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Tax aspects of loan agreements

Companies usually finance their activities by loans, arranged via formal agreements with the shareholders, other legal entities, banks or other credit institutions. Loans are always expected to include interest on the borrowed amount, which is payable monthly or annually and is recognized as tax deductible expense.Loans should be repaid after contracted period of time together with the interest. When BG Ltd’s execute loans cross-border, they are liable to register the loan at the Bulgarian national bank. Loans have to be booked in the books of a Bulgarian Ltd under Other Creditors. Loan amounts may exceed the value of the assets of the company. Loans do not reflect the annual taxable result at the end of the year. Only the interest calculated on loans is reflecting the taxable result, no matter if the actual interest payment is preceded or not.When the interest on loan is calculated and agreed for period for more than one financial year, the total interest amount is treated as an asset (i.e. Deferred Expenses). When the part of the interest is charged and becomes payable, this part becomes a tax deductible expense and a liability of the company payable to the lender. All lenders are liable to tax on interest income. If the private person is a local (Bulgarian) person, they are liable to report the interest income in their annual tax return. A foreign lender receiving interest income will be charged by the borrower a withholding tax of 10% on the Interest income and will be paid the difference, but after deducting and paying the tax of 10%. This is however subject to withholding tax exemption rules.The precise loan structure has no relation to tax, also to the value of the assets.

Taxation of the acquisition of shares in Bulgarian private limited companies on their initial creation or subsequent disposition

Where there is no premium over the nominal price, there is no taxable base. If the seller of the shares of the BG Ltd is an individual and the sale price exceeds the registered nominal price, then the Seller is obligated to account for tax on the profit differential. The tax is reported and is due in the year when the shares are legally transferred to the buyer, no matter when the payment will be made. If the seller of the shares is legal entity, then the taxable base is the same. This difference/profit should be included in total annual tax basis and taxed with 10% corporate tax.

So, in case, when the UK Ltd’s buy the shares of the BG Ltd’s at their nominal legally registered price there is no tax liability, no tax event, and no tax basis.

Only the operational accounting profits generated during the financial year are matter of corporate taxation.

Capital gains do not apply as a separate tax as they do in the most EU countries. When the Company A is owner of the 50% shares of Company B, and decides to sell these shares to Company C at price exceeding the nominal price, this is a profit, which is taxable as same as the profits generated from any other activities. When the company A, with registered capital of 50000BGN makes a profit for the financial year, pay the corporate taxes and then take a decision to convert the prior period undistributed profit into capital reserves, legal reserves, or decide to increase the registered capital – this is also not taxable event. InBulgariathis is referred to as an end-of-year balance sheet event…

Opening of a Trade representative office in Bulgaria

A foreign company, entitled to engage in business under its domestic law, may set up a trade representative office inBulgaria(“TRO”). The TRO is not a separate legal entity and it has no individual capacity. It is not allowed to engage in commercial activity. The TRO should support the foreign company in marketing with representative functions only. Notwithstanding, the law does not provide any sanctions for breach of this restriction, but for all commercial activities engaged by the TRO, the necessary taxes should be paid. The TRO is subject of registration with the Bulgarian Chamber of Commerce and Industry (“BCCI”).

For registration of a TRO with the BCCI a formal application must be submitted with the following documents attached to it…….

Definition of Tax Residency Status

1. General overview

The taxation of your client’s personal income will depend mainly on his/her tax residency status
and not on his/her nationality (citizenship). In general, he/she will have the obligation for paying
taxes on his/her world wide income1 only in one state – in the state where he/she is considered tax
resident. In other state(s), where he/she is not considered tax resident but he/she derives income,
he/she may be obliged to pay taxes only on those income that are sourced from that other state(s).

Nevertheless, in the State of residence, the taxes paid abroad shall be taken into consideration by
applying methods of avoidance of double taxation.

2. Bulgarian domestic tax residency criteria

According to the effective provisions of the Bulgarian domestic legislation (Art. 4, para. 1 of the
Bulgarian Personal Income Taxes Act, PITA), regardless of the nationality/citizenship thereof, a
Bulgarian tax resident individual shall be an individual:

who spends within the territory of Bulgaria more than 183 days in each period of 12
consecutive months, or

whose permanent place of residence is in Bulgaria, or

who has his/her centre of vital interests in Bulgaria.

Nevertheless, please be informed that the Bulgarian nationals are obliged to indicate permanent
address on the territory of Bulgaria on their Bulgarian ID documents. So, it shall be considered
that each Bulgarian national has a permanent place of residence in Bulgaria.

The individual shall be considered Bulgarian tax resident for the financial year during which his/
her stay exceeds 183 days. The financial year in Bulgaria refers to the calendar year, i.e. starts on
1 January and finishes on 31 December.

The individual shall have his/her centre of vital interests in Bulgaria in those cases where the
interests of the person are closely connected with the State. In the course of determining those
interests, the following may be taken into consideration: the family, the property, the place
wherefrom the person carries out his/her employment, professional or business activity, and the
place from which he/she manages his/her property.

A person who is permanently residing in the country, however, his/her centre of vital interests
is not located in the country, shall not be considered a Bulgarian tax resident. Non-resident
individuals shall be the ones who are not considered residents, i.e. those who do not fulfill the
criteria above.

As you may see from the legal definition above, the nationality/citizenship is not a tax residency
criterion under the Bulgarian domestic legislation. Thus, nationality could not directly reflect
your client’s personal income taxation in Bulgaria.