Withholding Tax

The withholding tax regime is regulated in Articles 194-203 of the Corporate Income Tax Act.

Scope of taxation

Withholding tax is levied on:

  1. Any dividends and shares in a liquidation surplus, as distributed (apportioned) by any resident legal person in favour of:
  • any non-resident legal persons, with the exception of the cases where the dividends accrue to a non-resident legal person through a permanent establishment in the country;
  • any resident legal persons who are not merchants, including any municipalities.
  1. The following income which has its source inside the country, accruing to any non-resident legal person, where not accruing through a permanent establishment:
  • any income from transactions in financial assets and from financial assets issued by resident legal persons, the Bulgarian State and the municipalities;
  • any interest payments, including interest within payments under a financial lease contract;
  • any income from rent or other provision for use of movable property;
  • any copyright and licence royalties;
  • any technical assistance fees;
  • any payments received under franchising agreements and factoring contracts;
  • any compensations for management or control of a Bulgarian legal person;
  • any income from agriculture, forestry, hunting ground management and fisheries within the territory of the country shall have its source inside the country;
  • any income from rent or other provision for use of immovable property, situated in the country;
  • any income from disposition of immovable property, situated in the country;
  • penalties and indemnities of any kind, excluding benefits under insurance policies, charged by resident legal persons, resident sole proprietors or non-resident legal persons and sole proprietors through a permanent establishment or a fixed base in the country in favour of non-resident legal persons established in preferential tax treatment jurisdictions shall be income having its source inside the country.

Exemptions

Withholding tax is not levied on:

  • dividends and shares in a liquidation surplus where distributed in favour of:
    • any resident legal person who participates in the capital of the company as a representative of the State;
    • any common fund;
    • any non-resident legal person who is resident for tax purposes in a Member State of the European Union or in another State which is a Contracting Party to the Agreement on the European Economic Area, with the exception of the cases of hidden profit distribution.
  • any income from interest payments on bonds or other debt instruments issued by a resident legal person, the Bulgarian State and the municipalities and admitted to trading on a regulated market in the country or in a Member State of the European Union, or in another State which is a Contracting Party to the Agreement on the European Economic Area;
  • any income from interest payments on a loan extended by a non-resident person who is an issuer of bonds or other debt securities, where the following conditions are simultaneously fulfilled:
    • the issuer is resident for tax purposes in a Member State of the European Union or in another State which is a Contracting Party to the Agreement on the European Economic Area;
    • the issuer has issued the bonds or the other debt securities for the purpose of lending the proceeds therefrom to a resident legal person;
    • the bonds or the other debt securities have been admitted to trading on a regulated in the country or in a Member State of the European Union, or in another State which is a Contracting Party to the Agreement on the European Economic Area.
  • any income from interest and royalties according to the conditions in Article 195, paragraphs 7-12 of CITA (Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States);
  • any income from interest on loans, under which no bonds are issued and under which the Bulgarian State or the municipalities are the borrower;
  • any income from disposition of financial instruments within the meaning given by Item 21 of § 1 of the Supplementary Provisions of CITA shall not be subject to a tax withheld at source.

International Treaties

Pursuant to Article 13 of CITA, where a convention for the avoidance of double taxation (CADT) which has been ratified by the Republic of Bulgaria, has been promulgated and has entered into force, contains any provisions different from the provisions of CITA, the provisions of the relevant conventions shall prevail. After certification under the procedures set out in the Tax and Social-Security Procedure Code (TSSPC) by the non-resident persons of the grounds for application of CADTs, the provisions of CADTs for taxation can be applied, including lower tax rate or exemption.

Taxable Amount

  1. The taxable amount for assessment of the tax withheld at source on any income accruing from dividends shall be the gross amount of the dividends distributed.
  2. The taxable amount for the assessment of the tax withheld at source on any income accruing from shares in a liquidation surplus shall be the difference between the market price of the claim by the relevant shareholder or member and the documented cost of acquisition of the shares or interests thereof.
  3. The taxable amount for assessment of the tax withheld at source on any income accruing to any non-resident legal persons from interest payments under financial lease contracts, in the cases where the contract does not stipulate the rate of the said interest, shall be determined on the basis of the market rate of the interest.
  4. The taxable amount for the assessment of the tax withheld at source on any income accruing to any non-resident legal persons from acts of disposition of financial assets shall be the positive difference between the selling price of the said assets and the documented cost of the acquisition thereof.
  5. The taxable amount for the assessment of the tax withheld at source on any income accruing to any non-resident legal persons from disposition of immovable property shall be the positive difference between the selling price and the documented cost of acquisition of the immovable property.
  6. For all other cases the taxable amount for the assessment of the tax withheld at source on the income shall be the gross amount of the said income.

Tax Rate

  1. The tax rate on the income covered under Article 194 of CITA (dividends and liquidation shares) shall be 5 per cent.
  2. The tax rate on all other income covered under Article 195 of CITA shall be 10 per cent.      

Declaring the tax

The persons, who are obligated to withhold and remit the tax at source under Articles 194 and 195 of CITA shall declare the tax due for the quarter in a declaration according to standard form by the end of the month succeeding the quarter. The declaration shall be submitted to the National Revenue Agency territorial directorate exercising competence over the place of registration of the payer or over the place where the payer is subject to registration.

In the cases where the payer of the income is a person who is not obligated to withhold and remit tax, the declaration shall be submitted by the recipient of the income.

A certificate on the tax remitted according to the procedure established by CITA on income accruing to non-resident legal persons shall be issued in a standard form at the request of the interested party. Any such certificate shall be issued by the National Revenue Agency territorial directorate where the declaration for the withheld and remitted taxes is submitted or is subject to submission.

The persons who are obligated to withhold and remit tax at source under Article 195, or the recipients of income in the cases referred to in Article 201 (3), shall provide information on the income referred to in Article 143h(1), items 2 and 6 of the Tax and Social-Security Procedure Code for the purposes of the automatic exchange of information. The said information shall be provided once a year by the declaration submitted for the fourth quarter of the relevant year. Any non-resident legal persons, who realize the income referred to in Article 143h(1), items 2 and 6  of the Tax and Social-Security Procedure Code through a permanent establishment in the Republic of Bulgaria, shall likewise apply this procedure.

Upon expungement/dissolution of the taxable person, the return shall be submitted by the person, who has represented the taxable person in the last tax period by following the procedure for submitting the return for the last tax period. 

Tax Remittance

Any payers of income withholding the tax at source under Article 194 herein shall be obligated to remit the taxes due not later than at the end of the month succeeding the quarter during which a decision was made on distribution of dividends or shares in a liquidation surplus.

Any payers of income withholding the tax at source under Article 195 herein shall be obligated to remit the taxes due not later than at the end of the month succeeding the quarter of charging of the income.

The tax due shall be remitted to the relevant National Revenue Agency territorial directorate exercising competence over the place of registration of the payer or over the place where the payer of the income issubject to registration . Where the payer of the income is not subject to registration, the tax shall be remitted to the Sofia Territorial Directorate of the National Revenue Agency.

Where the tax is not withheld and remitted according to the relevant procedure, it shall be payable jointly by the persons taxable for this income.Upon expungement/dissolution of the taxable person, the tax shall be remitted within the time limits for declaring of the said tax by the persons representing the taxable person.

Recalculation of Withholding Tax

Any non-resident legal person, who is a resident person for tax purposes of a Member State of the European Union or of another State which is a Contracting Party to the Agreement on the European Economic Area, shall have the right to opt for a recalculation of the tax withheld at source on the income under Article 12 (2), (3), (5) and (8) herein. Where the non-resident person opts for a recalculation of the tax withheld at source, the said recalculation shall be made in respect of all income realized thereby under Article 12 (2), (3), (5) and (8) herein during the year.

Where the non-resident person opts for a recalculation of the tax withheld at source on the incomes realized thereby, the tax as recalculated shall be equal to the corporate tax which would have been due on such income if it were realized by a resident legal person. Where the non-resident person has effected any expenses associated with the income referred to in sentence one, whereon a tax on expenses would have been due if the said expenses have been effected by a resident legal persons, the said tax shall be added to the sum total of the tax as recalculated.

Where the tax withheld at source as remitted on any income referred to in Article 195 (1) herein exceeds the amount of the tax as recalculated, the difference shall be refundable up to the amount of the tax withheld at source on any income referred to in Article 195 (1) herein which the non-resident person cannot deduct from the tax due in the State where the person is resident.

The option of recalculation of the tax withheld at source shall be exercised by means of submission of an annual tax return completed in a standard form. The tax return shall be submitted by the non-resident person to the Sofia Territorial Directorate of the National Revenue Agency on or before the 31st day of December of the year succeeding the year in which the income was charged. 

The refund of tax shall be effected according to the procedure established by the Tax and Social-Security Procedure Code by the Sofia Territorial Directorate of the National Revenue Agency.

Recalculation of withholding tax shall not apply where the non-resident person is resident for tax purposes of any State which is a Contracting Party to the Agreement on the European Economic Area but which is not a Member State of the European Union, wherewith the Republic of Bulgaria:

  1. does not have an effective convention for the avoidance of double taxation, or
  2. has an effective convention for the avoidance of double taxation which does not provide for:

(a) exchange of information, or

(b) cooperation in tax collection.

The exceptions under item 1 pertain to two states - Iceland and Lichtenstein, and under item 2 - Norway wherewith Republic of Bulgaria has an effective convention for the avoidance of double taxation which provides for exchange of information, but not for cooperation in tax collection.

Sanctions

In accordance with Article 9 of the Corporate Income Tax Act, interest according to the Interest on Taxes, Fees and Other State Receivables Act shall be due on any taxes which are not remitted when due.

Under the provision of Article 175(2), item 3 of the TSSPC interest shall be due also on  any obligations of a non-resident person for taxes withholdable at source: from the date of expiry of the time limit for remittance of the said taxes according to Bulgarian legislation until the day when the non-resident person proves the existence of a ground for application of a CADT whereto the Republic of Bulgaria is a party, including in the cases where tax is not due or is due at a lower amount according to the convention.

In accordance with the provisions of Article 261 of the Corporate Income Tax Act, any taxable person, who fails to submit a tax return under this Act, who fails to submit any such return when due, or who fails to state or misstates any particulars or circumstances leading to underassessment of the tax due or to undue reduction, retention of or exemption from tax, shall be liable to a pecuniary penalty varying between BGN 500 and BGN 3,000. Any repeated violation shall be punishable by a pecuniary penalty varying between BGN 1,000 and BGN 6,000.

In accordance with the provisions of Article 278 of the Corporate Income Tax Act, the written statements ascertaining the violations shall be drawn up by the authorities of the National Revenue Agency, and the penalty decrees shall be issued by the Executive Director of the National Revenue Agency or by an official authorized thereby. The ascertainment of violations, the issuing, appeal against and enforcement of the penalty decrees follows the procedure established by the Administrative Violations and Sanctions Act.

For further information: http://www.nap.bg/

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