On 26 March 2015 the UK and Bulgaria signed a new tax treaty (the “Treaty”).
The Treaty will significantly restrict the existing 1987 UK-Bulgaria tax treaty reliefs available in respect of cross-border dividend, interest and royalty payments. It will also introduce new anti-avoidance measures and provide for a new mutual assistance procedure in respect of the collection of taxes.
Limitation of Reliefs
Currently, interest and royalty payments made between the UK and Bulgaria benefit from withholding tax exemption. Under the Treaty, relief from withholding tax will be restricted as follows:
- Interest: May be taxed up to 5% of the gross amount of interest income. However, exemption from withholding tax will continue to be available in a number of specific circumstances, such as in respect of interest paid to a pension scheme, financial institution or to a State entity.
- Royalties: May be taxed up to 5% of the gross amount of the royalties.
- Dividends: May be taxed up to 5% of the gross amount of dividends (currently a 10% rate applies), except that (i) a higher rate of 15% will apply in respect of distributions by tax exempt real estate investment vehicles, and (ii) exemption applies for distribution to other companies and pension schemes. No relief will be available in cases classified by the Bulgarian revenue authorities as hidden profit distributions.
- Capital gains: Exemption from tax on share sales will continue to be available except where a company derives 50% or more of its value from real estate, unless such company is traded on a regulated stock exchange.
The Treaty provides elaborate rules for mutual assistance between the UK and Bulgarian revenue authorities for the collection of taxes, including late interest, penalties and collection costs.
The Treaty provides for stricter anti-avoidance measures in relation to treaty shopping, profit-shifting schemes and transfer pricing.
The Treaty will come into force following ratification by, and the exchange of diplomatic notes between, the UK and Bulgaria. It is likely to result in increased levels of withholding taxes for companies with, for example, lending transactions between the two jurisdictions with less flexibility to engage in tax driven structures and closer interaction and mutual assistance between the respective tax authorities.
However, in specific circumstances, there may be other ways to relieve withholding tax under EU rules and the domestic rules of both the UK and Bulgaria.