While other corporate structures are also available under Bulgarian law (such as general partnerships, limited partnerships, etc.), the limited liability company (“LLC”) and the joint stock company (“JSC”) structures proved to be the most commonly used investment vehicles. Under Bulgarian law, both LLC and JSC may be established by one or more local or foreign individuals or legal entities. Both types of companies are liable for their obligations up to the amount of the company’s assets. The liability exposure of the shareholder(s) of LLC or JSC is limited to the amount of their equity participation. Both LLC and JSC are established by way of registration with the Bulgarian commercial register and are deemed incorporated and capable legal entities as of registration date.  Any subsequent change to registered circumstances is also subject to registration into the Commercial Registry.  All registrations are effected through filing of standard form applications, either electronically or in hard copy and are associated with the payment of insignificant official fees.

1. Share Capital

The legally required minimum share capital in the case of the LLC amounts to BGN 2 (approximately EUR 1) and in case of the JSC - BGN 50,000 (approximately EUR 27,000). 

2. Corporate Governance Structure

The corporate governance structure of the LLC consists of the shareholders’ meeting (or the sole owner, in case of a sole shareholder LLC) and the general manager(s).

The shareholders’ meeting consists of all shareholders of the company and should be convened at least once per year.  The shareholders’ meeting (sole owner) is the superior body of the LLC, having the authority to make all key strategic and executive decisions regarding the business activity of the company.

The general manager(s) of the LLC can be a shareholder(s), as well as a third party.  The general manager(s) represents the company vis-à-vis third parties and carries out the day-to-day management pursuant to the resolutions of the shareholders’ meeting, the company’s articles of association and the law.  Only an individual may be appointed as a general manager of the LLC.  There are no requirements pertaining to the nationality or residence of a general manager(s).  In the event of more than one general manager, each of them may act severally unless the articles of association provide that the general managers shall act jointly. The joint representation is the only restriction that may be imposed on the representative powers of the general manager(s) with a binding effect on third parties. Any other restrictions would be valid only vis-à-vis the company itself and, if breached, would not affect the validity of the executed transaction, but would form grounds for triggering the liability of the general manager against the company.

The JSC may feature a one-tier system or a two-tier system of corporate governance.  The corporate bodies of a JSC with a one-tier system of corporate governance are: (i) the shareholders’ meeting (the sole owner, in case of a sole shareholder JSC) and (ii) the board of directors (the “BoD”).  The corporate bodies of a JSC with a two-tier system of corporate governance are: (a) the shareholders’ meeting (the sole owner), (b) the supervisory board (the “SB”) and (c) the management board (the “MB”).

The shareholders’ meeting consists of all shareholders with voting rights. Similarly to the LLC, certain matters fall within the exclusive competence of the shareholders’ meeting (sole owner) by virtue of law. In addition to these powers, the company’s by-laws may vest other powers to the shareholders’ meeting (sole owner). 

The board members may be individuals or legal entities provided the company’s by-laws envisage the latter option.  No restrictions are provided for with respect to the nationality or residence of the board members.  The number of members of a BoD or of a MB may vary from three to nine. The number of members of the SB may vary from three to seven. In the case of a JSC with a one-tier corporate governance system, the members of the BoD are appointed and removed from office by the shareholders’ meeting (sole owner). In the case of a JSC with a two-tier corporate governance system, the shareholders’ meeting (sole owner) elects the SB. The latter appoints and removes from office the members of the MB. The SB monitors and controls the activities of the MB. The SB does not take part in the management of the company and represents the company only in its relations with the MB.

The BoD (in the case of one-tier governance system) or the MB, subject to the approval of the SB (in the case of two-tier governance system), may authorize one or more persons among their members to represent the company jointly or severally before third parties (“Executive Director(s)”). The joint representation is the only restriction that may be imposed with a binding effect on third parties on the representative powers of the Executive Director(s). Any other restrictions would be valid only vis-à-vis the company itself and, if breached, would not affect the validity of the performed transaction, but would form grounds for triggering the liability of the respective board member against the company.

3. Reserve Fund of the JSC

Bulgarian law prescribes rigidly accurate rules for the JSC regarding accumulation of the mandatory funds.  A part of the profit accumulated by the JSC shall be transferred to the Reserve Fund and it should be used only for covering losses that might be incurred in the current year or have been incurred over preceding years.  The Reserve Fund shall amount to 1/10 of the registered capital of the company, or a higher amount as may be provided for in the company's by-laws.  In event the funds in the Reserve Fund exceed 1/10 of the capital, or the respective higher amount, they can also be allocated for a capital increase.

The sources of the Reserve Fund could be (i) certain percentage of the company’s profit, which will be set apart until the reserve reaches an amount equal to 1/10 of the registered capital, or another amount specified in the by-laws, and (ii) any revenues received from the difference between the nominal and the issue value of the shares (and bonds, if such have been issued).  The company’s by-laws may stipulate other sources for accumulation of the Reserve Fund, as the JSC may establish other funds, subject to a mandatory requirement of a law or a provision in its by-laws.

4. Dividend Distribution

The payment of the dividend is subject to approval by the shareholders’ meeting (sole owner) of both the JSC and the LLC.  However, stricter regulatory requirements regarding dividend distribution are applicable to the JSC. In a JSC such distribution would depend on the net asset value of the JSC, whereas net asset value is the balance between the value of the assets and liabilities of the company pursuant to its balance sheet.  The shareholders’ meeting or the sole owner may decide on payment of dividends only provided that, pursuant to the approved audited financial statements of the company for the respective year, the net asset value minus the dividends and any interests to be paid is not less than the total amount of the registered capital of the company, the Reserve Fund and other funds of the company (if applicable).

5. Annual Closing

An audit of the annual financial statements of the JSC is compulsory under the Law on the Independent Financial Audit. With respect to the LLC - its annual financial statements must be audited, provided that during the current or the preceding financial year (or in the case of newly-registered companies - the year of registration) two out of the following three economic indicators are exceeded: (i) value of the company assets as per the balance sheet as at 31 December - BGN 1,5  million (EUR 770,000 approximately); (ii) annual net sales profits - BGN 2,5 million (EUR 1,3 million approximately) and (iii) average number of employees for the year - 50 people.

6. Thin Capitalization Rule

There are no major differences in the tax regime for the JSC and the LLC.  The requirements for having a tax registration with the revenue authorities, bookkeeping and reporting are the same for both types of companies.  As a whole, there is no particular tax benefit from choosing any of the two types of companies. 

Under the thin capitalization rules, if the debt equity ratio does not exceed 3:1 as of the end of the respective calendar year, the interest costs (qualified also as temporary tax differences) can be deducted for tax purposes in full.  If the debt equity ratio is higher than 3:1, then the maximum tax deductible portion could not exceed the amount of the interest income of the taxpayer and 75% of the accounting financial result prior to all expenses from interest payments and income from interest receivable.  The portion that appears to be non-deductible in the current year can be carried forward and deducted in the following five years.  The thin capitalization rule shall apply to all types of financing, with the following exceptions - the rule shall not apply to: (i) any interest payments on financial leases and bank loans excluding where the parties to the transaction are related parties, (ii) any penalty charges for late payment and damages and (iii) any interest unrecognized for tax purposes under the Law on Corporate Income Taxation.