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.
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A win in an insurance exclusion clause dispute at the Supreme Court
NBLO's dispute resolution team, led by Yordan Neshkov, secured a success against a large Bulgarian insurer in a claim brought on behalf of a UK national, who had lost her property in a fire. The insurer had refused to pay out under the insurance, on the grounds that a widely drawn clause in its general terms allegedly excused it from paying whenever there was a breach of building regulations, even if (as was accepted in this case) this breach was invisible externally, could not be discovered through reasonable investigation and was not caused by the insured. NBLO had good reasons to argue that this position was unsupported in the Bulgarian Insurance Code or civil law generally and persuaded the Supreme Cassation Court to back it. This is covered more fully in an article on our website.
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