The long-awaited clarification on the personal use of company assets - widely known as the “weekend tax”- is now in force.
How company assets can be used in a personal capacity in Bulgaria is determined by both enterprise taxation rules and those affecting the personal income of the employees or manager.
Tax on personal use of company assets
Recently adopted in Bulgaria, this long-awaited clarification to what is widely known as the “weekend tax” was introduced through a change in the local tax acts, thus affecting both taxation of the enterprises and personal income tax for the employees/manager benefiting from the personal use.
The changes were anticipated by the business community, as immediately following the tax authorities’ launch of the “weekend tax” campaign at the start of 2016, many aspects remained unclear. Specifically there was uncertainty around calculations, reporting, declaring and taxing of the use of company goods and services for personal purposes.
Following internal discussions and assessments, the Bulgarian tax authorities promoted their idea to decrease the administrative burden for business. The changes are retroactive, thus in force as of 1 January 2016.
Introduction of a one-off 10% tax on personal use
Through the new legislation the Bulgarian parliament allows businesses to make a choice:
- to consider the use of goods and services for personal purposes as part of the income of the employees/managers (and respectively, include this income in payroll for tax and social security purposes) or
- to pay a 10% tax over the costs related to the personal use, and not consider these costs as part of the income of the respective physical person.
The enterprises must choose one of the above options with the submission of their annual tax return. This means enterprises may make different choices on annual basis.
If the enterprise chooses to consider these costs as income for the employees/managers, it will be required to report them on a monthly basis as part of their payroll. On the other hand, if the enterprise prefers to tax these costs with the newly-introduced tax, it will have to declare it and pay on an annual basis, by 31 March of the following year.
From an enterprise perspective, allowing one-off taxation may bepreferred as it will decrease administrative efforts for reporting, declaring, payment and practically everything related to tax compliance in terms of personal use of company assets.
However, each company will have to consider and decide on annual basis which approach will be the best for their circumstance.
In view of the specific character of the retroactive change, companies will be allowed to apply a different treatment of these costs in the different parts of the 2016 calendar. Thus, if they have treated these costs as personal income of the employees before the new legislation was promulgated, they may keep this approach until the end of 2016, or change it from 1 October 2016 based on the new rules; and start paying 10% tax on the costs until the end of the year.
Taxable base of the one-off tax
Another positive change introduced by the Bulgarian authorities is the optional rules for calculating the taxable base of the one-off tax over the costs related with personal use of goods and services.
When defining those optional rules, the parliament introduced three main groups of assets subject to personal use by the employees/managers:
- real estate and
- other assets (any assets not covered by the other two groups)
For each of these groups, the authorities propose different calculation methods that seem to provide enough options and freedom for the enterprises to choose the one that best suits their organisation:
If a car is used both for company and personal purposes, the enterprise can choose to consider either the kilometres or the number of hours in which the employee/manager has used the car for personal purposes, when calculating the one-off tax.
Alternatively, if the employer is willing to avoid the additional administration that would be required to introduce the respective monitoring, the tax authorities will accept a 50:50 split between company usage and personal usage. This means that if an enterprise introduces this split it will not be required to maintain travel sheets showing for example, the exact time or the exact kilometres in which the employee/manager used the car for, company/personal purposes. This split seems very attractive in view of the easy administration that it offers, however for enterprises that do control the usage of company cars and limit personal use (if any at all), any such split may not be such a good option.
If real estate is used both for company and personal purposes the enterprise has the choice to consider either the size of the property area, or the hours in which the employee/manager has used the real estate for personal purposes, when calculating the one-off tax.
Other company assets
All other assets will be covered by one common rule stating that 20% of costs related to such assets should be considered as such related to personal use (irrespective of the actual use of these assets). The enterprise is allowed to prove and apply a different taxable base without such being proposed in the legislation. Considering the broad range of assets that fall within this group (company phones, computers and laptops, tablets, etc.) the enterprises should decide if the administration related to proving the different taxable base for this third group of assets is worth it, or if they will simply apply the 20% rule.
The new rules are now in force and the enterprises should consider a consistent approach for VAT purposes. At this stage, the criteria in the VAT Act is not identical and enterprises should expect additional clarifications from the tax authorities. There are proposed changes of the VAT Act but these are still under parliamentary discussion and there is no final decision at the time of publishing (particularly on the 50:50 split where the EU derogation procedure should be completed in advance).
Nevertheless, the general VAT rule should remain until the new legislation comes into force: VAT credit is allowed only on purchases which are used for taxable supplies. Thus, if goods and services are used for personal purposes the enterprises will be obliged to self-charge VAT on the same cost, as the personal use of the goods and services is not part of the economic activity of the enterprise. While this is not a new rule one may expect that the local tax authorities will monitor it with greater diligence, in view of the ongoing campaign targeting the personal use of company assets.