Boyanov & Co.
  July 26, 2013 - Bulgaria

HNWI: Welcome to Bulgaria!
  by Yordan Naydenov, Mihail Vishanin

The financial services sector tends to define “high-net-worth individual” (HNWI) asan individual or a family possessing substantial amount of investable funds. There is no generally accepted prefixed denominationof the size of wealth that an individual must possess in order to fall within this category. However, high net worth is commonly used in terms of liquid assets exceeding a certain amount while precise figures differ by financial institution and region.

As mentioned above there are some common financial criteria for gaining “citizenship” in the land of HNWIs. The most popular minimum threshold is $1 million in liquid financial assets whereas the ceiling for this category hits $5 million. Above $5 million in liquid assets comes the pack of “very HNWI” and a wealth that surpasses $ 50 million would assign to its possessor the status of “ultra HNWI”.

The expanded geography of the wealth:While the financial crisis, that has spread over USA and Europe, has caused slowdown or even recession of most of the national economies, it seems that it has made the economy run faster for HNWIs club, and especially for its “topmembers”, for instance the US very HNWIs and ultra HNWIs.

At the same time the booming economy of China is producing at remarkable speed more and more people who could be considered HNW. Other countries like Russia, Turkey, India, Brazil are also keeping the pace and their upper middle class includes more and more people who would consider themselves HNWI. Many of them are considering bringing their businesses closer to their main markets (EU, USA, others places) or are just looking for a different place to live and stay for them and their families. Here come to play the incentives that the countries needing investments, like Bulgaria, may offer.

Is it always a question of taxes?:not only do the private wealth managers aspire to attract HNWI to their “teams”,but the national governments, caught in the financial crisis downward spiral,would go for making their countries more appealing to HNWI anointed class, too.

One of the most powerful tools in this regard is the favorable tax legislation. Although not featured as an offshore jurisdiction or tax heaven, Bulgaria applies tax rates such as 10 % corporate tax and flat 10 % tax rate on the global personal income, which could be viewed as preferential to most of the other countries. Certain incomes, e.g. dividends paid by Bulgarian companies to individuals, irrespective of their tax residence, are subject to 5% tax only, whereas the business to business dividends distribution within EU remains tax free.Nevertheless, listing all tax regimes that make Bulgaria one of the most favorable tax jurisdictionsin EU would stray by far from the subject of the present article.

The applicability of said tax rates will call for meeting certain conditions. First of all, Bulgaria considers its tax residents individuals that have permanent address on its territory, or who reside within its territory for a period exceeding 183 days in any twelve-month period or whose center of vital interests (family, property, the place of labor, professional or economic activity) is situated in Bulgaria. Obtaining such residency could go hand in hand with getting permanent residence status in Bulgaria or Bulgarian citizenship.
Certain statutory acts of theBulgarian Parliament such as the Foreigners in the Republic of Bulgaria Act (1998), Bulgarian Citizenship Act (1998) and the Investment Promotion Act, provide for the legal framework of the general and fast-track investment options for individuals for gaining permanent residence in Bulgaria and Bulgarian citizenship.

Obtaining permanent residence and Bulgarian citizenship: general investment options.The legal framework of the preconditions and the procedural rules are elaborated in the legislation. The gaining of permanent residence permit (PRP) is a preliminary step to the obtainment of Bulgarian citizenship, which would allow the investor to freely move and invest within the EU. Following the making of an initial investment (the available principal forms are outlined below) and upon the expiry of a certain period of time (5 years in the general case) the investors may apply and obtain Bulgarian citizenship, often at terms and conditions that are more beneficial than the general procedure.

The investments could be in the form of:
· investment of EUR 512,000 in Bulgarian T-Bonds, issued by the Bulgarian Government;
· investment of EUR 512,000 in shares of public companies, listed at the Bulgarian stock exchange;
· investment of EUR 256,000 in shares of a company in which the foreign investor holds a shareholding of at least 50%,using of this investment for purchase of assets and creation of at least 10 new jobs;
· investment of EUR 3,068,000 in shares of private companies, irrespective of their activities, assets, etc. Due to the relatively high amount of the investment this option is perhaps less attractive.
· investment of EUR 512,000 in Bulgarian intellectual property (patents, utility models, trademarks, service marks, industrial designs, copyrights).
· Investment (the amounts vary depending on the sector of the economy) in company in which the foreign investor holds a shareholding of at least 50% certified as Class A Investor or Class B Investor or performing priority investment project under the conditions and procedure elaborated in the Investment Promotion Act. This option would require material investment and, possibly, serious dedication to the management of the project. Yet, it could be used by strategic investors who would be developing such projects in our country anyway.

Some other relevant requirements include the obligations for the applicant for Bulgarian citizenship to maintain the investment during the waiting period and until obtaining of Bulgarian citizenship. Yet the applicant does not need to be present in Bulgaria during the waiting period. If the applicant has not entered in Bulgaria for 6 years the migration authorities are competent to withdraw the PRP. Thus, if the applicant does not plan to enter into Bulgaria at all, he needs to obtain Bulgarian citizenship within this 6-year period. The good news is that the applicant is not required to complete language exam in Bulgarian language and does not need to waive his current citizenship.

As of the conditions for Class A and B investment projects and priority projects, they include investments in certain economic sectors (for example in high technology), creating certain number of new jobs and meeting investment threshold in a single unit. The certification is granted by the Minister of the Economic, Energy and Tourism for projects of national significance and by mayors for municipality relevant projects.

Obtaining permanent residence and Bulgarian citizenship: fast-trackinvestment options.The legal framework of those options is elaborated in the statutory legislation.Each of the general options has its fast-track version, which is usually associated with additional investments. In this case the waiting period between the granting of the PRP and the filing of the application for Bulgarian citizenship is of 1 year only. The most attractive fast-track options are, in our view, the investment of EUR 512,000 in T-Bondsor shares of public company, getting of PRP on that basis, investment of EUR 512,000 in company performing priority investment project, expiry of 1-year waiting period after issuing of PRP and filing for Bulgarian citizenship.

The strategic investors who have interests and plans to invest and develop companies certified as Class A or Class B Investors or performing priority investment projects can also benefit from a fast track (1 year) option. To do this they need tomaintain the investments made above the threshold necessary for issuance of a Certificate for Class A Investor. Thus upon expiry of the 1-year waiting period they may file for Bulgarian citizenship.

Concluding words:the countries are in competition for HNW individuals as taxpayers or investors. The world is getting more and more globalized and one of the few assets the countries may offer to the investors is their citizenship and the side benefits that may go with it. The amended Bulgarian legislation and the options offered by it demonstrate that our country is ready to accept HNWI – investors as its citizens. Many have come already, the more, hopefully, are yet to come.