Ratification of the Multilateral Convention to implement Tax Treaty related measures to prevent Base Erosion and Profit Shifting

In this issue of Tax News for 2022 we focus on the developments in the Bulgarian tax legislation which will change the way Double Tax Treaties (“DTTs”) are analyzed and applied and how we should prepare for it. Earlier this year, in the Bulgarian State Gazette issue 47 dated 24 June 2022, the Act on ratification of the Multilateral Convention to implement Tax Treaty related measures to prevent Base Erosion and Profit Shifting (the Multilateral Convention) by Bulgaria was promulgated.

The Multilateral Convention signed by Bulgaria in June 2017, introduces part of the measures of OECD's Base Erosion and Profit Shifting Action Plan (“BEPS Plan”). The objective of the Multilateral Convention is to amend multiple DTTs simultaneously without bilateral renegotiations of the parties to each DTT.

Mechanism of the Multilateral Convention

The Multilateral Convention mechanism provides for the following: 

  • Each state to indicate which existing DTTs to be modified - Bulgaria has indicated a list of 64 DTTs to be covered by the convention. The list does not include the DTTs with the United States of America, Germany, Switzerland, the Netherlands, Malta, Finland, Pakistan and Uzbekistan, meaning they will not be affected (amended) by the ratification of the Multilateral Convention 
  • Choice of optional provisions by each state - the Multilateral Convention allows for an alternative between certain provisions - for example, relating to activities that lead to the attribution of a permanent establishment, etc. 
  • Expression of reservations – the Multilateral Convention provides that each state may express reservations in regard to certain provisions. This means that these provisions will not apply. No reservations can be expressed for the mandatory provisions. 
  • Lack of explicit choice in the list of reservations and notifications of a specific eligible provision - the relevant provision is not chosen and will not apply to the agreements concluded by the respective state. 

Provisions adopted by Bulgaria

The provisions of the Multilateral Convention which Bulgaria has chosen to apply in accordance with its final list of reservations and notifications are as follows:

  • The tax credit as the applicable method for avoidance of double taxation for the covered tax treaties
  • The updated preamble to OECD’s Model Tax Convention on Income and on Capital, 2017 edition, regarding the purpose of the tax treaties 
  • A general clause aimed at preventing treaty abuse
  • Taxation at source of capital gains derived from alienation of shares or similar rights of participation in an entity. The taxation at source will apply to shares or rights which derive a certain part of their value from immovable property situated in the source state at any time during the period of 365 days preceding the transfer. Bulgaria will also apply this provision to comparable interests in other forms of entities, such as interests in a partnership or trust. 
  • Rules for artificial avoidance of permanent establishments through (a) commissionaire arrangements and similar strategies, as well as (b) through specific activity exemptions under the applicable DTTs, which are not of a preparatory or auxiliary character
  • The updated text of the OECD’s Model Tax Convention on Income and on Capital for the Mutual Agreement Procedure and
  • Making corresponding adjustments of the profits of related parties for transfer pricing purposes.

Entry into force and application of the Multilateral Convention

Bulgaria's final position on the Multilateral Convention is to be deposited with the OECD’s Secretary-General. The Multilateral Convention will enter into effect for Bulgaria on or after 1 January of the year following the year in which the three-month period from the date of such a depositary with the OECD’s Secretary-General expires. 

What are the practical effects of the Multilateral Convention? 

Bulgarian residents and foreign non-residents who will apply a DTT in Bulgaria after the entry into force of the Multilateral Convention should consider whether and how the respective DTT is affected by the convention. 

They should first verify whether the relevant DTT is within the tax treaties covered by the Convention for Bulgaria. If so, they should check whether the DTT is in the list of tax treaties to which the other party (i.e., the other state, which is a party to the DTT) will apply the Multilateral Convention. If one of the two countries – Bulgaria or the other state has not indicated the respective DTT as covered by the convention, then the provisions of the DTT would not be affected by the Multilateral Convention. For DTTs designated by both Bulgaria and the other state as falling within the scope of the Multilateral Convention, it should be further analyzed whether the DTT provisions for the relevant type of income (e.g., interest income, attribution of a permanent establishment, etc.) have been amended by the Multilateral Convention. 

The positions of both Bulgaria and the other state for the application of the Multilateral Convention shall be checked. If the two states’ positions coincide, the amended text of the DTT provision shall apply. In case of divergence, it should be further analyzed what is the applicable tax treatment. 

There is no formal requirement for new DTT application procedures to be initiated for income for which both (a) DTT relief has already been provided prior to the entry into force of the Multilateral Convention and (b) the DTT provisions are amended after the entry into force of the convention. At this point, there is no written statement of the revenue authorities confirming or rejecting such a position. However, we consider that if the tax treatment of a specific type of income under a DTT is amended after the entry into force of the Multilateral Convention for Bulgaria, then the revenue authorities can be expected to require initiation of a new DTT application procedure with respect to such income. 

Should you have any questions, please contact a representative of the Tax Department of KPMG in Bulgaria. 

For information

Alexander Hadjidimov
Director, Tax
Tel.: +359 (2) 9697 700 

Rumyana Staneva
Manager, Tax
Tel: +359 (2) 9697 700