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The draft law contains amendments to the Investment Promotion Act and the Foreigners in the Republic of Bulgaria Act, aimed at addressing the following problems:
Bulgarian legislation is not competitive with the legislation and measures in other European countries when it comes to attracting so-called startup companies from third countries. These are companies at an early stage of development, most often high-tech businesses developing a product or service that constitutes an innovation with high added value and has the potential for rapid growth. Startup companies usually consist of very small teams, most often fewer than 10 people.
A number of European countries have developed special measures and policies to attract startup companies from third countries. These measures create opportunities and conditions for starting and/or developing startup companies (projects) by third-country nationals on the territory of the respective state and facilitate the procedure for obtaining residence permits. The purpose of such measures is for those countries to become hubs for launching innovative businesses, centers for creating new technologies, and places for attracting experienced specialists in various fields, as well as gathering entrepreneurs and investors from different countries in one place. A good example is the French government’s “La French Tech” program.
The program is aimed at entrepreneurs wishing to establish their startup company in France. The procedure for obtaining a residence permit under this program consists of only three stages:
First stage – applying with a business project or idea to organizations representing the startup community in France.
Second stage – receiving notification that the entrepreneur has been approved.
Third stage – completing the administrative procedures for obtaining a residence permit in accordance with French immigration law.
The main criterion for granting residence in France in this case is the existence of a project to establish a high-tech and/or innovative company in France, where the project has been assessed by representatives of the French startup community as having development potential and bringing added value to the local economy. There are no additional requirements to invest a certain amount of money and/or hire a certain number of employees, nor are there requirements concerning diplomas, certificates, or completed education. The same or a similar principle of assessment and application is also applied in other countries with similar programs, such as Estonia’s “Startup Estonia” and the UK’s “Start-up visa.”
The main obstacles preventing Bulgaria from attracting startup companies and entrepreneurs from third countries are the current legal requirements under the Investment Promotion Act and the Foreigners in the Republic of Bulgaria Act, namely the requirements for minimum monetary investments in tangible and/or intangible assets, as well as the requirement to create a certain number of jobs, which cannot be fewer than 10. These measures make Bulgaria unattractive and uncompetitive as a country in which entrepreneurs from third countries can start and develop a startup company.
In order for a third-country national to reside in Bulgaria, that person must meet the criteria and grounds for residence set out in the Foreigners in the Republic of Bulgaria Act. The grounds currently existing in that law cannot effectively apply to attracting entrepreneurs from third countries who wish to stay in Bulgaria in order to start and develop a startup company, for the following reasons.
For example, Article 24, para. 1, item 2 of the Act provides that in order to obtain residence in Bulgaria, a third-country national who wishes to carry out commercial activity in the country must, as a result of that activity, create at least 10 full-time jobs for Bulgarian citizens, maintained for the duration of the stay, unless otherwise provided in an international treaty ratified, promulgated, and in force for Bulgaria. This requirement applies separately to each partner and separately to each manager. Thus, in the example of a startup company with a team of three people, all third-country nationals, in order for them to reside in Bulgaria on the basis of Article 24, para. 1, item 2, at least 30 jobs would have to be created. As stated above, requiring entrepreneurs from third countries to hire a specific number of employees is uncompetitive compared to the criteria of other European countries with similar programs, where such a requirement does not exist. The requirement is also excessively burdensome for startup companies, given that their teams are usually fewer than 10 people. In addition, Article 24, para. 1, item 2 applies to any commercial activity not prohibited by law and is thus aimed at a broader category of persons, whereas startup companies are high-tech and develop innovative products or services with high added value, meaning the target group is narrower.
Another basis for residence and self-employed economic activity is found in Article 24, para. 1, item 15, which applies to third-country nationals wishing to perform a freelance activity after authorization from the Ministry of Labor and Social Policy, in accordance with Article 24a and the Labor Migration and Labor Mobility Act. According to §1, item 9 of the supplementary provisions of the Act, “freelance activity” means any economic activity, except that under Article 24, para. 1, item 2 and Article 25, para. 1, item 13, carried out personally without commitment to an employer. This definition shows that the provision concerns persons working as self-employed individuals rather than through a company, which makes it inapplicable to entrepreneurs wishing to establish a startup company in Bulgaria. Moreover, startup companies developing a high-tech and/or innovative product are usually composed of teams of at least two people.
Further, Article 24, para. 1, item 19 provides grounds for residence where third-country nationals have invested a specified amount of money in Bulgaria: no less than BGN 600,000 for acquiring ownership of real estate in Bulgaria, or where the foreigner owns more than 50% of the capital of a Bulgarian commercial company, has invested the same amount in the company’s capital, and as a result the company has acquired ownership of real estate in the country of that value. By the date of filing the residence application, the sum must be fully paid into an account in a licensed Bulgarian credit institution, and if the property was acquired with borrowed funds, the unpaid portion of the loan must not exceed 25%.
Similar in content is Article 24, para. 1, item 20, which applies where third-country nationals have made an investment in economically disadvantaged regions under the Investment Promotion Act by contributing at least BGN 250,000 to the capital of a Bulgarian commercial company, while being a partner or shareholder with registered shares and holding at least 50% of the company’s capital, and as a result of the investment the company has acquired new fixed tangible and intangible assets worth at least BGN 250,000 and created at least 5 jobs for Bulgarian citizens, maintained for the duration of the stay, as certified by the Ministry of Economy.
These two grounds under Article 24, para. 1, items 19 and 20, with their minimum investment amounts and required number of jobs, are uncompetitive compared to the startup attraction programs of other European countries, where such requirements do not exist.
Further, Article 25v, para. 1 allows a third-country national to obtain permanent residence when carrying out activities related to implementing and/or maintaining an investment that has received a Class A, Class B, or Priority Investment Project certificate under Article 20, para. 1, item 1 of the Investment Promotion Act. The Act sets the minimum thresholds for applying for such investment class certificates, the economic sectors that are supported, and the required documents. The minimum investment thresholds are: in the industrial sector – manufacturing: BGN 10 million for Class A and BGN 5 million for Class B. The minimum amount of investment in a single site for service-sector activities such as cargo storage and support activities for transport, administrative and support office activities, call center services, and other business support services is BGN 3 million for Class A and BGN 1.5 million for Class B, etc. Article 12, para. 2 of the Act also sets criteria the investment must meet, including the obligation to create a certain number of jobs, which helps determine the investment class. The detailed criteria are regulated in the Implementing Regulations to the Investment Promotion Act. These features of the current legal framework show that it is primarily intended for attracting investors who either invest significant financial resources in tangible and/or intangible assets and/or create a significant number of jobs, which cannot be fewer than 10. This framework is uncompetitive compared to the measures applied in other European countries to attract entrepreneurs from third countries wishing to establish startup companies there. These criteria are excessively burdensome and inconsistent with the nature of startup companies: small teams of under 10 people operating with limited resources.
The above-mentioned problems in the application of the current rules under the Investment Promotion Act and the Foreigners Act make it necessary to introduce into the Foreigners Act a new ground for residence for entrepreneurs, citizens of third countries, who wish to start and/or develop a startup company in Bulgaria. The conditions for applying under this new ground should be competitive with the measures and programs in other European countries. At the same time, the need to establish rules and mechanisms for assessing, monitoring, and controlling compliance by the entrepreneur with their commitments to start and develop a startup company, and the fact that attracting entrepreneurs from third countries constitutes a form of attracting investment into the country, means that the criteria for evaluation and the control and monitoring measures should be regulated in the Investment Promotion Act.
The proposed measures are aimed at entrepreneurs, citizens of third countries, who want to start and/or develop a startup company in Bulgaria, meaning a high-tech and/or innovative project. Their adoption and implementation will also indirectly affect startup companies in Bulgaria and individual, private, or public investment funds.
The following chart shows a comparison of entrepreneurship conditions in the European Union within the framework of Industry 4.0.
As can be seen, countries are divided into 4 groups:
Bulgaria is in the fourth and last group, in the second-to-last place.
A list has been attached of programs and measures in other EU or EEA member states aimed at attracting entrepreneurs from third countries to establish and/or develop their startup companies in the respective country.
In addition to the 14 countries in the comparative table, startup visas also exist in: Luxembourg, Austria, Hungary, Cyprus, the Czech Republic, Germany, and Greece.
The only EU countries that do not have a startup visa are: Poland, Malta, Slovakia, Slovenia, Croatia, Romania, and Bulgaria. Romania is currently working on its own Startup Visa, as well as on the concept of a European Startup Visathat would unite all Schengen states, which would also mean that Poland, Malta, Slovakia, and Slovenia would have startup visas.
The current project is aligned with the emerging standard for the Schengen area states.
The main objective of the proposed amendments to the Investment Promotion Act and the Foreigners Act is for Bulgaria to align itself with the rest of Europe and to provide competitive conditions for attracting entrepreneurs from third countries to start and/or develop their startup companies, meaning high-tech and/or innovative projects, in Bulgaria.
A further objective is to increase the number of startup companies in the country, which will also attract investors willing to invest in companies registered in Bulgaria that develop products and/or services with high added value, thereby creating and developing a sustainable venture capital investment market.
By allowing residence permits to be granted in Bulgaria through a procedure similar to those already in place in countries such as the Netherlands, France, Estonia, Finland, Denmark, the United Kingdom, and Ireland, Bulgaria will be able to attract new human capital, know-how, investment, and business opportunities, create conditions for the emergence of new high-tech companies, and generate related new jobs.
The aim of the proposed changes is to turn Bulgaria into a preferred place in Europe for entrepreneurs from third countries to found their startup companies and to improve the country’s economic prospects.
Entrepreneurs who are citizens of third countries (non-EU countries)
The absence of a legal possibility for entrepreneurs who are citizens of third countries to reside in Bulgaria and establish and develop a startup company means there is no available data on the number of directly affected persons. As an example, data from Estonia’s Startup Estonia program shows approximately 400 visa applications per year.
All state institutions, insofar as obtaining a certificate is connected with the subsequent establishment and development of a startup company carrying out a certain activity in the country.
Startup companies in Bulgaria
Although there are no official statistics, estimates from various sources indicate that about 2,000 startup companies have been created in Bulgaria over the past five years. The change will create opportunities for greater competition and more and better innovation among startup companies in the country.
Individual, private, or public investment funds
There are currently around 10 active investment funds in Bulgaria investing in companies at various stages of development. The proposed changes will give these funds a wider range of innovative projects in which to invest.
The following two options have been considered under this regulatory act:
Under this option, the proposal to introduce an opportunity to encourage citizens of third countries to start and develop a startup company in Bulgaria, and to legally reside in the country for the purpose of implementing their approved plan, is not adopted, and the problems identified in section 1 remain unresolved.
Under this option, the necessary legal framework is introduced to allow entrepreneurs who are citizens of third countries to start and develop a startup company in Bulgaria. For this purpose, the following amendments and additions to the legal framework are proposed.
A new Chapter Six A is added to the Investment Promotion Act, setting out the procedure for application, evaluation, issuance of certificates for high-tech and/or innovative projects, refusal to issue or renew such certificates, and their revocation.
In line with the practice in other EU member states, the evaluation of projects for launching a startup company is to be carried out by persons from the startup community with practical experience in assessing whether a business project is innovative and has growth potential.
It is envisaged that the expert council will include representatives of the Bulgarian Investment Agency, as well as representatives of non-governmental organizations, incubators, accelerators, venture capital funds, and credit and financial institutions.
Incubators are legal entities or structures within legal entities that provide logistical, managerial, and technological support to entrepreneurs with innovative, high-tech, or knowledge-based ideas for the development of a product and/or service, with the ultimate goal of helping those entrepreneurs create and develop innovative and/or high-tech companies.
Accelerators are legal entities that support innovative and/or high-tech startup companies with the goal of accelerating their development through financial resources, managerial support, technological or market guidance, and by connecting them with clients and investors, in exchange for which the accelerators receive a minority stake in the supported company or the right to acquire shares in it at a later stage.
Venture capital funds are legal entities that organize and invest third-party funds managed by the fund for the purpose of investing in high-risk, high-yield assets.
Credit and financial institutions are those defined in the Credit Institutions Act.
The council is expected to support the executive director in the assessment of applicants for certificates for high-tech and/or innovative projects, discuss and provide opinions on requests to extend issued certificates, requests to amend already approved projects, and also provide opinions on changes in the application procedure for certificate issuance.
To speed up the application and certification process, while also relying on the expert council to assist in the evaluation of submitted projects and their subsequent amendments, the draft provides that certificates for high-tech and/or innovative projects will be issued by the Executive Director of the Bulgarian Investment Agency.
In line with the practice in other member states, the application process for obtaining a certificate for a high-tech and/or innovative project will be entirely electronic. It is envisaged that all information about the applicant, the project, and its implementation will be published and maintained in a separate electronic register, accessible to the Bulgarian Investment Agency and other state bodies such as the State Agency for National Security, the Ministry of Interior, and the Ministry of Foreign Affairs. This will shorten the deadlines for obtaining a certificate and reduce the administrative burden on applicants.
In addition, a new Article 24p is added to the Foreigners in the Republic of Bulgaria Act, setting out the conditions and procedure for obtaining a residence permit for persons wishing to develop a high-tech and/or innovative project in Bulgaria. The conditions for obtaining such a permit include receiving a certificate for a high-tech and/or innovative project, obtaining a long-term visa, and holding more than 50% of the capital of a Bulgarian commercial company whose subject of activity matches that declared when applying for the certificate.
The person seeking a residence permit must also provide proof of housing, sufficient means of support, valid health insurance, and a criminal record certificate.
The adoption of the proposed amendments will allow Bulgaria to position itself as one of the possible entry points for starting a business in the European Union, will provide opportunities for the development of new technologies, the introduction of know-how, increased competition, attraction of qualified employees, and a larger share of innovative enterprises in the economy.
Under this option, all existing problems continue to exist.
Economic impacts:
At present, Bulgaria competes with other European countries for the attraction of business and talent. If no changes are made to allow entrepreneurs from third countries to start and/or develop startup companies in Bulgaria, the country will not be able to compete with the countries that already have such measures and programs, namely startup visas.
A serious risk lies in Bulgaria’s lagging position regarding innovation and new technologies. The country’s chance to move forward lies in creating the conditions for the industries of the future. In the absence of sufficient talent and skills among our own population, it is very important to create conditions that make it easy for foreign startups to come here. Otherwise, Bulgaria will deepen its lagging position and risks becoming isolated from the rest of the EU in terms of startup ecosystem development.
Thanks to the funds created under JEREMIE, Bulgaria for some time played the role of a leader in the startup community in the Balkans. Romania is now catching up confidently and, by many indicators, has already surpassed Bulgaria, including in results, because it has more successful companies. Greece has traditionally been a leader in terms of administrative and legal framework. Serbia and the countries of the Western Balkans are catching up aggressively, and within no more than two to three years they may surpass Bulgaria if Bulgaria does not continue developing.
We believe that keeping the door closed to foreign startups condemns the Bulgarian economy to inertia and even stagnation. The chance for an industry to continue developing lies precisely in startups and small innovative companies. If legislation is designed only to preserve the comfort of existing businesses in an industry, that industry is doomed to disappear slowly or quickly. Traditional large business in Bulgaria already suffers from a lack of talent, and very soon the issue of lack of innovation and inability to compete on the global market will also arise. If Startup Visa is not adopted, the entire large business sector in Bulgaria may be put in difficulty.
It should also be added that failure to adopt the proposed amendments will negatively affect startup companies in Bulgaria, as well as individual, private, and public investment funds. The lack of healthy competition, experience, and know-how that entrepreneurs from third countries would bring may slow and hinder the development of startup companies in Bulgaria. The relatively small number of startup companies in the country, compared with other EU member states, leads to lower interest from individual, private, and public investment funds that would otherwise invest in Bulgarian startups, and this in turn delays the creation of a sustainable and developed venture capital market for companies developing high-tech and/or innovative projects.
Social impacts:
A strengthening of the trend of qualified young specialists and entrepreneurs leaving the country. This has a direct effect on demographics, as well as on the related sectors of education, healthcare, culture, and others.
Environmental impacts:
No impact.
No negative consequences are expected for the identified groups of interested parties.
Economic impacts: no negative economic impact expected.
Social impacts: no negative social impact expected.
Environmental impacts: no negative environmental impact expected.
No positive impacts have been identified for the stakeholders under this option.
Economic impacts:
Improving the competitiveness of the Bulgarian economy
Bulgaria needs a transformation of its economic model, and for this to happen, it needs strong startup companies that can rapidly create, introduce, and commercialize innovation. To make this happen, Bulgaria needs positive foreign influence, both in the form of more foreign entrepreneurs in the country and through their experience.
By attracting a large number of startups, for example from Israel, Canada, or Japan, Bulgaria will also attract the attention of their investors. This will increase the chances of Bulgarian companies receiving foreign investment and reaching new markets. We consider it entirely realistic that in the next 10 years Bulgaria could achieve the results of the Czech Republic and Poland and move closer to the standard of Central Europe.
By putting Bulgaria on the map of the global startup community, we are giving Bulgarian startups a better chance to develop into globally recognizable brands. It is high time Bulgaria had its own “Skype,” but for that to happen, more changes are needed. Unlike Estonia, Bulgaria does not border countries that created Nokia and Ericsson, but it can attract the knowledge it needs by drawing startups from all over the world.
We believe Bulgaria can learn a lot from Israel. The similarity lies not only in the size of the countries but also in the fact that, like Israel, Bulgaria is surrounded by countries that are not very developed and therefore must compete for exports over longer distances. Israel is perhaps one of the countries with the most restrictive migration policies, yet it has all possible visa instruments related to startups, entrepreneurs, and the attraction of highly qualified personnel. While Bulgaria is striving to join Schengen, it too must take all necessary measures to protect the external border of the EU, but like Israel, it can, through smart policies, keep its doors open to innovative businesses entering Europe. We remind that Bulgaria is currently among the last choices.
Further, allowing entrepreneurs from third countries to start and develop a startup company in Bulgaria will increase competition among startup companies, drive innovation, and attract foreign experience and know-how. Increasing the number of startup companies will also attract investors from other countries to invest in startups launched and developed in Bulgaria.
Social impacts:
Providing highly qualified and entrepreneurial individuals with the opportunity to develop successfully in Bulgaria and not leave it. Creating conditions for the development of first-time entrepreneurs and increasing entrepreneurial activity.
Environmental impacts:
Creating opportunities for the development of innovative products and services related to improving transport, and therefore air quality, waste management, and others.
The possibility provided to third-country nationals to reside in Bulgaria may be used not for starting and developing a high-tech and/or innovative activity, but as a means of economic immigration.
A new ground for residence in the country is being created: obtaining a certificate for a high-tech and/or innovative project from the Bulgarian Investment Agency. The residence regime is linked to compliance with the commitments undertaken under the project.
A register is being created for the issued certificates for high-tech and/or innovative projects and the related data concerning the persons and circumstances involved in the preliminary and current evaluation of the project, amendments to the data and circumstances, revocation of the certificate, or refusal to extend it.
The act directly affects SMEs.
The draft amendment and supplement to the Investment Promotion Act will be published on the public consultation portal for a period of 30 days, in accordance with the requirements of the Normative Acts Act, and on the website of the Ministry of Economy.
Name and position: Zhelyaz Enev, Director of the “Economic Policy” Directorate
Date: 26.11.2019
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