Saturday 13 April 2013

Bulgaria: withholding taxes


Withholding tax levied pursuant to the Corporate Income Tax Act (CITA)

With withholding tax are levied the dividends and liquidation quotas, which are distributed by local legal entities in favor of:

·     Foreign legal entities, except for the cases when the dividends are realized by a foreign legal entity through permanent establishment in Bulgaria;
·     Local legal entities that are not traders.
No withholding tax is levied on dividends and liquidation quotas when they are distributed in favor of:

Local legal entity that participates in company’s capital as state representative;
Mutual fund;
Foreign legal entity, which is treated as local entity for taxation purposes of a EU member state or other state that is party under the European Economic Area (EEA) Agreement.        
With withholding tax is also levied the following income of foreign legal entities when this income is not realized through a permanent establishment in Bulgaria:
     
1.      Income from financial assets and transactions with financial assets issued by local legal entities, state and municipalities.
2.      Interests, including interests that are contained in financial leasing installments.
3.      Income from rent or other consignment of movables for use;
4.      Author and license fees.
5.      Remunerations for technical services.
6.      Remunerations under franchising and factoring contracts.
7.      Remunerations for managing and controlling a Bulgarian legal entity.
8.      Income from rent or other form of granting the right to use a real estate located in Bulgaria.
9.      Income from disposal with real estate located in Bulgaria.
10.    Remuneration of foreign legal entities residing in jurisdictions with preferential tax regime for services or rights, except for the cases when the services or they rights have been actually provided.
11.    Any kind of penalties and compensations accrued in favor of foreign legal entities that are residing in jurisdictions with preferential tax regime, except for compensations pursuant to insurance contracts.
                              
No withholding tax is levied on the income from disposing of financial instruments according to § 1, Item 21 of CITA’s Additional Provisions.
                
Tax base for the withholding tax:
1.      The tax base for tax assessment of the income from dividends is the gross amount of the dividends distributed.
2.      The tax base for assessing the tax on the income from liquidation quotas is the difference between the market price of the sum that the respective shareholder or partner must receive, and the documentary proved price for acquiring its stocks or shares.
3.      The tax base for assessing the withholding tax on income from interests under financial leasing contracts in cases when the contract does not stipulate the interest size, is the market interest.
4.      The tax base for assessing the withholding tax on income of foreign entities from financial assets disposal is the positive difference between assets’ sale price and their documentary proved price of acquiring.
5.      The tax base for assessing the withholding tax on income of foreign entities from real estate disposal is the positive difference between the sale price and the documentary proved price of acquiring this real estate.
6.      The tax base for assessing the withholding tax on income of foreign entities in all other cases is the gross amount of the income.

Tax rates:
     
1.      The tax rate of the income tax pursuant to Art. 194 of the CITA (dividends and liquidation quotas) is 5 per cent.
        
2.      The tax rate of the income tax on interest, author and license fees is amounting to 5 per cent when all of the following conditions are met:

- the beneficiary owner (income recipient) is a foreign legal entity from a EU member state or a EU-based place of business of a foreign legal entity from a EU member state;
       
- the local legal entity that is paying the income, or the entity, which has place of business in the Republic of Bulgaria and is paying the income, is related with the foreign legal entity that is the beneficiary owner or with the entity whose place of business is the beneficiary owner.

3.      The tax rate on the other income pursuant to Art. 195 of the CITA is 10 per cent.

Declaring the tax:
The entities that have withheld and paid the withholding tax and the entities that have accrued the income pursuant to Art. 12, Para. 3 (from disposal with financial assets) and Para. 8, Item 2 (from disposal with real estate) declare these facts at the territorial directorate of the National Revenue Agency where the entity paying the income is registered or must be registered. This information is declared using a tax return as per the template.
The tax return is submitted timely for each quarter by the end of the month which follows the quarter when the tax was paid. If the payer of the income is an entity, which is not liable to withhold and pay the tax, the tax return is submitted by the income recipient.

A certificate is issued as per the template upon request of the interested entity for the tax paid on income of foreign legal entities. This certificate is issued by the territorial directorate of the National Revenue Agency where the tax must be paid.

Tax return for downloading:
       
Tax return template as per Art. 201 of the CITA
  
Deadlines for paying the tax:
     
The entities who withhold the withholding tax for income on dividends and liquidation quotas must pay the taxes due as follows:
 
1. Within three months from the beginning of the month which follows the month when a decision was taken to distribute dividends or liquidation quotas – in the cases when the beneficiary owner (income recipient) is a resident of a state which has concluded with the Republic of Bulgaria an effective tax treaty;
   
2. in all other cases - by the end of the month, which follows the month when decision was taken to distribute dividends or liquidation quotas.
         
The entities, who withhold the withholding tax on all other income of foreign entities, must pay the taxes due as follows:
     
1. within three months from the beginning of the month, which follows the month when income was accrued – in the cases when the income recipient is a resident of a state which has concluded with the Republic of Bulgaria an effective tax treaty;
     
2. in all other cases - by the end of the month which follows the month when income was accrued.
Recalculation of the withholding tax (Art. 202а of the CITA)

A foreign legal entity which is not a local entity for tax purposes of a European Union member state or of another country which is a member of the European Economic Area Agreement, shall be entitled to choose to recalculate the withholding tax for the income as per Art. 12, Para. 2, 3, 5 and 8. When the foreign entity chooses to recalculate the withholding tax, the recalculation shall be done for all the income received by it under Art. 12, Para. 2, 3, 5 and 8 over the year.

When the foreign entity chooses to recalculate the withholding tax on the income received by it, the recalculated tax shall be equal to the corporate tax, which would have been payable for that income provided that they are received by a local legal entity. Where the foreign entity has incurred expenses related to the income under sentence one, for which tax on expenses would have been payable provided that they have been incurred by a local legal entity, the amount of the recalculated tax shall be increased by this tax.

Where the amount of the deposited withholding tax under Art. 195, Para. 1 exceeds the amount of the recalculated tax, the difference shall be refundable up to the amount of the withholding tax under Art. 195, Para. 1, which the foreign entity cannot deduct from the tax payable to the state where it is considered a local entity.

The choice of recalculating the withholding tax shall be exercised by submitting an annual tax return as per the template. The tax return shall be submitted by the foreign entity to the Sofia Territorial Directorate of the National Revenue Agency not later than 31 December of the year, following the year when the income was accrued.

Tax return for downloading:

Annual tax return template as per Art. 202a of the CITA
ax refund shall be done according to the provisions of the Tax and Social Security Procedure Code by the Sofia Territorial Directorate of the National Revenue Agency.

The procedure for withholding tax recalculation shall not apply where the foreign entity is a local entity for tax purposes of a country which is a member of the European Economic Area Agreement, but is not a European Union member state, and with which the Republic of Bulgaria:

1. Does not have an effective tax treaty, or

2. Has got an effective tax treaty where the following is not provided:

a) Information exchange, or

b) Cooperation in collection of taxes.