At the end of August 2018 the Tax Directorate at the Bulgarian Ministry of Finance has submitted for public discussion a proposal for amendments to the Bulgarian Corporate Income Tax Act aiming to implement the EU Anti Tax Avoidance Directive. The legislative procedure for adopting the proposal is expected to commence shortly and the changes should enter into force on 1 January 2019.
The proposal entails concrete legislative measures in pursuit of the EU's action plan for fair and efficient corporate taxation, in accordance with the OECD's initiative against base erosion and profit shifting (BEPS). The new regime will apply to all taxable persons whose business activities are subject to corporate income tax in Bulgaria.
Under the proposal the current Bulgarian thin capitalization rules are entirely replaced by new interest limitation rules pursuant to which any excessive borrowing costs which exceed 30% of the taxpayer's earnings before interest, tax, depreciation and amortization (EBITDA) are non-deductible for corporate income tax purposes. The scope of the new interest limitation rules is broader than the scope of the current thin capitalization rules and covers interest expenses on all forms of debt, other costs economically equivalent to interest and any other expenses incurred in connection with the raising of finance. Unlike the current Bulgarian thin capitalization rules which limit the carrying forward of non-deductible borrowing costs to five years, there are no time limitations for carry forward under the new rules – which should allow the complete utilization of interest costs incurred in relation to investment activities. The interest limitation rule will not apply to excessive borrowing costs below the threshold of BGN 500,000 (approximately EUR 250,000) for one calendar year.
The proposal also introduces broadly scoped controlled foreign company ("CFC") rules for reattribution of the income of low-taxed controlled subsidiaries and permanent establishments to their Bulgarian parent companies. Where the criteria for a non-resident subsidiary or permanent establishment to qualify as a CFC under Directive 2016/1164 are met, the profits of the CFC will be included in the taxable profit of its Bulgarian parent and subject to 10% Bulgarian corporate income tax, subject to certain measures to avoid double taxation in both jurisdictions. The CFC rules shall not apply where the CFC carries out substantive activity supported by staff, equipment, assets and premises, unless it is established in certain offshore jurisdictions included in a list which is maintained and regularly updated by the Bulgarian Ministry of Finance.
Due to the extended deadline for implementation of the rules for hybrid mismatches and exit taxation under Directive 2016/1164, no measures have been undertaken yet for incorporating these provisions into the Bulgarian tax legislation.