The Opportunities offered by the Bulgarian Regulatory Framework for VASPs

Design @B3Rhunter

Introduction

EU-wide rules for providing crypto services have been agreed upon and will enter into force following approval and publication in the Official Journal of the European Union. The Markets in Crypto-Assets regulation (MiCA) is intended to become applicable approximately 18 months following this date. Meanwhile, crypto companies should comply with the specific regulations of the different European Member States. One such little-known destination is Bulgaria. The country has relatively liberal regulation for VASP activities and attractive tax legislation, which should not be underestimated when structuring a crypto business operating in numerous markets.

Legal Definitions

The term “virtual currency” received legal definition for the first time in 2019 in § 1, Art. 24 of the Supplementary Provisions of the AML Act (“AMLA”) stating that “Virtual currencies” are

digital representations of value that are not issued or guaranteed by a central bank or public authority, are not necessarily linked to a legally established currency and do not have the legal status of currency or money, but are accepted by natural or legal persons as a medium of exchange and can be transferred, stored and traded electronically.

In the following Art. 25 of the same act, the Legislator also defines a “Wallet provider that offers custodial services” as a

natural or legal person or other legal entity that provides services for the protection of private cryptographic keys on behalf of its customers for the possession, storage and transfer of virtual currencies.

AMLA Compliance

Persons who, on a professional basis, provide exchange services between virtual currencies and recognized currencies without gold cover and wallet providers who offer custodial services (together referred to as “Virtual Asset Service Providers” or “VASPs”) are obliged entities within the meaning of Art. 4 AMLA. In this capacity, companies or individuals carrying out the above-mentioned activities with cryptocurrencies are obliged to take the following measures to prevent the use of the financial system for the purposes of money laundering:

• customer due diligence;
• collection and preparation of documents and other information under the conditions of AMLA;
• storage of the documents, data and information collected and prepared for the purposes of AMLA;
• risk assessment for money laundering and terrorist financing;
• disclosure of information about suspicious operations, transactions and customers;
• disclosure of other information for the purposes of AMLA;

Provisions of the AMLA and subsequently adopted Regulations for the implementation of the AMLA are fully applicable to the activity of the VASP established on the territory of Bulgaria. The scope of the law also reaches foreign branches of Bulgarian VASPs and branches of foreign persons registered in the country.

VASPs are obliged to develop, adopt and apply Internal Rules for the control and prevention of money laundering with minimum mandatory content:

• clear criteria for recognizing suspicious customers, transactions or operations;
• procedure for the use of technical means to prevent and detect money laundering;
• system for internal control over the fulfilment of the AMLA obligations;
• possibility of carrying out an internal audit review;
• possibility of performing an independent audit;
• the internal system for PEP identification;
• an internal system for risk assessment and determining the risk profile of customers;
• policies, controls and procedures to mitigate and manage effectively the risks of money laundering and financing of terrorism identified at the level of the European Union, at the national level and at the level of the obliged entity which shall be proportionate to the nature and size of the business of the obliged person;
• rules and organisation for fulfilling the obligations to clarify the source of funds and the source of wealth;
• the terms and procedure for the collection, retention and disclosure of information;
• the time intervals over which the databases and customer dossiers are reviewed and updated;
• the allocation of responsibilities for the application of AML/CTF measures and measures including risk assessment procedures with respect to branches and subsidiaries, if any;
• rules on the AML training of the employees;
• the allocation of responsibilities among the representatives and employees of the obliged person for the fulfilment of the AML/CTF obligations, as well as disclosure of contact details of the obliged person and of its representatives and responsible employees;
• a whistleblowing procedure, including reports concerning suspicions of money laundering or terrorist financing;
• an internal risk assessment;

Registration Regime to NRA

By Order No H-9/07.08.2020, the Ministry of Finance determined the conditions and procedure for entering VASPs in a special register, which is kept and maintained by the National Revenue Agency (NRA). The same agency (NRA) carries out the registration before the start of commercial activity.

To be registered, natural or legal persons (i.e. applicants) submit electronically a standardized application, signed with a qualified electronic signature and containing the following details:

1. name of the applicant;
2. seat and registered address;
3. correspondence address;
4. e-mail address;
5. representatives of the applicant registered in the Commercial Register — director, CEO, procurator, etc.;
6. contact person with specified position, telephone number and e-mail address for correspondence;
7. uniform identification code (UIC) for legal entities (company number) or personal identification number (PIN)/ personal number of a foreigner (PNF) for individuals;
8. payment accounts opened in the country and abroad — account number, payment service provider name and business identification code;
9. data on the website or software application, incl. mobile app for exchange between virtual currencies and non-gold-backed recognized currencies and/or private cryptographic key storage services on behalf of its customers for the holding, storage and transfer of virtual currencies;
10. description of the activity that the applicant intends to carry out;
11. countries where the applicant intends to offer his services;
12. information and data on whether the applicant is a company with cross-border activity or part of a cross-border enterprise within the meaning of the Final Guidelines on cooperation and exchange of information for the purposes of Directive (EU) 2015/849 between the competent authorities exercising supervision over credit and financial institutions of the European Supervisory Authority (the European Securities and Markets Authority).

Entries shall not be made in the register when:

• the required information is not provided, or the information provided is incomplete, contradictory or incorrect;
• in the last two years before the date of submission of the application, the person was sanctioned under Art. 116, para. 2 and 3 of the AMLA and/or under Art. 15, para. 2 and 3 of the CTF Act with an effective criminal decree.

When there is a valid reason for entering the VASPs in the public register, all information has been submitted, and the state fee has been paid under Art. 9a, para. 3 of the AMLA, the NRA issues a registration certificate — an electronic document signed with a qualified electronic signature.

The entry may be erased, i.e. registration cancelled, under several different cases:

1. At the request of the registered person upon a decision to terminate the activity or terminate the legal entity as a whole;
2. Pursuant to the AML Act/ CTF Act when the registered person is sanctioned under Art. 116, para. 2 and 3 of the AMLA and/or under Art. 15, para. 2 and 3 of the CTF Act;
3. Ex officio if established that the registration and relevant changes were made on the basis of incomplete, contradictory or false information, the registered person is deleted from the Commercial Register or in the event of death of the registered individual.

Taxation

As regard to taxation, the NRA adheres to the virtual currency definition provided by the European Banking Authority in EBA/Op/2014/08 dated 04.07.2014: “digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a FC, but is used by natural or legal persons as a means of exchange and can be transferred, stored or traded electronically”. The state authority shares the opinion that virtual currency is a type of unregulated digital money that is not issued and guaranteed by a central bank and that can act as means of payment. Virtual currencies may come in many forms, from currencies in online computer games and social networks to means of payment accepted ‘offline’ or in ‘real life’.

For tax purposes, proceeds from the sale or exchange of virtual currencies are considered proceeds from financial asset sales. Therefore, the taxable income shall be declared pursuant to the Corporate Income Tax Act.

10% corporate tax is levied on the taxable profit formed on the basis of the difference between all activity-related income and expenses that are recognized for tax purposes. Distribution of profit in the form of dividends paid to the shareholder(s) is subject to an additional 5% dividend tax.

VAT implications

NRA has dealt with numerous case studies and inquiries for clarification about the VAT applicability on cryptocurrency transactions. The cae-law of the European Court of Justice is particularly important here due to the lack of explicit legal regulations in Bulgaria. In the motives of the decision on the case Skatteverket v. David Hedqvist, the Court states that “…the supply of services …..which consist of the exchange of traditional currencies for units of the ‘bitcoin’ virtual currency and vice versa, performed in return for payment of a sum equal to the difference between, on the one hand, the price paid by the operator to purchase the currency and, on the other hand, the price at which he sells that currency to his clients, are transactions exempt from VAT….” within the meaning of Directive 2006/112/EC (VAT-Directive).

Pursuant to the provisions of the Directive, transactions involving currency, banknotes and coins used as legal tender, with the exception of objects of collector’s value, i.e. coins of gold, silver and other metals or banknotes which are normally not used as legal tender or coins of numismatic value shall be VAT exempted. The same principle is enshrined in the Bulgarian VAT Act, which implements the provisions of the Directive. This rule applies when the place of the delivery is on the territory of Bulgaria, on the territory of the European Union and outside it (Art. 86, Para. 3 VAT Act).

In certain cases registration of the VASP for VAT purposes becomes mandatory, meaning that the legal entity shall undertake a specific administrative procedure with the tax office. One hypothesis outlined by the law is upon reaching a taxable turnover of over BGN 50,000 or more for a period not longer than the last 12 consecutive months before the current month. Within 7 days from the end of the tax period during which the turnover is reached, the company shall submit an application for registration (Article 96, Para. 1 VAT Act). Voluntary registration is also possible for any taxable person who does not meet the conditions for mandatory registration (Article 100, Paragraph 1 VAT Act). Under this law, the legal entity may get its VAT registration regardless of the turnover made in distance sales, when it has duly notified the tax administration of the Member State where it is registered for VAT purposes of its desire to carry out distance sales with a place of performance on the territory of the country (Art. 100, Para. 3 VAT Act)

Conclusion

This article reflects the state of regulation in Bulgaria as of October 2022. By taking into consideration various legislative amendment initiatives, the latest updates may not be timely captured by the author. Should you require an in-depth review of a particular topic concerning blockchain legal treatment, do not hesitate to reach out via BLG.

Svetlin Konsulov is a member of Blockchain Lawyers Group. He is a Bulgarian attorney, expert in AML/KYC compliance, privacy and VASP licensing regulations.

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