Bulgaria: International tax developments quarterly digest

Bulgaria ratified the Multilateral Instrument (MLI) to modify its existing tax treaties

Bulgaria deposited its instrument of ratification for the MLI Convention in September 2022 and the latter will enter into force on 1 January 2023.

The Base Erosion and Profit Shifting (BEPS) Multilateral Instrument (“the Convention” or “MLI”) enables jurisdictions to swiftly implement the treaty-based recommendations from the BEPS package, including the agreed minimum standards. The MLI has been signed by more than 70 jurisdictions, including Bulgaria and it represents one of the most important changes to cross-border tax rules in history.

The main objective of the MLI is to allow countries to modify the entirety or part of their treaty network by just signing a single multilateral convention instead of the need to renegotiate all of its bilateral agreements.

Bulgaria specifically has included 66 of its tax treaties in effect, excluding those recently revised (e.g., with the Netherlands) and the ones expected to be renegotiated soon thereafter (e.g., with Germany, Malta, Switzerland).

Some of the notable amendments concern the right to tax capital gains on transfer of shares in real estate rich Bulgarian entities by their foreign holding vehicles, as well as a number of measures against artificial avoidance of permanent establishments. Taxpayers claiming tax relief would likely have to evidence that they have not put in place a given structure or transaction with the main objective of obtaining tax benefits under the treaty.

The ratification of the MLI could have a direct impact on exit strategies in the real estate space, as well as any on foreign entities that sell goods on the Bulgarian market without being established through a local branch or a related distribution entity.

Update on the EU 15% minimum corporate tax proposal

On 4 October 2022, an Economic and Financial Affairs Council (ECOFIN) meeting was held, initially intended to reach the unanimity required to adopt the Directive introducing  minimum effective rate tax of 15%. However, the latter topic of discussion was further excluded from the meeting’s agenda.

Although during the previous meetings, Hungary has expressed its objections against moving forward with the proposal, the European Commission has stated that it remains fully committed to introduce the minimum corporate tax rate along with the Czech presidency of the Council this year.

What is more, in case unanimity is not reached by the end of the year, some Member States, amongst which Germany and France, are determined to explore different alternatives in implementing the minimum tax rules on their own. No official statement or comment has been made by the competent Bulgarian authorities on this matter.

Distribution of advance dividends already possible

Historically, any attempts for distribution of interim dividends in Bulgaria had been highly contested by the tax authorities and adversely treated as hidden profit distribution triggering adverse tax consequences.

In a recent non-binding ruling issued by the Bulgarian tax administration on the topic, the tax authorities took a position acknowledging that distribution of interim dividends could be tax compliant under certain conditions among which the availability of reliable forecast and preparing interim financial statements.

This position aligns with the EU wide attempts to reduce the tax considerations in the debt vs. equity bias and provide further flexibility in deploying liquidity within groups of entities.

EU wide windfall tax in the energy sector

The EU has adopted Council Regulation (EU) 2022/1854 on an emergency intervention to address high energy prices (the “Regulation”). Among all, the latter aims at mitigating the effects of high energy prices through measures targeting companies in the energy sector. They will apply directly to the in-scope businesses as od 1 December 2022.

One of these measures is the introduction of a temporary revenue cap on “inframarginal” electricity producers. Namely, the market revenue should be capped to a maximum of EUR 180 per MWh of electricity produced. This measure will apply with some exceptions to low-cost electricity generating companies (i.e., those whose production costs are unrelated to high fossil fuel prices, such as wind, solar and nuclear producers). The surplus revenues from the application of the cap should have to be employed by the Member States to finance programs mitigating the high electricity prices for final consumers.

Along with the above, the European Commission deems the fossil fuel sector is benefiting from price increases due to the market environment, thus generating profits beyond the usual business activities. Hence, temporary solidarity contribution is introduced in the EU, related to surplus profits derived by companies in the oil, gas, and coal sectors.

The rate for calculating the solidarity contribution should be at least 33% and should be applied to the taxable profits obtained during fiscal year 2022 and/or 2023 which are above a 20% increase compared to the average taxable profits of the preceding four fiscal years. The solidarity contribution should apply together with regular national taxes and levies.

As a next step, the Regulation should be promulgated, and it is expected to become in effect for the Member States. The discussed measures may have a significant impact on the companies operating in the targeted sectors. It is still uncertain how material the effects for Bulgaria would be and how the scope of the measure will be interpreted towards the local reality. Additional assessment and monitoring on the proposed actions should be done in due course.

Bulgaria in preparation to implement DAC7

On March 22, 2021, the EU adopted a new Directive introducing the automatic exchange of information for both EU and non-EU digital platform operators referred to as “DAC7”. New rules will require digital platforms to report income earned by sellers using their platform on an annual basis.

Bulgaria similar to the other EU Member States should adopt the Directive by 1 January 2023 as the first reporting deadline is envisaged to 31 January 2024.

Following that, the Bulgarian Ministry of Finance has published a draft bill for transposing DAC7 which closely follows the text of the Directive. The bill is open for public discussion until 30 October 2022 and it remains to be clarified whether any amendments will be made before it is enacted by the Bulgarian National Assembly.

Information will be shared automatically between tax authorities to allow them to target under-declared income by sellers using digital platforms that allows sellers to connect with other users to carry out a relevant commercial activity. Particularly, within the scope are activities related to rent of immovable property and transport, provision of services and sale of goods. Certain exceptions are also envisaged for limited number of activities and consideration earned.

Furthermore, the draft bill extends the scope with royalty payments subject to exchange of information and introduces a legal framework for joint audits and similar actions in the area of the administrative cooperation.

As the initiatives around tax cooperation and the exchange of information are rapidly developing, platform operators should get acquainted with the applicable rules and ensure that remain well prepared and positioned to meet the envisaged obligations. Additional package of measures capturing in scope crypto assets and e-money is also expected.