In its latest tax newsletter DGKV puts into focus new rules that have been introduced in the Law on Corporate Income Taxation (“LCIT”) end-November to become effective as of 1 January 2019.
New interest limitation rule and for the first time CFC rules for determining the taxable financial result of a tax resident company holding a controlled foreign company or foreign PE, rooted in Council Directive (EU) 2016/1164 of 12 July 2016 (the Anti-Tax Avoidance Directive or ATAD), will come into play.
The new interest limitation rule kicks in for interest exceeding 3 million euro for the year and significantly lowers the deductibility for tax purposes of borrowing costs, down to 30% of EBITDA, although it allows carry forward of unrecognized exceeding borrowing costs without limitation in time for future years.
Notably, new taxation regime regarding undistributed and non-taxable in Bulgaria profit of foreign companies controlled by corporate tax residents is also introduced. Controlled foreign companies that fall under such new regulation (“CFC”) cover foreign permanent establishments of Bulgarian corporate tax residents as well as formations in a foreign country (legal entities or legal contractual arrangements, including companies, partnerships, trusts or foundations) in which a Bulgarian corporate tax resident has direct or indirect participation exceeding 50%: of the voting rights, or the share capital, or the right to receive such profit stake.
Such specific taxation would apply only if the corporate income tax actually paid by the CFC is lower than the difference between the corporate income tax to be accrued to the CFC under Bulgarian law and the foreign profit tax actually paid by the CFC. The only carve-out of this regime would be for CFC engaged in business operations which could demonstrate substance or for one, exempt from corporate taxation in the foreign jurisdiction (the latter significantly narrowing the scope of the rule, thus under question if in line with ATAD).