KPMG Bulgaria Tax News presents a summary of recently promulgated amendments to the Corporate Income Tax Act effective from 2022.
In this issue of Tax News we summarize the amendments to the Corporate Income Tax Act (CITA), promulgated in the Bulgarian State Gazette issues 14 dated 18 February 2022 and 17 dated 1 March 2022 as well as the relevant provisions from the 2022 State Budget Act promulgated with issue 18 of the Bulgarian Sate Gazette dated 4 March 2022.
Tax treatment of sale and leaseback agreements classified as operating leases under the International Accounting Standards (IAS)
- The CITA amendments aim to achieve an equal tax treatment of sale and leaseback agreements classified as operating leases under the IFRS regardless of the accounting framework applied by the lessee.
- Thus, Right-of-Use (RoU) assets arising under sale and leaseback agreements classified as operating leases under the IAS shall not be recognized tax depreciable assets. The accounting income, expenses, profits and losses recognized in accordance with the IAS by the lessees under the sale and lease back agreements shall be considered nondeductible for tax purposes. Instead, lessees should recognize income, expenses, profits and losses determined under the rules of National Accounting Standard 17 - Leases applied to the respective sale and leaseback agreements classified as exploitation leases.
Amendments transposing EU anti-tax avoidance rules in the national legislation
Two of the amendments to the CITA relate to transposing of and elimination of non-conformity to the EU Directive 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market (ATAD II).
- The first amendment, which enters into force on 1 January 2022, provides for that certain hybrid entities registered or established in Bulgaria which so far have been outside the scope of the tax liable persons shall be regarded as legal entities for the purposes of the CITA (reverse hybrid mismatch rule). The conditions which should be fulfilled for the reverse hybrid mismatch rule to apply include (a) one or more associated nonresident entities holding in aggregate a direct or indirect participation of 50% or more of the voting rights, capital interests or rights to a share of profits of the hybrid entity and (b) the jurisdictions in which these nonresident entities are located treat the hybrid entity as a taxable person in Bulgaria.
- The above rule does not apply to collective investment schemes which are investment funds or schemes covering simultaneously the conditions to have many owners, diversified portfolio and are subject to investor protection legislation.
- The second amendment repeals the provision exempting from the scope of the local Controlled Foreign Company (CFC) rules local tax liable persons subject to alternative taxation under Part V of the CITA as well as CFCs which are subject to alternative taxation in the jurisdiction of registration/establishment.
Tax rate of one-off tax on expenses
Effective 1 January 2022, the tax rate of the one-off tax on expenses in-kind related to private use of company assets is reduced from 10% to 3%.
Amendments related to tax treatment of food vouchers
- In view of the promulgation of the 2022 State Budget Act in March of the current year, a transitory provision, in force from 1 January 2022, provides for an opportunity for food vouchers within the meaning of Article 209, Paragraph 1 of the CITA to be provided to each employee in a following month of 2022 where the exemption from one-off tax on in-kind social expenses shall also apply when the total amount of the food vouchers provided to employees does not exceed the monthly non-taxable limit for each of the months for which the food vouchers relate per individual.
- The following amendments in force from 1 January 2022 are introduced with the Transitional and Final Provisions of the 2022 State Budget Act:
- The scope for application of the food vouchers under Article 209, Paragraph 1 of the CITA, including those issued before 4 March 2022, is extended to include also payment of utility bills for electricity and heat, natural gas and water as well as for activities performed by cultural organizations under the Protection and Promotion of Culture Act and for showing of movies under the Film Industry Act.
- The threshold of the tax exempt amount of food vouchers for 2022 is increased from BGN80 to BGN 200 per month subject to the condition that the food vouchers are provided in compliance with the requirements set in the CITA.
- The mechanism for determination of the tax base of the one-off tax on food vouchers for 2022 is further refined to cover the sum of (a) the excess of these expenses over BGN 200 including the amount of already provided food vouchers for each of the months per individual and (b) the total amount of the expenses for food vouchers incurred during the months when the conditions for exemption from one-off tax on in-kind social expense under Article 209 of the CITA were not fulfilled.