In 2011, changes in the Bulgarian tax legislation have been made with regard to withholding tax and VAT. Moreover, a new tax on insurance premiums has been introduced.
Withholding tax changes.
As from 1 January 2011, a lower withholding tax rate of 5% (instead of before 10%) applies to interest and royalties accrued by Bulgarian legal entities (or Bulgarian permanent establishments of non-residents) to EU based related parties subject to certain conditions (eg affiliation threshold, beneficial ownership, etc). The withholding tax rate on interest and royalties might be further reduced or eliminated under an applicable tax treaty between Bulgaria and the country of tax residence of the recipient.
Effective from 1 January 2011, a 10% withholding tax applies to service fees, remuneration for the use of rights and penalty or damages payments (except for insurance compensation) accrued by Bulgarian resident entities (or Bulgarian permanent establishments of non-residents) to foreign legal entities based in low tax jurisdictions. No withholding tax applies if the payer can prove that “services or rights have in fact been provided” by the income recipient (“fake” payments are subject to withholding tax and non-deductible for corporate income tax purposes). Countries considered low tax jurisdictions include Liechtenstein, Monaco, the Dutch Antilles, the Cayman Islands, the Bahamas, the British Virgin Islands, Gibraltar, etc.
Definition of beneficial owner introduced.
As from 1 January 2011, the definition of beneficial owner for the purposes of obtaining withholding tax relief was introduced in the Bulgarian tax legislation. Generally, a foreign entity is considered the beneficial owner of income if it has the right to freely dispose about the income and bears the full or a significant part of the risk related to the activity, and is not a conduit company.
Changes to VAT rules.
Effective as of 1 April 2011, the single reduced VAT rate of 9% applies to hotel accommodation services regardless of whether they are a part of a tourist package or bought individually. Previously, the reduced VAT rate of 7% applied only to hotel accommodation if it was a part of a tourist package.
New tax on insurance premiums.
As from 1 January 2011 a new tax on insurance premiums was introduced in Bulgaria, which is determined by multiplying the insurance premium by 2% and born by the insured persons. Insurance premiums for reinsurance and retrocession contracts as well as “Life” insurance contracts, permanent health insurance, the insurance of airplanes and ships and the insurance of cargo in international transport are exempt from the tax.
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