Tax Newsletter

Tax implications of Brexit from 1 January 2021

In Brief As of January 1, 2021, the United Kingdom will be treated as a non-EU country for tax purposes. The Bulgarian Parliament has introduced amendments in the indirect tax legislation that reflect this change. In addition, Brexit has several corporate and personal income tax implications for companies and individuals.

1. VAT implications of Brexit

1.1. The United Kingdom of Great Britain and Northern Ireland (the UK) will be treated as a non-EU country

The amendments to the VAT Act explicitly specify that the UK will be considered a non- EU (i.e., third) country as of January 1, 2021. This means that companies making supplies of goods between Bulgaria and the UK will no longer be able to rely on the provisions applicable for Intra-Community transactions. Instead, supplies of goods between the two countries will be considered as imports or exports. The relevant customs formalities will have to be fulfilled.

PwC БългарияPwC Bulgaria | Данъчен| Tax бюлетин newsletter априлJanuary 20202021 For transactions with services between businesses (the so called “B2B services”) – to a large extent the VAT rules will remain unchanged (the services will continue to be taxed under reverse charge mechanism by the customer). The major difference is that such services will no longer be reported in the VIES system after January 1, 2021.

For transactions with services from Bulgarian suppliers towards non-taxable persons in the UK (the so-called “B2C services”) – the rules for supplies towards non-EU customers would apply. Key examples are:

▪ As a main rule the place of taxation will be in the country where the supplier is established (i.e., Bulgaria) and the supplier should invoice with local (Bulgarian) VAT; ▪ The services that have a consulting, engineering, advertising, accounting, electronic, and similar nature (listed in art. 21, para 5 from the VAT Act) will be with a place of taxation in the country where the customer is established (i.e., in the UK) and should be invoiced without VAT by the Bulgarian supplier.

1.2. Transitional rules for supplies of goods dispatched before December 31, 2020

Supplies of goods dispatched or transported from Bulgaria to the UK before December 31, 2020 where the dispatch or transport ends after that date will be treated as Intra- Community supplies. Supplies from the UK to Bulgaria dispatched from the UK before December 31, 2020 will respectively be treated as Intra-Community acquisitions.

VAT refund claims by UK businesses for purchases made in Bulgaria before December 31, 2020 will be allowed under the rules for VAT refund for EU businesses. The deadline for filing the VAT refund claim will be March 31, 2021 (while for other EU businesses the deadline is September 30, 2021).

1.3. UK taxable persons will need a fiscal representative in order to have a Bulgarian VAT registration

Taxable persons established in the UK who have an existing VAT registration in Bulgaria must appoint a fiscal representative by:

▪ January 15, 2021 for persons registered under the rules for distance sales of goods or electronically supplied services or telecommunication services or radio/TV broadcasting services; ▪ March 31, 2021 for all other persons.

PwC БългарияPwC Bulgaria | Данъчен| Tax бюлетин newsletter априлJanuary 20202021 Taxable persons who do not appoint fiscal representatives until the deadlines above will be deregistered for VAT as of these dates.

Any UK taxable persons who want or are required to obtain a new Bulgarian VAT registration after January 1, 2021 will also have to first appoint a fiscal representative.

1.4. Treatment of Northern Ireland for transactions in goods

Supplies of goods to or from Northern Ireland will be treated as Intra-Community supplies/Intra-Community acquisitions if the supplier/recipient is VAT registered in Northern Ireland with a VAT number containing the prefix “XI.”

Taxable persons established in Northern Ireland will be able to apply for VAT refund for goods purchased in Bulgaria under the rules for EU businesses.

For transactions with services – Northern Ireland will be treated as third country.

2. Corporate and personal income tax implications of Brexit

Several preferential tax regimes towards companies and individuals from the EU will no longer apply in respect of UK companies, individuals or other entities. These include:

▪ Dividends distributed by a Bulgarian company to a UK company will no longer be exempt from 5% Bulgarian withholding tax under the domestic legislation. An exemption could be claimed under the tax treaty between Bulgaria and the UK if the relevant conditions are met; ▪ Dividends received by a Bulgarian company from a UK subsidiary will be included in the taxable result subject to 10% corporate tax. Before Brexit these were exempt

from corporate tax. PwC България | Данъчен бюлетин април 2020 ▪ Interest and royalties payable to qualifying UK related party companies will no longer be exempt from 10% Bulgarian withholding tax under the so-called Interest and Royalty Directive regime. Relief could be claimed under the tax treaty between Bulgaria and the UK if the relevant conditions are met; ▪ The tax neutral regime for mergers and spin-offs of companies (based on the so- called Merger Directive) will no longer apply when one of the companies is a UK entity; ▪ The result of trades (profits or losses) in securities traded on regulated exchanges in the UK will no longer be exempt from Bulgarian corporate tax (unless considered as equivalent exchange by the European Commission) or personal income tax; ▪ The sale of immovable property in Bulgaria owned at least 3 years (in some cases 5 years) by UK nationals will be no longer be exempt from taxation in Bulgaria; ▪ UK tax resident individuals will no longer be entitled to apply the annual tax regime and use certain tax deductions in Bulgaria as applicable to EU tax resident individuals (e.g. on rental income, mortgage interest, child allowances); ▪ The mechanisms for cross-border tax dispute resolution, exchange of information and mutual assistance between the tax administrations of EU Member States will no longer apply to the UK.

3. Social Security

The Protocol on Social Security Coordination signed between the EU and the UK generally replicates in many aspects the coordination rules amongst the EU member states, so no dramatic changes are expected in the social security area, including the mutual recognition of aggregation periods for pension and other social security purposes. The Protocol envisages for non-discrimination an equal treatment to be applied on EU and UK citizens in the social security coordination area. At this stage it is also envisaged to preserve the rule that detached/posted workers may continue to be subject to the social security legislation of the sending state provided that the work in the other state does not exceed 24 months. More details and clarifications are expected to follow.

PwC България | Данъчен бюлетин април 2020 Contacts:

Orlin Hadjiiski Nikolay Ilchev Atanas Sabev Partner Director Senior Manager Tax & Legal Services Tax Services Tax Services [email protected] [email protected] [email protected]

Vladislav Handzhiev Elizabeth Sidi Senior Manager Manager Tax Services Tax Services [email protected] [email protected]

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The material contained in this publication is provided for general information purposes only and does not contain a comprehensive analysis of each item described. Before taking (or not taking) any action readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this publication.

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PwC PwCБългария Bulgaria | Данъчен | Tax бюлетинNewsletter априлApril 2020 2020