Bulgaria: Withholding tax on “fictitious interest” assessed on interest-free loan (CJEU judgment)

Anti-abuse provisions allowing assessment of withholding tax on deemed interest regarding interest-free loans between related parties

Assessed on interest-free loan (CJEU judgment)

The Court of Justice of the European Union (CJEU) issued a judgment regarding withholding tax on “fictitious interest” (deemed interest) assessed with regard to interest-free loans between related parties.

The CJEU, in response to the question from the referring Bulgarian court on upholding the withholding tax assessment, concluded that such fictitious interest did not involve an actual payment between the companies and, accordingly, the lender could not be deemed to be a “beneficial owner” eligible under the EU Interest and Royalties Directive, and the interest could not be regarded as a “distribution of profits” within the meaning of the Parent-Subsidiary Directive.

The case is: Viva Telecom Bulgaria EOOD, C-257/20 (24 February 2022)


The case concerns national anti-abuse provisions allowing the assessment of withholding tax on fictitious interest related to interest-free loans between related parties. The taxpayer (a Bulgarian company) received an interest-free convertible loan from its Luxembourg-based parent company, repayable 60 years after the loan agreement was signed.

Based on national anti-tax evasion and avoidance provisions, the Bulgarian tax authorities computed an arm’s length interest rate for the loan and assessed a 10% withholding tax on the resulting interest.

CJEU judgment

The CJEU reiterated comments made by the CJEU Advocate General that, based on settled case-law, the Bulgarian provision at issue was not covered by the EU Interest and Royalties Directive or the Parent-Subsidiary Directive. Specifically, as noted by the CJEU, fictitious interest established by tax authorities does not involve an actual payment between the companies. Therefore, the lender cannot be considered to be the “beneficial owner” for the purpose of the EU Interest and Royalties Directive, and the interest itself cannot be regarded as a “distribution of profits” within the meaning of the Parent-Subsidiary Directive.

The CJEU continued by analyzing the compatibility of the withholding tax assessed by the tax authorities with the fundamental freedoms. In line with the Advocate General’s position, the CJEU affirmed that the Bulgarian provision may restrict the fundamental freedoms, but that this restriction was justifiable by overriding reasons in the public interest (i.e., the prevention of tax avoidance and the balanced allocation between EU Member States of the authority to impose taxes).

However, the CJEU did not follow the Advocate General’s reasoning regarding the proportionality of the measures. The Advocate General had expressed a view that the imposition of withholding tax on interest-free loans was to be based on a case-by-case examination of each transaction, and that the taxpayer must be afforded an opportunity to produce evidence regarding the economic substance of the transaction. 

Instead, the CJEU noted that an irrebuttable presumption of abuse in the Bulgarian tax law applies to both resident and non-resident lenders, and as such, this does not restrict the fundamental freedoms. A breach of the freedoms could nevertheless be triggered by the difference between the cost that would have been borne by a resident lender and the withholding tax assessed by the Bulgarian tax authorities. On this point, the CJEU concluded that the Bulgarian measure does not go beyond what is necessary to attain the objectives that it pursues—on the grounds that the non-resident lender is granted the opportunity to receive a refund for the cost difference. In the CJEU’s view, despite claims to the contrary submitted by the taxpayer, the refund process was not excessive given the deadlines included in the Bulgarian law and due to the fact that late-payment interest would be owed to taxpayers for governmental delays in granting a refund.

Read a March 2022 report prepared by KPMG’s EU Tax Centre


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