AMENDMENTS TO THE CORPORATE INCOME TAXATION ACT EFFECTIVE AS OF 1 JANUARY 2014 AND 1 JANUARY 2015

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1 AMENDMENTS TO THE CORPORATE INCOME TAXATION ACT EFFECTIVE AS OF 1 JANUARY 2014 AND 1 JANUARY 2015 With the Law for Amendment and Supplementation of the Value Added Tax, promulgated in State Gazette issue No 105 from 19 December 2014 and the Law on the State Budget of Republic of Bulgaria for 2015, promulgated in State Gazette issue No 107 from 24 December 2014, have been adopted amendments to the Corporate Income Taxation Act (CITA). Part of the amendments to CITA related to the tax relieves representing de minimis and state aids enter into force retroactively from 1 January 2014, and the rest of the amendments to the tax law are effective from 1 January The aim of the present letter is to summarize and present briefly the basic and most important amendments to CITA. I. Exemption from taxation with withholding tax of particular types of income 1.1. As of 1 January 2015 no withholding tax will be imposed on: a) Interest and royalty income payable by tax resident entities of Bulgaria to the benefit of foreign legal entities from the European Union (EU) Member States, when the two entities (the income payer and the beneficiary of the income) are associated parties and the conditions stipulated in the tax law (new item 3 of Art. 195, para 6 of CITA) are simultaneously met. The adopted amendment is related to the necessity of introduction of the requirements of Directive 2003/49/EC of the Council to the common system for taxation of interest and royalty payments between associated parties from different EU Member States to the national legislation, which has been postponed until 31 December 2014 by means of the Treaty of Accession of Republic of Bulgaria and Romania to EU. In accordance with the said Directive the interest and royalty income is not subject to tax when the payer and receiver of the income are associated parties. The withholding tax exemption is allowed under the same conditions under which these types of income have been subject to reduced tax rate of 5% valid until 31 December Only the systematic place of the conditions in the tax law has been changed (i.e. the conditions have been moved to new provisions para 7 12 of Art. 195 CITA whereas the Art. 200a of the tax law has been repealed). b) The scope of the income exempt from withholding tax is extended by adding expressly the interest income on bonds and other debt securities issued by the state and municipalities permitted for trade on regulated market in Bulgaria or in EU Member State or in a state under the EEA Agreement (supplementation to item 1 of Art. 195, para 6 of CITA) and the interest income on loan under which no bonds are issued and the state and municipalities are borrower (new item 4 of Art. 195, para 6 CITA). 1

2 II. De minimis aid and state aid in the form of tax relieves (retainment of corporate income tax) The second group of tax law amendments is related to new acts of EU which have become effective in 2013 and 2014 regulating de minimis and state aids 1. As a Member State of the EU, the obligation arises for Bulgaria, to introduce in its legislation the new European rules for de minimis and state aids. The adopted tax law amendments become effective from 1 January 2014 in accordance with the entering into force of the amendments to the European legislation. The state aid for regional development and state aid for agricultural producers in the form of tax relieves (retainable corporate income tax) could be used until 31 December The tax relieves could be used in 2014 under the condition that the European Commission issues a positive statement for approval of the two types of state aid by 31 March Some of the more important amendments to CITA could be summarized as follows: 2.1. Basic amendments related to tax relief representing de minimis aid a) The use of tax relief representing de minimis aid for the so called single undertaking is regulated. A definition for single undertaking is included in 1, item 71 of the Additional Provisions of CITA (AP of CITA) referring to Regulation (EU) 1407/ 2013 of the Commission. A single undertaking is defined as a group of enterprises having particular relationships with each other. For example a single undertaking can include a group of two enterprises, whereas: one of the enterprises has the majority of the shareholders or members voting rights in the other enterprise or one of the enterprises has the right to appoint/remove a majority of the members of the administrative, management or supervisory body of the other enterprise or one enterprise has the right to exercise a dominant influence over another enterprise pursuant to a contract entered into with that enterprise. The full definition for a single undertaking is included in Art. 2, para 2 of Regulation (EU) 1407/2013 of the Commission. According to the new para 2 and para 4 of Art. 188 CITA when the tax liable person is a single undertaking as at 31 December of the respective year, it has the right to use the tax relief representing de minimis aid (i.e. retainable corporate income tax), if the sum of the received de minimis aids by all persons defined as a single undertaking during the last three years including the current year, do not exceed the established threshold for de minimis aid. 1 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid; Guidelines on Regional state aid for (effective as of 1 July 2014); National Regional state aid map for (applicable from 1 July 2014); European Union Guidelines on State aid in the agriculture and forestry sector and in rural areas (effective as of 1 July 2014). 2

3 In the cases of single undertaking CITA provides for a special order for declaring circumstances related to the used tax relief representing de minimis aid. For the year of corporate income tax retainment shall be declared all tax liable persons of the single undertaking, as well as the amount of the de minimis aids received by these persons during the last three years including the current year. The amount of the received de minimis aids shall be declared by the tax liable person, which has first submitted a tax return (new para 7 and para 8 of Art. 188 CITA). b) The tax relief representing de minimis aid will be applied also by enterprises in difficulty as well as by the persons performing coal mining activity. Before the adoption of the amendment to CITA the enterprises in difficulty and the coal mining enterprises did not have the right to apply the tax relief representing de minimis aid. c) Specific rules are introduced when receiving de minimis aids in the cases of restructuring of companies and transfer of enterprise. According to CITA de minimis aid is the aid which does not exceed the BGN equivalent of EUR for a period of three years, including the current year, and for tax liable person performing road freight transport for hire or reward it shall not exceed EUR With the new item 2 of Art. 188, para 1 of CITA a limitation is stipulated when determining the total amount of received de minimis aid in the cases of restructuring of companies and transfer of enterprise, all de minimis aids provided to the restructuring companies or in connection with the transferred enterprise for the last three years including the current year, shall be taken into consideration. d) A transitional regime has been adopted according to which persons, which do not comply with the new conditions for using the tax relief for de minimis aid effective as of 1 January 2014 and which have retainable corporate income tax, respectively advance tax installments in 2014, will not be liable for the payment of penalty interest for: (1) the excess of the annual corporate income tax due for 2014 with more than 20% over the declared advance corporate income tax installments and (2) for payment of the advance installments after the prescribed legal deadlines Basic amendments related to tax relief representing state aid for regional development and state aid for agricultural producers a) New requirements have been introduced for the use of the tax relief for retainment of corporate income tax when using state aid for regional development and state aid for agricultural producers. The tax liable persons shall notify the NRA authorities for the fulfillment of initial investment when using state aid for regional development or for the intention to invest corporate income tax when using state aid for agricultural producers. The NRA notification shall be performed by submission of an application form to the Territorial Directorate of NRA as per registration of the person, namely: In the cases of state aid for regional development the submission of the application form for the aid shall be made before starting the fulfillment of the project for initial investment for which retainment of corporate income tax is made. The persons which use state aid for regional development shall submit the application form for the aid together with the annual tax return for 3

4 2014, if the fulfillment of the initial investment for which the aid is used has started after 31 December 2013 but before the receiving of the positive statement for approval of the aid by the European Commission. In the cases of state aid for agricultural producers an application form shall be submitted by persons representing big enterprise before the investment of retainable corporate income tax is commenced. A definition for big enterprise is included in 1, item 74 of the Additional provisions of CITA and these are enterprises which do not meet the criteria for micro-, small and medium- sized enterprises. The legal requirements mentioned above are regulated in Art. 189, para 8 and Art. 189b, para 2, item 7 of CITA. In the commented amendments to the tax law neither an obligation or term for the issuance of an act by NRA, nor are other actions provided for, which the revenue authorities shall undertake for the approval of the project for initial investment, or the respective state aid. As a result the estimate whether the retainment of corporate income tax is admissible, again will be performed by the authorities of NRA during subsequent tax audits, which creates the risk of assessment of penalty interest for delay, if the right of the person to report retainable corporate income tax is disputed. b) The tax relief representing state aid for regional development will not be applicable to taxable persons, which (1) liquidate their manufacturing activity (or similar activity) in an EEA Member State 2 years before the date of submission of the application form or (2) intend to close such manufacturing activity in 2-year term after the finalization of the initial investment for which retainment of corporate income tax is made (new item 4 of Art. 182, para 1 CITA). This tax relief could be applied by the persons performing activity in the sector of shipbuilding. c) It is stipulated for that the retainable tax representing state aid for regional development shall not exceed 50% of the present value of the tangible and non-tangible assets included in the initial investment determined as at the date of aid provision. For initial investment performed in municipalities from Southwest Region the retainable tax shall not exceed 25% of the present value of the tangible and non-tangible assets included in the initial investment (Art. 189, para 1, item 9 CITA). Southwest Region includes the settlements in Sofia District and Sofia-City and the Blagoevgrad, Pernik and Kjustendil Districts ( 1, item 72 of the Additional provisions of CITA). d) With the Additional Provisions of the tax law, definitions for big enterprise, single undertaking have been introduced and the existing definitions for manufacturing activity, enterprise in difficulty, de minimis aid and agricultural products have been amended. III. Other amendments 3.1. The wording of Art. 201, para 5 CITA has been precised. It is now expressly indicated that information for income under Art. 143g, para 1, item 2 and 6 of the Tax and Social Security 4

5 Proceedings Code (including fees for management and control and rental income or other transfer of the right for use of real estate property) for the purpose of the automatic exchange between EU Member States, shall be submitted: (1) in case of restructuring by the successor and (2) in case of dissolution of taxable persons under the procedure and within the terms for submission of the tax return for the last tax period A tax at the rate of 10% is introduced for taxation of the additional expenses of Members of the Parliament. The obligation for assessment, declaring and payment of the tax is of the Parliament (new Art. 217a 217e CITA). The amendments of CITA commented in point III enter into force as of 1 January The material herein is only of general informative nature and does not represent a specific advice or consultation. Should any additional questions arise, please do not hesitate to contact us at tel.: 02/ , fax: 02/ , е-mail: office@afa.bg or at: 38, Oborishte Str., Sofia