Interest limitation rule

The new rules for limitation of borrowing costs deductible for tax purposes are applied by taxable persons whose exceeding borrowing costs for a respective year are higher than EUR 3 mln (equivalent in BGN). In such cases the amount of the exceeding borrowing costs deductible for tax purposes may not exceed the difference between the amount of the exceeding borrowing costs and 30% of earnings before interest, tax, depreciation and amortization. Borrowing costs exceeding this amount are not tax deductible in the year of their accrual.

The non-deductible borrowing costs in а certain year can be carried forward for tax deduction with no limitation in the number of the periods in which deduction can be claimed. The amount of the tax deductible borrowing costs which were previously non-deductible is calculated as 30% of the earnings before interest, tax, depreciation and amortization is increased by the amount of interest income and decreased by the amount of borrowing costs.

There is a non-exhaustive list of borrowing costs which are regulated under the new rules. The list is broader in comparison to the types of interest falling within the scope of the thin capitalization rules.

The existing thin capitalization rules remain in force with some modifications and will apply in parallel to the new interest limitation rules where the conditions for that are fulfilled. The existing 5-year limitation for carry forward of the non-deductible interest expenses under the thin capitalization rule has been abolished.

Non-deductible interest expenses which have arisen after 1 January 2014 under the thin capitalization rules not recognized by the end of 2018 will be tax deductible under the changed thin capitalization rules and subject to the new interest limitation rule where the latter applies.

Controlled foreign company rules

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.

A CFC is a foreign legal entity or a foreign permanent establishment (PE) whose profits are not subject to taxation or are exempt from taxation in Bulgaria, where the following conditions are simultaneously met:    

• The taxable person under the CITA (i.e. Bulgarian legal entity) by itself or together with its associated enterprises holds a direct or indirect participation of more than 50 percent of the voting rights, or owns directly or indirectly more than 50 percent of the capital, or is entitled to receive more than 50 percent of the profits of the foreign legal entity;
• The actual corporate tax paid on its profits by the entity or PE is lower than the difference between the corporate tax that would have been charged on the entity or PE under the Bulgarian CITA and the actual corporate income tax paid on its profits by the entity or PE.

The law clarifies the way of calculation of the indirect participation, on the impact which a CFC’s PE in a third country may have on the Bulgarian entity, on the impact of the tax status of the CFC itself in its country of residence, etc.

Under the CFC rules, the tax result of the (Bulgarian) taxable person is increased with the non-distributed profits of the CFC realized for the relevant tax period. When undistributed profits which have already been taxed with the Bulgarian entity are distributed by the CFC, the Bulgarian entity is entitled to deduction from its tax result. A proportionate calculation of the CFC’s profit subject to taxation in Bulgaria is provided for in cases when the tax periods of the CFC and the Bulgarian entity do not coincide as well as when the CFC conditions have not been met throughout the entire tax period.

A tax loss incurred by the CFC in a certain year can only be deducted from tax profits of the CFC (or another CFC within the same country) within the next 5 years.

The CFC rules do not apply when the latter carries on substantive economic activity supported by staff, equipment, assets and premises.

Bulgarian taxable persons are required to maintain a register of their CFCs to be provided to the authorities upon request. The failure to properly maintain such a register is subject to an administrative sanction.

Taxation of lease contracts with lessees

The new CITA provisions affect lessees applying the International Accounting Standards as a basis for preparation of their financial statements.

According to the new rules, the lessees will not recognize for tax purposes income and expenses related to operating lease contracts within the meaning of the International Accounting Standards. Right of use (RoU) assets recognized by lessees under operating lease contracts under the international accounting standards would not be treated as tax depreciable assets.

The lessees will recognize for tax purposes income and expenses which would have been recognized in respect of operational (exploitation) leases under National Accounting Standard 17 Leases should the latter have applied with respect to the noted operational leases under the international accounting
standards.

The existing provisions regarding tax depreciable assets under contracts for financial leases are supplemented. RoU assets under finance lease contracts in accordance with the international accounting standards will be treated as tangible tax depreciable assets. Changes to the values of such assets can be made in the case of a revaluation of the liability under the finance lease contract.

The provisions of the CITA relating to changes of accounting policy will not apply with respect to the transition to IFRS 16 Leases.

Other changes

There are changes in the provisions regarding the submission of the annual tax return under Article 92 of the CITA by taxable persons who have not carried out economic activity throughout the year according to the Accountancy Act, but for whom an obligation arises to report tax on expenses or a tax loss. The annual tax return under Article 92 of the CITA may also be submitted when the taxable person wants to declare any other information or circumstances.

The provisions currently in effect in relation to the reporting and remittance of taxes under the CITA in the case of closure/liquidation of a legal entity or the closure of a permanent establishment are also amended. The last tax period for entities in a liquidation/closing down procedure will be between 1 January of the year of the deletion from the Commercial Register/closing down and the date of the deletion/closing down itself. The deadline for the tax return submission and payment of the tax liabilities for the last tax period is 30 days of the date of deletion/closing down.