Bulgaria

Galina Petkova and Froso Alexandrou
Eurofast Global
Bulgaria

The accession of Bulgaria to the EU in 2007 has brought many tax benefits, explain Galina Petkova and Froso Alexandrou of Eurofast Global

Bulgaria joined the EU on January 1 2007, becoming part of the internal market with access to nearly 500 million people. In turn this brought new challenges for the Bulgarian legislation. To meet the requirements of EU membership Bulgaria had to modify its legal system to comply with EU legislation and in line with the acquis communauitaire.

For multinational companies investing in Bulgaria the EU membership created opportunities in response to the changing tax environment. Foreign investors were attracted by the low corporate tax rate of 10 % levied under the national law – one of the lowest corporate tax rates within the EU.

In addition, on its accession date Bulgaria had implemented in its local legislation four of the major corporate EU directives: (i) the Parent-Subsidiary Directive (designed to eliminate tax obstacles in the area of profit distributions between groups of companies in the EU), (ii) the Interest and Royalty Directive (designed to eliminate withholding tax obstacles in the area of cross-border interest and royalty payments within a group of companies), (iii) the Merger Directive (providing for the deferred taxation of capital gains arising from cross-border company restructuring) and the Mutual Assistance Directive (providing for tax cooperation). The synchronisation of the Bulgarian legislation with EU laws ensures favourable tax treatment for cross-border transactions with Bulgarian elements and therefore, serves as an additional stimulus for multinational companies to invest in the country.

It should be noted also that to encourage foreign direct investment Bulgaria proposes a tax incentive formulated mainly in the Encouragement of Investment Act and Corporate Income Tax Act (CITA). For example, Bulgaria will provide a 100% tax exemption for manufacturing enterprises conducted in designated regions with high unemployment. The incentives are available to companies registered in Bulgaria, regardless of the owner's nationality.

Mergers and acquisitions

At the beginning of 2009, after a series of legislative amendments introduced in the CITA and the Protection of Competition Act Bulgarian legislation became fully compliant with the European Acts in terms of tax treatment of M&A transactions and in terms of the amount of sanctions imposed in case of failure of notification of concentration with the competent Bulgarian authority.

The full implementation in Bulgaria of EU M&A legislation means that:

All companies registered in Bulgaria which are incorporated under any of the legal forms mentioned in a list annexed to the Merger Directive (Annex 1) shall fall under its scope. In addition, the Merger Directive shall also apply to European Companies (SE) and European Cooperative Societies (SCE) registered in Bulgaria;
A merger or division shall not give rise to any taxation of capital gains calculated by reference to the difference between the real values of the assets and liabilities transferred and their values for tax purposes;
In a merger, division or exchange of shares, the allotment of securities, representing the capital of the receiving or acquiring company, to a shareholder of the transferring or acquired company in exchange for securities representing the capital of the latter company shall not, of itself, give rise to any taxation of the income, profits or capital gains of that shareholder;
SE and SCE registered in Bulgaria can choose to transfer their registered office between member states without winding up or the necessity to create a new legal entity. The transfer of the registered office of an SE or SCE, or an event connected with that transfer, shall not give rise to any taxation in a case where the assets of an SE or SCE remain effectively connected with a permanent establishment situated in Bulgaria;
No tax liability arises to the receiving company when it cancels its holding in the capital of the transferring company, provided that the holding is more than 10% as of January 1 2009;
The Merger Directive covers situations where the assets connected to a 'branch of activity' are transferred to a newly set up company – a subsidiary of the same company whose permanent establishment transfers the assets;
A split-off which represents an operation whereby a company transfers, without being dissolved, one or more branches of activity, to one or more existing or new companies, leaving at least one branch of activity in the transferring company, is to be defined as a tax neutral transaction provided that the assets and liabilities so transferred remain connected with a permanent establishment of the receiving company in the member state of the transferring company;
The Bulgarian Commission for the Protection of Competition is obliged to fully cooperate with the European Commission for merger or acquisition transactions with a European dimension;
The failure of an entity to notify of a planned merger or acquisition transaction may result in sanctions amounting to 10% of its annual turnover.

Dividends

In the area of profit distributions between a group of companies (including SE and SCE) where one of them is headquartered in Bulgaria and the other (s) in other member states, the Parent Subsidiary Directive shall apply.

The ultimate purpose of the Parent Subsidiary Directive is to eliminate tax obstacles on profit distributions in the EU. No withholding taxes arise on dividends distributed by the subsidiary to its parent, given that both a holding of at least 10% and or a two-year holding period can be established.

Bulgaria adopted and implemented the directive fully. Dividends paid by a Bulgarian subsidiary to EU resident companies may be exempt from withholding tax given that a parent company holds at least 15% of the shares of its subsidiary for at least two years.

Where the parent company is not a member of the EU but is a nonresident company receiving dividends from a subsidiary Bulgarian Company, dividends are subject to a 5% withholding tax, unless a lower rate applies under an applicable tax treaty.

Interest and royalties

Another important EU directive which applies in Bulgaria is the Interest and Royalties Directive. It abolishes withholding taxes on interest and royalty payments in a member state. A direct minimum holding of 25% is required and member states can choose not to apply the provisions of the directive where the holding period was not been maintained for an uninterrupted period of at least two years.

Bulgaria is under a transitional period to implement this directive. During this transitional period a Bulgarian company will impose a 10% withholding tax on interest and royalties paid to an associated EU company until December 31 2010, which will be reduced subsequently to 5% until December 31 2014 when it will finally be eliminated for transactions between EU associated companies.

Payments of interest and royalties from a Bulgarian company to non-residents are subject to 10% withholding tax, unless a treaty provides for more favourable tax rates.

Opportunities created

Bulgaria's accession to the EU brings a number of opportunities for foreign investors who invest or are planning to invest in the country.

The harmonisation of Bulgarian legislation with the European Acts along with the favourable geographic location of the country, the incentives proposed, the macroeconomic and financial stability and low corporate tax rate make the country an ideal destination for multinationals companies to invest in.