United States-Bulgaria Tax Treaty
Bulgaria – US Tax Treaty Quick Summary. The Republic of Bulgaria is situated on the Balkan Peninsula in southeastern Europe bordering the Black Sea in east. It is comprised of 28 provinces and a capital at Sofia.
The Bulgarian 1991 Constitution serves as the foundation of its legal system and creates an independent judicial branch comprised of judges, prosecutors, and investigators, as well as a 240-seat unicameral National Assembly (Narodno Sabranie). Its court system consists of three levels of courts: Regional courts; district courts, and a Supreme Court of Cassation, as well as a separate Constitutional Court and administrative court regime.
Bulgaria is a member of the World Trade Organization, the North Atlantic Treaty Organization (NATO), and the European Union (EU).
Bulgaria implemented a new exit tax in 2020, as well as Directive 2016/1164/EU (Anti-Tax Avoidance Directive or “ATAD”). Certain corporate transfers of assets outside of Bulgaria may be subject to taxation. In addition, Bulgaria introduced hybrid mismatch rules in 2020 pursuant to Directive 2017/952/EU (“ATAD II”), as well as amendments to its thin capitalization rules.
U.S.-Bulgaria Tax Treaty
Treaty.
Currency. Bulgarian Lev (BGN)
Common Legal Entities. Joint stock company, limited liability company, sole trader, and branches.
Tax Authorities. National Revenue Agency
Tax Treaties. Bulgaria is party to approximately 70 tax treaties and is a signatory to the OECD MLI.
As of 2017, Bulgaria has signed bilateral double taxation treaties with the United States and the following countries: Albania, Algeria, Armenia, Austria, Azerbaijan, Bahrain Belarus, Belgium, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Kuwait, Latvia, Lebanon, Lithuania, Luxembourg, Macedonia, Malta, Moldova, Mongolia, Montenegro, Morocco, North Korea, Norway, Poland, Portugal, Qatar, Romania, Russia, Serbia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Syria, Thailand, The Netherlands Turkey, Ukraine, United Arab Emirates, United Kingdom and Northern Ireland, Uzbekistan, Vietnam, and Zimbabwe.
Corporate Income Tax Rate. 10%
Individual Tax Rate. 10%
Corporate Capital Gains Tax Rate. 10%
Individual Capital Gains Tax Rate. 10%
Residence. Residence is based upon permanent address and presence for more than 183 days in a 12-month period.
Withholding Tax.
Dividends. 0% (resident company) / 5% (resident individuals) / 5% (nonresident company) / 5% (nonresident individual)
Interest. 0% (resident company) / 8% (resident individuals) / 10% (nonresident company) / 5% (nonresident individual)
Royalties. 0% (resident company) / 10% (resident individuals) / 10% (nonresident company) / 5% (nonresident individual)
Transfer Pricing. Mandatory transfer pricing rules are in place.
CFC Rules. Yes.
Hybrid Treatment. Rules are consistent with ATAD 2.
Inheritance/estate tax. .4% – 6.6%
Set forth below are selected explanations, analysis, and insights with respect to the Convention and Protocol between the United States and Bulgaria (the “Convention”).
General Rights
The Convention provides that if a deduction would be allowed under the U.S. Internal Revenue Code (the “Code”) in computing the U.S. taxable income of a resident of Bulgaria, the deduction also is allowed to that person in computing taxable income under the Convention. The Convention may not increase the tax burden on a resident of a Contracting State beyond the burden determined under domestic law. Thus, a right to tax given by the Convention cannot be exercised unless that right also exists under internal law. A taxpayer’s U.S. tax liability need not be determined under the Convention if the Code would produce a more favorable result. A taxpayer may not, however, choose among the provisions of the Code and the Convention in an inconsistent manner in order to minimize tax. Similarly, nothing in the Convention can be used to deny any benefit granted by any other agreement between the United States and Bulgaria. For example, if certain benefits are provided for military personnel or military contractors under a Status of Forces Agreement between the United States and Bulgaria, those benefits or protections will be available to residents of the Contracting States regardless of any provisions to the contrary (or silence) in the Convention.
Non-Discrimination
Generally, under the non-discrimination obligations of the Contracting States under the General Agreement on Trade in Services (the “GATS”) the Convention shall not restrict in any manner any benefit accorded by any other agreement between the Contracting States.
Saving Clause
The Convention contains the traditional saving clause found in all U.S. treaties. The Contracting States reserve their rights, except as specifically provided, to tax their residents and citizens as provided in their internal laws, notwithstanding any provisions of the Convention to the contrary. For purposes of the saving clause, “residence” is determined under Article 4 . Thus, an individual who is a resident of the United States under the Code (but not a U.S. citizen) but who is determined to be a resident of Bulgaria under the tie-breaker rules of Article 4 would be subject to U.S. tax only to the extent permitted by the Convention. However, the person would nonetheless be treated as a U.S. resident for U.S. tax purposes other than determining the individual’s U.S. tax liability. For example, in determining under Code section 957 whether a foreign corporation is a controlled foreign corporation, shares in that corporation held by the individual would be considered to be held by a U.S. resident. As a result, other U.S. citizens or residents might be deemed to be United States shareholders of a controlled foreign corporation subject to current inclusion of Subpart F income recognized by the corporation. See Treas. Reg. section 301.7701(b)-7(a)(3). Under the Convention, the United States also reserves its right to tax former citizens and former long-term residents for a period of ten years following the loss of such status with respect to income from sources within the United States (including income deemed under the domestic law of the United States to arise from such sources). Thus, the Convention allows the United States to tax expatriates.
How are Fiscally Transparent Entities Treated?
The Convention addresses fiscally transparent entities such as partnerships and certain estates and trusts. Because different countries frequently take different views as to when an entity is fiscally transparent, the risk of both double taxation and double non-taxation are relatively high, and fiscally transparent entities create potential technical problems that could, if not addressed, prevent investors using such entities from claiming treaty benefits, even though such investors would be subject to tax on the income derived through such entities. In general, the Convention applies to any resident of a Contracting State who is entitled to income derived through an entity that is treated as fiscally transparent under the laws of either Contracting State. Entities falling under this description in the United States include partnerships, common investment trusts under section 584 and grantor trusts, as well as U.S. limited liability companies (“LLCs”) that are treated as partnerships or as disregarded entities for U.S. tax purposes. Under the Convention, an item of income derived by a fiscally transparent entity is considered to be derived by a resident of a Contracting State if a resident is treated under the taxation laws of that State as deriving the item of income. For example, if a company that is a resident of Bulgaria pays interest to an entity that is treated as fiscally transparent for U.S. tax purposes, the interest will be considered derived by a resident of the United States only to the extent that the taxation laws of the United States treats one or more U.S. residents (whose status as U.S. residents is determined, for this purpose, under U.S. tax law) as deriving the interest for U.S. tax purposes. In the case of a partnership, the persons who are, under U.S. tax laws, treated as partners of the entity would normally be the persons whom the U.S. tax laws would treat as deriving the interest income through the partnership. Also, it follows that persons whom the United States treats as partners but who are not U.S. residents for U.S. tax purposes may not claim a benefit for the interest paid to the entity under the Convention, because they are not residents of the United States for purposes of claiming this treaty benefit. In contrast, if, for example, an entity is organized under U.S. laws and is classified as a corporation for U.S. tax purposes, interest paid by a company that is a resident of Bulgaria to the U.S. entity will be considered derived by a resident of the United States since the U.S. corporation is treated under U.S. taxation laws as a resident of the United States and as deriving the income. These principles also apply to trusts to the extent that they are fiscally transparent in either Contracting State.
Residence
The Convention sets forth rules for determining whether a person is a resident of a Contracting State for purposes of the Convention. As a general matter only residents of the Contracting States may claim the benefits of the Convention. The determination of residence for treaty purposes looks first to a person’s liability to tax as a resident under the respective taxation laws of the Contracting States. As a general matter, a person who, under those laws, is a resident of one Contracting State and not of the other need look no further. For purposes of the Convention, that person is a resident of the State in which he is resident under internal law. If, however, a person is resident in both Contracting States under their respective taxation laws, the Convention applies a tie-breaker rules to assign a single State of residence to such a person for purposes of the Convention.
Transfer Pricing
The Convention incorporates the arm’s-length principle reflected in the U.S. domestic transfer pricing provisions, particularly Code section 482. It provides that when related enterprises engage in a transaction on terms that are not arm’s-length, the Contracting States may make appropriate adjustments to the taxable income and tax liability of such related enterprises to reflect what the income and tax of these enterprises with respect to the transaction would have been had there been an arm’s-length relationship between them.
Limitation on Benefits
The Convention contains anti-treaty-shopping provisions that are intended to prevent residents of third countries from benefiting from what is intended to be a reciprocal agreement between two countries. In general, the provisions do not rely on a determination of purpose or intention but instead sets forth a series of objective tests. A resident of a Contracting State that satisfies one of the tests will receive benefits regardless of its motivations in choosing its particular business structure. The general rule is that residents are entitled to benefits otherwise accorded to residents only to the extent provided in the Article. Under the a so-called “derivative benefits” test, certain categories of income may qualify for benefits. Regardless of these tests, certain benefits may be granted with respect to certain income earned in the conduct of an active trade or business. The Convention provides special rules for so-called “triangular cases.”
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