The twelfth issue in 2015 summarises the key amendments to the tax legislation which are promulgated in the State Gazette and will come into force on 1 January 2016.

Introduction

Issue 95 of the State Gazette dated 8 December 2015 promulgates the amendments to the Corporate Income Tax Act (CITA). The Act to Amend the CITA introduces changes not only to the CITA but also to other tax laws, including: (i) Personal Income Tax Act (PITA), (ii) Local Taxes and Fees Act (LTFA), (iii) Tax and Social Security Procedure Code (TSSPC), (iv) Value Added Tax Act (VATA), (v) National Revenue Agency Act, and (vi) Act on Limitation of Cash Payments. Below we present a summary of the key amendments to these acts.

Value Added Tax Act 

Mixed use

As we informed you in the ninth issue of Tax News, the proposed amendments to the VATA were aimed at the mixed (private and business) use of a company’s vehicles and immovable property. The proposed changes sparkled a great public interest but were not adopted at the second hearing at the Parliament.

The act adopted introduces only a general provision concerning the determining of the taxable amount in the cases of mixed use. The change envisages that in the case of simultaneous use of goods and/or services for both:

• independent economic activities (business use) and
• supplies of services treated as services provided against consideration under Article 9, para 3, items 1 and 2 of the VATA (private use or purposes other than business),
  

the taxable amount is to be allocated proportionally depending on the use of the respective good and/or service. No notification is to be filed with the National Revenue Agency (NRA).

Supplies treated as supplies provided against consideration

The following amendments are introduced with regard to supplies treated as supplies provided against consideration (under Article 9, para 3, items 1 and 2 of the VATA):

• Taxable event: The taxable event for these supplies occurs on the last day of the month during which the service was provided.
• Taxable amount: Upon determining the amount of the direct costs incurred for providing such services, the related costs for the normal wear and tear (depreciation) of the goods used for the provision of those services are to be taken into account, provided that these goods qualify or would qualify for non-current assets pursuant to the provisions of the CITA, if they have been used in the business activity of the entity, and for which input VAT was wholly or partially deducted. Specifically, the costs for the normal wear and tear are to be determined as part of the taxable amount (on which the input VAT was initially deducted) for each tax period on a straight-line basis over a five-year period for movable property and a twenty-year period for immovable property.
  

It has been clarified that the provision of goods or services for personal use or for purposes other than business will not be treated as a service provided against consideration if it is triggered by dire need or force majeure. The law does not provide for specific definitions of “dire need” and “force majeure”.

Administrative penalties

The amendments envisage a decrease in the amount of the penalty in the case of non-accrual of VAT on a timely basis. The new penalties will be determined as follows:

1. 5% of the amount of the tax if the tax has been accrued not later than 6 months as from the end of the month in which it should have been accrued, and
2. 10% of the amount of the tax if the tax has been accrued after the period mentioned in point 1, but not later than 18 months as from the end of the month in which it should have been accrued. 
   

Supplies and sale of liquid fuel

The simplified regime (provided for under Article 118, para 7 of the VATA currently in force) in respect to the issue of cash receipts and the submission of data upon supply/sale of liquid fuel from oil stations is revoked. As a result of this, the registering and reporting of the supplies/sales of liquid fuel from oil stations will be subject to the general provisions of the law. In this respect, it is envisaged that the entities currently benefiting from the simplified regime are to bring their activities in compliance with the new legal requirements within six months from enforcement of the change.

Other amendments

The other amendments concern the following areas:

• Distance sales: The conditions for determining the place of supply of distance sales are defined more precisely and certain mandatory requisites of invoices for distance sales with a place of supply in another EU Member State are no longer required.
• Coefficient for determining the amount of the partial tax credit: The text concerning the principle for rounding of the coefficient is refined in compliance with Directive 2006/112/EC. 
  
• Accelerated VAT refund: It is envisaged that the accelerated 30-day term for VAT refund is to be applied also to entities providing access to railroad infrastructure which used funds under projects financed under European programs up to their completion. 
  
• Special registration for Union scheme: Upon registration for the purposes of applying the Union scheme, the suppliers established in Bulgaria may declare both a bank account in euro and in Bulgarian leva under the condition that the account is in a Bulgarian bank or in a Bulgarian branch of a foreign bank. 
  
• Exempt supplies: The scope of the exempt supplies is extended and includes also the provision of medical care by a person exercising medical profession under the Health Act.
  

Tax and Social Security Procedure Code 

The amendments promulgated envisage an extension of the period for application of the VAT reverse charge mechanism for supplies of cereals and industrial crops up to 31 December 2018.

Corporate Income Tax Act 

The latest amendments to the CITA are aimed at harmonizing the domestic tax legislation with EU directives in the area of direct taxation.

Tax relief in the form of retained tax

Some of the rules for granting state aid for regional development in the form of retained corporate income tax are changed. The amended rules comply with the EU legal framework in the area of state aid as well as with the scheme for provision of regional investment aid approved by the European Commission. The approval was received in Bulgaria on 12 October 2015. The investment aid scheme will be applied until 2020 under the condition that the funds from retained corporate income tax have been used for eligible investment projects started prior to 1 January 2021. The key amendments are discussed below.

Retention of tax will be allowed only if an order/approval is issued by the InvestBulgaria Agency certifying the maximum allowed amount of the state aid (the retained tax), the intensity and term of the aid (the tax periods for which the retention of tax is allowed) and confirming the stimulating effect of the investment project.

Retention of advance tax installments (the whole amount or part of it) can be made as from the month/quarter following the month of issue of the order.

There will be no further possibility for retention of tax in the form of a state aid for regional development for entities acting in industries such as transportation, energy, primary production, processing and subsequent offering on the market of agricultural products as stated in Appendix 1 to the Treaty on the Functioning of the European Union.

The scheme excludes the possibility to grant aid to entities that have closed down the same or similar activity in another Member State of the European Union or the European Economic Area two years preceding the date of applying for aid or at the moment of the aid application. Investment projects which would be closed down within two years after their completion would also not be subject to state aid. This requirement also refers to activities carried out at a group entity level.

The list of the municipalities with a high unemployment rate where eligible investment can be made will be approved by the Minister of Finance within three working days from receipt of a proposal prepared by the Minister of Labour and Social Policy. The deadline for presenting the proposal is 31 January of the year for which the tax allowance is used.

The retained tax amount cannot exceed fifty percent of the current value of the acceptable expenses included in the initial investment project (with regard to activities performed in municipalities in the South West region the upper limit is twenty five percent).

The CITA amendments also change the definition of initial investment and clarify concepts and rules for the determination of the amount of the aid and the acceptable expenses included in the investment project. The initial investment is to be made within four calendar years, including the year of receipt of the order from the InvestBulgaria Agency.

There are also new requirements for the amount of the acceptable expenses in the cases when the investment project results in diversification of the output and in significant change of the overall production process. Additional conditions are implemented with regard to the calculation of the amount of the state aid for projects realized by large enterprises as well as in the cases where the initial investment is part of a large investment project or a unified investment project.

State aid for regional development in the form of retained tax cannot be granted for the corporate tax additionally assessed in tax audits.

Other amendments

The law adopts new provisions concerning distributions which are aimed at elimination of the possibilities for double non-taxation. The new provisions stipulate that the income accrued in the receiving entity is not to be recognized as a deduction from the tax result if the respective amount decreases the tax result of the distributing entity (either as tax deductible expenses, or as another type of downward adjustment of the tax base).

The explicit list with preferential tax jurisdictions is removed from the additional provisions of the CITA. It is envisaged that the list of these states/territories will be approved by the Ministry of Finance upon a proposal by the NRA and be promulgated in the State Gazette. The additional provisions of the CITA will contain only the criteria for determining whether states/territories represent such with preferential tax regime.

The result (gain or loss) from transactions with government securities traded on a regulated market within the meaning of Article 73 of the Markets in Financial Instruments Act will no longer be included in the tax base.

There is a new requirement for declaring the corporate income tax due upon the termination of a company. The tax return is to be submitted within the deadline for payment of the corporate income tax liability, i.e. 30 days from the date of entry of the cessation in the Trade Register.

Personal Income Tax Act

Treatment of the diplomatic missions as employers

According to the amendments to the PITA, diplomatic missions in Bulgaria are allowed the opportunity to withhold and pay tax on the employment income paid to the local employees working at the missions. For the purpose, the respective diplomatic mission is to inform the NRA until 31 December of the preceding year that it would like to be considered as an employer under the meaning of the PITA with regard to the locally employed personnel. Such a notification remains in force for an indefinite period of time until its explicit withdrawal. For the purpose of ceasing the withholding obligation, the notification is to be filed until 30 November of the preceding year.

With regard to the year 2016, diplomatic missions are given the opportunity to declare their willingness to start withholding personal income tax until 31 January 2016.

Advance withholding of personal income tax on income from other sources

The amendments introduce advance taxation of income from other sources. Until now, such income was taxed only on an annual basis through the filing of the annual personal income tax return. With regard to such income, the payer is to apply the same withholding and remittance process as currently applied with respect to income from other economic activity and rental income. The tax base in this case is equal to the taxable income, where the payer of the income is allowed to decrease it only in the instances where a disability certificate is available.

Other amendments

As of 1 January 2016, the funds received by individuals under the program ERASMUS+ are included in the range of tax exempt income.

The changes provide for the possibility to deduct the compulsory health insurance contributions made under Article 40, para 5 of the Health Insurance Act (HIA) from the tax base for all types of income that are taken into account when determining the final annual insurance income. 

Local Taxes and Fees Act

The real estate tax exemption for buildings with an energy consumption certificate obtained as a result of the application of publicly funded measures aiming at energy efficiency is cancelled.

In the case of an acquisition of real estate after 31 October of the respective year (i.e. after the deadline for payment of the tax on the property acquired earlier), a term of two months for payment of the real estate tax is introduced.

The enforcement of the amendments already adopted to Article 67, para 2 regarding the change in the base for determination of the garbage collection fee is postponed by one more year. According to the amendments, the new base will be applied as of 2017.

Limitation of Cash Payments Act

The threshold for cash payments is decreased from BGN 15,000 to BGN 10,000 and the limitation is applicable for payments made in a foreign currency as well.