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01 February 2015

Bulgarian Update: The Quest for the Lost Forest

On 5 September 2014, the European Commission concluded that state forest swaps executed in the early years of Bulgarian EU membership violate the EU state aid rules and required that Bulgaria undertake measures to remedy the issue.

The forest lost

The European Commission (EC) investigation included a total of 132 swaps of state forest in the period January 2007 to January 2009. Still, the cases in which there is indeed a violation of the EU state aid rules have to be selected after revision of the swaps by the Bulgarian administration.

The EC requirements to Bulgaria

The EC required that “Bulgaria must now either recover the incompatible State aid from the companies that received it or undo the swaps concerned”. If Bulgaria fails to comply effectively and timely, the EC might initiate an injunction procedure.

The administration in charge of this quest

The EC decision is binding for all state authorities, including the courts. They are required (i) to prevent a distortion of the competition on the market that might be caused by acquisition by the beneficiary of a state forest at a price lower than the market price and (ii) to restore the status of the market prior to the provision of the non-compliant state aid.

According to the constant EU case law applying the provisions of EU law related to state aid, the Bulgarian courts must cooperate in good faith with the EC and the EU jurisdictions. In other words, the Bulgarian court cannot stop a procedure for restitution of non-compliant state aid without depriving Art. 108 paragraph of the Treaty on the Functioning of the EU of its effect, thus violating the principle for efficiency of the applicable national procedures.1

On the contrary, the Bulgarian courts must undertake all measures necessary for the enforcement of the EU obligations and refrain from actions that might stop EC decision from being enforced.2 A requirement to that effect is set out also in Art. 14 paragraph 3 of Regulation No. 6591999.

In summary, under EU law, Bulgarian authorities are required to be proactive and efficient in enforcing the EC decision.

Under Bulgarian law, when the EC issues a decision for restitution of non-compliant state aid, the Bulgarian Minister of Finance is to order the state aid administrator to undertake the necessary restitution measures. If the amount and the beneficiary of the state aid are not specified in the EC decision, then the administrator (ie, the Minister of Agriculture in the case of forest swaps) is to make this specification, documenting it in a public receivable act.

In summary, the EC decision for restitution of non-compliant state aid is to be enforced at the national level via public receivables acts by the public enforcement agents at the National Revenues Agency under the collection procedure of the Tax and Social Insurance Procedure Code.

The effect of the EC decision from a Bulgarian property law perspective

As discussed, the EC decision requires that Bulgaria either recover the incompatible state aid or undo the swaps. The second option is particularly interesting in the context of Bulgarian property law. Can the enforcement of the EC decision affect the validity of the title of the current owner on the swapped forest? It might. In general, the authorities have discretion to choose the measures for enforcement of the decision in a manner that will ensure their effectiveness.

The retroactive swap is the advisable approach when the swapped forests still exist in the same condition at the time of the swap. If, however, the property has been developed or is no longer forest land (eg, its designation has been changed to constructible), thus changing the value of the property, or if the swapped properties have been transferred to third parties, then the “undo” option might not be available.

The question then remains whether the owners of the swapped forest can claim acquisition by prescription under the Bulgarian law as a defence. With respect to state aid, Art. 15 of Regulation No. 6591999 provides for a 10-year prescription period whereby each action by the EC or Bulgaria interrupts the period. Even under Bulgarian law, this defence might be difficult to invoke.3

The European Court of Justice has consistently ruled that “undertakings to which State aid has been granted may not, in principle, entertain a legitimate expectation that the aid is lawful unless it has been granted in compliance with the procedure”.4 In the case at hand, as there was no procedure for coordination with the EC before the swaps, the beneficiaries cannot invoke the defence of good faith or claim that restitution would violate moral principles or legitimate expectations. The efficient enforcement of EC decisions has been consistently upheld as a priority by the European Court of Justice, and national authorities must comply.

According to the European Court of Justice's case law, "a diligent businessman should be able to determine whether procedure has been followed". So the owners of the swapped forest cannot claim acquisition by prescription under the Bulgarian Ownership Act as defence against any recovery actions.


1Case C‑27/13, paragraph 31.
2Case C‑284/12, paragraph 41.
3The Bulgarian law provides for a five-year prescription period for possession in good faith under Art. 79 of the Bulgarian Ownership Act.
4Case C‑24/95, paragraph 25.

authors: Elena Todorova, Mariya Mihaleva