On 27 November 2018, amendments to the Bulgarian Corporate Income Tax Act were published. The main amendments, which will be applicable as of 1 January 2019 are summarized below.
New interest limitation rule will apply alongside the existing thin capitalization rule.
A new rule is introduced regarding the limitation of interest deduction, which implements the provisions of the European Union Anti-Tax Avoidance Directive 2016/1164 (ATAD). The new rule will apply if the net borrowing costs exceed EUR 3 Mio for the year. Net borrowing costs will be restricted if they exceed 30% of tax-adjusted earnings before interest, tax, depreciation and amortization (EBITDA). The new rule introduces a broader definition for borrowing costs. For example, unlike the existing thin capitalization rule, it will also include interest expenses on bank loans and finance leases, which are not guaranteed by a related party. The existing thin capitalization rule will remain in place and the two rules will be applied alongside. Any restricted interest expenses under the thin capitalization rule and borrowing costs under the new interest limitation rule can be carried forward indefinitely. Both rules will not apply for credit institutions.
Special rules for controlled foreign companies (CFCs).
With the implementation of ATAD, special rules for CFCs were adopted. The CFC rule aims to re-attribute the income of a low-taxed foreign controlled subsidiary/ permanent establishment to its Bulgarian parent company/ principal. If a Bulgarian taxpayer has a CFC, it should include a proportionate part of the CFC’s taxable profits into its Bulgarian taxable profits. In order to be a CFC, the respective foreign company/ permanent establishment must meet certain requirements (e.g. shareholding, low or no taxation abroad, no substantive economic activity). The Bulgarian taxpayer should maintain a special register for CFC purposes and present it to the tax authorities upon request. The register must contain certain information about the respective CFC, e.g. non-distributed profit, shareholding/participation, etc. Failure to keep such register or misreporting may trigger penalties.
Tax treatment of operating leases in the accounts of the lessee.
Income and expenses related to operating lease contracts recorded in the accounts of the lessee under the new IFRS 16 Leases (effective as of 1 January 2019) will not be recognized for tax purposes. In addition, the assets under the operating lease as per the new IFRS 16 cannot be recognized as tax depreciable asset in the tax depreciation plan of the lessee. Instead, the taxpayer must calculate the respective income and expenses under the National Accounting Standard 17 Leases and recognize them for tax purposes. Any income and expenses arising as a result of a change in the accounting policy due to the first time adoption of the new IFRS 16 will also not be recognized for tax purposes.
А taxable person who has not performed any business activity during the current year will be required to submit а corporate income tax return in order to report any obligations for corporate income tax or to report voluntary other relevant information (such as incurred losses, etc.). Certain amendments are introduced regarding the filing and payment of corporate income tax, withholding tax, and alternative tax in cases of liquidation or termination for insolvency of a company and when a permanent establishment of a foreign company is ceasing its activity. In this respect, the last tax period of such companies/permanent establishments will be from 1 January of the year of the deregistration until the date of the deregistration and the last corporate income tax, withholding tax, and alternative tax will be due within 30 days after the date of the deregistration.
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