Bulgaria
Simeon Grigorov and Anna Zafirova
Eurofast
Bulgaria
Simeon Grigorov and Anna Zafirova of Eurofast describe changes to tax legislation aimed at making the environment more attractive to investors
It is common knowledge that the international companies are constantly looking for new places where to locate or relocate their business, especially since the financial downturn globally. What they find particularly appealing is Bulgaria's low corporate tax rate of 10% – one of the lowest within the EU.
Amendments in the Corporate Income Tax Act
Reduction of withholding tax on royalties
The EU Interest and Royalties Directive (2003/49) precludes any taxation on royalty payments to associated EU companies. Availing itself of the eight-year transitional period for implementing the directive, Bulgaria levied a 10% withholding tax on those payments between January 1 2007 and December 31 2010. From January 1 2011 to December 31 2014, the withholding tax (WHT) rate for the transactions within the scope of the directive is reduced to 5%.
Introduction of WHT on offshore transactions
A 10% withholding tax has been introduced for payments for fictitious services or rights or for non-insurance indemnities of any kind when those are made to:
- entities from a list of uncooperative tax jurisdictions; or
- any other tax jurisdiction that does not have an effective tax treaty with Bulgaria provided that the corporate or individual income tax is more than 60% lower than the equivalent Bulgarian tax.
This restriction also applies to all payments made by residents to non-residents, including by sole traders and permanent establishments (PE) in Bulgaria.
| Bulgaria |
Bulgaria is situated in the South-Eastern part of the Balkan Peninsula. The country has a population of about 7.7 million people living in a territory of 110,994 kilometres squared. Bulgaria borders Greece and Turkey to the south, while the Danube river to the north is its natural border with Romania. Serbia and the Republic of Macedonia lie to the west and the Black Sea is situated to the east.
Bulgaria is in the centre of a region which is undergoing dynamic transition. Within 500 kilometres of the capital city, Sofia, which has 1.3 million people, a population of more than 90 million lives in nine countries that have recently embarked on their way to a market economy. This is a large market with a rapidly-increasing purchasing power.
A network of international motorways crosses the country, providing vital connections to the countries of Western Europe, Russia, Minor Asia, the Adriatic, the Aegean and the Black Sea. The national and international sea and river routes facilitate transportation and trade within the region. The strategic geographic position allows Bulgaria to act as a bridge between Europe and Asia.
Bulgaria has been a member of NATO since 2004 and joined the EU in 2007. Coupled with the increased attractiveness of local tax environment, the EU membership has opened new opportunities for foreign investors. In order to meet the EU membership requirements, Bulgaria has modified its legal and tax system making it compliant with the Community acts.
|
WHT on rentals
The rental income from immovable property is taxed with 10% withholding tax. The method of collection of this tax has been changed from assessment to withholding.
Hidden profit distributions
The existing definition of "hidden distribution of profits" has been expanded to include not only amounts not connected to the business activities or such that surpass the usual market levels, but also amounts paid or distributed, regardless the form, to shareholders, partners or persons related to them. Those cases are considered as payment of dividends. As a result, they will be subject to 5% withholding tax irrespective of the recipient's tax residency (EU or non-EU). Tax relief from this obligation is available under very few tax treaties.
Insurance premium tax
The law has introduced a new tax at the rate of 2% on insurance premiums paid under insurance contracts for which the risk is located in Bulgaria. Outside the scope of the new taxation remain these four categories of contracts: aircraft and vessels insurance; cargo insurance for goods in transit; reinsurance and retrocession; life insurance and similar, unit-linked and capital redemption insurance, health insurance or a combination thereof.
Permanent establishment
The latest amendments state that the definition of income attributed to a PE of a non-resident legal entity is extended to include gains from the disposal of assets of the PE, which also consists of gains from the disposal of the PE itself.
Partial refund of withholding taxes
A partial refund of withholding taxes paid on the gross amount of the income derived, among others, from interest, royalties and consultancy fees shall be available to non-resident legal entities established within the EU.
The amount subject to refund shall be the difference between the withholding tax paid on a gross scale and the income tax that would have been payable under the national corporate income tax legislation, minus the tax credited against the tax obligations of the company in question.
To exercise this right, the non-resident legal entity has to submit a request to the relevant revenue authorities in Bulgaria. The right to claim such a refund is available retroactively, that is, from January 1 2007.
Annual corporate income tax submissions
The obligation to file financial statements and audit reports has been waived. The submission of an annual report on corporate activity containing accounting verifications and an annual corporate tax return will suffice.
Annual returns shall not be required from tax-liable entities that have not performed economic activity during the calendar year and have not accounted for any incomes and/or expenses.
Proof of taxes paid abroad
When filing the tax return, resident legal entities receiving income from foreign sources must attach a certificate for the taxes paid abroad, unless the relevant tax treaty provides for the exemption-with-progression method for avoidance of double taxation.
Amendments in the Accountancy Act
Changes have been made in the rules for the publishing of annual financial statements. Up to now, all the companies irrespective of their legal form were obliged to submit their financial statements on the website of the Bulgarian Trade Register until June 30 of the following financial year. From 2011, there are new deadlines depending on the type of the legal entity:
- May 31 – for sole-traders;
- June 30 – for limited-liability companies;
- July 31 – all other legal entities registered under the Commerce Act.
Transfer pricing manual
The National Revenue Agency has issued a new transfer pricing manual aimed at assisting tax authorities in the application of the existing transfer pricing rules. Though not binding for taxpayers, it gives important guidelines about how the existing transfer pricing rules shall be interpreted, covering various aspects such as risk and functional analyses, different methods and their hierarchy, and intra-group services.
Amendments in the Value Added Tax Act
The tax rate on hotel accommodation has been increased from 7% to 9%. The scope of the tax is widened to include not only bookings as part of an organised trip, but all types of hotel accommodation. The amendment is in force as of April 1 2011.
The taxable economic activities performed by the state now explicitly include concessions. Transitional rules shall apply for the existing ones.
The place of supply in the case of cultural, sports and scientific events is distinguished based on whether the recipient is a taxable person or not.
Health services provided by infant day-care centres are considered as supplies of healthcare services and therefore are VAT-exempt.
The supply of dental prostheses is considered VAT exempt when provided by dentists or dental technicians.
Key skills training is explicitly considered as a VAT-exempt educational service.
The conditions and documentary proof for applying the exemption on import of goods followed by an intra-Community supply have been clarified requiring, among others, the VAT number of the recipient to be declared.
VAT refund
The VAT refund period after the provision of a guarantee is decreased from five days to three days.
Invoices
An option is given to the recipient of a VAT supply to issue the invoice on a transaction, if this is agreed with the supplier.
Amendments in the Local Taxes and Fees Act (LTFA)
Tourist tax
A new tourist tax ranging between BGN0.20 and BGN3 per day has been introduced. The tax due is calculated as the total number of individual accommodations per month multiplied by the fixed tax per day. A minimum amount of tax is envisaged calculated as 30% of the tax that would be levied at the maximum monthly capacity.
Tax on immovable property
The exemption of properties with tax valuation of less than BGN1,680 is abolished. The upper limit of the tax rate has been increased from 0.25% to 0.45%.
Vehicle tax
The upper limit of the tax on special construction vehicles, cranes, trolley buses and others is increased from BGN150 to BGN250.
The tax is due in two instalments as before, but the payment periods are changed to March 1 – June 30 and July 1 – October 30 respectively (the former periods were January 1 – March 31 and March 31 – September 30).
Penalties
The penalty for non-filing, late or false filing of declaration for newly acquired immovable property by companies is increased from BGN100 – BGN1,000 to BGN500 – BGN3000. For minor cases of administrative violations, lower immediate fines ranging from BGN10 to BGN50 are envisaged.
Simeon Grigorov (simeon.grigorov@eurofast.eu), Eurofast Global, Sofia Office/Bulgaria and Anna Zafirova (anna.zafirova@eurofast.eu), Eurofast Taxand, Cyprus