Amendments to the Tax Legislation

The amendments to the tax legislation at the end of the calendar year are quite expected and they refer to the main tax laws, i.e. the Corporate Income Tax Act, the Personal Income Tax Act, the Local Taxes and Fees Act, the Value Added Tax Act, the National Revenue Agency Act, the Excise Tax and Tax Warehouses Act, and the Accountancy Act. The amendments were introduced with the Amending Act to the Corporate Income Tax Act which was adopted at second reading on 21 November 2019. The proposed amendments to the Tax and Social Security Procedure Code (TSSPC) as laid down in the relevant amending bill have been presented to the National Assembly and the first reading vote took place on 27 November 2019.

Here we will focus on the main amendments to the Corporate Income Tax Act (CITA), the Value Added Tax Act (VATA), and the TSSPC. The Amending Act to the CITA is intended to ensure full transposition into the national tax legislation of Council Directive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that directly affect the functioning of the internal market and Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries. These Directives introduce EU-level tax treatment rules against tax avoidance practices that directly affect the functioning of the internal market.

The amended CITA lays down new rules as regards exit taxation which requires taxation in the event of a transfer of assets from Bulgaria to another part of the same undertaking outside the country. The objective of the new rules is to ensure that where a taxpayer moves assets/activities or its tax residence out of the tax jurisdiction of Bulgaria, the economic value of any capital gain created in the territory of Bulgaria will be taxed even though that gain has not yet been realised at the time of the exit. This rule will not apply where assets are transferred for up to 12 months and the transfer involves transactions in financing securities or relates to assets posted as collateral or where the transfer takes place in order to meet capital requirements or for the purpose of liquidity management. The amendments are intended only to transpose the foregoing Directives but they are not in line with the existing taxation system in Bulgaria. The objective of the Directives is to provide an opportunity in principle to the Member States in which the tax residence of a legal entity is determined by the place of its effective management. In Bulgaria, the local tax residence of a legal entity is determined by the place of its registration rather than the place of its effective management. If a company has been registered in the territory of the country, then it will be under the tax jurisdiction of Bulgaria.

Some of the amendments to the VATA relate to the transposition of certain provisions of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax to ensure better compliance of the national rules with the EU legislation. Member States may decide whether to regard the transfer of shares or interests equivalent to shares giving the holder rights of ownership to a new immovable property as supply of goods. The proposed amendments define as VAT taxable supply “the transfer of shares or interest equivalent to shares giving the holder thereof de jure or de facto rights of ownership or possession over new immovable property or part thereof, except for the cases in which persons under Article 34(2) of the Accountancy Act are parties to the transaction”. The exemption refers to financial institutions. As a result of the amendment, the transaction, including negotiation related to such shares or interest, will be taxable.

The reasons laid down in the explanatory memorandum of the bill specify that the objective of the amendment is to eliminate the common tax avoidance practices of some persons who use transactions involving transfer of shares or interests to actually transfer the ownership over immovable properties to be used for housing needs by natural persons as a way to avoid payment of VAT. As is seen in the reasons, the amendment is intended to prevent tax avoidance practices of natural persons who acquire shares or interests of a company in which the only asset is an immovable property used for housing purposes. However, the scope of this provision is limited only in the reasons laid down in the explanatory memorandum of the bill, while the wording of the provision itself covers many other cases, giving way to different interpretations. This is also the opinion of the Supreme Bar Council concerning the proposed amendments to the tax legislation.

The amendment to the Tax and Social Security Procedure Code (TSSPC) as proposed by the Ministry of Finance is intended to transpose Council Directive (EU) 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements. It has to be adopted in the national legislation by the end of this year and its provisions will apply from 1 July 2020. The proposed amendments read that “information on cross-border tax arrangements shall be reported to the Executive Director of the National Revenue Agency by a consultant on a cross-border tax arrangement. Information will be exchanged automatically under the TSSPC only with regard to cross-border tax arrangements falling within at least one of the categories that the bill characterizes as potentially related to aggressive tax planning. An important element of the tax arrangement is its cross-border nature, i.e. the arrangement has to involve more than one Member State or a Member State and a third country.  Consultants who prepare, propose, organize or manage the implementation of a cross-border tax arrangement with a potential risk of tax avoidance have the obligation to report information on these arrangements.“A consultant shall be exempted from the obligation to report information on a cross-border tax arrangement where the non-disclosure of this information as a professional secret is provided by the law”. However, the obligation entails also reporting to the National Revenue Agency on the other consultants under the tax arrangement and the taxpayer. The adoption of these amendments and their implementation could create legal uncertainty and opportunities for broader interpretation and implementation of the law, contrary to the Bar Act protecting the lawyer’s secret.