Is the liability of the partners in the VCC completely limited?
The responsibility of the partners in the company with variable capital (VCC )is not fully protected, which raises certain concerns about the legal status of this form of company. According to Art. 260a, para. 1 of the Commercial Law (TC), the company is liable to creditors only with its assets. This is a characteristic that brings it closer to capital companies, where the partners are not personally responsible for the obligations of the company. However, there are ambiguities in the legal provisions that leave room for interpretation and potential risks.
In the first place, VCC is not categorically defined either as a capital company or as a partnership company. Art. 64, para. 3 of the TC lists the capital companies, such as Ltd. and AD, which provide full protection of the personal property of the partners. On the other hand, partnerships, such as collecting societies, oblige the partners to be jointly and severally liable for the obligations of the company. The lack of a clear indication of the SPC in this classification creates a legal vacuum and leaves open the question of the protection of personal property.
Further doubts arise from Art. 263t, para. 8 of the TC, according to which the rules for personal partnerships apply when converting the DPP. This underlines that PPK has mixed characteristics, combining elements from both equity and personnel companies.
The capital of the VCC also creates some uncertainty. According to Art. 260e, para. 1 of the TC, it is variable and does not enter the Commercial Register. In contrast to capital companies, where the capital serves as a guarantee for creditors and is clearly indicated in the registration documents, the lack of fixed capital under the SPM can make it difficult for creditors to satisfy their claims.
A special feature is also the issue of inheritance of shares. According to Art. 260h, para. 3 of the TC, the heirs of a deceased partner may join the company within three months if they wish. This provision is unusual for capital companies, where participation is strictly regulated, and is closer to partnership companies, where the personal participation of the partners is key.
Also interesting is the provision of Art. 260g, para. 3 of the TC, which allows interested third parties to request an extract from the shareholders' book for the shares they own. However, there is no obligation to provide this information, which complicates the ability of creditors to identify those who may be liable.
Although the texts in the law indicate that VCC is liable only with its assets, the lack of a clear regulation on the legal status and personal liability of the partners creates uncertainty. The need for clarity can be achieved through future legislative changes or case law to clarify these issues.
Are there nuances in the accounting of variable capital companies in Bulgaria?
Keeping accounting for variable capital company (VCC)in Bulgaria requires strict compliance with the requirements of national and international accounting standards, tailored to the specifics of this type of company. Key features include the dynamic nature of capital, accountability of ownership and transparency in financial statements.
Variable nature of capital
One of the key characteristics of the VCC is the variable capital, which, according to Art. 260e, para. 1 of the Commercial Law, is not subject to entry in the Commercial Register. The amount of capital is updated annually and reflected in the annual financial statements. This requires careful monitoring of all changes, including contributions, withdrawals and revaluations, which must be accounted for in accordance with the principles of IAS 1 — Presentation of financial statements, and where applicable, with IFRS.
Accounting for assets and liabilities
In the case of a PPP, it is possible that the capital consists of cash and non-cash contributions, which are valued at fair value by experts (Art. 260e, para. 4 of the TC). This requires compliance with the principle of fair and fair presentation, set out in Art. 24 of the Accounting Act (CPA). Reporting should provide clarity on the value and origin of assets, applying relevant valuation standards, for example IAS 16 — Tangible fixed assetswhen the assets are fixed.
Financial statements
VCC are obliged to prepare financial statements in accordance with the requirements of Art. 29 of the Accounting Act. The annual financial statement shall include:
- Balance sheet, which reflects the structure of assets, liabilities and capital.
- Statement of income and expenses, showing the financial result of the activity.
- Explanatory annexes containing information on ownership, class of shares and changes in capital.
These reports must be prepared in Bulgarian language and presented in thousands of euros, in accordance with Art. 23 of the Accounting Act.
Applicable accounting base
According to Art. 34 of the Law on Accounting, companies can choose between National Accounting Standards (NSS) and International Financial Reporting Standards (IFRS), depending on their size and activity. An IFRS that operates in international markets or has specific requirements may choose IFRSs to ensure compatibility and transparency to international investors.
Principles in the preparation of financial statements
The financial statements of the VCC must reflect the principles laid down in Art. 26 of the Law on Accounting Act, including:
- Operating company— the assumption that the company will continue its activities for the foreseeable future.
- Accrual— transactions are recorded at the time of their occurrence, regardless of payment.
- Sequence— accounting policies are applied consistently to ensure comparability.
- Principle of caution— reflect expected risks and losses.
When should the variable capital company (VCC)prepare reports according to international accounting standards instead of national ones?
A variable capital company (VCC) must prepare its financial statements in accordance with International Accounting Standards (IAS) when it falls into the categories of entities that are obliged or choose to apply this accounting base under Art. 34, para. 2 of the Accounting Act (SCA). This includes undertakings that are defined as credit or financial institutions, payment service providers, insurance companies, pension insurance companies, investment intermediaries, management companies, as well as national investment funds and companies whose securities are admitted to trading on a regulated market in a Member State of the European Union. Also, entities that are part of a group compiling consolidated financial statements under IAS are required to use this accounting base for their consolidated accounts.
Except in cases of mandatory implementation, the variable capital company (VCC) may voluntarily choose to compile its IAS reports if this is necessary to attract international investors, work with foreign partners or participate in international markets. This choice is permissible when the company wants better transparency and compliance with the requirements of international reporting standards. When making this decision, it is important for the company to take into account that a change in the accounting base is limited by law and cannot be carried out more than once, except when required by a regulatory act.
Where a PPP is classified as a public-interest entity, such as companies with an important role in the economy, its accounts should also be prepared in accordance with IAS. This requirement is aimed at ensuring a high level of accountability and a fair presentation of financial performance, especially in the context of the international economic environment. The application of the IAS in these cases ensures full compliance with practices in the European Union and the world economy.
Compliance with IAS is also mandatory for businesses that are part of regulated industries, such as insurance or financial asset management, where transparency and standardization are critical. In these cases, IAS shall provide detailed rules for the classification and valuation of assets, liabilities and financial instruments that are essential for the correct presentation of the financial position.
Are variable capital companies subject to mandatory financial audit in Bulgaria?
Variable capital companies (MMFs) in Bulgaria are not subject to mandatory independent financial audit by default unless they meet certain criteria set out in the Accounting Act (SCA) and the Independent Financial Audit Act (IFA). The main criterion for requiring an audit is the exceeding of certain thresholds for the carrying amount of assets, net sales revenue and the average number of personnel or the belonging of the company to categories of enterprises that are subject to mandatory audit. Initially, according to Art. 260a, para. 3 of the Commercial Law (TZ), a variable capital company (VCC) can function as such only if:
- The average number of staff is less than 50;
- The annual turnover does not exceed BGN 4 000 000. ;
- The carrying amount of the assets does not exceed BGN 4 000 000.
These criteria, set for the preservation of the status of the variable capital company (VCC) , coincide with the thresholds above which the enterprises are subject to mandatory audit, according to Art. 37, para. 1 of the Accounting Act. This means that if the VCC exceeds these indicators, it automatically loses the right to exist as a company with variable capital and has to be converted into another legal form, for example, a limited liability company (LLC) or a joint-stock company (JSC). At the same time, it becomes subject to a mandatory financial audit if it meets the requirements of the CSE for assets, turnover and personnel.
According to Art. 37, para. 1 of the ZFZ, small enterprises are subject to mandatory financial audit if, as of December 31 of the current reporting period, they exceed at least two of the following indicators:
- Book value of assets over BGN 4,000,000 ;
- Net sales revenue over BGN 8,000,000 ;
- Average number of staff over 50 people.
In order to remain within the GPA requirements, the company must not exceed these criteria, which automatically excludes the obligation to audit. However, if the company exceeds at least two of these indicators, it will not only be subject to a mandatory independent financial audit, but also lose its right to operate as a SPP and will have to be transformed into another form of company.
In addition, compulsory audit also applies to enterprises of public interest or those for which it is expressly provided for by law (Art. 37, para. 1, item 3 and item 5 of the Law on Auditing). A PSC that does not fall into these categories and retains its status as a small or medium-sized enterprise is not required to carry out a financial audit, which gives it an advantage in reducing administrative costs.
It is important to note that if a company chooses to prepare its financial statements under International Accounting Standards (IAS), this does not automatically lead to an audit obligation, unless it falls into any of the above categories or exceeds the criteria described in the law.
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