November 30 2018

Amendments to Corporate Income Tax Act – gazetted

Source: IBFD Tax Research Platform News

On 27 November 2018, amendments to the Corporate Income Tax Act were published in the State Gazette. The main amendments are summarized below.

Limitation of interest deduction rule

A new rule is introduced for limitation of interest deduction, which implements the provisions of the European Union Anti-Tax Avoidance Directive (EU) 2016/1164 (2016). Under the rule, the exceeding borrowing costs for a tax year will be deductible for up to 30% of the tax-adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of the taxable person. Any restricted interest can be carried forward indefinitely.

The limitation of interest deduction will no longer be applicable when the exceeding borrowing costs are up to EUR 3 million. Also, the new rule will not be applied to credit institutions.

Amendments to thin capitalization rule

Although in August 2018, the Ministry of Finance proposed to abolish the thin capitalization rule, subsequently it was decided to keep it, but an amendment was introduced so that restricted interest expenses can be carried forward indefinitely (currently it is possible for a period of up to 5 years).

Controlled foreign company (CFC) rule

According to the new rule, a Bulgarian taxable person with a CFC, under certain conditions, will be required to include a share of the CFC's taxable profit into its taxable profit and thus be subject to Bulgarian corporate income tax.

Between the first and the second reading of the draft bill at the parliament, amendments were introduced to the initial texts and the CFC rules will not be applicable in terms of CFCs which are not subject to corporate income tax in the jurisdictions where they are tax residents.

Bulgarian taxable persons with CFCs will be obliged to keep a register with specific details on the CFCs. This register should be provided to tax authorities upon their request.

New tax rules for certain operating lease agreements

The new rules concern the tax treatment of expenses/income of a lessee under operating lease agreements to which the rules of IFRS 16 Leases (effective as of 1 January 2019) will be applied. It is provided that such income/expenses will not be recognized for corporate income tax purposes and instead, the income/expenses determined as per the National Accounting Standard 17 Leases applied to these agreements will be recognized for corporate income tax purposes. In addition, right-of-use assets in relation to operating lease agreements under IFRS 16 Leases will not be recognized as tax depreciable assets of the lessee.

Other amendments

An option is introduced for the submission of corporate income tax returns in cases when a taxable person did not perform an activity in the tax year in order to report tax on expenses, incurred losses, or reporting hidden profit distribution.

Certain amendments are introduced regarding the filing and payment of corporate income tax, withholding tax, tax on expenses and alternative tax in cases of liquidation or termination for insolvency of a company and when a permanent establishment of a foreign company is ceasing its activity. In this respect the last tax period of such companies/permanent establishments will be from 1 January of the year of the deregistration until the date of the deregistration and the last corporate income tax, withholding tax, tax on expenses and alternative tax to be due within 30 days after the date of the deregistration.

The above amendments will be applicable as of 1 January 2019.