then the rate will be 20%

In its opinion, the NRA takes a principled attitude towards certain cases. For example, restaurant services are also available at self-service restaurants. Such services also exist when, after using ancillary services, we want the unconsumed part of our food to be packaged in order to take it out of the restaurant or from the place of consumption during catering.

At the same time, the NRA points out the sale of vending machines, mini bars, shops, including a warm shop window, for ordinary food delivery; on food from restaurant counters for consumption outside the premises of the restaurant (‘drive in’, ‘walk through’), or food served at a train or bus.

• Alcoholic beverages

Art. 66 of the VAT Act explicitly stipulates that the rate remains at 20% for restaurant and catering services for the supply of beer, wine and spirits, including in the case of ancillary delivery.

For the definition of “beer”, “wine” and “spirits” new items 98, 99 and 100 have been created in § 1 of the Additional Provisions of the VAT Act, which refer to the concepts in the VAT Act and the Wine and Spirits Act.

• Books and magazines

The VAT Act in Art. 66, para. 2, item 2 provides for a rate of 9% for the delivery of books on physical media and / or electronically (including textbooks, cognitive books and study sets, children’s books with illustrations, for drawing or coloring , printed or handwritten music editions).

The opinion of the NAR explicitly reminds that there is no legal definition for the word “book” and its interpretation must be based on its generally accepted meaning (argument Normative Acts Act and Decree No. 883). According to the NRA, in order to be able to distinguish a book from a magazine, we must proceed with the definitions in the Interpretive Dictionary and in the Dictionary of the Bulgarian Language, published on the official website of the Institute of Bulgarian Language of BAS.

The delivery of a book on physical media includes not only the traditional sale of a book that is printed on paper. Here it is important that the contents of the book are delivered on physical media, as it can be not only paper but also a cassette, disk, CD, DVD, CD-ROM, USB memory, etc.

The opinion accepts that there is no need for text in the book, arguing that the norm clearly states that the rate is 9% for children’s books with illustrations. The reduced rate also applies to audiobooks if their content is wholly or mainly audio and not musical.

It should be emphasized that the rate remains at 20% for publications that are wholly or mainly intended for advertising and posts that are wholly or mainly composed of video or audio-music content.

• Baby items and food

With the changes in the VAT Act an Appendix No. 4 to Art. 66, para. 2, items 4 and 5 were adopted. The delivery of the foods specified in it, suitable for babies or small children, as well as baby diapers and similar baby hygiene items, shall be taxed at 9 per cent.

• Conclusion

In a number of public discussions, the representatives of the restaurant owners pointed out that the reduced rate will not improve the overall condition of the industry. The reason given is the fact that the sale of alcoholic beverages continues to be taxed at 20%, and most of the revenues of the establishments derive from them. Opinions were also shared that no reduction in prices is expected in the restaurant business.

We have yet to see exactly how the changes in VAT Act will affect business and society.

*This text does not constitute a legal advice and should not be taken into account in resolving legal disputes, but only to inform readers.

By Vili Datsov, Legal Advisor, Georgiev, Todorov & Co.

CMS has acted for private property investor Strategy Solution Ltd. on its EUR 1.4 million acquisition of a landmark office building in Sofia, Bulgaria, from six private individuals. Terziyski & Partners advised the sellers.

The building, which is located at 14 Serdika Street in Sofia, was erected in 1900.

The CMS team was led by Sofia Office Managing Partner Kostadin Sirleshtov and included Associates Borislava Pokrass and Zornitsa Stoykova.

Schoenherr Partners Ilko Stoyanov in Bulgaria and Slaven Moravcevic in Serbia Talk About The Deal of the Year in Bulgaria

CEELM: First, congratulations on winning the Deal of the Year Award in Bulgaria!

Ilko: Thank you! Although 2019 was a bit slow at the start it ended with a few major deals for us, including one involving Vivacom. Ending the year on a strong note gives you a gentle push for the upcoming year – you want to keep going with the same pace and enthusiasm, so we are really happy with our overall performance! 

CEELM: Can you describe the deal for us, and Schoenherr’s role in making it happen?

Slaven: Vivacom has been probably the single most recognizable asset in the M&A market in Bulgaria. Since its privatization 2004, the company has gone through a number of follow-on sales which attracted media coverage and interest from professionals and the general public who are, in fact, Vivacom’s subscribers. As a result of this deal, a large strategic investor with experience in CEE steps in, and we are happy to have been able to advise on all Bulgarian legal aspects. These included the legal due diligence review and advising on the Bulgarian angles of the deal structuring, the negotiations, and the offering memorandum related to the financing.

CEELM: Why did the United Group choose Schoenherr to assist it in this matter?

Slaven: Schoenherr has advised the United Group on almost all major deals across CEE in the last five years. The people from United Group know us and our work and it was natural for them to come back to us. But we do not take this for granted. There were a number of buy-side law firms on this deal advising on very specific aspects – transaction, financing, regulatory, deal insurance or local law. It was fiercely competitive and there were no generalists. Staying focused on your strengths in your particular field is what, we believe, matters in deals such as this.

CEELM: What was the significance of the deal, in your opinion?

Ilko: The deal had a very large value for Bulgaria – USD 1.3 billion, as reported. More importantly, however, the deal was complex and the complexity was driven by the ongoing legal disputes initiated in various courts/jurisdictions by a former shareholder. So, there was an element of hostility to this deal. The transaction structuring had to deal with this and the disentanglement of the legal disputes, which was challenging.

CEELM: This makes the second year in a row Schoenherr Sofia has won the Deal of the Year for Bulgaria, following the firm’s success last year for its work on OTP’s acquisition of Societe Generale Expressbank. How is the office continuing to obtain such high-profile mandates?

Ilko: Both mandates resulted from deals which went far beyond Bulgaria and included many other countries across CEE. The strategic decision of Schoenherr to position itself as a firm with a very strong CEE footprint has made these mandates possible. Our goal is to deliver stellar legal advice to all our clients. So on the cases where this also results in winning an award – even better! We were lucky to have won the awards in two consecutive years and we will do our best to make it three in a row next year.

 This Article was originally published in Issue 7.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Anton Petrov, who led the Competition & Regulatory and TMT practices at Djingov, Gouginski, Kyutchukov & Velichkov, has joined the Sofia office of Kinstellar as Of Counsel and Head of TMT.

Petrov spent 13 and a half years at DGKV. He got his law degree from the Sofia University St. Kliment Ohridski, an LL.M. from Central European University in Budapest, and a Doctor of Law degree from the Institute for Legal Studies at the Bulgarian Academy of Sciences, as well as an MBA from the University of Sheffield.

According to Kinstellar, “Petrov brings a breadth of expertise with more than 15 years of experience in the areas of competition, IP enforcement, and consumer protection. His client work includes advising local and international clients in the telecom and media sectors on a wide range of matters, including M&A due diligence, expansion of infrastructure and distribution networks, and end-user agreements. He has also worked closely with the European Commission, acting as a national expert on research projects relating to B2B payment behaviour, consumer issues in the sharing economy, cross-border litigation in Europe, and antitrust issues in the retail supply chain. As a professional representative before the European Union Intellectual Property Office and the Bulgarian Patent Office, Petrov will significantly enhance Kinstellar’s IP legal services.”

Georgiev, Todorov & Co has successfully represented the Port of Burgas on appeal of a decision of the Energy and Water Regulatory Commission in an administrative dispute regarding a connection to Bulgaria’s national electricity transmission grid.

According to Georgiev, Todorov & Co, “an essential issue for resolving the dispute was the subject of the proceedings before the Court of Justice of the European Union on a reference for a preliminary ruling in relation to another business. With a clear and definite position, fully adopted by the national administrative court, the CJEU ruled that the voltage level is not the only determining criterion to consider whether a customer is treated as connected to the electricity transmission or distribution grid.”

“The Administrative Court of Sofia-city dismissed at first instance the appeal of the electricity distribution operator and recognize the right of the state enterprise of direct connection to the electricity transmission grid,” the firm reported.

Georgiev, Todorov & Co’s team included Partner Miglena Peneva and Attorney Maria Dereileva.

Georgiev, Todorov & Co has advised COMSED JSC, the largest retail chain for toys and children’s accessories in Bulgaria, on a change in the ownership structure of the company, following the approval of Bulgaria’s Commission for Protection of Competition.

Georgiev, Todorov & Co’s team included Partner Mariya Derelieva and Junior Associate Ida Golemanova.

With amendments to the Energy Act, the Bulgarian legislator established a mechanism for reducing the prices of natural gas already delivered for a period in the past for the regulated market for end household and business consumers. The reduction in prices for end consumers is due to an agreement reached between the state public supplier Bulgargaz and the Russian supplier Gazprom Export.

However, the legal amendments unjustifiably affect and interfere with the relations on the free market for natural gas. In the free segment of the market there are electricity traders, who negotiate the prices of natural gas and who have not bought natural gas from Bulgargaz in order to be influenced by the agreement reached with the Russian supplier.

In other words, the agreed reduction should be extended downstream only to Bulgargaz’s counterparties, but not to interfere with the contractual relations of third parties that have already been completed.

The adoption of the disputed provisions in the Bulgarian Energy Act and the position of the European Commission

Pursuant to the Decision of the European Commission of May 24, 2018 in case AT.39816 – Gas supplies upstream in Central and Eastern Europe – the Russian gas supplier Gazprom Export and the Bulgarian state trade company and public supplier of natural gas Bulgargaz EAD agreed to reduce the prices under a contract for the supply of natural gas, as of August 5, 2019. The mutual agreement reached must be admired given its positive effect on the Bulgarian gas market. In order to spread the effect of the agreed reduction of the prices for the contractors downstream the chain of Bulgargaz EAD, a bill for amendments to the Energy Act was submitted. This established goal is also proclaimed in the reasoning of the bill: “to regulate a mechanism for reimbursement of amounts under contracts concluded between the public supplier Bulgargaz EAD and its customers in relation to the reached renegotiation of the natural gas prices between Gazprom Export LLC and Bulgargaz EAD, in order to have a positive effect on natural gas consumers.”

However, the price reduction should only affect the regulated segment of the natural gas market, as it concerns the prices at which the public supplier Bulgargaz EAD purchased natural gas on and then sold it further down the chain.It is in the regulated segment of the market that quantities of gas purchased by the Russian supplier along the chain of legal relations have been delivered – the public supplier sells to suppliers or directly connected consumers, and from there to the suppliers of the end consumers.

Despite the entirely positive expectations, through the already almost established constant practice of the legislator, between the first and the second reading of the bill, the controversial provision of para.17 of paragraph 2, according to which the Energy and Water Regulatory Commission (EWRC) by a decision instructs the transmission system operator to change the prices of natural gas for balancing them retroactively.

The European Commission, which is monitoring the implementation of the commitments in case AT.39816, welcomed the Bulgarian state for the agreement reached in relation to the natural gas supply contract with Gazprom Export, but at the same time expressed serious concerns that the retroactive nature of the amendments to the Energy Act violates the rules for protection of competition on the gas market and raises the issue of unregulated state aid in favour of the state gas transmission operator Bulgartransgaz EAD.

Does the transitional provision in the EA contradict EU law?

As we have indicated, the agreement reached on price reduction has nothing to do with the free segment of the gas market, such as: the purchase / sale price of balancing energy from Bulgartransgaz EAD and the free market contracts in which the regulated price is used as an index for determination of the freely agreed price.Companies that supply gas to the free market are adversely affected by the new law, which undermines the principle of legal certainty.

Due to the retroactive nature of the changes, these companies are placed at a disadvantage when compared to Bulgargaz’s customers and this has a negative impact on the number of companies operating on the market and the future development of competition in the sector.This also raises the issue of unregulated state aid in favour of the state-owned company Bulgartransgaz EAD.Under the national law of a Member State, revenues from gas traders will be taken away retroactively and thus a state-owned company will be benefited at the expense of traders.All legal facts under the contractual relations between the parties have been completed, the legal consequences have been executed, and the contracts have been finalised with their implementation – delivery by the traders and payment by the gas operator.

Is the transitional provision of the Energy Act unconstitutional?

The Preamble and art. 4, para. 1 of the Bulgarian Constitution enshrine the principle of the rule of law. Derived from it are the principle of legal certainty, predictability and stability, the principle of prohibition of the actual retroactive effect of legal norms and the principle of protection of legally acquired rights. In its case-law, the Constitutional Court has consistently held that the rule of law is a state of legal certainty, where the content of the legal order is clearly, predictably and unambiguously defined (Decision No. 1 of 2005 on Code of Criminal Procedure No. 8 of 2004, Decision No. 7 of 2005 on cd № 1 of 2005).

The Bulgarian legislator has already once allowed itself to violate the Constitution in the field of energy by introducing a fee for producers of energy from renewable energy sources, when this legal amendment was declared unconstitutional and as a result the state became a defendant in many cases under the Liability for Damages incurred by the State and the Municipalities Act. Then the Constitutional Court ruled with its decision No. 13 of 31.07.2014 on c. case No. 1/2014, according to which: “The Constitution prescribes to the state to build a system of legal regulation of economic activity, which should guarantee all citizens and legal entities with equal legal conditions, both when starting a business and in terms of its organization and implementation.”

The revocation of acquired property rights (paid prices for delivered natural gas for balancing) by natural gas traders retroactively for the period August 5, 2019 – March 31, 2020 through the administrative acts of the EWRC, based on the provision of § 2, para. 17 of the Transitional and supplementary provisions to the Act to Supplement of the Energy Act (Promulgated SG, issue 38 of 2020), raises serious doubts about the unconstitutionality of the new law.If the same is declared unconstitutional, then according to the recent Decision № 4 of 14.05.2020 under c.d. No. 9/2019 of the Constitutional Court, it will not be applied to the pending cases before the court, which electricity traders could initiate.

What measures should gas traders take to protect their violated rights and legitimate interests?

Pursuant to the above-mentioned provision of the Energy Act, the Energy and Water Regulatory Commission (EWRC) has issued a number of successive decisions (Decisions No. C-15 to C-22 of May 2020), which in its operative part indicate to Bulgartransgaz EAD in its capacity of the gas transmission grid operator, to amend the natural gas prices for balancing, determined during the period August 5, 2019 – March 31, 2020 in accordance with the Methodology for Determining the Daily Imbalance Fee and the Fee for Balancing Neutrality taking into account the reduced price at which the public supplier sells natural gas.

The decisions are administrative acts published on the Commission’s official website, but they are not explicitly communicated to natural gas traders affected by the decisions.Natural gas traders are interested parties, who have not participated in the administrative proceedings before the energy regulator.Therefore, in the absence of a proper notification according to the Administrative Procedure Code (APC), the term for appealing the decisions of the EWRC before the administrative court should not run.If it is assumed that the decisions constitute null and void administrative acts, their contestation as such is not limited in time – according to the APC, interested parties may indefinitely apply to the court for annulment of an administrative act.And the natural gas traders are undoubtedly interested persons – they have already started receiving invitations from Bulgartransgaz EAD for a refund of the prices paid under the balancing contracts on the basis of the reduced balancing price.This affects their property sphere and retroactively deprives them of revenues received in favour of the state gas transmission operator Bulgartransgaz EAD.

Gas traders can also file a complaint for the European Commission, which should contain a precise description of the manner in which the Bulgarian national authorities have infringed European Union law and details of the actions taken so far in relation to the infringement.

By Maria Derelieva and Dobrina Pavlova, Attorneys at Law, Georgiev, Todorov & Co.

Kinstellar has advised regional property developer Globe Trade Center on negotiations with Germany’s Commerzbank to lease 3,500 square meters of space at Sofia’ Advance Business Center II office building, which is expected to open its doors in the fourth quarter of 2020. Boyanov & Co advised Commerzbank on the deal.

Kinstellar reports that “Advance Business Center II is currently 75% occupied and at completion will offer ten floors of modern office space with a total leasable area of 17,000 square meters and three underground levels with 279 parking spaces.”

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

Boyanov & Co’s team was led by Partner Nickolay Nickolov.

Kinstellar has served as legal counsel to the SOF Connect consortium on litigation procedures related to its successful participation in the tender that resulted in its receiving the 35-year concession to operate the Sofia airport.

The SOF Connect consortium is led by French infrastructure fund Meridiam and includes Strabag AG and Flughafen Munchen GmbH. In July, 2019 its bid for the 35-year concession was identified as the winner (as reported by CEE Legal Matters on July 18, 2019).

On June 5, 2020, the Bulgarian Supreme Administrative Court upheld the decision of the Bulgarian Commission for the Protection of Competition that the Sofia Airport concession was lawfully granted to SOF Connect and that all appeals of other bidders against the award were unfounded, thereby giving the Bulgarian government the green light to proceed with the signing of the concession contract.

Kinstellar’s litigation team was led by Sofia Managing Partner Diana Dimova and Counsel Mladen Minev and included Partner Antonia Mavrova, Of Counsel Dessislava Fessenko, and Associates Simeon Vachev and Denitsa Kuzeva.