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Bulgaria: Corporate income tax law amendments include hybrid mismatch rules

Bulgaria: Corporate income tax law amendments

Changes to the income tax law were made by legislation that was published in the official gazette. The amendments, described briefly below, generally will be effective 1 January 2020.


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Hybrid mismatch rules

There are new rules that are intended to neutralize two types of mismatches resulting in tax avoidance in one or more jurisdictions. In general, hybrid mismatches are defined as mismatch arrangements that involve hybrid entities and/or hybrid instruments that may result in:

  • A deduction without inclusion (accounting expenses or amounts that result in a decrease in the tax result in the taxpayer’s jurisdiction without a corresponding inclusion in the taxable income in the jurisdiction of the income recipient)
  • A double deduction (accounting expenses or amounts that result in a decrease in the tax result in the jurisdiction of the taxpayer and in the jurisdiction of the investor)

The legislative measures focus on the type of hybrid mismatches that result in deduction without inclusion—for example, a payment under a financial instrument; a payment to and from a hybrid entity; a payment to an entity with one or more permanent establishments (PEs) or to a disregarded PE; or a deemed payment between a head office and its PE or between two or more PEs of the same entity.

In the case of payments made under such hybrid mismatch situations, the financial result is to be adjusted for tax purposes by the accounting income and expenses or by amounts (when no accounting expenses or income were accrued) that would have been treated as taxable income or tax non-deductible expenses. The application of these rules depends on circumstances such as whether the taxpayer is the investor or the payer, or whether the tax result in the other jurisdiction was adjusted due to the hybrid mismatch, etc.

There are also new rules on mismatches related to taxpayers that are residents of more than one jurisdiction.

Transfers between divisions of one or the same enterprise inside and outside Bulgaria

Scope of tax rules on transfers

The new provisions apply in instances of cross-border transfers of assets or activities conducted between an enterprise and other parts of the same enterprise when Bulgaria wholly or partially loses the right to tax the result of any subsequent disposal of the transferred assets or activity.

The following types of transfers fall within the scope of this new provision:

  • Transfers of assets or activity from the head office in Bulgaria to a PE outside Bulgaria
  • Transfers of assets or activity from a PE within Bulgaria to the head office or another PE outside Bulgaria
  • The taxpayer becomes a tax resident in another jurisdiction
  • Transfers of activity performed through a PE in Bulgaria to another jurisdiction

Transfer of assets

When a transfer of assets is performed, the financial result is:

  • Increased by the positive difference between the market value of the transferred assets and their value for tax purposes
  • Decreased by the negative difference between the market value and the value for tax purposes of the assets

The income tax legislation introduces rules for adjustments of the financial result for tax purposes and for correction of the asset values for tax purposes depending on whether the transferred assets are disposed of and/or written off or not. These rules are related to the new provisions for the determination of the tax value of the assets at the time of their transfer.

The rules for adjustment of the financial result do not apply in instances of a temporary transfer of assets. A transfer is deemed to be temporary if it does not last more than 12 months and it takes place for the purpose of liquidity management or when it comes to the financing of securities.

Transfer of activity

When there is a transfer of activity, the financial result for tax purposes is increased by the positive difference or is decreased by the negative difference (whichever of the two occurs) between the market value of the transferred activity and the tax value of the transferred assets less the tax value of the transferred liabilities at the time of the transfer.

Rules for deferred payment of corporate income tax liability related to transfers to EU Member States or EEA countries

The legislation provides an opportunity for a deferred payment of the amount of the corporate income tax liability due as a result of transfers of assets or an activity to an EU Member State or to a country in the EEA (these provisions apply to other countries that are members of the EEA only if there is an effective agreement for mutual assistance for the recovery of claims relating to taxes, duties,  and other measures equivalent to EU Directive 2010/24/EU.). One of the conditions for a deferred payment, made in installments, is that transfers have an incidental and irregular character (however, no definitive criteria were set out in this respect).

Transfer of assets from another part of the enterprise located outside Bulgaria

The legislation implements rules in respect of assets transferred from one part of the enterprise outside Bulgaria to another part of the same enterprise within Bulgaria. The assets’ values for tax purposes after the transfer must correspond to the market values as at the time of the transfer.

Transfer of services

According to the new rules, the taxpayer must recognize, for corporate income tax purposes, market-based income or expenses arising from transfer of services between one part of an enterprise in Bulgaria and another part of the same enterprise outside Bulgaria. The concept of “service cost” is introduced in the law.

The new tax provisions apply if the transfer of services to or from the part of the enterprise in Bulgaria coincides with the ordinary transactions or the ordinary activity of the party initiating the transfer or if the service is to be realized in an altered or unaltered form to a third party.

Withholding tax on income accrued by PE in Bulgaria to another part of the enterprise outside Bulgaria

The existing corporate tax law provisions for withholding tax on income accrued by a PE within Bulgaria to the head office or another PE outside Bulgaria are amended.

Withholding tax is levied on the income of the head office or the PE outside Bulgaria if:

  • It arises from transfers which coincide with the ordinary transactions of the head office or the PE outside Bulgaria with third parties,
  • The ordinary activity of the head office or the PE outside Bulgaria comprises similar transfers, or
  • The subject of the transfer is to be realized in altered or unaltered form to a third party

Expenses for repair services, construction or improvement of elements of state or municipal infrastructure

The new rules aim to remedy what has been viewed as the contradictory treatment under the corporate income tax law for expenses that taxpayers incur on the construction, improvement or repair of elements of technical infrastructure that are publicly owned (state or municipal ownership).

According to the new measures, when a taxpayer performs repair work or services on an infrastructure project and the accounting expenses are related to the activity of that taxpayer, these expenses are recognized for tax purposes. This rule applies also in instances when the infrastructure is accessible for use by third parties. The general corporate income tax law provisions apply when the taxpayer is entitled to a contractual remuneration for its works/service.

Thin capitalization rules, interest on bank loans/financial leases, partially guaranteed by the debtor/lessee

Under the new measures, the taxpayer can treat as deductible items a certain portion of interest expenses arising under a finance lease or a bank loan that is guaranteed by the taxpayer and a related party. The tax deductible amount that is not subject to the thin capitalization rules is determined based on the ratio between the taxpayer’s own collateral and the total amount of the finance lease or loan. When the ratio is greater than one, the entire amount of the interest expenses arising under the respective finance lease or loan is treated as tax deductible in the year of accrual.

Other amendments

Controlled foreign company (CFC) rules

There are legislative changes affecting the controlled foreign company (CFC) criteria. Under the new rules, domestic entities, foreign entities, and PEs outside Bulgaria—all of which are subject to alternative types of taxation—are not considered to be CFCs under Bulgaria’s corporate income tax law.

Estimated tax relief

Estimated tax payments (and the related penalty assessments and interest for insufficient advance installments of corporate income tax) are not affected by:

  • Tax profit relating to a CFC
  • The excess of the tax add-backs over the tax deductions relating to transfer of assets or activity when the corresponding amount for corporate income tax is paid in installments

Relief for agricultural producers

The retained amount of corporate income tax is due in full in instances of noncompliance with the requirements of the corporate income tax law. New provisions related to the corporate income tax liability of agricultural producers that were not entitled to tax benefits under the conditions of de minimis aid and state aid for agricultural producers.

Read a December 2019 report [PDF 77 KB] prepared by the KPMG member firm in Bulgaria

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