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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Advising on an LCIA claim
Suppliers with less bargaining power sometimes accede to arbitration clauses which make bringing or defending a claim prohibitively expensive.
In such cases, it is especially important when acting for the potential claimant (and subject to a judgement on the overall viability of the claim), to offer a cost-effective solution to allow the claim to get off the ground. This may include assessing whether the arbitration clause is likely to be found effective or pathological, and whether it may be permissible and advisable to launch court proceedings instead (which can be more economical especially in their early phases).
It is also helpful to be able to rely on advice which is simultaneously excellent in relation to both the jurisdiction in which enforcement is likely to be sought (e.g., Bulgaria) and the jurisdiction whose governing law the parties have agreed to apply or which applies for another reason.
NBLO recently acted for a potential claimant in such a situation alongside the client's existing Bulgarian counsel to advise on the interplay of the arbitration rules of the London Court of International Arbitration (LCIA) and Bulgarian law and on the mechanics and prospects of a claim. We regularly and successfully collaborate with clients’ existing counsel to achieve the best results for such clients.
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