On 27 November 2018, Bulgaria published a Bill on amendment and supplement to the Corporate Income Tax Act in the Official Gazette. The Bill includes a new interest limitation and controlled foreign company (CFC) rules in accordance with the EU Anti-Tax Avoidance Directive (ATAD). The new changes come into force as of 1 January 2019.
Interest Limitation rule modified
- The law introduce new Art. 43a of CITA, which implements EU Council Directive 2016/1164.
- The new article provides that the 30% limitation will be applicable if the sum of the borrowing expenses exceeds EUR 3 million (approx. USD 3,407,000). This threshold reproduces the upper limit of the directive above which the new rule is mandatory and excludes small business enterprises from the scope of the provisions. Excess interest expense/costs may be carried forward indefinitely, subject to the same 30% of EBITDA limit. An exemption is also provided for credit institutions.
- However, Bulgaria’s existing thin cap rule is not replaced with the introduction of the 30% of EBITDA rules, although the five-year carryforward limit of the existing rule has been removed. Both rules will be applied, with the deduction of interest expense limited based on the greater restriction.
CFC rule introduced
- The law introduces new rules on controlled foreign companies (CFC) and on the calculation of the financial result for tax purposes in the existence of a CFC.
- Under the definition of a CFC, the undistributed taxable profit of the taxpayer’s controlled foreign entities and permanent establishments will be subject to tax in Bulgaria. The law deems ‘control’ over a foreign company or PE to exist if the taxpayer holds directly or indirectly more than 50% of the voting rights, ownership, or entitlement to receive more than 50% of the entity’s profits.
- An exemption from the inclusion of CFC profits applies where the CFC carries on substantial economic activity involving personnel, equipment, assets, and premises in its jurisdiction.
