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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Stopping the improper use of insolvency proceedings
A client of our dispute resolution team (led by Kamen Shoylev and Yordan Neshkov) was recently the subject of an indirect claim by a Bulgarian bank with which this client has been engaged in a multi-stage dispute. Unusually, the bank acted through a vehicle registered in an African state, which made an unfounded claim in the tens of millions of euros against our client and sought the commencement of judicial insolvency proceedings against this client. The offshore vehicle was chosen to isolate the bank from liability and create certain evidential difficulties for our client's representation.
NBLO succeeded in terminating the insolvency proceedings, with direct loss fully awarded to our client. A second claim to recover our client's indirect losses is currently under way.
Where targeted in this way through insolvency proceedings, a company may be prevented from trading properly (e.g., by suffering restrictions on its financing or being unable to participate in public procurement).
Through our considerable experience in insolvency litigation, both entirely domestic and where there are European and cross-border elements, we are ideally placed to assist clients in resisting such attacks and recovering the real and considerable losses that may be suffered.
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