General principles.
A new act, regulating the relationships with companies established in the so-called "offshore zones" or preferential tax regime jurisdictions, has been effective since the beginning of 2014. The act was signed into law by the 42nd National Assembly and it was called Act on the Economic and Financial Relationships with Companies Registered in Preferential Tax Regime Jurisdictions, Persons Related to Them and Their Real Owners.

The main objective of introducing the bill is to regulate the relationships of these companies with the public economic and financial interest, to identify natural persons as owners as well as to avoid "tax evasion" which is nevertheless regulated by the Income Tax for Natural Persons Act, the Corporate Income Tax Act and a number of other acts.

Forbidding participation.

Such companies and the persons related to them are forbidden direct and indirect participation in economic sectors of public significance. Such sectors are the energy industry, public procurement, privatization, financial services, insurance, various activities which are subject to licensing, etc.

The above-mentioned prohibition will not apply to four hypothesis explicitly specified in art. 4 of the act. All of them have their practical application but item 3 of art. 4 seems to be the most prevalent. This hypothesis comprises all offshore companies participating in Bulgarian legal entities due to various reasons.

Existing practic.

This far offshore companies used to buy or establish local legal entities and their ownership used to remain a mystery. In order to establish such offshore companies, directors and stockholders, who were legal entities registered in the same or another jurisdiction and specializing in trust management, were used.

It was often the case that the stockholders in these trust management companies were third legal entities and so on and so forth. The same chain of companies used to create problems in identifying the real owners to banks and local and state authorities.

The norm of art. 4, item 3 should introduce change to this scheme as the hypothesis imposes identification of the real owners – natural persons. Actually the change that would come would be in increasing the interest of the real owners of offshore companies in the "nominee services" offered by individuals presented in the form of trust agreements.

Changing the existing practice. Agere in fraudem legis.

In practice the offshore company owners pay for trust management services but they pay to legal entities. After the act became effective, there should be increased interest in using trust services offered by natural persons which would lead to limiting the provision of the service to a certain degree.

When the legal entities – stockholders in the offshore company are replaced by natural persons, the latter will be entered in all official documents. In this case the requirements of art. 4, item 3 of the act will be observed, the identification of the natural person – owner will be realized and the objective of the act will be met.

In addition to identification, the representative of an offshore company or the representative of the local legal entity in which the offshore company has a direct or indirect participation will declare that he or she has information on the structure and ownership of the offshore company in a notarized sample declaration. This declaration will have to be entered in the Trade Register in the batch of the local legal entity.

The norm of art. 4 item 4 is puzzling as to why "the publishers of periodicals" are explicitly mentioned when the general prohibition does not apply to them. Is this type of business something peculiar which is not part of the general trade activities that a company may perform in accordance with art. 4, item 3? Or is it that this type of activity is impossible to exist in opposition of public interest?

Uncovering administrative offences when documents with false contents are presented.

According to the act the "competent administration authorities" will be the bodies which shall verify the authenticity of the documents presented. It is interesting to know how an administrative officer would check whether the offshore company is really in the patrimonium of the person entered in the presented official and legalized title documents.

Up until now the uncovering of any information on an offshore company by the authorities of the respective jurisdiction was very limited even when the norms of a court/investigation order were applied. This practice could not be changed through giving investigation duties to administration by law and whether the act will be applied in practice and exactly which parts of it will apply is yet to be seen.
 

Law Office Tomovski