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Its actual name is a Contractual Joint-Stock Company. We have been working on this draft law for a year and a half. We had several working groups at the Ministry of Economy, joined by six other ministries, employer organizations, and all interested parties. Today, we have finalized draft legal texts, an impact assessment, and detailed explanatory notes. Some of the largest law firms in the country, as well as some of the most prominent legal experts in commercial law, contributed to the drafting.
The current Commercial Act does not allow flexible use of vesting agreements, convertible loans, and many other instruments that are necessary for highly innovative companies, which by their nature go through multiple investment rounds. The texts we propose are based on the experience of the French SAS company form, which was introduced for innovative companies 25 years ago and has since become the most widespread company form in France. As some of the people regarded as “the fathers of our Commercial Act” have said, our law was written for 19th-century craftsmen, and it is high time it entered the 21st century.
Where capital markets are developed, pension funds play an important role as a source of capital for AIFs (VC funds, private equity and venture capital funds that invest in startups, technology and innovative companies, and other businesses). This is also the case in Western Europe, Romania, and Croatia.
Our request includes three main changes:
All this would unlock more than BGN 700 million to be invested in the Bulgarian economy and ultimately made available to high-tech companies in the country. This would turn us into an absolute leader in the Balkans and attract business from across Central and Eastern Europe.
The Startup Visa is an instrument offered by almost every EU member state. But not Bulgaria. Here too we have prepared a draft law, an impact assessment, explanatory notes, and a detailed procedure for issuing startup visas. We have also arranged for one of the world’s largest platforms to provide the software through which applicants for this visa in Bulgaria can be assessed.
We held working groups involving the State Agency for National Security, the Migration Directorate of the Ministry of Interior, the Ministry of Foreign Affairs, the Ministry of Economy, employer organizations, and all interested parties. Yet nine months after this working group concluded, nothing has happened. The draft law is sitting at the Ministry of Economy, and despite the support of Minister Karanikolov, there has been no progress.
Today, it is impossible for a startup company from outside the EU to come to Bulgaria because there is no Startup Visa. Our legislation is designed for small and medium-sized companies, but not for startups. We have examples of entrepreneurs developing startup companies who, even after two or three years, still fail to obtain the right to stay in the country. They transfer their investments and intellectual property here, but the people themselves cannot stay here. They begin with great enthusiasm about being in Bulgaria, but end in deep disappointment and then go on to explain around the world what a bad place for business Bulgaria is. We believe this draft law can completely change that and make Bulgaria a much better place in this respect.
In theory, Bulgaria has a Blue Card. In reality, with a shortage of between 50,000 and 70,000 people in the IT industry alone, we issue only around 200 Blue Cards per year. The procedure takes more than five months. By comparison, in other EU member states the procedure takes between two weeks and one month, and in the Netherlands there is an accelerated procedure that takes only two days.
It is unrealistic for a company to begin hiring, find a candidate, have that person want to come here, and then wait five months for permission to do so, sometimes up to eight months. The result is that Poland managed to attract close to one million programmers and engineers from Ukraine. Many of these people could have come here if we had a better-functioning Blue Card, because the businesses ready to pay them and in need of them are here.
Our concrete proposals are:
Such a system fully corresponds to the 2019–2023 Strategy for the Development of E-Government in the Republic of Bulgaria.
The Bulgarian Stock Exchange is connected to the global market through the German electronic trading system Xetra. Xetra allows Bulgarian investors to buy shares electronically from 1.7 million German and European issuers, but no German or European investor can buy shares of Bulgarian companies traded on the BSE electronically, due to the lack of further system development and connectivity in the direction of Bulgaria.
The BSE is majority-owned by the Bulgarian state, and responsibility for the development of the exchange lies with its owner. Investment is needed in the infrastructure of our capital market (the BSE and the Central Depository) so that European and German investors can invest in Bulgaria. Such an investment would allow European and international investors to freely invest in Bulgaria and trade shares of Bulgarian companies electronically on the BSE.
The draft law amending the Public Offering of Securities Act currently under discussion in Parliament sets a threshold requiring a prospectus for public offerings of securities exceeding the equivalent of EUR 3,000,000 over a 12-month period. This is significantly lower than the EUR 8,000,000 threshold allowed under Regulation (EU) 2017/1129.
This puts Bulgarian issuers at a clear disadvantage compared to issuers in other EU markets, especially given Bulgaria’s need to catch up economically. For example, even now, the existing practice in another Bulgarian financial market—the banking sector—allows management of local banks with foreign ownership in Bulgaria to approve credit exposures up to the equivalent of EUR 5,000,000. Our proposal is to raise this threshold from EUR 3,000,000 to EUR 5,000,000, so Bulgarian issuers can have development opportunities comparable to those of European companies.
Much has already been said on this issue, and you are surely aware of the problem. From the point of view of entrepreneurs, the situation is as follows: high-tech companies in their early stages do not possess liquid assets—no buildings or property to pledge against a loan. In Bulgaria, banks lend to businesses only against assets, preferably real estate. Young entrepreneurs are therefore forced to mortgage their homes, cars, or whatever they own in order to get support from a bank.
The risk of failure for highly innovative companies is very high, and if they fail, entrepreneurs may end up being pursued by private enforcement agents for decades. The solution then becomes either to leave the country or, if they stay, it becomes practically impossible for them to continue being entrepreneurs, and they are forced into a struggle for survival.
I will personally add that one of our country’s major problems is the lack of entrepreneurial mindset. Many studies show that, as a people, we do not have the courage or desire to start our own business. This changes when failure is encouraged rather than punished. Part of my education was in the United States, where from an early age people are encouraged to keep trying, to fail, and to try again. In Bulgaria, from school onward, every wrong answer is punished, and young people grow up believing that under no circumstances should they appear to have failed.
Bulgaria is the last EU member state without a Personal Bankruptcy Act, and it is very important that this finally changes.
At present, liquidating a company in Bulgaria takes around one year and costs between BGN 600 and BGN 1,000. For BGN 30 to BGN 50 per year, a company with no activity can be kept “alive.” In other words, it is cheaper to keep a company dormant for 20 years than to liquidate it.
Liquidation is also a burdensome process requiring repeated communication with the National Revenue Agency, the National Social Security Institute, and the Registry Agency. If someone is shutting down a business and, for example, starting a new job or business, they are unlikely to want to spend either the time or the money. The result is that we literally have hundreds of thousands of phantom companies. Around 60,000 new companies are registered every year, but only about 1,000 are liquidated.
We are far from believing this reflects real business success, and everyone knows it. The problem is that to attract foreign business, entrepreneurs need to know that if they fail, they can easily close their business, rather than spend so much time dealing with Bulgarian institutions. This is especially important for companies that have never had any activity. There is strong lobbying from banks that want this procedure to remain so long, but the situation is one of conflict between the interests of a few stakeholders and the overall business climate in Bulgaria. Political will is needed to solve this problem.
Returning to the idea of encouraging failure, besides personal bankruptcy, the second thing needed is a change in legislation related to the insolvency of legal entities—that is, corporate bankruptcy. Here we have specific proposals aimed at distinguishing between a factory through which hundreds of millions have passed and two students who borrowed BGN 10,000 and cannot repay it.
At present, there is no distinction. These two young people may be barred for at least two years from managing a new company, and potentially for life if there are still unsatisfied creditors. In every developed country there are “Second Chance” programs and even more opportunities to fail and start again.
Again, we know many arguments can be made about the need to protect banks and creditors, but the end result is that if you are an entrepreneur, you may prefer not to be in Bulgaria, not to pay taxes here, and not to be a Bulgarian company, just for the peace of mind that the state actually encourages free initiative and entrepreneurship and will give you another chance if you fail.
It is important to remember that successful businesses are most often built after many failures. If Steve Jobs, Richard Branson, Warren Buffett, and many others had operated under the current Bulgarian legislation, we most likely would never have heard their names, because after their first failure they would have been “out of the game.”
Together with other employer organizations, we have proposals on how to amend the Labour Code, but the goal is to regulate work from home, so-called home office. The coronavirus crisis brought to light the need for people to be able to work flexibly and easily from home. In the 21st century this will be common practice, and every company whose business allows it will offer this option to its employees. Urgent amendments to the Labour Code are needed to regulate this type of work.
Occupational medicine is currently an instrument that is extremely difficult for companies to comply with, and in our opinion no one actually manages to meet all its requirements. It was written a long time ago and, for example, according to its descriptions every employee should rest every 40 minutes—something completely impractical for a programmer who may spend two hours preparing to start working and then write code for ten hours straight without stopping, because if they stop, they may need another two hours to get back into it.
The reality is that the current occupational medicine framework was written to solve problems that were relevant decades ago and now needs a complete overhaul. We would be glad to work on the topic as well, if there is the will to make it happen.
In the 21st century it is entirely realistic to be on a plane or in a bar in Silicon Valley and have someone next to you become interested in your business and want to invest in it on the spot. The example with the plane is a real story in which Bulgarian entrepreneurs had to tell the person they would be delighted, but in order to get his share they would have to land in Sofia with him, go to a notary, and then to the Registry Agency to register it.
In the 21st century we need the flexibility to register shares digitally and transfer them digitally to other people.
Every time one works with any international company providing services, one has to go through the relevant double taxation treaty. For example, if we hire a freelancer to write an article for our company and that person is in Spain, we first have to determine under which category content writing falls in the treaty, then discuss it with them, because tax is often withheld, and then request three documents from them. All this is done for just a few articles, and it often discourages the other side.
And often it is not just articles but other services from other countries, requiring the same whole procedure. Our proposal here is that for smaller amounts this double taxation procedure should not apply.
Within the framework of the Tripartite Agreement, an understanding was reached on how the maximum social insurance income should be increased annually starting from 2022. We repeatedly received information this year that a major increase in the ceiling was possible.
We need a clear statement that the ceiling will not be changed during the term of the current government. Merely rumors of such a move caused many companies to rush to re-register in other countries, and the general feeling is that if this becomes reality, everyone who can will leave the country.
We received assurances from the Deputy Minister of Finance that there would be no increase, but we have often seen important amendments occur between the first and second readings in Parliament, and we need to be certain that in December we will not read in the budget bill that the ceiling has been sharply increased.
“Angel investors” are the people who invest at the earliest stage of startup and innovative companies. In Bulgaria this is barely developed. In developed countries there are different mechanisms that encourage such investments. The UK has some of the best tools, the so-called EIS and SEIS mechanisms. They work by returning up to 75% of the investment through tax relief if the business fails.
Angel investments are usually between BGN 10,000–20,000 and BGN 100,000–150,000 in exchange for a corresponding equity stake in the company. In Bulgaria there is absolutely no incentive for making this kind of investment. As a result, our companies register in the UK, where our potential investors also register under their mechanisms, and the deal then takes place under British law. The end result is that a Bulgarian company founded by Bulgarians and financed by Bulgarians becomes a foreign company, and the taxes and intellectual property go to another country.
Our wish is to develop a similar mechanism here so that such investments are encouraged in Bulgaria. This will achieve three important things:
For e-commerce businesses, it is completely impractical to comply with the requirements of Ordinance N-18, and the result of its entry into force would be that all Bulgarian online stores register in Romania, Estonia, or wherever they can escape to. The losses will be enormous, and we will collapse in terms of digitalization, perhaps irreversibly.
We call for a guarantee that this ordinance will not affect online business, and ideally that it should not exist at all in its current form. We believe the state should play a key role in oversight and especially in creating an environment for fair competition, but in this case the ordinance has become a symbol of bureaucracy and overregulation.
In conditions of free movement of people and capital within the EU, it is only a matter of time before the practically impossible requirements of this ordinance drive out the few remaining innovative companies that have chosen to operate under Bulgarian jurisdiction.
No impact assessment of the changes to the ordinance has ever been made, but we can assure you that even before all the changes entered into force—already postponed for the fourth time, or a total of two years—they had already driven thousands of Bulgarian businesses to seek refuge in countries such as Romania, Estonia, Latvia, and others.
We are not against state control or the creation of clear frameworks for reporting sales. On the contrary, we believe that this is fundamental for developing a sustainable economy. But we are convinced that the outdated concept of Ordinance N-18 and the ill-considered changes of the past two years, which doubled its length, are even more damaging to the local economy than Covid-19.
Our categorical opinion is that this ordinance should be completely replaced with a new one, written from scratch and with an eye to the future. Or to put it another way—in times of Covid-19, what we need is Ordinance N-19.
At present, the system of the National Social Security Institute does not allow outside parties to input or extract data, and therefore every employer still relies on employees’ paper employment record books. People are forced to maintain them. In the age of 21st-century technology, this is completely unnecessary and creates an unnecessary burden for both employers and workers.
Most people constantly do not know where their record books are, and they are aware that within their lifetime they will certainly become obsolete, so they do not consider them important. And yet they still are important. Everyone would be greatly облегчени if these books became digital.
Banks are fully autonomous, so the state cannot force them to work one way or another, but here we are asking for government support. For years the situation has been that foreigners find it very difficult to open accounts in Bulgaria, and in recent months it has become effectively impossible in some cases.
The problem is that on the one hand we are trying to make Bulgaria attractive to foreign business and entrepreneurs, while on the other hand our companies do not have access to sufficient human resources and constantly need to attract workers from abroad. Our banks have adopted such a protectionist policy that opening an account becomes a dramatic problem that lasts weeks, sometimes months, and not infrequently is simply impossible.
We ask you to support our efforts to change this and help the dialogue between banks and business.
Very often the previous track record of a company is extremely important in public procurement evaluations. Startups do not have such a history, nor do they have collateral in the form of substantial capital or assets, and therefore it is usually impossible for them to participate.
At the same time, the question is often raised of how startups can work with large companies or with the state. Such cooperation would be the most market-based way of supporting the development of Bulgarian innovative companies in their early stages. Our proposal is to change the requirements for smaller public procurements so that startup companies can participate in them. We are ready to provide concrete proposals on the matter.
This is a topic that has been discussed for years, but the feeling in business is that almost everything remains analogue. Estonia is the good example for many countries; many of our entrepreneurs already have Estonia’s so-called e-Residencyand have moved their companies there. They can literally manage everything related to their business from their phones while sitting here.
We are very far from their example, and at present we do not see real political will to implement e-government. This is in itself a huge topic, but we want results. Even if it starts from somewhere, we want to move step by step and see real progress, for which we are ready to work together with the state.
Because of lack of knowledge and the lengthy procedures for approving even simple requests, the administration becomes a huge obstacle to innovation. For example, in aviation, Bulgaria lags decades behind in the deployment of drones and urban air mobility. A good example of empowering public servants is the aviation safety authority of the Swiss Confederation, or even the United Kingdom. Their good analysis and teams have made these countries world leaders in unmanned technologies.
There are still public servants in the administration who put their heart and soul into serving citizens and Bulgaria. The problem arises when heavy sanctions and Stalinist reflexes appear from their superiors, or even outright ignorance.
Bulgaria participates in the European Blockchain Partnership, which works to realize the potential of decentralized technologies for the benefit of citizens, society, and business. A new digital infrastructure for cross-border public services and data exchange is currently being built in Europe—the European Blockchain Services Infrastructure (EBSI).
This creates many opportunities for Bulgaria to use new digital infrastructure and blockchain tools for more efficient and more secure electronic services and data exchange. If this is recognized by the Bulgarian government as an opportunity for secure digitalization, protection of citizens’ and businesses’ data, and modernization of outdated information systems, then the country will enter a new era of public services based on sovereign digital identities. This is included in the latest European Data Strategy and is an exceptional opportunity for us to achieve a leading position in Europe regarding the application of blockchain technology.
Bulgaria has deep traditions in the development of space technologies and is among the handful of countries that have sent their own citizens into space, launched their own satellites, and participated in interplanetary missions. Unfortunately, most of these achievements are in the past, due to 30 years of lack of institutional, legal, and financial support for space technologies.
Bulgaria has talented engineers and scientists who are prevented from participating in valuable international projects and lack the resources to work on space technologies.
Why is it important for Bulgaria to develop space technologies and sciences? First, this is an industry worth $345 billion as of 2016. It generates enormous side benefits in the form of new technologies, processes, and jobs. Many innovations in the automotive industry, new materials, and medicine, for example, were originally developed for space purposes.
Second, the exploration of space through new satellites and data processing will significantly improve agriculture, generate valuable data for national security, and boost Bulgarian manufacturing. Third, a developed domestic space technology sector could significantly alleviate one of our most serious problems—brain drain. The level of scientific and technical work in space technologies is high and intensive. Through this sector, we may retain our best engineers and scientists at home and attract foreign ones as well.
And finally, there is the prestige and national pride created by space missions—a recent example being the Israeli mission to the Moon, Beresheet, which showed the world the capabilities of Israeli engineers and industry.
As a first step, Bulgaria should immediately become a full member of the European Space Agency (ESA). This would ensure access to much better funding and allow Bulgarian companies and universities to participate in space missions and experiments, such as those on the International Space Station, and in research involving Mars, the Moon, and beyond.
For greater flexibility, the state should also establish a specialized fund for full grant financing of university space projects, since most new developments in space technologies result from university research and programs. To help Bulgarian companies developing satellites, the procedure for licensing radio transmitters for space purposes should be significantly simplified, as it is currently slow and can take over a year. If this time is shortened and the documentation burden reduced, Bulgaria has a chance to become highly competitive in the space sector, since frequency licensing is one of the biggest bottlenecks in the industry.
Bulgarian legislation on cooperatives is extremely outdated. In fact, cooperatives are a very practical form of governance for some new types of business, such as so-called decentralized organizations used by blockchain businesses. Under our legislation, for example, legal entities cannot participate in cooperatives.
Here we have a very practical solution, because there is already a law on European cooperatives at EU level, and it is well written. It can be directly applied in Bulgaria and solve this problem.
Over the last year there has been a serious threat to businesses involved in short-term apartment rentals (the so-called Airbnb case), electric scooters, and shared rides, which still cannot be used in Bulgaria. These things are important not only for business but also for making cities more attractive places for people and entrepreneurs.
The issue surrounding Airbnb apartments has still not been fully resolved, as individuals renting out their apartments in this way still have to pay patent tax, social security contributions, VAT on Airbnb’s commission, and tourist tax all at once. We believe it is time for the government to clearly state that the sharing economy is a priority it recognizes as such.
Many other countries have a separate ministry responsible for entrepreneurship, innovation, and high technologies. At present, our problems are divided between the Council of Ministers, the Ministry of Economy, the Ministry of Education, the Ministry of Labour and Social Policy, and the Ministry of Transport, which in fact is responsible for the IT industry.
Our proposal is to begin with a minister without portfolio who is part of the so-called entrepreneurial ecosystem and gradually build a ministry around that office, where policies concerning innovation and business can be initiated. It would also be logical for the relevant operational programs to be placed there.
In Bulgaria we have companies that help people find hourly jobs—for example as cleaners, seamstresses, caregivers, and so on. Under the current legislation they must be insured on at least the minimum wage, which in some cases means they earn BGN 200 or 300 per month and well over half of that goes in taxes and contributions.
We are talking here about people struggling to survive, and businesses are trying to help them. Sometimes this is a second source of income; sometimes it is their main source. Our proposal is that for certain types of hourly work there should be no lower social insurance threshold, so these people can keep a more decent share of what they have earned.
Electronic identification (eID) and electronic trust services (eTS) are key factors in ensuring secure cross-border electronic transactions and are essential building blocks of the digital single market. That is why Regulation (EU) No 910/2014 of the European Parliament and of the Council of 23 July 2014 on electronic identification and trust services for electronic transactions in the internal market, and repealing Directive 1999/93/EC (eIDAS), aims to provide a predictable regulatory environment that guarantees secure and seamless electronic interaction between businesses, citizens, and public authorities.
The Regulation creates opportunities for citizens and businesses to use their own eID to access public services in other EU countries where electronic identification means are available.
We believe that creating legal conditions for the notification of private electronic identification schemes in Bulgaria, through amendments to the Electronic Identification Act and the urgent notification of private schemes, will bring many benefits and advantages for citizens, businesses, and the state, and will guarantee equal competitive conditions for Bulgarian companies in accessing electronic administrative services in Bulgaria and throughout the European Union.
To these proposals we must add that the separation of powers and the rule of law are the foundation without which Bulgaria cannot build a strong economy. No entrepreneur will want to do business here if they do not feel secure and calm in the knowledge that their property is inviolable and that clear mechanisms exist to protect them and everyone else.
It is also worth mentioning that reform of the education system is crucial for the entire business sector. As employers, we often have to replace schools and universities in forming the skills and knowledge of young people, because our education system does not provide the quality we need. This is a very broad topic on which we have dozens of concrete proposals.
Our wish is for Bulgaria to be a place where it is easy to start a business, flexible to manage it, easy to close it, where there is access to people and capital, and where relationships with institutions can be managed electronically. In this way we will catch up with the developed countries and build the basic infrastructure needed for doing business. Then we will have the opportunity to stop being followers and perhaps even become leaders in some industries, and we also have proposals for how that could happen.
We believe that money in a country grows in two main ways:
EU subsidies are not a way to achieve sustainable large GDP growth on our own. We need 10% growth, not 3–3.5%. But that can happen when we have strong companies developing high value-added products and services and successfully selling them on the global market. These companies need to remain Bulgarian and pull our economy forward. That is what we are fighting for, and we believe we can work together and achieve very concrete results.
Respectfully,
The BESCO Team – Bulgarian Startup Association
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