On 7 November 2018, the National Assembly passed the 2019 Budget Act at first reading with 115 MPs in favor and 85 opposed.  The budget proposal containing amendments to the corporate tax laws. The proposed corporate income tax amendments are following:

Interest limitation rule:

  • Under the proposal the current Bulgarian thin capitalization rules are entirely replaced by new interest limitation rules pursuant to which any excessive borrowing costs which exceed 30% of the taxpayer’s earnings before interest, tax, depreciation and amortization (EBITDA) are non-deductible for corporate income tax purposes.
  • The scope of the new interest limitation rules is broader than the scope of the current thin capitalization rules and covers interest expenses on all forms of debt, other costs economically equivalent to interest and any other expenses incurred in connection with the raising of finance.
  • The current Bulgarian thin capitalization rules limits the carrying forward of non-deductible borrowing costs to five years. However, under the new rules, there are no time limitations for carry forward– which should allow the complete utilization of interest costs incurred in relation to investment activities.
  • The interest limitation rule will not apply to excessive borrowing costs below the threshold of BGN 500,000 (approximately EUR 250,000) for one calendar year.

CFC rule:

  • The proposal also introduces broadly scoped controlled foreign company (CFC) rules for reattribution of the income of low-taxed controlled subsidiaries and permanent establishments to their Bulgarian parent companies. Where the criteria for a non-resident subsidiary or permanent establishment to qualify as a CFC under Directive 2016/1164 are met, the profits of the CFC will be included in the taxable profit of its Bulgarian parent and subject to 10% Bulgarian corporate income tax, subject to certain measures to avoid double taxation in both jurisdictions.
  • The CFC rules shall not apply where the CFC carries out substantive activity supported by staff, equipment, assets and premises, unless it is established in certain offshore jurisdictions included in a list which is maintained and regularly updated by the Bulgarian Ministry of Finance.

The second reading of the Budget bill will be later this month, as Bulgarian law mandates that the Budget has to be passed by the end of November.