Defense in case for wrongful treatment of bonuses as a hidden profit distribution


Ilieva, Voutcheva & Co Law Firm was assigned by the company to defend it against a tax audit act, in which the financial result for 2016 and 2017 were increased to the amounts of EUR 225,000.00 and EUR 135,000.00 respectively, representing expenses for the bonuses paid to the managing directors. The tax administration treated them as expenses, representing a hidden distribution of profits. That unjustified and incorrect treatment of the income received by the managing directors also led to final taxation of the income paid in 2016 and 2017 as bonuses under the management and control agreements, treating the amounts as dividend income. We presented detailed arguments on the significant discrepancies on the part of the tax administration during the audit, such as:

  1. Misinterpretation of the concept of “Hidden distribution of profits” in terms of the Corporate Incomes Tax Act and failure to prove the circumstances behind the hidden distribution.
  2. Lack of justification that bonuses accrued and paid for 2016 and 2017 were not related to the activity carried out by the company. We made a detailed analysis of the activity of the two managing directors, which led to a positive financial result for the company regarding the two audited years. We based our arguments on all the signed agreements, which were the result of the managing directors’ efforts and meetings, the revenues from the implementation of these agreements, etc.
  3. Again, the lack of justification of the finding that the bonuses accrued and paid for 2016 and 2017 exceed the normal market levels.
  4. Unproven allegation of tax evasion by the company. Our defense was accepted by the deciding administrative authority and the tax audit act was repealed.

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