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…