Bulgaria: International tax developments quarterly digest (Jan – Mar 23)

The Bulgarian Supreme Administrative Court decided on cross-border taxation of notional interest on convertible debt following a CJEU ruling

On 5 January 2023 the Bulgarian Supreme Administrative Court (“SAC”) delivered its decision on the application of withholding tax on notional interest under an interest-free lending arrangement. Particularly, the case concerned a large Bulgarian taxpayer granted with an interest-free convertible loan from its non-resident shareholder, tax resident in Luxembourg. No interest had been accruing by the local borrower and it eventually had it converted into equity.

Тhe Bulgarian tax administration initiated a tax audit and assessed an arm’s length interest on that loan on which it imposed withholding tax at the rate of 10% (claiming no relief was available under EU rules or the applicable double tax treaty).

The conclusions made were appealed before SAC, which stayed the proceedings and referred its questions on the application of EU law and the national anti-abuse provisions to the Court of Justice of the EU (“CJEU”) and specifically whether they preclude the application of such withholding tax under the discussed circumstances.

In its ruling under case C-257/20 the CJEU has adjudicated the applicable EU Directives do not prevent the application of withholding tax on notional interest. In its subsequent decision SAC has relied on the CJEU conclusions and confirmed the imposed withholding tax on the determined deemed interest under the concluded financial arrangement. Furthermore, SAC has rejected the request of the local taxpayer to recalculate the tax due under the net basis regime (i.e. taxing net interest margin instead of gross interest accruals). On the other hand, the court relied on a separate transfer pricing benchmark study which determined a market interest in favor of the taxpayer in comparison to the initially used one by the tax administration, which has resulted in a partial annulment of the tax assessment act.

The landmark Bulgarian judgment features a broad array of international tax issues with EU wide impact such as taxation of notional interest on non-interest-bearing debt; scoping out certain parent-subsidiary financing arrangements from the EU Interest & Royalty Directive; application of the net-base regime for withholding taxes when other remedies are not available. Given the increasing complexity around new rules tackling taxation of financing returns coupled with the spike in borrowing rates, it is recommended that highly leveraged taxpayers revisit their setups to assess the need of derisking and restructuring.

Ministry of Finance proposal seeks formalization of taxation of digital assets

As part of its recent set of proposals for amendments to the applicable tax legislation, the Ministry of Finance has also recommended amendments with respect to the taxation of virtual currencies under the Bulgarian Personal Income Tax Act (“PITA”).

The treatment of virtual currencies has remained unregulated under Bulgarian law creating uncertainties and has been subject of multiple circulars by the Bulgarian National Revenue Agency (“NRA”). While there is no formal definition or reference to these types of digital instruments in the present tax legislation, the tax administration has accepted the view that they constitute a form of financial assets and their disposal is regarded as a taxable transaction under PITA.

Provided that the proposal by the Ministry of Finance would introduce an explicit definition considering virtual currencies and would tax them in a way similar to financial assets. This approach would also ensure higher legal certainly and serve to maintain the validity of the prior treatment of these transactions by the tax authorities.

Deadline approaches for implementation of the public Country-by-country reporting Directive

Published on 1 December 2021, the EU Council Directive 2021/2101 provides for mandatory requirements for disclosure of income tax information by certain undertakings and branches. Both EU based multinational enterprises (“MNEs”) and non-EU based MNEs doing business in the EU through a branch or subsidiary will be obligated to disclose certain information on their tax affairs provided their total consolidated revenue in each of the last two consecutive fiscal years exceeds EUR 750 million.

Bulgaria is also obligated to introduce the new rules on country-by-country reporting (“CbCR”), requiring companies to publicly disclose certain information for income tax purposes about their group. At present, there is no observed significant progress on the implementation of the new public CbCR regime locally, but transposition is required by 22 June 2023.

MNEs that fall into the scope of the Directive would need their ultimate parent entities (“UPE”) to provide the respective report with the information subject to mandatory disclosure, including among all, the nature of their economic activities, total net turnover and profits made before tax, amount of income tax due by country and the amount actually paid as well as their accumulated earnings.

The report containing this level of information must be published within 12 months of the balance sheet date for the respective year and be accessible in the public registry of the relevant member state and on the company website free of charge for a minimum of five years. Non-compliance with any of the obligations may give rise to penalties.

After the Directive is transposed, the first fiscal year of reporting will be the year starting on or after 22 June 2024, with the possibility, depending on implementation, to apply the rules from an earlier date.

Bulgaria has not provided draft legislation so far, therefore it is yet to be confirmed whether it would make use of the earlier implementation of the discussed rules. Furthermore, groups under the scope of the proposed regime should assess their position and reporting obligations towards the implemented statutory provisions.

EU Member States release proposals for implementation of the EU Directive on minimum corporate taxation of MNEs

Following the adoption of the EU Council Directive 2022/2523 implementing a 15% global minimum level of corporate taxation on 14 December 2022, several EU Member States have begun drafting proposals to transpose its provisions into their local law.

Most recently, Germany published its corporate minimum tax plan on 24 March 2023 including the provisions of the Directive and proposing to adopt the qualified domestic minimum top-up tax (“QDMTT”). Ireland has continued work on implementing the Directive’s requirements, releasing its Feedback Statement on transposition on 31 March 2023 for examination by the EU and relevant stakeholders. Before that, the Netherlands published draft legislation including elaborate commentary in respect of its domestic implementation of the GloBE rules.

As an EU Member State, Bulgaria is also required to transpose the Directive prior to 31 December 2023, although no proposal has been released up to date.

Bulgaria revises its list of jurisdictions with preferential tax regimes in line with the EU actions

On 14 February 2023 the EU Council аdopted the revised EU list of non-cooperative jurisdictions for tax purposes. This list was renewed in line with the EU Council Directive 2011/16 on administrative cooperation in the field of taxation, concerning jurisdictions considered to have a preferential tax regime or otherwise not complying with the required EU standard on the exchange of information for tax purposes.

The EU now lists sixteen jurisdictions which are considered non-cooperative. Most notably the Russian Federation has been included in the latest list as it has been designated as having a harmful preferential tax regime in regard to International Holding Companies, which along with the ongoing war in Ukraine has prevented the Code of Conduct Group of the EU from maintaining a dialogue with Russian authorities, including for tax purposes.

In line with this amendment by the EU, Bulgaria has also revised its list of preferential tax regimes. Along with all jurisdictions contained in the EU list of preferential jurisdictions Bulgaria also includes three more, namely:

• the U.S. Isle of Guam
• the Territory of Christmas Island
• the Pitcairn Islands

There are certain restrictions placed on entities residing in those jurisdictions, among others triggering withholding tax to certain payments made to such residents.

The amendment to Bulgaria’s list of non-cooperative tax jurisdictions entered into force on 1 February 2023.