Amendments to Corporate Income Tax Act
At the end of year 2010, Bulgarian parliament adopted a number of changes in the Corporate Income Tax Act (CITA), some of which will have a significant beneficial effect on cross-boarder transactions.
1. Transposition of EU Interest and Royalties Directive
From the beginning of this year, Bulgaria has reduced the general 10% rate of the withholding tax to 5% for interest and royalties paid by resident companies to associated companies established within the EU. This important change in the regime of taxation of interest and royalties came as a result of the transposition of the EU Interest and Royalties Directive (2003/49/EC) into national legislation.
In order to enjoy taxation at the reduced rate, the non-resident beneficiary of the payment of interest/royalties should satisfy certain conditions (i.e. to have one of the legal forms listed in CITA, to be tax resident in the EU etc. In addition to that, the payment of interest and/or royalties should be made between "associated" companies. As such are considered those in which one holds directly minimum 25% in the capital of the other or a third company has a direct minimum holding of 25% in the capital of both the resident payer and the beneficiary. Holdings must involve only companies resident in the EU. The minimum holding period that is required is 2 years. In cases of hidden distribution of profits, preferential treatment will not be applied.
2. Extension of tax avoidance rules to persons in offshore zones
Certain offshore transactions performed by resident legal entities, sole traders or permanent establishments to non-resident legal entities (payments for fictitious services and/or rights, non-insurance indemnities etc.) are taxed with 10% withholding tax. As "offshore" are qualified entities from uncooperative tax jurisdictions (explicitly listed) or any other jurisdiction that lacks DTT with Bulgaria and there the rate of the corporate tax rate is more than 60% lower than the equivalent Bulgarian tax.
3. Payment of withholding tax for rental income
When resident legal entities pay to non-residents rentals or other remuneration for the use of real estate, the tax due is withheld and paid to the budget by the resident payer of the income. Before 2011, this obligation was imposed on the foreign recipient of rentals.
4. Assets distributed as a dividends or liquidation quotas
According to the new regime, assets distributed as dividend or liquidation quotas will be considered as sold at market prices and will form part of the taxable income.
The second area where important amendments have been introduced is VAT taxation. The new provisions will have an impact on foreign investors, on companies operating in Bulgaria, as well as on non-residents visiting the country.
From the beginning of year 2011, granting of concession for construction services or extraction will be treated as a taxable supply and as such VAT will be charged on the contract value. This amendment should be taken into consideration by potential investors as the initial expenses for acquiring the concession will be increased with 20% VAT.
2. Intra-community Acquisitions
As VAT-exempted intra-community acquisitions of goods will be considered those goods whose import have been exempted according to the general rules for imports, except for the goods that will be subsequently delivered to other EU member state. In order to enjoy VAT exemption, the importer must provide its own Bulgarian VAT identification number, the identification VAT number of the client to whom the goods will be delivered, as well as to prove that the goods have been imported in order to be transported or sent to another EU country.
3. Barter transactions
From 1 January 2011, the tax base for calculating VAT on barter transactions has been changed. The market value of the received goods or services has been replaced by the market price of goods or services supplied on the date on which the tax became chargeable.
4. Place of supply of certain services
According to new provisions in the VAT Act, services related to cultural, artistic, sporting, scientific, educational, recreational or similar events, when provided to tax liable persons, will be taxed in the country where the recipient is established. The existing rule for VAT taxation in the country where the event takes place will continue to apply for services providing access to such type of events (tickets, subscription fees etc.) and accompanying access services when provided to a taxpayer, as well as for all services associated with these events when provided to tax non-liable persons.
5. Taxation of hotel accommodation
From 1 April 2011, the reduced VAT rate of 7% applicable to hotel accommodation will be increased to 9%. This rate will apply not only to lodging when it is part of a trip organized by a tour operator, but also to accommodation provided directly to the customer by a hotel or other lodging establishment.
6. Tax Compliance
A number of changes have been introduced to effect various tax compliance provisions. The most important one is the introduction of self-billing (self-invoicing) by the recipients of goods/services. When self-billing, the recipients may issue invoices or debit/credit notes on behalf of the supplier. This option may be used only after previously agreed by the parties in writing.
The period to recover VAT tax credit when a guarantee is provided has been shortened from 3 to 5 days.
VIES declaration from now on must be submitted electronically. In addition, when the VAT declaration, the VIES declaration and the reports are submitted electronically, there is no need for them to be resubmitted on optical or magnetic device.
Personal income tax amendments
1. Extension of tax avoidance rules to persons in offshore zones
Similarly to the amendments to CITA, as of 1 January 2011, all income from provision of services and/or use of rights, as well as damages and non-insurance compensations paid by resident legal entities/sole traders to individuals resident in jurisdictions with a preferential tax regime will be taxed with 10% withholding tax in Bulgaria. A reference is made to CITA in order to determine which countries fall under the category of "uncooperative tax jurisdictions" (at present to include Monaco, BVI, Gibraltar, Caiman Islands etc.). The place where the payment is actually made is irrelevant and those incomes are considered to be derived from Bulgaria. The 10% withholding tax will not apply if there is an evidence that the services or rights are actually provided/granted.
2. New requirements for rental payments
Bulgarian residents who pay rentals or other remuneration for the use of real estate to non-resident individuals are required to withhold a 10% tax. The tax is withheld and paid by the end of the month following the month when the payment has been made.
More stringent rules coupled with administrative fines have been introduced in order to combat the attempts for tax evasion. Payers of rental income are obliged to issue a statement in a specific format provided by the authorities where the amount of income paid and amount of withholding tax are reflected.
Amendments introduced certainly make Bulgaria much more attractive and beneficial in terms of investments. As such, after transitional period, EU Interest and Royalties Directive has now been implemented and fully comply with the EU legislation. With the changes to payment of withholding taxes for rental income, tax compliance obligations vested on from non resident investors to the Bulgarian residents. Furthermore extension of tax avoidance rules prove that Bulgaria is taken tax evasion seriously and doing all necessary to tackle it, thus becoming more and more trusted jurisdiction to do business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.