A new Bill on Law on Amendments to the Corporate Income Tax Act (LA to the CITA) was passed at first reading on 06.11.2019.
The LA to the CITA contains tax rules which are intended to block the possibilities for aggressive tax planning and tax avoidance. The amendments aim to fully implement the 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 (“Directive 2016/1164”) and Council Directive (EU) 2017/952 of 29 May 2017 amending Directive (EU) 2016/1164 as regards hybrid mismatches with third countries (“Directive (EU) 2017/952”).
Some of the most considerable amendments suggested are:
- Hybrid mismatches and mismatches with a tax payer who is a tax resident for tax purposes in more than one jurisdiction are to be eliminated
A definition of “hybrid mismatches” is introduced. In general, for hybrid entities and instruments, these mismatches can lead to one of the following effects:
- a deduction in the tax financial result in the jurisdiction of the payer, while the the tax financial result in the jurisdiction of the recipient is not increased (so-called deduction without inclusion), or
- a simultaneous deduction in the tax financial results in the jurisdictions of both the payer and the recipient (so-called double deduction).
Ancillary criteria and conditions are introduced for defining mismatches as hybrid ones or excluding mismatches as such.
It is suggested that expenses incurred or amounts paid insofar when they lead to double deduction or deduction without inclusion or to the direct or indirect financing of the deductible expense leading to a hybrid mismatch shall not be recognized for tax purposes.
Rules are also provided for non-recognition of costs upon mismatches in the case of a tax payer which is a resident for tax purposes of more than one jurisdiction.
A rule is introduced for use of tax credit for withholding tax paid on a payment related to hybrid transfer.
Amendments to the definition of associated enterprises are suggested in the Supplementary Provisions, and for the purposes of hybrid mismatches the associated undertaking should own 50 % or more in the tax payer or in another associated undertaking through voting rights or rights to receipt of profits of that entity. Associated undertaking is also a permanent establishment part of a consolidated group, as well as an undertaking in which the tax payer has significant influence in its management or an undertaking which has significant influence in the management of the tax payer.
Definitions of main notions are introduced such as “double deduction”, “deduction without inclusion”, „double included income”, „hybrid entity”, „hybrid instrument”, „hybrid transfer”, „market hybrid transfer”, “structured arrangement”, etc.
- Transfers between parts of one and the same undertaking located in different jurisdictions
The amendments hereby concern the following cases:
- When a tax payer transfers assets from its head office in the republic of Bulgaria to its permanent establishment abroad;
- When a tax payer transfers assets from its permanent establishment in the country to a part of the enterprise abroad;
- When a tax payer becomes tax resident for tax purposes of another jurisdiction;
- Upon transfer of business.
The purpose is to tax any prospective capital gain generated in the country by transfers of assets/business or by a non-tax residents.
Rules are introduced for the transformation of the accounting financial result upon its determination for tax purposes in cases of transfer of assets/business. Additional rules to the existing ones are provided for transfers of services/other transfers
The suggestions for amendments do not cover the following cases:
- transfers of assets between the parent company and its subsidiaries;
- assets’ return within 12 months (temporary transfer), if the transfer of assets is related to collaterals for financing of securities or to assets provided as collateral, or is carried out for the purpose of meeting prudential capital requirements or managing of the liquidity.
Rules are introduced to determine the tax financial result when a temporary tax difference related to an asset or liability is formed in the case of a transfer.
Definitions of main notions are introduced such as “transfer of assets/business”, „transfer of tax residence” of a person who is tax resident for tax purposes”, “transfer of a business carried on by a permanent establishment”, “prime cost”, etc.
Amendments in several other laws are to be introduced through the LA to the CITA, namely: Personal Income Tax Act, Local Taxes and Fees Act, Value Added Tax Act, National Revenue Agency Act, Excise and Tax Warehouses Act, and Accounting Act.
The amendments will enter into force since 01.01.2020 with the exception of few provisions from Value Added Tax Act, which will enter into force three days after the promulgation of the LA to the CITA in the State Gazette.
