Romania and Bulgaria recently ratified a new tax treaty (the “Treaty”) which both countries signed on 24 April 2015. The Treaty replaces the current treaty signed in 1995 and extends the existing relief for cross-border dividend, interest and royalty payments, introduces stricter anti-avoidance measures and provides for a new mutual assistance procedure for tax collection.
The Treaty provides the following withholding tax relief:
May be tax up to 5% of the gross amount of the dividends (current treaty provides for 10% rate on dividends arising from participations exceeding 25% of the total shares in the distributing entity and 15% rate in lesser participation share).
No relief will be available in cases of deemed dividend / hidden profit distributions.
The standard relief under the new Treaty is limited to 5% of the interest income (15% provided by current treaty). Full relief may be available in cases of government authority beneficiary.
The new Treaty will provide for up to 5% withholding tax on royalties (15% provided by the currently treaty).
- Capital gains
No relief will be available on capital gains tax from alienation of shares where the value of that company’s share derives of 50% or more from real estate.
Irrespective of the Treaty however, in specific circumstances, there may be other ways to relieve withholding tax under EU rules and the domestic rules of both Romania and Bulgaria
A Permanent establishment will be deemed to exist where a construction exists for a period longer than 12 months (currently – 9 months).
Mutual Assistance and Anti-avoidance measures
The Treaty will facilitate the mutual assistance procedures between the competent revenue authorities of Bulgaria and Romania. It is expected to draw closer the joint efforts on the collection of revenue claims for collection of taxes of all kind as well as interests, penalties and costs.
The Treaty provides for stricter anti-avoidance measures in relation to treaty shopping, profit-shifting schemes and transfer pricing.
The Treaty is expected to enter into force in 2016 and will apply to transactions occurring after 1 January 2017, subject to official exchange of diplomatic notes between Bulgaria and Romania on the ratification process.