guidelines to taxation 2019 bulgaria bulgaria

I FRAMEWORK FOR DOING BUSINESS IN BULGARIA 110 II SPECIAL AREAS OF TAXATION OF BUSINESS-RELATED ACTIVITIES 147 A LEGAL FORMS 110 A HOLDING STRUCTURES 147 B ASPECTS 112 1 Participation exemption 147 1 Sole entrepreneurs 112 2 Outbound dividends 147 2 Corporations 116 3 Interest deduction and thin capitalization 149 3 Reorganizations 121 4 Non-resident shareholders 150 4 Specific aspects for foreign investors 122 5 Tax group 150 C INTERNATIONAL BUSINESS-RELATED ISSUES 125 B REAL ESTATE INVESTMENTS 151 1 Tax treaties 125 1 Resident investors 151 2 125 2 Non-resident investors 153 3 Controlled foreign companies 126 3 Real estate 154

4 VAT on real estate 155 D VALUE ADDED TAX (VAT) 127 5 Real estate investment trust 156 1 Taxable persons 127 6 Structuring of real estate investments 156 2 Taxable transactions 127 3 Place of supply 129 III EMPLOYEES AND BOARD MEMBERS 157 4 Taxable amount 131 5 Tax rates 132 A EMPLOYEES 157 6 Exemptions 132 1 Resident employees 157 7 Input VAT deduction 134 2 Non-resident employees 159 8 VAT liability 136 B BOARD MEMBERS 160 9 139 1 Executives 160 E OTHER BUSINESS-RELATED TAXES 142 2 Non-executives 160 1 Capital 142 3 Non-resident board members 160 2 Stamp duties 142 C MUNICIPAL TAX 160 3 Notary Fees 142 4 duties 143 D SPECIFIC PROVISIONS FOR CROSS-BORDER 5 Other duties 143 EMPLOYMENTS 161 6 Tax on insurance premiums 143 1 General provisions 161 7 Local taxes and fees 143 2 Specific provisions 161 8 Solar and wind energy production charge 146 IV TAX ASPECTS FOR PRIVATE INVESTORS 162

A CAPITAL INVESTMENTS 162

B INHERITANCE AND DONATION TAX PLANNING 162

108 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 109 I TAX FRAMEWORK FOR DOING BUSINESS IN BULGARIA According to the Bulgarian Commercial Act, there are the following types of companies in Bulgaria: A LEGAL FORMS ¬ General partnership (Sabiratelno druzhestvo – SD) Business activities in Bulgaria are carried out by sole entrepreneurs and ¬ Limited partnership (Komanditno druzhestvo – KD) traders, by companies or cooperatives. A sole entrepreneur is defined as an ¬ Limited partnership with shares (Komanditno druzhestvo s individual carrying on business activities. A sole trader is an individual who aktsii – KDA) performs business activities as a trader within the meaning of the Commer- ¬ Joint stock company (Aktcionerno druzhestvo – AD) cial Law. The term »company« refers to business entities. In Bulgaria both ¬ Limited liability company (Druzhestvo s ogranichena types of companies as well as corporations and partnerships are recognized otgovornost – OOD) as legal entities. The term »cooperative« refers to a business organization ¬ European Economic Interest Grouping (EEIG) (Evropejsko consisting of a group of a variable number of individuals carrying out business obedinenie po ikonomiceski interesi – EEIG) activities for their mutual economic, social and cultural benefit. The cooperative ¬ Societas Europaea (SE) (Evropejsko drugestvo – SE) is also recognized as a legal entity in Bulgaria. It should be noted that, accor- When a joint stock company (AD) and a limited liability company (OOD) are ding to the Bulgarian , both companies and cooperatives are treated as owned by a sole shareholder, the sole ownership is indicated by the abbre- non-transparent taxable persons subject to corporate income tax. viation E (ednolicen = sole ownership) in front of the legal form (i.e. EAD and EOOD). Business activities carried out in the form of cooperatives or partnerships are not Overview of point A, more information on the next side: common. The types of companies most likely to be used are the limited liability company (OOD or EOOD) and the joint stock company (AD). Some information about the legal and tax framework of sole traders and com- panies is provided in the table on the side before.

FORMS LIABILITY MINIMUM REGISTRATION TAX TAX OF SHAREHOLDERS CAPITAL IN COMMERCIAL TREATMENT RATES

(EUR) MINIMUM OF FOUNDERS AND SHAREHOLDERS REGISTER (EUR)

ET no shares, personal 1 obligatory tax liability 15% liability of the sole of sole entrepreneur entrepreneur SD unlimited and 2 obligatory non-transpa- 10% joint liability of rent, dividend the partners taxation at the level of the partners KD unlimited 2 obligatory non-transpa- 10% (general partner) rent, see SD limited (limited partner) EOOD limited 1 (2) 1 obligatory non-transpa- 10% rent, see SD OOD limited 1 (2) 2 obligatory non-transpa- 10% rent, see SD EAD limited 1 obligatory non-transpa- 10% rent, see SD AD limited 25,553 2 obligatory non-transpa- 10% (50,000) rent, see SD KDA limited 25,553 3 obligatory non-transpa- 10% (50,000) rent, see SD

110 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 111 B INCOME TAX ASPECTS 1.2 PRINCIPLES OF DETERMINATION OF THE SOLE TRADER INCOME TAX BASE 1 SOLE ENTREPRENEURS AND PARTNERSHIPS The sole trader income tax base under the ITNPA is determined according to the same principles as apply to partnerships and corporations (companies) 1.1 UNLIMITED TAX LIABILITY AND INCOME according to the Bulgarian Corporate Income Tax Act (hereafter CITA). If a sole entrepreneur/trader, irrespective of his citizenship, is resident in The sole trader’s annual taxable base is the taxable business profit according Bulgaria, he is subject to unlimited personal income tax liability (i.e. resident to the CITA, less the annual statutory social security and health insurance taxation) on his worldwide income in Bulgaria (subject to tax treaties). An indi- contributions paid by the sole trader. If a sole trader conducts business vidual is deemed a resident of Bulgaria if his permanent address or center activities in the gambling (or shipping) industry, his income is subject to the of vital interests is in Bulgaria, or he is physically present in Bulgaria for a regulations of alternative . If a sole trader conducts business period or several periods exceeding in total 183 days in any 12-month period. activities in the field of passenger transportation by taxicab, then according Thus, income from the business activities of a sole trader or sole entrepreneur to the Local Taxes and Fees Act he is subject to tax on passenger transporta- carried on in Bulgaria is subject to tax at the level of the individual. Foreign sole tion by taxicab as is any similar activity related to this kind of transportation. entrepreneurs are subject to Bulgarian taxation on their income derived from Any income subject to tax on passenger transportations by taxicab shall be Bulgarian sources. excluded from the from a sole trader’s business activity. According to the Bulgarian Income Taxes on Natural Persons Act (hereinafter For sole traders in other branches, e.g. agricultural producers, deviating ITNPA), sole entrepreneurs running an operating business in Bulgaria may regulations apply under the CITA. derive »income from business activities as a sole trader« and »income from other business activities«. 1.2.1 Expenses The »income from other business activities« comprises income from all kinds of Basically, all expenses incurred by a or business are tax business activities other than trade, particularly from the following categories deductible. However, certain restrictions apply (inter alia): of income: ¬ business travel expenses of the sole trader are deductible ¬ income from tobacco production and agriculture, fisheries; up to double the amount of travel expenses stated by law ¬ income from intellectual property rights and royalties; (BGN 40 [approx. EUR 20]); ¬ income from independent (professional) services; ¬ expenses for representation are taxable with expense tax ¬ income from business activities in certain professions that are (this term includes entertainment expenditures and busi- not subject to local patent tax. ness meals); the taxpayer has to prove that the expenses were incurred for business reasons; the expenses must be The taxable »income from business as a sole trader« is taxed at a flat rate sufficiently documented. of 15%. The taxable »income from other business activities« is taxed at a flat rate of 10%. In the following, we refer only to the categories »income from 1.2.2 Carry-forward of losses business activities as a sole trader« (hereinafter referred to as »sole trader in- come«) and »income from other business activities«. On this basis, we will briefly Generally, the deduction of losses suffered in the »sole trader income« present the tax treatment of the abovementioned categories of income. category is regulated under the CITA. Tax losses may be deducted from the positive financial result over the following five years, but only up to According to the Bulgarian legislation partnerships (SD, KD and KDA) are the positive fiscal result. defined as business entities that are regarded as non-transparent for tax purposes and profits . Partnerships are thus taxable at the company level, i.e. 1.2.3 Tax rates and tax payments they are non-transparent entities for personal income tax purposes. Partner- ships are treated as taxable persons, subject to corporate income tax, The personal income tax for sole traders and persons carrying out see I.B.2. economic activities in the capacity of merchant within the meaning of the Commerce Act is levied at a proportional rate. The sole trader Please note that individuals can also derive income from non-operating is liable to make a monthly advanced income tax payment in the activities such as real estate or capital investments. For this type of activity, amount of 15% under the regulation of the CITA. As of 1 January see II.B and IV. 2017, the monthly advance payments of the tax due for the months of January, February, March and April must be remitted no later than 30 April of the current calendar year. The annual tax payment is calculated from the tax base multiplied with the annual of 15%, less the tax advance payments for the fiscal year.

112 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 113 The taxpayer must declare his income in the annual tax returns, 1.3 PRINCIPLES OF DETERMINATION OF THE TAX BASE OF THE which he must submit to the competent tax office between INCOME FROM OTHER BUSINESS ACTIVITIES 10 January and 30 April of the following year. Sole traders must The taxable base of the income from other business activities under the remit the tax on their expenses made in the preceding year by ITNPA is determined relative to the type of income. 30 April of the following year. If the annual tax return is submitted by 31 March of the following year by electronic means, the taxable The annual taxable base is the taxable income (income less expenses) person enjoys a rate rebate of 5% of the balance of tax due under according to the ITNPA, less the annual statutory social security and health the annual tax return, but no more than BGN 500 (approx. EUR 250). insurance contributions borne by the sole entrepreneur. There is an amend- There are two additional conditions for enjoying this rebate: the said ment concerning the determination of the annual tax base, effective as of person does not have any public obligations subject to enforcement January 2015. The annual tax base has to be debited with the new tax relief by the time of submission of the return, and the balance of tax is for raising children or the tax relief for raising disabled children. remitted by 31 January 2019 for the income derived in 2018. As of 1 January 2019, the deadline for receiving the rebate has been 1.3.1 Expenses extended to 31 March of the following year. Basically, for each type of income the tax deductible expenses are Furthermore, the sole trader must submit an annual activity report determined on a percentage basis: with the annual tax return. The annual activity report need not be ¬ 60% of the income from agriculture (and tobacco produc- submitted if the sole trader did not carry on business activities during tion), where the production is unrefined, with the excep- the fiscal year. The definition of an enterprise which does not carry tion of ornamental plant production. According to Art. 29 out business activities is provided in Section 1, item 30 of the Sup- ITNPA, the income from tobacco production is excluded plementary Provisions of the Accountancy Act and is applicable to from the deductible expenses; the sole trader as well. Enterprises which did not carry out business ¬ 40% of the income from agriculture, where the production activities during the fiscal period are such that simultaneously fulfill is unrefined and refined, including ornamental plant pro- all of the following conditions: duction; the same percentage applies to income from ¬ the enterprise did not carry out any commercial trans- forestry, fisheries, hunting; actions during the fiscal period; ¬ 40% of the income from intellectual property rights and ¬ no conditions for acknowledging the revenue according to royalties; the Accountancy Act and the applicable accounting stan- ¬ 40% of the income from patent activities that are not dards arose during the fiscal period; liable to taxation under the local patent tax; ¬ the enterprise did not carry out any activities related to ¬ 25% of the income from independent (professional) investments, manufacturing and/or sale of goods; services, other self-employment (lawyers, translators, ¬ the enterprise did not carry out any purchases of goods or etc) and non-work activities. services for the purpose of obtaining income or profit from them. 1.3.2 Carry-forward of losses The possibility of non-submission of an annual activity report under Generally, the deduction of losses suffered in the »other business the abovementioned conditions is also applicable to the corporate activities« category is not possible. entities according to the amendments of CITA. 1.3.3 Tax rates and tax payments The personal income tax for business activities other than those carried out as a sole entrepreneur or trader within the meaning of the Commerce Act amounts to 10%. The taxpayer must declare his income in the annual tax returns and file them with the competent tax office between 10 January and 30 April of the following year. As of 1 January 2018, the enterprises, which are payers of the income within the meaning of ITNPA, are obliged to file the annual tax returns only by electronic means. As of 1 January 2020, self-insured persons are obliged to file the annual tax return only by electronic means.

114 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 115 The recipient of the income (a self-insured or not self-insured person) is liable Local legal entities comprise companies, incorporated under the Bulgarian to make a tax prepayment on their personal income from other sources as Commercial Act or under (EC) No. 2157 and have a registered seat in Bul- compensation for lost profit and damages of such nature; cash prizes and garia, cooperatives, and non-profit organizations. Those legal entities are merchandise awards from competitions and contests which are not provided regarded as Bulgarian tax residents and are subject to unlimited corporate by an employer or a commissioning entity (orderer); interest, including such income tax liability, which provides for a taxation of income on a worldwide within payments under lease contracts; producer dividends distributed by basis (subject to applicable tax treaties). cooperatives; exercise of intellectual property rights by succession. The tax According to the CITA, non-resident companies are those that are not resi- rate is 10%. The tax must be withheld and remitted no later than the end of dent in Bulgaria. They are subject to tax on income and profits derived from the month following the quarter in which the income was charged by the Bulgarian sources. enterprise or the income was paid by the self-insured person.

As of 1 January 2017, a new tax relief for cashless payments is effective. The 2.2 PRINCIPLES OF DETERMINATION OF THE TAX BASE tax relief is 1% of the annual tax due on the total annual tax basis, but no more Income of legal entities (OOD, AD, etc) is to be regarded as »business in- than BGN 500. The relief is granted if the following conditions are fulfilled: come« in any event, regardless of the nature of the income. 1 In the course of the year the taxable person acquired taxable The CITA regulates four types of corporate income taxes: incomes subject to tax on the total annual tax basis; 2 100% of the incomes under item 1 were received by bank transfer; ¬ corporate income tax (»profit tax«); 3 The cashless payments made by the taxable person are 80% or ¬ withholding tax; more of the incomes under item 1. ¬ tax levied on certain types of expenses; ¬ alternative corporate tax (e.g. gambling, shipping). Only taxable persons who have no public obligations which are subject to legal enforcement at the date of submission of the annual tax return or at The tax base of each type of corporate tax is determined as follows: the date of submission of an annual adjusting tax return can take advantage ¬ the tax base of the corporate income tax is the taxable profit of of tax reliefs. the entity; ¬ the tax base of the withholding tax is the whole income of foreign 2 Corporations entities from Bulgarian sources; ¬ the tax base of the tax levied on certain types of expenses is the 2.1 TAXPAYERS AND RESIDENCE total amount of those expenses; Generally, legal entities, inter alia partnerships and corporations, are regar- ¬ the alternative corporate tax is imposed on gambling activities, on ded as non-transparent under Bulgarian tax law. Therefore, the income de- some activities of state-owned enterprises, and on activities from rived by legal entities is taxable at the level of the entity. maritime administration activities. The following legal entities are liable to corporate income taxation if they The following section refers to the tax base of the corporate income tax. undertake business in Bulgaria: The tax base of the corporate income tax is the taxable profit. The taxable ¬ local legal entities; profit is determined by reference to the accounting profit in the manner stipu- ¬ foreign legal entities that carry out business activities in Bulgaria lated in the CITA. As regards the determination of the accounting profit, through , or carry out property legal entities are required to draw up annual financial statements in accor- administration, or derive income from sources in Bulgaria; dance with the IFRS. For small and medium-sized enterprises, the Bulgarian ¬ sole entrepreneurs, tobacco and agricultural producers – for the Accounting Standards (hereinafter »Bulgarian GAAP«) are applicable. For withholding tax and in the cases determined in the Individual corporate tax income purposes, particular adjustments of the accounting Income Tax Act; profit as provided by the CITA must be made: ¬ employers and contracting entities of management and control – ¬ permanent tax differences; over the tax on certain social contribution expenditures; ¬ temporary tax differences; ¬ associations without legal capacity, and insurance funds; ¬ other elements according to the CITA. ¬ for withholding tax aims – foreign organizational and economical vehicles (trusts, funds, etc) that autonomously carry out business Specific regulations exist for the determination of the taxable profit of activities and undertake and administer investments when the permanent establishments. holder of the rights to derive income cannot be determined; ¬ the National Assembly of the Republic of Bulgaria in respect of the tax on the supplementary costs incurred by Members of Parliament.

116 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 117 The State Gazette, issue No. 75 of 27 September 2016, published the amend- 2.4 TAX RATES AND TAX PAYMENTS ments to the Corporate Income Tax Act (CITA) and the Income Taxes on Any profit derived by a corporation is subject to profit tax at a flat rate of 10%, Natural Persons Act (ITNPA), where the taxation of expenses for benefits in regardless of whether the profit is distributed to shareholders or retained. kind was introduced. The corporate income tax should be assessed on a financial year (calendar or Employers will have the opportunity to choose either a 10% one-off tax on ex- business year) basis. The annual activity report must be submitted together penses for benefits in kind under the CITA, or to tax the expenses as personal with the annual tax return, which is due by 31 March of the following year. As income in accordance with the ITNPA. The preferred option must be declared of 1 January 2018, the annual tax return can be submitted only by electronic in the annual corporate income tax return for the respective year. The CITA means. The CITA provides the option of submitting an adjustment statement effective as of 1 January 2019 provides a possibility for employers who were for an adjustment statement to the annual tax return. This option can be used not obliged to file and did not file an annual tax return for the previous year, once without special permission of the tax authorities, by 30 September in the but who wish to opt for one-off tax on expenses for benefits in kind, to declare year of submission of the return. As of 1 January 2018, there is no obligation this by submitting an annual tax return for the current year. to submit an annual tax report and an annual tax return if the entity did not The basis for assessment of the tax on expenses shall be the sum of the perform business activities during the tax period as per Section 1, item 30 of expenses in kind, associated with own assets, leased assets and/or assets the Supplementary Provisions of the Accountancy Act (see I.B.1.2.3). Howe- provided for use, provided for personal use, and/or associated with use on the ver, as of 1 January 2019, a taxable person that has not carried out business part of staff, for the calendar year. For the purpose of determining the tax activities as per the abovementioned regulation for the respective tax period base of the one-off taxation of expenses for benefits in kind, the company’s must submit an annual tax return, if an obligation for taxation of the corporate assets are divided into the following categories: income or of the expenses arises, or if the taxable person wishes to declare other data and circumstances in the draft of the declaration. ¬ Vehicles: ¬ Upon determination of the tax base, the expenses shall be charged All taxable persons must make monthly or quarterly prepayments of corpo- to the personal use by multiplying the total amount of all expenses ration tax based on the projected tax profit for the current year. Prepayments related to the vehicle by: shall not be made by taxable persons whose net turnover in the preceding 1 the proportion of the personal to the total use of the year does not exceed BGN 300,000, nor by newly incorporated taxable per- vehicle based on the mileage or the hours of the sons for the year of the incorporation, with the exception of any such persons respective vehicle; newly incorporated as a result of a transformation under the Commerce Act. 2 50% According to Art. 84, monthly tax prepayments shall be made by taxable ¬ Immovable property: area- or hourly-based proportion between the persons whose net turnover in the preceding year exceeds BGN 300,000. personal and the total use of the assets. According Art. 85, taxable persons who are not obliged to make monthly tax ¬ Assets other than in the abovementioned categories: the tax base prepayments shall make quarterly tax prepayments. shall be 20% of the total amount of all expenses related to the The monthly and quarterly prepayments shall be determined according to a respective asset, unless the taxable person can provide documents formula stipulated in Art. 86 and 87 of the CITA. supporting another tax base amount. There are also rules stipulating the declaration of the prepayments. The The amendments to the CITA and ITNPA take effect retroactively and apply tax prepayments for the current calendar year, determined according to the as of 1 January 2016. procedure established by Art. 86 and Art. 87 have to be declared in the annual tax return for the preceding calendar year. 2.3 CARRY-FORWARD OF LOSSES According to the rules for remittance of the tax prepayments, monthly In terms of taxes, the losses of corporations are basically treated similarly to tax prepayments shall be remitted as follows: for the months of January, the losses of sole entrepreneurs (see I.B.1.3). An ordinary loss occurs when February and March: no later than 15 April of the current calendar year; for deductible costs exceed the gross income subject to tax. Losses may be the months from April to December: no later than the 15th of the month to carried forward for a maximum period of five years following the year in which which the said prepayments apply. Quarterly tax prepayments for the first they were incurred. The receiving company has no right to carry forward the and second quarters shall be remitted on or before the 15th of the month losses of the transferring company in the case of mergers, acquisitions, or directly following the quarter to which the said prepayments apply, and for divisions. the third quarter: not later than 15 December. No quarterly tax prepayment shall be made for the fourth quarter. Taxable persons must remit the corporation tax for the relevant year on or before 31 March of the following year, after deduction of the tax prepayments remitted for the relevant year.

118 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 119 2.5 TAX INCENTIVES 3 Reorganizations Some of the rules for granting tax relief, representing state aid for regional The most feasible means of reorganization is the transformation. The trans- development in the form of retained corporate income tax, have been formation is regulated by the corporate law and the CITA, which provides for changed. The tax shall be remitted only on the grounds of an order issued a special tax regime based on the EC Merger Directive. According to the CITA, by the InvestBulgaria Agency, which certifies the maximum allowed amount the following types of reorganizations are applicable: of state aid for regional development (respectively the maximum allowed ¬ mergers; amount of the remitted tax), the intensity and term of the aid (the tax periods ¬ divisions; for which the tax remission is allowed), and confirms the stimulating effect ¬ transfers of a separate activity (assets and liabilities); of the investment project. ¬ exchanges of shares. Advance payments of tax (the whole amount or part of it) can be remitted as According to the CITA, the following rules, among others, are to be observed of the month or the quarter following the month of issue of the order. in the case of reorganizations: There will be no further possibility for tax remission in the form of a state ¬ the accounting profits or losses that occur when assets and aid for regional development for entities operating in industries such as liabilities are written off as a result of the transformation are transportation, energy, primary production, processing and subsequent not recognized for tax purposes; offering on the market of agricultural products as stated in Appendix 1 to ¬ the fiscal value of the assets and liabilities transferred is equal the Treaty on the Functioning of the European Union. at the level of the absorbing company to the value that they had The scheme excludes the possibility of granting aid to entities which are at the level of the absorbed company (»continuance/roll-over of closing down the same or a similar production activity in another Member book values«); State of the European Union or the EEA separately or at a group level two ¬ the tax depreciation of the transferred assets must be calculated years prior to the date of applying for aid, or plan closing down within two by the absorbing company in accordance with the rules that would years after the initial investment has been completed. have been used by the absorbed company had the merger not taken place; The CITA amendments also change the definition of initial investment ¬ the acquiring companies have no right to carry forward any tax and clarify concepts and rules for determination of the amount of the aid losses generated by the companies under transformation – except and of the acceptable expenses included in the investment project. The in the case of the takeover or merger of a business establishment initial investment has to be made within four calendar years, including within the country by a company from another Member State of the year when the order of the InvestBulgaria Agency was received. the European Union; ¬ the acquiring or newly formed companies have no right to recognize for tax purposes any unrecognized expenses on interest payments and/ or upon unrecognized exceeding borrowing costs in the transferring companies, resulting from application of the thin capitalization rule or the interest limitation rule; ¬ exemption from value added tax with respect to the transformation. As of 1 January 2019 the advance declaring and remitting of corporate tax in case of liquidation or insolvency has been abolished. Furthermore, in the case of liquidation or insolvency, corporate tax is due on the date of the deletion from the Commercial Register. The corporate tax must be assessed on the basis of the tax profit for the period from the beginning of the year of deletion of the entity until the date of entry of the deletion. The payable corporate tax must be declared and paid from the entity’s property within 30 days of the date of deletion by the person representing the entity during the last tax period. An identical approach has also been adopted with regard to the termination of the activity of permanent establishments or the termination of unincorporated entities. These amendments, effective as of 1 January 2019, aim at facilitating the process of declaring and remitting tax, unifying the deadline for the submission of tax returns and payment of taxes due for the last tax period for all cases of winding up of a taxable person and for all types of taxes due under CITA.

120 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 121 4 Specific aspects for foreign investors Foreign natural persons resident in jurisdictions with a preferential tax regime (off-shore zones) are taxed with a 10% final tax for the income from sources 4.1 NON-RESIDENT SOLE ENTREPRENEURS in Bulgaria received from: An individual who is not resident in Bulgaria is subject to limited tax liability ¬ remuneration for services or rights, except if the services or the only. Tax liability is limited to the following Bulgarian-source income, listed rights are actually granted; in the Bulgarian ITNPA: ¬ penalties and damages of any kind, except for benefits accrued ¬ income from a legal employment relationship; under insurance contracts. ¬ income from business activities as a sole proprietor; ¬ income from other business activities; 4.2 NON-RESIDENT CORPORATIONS ¬ income from rent or any other granting of rights or property; A non-resident corporation (i.e. neither the place of management nor legal ¬ income from the transfer of rights or property; seat is in Bulgaria) that is comparable to a Bulgarian corporation is subject A 10% withholding tax rate is applicable – inter alia – on the following types to limited corporate tax liability if it carries on business in Bulgaria through a of income: income from rent or other granting of the use of movable or Bulgarian permanent establishment. In this case, tax liability is limited to the immovable property; income from franchising contracts and factoring income attributed to that permanent establishment. Any non-resident legal contracts; income from author’s and license remuneration; income from entity carrying out an activity through a permanent establishment in the remuneration for technical services; income from awards and remuneration country must specify, in the annual tax return, identification data on the for activities of foreign natural persons – public figures, scientific workers, owners, shareholders, or partners in the foreign legal entity, and on the eminent figures in arts, culture and sport, etc; income from management and amount of the participating interest, when the amount of said participating supervision of establishments, and from the participation in management interest exceeds 10%. Item 3 of Art. 27 par. 2 of the CITA explicitly states that and supervisory bodies of establishments; income from sale or transfer of profits accrued as a result of distributions of amounts are subject to taxation immovable property for consideration; income from the sale or transfer insofar as these amounts are recognized for tax purposes and/or lead to a for consideration of stocks, shares and other financial assets; income from reduction of the tax financial result of the distributing person, regardless of interests; income from cash prizes and merchandise awards that are not pro- the way they have been accounted for with said person. Further, income from vided by an employer or a commissioning entity; income obtained by natural Bulgarian real estate is subject to the limited tax liability if it belongs to the persons who are not registered as farmers in the form of state aids, subsi- business of the foreign corporation. The corporate income tax rate is 10%. dies and other support from the European Agricultural Guarantee Fund, the Non-resident companies deriving a Bulgarian-source income not through a European [Agricultural] Fund for Rural Development, and the State Budget. permanent establishment in Bulgaria are subject to a final withholding tax. According to ITNPA, no tax shall be assessed at the date of acquisition of A 10% withholding tax rate is applicable to the following types of income: shares and interests acquired in return for non-cash contributions made to ¬ income from financial assets and transactions with financial trading companies. The amendments of the act effective as of 1 January 2017 assets issued by local legal entities, state and municipalities; limit the scope of the cases of of non-monetary contributions ¬ income from rent or other consignment of movables for use; made to trade companies. Tax shall be assessed upon sale or exchange of the ¬ remunerations for technical services; stock and shares acquired in return for non-monetary contributions. The aim ¬ remunerations under franchising and factoring contracts; of the tax authorities is to prevent practices. In this connection ¬ remunerations for managing and controlling a Bulgarian legal a special procedure for determining the price of the sale/exchange of stock entity; and shares acquired in return for contribution of stock and shares to another ¬ income from real estate or transactions with real estate. company is regulated as of 1 January 2017. If, at the date of the entry of the non-monetary contribution in the trade registry, the income from the sale/ A 10% to withholding tax rate is applicable if foreign companies estab- exchange of the property, subject to the contribution, is taxable according to lished in jurisdictions with a preferential tax regime (offshore zones) receive the provisions of the ITNPA, the price of the acquisition shall be the documen- Bulgarian-source income from: ted price of acquisition of the property which was initially the subject of the ¬ remuneration for services or rights; non-monetary contribution. ¬ penalties and damages of any kind, except for benefits accrued A 5% withholding tax rate is applicable on the income from dividends and under insurance contracts. liquidation shares. For individuals who carry out business activities as traders within the meaning of the Commercial Act (including sole entrepreneurs/traders), the provisions of CITA are applicable regarding the taxation of income and the taxes withheld at the source.

122 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 123 The reduced rate of 5% for withholding tax on income from interest and C INTERNATIONAL BUSINESS-RELATED ISSUES royalties is repealed with the 2015 amendments to the Bulgarian CITA. As of January 2015 any income from interest payments, any copyright and license 1 Tax treaties royalties do not attract a tax withheld at source if the payer and the recipient Bulgaria has concluded about 69 double tax treaties in the area of personal of the income are related parties. Two persons are related if one of them and corporate income tax. In most of the treaties the exemption method possesses at least 25% of the capital of the other person continuously for applies, except for dividends, interest and royalties. For details on Bulgarian at least two years. Two parties are related if a third entity registered in the tax treaties, see Annex VI. European Union has continuously held for at least two years at least 25% of the capital of both parties separately. 2 Transfer pricing The explicit listing of the preferential tax regime jurisdictions is approved by the Ministry of Finance at the proposal of the NRA on 21 December 2016 and For the purposes of the Bulgarian Tax Law, the Bulgarian Tax and Social is promulgated in the State Gazette. As of January 2016 the term »Juris- Insurance Procedure Code (Bulgarian Fiscal Code) provides basic definitions dictions with preferential tax regime« is extended to those territories/states of transfer pricing terms such as market price, related persons and methods which are not EU Member States and do not exchange information with the for determination of market prices. The CITA and the Transfer Pricing Guide- Republic of Bulgaria on the grounds of Council Directive 2011/16/EU of 15 lines of the National Revenue Agency (which consist of 15 sections) provide February 2011 on administrative cooperation in the field of taxation, which transfer pricing rules, i.a. for , simulated transactions, hidden repeals Directive 77/799/EEC, and corresponds to the following conditions: profit distribution, cross-border transfer of assets (see Annex V), etc, that are applicable to both domestic and cross-border transactions. ¬ There is no effective Treaty (DTT) or Agreement for Exchange of Information between the Republic of Bulgaria or The transfer pricing documentation must comply with the general provisions the European Union and the respective territory/state; of the CITA and the Transfer Pricing Guidelines of the National Revenue ¬ There is an effective DTT or Agreement for Exchange of Informa- Agency. In practice, it is recommended to set up a proper transfer pricing tion between the Republic of Bulgaria or the European Union and documentation, for the reason that when the documentation does not cover the respective territory/state, and the latter refuses or is not able the requirements of the National Transfer Pricing Guidelines and CITA, the to exchange information on request; Bulgarian Tax Authorities have the right to set the prices on their own by ¬ The due income tax or corporate tax, or the respective substitu- using public information sources. The preparation of transfer pricing docu- ting taxes on incomes under Art. 12 par. 9 or Art. 8 par. 11 of the mentation is not compulsory for the taxable persons according to Bulgarian Income Taxes on Natural Persons Act, realized or to be realized legislation. There is a draft amendment of TSSPC regulating the cases in by non-resident natural persons, is more than 60% lower than the which the preparation of a local file will be compulsory. The final amendment income tax or corporate tax on said incomes in the Republic of of the Code will be promulgated in 2019. Bulgaria. The OECD Transfer Pricing Guidelines are not obligatory for Bulgaria, because Bulgaria is not a member of the OECD. However, the OECD Guidelines are used by the Bulgarian Tax Authorities to solve transfer pricing cases by incorpo- ration of the OECD Transfer Pricing Guidelines in the Transfer Pricing Guide- lines for the Bulgarian National Revenue Agency. As of 4 August 2017, the amendments of the TSSPC regarding the auto- matic exchange of country-by-country reports of multinational groups of undertakings (MGUs) are effective. One group of data concerns transfer pricing agreements and binding opinions. Another change in this direction is the introduction of automatic exchange of CbC reports. The first CbC report, namely for the year 2016, had to be submitted by 31 December 2017. This requirement was introduced by Council Directive (EU) 2016/881 of 25 May 2016. Only MGUs which, according to their consolidated financial statements, have total income exceeding EUR 750,000,000 (BGN 1,466,872,500) for the tax year preceding the reporting tax year are obliged to submit such infor- mation. In case the ultimate parent undertaking is a Bulgarian local taxable person, it is obliged to submit a CbC report if the group, according to the consolidated financial statements of the group, has a total income exceeding BGN 100,000,000 (approx. EUR 51,129,000) for the tax year preceding the reporting tax year.

124 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 125 3 Controlled foreign companies D VALUE ADDED TAX (VAT) As of 1 January 2019, a new regulation for the determination of the tax Taxable transactions, including those taxable at zero tax rate, carried out by financial result in case of controlled foreign companies (CFCs) has been a taxable person with place of supply in Bulgaria are subject to value added introduced. The undistributed profits of such companies, incl. of perma- tax (VAT). nent establishments, are included annually in the tax financial result of the Bulgarian company which has a direct or indirect participation in a foreign enterprise, and are taxed under the general rules of the CITA. The new regu- 1 Taxable persons lations are applicable in the following cases: A »taxable person«, according to the Bulgarian VAT Act is any person who ¬ a taxable person within the meaning of the CITA (only local legal independently carries out in any place any economic activity, whatever the entities established under the Bulgarian law) has, either alone purpose or result of that activity is. In this sense, foreign taxable persons (per- or together with its affiliated enterprises, directly or indirectly sons without a seat or fixed establishment in Bulgaria) may also be subject over 50 % of participation in capital, voting rights, or profits of a to Bulgarian VAT if they carry out taxable transactions in Bulgaria (see I.D.9). foreign enterprise; ¬ and when the tax actually paid by this foreign enterprise or 2 Taxable transactions permanent establishment is lower than the amount specified by Bulgarian law. 2.1 SUPPLY OF GOODS AND SERVICES If a foreign enterprise is not subject to corporate taxation in its jurisdiction, According to the general provisions of Art. 6 (1) Bulgarian VAT Act, »supply it will not fall within the definition of CFC, and the new regulations will not of goods« is defined as the transfer of the right of ownership or another right apply thereto in any way. in rem to the goods, with the term »goods« comprising, within the meaning given by the Bulgarian VAT Act, all movable and immovable assets, inclu- All CFC incomes have to be included in the taxable amount of the Bulgarian ding electric current, gas, water, heat or refrigeration and such, as well as taxable person. The amount of the income or profits of a CFC should be de- standard software. termined by the CITA and should be included in proportion to the Bulgarian taxpayer’s participation in the CFC. CFC regulations do not apply when the Each taxable supply of goods or services made in return for payment is CFC carries out a substantial business activity with staff, equipment, assets subject to VAT. The law stipulates that the following is deemed supply made and premises in Bulgaria. in return for consideration: ¬ setting aside or submitting goods for the private use or consump- tion of the taxable person, of the owner, the factory or office workers of the latter, or for purposes other than the independent economic activity of the taxable person; ¬ providing services for the private use of the taxable person, of the owner, of the factory and office workers of the latter, or for purposes other than the independent economic activity of the taxable person. The sole exceptions are such cases in which the abovementioned provision of goods or services has been caused by dire straits or force majeure. These exceptions are specified in the new item 3 of Art. 6 par. 4 and the new item 5 of Art. 9 par. 4 of the Bulgarian VAT Act. According to the general provisions of Art. 9 (1) Bulgarian VAT Act, »supply of services« is any performance of services. »Services«, within the meaning of the Bulgarian VAT Act, are defined as everything that has a value and is not goods, money in circulation, or foreign currency used as legal tender. The supply of services may result from a positive action (e.g. rendering of services, the sale or transfer of rights to intangible property) or tolerating actions of other persons (e.g. lease of immovable property, use of rights and patents). According to the amendments of the act effective as of 1 January 2017, the non-monetary contributions to an unincorporated partnership shall not con- stitute a supply of goods or services for VAT purposes.

126 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 127 A supply is also the withdrawal of goods or the use of goods by a taxable 2.4 INTRA-COMMUNITY ACQUISITIONS person for his private use or for use by his staff if the goods form part of the An intra-Community acquisition is the acquisition of the right of ownership of business assets of the taxable person and the VAT on those goods was totally goods, as well as the actual receipt of goods, in certain cases, that are dis- or partly deductible. patched or transported to the territory of the country from the territory of another Member State, where the supplier is a taxable person registered for 2.2 SELF-SUPPLY VAT purposes in another Member State. On the one hand, the supplier carries »Self-supply«, within the meaning of the Bulgarian VAT Act, is defined as the out a tax-exempt intra-Community supply; on the other hand, the recipient dispatch or transportation of goods produced, extracted, processed, purchased, effects an intra-Community acquisition, must pay VAT and may deduct the acquired, or imported on the territory of the country by a taxable person in the VAT under the general conditions. The receipt of goods within the territory of course of his business activity when the goods are sent or transported for the the country by a taxable person, which will be used for the purposes of the purposes of his business activity from or for his account from the territory of economic activity of the said person, are also regarded as an intra-Community the country to the territory of another Member State. acquisition for consideration where the goods in question are dispatched or transported by or on behalf of the taxable person from the territory of another 2.3 IMPORTATION OF GOODS Member State in which the person is registered for VAT purposes and where the goods were produced, extracted, processed, purchased, acquired, or The transfer of goods from a country outside the Community to Bulgaria is imported within the framework of the economic activity. subject to import VAT. The import of goods to which the exemption from customs duties under 3 Place of supply Regulation (EC) No. 1186/2009 applies have been exempt from VAT since 1 January 2011 because of amendments according to Council Directive The supply of goods and services will only be taxed under the Bulgarian VAT 2009/132/EC. Act if the place of supply is considered to be in Bulgaria. Regulations in respect to the import of goods for the purpose of subse- Generally, the »place of supply of goods« that are not dispatched or trans- quent supply of those goods within another EU Member State are provided ported is the place where the goods are when the ownership changes hands. because of amendments according to Council Directive 2009/69/EC from In certain cases, e.g. supply of goods in accordance with a lease contract, the 30 November 2010, in force since 1 January 2011. There arises an obligation place of supply is where the actual handing over of the goods occurs. to indicate the Bulgarian VAT number of the importer and the buyer’s VAT The »place of supply of goods« that are dispatched or transported either by number issued by the Member State for which the subsequent supply of the supplier, the recipient or a third person is the place where the goods are goods is meant, or the VAT importer number issued by the Member State for at the time when dispatch or transport to the recipient commences. which the subsequent delivery of goods is meant. Special rules are applicable for »distance selling«, where goods are supplied The regulations of the taxable amount upon importation of goods are unified to private customers and are dispatched by or on behalf of the supplier, who to those of Directive 2006/112/EC. As of 1 July 2019, importers of certain is a taxable person registered for VAT purposes in an EU State other than goods (explicitly listed in Annex 3 of the Bulgarian VAT Act) can postpone that in which the dispatch ends, from one EU Member State to another EU the charging of VAT upon import under the following conditions, and namely: Member State. In the case of distance selling, the place of supply is not the ¬ the customs value of each item declared in the import place of departure of the goods, but the place where the goods are located customs declaration is equal to or more than BGN 50,000 at the end of transport. (approx. EUR 25,564.60) The »place of supply of services« is determined according to whether the ¬ voluntary or compulsory registration of the importer in Bulgaria, recipient of the services is a taxable person (B2B transactions) or a non- at least 6 months prior to the import taxable person (B2C transactions). ¬ no payable and unpaid public liabilities collected by NRA.

128 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 129 B2B transactions If the supplier exceeds this threshold, he will have a place of supply under the In general, the supply of services is taxable at the place where the current regulations – Art. 21, par. 6 of the VAT Act, i.e. where the non-taxable recipient has established his business or has a fixed establishment to recipient is established. There is a possibility, even if the threshold is not which the service is supplied. However, there are several particular exceeded, for the supplier to choose to determine the place of supply where regulations for determining the place of supply of services, e.g.: the non-taxable recipient is established – Art. 21, par. 10 of the VAT Act. ¬ services in connection with immovable property are carried out where the immovable property is located; 4 Taxable amount ¬ cultural, artistic, scientific and similar services are The taxable amount is the amount on which tax is charged or not charged, supplied at the place where they are physically carried depending on whether the supply is taxable or exempt. The taxable amount is out. However, amendments according to Council determined on the basis of everything that constitutes the consideration that Directive 2008/8/EC of 30 November 2010, in force from has been obtained by or is due to the supplier from the recipient or another 1 January 2011, apply; the scope of the special rule for person in connection with the supply, expressed in leva and stotinki exclusive taxation according to the place of actual supply of these of the tax under the Bulgarian VAT Act. Any payment of interest and damages services is narrowed, so that only access granted to tax- of a compensatory nature are not considered a consideration for a supply. able persons to such events (also fairs and exhibitions), incl. related support services, would be taxed where the Where the consideration is expressed entirely or partially in goods or services event actually takes place. where the parties have not quoted a monetary amount, the taxable amount of each supply at the date of occurrence of the chargeable event is the taxable B2C transactions amount upon acquisition or the cost of the supplied goods, and in the cases If the services are supplied to non-taxable persons, they are gene- of import, the taxable amount upon import or of the direct costs incurred rally taxable at the place where the supplier has established his busi- for the supply of the service provided. Where the taxable amount cannot be ness. If the supplier has a fixed establishment from which the service determined according to this procedure, the taxable amount is equal to the is supplied, the service is taxable at the place where the fixed estab- market price. Art. 25 par. 3, item 7 of the Bulgarian VAT Act explicitly define lishment is located. However, there are again several special regula- the taxable amount for fixed assets, goods and services used entirely or tions for determining the place of supply of services; e.g. the place of partly for private use. As a rule the taxable amount is the sum of the direct supply in the following cases is where the service is actually provided costs incurred. In case of services used entirely for the private use or for to a non-taxable person: private use and simultaneously also for the economic activity of the taxable person, the taxable amount is divided proportionally, depending on the degree ¬ services relating to transport handling of goods; of utilization of the respective goods or services for the private use of the ¬ services connected with the valuation, expert examination, owner, of the factory or office workers of the latter, or for purposes other than or work on movable goods. the independent economic activity of the taxable person. With the amendment effective from January 2015, the place of provision The tax shall be charged by issuance of the protocol which must be entered of electronic communications services, radio and television broadcasting in the sales log for the respective tax period. services, as well as electronically provided services, when the recipient is a non-taxable person, is within the territory of the country where the recipient As of 1 January 2019, the taxable amount in case of a concluded intra-com- is established, has a permanent address or usually resides. munity acquisition, determined at the beginning of the month in which the goods are separated or delivered, is the amount of the tax base upon acquisi- As of 1 January 2019, the regulations of Council Directive (EU) 2017/2455 of tion or the cost price of the goods reduced by the costs of depreciation in the 5 December 2017 as regards certain value added tax obligations for supplies light of the usual economic life of the goods, credited with all other taxes and of services and distance sales of goods are fully implemented in the Bulgarian fees, all costs of the usual or customary packaging materials or containers. VAT Act regarding the place of supply of communications services, radio and television broadcasting services, as well as electronically provided services, when a threshold of EUR 10,000 in case of such supplies for the current year is exceeded. When the total amount, exclusive of VAT, of these supplies is: ¬ under the threshold of EUR 10,000; and ¬ provided that the supplier is established, has his permanent address or habitual residence on the territory of one Member State only, the place of supply will be where the supplier is established, has his permanent address or habitual residence – Art. 21, par. 8 of the Bulgarian VAT Act.

130 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 131 5 Tax rates VAT exemptions that preclude the deduction of input VAT include: In Bulgaria the following tax rates are applicable: ¬ supply linked to health care; ¬ supply linked to welfare and social security work; A supply by a tour operator to another tour operator shall be treated and ¬ supply linked to education, sports or physical education; taxed as a supply of a single service to tourists and taxed at a rate of 20%. ¬ supply linked to culture; ¬ supply linked to religious denominations; 20% standard VAT rate ¬ supply of a non-profit making nature; 9% a reduced rate of 9% for hotel accommodation, applicable ¬ supply of financial and insurance services; since 1 April 2011, to all supplies of accommodation ¬ supply linked to land and building (option for taxation connected with the right to deduct input VAT possible); 0% ¬ intra-Community supply of goods; ¬ gambling; ¬ cross-border transport of persons; ¬ supply of postage stamps and postal services; ¬ cross-border transport of goods; ¬ supplies linked to health care provided by a person ¬ supply linked to international transport; following a medical profession under the Health Act. ¬ supply linked to international goods traffic; ¬ work on and processing of goods to be exported outside the Community; ¬ supply of gold for central banks; ¬ supply linked to duty-; ¬ certain zero-rated supplies of services provided by agents, brokers and other intermediaries; ¬ supply linked to the importation of services.

6 Exemptions The numerous exemptions from VAT can be classified in two categories, depending on whether they preclude the deduction of input VAT or not. The most important exemptions are listed below:

Zero-rated supplies Supplies that do not affect the right to deduct input VAT include: ¬ export of goods (goods are transported outside the Community); ¬ intra-Community supply of goods; ¬ cross-border transport of export goods; ¬ cross-border transport of passengers. Upon fulfillment of contracts for transportation of goods, the motor vehicles are not part of the luggage of the passenger (with respect to their drivers); ¬ work on and processing of goods to be exported outside the Community. The following two additional conditions for zero-rating of certain supplies intended for consumption on board of vessels used for transportation of goods or passengers have been introduced: ¬ The vessels should be used for the transportation of goods or passengers in high seas and ¬ The vessels should not be used for entertainment, sports, or personal purposes. Exempt supplies

132 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 133 7 Input VAT deduction An option for adjustment of credit for input tax upon advance payment is provided. If a supply has been cancelled and the supplier has failed to issue A taxable person is entitled to deduct VAT paid on goods and services, a credit note certifying that supply has not been effected, the recipient must importations, and intra-Community acquisitions if the following conditions adjust the credit for input tax used, based on the invoice, whereby the advance are fulfilled: payment is documented. The adjustment shall be made during the tax period ¬ the acquired goods and services are used for the purposes of the in which the supply was cancelled. This requirement does not depend on taxable supplies effected by the registered person; the fact whether the supplier returned the advance payment or whether he ¬ the recipient holds a tax document drawn up in accordance with issued a credit note. This adjustment is also applicable if the VAT registration the requirements of Art. 114 and 115 Bulgarian VAT Act, wherein of the supplier was terminated. the tax is indicated on a separate line: in respect of supplies of An adjustment is provided for in case of destruction, shortfalls in quantity, goods or services for which the person is a recipient; or or waste. In case of destruction, shortfalls in quantity, or waste, the recipient ¬ the recipient has issued a protocol under Art. 117 and Art. 163b of the goods must charge and remit to the state budget tax in the amount of Bulgarian VAT Act in the case that tax is executable by the person the credit for input tax deducted in case of partial or proportional deduction of as a payer under chapter eight; credit for input tax for any goods produced, purchased, acquired, or imported ¬ no VAT exemption precluding VAT deduction is applicable. thereby for the purpose of its independent economic activity. The VAT due The right to credit for input tax is not exercisable in respect of any shall be charged during the tax period in which the respective circumstance mischarged tax. occurred, by drawing up a protocol for determining the amount of the due tax and recording it in the purchase log and in the VAT return for the aforesaid Finally, the amount of the VAT liability in a taxable period consists of the VAT tax period. due on taxable transactions carried out by the taxable person less input VAT paid in the same period. The taxable person must pay the balance due or may The last amendments of the Tax and Social Insurance Code effective as of claim a refund from the tax authority. January 2016 stipulate that the simplified procedure for under Art. 130 TSIC in the cases of income tax or local tax refund may be applicable The Bulgarian VAT Act is amended in accordance with the provisions of the to VAT refund as well. As of 1 September 2016, the VAT refund without previ- Council Directive 2006/112/EC. The amendments which are in force as of ous audits is possible upon submission of the VAT return stating the amount 1 January 2017 are as follows: to be refunded electronically, through the website of the National Revenue Deduction of VAT paid in proportion to the use or consumption of goods and Agency, under the following conditions: services for the purposes of the independent economic activity of the taxable ¬ indicated valid bank account in BGN; person, and for purposes other than the independent economic activity of this ¬ the taxable persons should be deemed low-risk taxpayers by the taxable person, is introduced for: NRA; ¬ immovable properties – stated in Art. 13b of the Council Implemen- ¬ the taxable persons do not have any outstanding public liabilities; ting Regulation (EU) No. 1042/2013 of 7 October 2013 as regards ¬ no offset of VAT against other due public debts. the place of supply of services; ¬ goods other than immovable property, which are or would be fixed assets within the meaning of item 83 of Sec. 1 of the Supplemen- tary Provisions of the VAT Act and according to the definition regu- lated in the CITA with value equal to or more than BGN 5000 upon acquisition, production, or import. In connection with the option for a proportionate deduction of input VAT, rules for subsequent adjustment of input tax were introduced, specifically provisions for adjustment of with respect to supplies of: ¬ goods acquired, manufactured, or imported; ¬ services received that are or would be fixed assets.

134 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 135 8 VAT liability A crucial aspect is the requirement for the content of the invoice, namely the designation of the name of the regime in the invoice. The text of Art. 224 of In general, a taxable person carrying out a taxable transaction is liable for Directive 2006/112/EC was incorporated in par. 11 of Art. 113 Bulgarian VAT payment of VAT. The taxable person is obliged to pay the invoiced VAT to Act. It provides the option to issue an invoice or notice to invoice in the name the tax authority. of or on behalf of the supplier, taxable person, by the recipient, if there is prior Exceptions apply, inter alia, for supply of goods with installation/assembly written agreement between two parties. Acceptance procedu- res between and for supply of services carried out by a foreign taxable person (no seat and the provider and the recipient are governed by the regulations implementing no fixed establishment in Bulgaria that is involved in the supply) to another the law. The Bulgarian legislation provides for: (domestic or foreign) taxable person. In this case the VAT liability shifts from ¬ issuance of electronic invoices and electronic notifications to the supplier to the recipient (reverse-charge mechanism). invoices on the date on which the supplier or another person acting The amendments to the VAT Act that entered into force in 2014 provide for a on his behalf provides the invoices and the notifications to the new regime called cash accounting, aiming to unify the provisions of the law invoices so that these can be received by the client; to those of Directive 2010/45/EU according to the common system of VAT. ¬ issuance of a combined invoice for two or more effected supplies Chapter 17a of the Bulgarian VAT Act covers the character and the applica- of goods and services the tax on which becomes chargeable in one bility of the institute. This regime is not obligatory and will be applied if the and the same tax period. tax person files a written request to the tax office. Upon this written request, In addition, the amendments to the VAT Act for 2014 provide for a new the competent tax authorities will issue a written permission for applying regime of charging VAT to certain kinds of goods with high fiscal risk, as the regime. The permission shall be issued if the tax person fulfills certain stated in application 2 to the VAT Act. To prevent tax fraud, the legislature conditions explicitly stated in the Bulgarian VAT Act. provides in Art. 163a and Art. 163b of the VAT Act that the reverse-charge ¬ it is registered under the VAT Act; mechanism is applicable in case of supplies of the goods listed in application ¬ the taxable turnover does not exceed the amount of EUR 500,000 2 of the Bulgarian VAT Act. Application 2 includes: seeds, wheat, rye, oats, for a period of 12 consecutive months before the current month; corn (maize), rice, and other cereals. The amendments of the Act for 2019 ¬ the company does not have an assessment act issued due to the provide an extension of the period for application of the VAT reverse-charge provision of Art. 122 of the Tax and Social Insurance Procedure Code; mechanism for supplies of cereals and industrial crops which are normally ¬ the company does not have outstanding or unpaid tax liabilities or not used for final consumption in their unprocessed state, until 30 June 2022. unpaid social contributions. According to the amendment of the VAT Act effective as of 1 January 2017, The most essential part of the regime is the opportunity it provides for the upon supply effected in stages, the performance of each stage is considered supplier to pay the charged VAT when it receives full or partial payment. a separate supply and the chargeable event for each separate supply occurs on the day on which the respective stage was concluded. VAT is liable in the tax period in which the payment has been received by the supplier. The right of tax deduction arises in tax period in which the full or The following new treatment of the supply of goods or services in connection partial payment for the supply to the supplier was made and must be exerted with commission agreements is effective as of 1 January 2017: in the tax period during which the right arose or in one of the following 12 tax In case the commission agent acts on account of the principal with respect periods. As of 1 January 2019, the taxable person is not obliged to charge and to sale of goods: effectively pay VAT for the goods and services which are available both on the date of deregistration and on the date of a subsequent registration, if they are (i) the taxable event shall be classified in accordance with the both initiated within the same tax period. When there is an output tax payable general rules of the Bulgarian VAT Act, but may be no later for the last tax period, all deregistered persons are obliged to remit the tax by than the date of the sale to the third party; the end of the calendar month following the calendar month during which the (ii) the tax base is the taxable amount of the supply performed VAT return for the last tax period should have been submitted. between the commission agent and the third party, reduced by the remuneration of the commission agent. In case the commission agent acts on account of the principal with respect to purchase of goods: (i) the taxable event shall be classified in accordance with the general rules of the Bulgarian VAT Act, but may be no earlier than the date on which the purchase was made by the third party; (ii) the tax base is the taxable amount of the supply performed between the commission agent and the third party, increased by the remuneration of the commission agent.

136 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 137 The supply of service between the commission agent and the principal 9 Tax assessment shall not be deemed a separate supply of service; it shall be set off against 9.1 RESIDENT TAXABLE PERSONS the taxable amount of the supply between the commission agent and the principal. The registration requirement under the Bulgarian VAT Act apply to all taxable per- sons established within the territory of the country and who effect Effective as of 1 January 2019, the Bulgarian legislation fully implements the taxable supplies of goods or services. The registration can be mandatory or provisions of Council Directive (EU) 2016/1065 of 27 June 2016 amending voluntary, i.e. a taxpayer who does not satisfy the conditions for compulsory Directive 2006/112/EC as regards the treatment of vouchers. registra- tion for VAT may register on a voluntary basis. A simplified pro- As of 1 January 2019, the Bulgarian VAT treatment of supply of telecom- cedure for voluntary registration will enter into force as of 1 January 2019. munication, broadcasting or electronically provided services supplied by The newly established legal entities will have the possibility to apply for a taxable persons to non-taxable persons is in line with Council Directive voluntary VAT registration electronically, simultaneously with their regist- (EU) 2017/2455 of 5 December 2017 and Directive 2009/132/EC as regards ration with the Registry Agency. Any taxable person with a taxable turnover certain value added tax obligations for supplies of services and distance sales of BGN 50,000 (approx. EUR 25,540) or more for a period not exceeding 12 of goods (see I.D.3). consecutive months preceding the current month is obligated to submit an application for registration under the Bulgarian VAT Act within 7 days of the lapse of the tax period during which that person generated such turnover. As of 1 January 2018, in case the taxable turnover of BGN 50,000 is realized for a period no longer than 2 successive months, including the current month, the taxable person is obliged to apply for the registration within 7 days as of the date on which said turnover threshold is reached. The turnover realized by the transferring company or transferor, when they are not registered for VAT purposes, is added to the types of payments included in the taxable turnover. If the taxable person has failed to submit an application for regist- ration, VAT for the taxable supplies with which it exceeded BGN 50,000 will be charged for the period from the moment of reaching the taxable turnover until the moment of VAT registration. The supply with which the taxable person exceeds the taxable turnover of BGN 50,000 shall also be charged. The taxable person is liable for the tax with respect to taxable supplies of services received, in case the tax is chargeable from the recipient, and with respect to IC acquisitions performed during this period. As of 1 January 2018, in case of dissolution of a legal person with liquidation, the deregistration procedure has to be initiated by the taxable person upon submission of application for deregistration to the NRA. In case of dissolu- tion of a legal person without liquidation or dissolution of unincorporated association or the social insurance fund, the deregistration procedure shall be initiated by the revenue authority. Moreover, as of 1 January 2019, there is a legal possibility for the liquidator to decide whether the dissolved legal person will continue to be registered for VAT purposes until the date of its removal from the trade register. In this case the liquidator is jointly liable for the tax due during the liquidation period. This amendment refers to ECJ Case C-552/16, Wind Innovation 1 EOOD. Furthermore, all non-taxable persons and taxpayers who are not registered on other grounds and who realize intra-Community acquisitions of goods, the total value of which exceeds TBGN 20,000 (approx. TEUR 10.210) in the current year, are subject to VAT registration. Further obligations to register arise in case of supply of services where the reverse-charge mechanism applies; however, taxable persons registered for that reason do not have the right to charge VAT or deduct input VAT.

138 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 139 If a partner in an unincorporated partnership is registered under the Bulgarian An obligation for VAT registration arises for all foreign non-taxable persons VAT Act, this partnership is subject to compulsory registration under the and taxpayers who are not registered on other grounds and who realize in- VAT Act as well. tra-Community acquisitions of goods (see I.D.9.1). A foreign taxable person who does not satisfy the conditions for compulsory registration for VAT For VAT purposes, persons registered under the Bulgarian VAT Act are obli- may register on a voluntary basis. Foreign taxable persons who do not have ged to keep the following ledgers: a purchase day book and a sales day book. their permanent residence, seat or fixed establishment in the EC or are not For every tax period, fixed generally as one calendar month, the registered resident in a third country with which Bulgaria has signed legal assistance person must submit a VAT return, prepared on the basis of these ledgers. The instruments must have a fiscal representative if they carry out supplies VAT return must be submitted in person, or by proxy – on or be- fore the 14th subject to Bulgarian VAT. of the month following the tax period to which said returns and ledgers refer. According to Art. 125, par. 7 of the Bulgarian VAT Act, as of 1 January 2018 After registration, foreign taxable persons must fulfill the same VAT declara- the submission of the abovementioned documents shall be done only elec- tion obligations as resident taxable persons (see I.D.9.1). However, as of tronically, under the conditions and according to the procedures of the Tax 1 January 2019, foreign taxable persons voluntarily registered in Bulgaria are and Social Insurance Code of Procedure. In addition, next to the VAT return, not allowed to terminate the registration before the lapse of 12 months as of a taxable person carrying out intra-Community supply of goods and who is the beginning of the calendar year following the year of registration an intermediary in a triangle transaction or supply of services with a place of Taxable persons established within the EU may reclaim Bulgarian VAT that supply in the EC must submit a VIES declaration (recapitulative statements) was invoiced to them by filing a refund application with the competent tax with the VAT identification numbers of the recipient and the total value of all authority in the Member State of residence. Subsequently, after verification, supplies made to them each month. the application is automatically submitted to the Bulgarian tax authorities. A taxable persons selling or purchasing liquid fuel for reselling purposes The following conditions must be fulfilled: must provide the National Revenue Agency (NRA) with a guarantee valid for ¬ the taxable person has no seat and no fixed establishment in Bulgaria; a period of one year, if the threshold of BGN 25,000 in a reporting month is ¬ the taxable person has neither effected supply of goods or services, exceeded. Security can be provided by government securities, an unconditi- self-supplies nor carried out intra-Community acquisitions in onal and irrevocable bank guarantee, or a cash deposit, no lower than 20% Bulgaria or has rendered only certain supplies (i.a. only supplies of the VAT base of the respective supplies of liquid fuels realized during the for which the reverse-charge mechanism is applicable). previous tax period (minimum BGN 50,000). Taxable persons from non-EU Member States may claim a refund of input 9.2 FOREIGN TAXABLE PERSONS VAT by filing an application to the National Revenue Agency Sofia-Grad and using the official form. The following conditions must be fulfilled: Foreign taxable persons (no seat or fixed establishment in Bulgaria) carrying out taxable transactions in Bulgaria must generally register for VAT purposes ¬ the taxable person has no seat and no fixed establishment in at the tax office National Revenue Agency Sofia-Grad when their domestic Bulgaria or in the EU; turnover exceeds BGN 50,000 (approx. EUR 25,540), unless they only per- ¬ the taxable person has neither effected supply of goods or ser- form supplies in Bulgaria to which the reverse-charge mechanism applies. vices, self-supplies nor carried out intra-Community acquisitions Irrespec- tive of the excisable turnover, a person who is established abroad in Bulgaria or has rendered only certain supplies (i.a. only supplies and not established in Bulgaria, but who carry out taxable supplies of goods for which the reverse-charge mechanism is applicable); that are assembled or installed on Bulgarian territory by him or at his ex- ¬ the country in which the taxable person is established is listed pense, is subject to registration for VAT. Further, a taxable person carrying in the Ministry of Finance and Ministry of Foreign Affairs list of out supplies on the terri- tory of Bulgaria according to the VAT Law under countries that refund VAT to Bulgarian taxable persons. the conditions of distance sales is obliged to register for VAT no later than seven days before the date of the tax event of the supply with which the total value of the distance sales throughout the current year exceeds BGN 70,000 (approx. EUR 35,760).

140 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 141 E OTHER BUSINESS-RELATED TAXES 4 Customs duties In general, all goods crossing the Bulgarian border are subject to customs 1 Capital duty duties. As an EU Member State, Bulgaria does not levy customs duties on the There is no capital duty levied in Bulgaria. Real estate registration fees and import of goods from other Member States. The customs tariffs for imports notary fees (see I.E.2) are levied for contributions of immovable properties to from countries outside the EU are determined by the Bulgarian Customs Law, the share capital of a Bulgarian company by the shareholder(s). which is harmonized with the EU Legislation.

2 Stamp duties 5 Other excise duties In Bulgaria several different stamp duties are levied on certain legal trans- Excise duties are levied on tobacco, alcoholic drinks, energy products and actions during administrative or court proceedings. Administrative fees are electricity. These duties are non-recurring and are payable by the seller, who usually levied as fixed amounts. Judicial stamp duties are levied, inter alia, on passes these costs on to the customer. The Excise Duties and Tax civil procedures, non-litigation civil law procedures and land registry proce- Warehouses Act (EDTWA) is aligned with the EU Legislation. As of 1 January dures, bankruptcy proceedings, registration proceedings, and administrative 2010, no excise duty is levied on automobiles. disputes. Court fees vary between BGN 50 and 4% of the amount in dispute. 6 Tax on insurance premiums 3 Notary fees The Insurance Premium Tax Act, which came into force on 1 January 2011, Notary fees are levied on the transfer of immovable properties at a rate provides a new taxation on the insurance premiums for insurance contracts between 0% and 1.5%, applicable on the total amount of the transaction. The on the territory of Bulgaria. The tax rate is 2% on the insurance premium applicable rates are: less the determined deductions according to the IPTA. The insurer has the obligation to calculate and pay the tax within the tax period (the respective VALUE OF THE calendar quarter). IMMOVABLE PROPERTY % NOTARY FEES less than BGN 100 - BGN 30 7 Local taxes and fees more than BGN 100 but less 1.5 BGN 30 + 1.5% applied to the than BGN 1,000 amount exceeding BGN 100 Local taxes and fees are stipulated in the Local Taxes and Fees Act (LTFA). Since the beginning of 2006 (concerning the patent tax, since 2008), these more than BGN 1000 but less 1.3 BGN 43.50 + 1.3% applied taxes are collected by the municipality administration, not by the tax ad‑ than BGN 10,000 to the amount exceeding ministration. The Municipality Council determines the amounts of the taxes BGN 1,000 and fees or the conditions for exemptions by issuing an ordinance or decision. more than BGN 10,000 but less 0.8 BGN 160.50 + 0.8% applied than BGN 50,000 to the amount exceeding 7.1 PATENT TAX (FINAL ANNUAL TAX) BGN 10,000 Individuals and sole traders who perform patent activities as specified in the more than BGN 50,000 but less 0.5 BGN 480.50 + 0.5% applied LTFA are levied with annual patent tax for the income from these activities. than BGN 100,000 to the amount exceeding Individuals are not obliged for these activities to file a tax return under the BGN 50,000 procedure of the ITNPA. The conditions are: more than BGN 100,000 but less 0.2 BGN 730.50 + 0.2% applied than BGN 500,000 to the amount exceeding ¬ the individual’s turnover in the previous year does not exceed BGN 100,000 BGN 50,000 (approx. EUR 25,000); ¬ the individual is not registered under the VAT Act, except for the more than BGN 500,000 0.1 BGN 1,530.50 + 0.1% applied registration for Intra-Community Acquisition. to the amount exceeding BGN 500,000; The patent tax returns are filed in the municipality on whose territory the however, maximum fee limit of commercial premises where the patent activity is performed are located, or BGN 6,000 in the municipality corresponding to the permanent address of the individual/ sole trader. For non-resident individuals, the tax return is filed in the mu- nicipality corresponding to the permanent address of the proxy or in the municipality of Sofia.

142 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 143 7.2 7.4 TAX ON VEHICLES According to the LTFA, owners of immovable properties in Bulgaria (buildings Tax on vehicles is levied on motor vehicles that are registered or subject to and land, with the exception of farmland and forests) are obliged to pay pro- registration for use of public roads and highways in Bulgaria. The tax is calcu- perty tax, regardless of whether the immovable property is used or not. The lated by the council of each municipality. As of 1 January 2019, the annual tax tax is levied at a rate ranging: for cars and trucks with technically permissible maximum mass not excee- ding 3.5 tons consists of two components (property and environmental). The ¬ between 0.01% and 0.45% of the tax valuation of the immovable percentage of tax relief depends on the engine power, the type of the vehicle, property; the relevance to the ecological standards and categories. The relief for ve- ¬ between 0.5% and 0.7% of the tax valuation of the immovable hicles that are relevant to the certain ecological categories is between 50% property – for properties located in balneological, sea and and 60%; there is no tax relief for older vehicles with engine power up to 74 kW mountain resorts of national significance included in the list of with working catalysts that do not respond to the ecological standards. Ex- resorts adopted by the Council of Ministers; empt from tax as of January 2018 are electric cars, motorcycles and mopeds, ¬ between 0.45% and 0.6% of the tax valuation of the immovable and electric vehicles with categories L5e, L6e and L7e under the provisions of property – for properties included in the list of resorts, but not Regulation (EU) No. 168/2013 of the European Parliament and of the Council. falling within the scope of the previous item. As of January 2015 the taxable person is the owner of the motor vehicle who In case of acquisition of real estate after 31 October of the respective year pays the tax in two equal parts, by 30 June and 31 October of the year when (i.e. after the deadline for payment of the tax on the property acquired earlier), it is due to the municipality where the permanent address or registered office a term of two months for payment of the real estate tax is introduced. of the owner of the vehicle is. Any taxpayer who prepays the amount of tax The tax is determined according to the tax valuation of the immovable pro- due for the whole year by 30 April enjoys a rate rebate of 5%. perty. The tax valuation of immovable properties owned by companies is to be based on the assessed value or book value of the property, whichever is 7.5 INHERITANCE AND higher. 7.5.1

7.3 PROPERTY Individuals inheriting properties in Bulgaria are subject to inheri- tance tax. Tax rates apply depending on the beneficiary’s degree According to the LTFA, the purchase of immovable property and correspon- of relationship to the decedent and the value of the property trans- ding rights, and of automobiles is subject to local property transfer tax. The ferred. A surviving spouse and relatives in the direct line (children, tax is levied on the value of the property in the range of 0.1% to 3%. grand-children, parents) are not liable to pay inheritance tax. Other Property transfer tax is also levied on the acquisition of property for free (as individuals inheriting properties are tax liable for an inheritance share a grant), or as a result of the elapse of a prescribed time. An exemption is over BGN 250,000. provided if properties are acquired as a grant between relatives of direct line and between spouses. 7.5.2 Gift tax Contributions of properties to the share capital of a company by the share- Gift tax is generally levied on the transfer of assets without consi- holders are not subject to property transfer tax. deration by the acquirers of the properties. This includes, inter alia: ¬ the donation of real estate situated in Bulgaria and corresponding rights; ¬ the donation of movable goods and automobiles above their value if the donation takes place in Bulgaria. rates apply, depending on the recipient’s degree of relationship to the donor and the value of the property transferred. Donations or transfer of properties for no consideration between spouses and relatives in the direct line are exempt from gift tax.

7.5.3 The inheritance and gift tax rates are ¬ in the range of 0.4% to 0.8% for property inherited by / donated to brothers, sisters, and their children; ¬ in the range of 3.3% to 6.6% for inheritances/gifts (donations) between unrelated persons.

144 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 145 7.6 TAX ON PASSENGER TAXI TRANSPORT II SPECIAL AREAS OF TAXATION ON BUSINESS-RELATED A new local tax was introduced in the amendments of the Local Taxes and ACTIVITIES Fees Act effective as of 1 January 2017. Carriers holding a certificate for A HOLDING STRUCTURES registration issued by the Executive Agency Automobile Administration and a permit for passenger transport by taxicab issued by the mayor of the respec- tive municipality are subject to tax on passenger transport by taxicab for any 1 Participation exemption passenger taxicab transport activity performed by them or on their behalf. Under the Bulgarian CITA, dividends derived by resident companies from a The municipal council determines the annual amount of tax on passenger participation in another Bulgarian or non-resident corporation are exempt transport by taxicab for the respective year, in the range of BGN 300 to BGN from corporate income tax, regardless of the capital ownership percentage 1,000. The tax is due to be paid by the taxable person for each individual and the holding period of the participation. There are the following exceptions vehicle for which a permit for passenger transport by taxicab was issued. to this participation exemption regime concerning: ¬ the dividends received as a result of a profit distribution made 8 Solar and wind energy production charge by companies qualified as an investment fund under the Special Purpose Investment Companies Act; The charge on income from solar and wind power installations is set out in the ¬ dividend income reported by the Bulgarian company where 6th paragraph of the Final Provisions of the State Budget Act for 2014, which dividends are paid by foreign companies outside the EU/EEA; made amendments in the Energy From Renewable Sources Act – namely, ¬ any dividends representing hidden profit distribution; a newly created section V in chapter IV. This fee shall be 20% of electrical ¬ any dividends resulting from distribution of sums, insofar as energy received from solar and wind power equipment and of the preferential these sums are expenses, recognized for tax purposes and/or price of the electricity from renewable sources. leading to a reduction of the tax financial result of the distribu- The fee shall be withheld by the public supplier, respectively the end supplier. ting company, regardless of the way they have been accounted for by this company. The provisions regulating this fee have been deemed unconstitutional by Decision No. 13 of the Constitutional Court of the Republic of Bulgaria, but In this case, dividends are subject to taxation with a corporate income tax rate have not yet been revoked. of 10% at the shareholder level. However, the domestic participation exemption does not apply to capital gains of a company, e.g. OOD, AD, etc, resulting from the alienation or liqui- dation of the domestic participation in another Bulgarian corporation.

2 Outbound dividends In general, dividends and liquidation shares distributed by Bulgarian entities in favor of resident unincorporated entities, non-resident legal entities or individual shareholders are subject to a withholding tax of 5%. However, the CITA provides some exemptions from withholding tax. With- holding tax is not levied in the following cases: ¬ if the recipient is a legal entity that is not a trader within the meaning of the Bulgarian Commercial Act (e.g. OOD, AD, etc); ¬ if the recipient is a foreign legal entity, resident for taxation purposes in a Member State of the EU or in another state – party to the Agreement on European Economic Area; ¬ if the recipient is a local legal entity that participates in a company’s capital as a state representative; ¬ the recipient is a mutual fund; ¬ in all the cases of hidden distribution of profit.

146 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 147 Effective as of 2015 are additions to the provisions for tax exemption con- 3 Interest deduction and thin capitalization cerning tax at the source of certain kinds of income. The following types of 3.1 INTEREST DEDUCTION income are exempt from levying tax at source: Interest expenses on the debt financing of the acquisition of a participation in ¬ Income from interest on bonds and other debt securities issued a (resident or non-resident) corporation is tax deductible under certain rules by a resident legal person, the state or the municipalities and ad- according to the CITA, known as thin capitalization. The new interest limita- mitted to trading on a regulated market in the country or Member tion rule is in force as of 1 January 2019. This rule implements the regulation State of the European Union or EEA. of Art. 4 of Council Directive (EU) 2016/1164 of 12 July 2016. The new regime ¬ Income from interest on a loan granted by a foreign person – issuer is applicable in case of taxable persons whose borrowing costs exceed the of bonds or other debt securities – if all of the following conditions equivalent BGN amount of EUR 3,000,000 in the respective year. In this case are met: the amount of borrowing costs recognized for tax purposes cannot exceed ¬ the issuer is resident for tax purposes in a country or the difference between the excess of borrowing costs and 30% of the positive Member State of the European Union or EEA; tax financial result before interest, tax, and depreciation. The borrowing costs ¬ the person issued the bonds or the other debt securities above this amount are treated as expenses unrecognized for tax purposes in order to provide the proceeds to a company deemed in the year of their reporting. Unrecognized borrowing costs are recognized resident for tax purposes; until they are exhausted in subsequent periods without any limitation on ¬ the bonds or the other debt securities are admitted to the number of the years in which they may be recognized for tax purposes. trading on a regulated market in the country or Member Credit institutions are excluded from the taxable persons applying the new State of the European Union or EEA. borrowing costs limitation rules. ¬ Income of EU Member State legal entities from interest payments, copyright and license royalties when the payer and the recipient of 3.2 THIN CAPITALIZATION the income are related parties (if one of the parties owns at least 25% of the capital of the other person continuously for at least two Specific provisions on thin capitalization are set out in the Bulgarian CITA, years). applicable to all loans, with the exception of interest expenses on loans ¬ Income from interest payments on a loan, when no bonds are from banks or finance leasing received from non-related lessors. However, issued and the state or the municipalities are the borrower. if the loan is guaranteed by a related party, or granted by order of a related party and the borrowing costs do not exceed the amount of EUR 3,000,000 If a double (DTT) is concluded between Bulgaria and the bene- in the respective year the interest expenses in this case are to be determined ficiary’s country of residence, the rate provided for by the DTT is applicable. under the thin capi- talization rules. Interest expenses are deductible if the The respective DTT may reduce or eliminate withholding taxation if certain debt/equity ratio is positive and less than or equal to three. If it is higher than administrative requirements are met (e.g. availability of a certi- three or negative, the interest is non-deductible; however, it may be carried ficate, beneficial ownership declaration prior the payment or at least by the forward and deduc- ted in the next years until they are exhausted, when for end of the year, etc). the respective year an accounting profit occurred before interest and the interest expense exceeds 75% of the accounting profit or loss before interest.

148 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 149 4 Non-resident shareholders B REAL ESTATE INVESTMENTS

4.1 INTEREST AND ROYALTY PAYMENTS TO NON-RESIDENTS The general principles of taxation of Bulgarian resident or non-resident in- dividuals and corporate investors also apply to real estate investors. For an Interest and royalties paid by a Bulgarian entity to a non-resident taxpayer overview of the tax treatment of real estate investments, see Annex VII. are subject to a 10% withholding tax. In accordance with the EC Interest and Royalty Directive, interest and royal- 1 Resident investors ties that are paid to associated companies or to their permanent establish- ments located in an EU Member State are exempt from the withholding tax An individual person is deemed a tax resident in Bulgaria if he has his in the state in which they arise. For the relevant exemptions according to the permanent address or his center of vital interests in Bulgaria, or is physically Bulgarian legislation, see I.B.4.2. present in Bulgaria for a period or several periods exceeding in total 183 days in any 12-month period. Such a person is subject to Bulgarian personal 4.2 CAPITAL GAINS income tax on his worldwide income, including income from real estate. Capital gains of a non-resident corporation (or individual) resulting from the A corporate investor (including partnerships) is a tax resident in Bulgaria if alienation of a participation in a Bulgarian corporation are taxable in Bul- he is incorporated under Bulgarian Law or under (EC) No. 2157, and is re- garia. They are subject to a 10% withholding tax. Double tax treaties usually gistered and has his seat in Bulgaria. Such a corporate investor is subject to prohibit Bulgaria from taxing if they contain an OECD Model type of capital Bulgarian corporate income tax on his worldwide income, including income gain provision. from real estate. If the capital gain was realized at the level of a Bulgarian permanent estab- 1.1 INDIVIDUAL INVESTORS lishment of the non-resident seller, the gain is treated as business income of the permanent establishment and is subject to tax under the general rules. Income from real estate can be the following: ¬ business income; 5 Tax group ¬ income from rentals and leasing; ¬ income from sale, barter of real estate, and other real estate Bulgarian legislation does not provide for a tax group for corporate income transactions; tax purposes. ¬ dividends from REITs (joint stock company with special investment purpose) incorporated under the Law on Special Purpose Investment (promulgated, SG. 46/2003).

Business income If real estate activity qualifies as business income (see I.B.1.1), the general principles of business taxation apply (see I.B.1.2). Rentals and leasing payments and income from selling the real estate are fully taxable. Expenses (e.g. ongoing expenses and maintenance) are, in general, tax deductible. A plot of land is not depreciable. Acquisition costs must be capita- lized, and for buildings such acquisition costs may be depreciated over the useful life. The same applies to manufacturing costs of real estate. The costs incurred during the construction of a building, including subsequent costs of existing buildings, which constitute the value of the depreciable asset, are not recognized for tax purposes. According to the tax law, the maximum depreciation rates for real estate are 4% for buildings. Prepayments that refer to future peri- ods must be deferred and are in general tax effective in the future period. The standard personal income tax rate applies to sole entre- preneurs (15%) and other business activities (10%).

150 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 151 Income from rent and lease 2 Non-resident investors If the activity does not qualify as a business activity, rental and 2.1 INDIVIDUAL NON-RESIDENT INVESTORS leasing payments are taxed as »income from rentals and other pay- able surrender of use of rights and property«. The taxable income is Non-resident individuals are taxed with withholding tax on real estate on determined by deducting a fixed expense rate of 10% from the gross income from the following sources: income. The standard income tax rate (10%) applies. ¬ income from rent and lease, if the immovable property is located in Bulgaria; Income from sale, barter of real estate, and other real estate ¬ income from the sale of real estate located in Bulgaria. transactions If the activity does not qualify as a business activity, the acquisition Further more non-resident investors can draw dividends from REITs (joint and sale of real estate and comparable rights is generally taxable. stock company with special investment purpose) incorporated under the Law Exemptions apply i.a. to one residential property, if the acquisition on Special Purpose Investment. date and the sale date are more than three years apart; or to up to Non-resident individuals with Bulgarian-source real estate income must two properties, or to an unlimited number of agricultural and forestry submit tax returns. With the submission of the tax return, a non-resident land plots, if the acquisition date and the sale date are more than five investor who is resident in the EU/EEA can choose to settle the tax like a years apart; these transactions are not taxable. The taxable income is resident, otherwise the withholding tax is applicable to the gross income. The determined by deducting a fixed expense rate of 10% from the gross standard income tax rate of 10% applies. income.

The tax base is the difference between the sales price and acquisition 2.2 CORPORATE NON-RESIDENT INVESTORS costs reduced by 10% fixed rate costs. The standard income tax rate The income from immovable property situated in Bulgaria derived by non- (10%) applies. resident companies (both partnerships and corporations) without a perma- nent establishment in Bulgaria is taxable as income from domestic sources Dividends from REITs and is subject, as gross income, to a 10% withholding tax. Furthermore, Dividends from a Bulgarian REIT joint stock company granted to an non-resident corporate investors who do not have a permanent establish- individual/company are subject to a 5% final income/corporate tax. ment in Bulgaria can draw dividends from REITs (joint stock company with special investment purpose) incorporated under the Law on Special Purpose 1.2 CORPORATE INVESTORS Investment, which are subject to 5% withholding tax; 0% in the case of a The income of a company is always to be regarded as »business income« corporation established within the EU. regardless of the nature of the income (e.g. income from real estate Companies that are resident in the EU/EEA may choose to settle the tax like investment). The rules for business income are applicable. Rent and lease a resident company with the submission of the annual tax return, i.e. the tax payments as well as capital gains are taxable. base is the net income. The corporate income tax rate of 10% applies. The income from immovable property situated in Bulgaria derived by non- resident companies that have a permanent establishment in Bulgaria is tax- able as business income on a net basis with a 10% corporate tax.

152 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 153 3 Real estate taxes The following properties are tax exempt: agricultural and forestry properties without buildings, areas of properties that are occupied by streets, railway, 3.1 REAL ESTATE TRANSFER TAX – BY DONATION AND BY public water areas, the municipalities, in respect of any immovables consti- REMUNERATION tuting public municipal property, the buildings owned by foreign states that Transfer of real estate and comparable rights. house diplomatic missions and consular posts, on a basis of reciprocity, etc. The real estate transfer tax is levied on transfers of immovable property (land The Municipal Council shall determine the amount of tax within the ranges and buildings) or on the transfer of limited property rights on immovable stated in point I.E.7.2. property located in Bulgaria. Taxable transactions include, i.a., the sale, the The taxable base is the assessed tax value of the property according to exchange, the donation, or other complimentary transfer of (i.a. immovable) Attachment 2 of the LTFA as per 1 January of the year for which the real properties. A tax on gratuitous acquisition of properties is furthermore due estate tax is due. The real estate tax will be announced to the person liable to upon acquisition of corporeal immovables and limited rights in rem thereto pay tax by 1 March of the same year. The amendments in force from January by prescription. 2015 envisage establishing a national database with information about the The taxable base is the appraisal (assessed value) of the property for the real estate, its owner, the tax relief, the tax due. transfer of ownership in BGN. Generally, the assessed value in the case of transfer of immovable property is the agreed price or the price stipulated by 4 VAT on real estate state authority, or otherwise if the stipulated price is lower than the tax value of the property according to the provisions of the LTFA. The assessment of Tax exemption from VAT in connection with supply linked to real estates the tax value of the property is regulated in Attachment 2 of the LTFA. The applies, i.a., in the following cases: tax shall be paid by the transferee of the property, or, in the case of exchange, ¬ the letting out of land, the transfer of ownership or other limited by the person acquiring the more valuable property, unless otherwise agreed. rights over land with the exception of land with new buildings or Tax exemptions in the case of property donations are granted, i.a., for dona- stationary equipment) are generally tax exempt. The supplier may tions of property between relatives in the direct line (e.g. grandfather, father, opt for VAT liability with 20% Bulgarian VAT; grandchild) and between spouses. Further exemptions are given for the ¬ the supply of buildings, or parts thereof, that are not new, and acquired property by, i.a., the state, municipalities, Bulgarian health, educa- the supply of building land, as well as the creation and transfer tional, cultural and scientific organizations, certain donations, and charitable of other rights in rem thereto, is tax exempt. The Bulgarian VAT NGOs, etc. Act defines »new buildings« as any buildings that are in the stage of completion of »rough construction work« at the date on which Regarding the tax rates, the general principles of inheritance and gift tax and the tax on the supply of said buildings became chargeable, or property transfer tax apply (see I.E.7.3 and I.E.7.5). in respect of which the tax on the supply thereof became charge- able before the lapse of 60 months from the date on which a use 3.2 REAL ESTATE TAX permit was granted according to the procedure established by the Real estate tax is levied on the following Bulgarian immovable properties, if Spatial Development Act; the assessed tax value exceeds BGN 1,680 (approx. EUR 853) for the whole ¬ the letting out of a building or part thereof for residential use to a taxable property value: natural person who is not a merchant is an exempt supply. This regulation does not apply to provision of accommodation in hotels, ¬ business and private immovable properties including properties motels, cottage villages and holiday villages, rented rooms in in urban areas; family houses, villas, houses, cabanas, camping sites, hikers' ¬ plots of land and wooded areas outside of urban areas only when chalets, guest houses, inns, boarding houses, caravan parks, the build-up area and the adjoining premises are subsequently holiday camps, holiday accommodations owned by businesses developed (e.g. used for residential, entertainment, business pur- for their employees, spa centers and sanatorium complexes. poses, transportation, technical infrastructure, special establish- ments, etc). In these cases the supplier may opt for VAT liability with 20% Bulgarian VAT. The seller is only entitled to a full input VAT deduction for services received related to the acquisition of real estate and the acquisition costs if he sells with application of VAT.

154 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 155 5 Real estate investment trust III EMPLOYEES AND BOARD MEMBERS Real estate investment trusts (REITs) in Bulgaria are special investment purpose joint stock companies under the terms and conditions of a special A EMPLOYEES law: the Special Purpose Investment Companies Act. These companies may not acquire real estate or receivables that are subject to dispute. The law 1 Resident employees requires that property acquired by these companies belongs to the territory An employee is resident in Bulgaria for tax purposes if he fulfills at least one of Bulgaria. of the following conditions: The general principles of the treatment of dividends from Bulgarian REITs are ¬ his domicile is in Bulgaria; real estate investment fund (tax) law, are very similar to the (tax) treatment ¬ the center of his vital interests is located in Bulgaria; of capital investment funds, and include income from renting and leasing, ¬ he is present in Bulgaria for a period or several periods exceeding revaluation income and interest and earnings from cash (see IV.A.3). The real in total 183 days during any period of 12 consecutive months estate investment fund taxation applies to direct and indirect (e.g. through ending in the respective calendar year; asset owning companies) holdings of real estate. ¬ he is a Bulgarian citizen who is serving abroad as an official or employee of Bulgaria in a foreign state. 6 Structuring of real estate investments 1.1 EMPLOYMENT INCOME A real estate investor can acquire Bulgarian real estate by way of an asset deal (e.g. direct acquisition of real estate), or a share deal (e.g. acquisition of a For purposes of the ITNPA, an employee receiving income under an employ- corporation owning real estate). ment contract is deemed to derive employment income. Employment income includes all remuneration, in cash or in kind, derived by an employed person A Bulgarian corporation may directly acquire Bulgarian real estate. Gene- and paid by the employer or by a third party, except the income designated rally, the interests accrued for the respective period are deductible. The thin in the legislation as non-taxable. capitalization and transfer pricing rules must be considered. The direct acquisition (»asset deal«) of real estate is subject to real estate 1.2 PRINCIPLES OF DETERMINATION OF THE TAX BASE transfer tax according to point II.B.3.1. In general, employment income is calculated as the excess of taxable The transfer of shares in companies owning real estate (»share deal«), bonds receipts over deductible expenses in respect of an employment. Cash and other types of securities connected with real estate is not subject to expenditures reimbursed by the employer and certain payments rendered transfer tax. by the employer for various purposes, e.g. as business travel expenses, food vouchers, to pension funds, life insurance premiums, etc, do not constitute taxable employment income. The taxable employment income received during the year of taxation is reduced by: ¬ the mandatory insurance contributions withheld by the employer at the expense of the natural person, in accordance with the Social Insurance Code and the Health Insurance Act; ¬ the mandatory insurance contributions, deposited abroad, which are at the expense of the natural person; The advance tax on income originating from employment relationships are calculated monthly by the employer for the purpose of determining the monthly basis of taxation.

156 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 157 1.3 TAX RATE, ASSESSMENT AND SOCIAL SECURITY CONTRIBUTIONS For 2019 the social security contribution rates for employed persons are as As regards the computation of the income tax rate, a flat personal income follows: tax rate of 10% applies. In Bulgaria the annual salary is paid in 12 equal in- CONTRIBUTION EMPLOYEE EMPLOYER TOTAL stallments. The ITNPA provides that employers are obliged to withhold wage pension fund tax from gross salaries paid to their employees and to transfer the wage tax ¬ persons born before 8.78% 11.02% 19.8% to the competent tax office. The personal income tax must be assessed and 1 January 1960 withheld monthly by the employer from the gross salary of his employees ¬ persons born after 6.58% 8.22% 14.8% for the purpose of determining the monthly basis of taxation. The annual tax 1 January 1960 return has to be submitted between 10 January and 30 April of the year suc- ceeding the year of acquisition of the income. The adjustments of the ITNPA, common diseases and 1.4% 2.1% 3.5% effective as of 1 January 2017, provide an option for an adjustment statement maternity fund to the annual tax return. This option can be exercised in case of identifying unemployment fund 0.4% 0.6% 1% errors by 30 September of the year of submission of the return. Any person who submits an annual tax return by 31 March of the succeeding year by contribution to the fund N/A 0.4-1.1% 0.4-1.1% electronic means enjoys a 5% rebate of the balance of the tax due under the for work accidents and annual tax return, not exceeding BGN 500, provided that said person does not professional diseases incur any public obligations subject to enforcement by the time of submission health fund N/A 8% 8% of the return, and the balance of tax is remitted no later than 31 March of the year following the year of acquisition of the income. According to the amendments of the ITNPA which become effective as of The social security contributions to the pension fund depend on the working 1 January 2016, the diplomatic representations of foreign countries are conditions and the category of labor. deemed as employers if the respective representation chooses to determine, deduct and pay to the state budget taxes on incomes under employment 2 Non-resident employees contracts signed with local natural persons in connection with the functions carried out by the representation in the Republic of Bulgaria. A non-resident is defined as an individual who spends less than 183 days in Bulgaria, is resident in another country or unit, but receives income in Wage tax is considered to be a prepayment on the employee’s final income Bulgaria. Non-resident employees are taxed only on income from tax and is credited against his assessed income tax liability. If an individual employment activities performed or utilized in Bulgaria. only generates income under a single employment contract, no obligation exists to file an income tax return. The rules regarding the determination of the tax base, tax rate, assessment, and social security contributions are very similar to those that apply to The tax rate on incomes from interest payments on bank accounts is levied resident employees (see III.A.1). on the gross amount of the assets and is 8%. In general, the income tax base of a non-resident is the total amount of all Furthermore, the employer is obliged to withhold social security contribu- income received in Bulgaria (the domestic income principle), less personal tions from the gross salaries paid to the employees. However, in Bulgaria allowances. social security contributions are only levied up to the maximum contribution base, which is BGN 3,000 in 2019. The minimum wage as of 1 January 2019 is BGN 560.

158 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 159 B BOARD MEMBERS D SPECIFIC PROVISIONS FOR CROSS-BORDER EMPLOYMENTS 1 Executives Executive directors are, in general, taxed as employees of the respective 1 General provisions company (see III.A). According to the Bulgarian ITNPA, legal relations under 1.1 TAX TREATY LAW management and control contracts, including those with the members of managing and control bodies of undertakings, are employment relationships. Foreign nationals carrying out their employment in Bulgaria are basically subject to taxation in Bulgaria, unless a double tax treaty assigns the taxation Moreover, employment relationships are also defined as legal relations, irres- right to the other contracting state. pective of the reasons for their formation, between partners and associated cooperators, and shareholders holding more than 5% of the capital of the In most cross-border employments, DTTs include an assignment provision joint stock company, for work carried out personally in the companies and co- (most Bulgarian DTTs are concluded according to the OECD MC). Accor- operatives in which they are partners, associated cooperators or sharehol- ding to the provisions of the DTT, the country in which the employment is ders. For the determination of the annual basis of taxation and of the annual performed (country of exercise) is generally assigned the taxation rights tax, the income from legal employment relationships in these cases is not on the remuneration granted for this activity. However, the employment is included. taxable in the residence state only if the following criteria are cumulatively met: (i) the employee does not stay longer than 183 days during a calendar/tax The tax rate is 10% on the income, including benefits in cash and in kind. year or 12-month period in the country of exercise, and (ii) the employer is not resident in the country of exercise, and (iii) the employer does not maintain a permanent establishment in the country of exercise. 2 Non-executives

In general, non-executive resident directors of a Bulgarian legal entity are 1.2 SOCIAL SECURITY LAW taxed in the same way as executive directors working on the basis of an employment relationship. Foreign nationals coming to Bulgaria to perform their dependent activities in Bulgaria are basically subject to the same social security scheme applicable to Bulgarian employees. However, a different treatment may be claimed 3 Non-resident board members under EC Regulation 883/2004 or under a particular bilateral social security Non-resident executive directors are taxed only on income from employment agreement that aims at preventing a person being subject to double social activities performed or utilized in Bulgaria if they have an employment re- security schemes. lationship with the respective company; the rules regarding the determination Persons resident in the EU are subject to the provisions of the new EC of the tax base, tax rate, and assessment are very similar to the treatment of Regulation 883/2004, EC Regulation 987/2009, and the new Regulation resident directors (see III.B.1 and III.B.2). 1224/2012, which replaced EC Regulation 1408/71 in May 2010 and the EC Non-resident non-executive directors, members of boards of a company or 574/72. They provide for the applicable social security regulation in the case working under management contracts are taxed with a 10% final withholding of cross-border activities. Depending on a person's personal and professio- tax on the income of their remuneration in Bulgaria. The tax is payable prior nal circumstances, in many cases either the social security scheme of the to the end of the month following the month for which the income is charged home country or of the seconding country is applicable. The A1 form on the and received by the individual. In those cases in which the income is gene- applicable social security provisions has to be requested in the competent rated by a person who is a citizen of a state with which the Republic of Bul- country. Based on this form, no other country is entitled to levy local social garia has concluded a treaty for the avoidance of double taxation, the tax security contributions. is payable within a term of three months as of the beginning of the month For non-EU residents working in Bulgaria or Bulgarian nationals working in following the month of income accrual. a third country, EC Regulation 1408/71 and EC Regulation 574/72, or a bilateral social security agreement are still applicable.

C MUNICIPAL TAX N/A 2 Specific provisions 2.1 EXPATRIATES Apart from the general rules described under III.A.1, there are no special regimes or tax exemptions applicable to expatriates.

160 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 161 IV TAX ASPECTS FOR PRIVATE INVESTORS

A CAPITAL INVESTMENTS An individual capital investor is resident in Bulgaria if he has his permanent address or his center of vital interests in Bulgaria, or is physically present in © LeitnerLeitner Bulgaria for a period or several periods exceeding in total 183 days in any Reliance should not be placed on nor should decisions be taken on the basis of the con- 12-month period. A corporate investor is resident in Bulgaria if he is incorpora- tents of this country report. The country report contains so-called „external links” (links ted under the Bulgarian Law or under (EC) No. 2157, and has a registered seat to websites of third parties), over which we have no control and assumes no liability. in Bulgaria. Neither LeitnerLeitner as a company nor any counsel of LeitnerLeitner involved in the The tax regime for foreign and domestic capital investments was in detail preparation of this country report is responsible for the results of any actions taken on discussed above. Here we can summarize that if non-resident companies the basis of information herein, including errors and omissions. receive income from dividends or liquidation quote, that income shall be levied with tax at the source at 5% only if the foreign companies are not All rights reserved. No part of this country report may be reproduced, stored in a retrieval residents of a Member State of the European Union or EEA. If the income from system or disclosed in any form or by any means, electronic, mechanical, photocopying, dividends or liquidation quote is received by individuals who are residents or recording or otherwise, without the prior written permission of LeitnerLeitner. non-residents, that income shall be levied with 5% final tax. In a nutshell, the tax regime for the capital investments made by companies or individuals who are residents for tax purposes in a Member State of the European Union or EEA is the same as the tax regime for resident companies and individuals.

B INHERITANCE AND DONATION TAX PLANNING N/A

162 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 annex ANNEX I Holding Structures

BOSNIA-HERZEGOVINA

AUSTRIA FED OF BIH REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC CORPORATE 25% 10% 10% 10% 18% 19% INCOME TAX RATE (12% if revenues < HRK 3 m) CAPITAL DUTY None None None None None None

INTERNATIONAL PARTICIPATION EXEMPTION INBOUND Full exemption (participation of Full exemption Full exemption Full exemption of legal entities Full exemption Full exemption within EU, CZ and DIVIDENDS at least 10% in the equity of a within EU; withholding tax of 5% Liechtenstein, Norway, Iceland, foreign company, minimum for the rest persons within EU and Switzerland (participation holding period of 1 year) and any other persons from third of at least 10% of capital, mini- countries mum holding period of 1 year); additional requirements for third countries

CAPITAL GAINS Full exemption (participation of at Taxable Taxable Taxable Taxable Full exemption if capital gain least 10%, 1 year); option to treat (exempt if realized by realized by a Czech parent capital gains as taxable (capital non-resident companies) company (for requirements losses are tax deductible accordingly) see »Inbound Dividends«)

DEDUCTION OF No Yes Yes Yes Yes No CAPITAL LOSSES (unless the option was exercised (exception for shares held and in certain cases of liquidation/ for securities trading under insolvency) certain conditions)

DEDUCTION OF No Yes Yes Yes, according to special Yes No WRITE-OFFS (unless the option was exercised) conditions (upon realization)

CROSS-BORDER Yes No No No No No LOSS DEDUCTION

DEDUCTION OF Yes Yes Yes Yes, Yes No EXPENSES restrictions for intra-group acquisi- however restrictions for (e.g. interest) tions and intra-group payments to intra-group acquisitions low tax

THIN CAP RULES No Yes No Limitation by Limitation by debt-equity Limitation by debt-equity ratio debt-equity ratio ratio of 4:1 for related parties of 4:1 for related parties and of 3:1 6:1 for banks and insurance companies; interest on profit- linked loans fully non-deductible

WITHHOLDING 25% (reduction by 5% (reduction by 5% (reduction by 5% (reduction by tax treaties) 12% (reduction by tax treaties) 15% (reduction by tax treaties) TAX ON OUTBOUND tax treaties) tax treaties) tax treaties) 35% for residents of non-EU/-EEA DIVIDENDS 0% if EC Parent-Subsidiary and non-treaty states 0% if EC Parent-Subsidiary Directive is applicable Directive is applicable (at least 10%, 2 years) 0% if EC Parent-Subsidiary Directive (at least 10%, 1 year) is applicable (at least 10%, 1 year)

CFC LEGISLATION Yes (For fiscal years starting No No Yes Yes No (but planned introduction in after 31 December 2018, 2019) CFC rules apply)

ANTI-ABUSE As of 1 January 2019, participation Substance-over- Substance-over- Substance-over- Substance-over- Substance-over- PROVISIONS exemption is denied under form principle form principle form principle form principle form principle; revised conditions (passive income, abuse-of-law principle effective foreign tax rate of 12.5% or lower); switch-over to credit method.

488 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 489 ANNEX I Holding Structures

HUNGARY SERBIA SLOVAKIA SLOVENIA CORPORATE 9% 15% 21% 19% INCOME TAX RATE

CAPITAL DUTY None None None None

INTERNATIONAL PARTICIPATION EXEMPTION INBOUND Full exemption Fully included, Full exemption within EU for dividends paid out of Full exemption within EU; DIVIDENDS (except dividends received from a CFC) foreign paid tax credited against profits generated after 1.1.2017 (corporations) additional requirements for third countries Serbian tax

CAPITAL GAINS Full exemption for Taxable at 15% Full exemption (at least 10%, 2 years and substance 50% exemption if at least 8%, »reported participations« (minimum 1 year requirements). The 2-year holding period will first be 6 months and 1 employee for holding period, must be reported to the tax fulfilled in 2020. 6 months (for third countries authority within 75 days from acquisition) the same additional requirement as for inbound dividends)

DEDUCTION OF Yes Yes, No Yes (50%) CAPITAL LOSSES (except for participations in CFC or under against capital gains (certain exceptions and compensation by capital the reported participation scheme) gains possible)

DEDUCTION OF Yes Yes, No Yes, WRITE-OFFS (under certain conditions) under certain conditions subject to special conditions

CROSS-BORDER No No No No LOSS DEDUCTION DEDUCTION OF Yes Yes Yes Yes, EXPENSES (provided that the business purpose and the amount of 5% of exempt dividends and capital (e.g. interest) CFC test are met) gains is not recognized as expenditure

THIN CAP RULES Limited at 30% of EBITDA or HUF Limitation by debt-equity ratio of 4:1 for Yes – limitation on interest expense up to Limitation by debt-equity ratio of 4:1 for related 939,810,000 (approx. EUR 3 million) – related parties and 10:1 for banks and 25% EBITDA for related parties parties whichever is higher – but might be carried financial lease companies forward. Special exemption rules apply for groups drawing up a consolidated financial statement.

WITHHOLDING No withholding tax for corporate recipients 20% WHT rate unless reduced by the Dividends from profits generated as of 1.1.2017 15% (reduction by tax treaties) TAX ON OUTBOUND applicable DTT subject to DIVIDENDS ¬ 35% if distributed to non-contracting states 0% if EC Parent-Subsidiary ¬ 7% (reduction by tax treaties) if distributed to Directive is applicable (at least 10%, 2 years) or 0% if individuals who are residents in contracting states dividends fully exempt at the level of EU ¬ 0% if distributed to corporations within EU parent company which is treated as a taxable person and has no right to claim a tax repayment

CFC LEGISLATION Yes No Yes Yes

ANTI-ABUSE Substance-over- form principle Substance-over-form principle Substance-over-form abuse of law principle, Participation exemption for dividends and capital PROVISIONS Principal purpose test anti-abuse rule for dividends, and beneficial owner gains can be denied under certain conditions concept (for third countries see above; hybrid loans, substance-over-form principle) An arrangement or a series of arrangements which are not genuine shall be ignored for the purposes of calculating the corporate tax liability (this GAAR complements the substance-over-form principle).

490 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 491 ANNEX II Companies covered by the Parent-Subsidiary Directive

COUNTRY COMPANY FORMS COVERED AUSTRIA Aktiengesellschaft; Gesellschaft mit beschränkter Haftung; Versicherungsvereine auf Gegenseitigkeit; Erwerbs- und Wirtschaftsgenossenschaften; Betriebe gewerblicher Art von Körperschaften des öffentlichen Rechts; Sparkassen; companies constituted under Austrian law subject to Austrian corporate tax

BOSNIA-HERZEGOVINA –

BULGARIA Sabiratelno drujestvo; Komanditno drujestvo; Komanditno drujestvo s akzii; Drujestvo s ogranichena otgovornost; Akzionerno drujestvo; Nepersonificirano drujestvo; Kooperazia; Kooperativen sajuz; Darjavno predpriatie

CROATIA Dioničko društvo; Društvo s ograničenom odgovornošću; other companies constituted under Croatian law subject to corporate tax

CZECH REPUBLIC akciová společnost; společnost s ručením omezeným

HUNGARY közkereseti társaság; betéti társaság; korlátolt felelősségű társaság; részvénytársaság; egyesülés; szövetkezet; közös vállalat (this company form is no longer possible after 15 March 2014)

SERBIA n/a

SLOVAK REPUBLIC akciová spoločnost’; spoločnosť s ručením obmedzeným; komanditná spoločnosť

SLOVENIA delniška družba; komanditna družba; družba z omejeno odgovornostjo

guidelines to taxation 2019 leitner leitner 492 ANNEX III Companies covered by the Merger Directive

COUNTRY COMPANY FORMS COVERED AUSTRIA Aktiengesellschaft; Gesellschaft mit beschränkter Haftung; Erwerbs- und Wirtschaftsgenossenschaften

BOSNIA-HERZEGOVINA –

BULGARIA –

CROATIA Dioničko društvo; Društvo s ograničenom odgovornošću; other companies constituted under Croatian law subject to corporate tax

CZECH REPUBLIC akciova společnost; společnost s ručenim omezenym

HUNGARY közkereseti társaság; betéti társaság; korlátolt felelősségű társaság; részvénytársaság; egyesülés; közhasznú társaság (this company form ceased to exist after 30 June 2009, replaced by non-profit companies, the directive was not amended); szövetkezet; közös vállalat (is no longer possible after 15 March 2014)

SERBIA n/a

SLOVAK REPUBLIC akciová spoločnost’; spoločnosť s ručením obmedzeným; komanditná spoločnosť SLOVENIA delniška družba; komanditna družba; družba z omejeno odgovornostjo

guidelines to taxation 2019 leitner leitner 493 ANNEX IV Companies covered by the Interest and Royalty Directive

COUNTRY COMPANY FORMS COVERED AUSTRIA Aktiengesellschaft; Gesellschaft mit beschränkter Haftung

BOSNIA-HERZEGOVINA –

BULGARIA Komanditno drujestvo s akzii; Drujestvo s ogranichena otgovornost; Akzionerno drujestvo

CROATIA Dioničko društvo; Društvo s ograničenom odgovornošću; other companies constituted under Croatian law subject to corporate tax CZECH REPUBLIC akciová společnost; společnost s ručením omezeným veřejná obchodní společnost komanditní společnost družstvo

HUNGARY közkereseti társaság; betéti társaság; korlátolt felelősségű társaság; részvénytársaság; egyesülés; közhasznú társaság (this company form ceased to exist after 30 June 2009, replaced by non-profit companies, the directive was not amended); szövetkezet; közös vállalat (this company form is no longer possible after 15 March 2014)

SERBIA n/a

SLOVAK REPUBLIC akciová spoločnosť; spoločnosť s ručením obmedzeným; komanditná spoločnosť; verejná obchodná spoločnosť; družstvo

SLOVENIA delniška družba; komanditna delniška družba; komanditna družba; družba z omejeno odgovornostjo; družba z neomejeno odgovornostjo

guidelines to taxation 2019 leitner leitner 494 ANNEX V Transfer Pricing BOSNIA-HERZEGOVINA

AUSTRIA FED OF BIH REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC

APPLICABLE Transfer Pricing Documentation Corporate Income Tax Corporate Income Tax Regulated by law is the principle Corporate Income Tax Act Income Tax Act 586/1992 LEGISLATION Law; Income Tax Act (Sec. 6/6, Act and corresponding Act and corresponding on the market character of the and corresponding decrees; Sb. (Sec. 23/7, 38nc); AND RULINGS Sec. 6/14); Corporate Income Tax decrees; decrees; relations between related parties Double Tax Treaties; Directives of the Ministry of Act (Sec. 8/1 and 2); Double Tax Double Tax Treaties Double Tax Treaties as well as the methods on deter- Guidance stipulating MAP Finance D-332, D-32 and Treaties; Transfer Pricing Guide- mination of market values. The Procedure D-334; Directive of the General lines of the MoF as interpretation tax offices apply in their practice Finance Directorate D-10, Double instrument (not legally binding) transfer pricing manual. Tax Treaties APPLICABLE Both traditional and (alternatively) Both traditional and other Both traditional and other Both traditional and other Both traditional and other Both traditional and other TP METHODS other TP methods according to TP methods according to TP methods according to TP methods according to TP methods according to TP methods according to OECD Transfer Pricing Guidelines OECD Transfer Pricing OECD Transfer Pricing OECD Transfer Pricing OECD Transfer Pricing OECD Transfer Pricing Guidelines Guidelines Guidelines Guidelines Guidelines

CONTROLLED Art. 9/1 OECD MC Cross-border and Cross-border and According to the provisions of the Cross-border and domestic Sec. 23/7 of the PARTIES domestic related parties domestic related parties Bulgarian Tax and Social Security related parties (under certain Czech Income Tax Act Code of Procedure conditions)

AVAILABILITY No, No No No Yes Yes OF APA respectively on discretionary basis; however, binding rulings in transfer pricing issues available as of 2011 according to Sec. 118 Federal Tax Act

VALIDITY OF APA N/A N/A N/A N/A Up to 5 years Up to 3 years (depending on specific cases); rulings according to Sec. 118 Federal Tax Act have binding force

APPLICATION Ministry of Finance/ N/A N/A N/A Ministry of Finance – Local tax authority FOR APA Local tax authority Tax Authorities (also for binding rulings)

FEE FOR APA None; N/A N/A N/A Unilateral: HRK 15,000-50,000; CZK 10,000 costs for binding rulings according Bilateral: fee for unilateral agree- to Sec. 118 Federal Tax Act amount ment increases for HRK 50,000; between EUR 1,500 and Multilateral: fee for unilateral EUR 20,000 depending on turnover agreement increases for HRK of requesting taxpayer 100,000, extension of the agree- ment amounts to 50% of the base fee DOCUMENTATION Duty to keep documentation in TP documentation is TP documentation is The evidence materials to be Chosen TP method has to be TP documentation is REQUIREMENTS line with the relevant provisions practically necessary practically necessary provided, incl. in the appeal trial, supported by extensive TP practically necessary as provided by the Transfer Pricing but not strictly prescribed but not strictly are at one’s own discretion (no documentation prescribed by but not obligatory. Documentation Law, the Austrian by the PTA prescribed by the PTA specific requirements). There is Corporate Income Tax Act and Directive D-334 gives General Fiscal Code, taking into no specific requirement by law corresponding decrees recommendations for account the OECD Transfer Pricing for a prior preparation of transfer the documentation. Guidelines and the Transfer Pricing pricing guidelines Guidelines of the Austrian MoF

SUBJECTS All taxpayers engaged in All entities engaged in All entities engaged in All taxpayers (legal persons) All entities engaged in cross- All entities engaged in OBLIGED TO KEEP cross-border transactions transactions with related transactions with engaged in transactions with border transactions with related cross-border and DOCUMENTATION with related parties parties related parties related parties. Draft amendments parties/all resident related domestic transactions of the Bulgarian Tax and Social parties (if one of the parties has a with related parties Security Code of Procedure, will preferential tax status be discussed and promulgated in 2019 and will regulate the compulsory preparation of local file in certain cases.

495 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 496 ANNEX V Transfer Pricing BOSNIA-HERZEGOVINA

AUSTRIA FED OF BIH REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC PENALTIES No specific TP penalties No specific TP penalties EUR 10,000-30,000 No specific fine, option for adjust- No specific TP penalties No specific TP penalties (adjustment of tax base + (adjustment of tax base + (adjustment of tax ment of the financial result and (adjustment of tax base + (adjustment of tax base + late payment interest) late payment interest if base + late payment accruing of additional tax and late payment interest if late payment interest applicable) interest if applicable) default interest. The draft amend- applicable) and penalty 20% or 1% ments are envisaging fines for in the case of a loss) non-submission of local file.

497 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 498 ANNEX V Transfer Pricing HUNGARY SERBIA SLOVAKIA SLOVENIA APPLICABLE Hungarian Act on Corporate Income Tax Corporate Income Tax Act and corres- Corporate Income Tax Act and corresponding rule- Corporate Income Tax Act; (Official Gazette LEGISLATION AND (Sec. 18); ponding rulebooks; Double Tax Treaties books; Double Tax Treaties No. 117/06, Art. 16-19); Rules on Transfer Pricing; RULINGS Decree No. 32/2017 of the Ministry of Income Tax Act 595/2003 (Sec. 17/5, 17/6, 17/7, 18); Double Tax Treaties National Economy; Double Tax Treaties Regulation of Ministry of Finance on contents of TP documentation; Double Tax Treaties APPLICABLE Both traditional transaction methods and OECD TP methods + any other method, Traditional and other TP methods according to OECD Both traditional and other TP methods according to TP METHODS transactional profit methods according in case OECD methods cannot be Transfer Pricing Guidelines OECD Transfer Pricing Guidelines to OECD Transfer Pricing Guidelines applied

CONTROLLED PARTIES Act on Corporate Income Tax Cross border and domestic related Sec. 2 (n) and (r) of the Slovak Income Tax Act; Art. 16 and 17 of the Slovenian Corporate Income (Sec. 4 point 23). Cross-border as well as parties cross-border and inland transactions covered Tax Act domestic related parties – OECD MC

AVAILABILITY OF APA Yes No Yes Yes (unilateral, bilateral, multilateral)

VALIDITY OF APA For 3 to 5 years, possible to N/A Up to 5 years, possible to extend for another 5 years The agreement may be concluded for a maximum extend for another 3 years period of 5 years with the possibility of an exten- sion.

APPLICATION FOR APA Hungarian Tax Authority N/A Local tax authority The General Tax Office in Ljubljana

FEE FOR APA HUF 2 million (approx. EUR 6,250) if N/A EUR 10,000 for unilateral APA / EUR 15,000 to conclude the APA, and EUR 7,500 Comparable Uncontrolled Price Method, EUR 30,000 for multilateral APA for the renewal of the APA Cost Plus Method or Resale Price Method can be applied in unilateral procedure, othewise HUF 2 million multiplied by the number of parties involved; in personal consultation: HUF 0.5 million (approx. EUR 1,562.5)

DOCUMENTATION Detailed transfer pricing documentation Chosen TP method has to be supported Duty to keep documentation in line with requirements According to Slovenian tax law, the TP documenta- REQUIREMENTS rules are valid since 2003 (transitional by TP documentation prescribed by under the Regulation of Ministry of Finance taking into tion consists of a »master file« and a »country- period until 2005) the Rulebook issued by the Ministry of account the Code of Conduct on TP Documentation specific documentation« and is in line with the Code Finance and OECD provisions. of Conduct on TP Documentation. Taxpayers are obliged to submit the TP documenta- Multinational enterprise groups (MNE groups) with tion to the tax authority within 15 days upon request. an annual consolidated group revenue of EUR 750 million or more must include a country-by-country report in their documentation.

SUBJECTS Currently all (local and cross- border) All taxpayers engaged in transactions Obliged subject depends on number of criteria and All taxpayers (legal persons) engaged in transac- OBLIGED TO KEEP related party transactions (except small with related parties other special circumstances, e.g. low-risk or high-risk tions with related parties. DOCUMENTATION enterprises and small transactions) entities. New multilevel rule classifies 3 types of should be documented over the yearly documentation: shortened, basic and full scope. threshold of HUF 50 million (approx. EUR 156,250); for low added value ser- vices simplified documentation require- ment applies subject to meeting certain criteria

PENALTIES Special default penalty of HUF 2 million Penalties of up to approx. EUR 16,600 No specific TP penalties (adjustment of tax base plus Specific penalties between EUR 1,200 and (approx. EUR 6,250) per transaction for for failure to include arm’s length late payment interest and/or a penalty of up to EUR 30,000 are imposed in respect of TP docu- non-compliance with the documentation prices in the tax balance, for failure to EUR 3,000 for breach of a non-monetary obligation); mentation. Additional penalty (EUR 600-4,000) is obligations (repeated penalty may reach submit TP documentation. Additional The penalty is twice as high on the additional tax as- imposed on the responsible person. Penalty for an HUF 4 million (approx. EUR 12,500), or fines if due to failure to comply with TP sessed in the case of non-compliance with anti- offence that is considered particularly severe can four times higher than the first penalty); rules results in false income tax repor- avoidance rules for the tax audits started after amount to between EUR 4,500 and EUR 150,000 plus TP adjustment of tax base resulting ting (30% on difference between repor- 31.12.2016. and for the responsible person from EUR 1,200 to tax penalties and late payment interest ted and actual tax + default interest). EUR 20,000. if applicable

499 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 500 ANNEX VI Treaty withholding tax rates on Dividends, Interest, Royalties

BOSNIA CZECH SLOVAK AUSTRIA HERZEGOVINA BULGARIA CROATIA REPUBLIC HUNGARY SERBIA REPUBLIC SLOVENIA AUSTRIA DIVIDENDS 10/5 5/0 1 15/0 3 10/0 3 10 15/5 10 15/5 INTEREST 5 0/5 2 5 0 0 10 0 0/5 7 ROYALTIES 5 5 0 0/5 4 0 5/10 4 0/5 4 5 BOSNIA-HERZEGOVINA DIVIDENDS 10/5 Acc. to IBFD, 10/5 5 10 10/5 15/5 10/5 INTEREST 5 no DTT with 10 0 0 10 0 0/7 7 ROYALTIES 5 Bosnia 10 10 10 10 10 5 BULGARIA DIVIDENDS 5/0 1 Acc. to IBFD, 5 10 10 15/5 10 10/5 INTEREST 0/5 2 no DTT with 5 10 10 10 10 5 ROYALTIES 5 Bulgaria 0 10 10 10 10 5/10 7 CROATIA DIVIDENDS 15/0 2 10/5 5 5 10/5 10/5 10/5 5 INTEREST 5 10 5 0 0 10 10 5 ROYALTIES 0 10 0 10 0 10 10 5 CZECH REPUBLIC DIVIDENDS 10/0 3 5 10 5 15/5 10 15/5 3 15/5 INTEREST 0 0 10 0 0 10 0 5 ROYALTIES 0/5 4 10 10 10 10 5/10 7 0/10 4 10 HUNGARY DIVIDENDS 10 10 10 10/5 15/5 15/5 15/5 15/5 INTEREST 0 0 10 0 0 10 0 5 ROYALTIES 0 10 10 0 10 10 10 5 SERBIA DIVIDENDS 15/5 10/5 15/5 10/5 10 15/5 15/5 10/5 INTEREST 10 10 10 10 10 10 10 10 ROYALTIES 5/10 4 10 10 10 5/10 7 10 10 5/10 4 SLOVAKIA DIVIDENDS 10 15/5 10 10/5 15/5 3 15/5 15/5 15/5 INTEREST 0 0 10 10 0 0 10 10 ROYALTIES 0/5 4 10 10 10 0/10 4 10 10 10 SLOVENIA DIVIDENDS 15/5 10/5 10/5 5 15/5 15/5 10/5 15/5 INTEREST 0/5 6 7/0 6 5 5 5 5 10 10 ROYALTIES 5 5 5/10 7 5 10 5 5/10 4 10

1 The zero rate applies if the beneficial owner is a company (other than a partnership); no degree of ownership is required. 2 The lower rate applies to interest on bank loans. 3 A holding of at least 10% is required. 4 The lower rate applies to copyright royalties, including films. 5 The zero rate applies among others to interest on bank loans and interest on loans granted for a period of more than two years. The lower rate applies if and as long as the treaty partner under its domestic law does not levy withholding tax on interest paid to a resident of Romania. 6 The lower rate applies to interest paid by public bodies. 7 The lower rate applies to copyright royalties, excluding computer software and cinematograph films, but including films and to equipment rentals.

501 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 502 ANNEX VII Real Estate Taxation BOSNIA-HERZEGOVINA

AUSTRIA FED OF BIH REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC CORPORATE INCOME 25% 10% 10% 10% 18% 19% TAX RATE

ARE FOREIGNERS EEA Investors: yes Yes Yes EU residents: without restrictions; EU investors: yes Yes ALLOWED TO Other Investors: other countries: buildings and Other investors: ACQUIRE approval required building right – no restrictions; yes but subject to additional REAL ESTATE? land – only on the basis of inter- conditions that have national agreement to be fulfilled

IS A LOCAL No No No No No, but usual to avoid need for No ACQUISITION Minister of Justice approval COMPANY REQUIRED?

REAL ESTATE 0.5% to 3.5% Taxed at a level set by No 2% of sales price or tax value 3% of retail price 4% of either (i) sales price or TRANSFER TAX RATE each canton individually. (market value); (ii) 0.75 legal value under In most cantons in FBiH exemption for building Valuation Act or guided value the tax rate is 5% and building land if in case real estate value is set by subject to VAT tax office (tax base = the higher value from (i) and (ii))

REAL ESTATE Yes. RETT is levied if at least Not applicable Not applicable Not applicable Not applicable Not applicable TRANSFER TAX 95% of all shares of a corpora- ON THE tion owning Austrian immovable TRANSFER OF property are transferred to one shareholder or several shareholder SHARES who are members of a tax group. RETT is also triggered if 95% of the shares of a partnership have been transferred to new partners within the last five years

REAL ESTATE 1% of special tax assessed value; No Tax rate in the range Depending on the local No Land tax depends on the type of TAX in addition 1% of 0.1% to 0.2% of municipality (however other parafiscal property. Rates from 0.25% per m² of the special tax assessed value current real estate fees are levied) for agri land) up to CZK 2 per m² for undeveloped land market price multiplied by coefficient (1-5) for building land; building tax from CZK 2 up to 10 (plus CZK 0.75 per floor above the ground floor of real estate), multiplied by the coefficient

DEPRECIATION 2.5% Over 20 years Over 20 years No 5%, Over 30 years in general; RATES FOR REAL may be doubled Over 50 years for office parks, ESTATE HELD shopping malls and hotels AS BUSINESS ASSET

TAXABLE GAIN FOR Yes No Yes Yes Yes Yes DIRECT SALE OF (exceptions if held (exceptions if held REAL ESTATE outside a business) outside a business under certain conditions))

503 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 504 ANNEX VII Real Estate Taxation BOSNIA-HERZEGOVINA AUSTRIA FED OF BIH REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC SALE OF REAL VAT exempt but option into Yes Yes Agricultural land – VAT exempt. Agricultural land – VAT exempt; In general 21% VAT, 15% for resi- ESTATE SUBJECT 20% VAT possible Old buildings (5 years after the used buildings (2 years after the dential buildings with limited size. TO VAT construction) – optional taxation first occupancy) – VAT exempt/ Non-building plots which do not subject to 20%; any other real optional taxation subject to 25% comprise a functional unit are VAT estate – subject to 20% tax of VAT; any other real estate – exempt. Exemption applies also subject to 25% VAT after the expiry from the issue of first consent concerning the final building (“after expiry from the issue” sounds strange. Could this work: “… after expiry of the first issue of approval for use of the building”?). Option for taxation in this cases (either “this case” [sin- gular] or “these cases” [plural]) is applicable.

505 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 506 ANNEX VII Real Estate Taxation

HUNGARY SERBIA SLOVAKIA SLOVENIA CORPORATE INCOME 9% 15% 21% 19% TAX RATE ARE FOREIGNERS EEA investors: yes Yes, subject to reciprocity. Restriction Yes EU investors: yes ALLOWED TO Other investors: some conditions have to applies only to agricultural land Limitations for agricultural land and forest land Other investors: reciprocity required (exceptions ACQUIRE be fulfilled, as of 1 May 2014 citizens of apply) REAL ESTATE? the EU member states are entitled – under strict conditions – to acquire arable lands

IS A LOCAL No, but usual No (apart from agricultural land), but No No, but usual ACQUISITION recommendable COMPANY REQUIRED? REAL ESTATE 4% up to the value of HUF 1 billion 2.5% No tax 2% of sales price TRANSFER TAX RATE (approx. EUR 3,125) and 2% above (exempt if subject this threshold. The tax will be capped, to VAT) however, at HUF 200 million (approx. EUR 625,000).

REAL ESTATE RETT is levied upon the transfer of shares Not applicable Not applicable Not applicable TRANSFER TAX in a »real estate company« over the ON THE 75% participation level. However, certain TRANSFER OF structures are exempt from RETT. SHARE

REAL ESTATE Building and undeveloped land tax Up to 0.4% for taxpayers keeping Land tax is 0.25% of the value; building tax and the No general real estate tax. TAX (max. HUF 1,898/m² or 3.6% of the business books, up to 2% (progressive) apartment tax is EUR 0.033/m². Municipalities may impose a local real estate tax market value in case of buildings and for taxpayers who do not keep accoun- The above rates may be increased or decreased by called »charge« for the use of land for construction max. HUF 345/m² or 3% of the respective ting records. A (or should this be “The”) municipality purposes, and a building tax. adjusted market value in case of taxable base is the market value of undeveloped land) the real estate on 31 December of the previous year.

DEPRECIATION 2% for long-life, 2.5% 20 or 40 years Up to 3% for buildings, RATES FOR REAL 3% for medium-life, for part of buildings up to 6% ESTATE HELD 6% for short-life structures AS BUSINESS ASSET and 1-25% for other special buildings

TAXABLE GAIN FOR Yes Yes Yes Yes DIRECT SALE OF (exceptions if held outside a business) (exceptions if held (exceptions if held REAL ESTATE The capital gain is taxed in the case of an outside a business) outside a business) asset deal

SALE OF REAL ESTATE Generally 27% VAT with exemptions Transfer of all types of land is VAT VAT exempt (except for new buildings and developed Generally VAT exempt (except new buildings and SUBJECT TO VAT (but taxpayer may opt into taxation) exempted. First transfer of building land), option for 20% VAT possible (except sale of building land) with the option for taxation between built after 1 January 2005 is subject building for accommodation, a flat/apartment in a taxable persons if certain conditions are fulfilled. to 20% VAT (commercial real estate), property intended for dwelling); When taxed, generally 9.5% for residential buildings i.e. 10% (residential real estate). Every the inland reverse charge is applicable to the supply and 22% for business premises. next transfer of buildings can be sub- of real estate or its part in inland, when the supplier ject to VAT if contracting parties so opts for taxation and the buyer is a VAT registered agree. person

507 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 508 ANNEX VIII Tax reliefs, incentives in CEE countries

BOSNIA-HERZEGOVINA AUSTRIA FED OF BIH AND REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC R&D TAX RELIEFS R&D expenses are deductible; specific R&D expenses are deductible R&D expenses are deductible Deduction is possible. Tax reliefs Double deduction (200% = 100% (AS CIT BASE R&D tax relief is available (for own and for R&D are approved in the form tax deductible expenses + 100% DECREASING contract R&D) in the form of cash tax credit of additional decrease of the tax as CIT base decreasing item) is ITEMS) (12% of R&D expenses before 1 January liability in respect of eligible costs available on direct R&D costs 2018 and 14% as of 1 January 2018; of scientific and development expended in same tax period. max. EUR 100,000 for contract R&D) research. Additional CIT base deduction of 10% of increased sum of R&D Maximum amount of incentives expenses from previous tax period. for which additional reduction of taxable base is possible may not If the tax base is lower than the exceed the following amounts: R&D CIT base decreasing item ¬ for basic research, up to 150% (also in case of the tax loss), this of the project’s eligible costs, CIT base deduction can be used in ¬ for applied research, up to three years immediately following 125% of the project’s eligible the taxable period. costs (with the increase of 10% and 20% for medium and small This tax deduction cannot be enterprises), used for R&D projects which are ¬ for development research, up at least partly financed by public to 100% of the project’s eligible sources. costs (with the increase of 10% and 20% for medium-sized and small enterprises).

The can be used upon prior approval from the Ministry of Science.

DONATIONS Donations to certain charitable organi‑ Accounting expenses on donations Tax deductible if provided to Donations to charities can reduce zations such as universities, the Austrian to a total amount of up to 10% specific domestic entities up to the CIT base up to 10% of the CIT Research Promotion Agency, museums, of the accounting profit (in some the amount of 2% of the revenue base. The minimum value of one etc, up to an amount of 10% of total cases to an aggregate amount of generated in the previous year. donation has to be CZK 2,000. income of the current year. Furthermore, up to 50%) is recognized for tax donations to certain entities covered by a purposes where the expenses on list issued by Austrian tax authorities are donations are incurred in favor of deductible as well. certain entities.

ACCELERATED N/A The accelerated depreciation General annual depreciation rates By tangible assets the taxpayer DEPRECIATION is applicable for the following (buildings and ships of over 1,000 may opt for linear or accelerated assets: GRT – 5%; basic herd and personal depreciation (non-tangible assets ¬ machinery, process equipment, cars – 20%; intangible assets, have to be depreciated linearly). apparatus. The annual rate of equipment, vehicles (except per- The depreciation period for both tax depreciation may not sonal cars) and machinery – 25%; methods is the same. exceed 50%, where the following computers, computer hardware conditions are simultaneously and software, mobile telephones fulfilled: 1) the assets form part and computer of an initial investment; 2) the network accessories – 50%; other assets are new as fabricated and non-mentioned assets – 10%) can have not been exploited prior to be doubled. Depreciation for tax the acquisition thereof; purposes should be aligned with ¬ computers, computer peripheral accounting depreciation. equipment, software, and right to use software, mobile telephones. Annual rate of tax depreciation – 50%.

509 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 510 ANNEX VIII Tax reliefs, incentives in CEE countries

BOSNIA-HERZEGOVINA AUSTRIA FED OF BIH AND REP OF SRPSKA BULGARIA CROATIA CZECH REPUBLIC OTHER SPECIAL CIT Possibility to deduct foreign losses of EU N/A N/A N/A Under specific requirements BASE DECREASING subsidiaries/subsidiaries resident in DTT Relief for reinvested profits is deduction for vocational training ITEMS states with comprehensive administrative abolished from FY 2017 onwards (e.g. deduction for the trainee or assistance (by tax grouping); deduction of the acquisition price deduction of losses of foreign partnerships/ of the asset for vocational training) PEs

INVESTMENT Transfer of hidden reserves: N/A In case of recruiting certain Investment incentives can reduce The Czech Republic grants invest‑ INCENTIVES sole entrepreneurs and partnerships categories of unemployed – the corporate tax rate, depending ment incentives to investors who (whose partners are individuals) may reducing the tax financial result on the amount invested and the meet special conditions set by transfer hidden reserves that are realized by the amount of the wages and number of employees connected the Investment Incentives Act and from the sale of an asset to a newly social security contributions paid to the investment. Grants are other legal regulations. Invest- acquired asset under the condition that by the employer for a period of provided to taxpayers who, in ment incentives are granted in the the asset sold has belonged to the enter- 12 months; connection with a new invest- form of tax abatement or compen- prise for at least 7 years (15 years for ¬ agricultural producers – 60% of ment, create new employment or sation for certain operating costs. certain buildings and land) corporate tax due is subject to professionally train or re-qualify remission; employees. Additionally, a percen- Tax abatements may be granted ¬ in case of manufacturing tage of the general and specialized in the amount of the tax liability activities in municipalities with training costs not associated with calculated for the specific taxable a high unemployment rate – up a new investment may be used to period or as the amount of the to 100% of the corporate income reduce the income tax base. difference between the tax liability tax may be subject to remission calculated for the taxable period preceding the granting of the investment incentives and the tax liability calculated for the specific taxable period (after the invest- ment was made).

The period for which the invest- ment incentives may be drawn is 10 years.

R&D RELATED TAX As of 2016, the previously applicable N/A N/A N/A N/A INCENTIVES education allowances (20%/6%) have been abolished entirely.

OTHER TAX Sole entrepreneurs and partnerships Full CIT exemption for companies whose Income from trade in securities Accelerated depreciation; Tax allowance on disabled ALLOWANCES may claim a general allowance for profits exceed 30% of total turnover and and financial instruments on stock Reduced/abolished CIT rate for a employees (»Gewinnfreibetrag«) if they acquire or for companies investing no less than exchange/regulated market is not period of 10 years for qualifying produce a depreciable tangible asset or EUR 10 million over 5 consecutive years taxable investments (depending on a securities. The deductible profit allowance in production under condition that the number of new employments and decreases gradually, depending on the investment during the first year is at least the total amount of investment) amount of the assessment basis, and is EUR 2 million; for investment in plants and 13% for the first EUR 175,000 of profits, immovable property used for production; 7% for the next EUR 175,000 and 4.5% for employment incentives the next EUR 230,000. In total, the profit allowance is capped at EUR 45,350 for the assessment.

OTHER INCENTIVES Employment and family incentives, Free trade zones; custom duty incentives; Shortened terms for administra- Employment incentives; Financial support for new job incentives for certain expats moving to employment incentives tive service, assumption of expen- incentives for education/training openings and for staff training or Austria ses for building infrastructure, of employees in relation to the retraining acquisition of state and municipal investments; incentives for R&D properties without opening an activities auction

511 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 512 ANNEX VIII Tax reliefs, incentives in CEE countries

HUNGARY SERBIA SLOVAKIA SLOVENIA R&D TAX RELIEFS Double deduction (200%) is available to R&D expenses are deductible R&D expenses are deductible (in line with IFRS R&D expenses are tax deductible (depreciated (AS CIT BASE direct costs of R&D activity performed by accounting rules) + additional »super-deduction« over the useful life of assets) + additional tax DECREASING own assets and personnel; the tax base of costs up to 100% of the qualifying R&D expenses relief (100%) of the amount invested in R&D; the ITEMS) decreasing item available to the Hungarian + deduction up to 25% personnel costs (under certain unused part of the tax relief may be used up in the taxpayer may be transferred, wholly or conditions) + possibility to deduct 100 % of R&D subsequent 5 years. Tax relief is provided for R&D partly, to a Hungarian domestic related costs growth, whilst the calculation of the growth expenses for new or substantially enhanced party company, subject to certain criteria. will consider two tax periods materials, products, systems, services, etc. Expenses for R&D include costs of employees, 400% deduction possible (max. HUF 50 services, equipment for R&D, trainings, protection million, approx. EUR 156,250) with regard of IP rights. to R&D performed jointly by the taxpayer and an institution of higher education or MTA (Hungarian Academy of Sciences) or any other entity including corporations performing R&D activities that are held directly or indirectly by the state.

As of 26 July 2018, the tax base decreasing item regarding direct R&D costs performed by own assets and personnel may also be shared between the service provider and the customer under certain conditions.

DONATIONS Donations (with certain restrictions) to Donations are tax exempt Donations are not deductible costs (except for Donations to charitable and some non-profitable charitable entities entitle the donee to a humanitarian aid donations under certain conditions); organizations entitle the donee to tax relief in the 20 or 50% tax base reduction (40% in case income is out of scope amount of 0.3 % of taxable income, and 0.2 % of of a long-term donation agreement) taxable income in certain cases. Costs for donations are not deductible

ACCELERATED (General) development reserve = N/A Yes (only assets of 2nd and 3rd depreciation groups). No (except in cases of small value tangible assets DEPRECIATION accelerated depreciation (capped at – up to EUR 500, which may be depreciated in one HUF 10 billion – approx. EUR 31 million – year) and at 50% of the positive pre-tax profit), on the condition that the reserve is utilized in 4 tax years for investment

513 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 514 ANNEX VIII Tax reliefs, incentives in CEE countries

HUNGARY SERBIA SLOVAKIA SLOVENIA OTHER SPECIAL CIT Royalty exemption – old scheme available A taxpayer which is not a newly estab- Tax depreciation generally faster than accounting BASE DECREASING with restrictions on certain already acqui- lished company performing innovative depreciation ITEMS red IPs until 30 June 2021: 50% of royalty business activities and which invests in income tax exempt; capped at 50% of the the share capital of the (as in the other positive pre-tax accounting profit file, I think this should be “a”) newly established company performing in- Special development reserve for intangible novative business activities has a right assets (mount of revenue realized on sales to a tax credit in the amount of 30% of or in connection with in-kind contribution of such investment. intangible assets entitling to receive royalty income, which has been booked from the re- A tax incentive for taxpayers who tained earnings to the tied-up reserves derive income based on the compensa- and has been shown among the tied-up tion for the use of intellectual property, reserves on the last day of the tax year. with condition that it must be regis- This amount may be utilized exclusively for tered. Qualified income, realized by the acquisition of intangible assets entitling the owner of the intellectual property, to receive royalty income, in five years based on the compensation for the use following the year of creating; otherwise tax of registered IP, except compensation plus late payment penalty should be paid by for the transfer of all rights on the IP the general rules. This regulation cannot be (as suggested in the other file: with applied to the intangibles that are reported the exception of compensation for the under the »reported intangibles scheme« transfer of all IP rights), may be exclu- as introduced above) ded from the tax base in the amount of 80% of such realized income, if the New royalty schemes were introduced as of taxpayer opts for it; July 2016, replacing the above old scheme: 50% of royalty profit may be tax exempt, capped at half of the positive pre-tax A new tax incentive provides that accounting profit, with the application of the expenses directly related to R&D so-called Nexus ratio. The Nexus ratio shall activities performed in the Republic of also apply to the above introduced special Serbia are tax deductible in the double development reserve for intangible assets amount (My suggestion was: … in the as of July 2016. amount of double the invested sum. Also, I was wondering whether this Further decreasing items on employment paragraph should be in the “R&D TAX of students, students graduated recently, RELIEFS” section two pages up). unemployed persons, persons released from prison.

INVESTMENT Development allowance is available in Corporate income – Slovakia grants investment incentives to investors Tax relief on investment (40% of the invested INCENTIVES connection with certain environmental companies are exempt from corporate who meet special conditions set by the Investment amount) protection investments or other kinds of profit tax for a period of 10 years Incen- tives Act. Investment incentives are granted high-volume investments. 80% of the CIT starting from the first year in which mainly in the form of tax relief. The amount of payable may be credited, arriving at an they report taxable profit if they invest income tax relief (investment aid – IA) depends on the effective tax rate of 1.8%. The tax credit is an amount exceeding approximately unemployment rate. The maximum possible intensity available in 13 tax years in total, within EUR 8.3 million in fixed assets, and amounts to 35% of total eligible costs. A precondition 16 years from the request year. employ at least 100 additional emplo- for granting IA is the creation of new jobs (the number yees throughout the investment period. of new jobs must be at least 40). A tax incentive for investment projects Investment aid can be used to finance investments to aimed at energy efficiency is available Carry-forward of losses – the tax loss specific fields: depending on the intensity ratio of the stated in the tax return can be carried ¬ industrial production region, capped at the HUF equivalent of forward and offset against future pro- ¬ technology centers EUR 15 million in present value. This allo- fits over a period of up to 5 years. ¬ strategic services centers wance is available for 6 tax years in total. (e.g. software development, customer support, headquarters of international corporations The taxpayer is entitled to only one of the ¬ tourism above tax allowances regarding the same investment project.

515 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 516 ANNEX VIII Tax reliefs, incentives in CEE countries

HUNGARY SERBIA SLOVAKIA SLOVENIA R&D RELATED TAX Special development tax allowance of N/A A special tax treatment of the patent box regime Tax relief for R&D amounts to 100% of the amount INCENTIVES 80% of the tax for investments designed of commercial use of intangible assets is applied in invested in R&D to promote R&D worth at least HUF Slovakia with the aim of supporting science, research 100 million (approx. EUR 312,500) at and intellectual property: present value; it may be utilized during ¬ exemption of royalties from the provision of 13 tax years in total, but in the 16th tax registered patents year at the latest. ¬ exemption of income from the herewith related sale of products.

The exemption amounts to 50 %. Where the acquisition costs include expenses charged by a related party, a coefficient is to be used to calculate the exempt amount. The exemption can be claimed during the tax depreciation period of the relevant intangible assets capitalized. ¬ utility models and designs and from the provision of computer programs (software); and ¬ exemption of income from the herewith related sale of products. The exemption is applicable only if the intangible assets are developed internally by the taxpayer in Slovakia (not purchased).

The exemption amounts to 50 %. Where the acquisition costs include expenses charged by a related party, a coefficient is to be used to calculate the exempt amount. The exemption can be claimed during the tax deprecia- tion period of the relevant intangible assets capitalized.

OTHER TAX Tax allowance on sponsorship of popular Value added tax (VAT) exemptions in Taxpayers can claim corporate income tax relief also Tax relief for employment/for employing disabled ALLOWANCES team sports (football, basketball, handball, free zones under the Act on Research and Development, which is persons; tax relief for practical work in professional ice hockey, water polo, volleyball) and the subject to an approval process. education; tax relief for voluntary supplementary film industry. Income generated through commercial pension insurance. Special allowances for employ- activities in the free zones in Serbia Income tax relief is granted for a proportional part of ment of certain groups of employees (70% of cost Two types of tax allowances may be is exempted from VAT. There are 13 the tax base, the amount of tax relief is limited by the of employees) and investments (70% of invested obtained for the above forms of support in free zones currently operating in the absolute amount of aid recognized for the given type. amount) in certain equipment and intangible assets the form of: country: Subotica, Novi Sad, Zrenjanin, The grantor is relevant tax office. in underdeveloped parts of Slovenia (e.g. Premurje). ¬ 70% deduction from the CIT payable; or Sabac, Kragujevac, and Pirot, Uzice, ¬ by way of a cash credit to be received in Smederevo, Nis, Krusevac, Svilajnac, On 1 January 2019 the special tax relief for registered the tax account in proportion with the Apatin, Vranje. Foreign companies can social corporations which fulfill the public interest support amount. establish a privately owned free zone was introduced. based on the project approved by the government.

Tax relief for employment of disabled persons – tax duty is reduced based on proportion of disabled persons in total number of employees (Art. 46 of the Corporate Income Tax Act).

OTHER INCENTIVES Special government decision for tax Availability of funds (subsidies) for Except for income tax relief, under the Investment Subsidies for the acquisition of non-current tangible allowances regarding investment projects creation of new jobs, tax incentives for Incentive Act, investors can also apply for: and intangible assets, real estate owned by state or in the value of at least the HUF equivalent employing senior and junior work force ¬ investment grants; municipalities; contribution for the creation of new of EUR 10 million. In addition to tax allow- ¬ new job grants; or jobs; EU funds still available ances, cash incentives may also be granted; ¬ the option to acquire property at a price lower than strategic partnerships between the market value. Hungarian government and certain significant Hungarian taxpayers – the aim is to grant incentives for employment, R&D, and certain investment activities

517 leitner leitner guidelines to taxation 2019 guidelines to taxation 2019 leitner leitner 518