Bulgaria outlines intention to introduce minimum top-up tax
On 27 June the Ministry of Finance published its drafts of a Mid-term budget forecast for the period 2023-2025 (“Forecast”), together with the 2023 Budget Act amendments. With the Forecast Bulgaria intends to introduce a “domestic top-up tax” from 1 January 2024 in adherence to the Directive 2022/2523 on global minimum tax (the “Directive”), ensuring 15% effective taxation of large multinational and domestic groups and not opt for the derogation in the Directive under which the introduction of the rules could be postponed for six consecutive years (i.e., available when less than twelve ultimate parent entities in scope are situated in Bulgaria).
There is no available legislative draft for the implementation of the rules and the exact approach on how the Directive will be transposed in Bulgaria remains unclear. More developments may be expected in the following months.
Moreover, the published on 17 July 2023 Administrative Guidance released by the BEPS Inclusive Framework, provides for guidance on, among other, the design of the Qualified Domestic Minimum Top-up Taxes (“QDMTT”), which could serve for the implementation of this rule in Bulgaria.
The introduction of a domestic top-up tax in Bulgaria would have a significant impact on subsidiaries and permanent establishments of multinational groups, as well as large domestic groups, which are in scope of the rules, as this could translate into a hike of 5% (from 10% to 15%) on the corporate income tax due locally.
German Federal Council approves protocol amending Bulgaria-Germany Double Tax Treaty
On 7 July 2023, The German Federal Council (“The Bundesrat”) formally approved the Amending protocol to the Bulgaria-Germany Double Tax Treaty (“The Protocol”) previously signed on 22 July 2022. This follows an earlier approval by the German lower house of Parliament (“The Bundestag”) on 15 June 2023 and advances the path to its entry into force.
The Protocol’s amendments to the treaty expands its focus to certain areas in line with the global BEPS Initiative. This involves, among other, introducing the principal purpose test (“PPT”) to all provisions of the treaty. In that sense, any benefit provided for by the treaty may be denied, if it is reasonable to conclude that obtaining the tax benefit is one of the principal purposes of the arrangement in place.
Although the Protocol has been already approved, its entry into force is provided upon the exchange of the ratification instruments by Bulgaria and Germany, and its provisions will come into effect at the start of the year following the exchange. There is no clear indication of when this exchange will take place, but if this happens by the end of 2023, the amendments under the protocol would then become effective as of 1 January 2024.
Taxpayers relying on the application of the DTT between Bulgaria and Germany are advised to review their operations and analyze how the Protocol could affect their current business model and transactions, especially in light of the introduced PPT.
Progress on OECD’s international tax initiatives
On 30 June 2023, the European Commission provided its Progress report on Pillar One shedding light on the progress of this initiative at the level of the Organization for Economic Co-operation and Development (“OECD”).
Pillar One is part of the OECD’s Two pillar solution to address the tax challenges arising from the digitalization of the economy. The Pillar One rules contain two main components, namely Amount A and Amount B. Amount A provides for a taxing right over a part of the residual profits of the largest multinational enterprises to market jurisdictions (i.e., jurisdictions where the taxpayer operates, however allocate no or limited taxing rights). Amount B, on the other hand, provides for a simplified application of the arm’s length principle to baseline marketing and distribution activities performed in a jurisdiction.
While the framework on Amount B is subject to public consultation by 1 September 2023, work on Amount A has progressed significantly and a Multilateral Convention (“MLC”) text containing the respective provisions has been delivered by the Inclusive Framework. Even though a few jurisdictions have expressed concerns with some specific items, it is still envisioned for a signing ceremony to be organized by the end of 2023, with MLC entering into force in 2025.
Furthermore, as additional work on the Two Pillar solution, on 17 July 2023, the OECD published its model text for the Subject To Tax Rule (“STTR”) together with relevant commentary related thereto. The STTR is a treaty-based rule applicable to intra-group payments which are subject to low nominal tax rates (below 9%) in the jurisdiction of the income recipient. The rule provides that although a source jurisdiction may be restricted to tax certain item of income under the respective Double Tax Treaty, it may nevertheless tax such an outbound intra-group payment where it is taxed at the recipient’s jurisdiction at a rate below 9%. It is envisioned a Multilateral instrument implementing the STTR to be released and open for signature from 2 October 2023.
The international tax landscape is observing dynamic changes which are bound to have a significant influence on the multinational group’s tax positions. Moreover, taxpayer’s having cross-border dealings could need to assess whether the STTR could account for additional tax burden.
EU FASTER Directive proposal to improve withholding tax relief procedures
On 19 of June 2023, the European Commission published a proposal for a Council Directive on Faster and Safer Relief of Excess Withholding Taxes (“FASTER” or “the Directive”). With this Directive, the Commission is trying to tackle two intertwined issues which have emerged with respect to the investment activities and the current withholding tax (“WHT”) measures.
In first place, FASTER is trying to resolve concerns around foreign investors operating cross-border that may be subject to double taxation on income they receive (e.g., dividends, interest on bonds etc.) with source in different EU Member States. Whilst there are tax refund and relief procedures which may be benefit from, they are often cumbersome, and complex in the respective countries. Therefore, it is deemed the current status quo has discouraged cross-border investments within the EU. The second issue that the European Commission aims to address with proposal concerns aiding the tax authorities in Member States in identifying and tackling tax fraud related to WHT.
Therefore, the European Commission has proposed establishing a common and standardized system for WHT though the following measures:
- Creation of a common EU digital tax residence certificate (eTRC)
- Establishment of National Registers for the ‘certified financial intermediaries’ (CFIs)
- Standardized reporting obligations
- Introduction of a ‘relief at source’ system and/or ‘quick refund’ system.
Ultimately, the proposed Directive provides a solution for cross-border investments with the objective of making them more efficient, faster and economical. In case a consensus is achieved at the level of the EU, the Directive would enter into force by 1 January 2027.
Progress on other EU tax initiatives
In June 2023, the European Council approved the biannual ECOFIN report on tax issues (“The Report”). The Report provided a summary of the progress on the EU’s tax initiatives during the Swedish Presidency, as well as an update on the expected steps in that direction.
Specifically, it was observed that progress was achieved with respect to the proposal for a Council Directive laying down rules to prevent the misuse of shell entities for tax purposes (referred to “Unshell” proposal). Notably, the Unshell could limit tax benefits provided for under respective Double Tax Treaties and/or EU Tax Directives for EU tax resident entities failing to meet certain minimum substance criteria.
The Report acknowledges the Swedish Presidency was able to draft partial compromise texts and advance on certain topics of the Unshell Directive subject to controversy. However, it seems further discussions will be needed in order to find solutions on outstanding issues. No provisional timeline has been included in the Report on when an agreement could be expected.
The Report also notes a significant progress on the rules amending the Directive on administrative cooperation in the field of taxation (“DAC8”), which, among other, seeks to extend the scope of automatic exchange of tax information. Particularly, they concern exchange of information on crypto-assets and tax rulings for wealthy individuals. ECOFIN reached general agreement on the adoption of the amended Directive, but subject to further review and opinion of the European Parliament.
In addition, the Spanish Presidency, which has begun on 1 July 2023, has expressed its intentions to advocate for the establishment of minimum and common standards on corporate taxation in all Member States and to fight tax evasion by large multinationals. Thus, it seems the latter could provide an additional impetus to the discussed above tax initiatives along with the Business in Europe: Framework for Income Taxation (“BEFIT”) proposal aiming at common set of rules for EU companies to calculate their taxable base and ensuring a more effective allocation of profits between EU countries.
The Bulgarian Supreme Administrative Court interprets the correct qualification of income under specific security instrument
The judgment, rendered by the Bulgarian Supreme Administrative Court (SAC) on the 31 of May 2023, deals with a case where a Bulgarian tax resident issued a security instrument to a Dutch company (the “Holder”). Under this instrument the Holder paid the issuance value and it assumed the risks and benefits from the assets underlying the security without the former being transferred from the Bulgarian taxpayer to the Holder. The income generated by the Holder consisted in the collected amounts from the underlying assets which exceed the issuance value of the security.
The dispute between the Bulgarian tax authorities and the Holder concerned two aspects: 1) the nature of the income and 2) the beneficial ownership of the income. Primarily, the NRA argued that the issued security had the characteristics of a debt instrument and hence, the income earned by its Holder should be treated as an interest income for tax purposes. Secondly, the NRA took the view that the Holder was not the beneficial owner of the income and concluded the tax benefits under the respective Double Tax Treaty were not applicable.
However, the Supreme Administrative Court did not share the above conclusions of the tax administration. The Court outlined that the income accrued to the foreign entity under the security instrument was not to be regarded as interest and was to be relieved from withholding tax under the respective Double Tax Treaty. Notwithstanding the above, the court observed that even if the income was regarded as interest income, due to the fact the Holder bore the risk of the activity it would be able to qualify as the beneficial owner.
Taxpayers are using ever more complex cross-border financial instruments in order to obtain the flexibility necessary for their business operations, especially with rising interest rates worldwide. Nevertheless, it should be assessed how the income from such instruments is to be characterized under the respective tax provisions and whether the financing structure may benefit from any available tax relief.
