Redefining investment risks: Bulgaria's proactive FDI screening regime

Bulgaria's recent enactment of a comprehensive Foreign Direct Investment (FDI) screening regime marks a shift in its approach to safeguarding national security interests. This regime, which implements EU FDI Screening Regulation 2019/452 introduces rigorous oversight mechanisms for inbound investments. Analysing the nuances of Bulgaria's FDI screening framework and its implications for businesses is imperative for investors to understand this evolving regulatory landscape. (For background, see the previous Law-Now alert [ https://cms-lawnow.com/en/ealerts/2023/09/foreign-direct-investment-screening-mechanism-in-bulgaria-new-frontiers]).

The introduction of Bulgaria's FDI screening mechanism represents a paradigm shift, addressing gaps in the country's regulatory framework by instituting mandatory review processes for FDI transactions. This regime mitigates potential risks associated with foreign investments and aims to protect critical sectors such as:

·         critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, sensitive facilities, and land and real estate crucial for the use of infrastructure;

·         critical technologies and dual use items, including artificial intelligence, robotics, semiconductors, cybersecurity, aerospace, defence, energy storage, quantum and nuclear technologies, nanotechnologies and biotechnologies;

·         supply of critical input, including energy or raw materials, and food security;

·         access to sensitive information, including personal data, and the ability to control such information; and

·         the freedom and pluralism of the media.

By expanding the definition of FDI to include management, the regime is promoting transparency and accountability in cross-border transactions.

The regime in the Bulgarian Investment Promotion Act provides clear criteria for identifying foreign investors and determining the scope of investments subject to scrutiny. Notably, the inclusion of EU-based entities controlled by non-EU entities reflects Bulgaria's proactive stance towards addressing indirect foreign influence. The regime establishes quantifiable parameters for assessing investment risks through the following monetary thresholds:

·         at least 10% of the capital of a company operating in Bulgaria is acquired, or the investment's value exceeds EUR 2,000,000 in value;

·         at least 10% of the capital of a company operating in the country and carrying out high-tech activities is acquired; or

·         a new investment that exceeds EUR 2 million.

Furthermore, the designation of certain jurisdictions as low risk (e.g. US, UK, Canada, Australia, New Zealand, Japan, South Korea, the United Arab Emirates and Saudi Arabia) underscores Bulgaria's strategic alignment with international standards while streamlining regulatory processes for investors from trusted regions. While the FDI Screening Act outlines general criteria for mandatory screening, it also delineates exceptions and provisions for ex officio scrutiny. Investments in critical sectors such as energy production and those originating from specific countries, irrespective of monetary thresholds, are subject to heightened scrutiny. This approach highlights Bulgaria's strategic imperative to safeguard critical assets and infrastructure from potential threats. Additionally, the provision for ex officio screening underscores the proactive nature of Bulgaria's regulatory framework, empowering authorities to address emerging security concerns promptly.

The implementation of Bulgaria's FDI screening regime will require a paradigm shift in the way businesses approach investment decisions and operational strategies. Foreign investors operating in critical sectors must navigate a complex regulatory landscape characterised by stringent review processes and compliance obligations. Failure to adhere to screening requirements may result in financial penalties and regulatory sanctions, underscoring the importance of proactive risk management and due diligence measures. Moreover, businesses must anticipate potential delays in transaction timelines and factor in regulatory uncertainties when formulating investment strategies. As Bulgaria enters a six-month transitional phase to align subordinate legislation with the newly introduced mechanism, stakeholders must anticipate regulatory clarifications and procedural guidelines to facilitate compliance. The forthcoming regulatory framework is expected to provide clarity on enforcement mechanisms, judicial review processes, and mitigatory measures for non-compliance. Businesses are advised to remain vigilant and engage with regulatory authorities and industry experts to navigate the evolving regulatory landscape effectively.

Bulgaria's adoption of a robust FDI screening regime underscores its commitment to safeguarding national security interests while fostering a conducive environment for foreign investment. The regime introduces a nuanced approach to regulatory oversight, balancing the imperative for transparency with the need to attract foreign capital. As businesses navigate the complexities of Bulgaria's evolving regulatory landscape, proactive engagement with regulatory authorities and strategic risk management will be essential for ensuring compliance and capitalising on investment opportunities in the region.

For further information on the FDI screening regime and to stay up-to-date on developments, contact your usual CMS contact or our local CMS Sofia experts, Ivan Gergov and Berdzh Draganov.