International tax legislation, also known as CFC (Controlled Foreign Company) rules, is applied by a number of countries as a means against the reduction of tax payments.
The various rules against tax evasion practices that directly affect the functioning of the domestic markets are outlined in Council Directive (EU) 2016/1164, also known as the Taxation Directive or the Anti Tax Avoidance Directive, that was adopted on July 12, 2016.
In Europe, CFC rules are widely applicable in the UK, Germany, Russia, France, and in various other places.
On November 11, 2018, the Bulgarian Parliament adopted changes to the Corporate Income Tax Act as per Directive (EU) 2016/1164.
The mechanism of CFC operation is as follows:
A taxpayer with a CFC company must include the company’s income when calculating the relevant tax base for the current year and pay the applicable tax in the country of which he or she is resident.
This company is considered to be a CFC, if the taxpayer, together with related parties, has a direct or indirect controlling participation in the capital, has voting rights or can share in the profit of the company; or when the tax paid by CFC is lower than the established by the legislation threshold.
Once a company is considered a CFC, fundamentally any revenue from that company should be included in the tax base of the taxpayer.
In order to avoid double taxation, states can allow the taxpayer to pay a tax credit for taxes paid by the CFC, or reduce the tax base of the taxpayer by the amount of distributed revenue from the CFC.
CFC rules will not be widely applicable in Bulgaria
Some experts identify two main problems with the functioning of the CFC rules in Bulgaria.
The first is that CFC rules do not apply to taxes of individuals. If the company is controlled by a physical person who is a Bulgarian tax resident, the Bulgarian CFC rules do not matter.
The second problem is that if a potential CFC is not subject to corporate tax in its jurisdiction, it will not be considered a CFC, and the new rules will not affect it.
If you would like more information, please contact us at firstname.lastname@example.org
Asset tracing and fraud: Use of evidence from parallel criminal proceedings in a civil trial
Over the last year, we have assisted the victims of a multi-million dollar large-scale international fraud. Certain of the scheme’s operations were embedded in Bulgaria’s thriving business process outsourcing (BPO) ecosystem.
As part of our representation for clients, we have pursued a claim in a regional Bulgarian court (the organisers of the fraudulent scheme having transferred the registration of the relevant entity to a disused building in that location). We were pleased to obtain a very helpful intervention from the court at first instance including an order to append files containing a substantial amount of evidence generated through a criminal investigation into the fraud to the civil case. This provides rich evidential pickings for proceedings which are either already being conducted or are being contemplated in a range of international jurisdictions as well as Bulgaria.
© New Balkans Law Office 2019