The Act on the Economic and Financial Relations with Companies Registered in Preferential Tax Regime Jurisdictions, the Persons Related to Them and Their Beneficial Owners1 (the “Offshore Companies Act”) was promulgated in issue 1 of the State Gazette, dated January 3, 2014.

The new law was passed as part of the attempt of the legislator to counteract illegal schemes involving the use of companies registered in offshore zones (legal definition for “preferential tax regime jurisdictions” is available in the Supplementary Provisions of the law, referring to § 1 (64) of the SP of the Corporate Income Tax Act). Such companies are often used for aggressive tax planning and tax evasion, as well as for concealing the source of funds which have often been acquired through criminal activity2.

The main objective of the law is to prevent the receipt and management of public funds and resources by offshore companies in contravention of the public interest, as well as to prevent tax evasion schemes.

For achieving such purposes the Offshore Companies Act provides for measures in two main directions:

A. Imposing a prohibition on companies registered in preferential tax regime jurisdictions to carry out activities in the most significant sectors of the economy or to acquire companies operating in such similar sectors which are particularly sensitive in terms of protecting the public interest.

In particular, companies registered in preferential tax regime jurisdictions and persons related to them are prohibited directly or indirectly to:

participate in procedures for obtaining a license to conduct business as a credit institution, a payment institution or as a retirement insurance company, to carry out activity under the Insurance Code, the Markets in Financial Instruments Act and the Law on the Activities of Collective Investment Schemes and Other Collective Investment Undertakings, etc.;

participate in public procurement procedures, concession granting procedures, public-private partnerships;

acquire state or municipal property, participate in companies with state or municipal shareholding, acquire ownership over agricultural and forest land, participate in privatization transactions; etc.

There are certain exceptions from the imposed prohibitions, for the purposes of which an additional requirement has been introduced – for entering special circumstances into the Commercial Register in the file of the company registered in a preferential tax regime jurisdiction or in the file of the Bulgarian company.

The identification data of the beneficial owners (natural persons) is among the circumstances subject to entry – by means of a notarized declaration in a standard form approved by the Ministry of Justice. In some of the cases a document evidencing the existence of the company registered in a preferential tax regime jurisdiction also needs to be presented; such document needs to show also the representatives of the company as per its national law. For registration of the circumstances companies should use standard form applications – A14, B7 (Б7 in Bulgarian3).

B. The Transitional and Final Provisions of the Offshore Companies Act have also introduced certain amendments to a number of tax laws aimed at improving the tax law framework and thus achieving more effective counteraction to the international aggressive tax planning and tax evasion.

The legislation in force prior to the amendments has not been very effective in covering offshore companies because of the limited mechanisms for identifying the beneficial capital owners of such companies. The latter, in turn, makes it almost impossible to establish connections between the persons owing the capital of local companies and the offshore companies themselves.

The law enters into force as of January 1, 2014. Persons falling under the imposed prohibitions need to ensure compliance with the new legal requirements within 6 months from such date.

Footnotes:

1 See the text of the newly adopted law on the website of the State Gazette

2 For more related information, please read News article The possibility of issuing bearer stocks will no longer be available.

3 The same standard form application is used for requesting entry of circumstances under other laws as well – for more information, please read News article New law puts companies under the obligation to declare their beneficial owners.