Can Bulgaria be a place to manage offshore companies regardless of DTA?

[ElBotellon]

Let's start from this premise: the residence of an entity should be verified according to the local definition of residence (country-specific) and only in case of double residency a treaty could be used to determine the only residency of an entity.

Having said that, I noticed that while in many countries the internal tax code defines an entity as resident based on POEM, in Bulgaria the internal tax residency is defined exclusively by the incorporation principle.

"The criteria for an entity to be considered a tax resident in Bulgaria are set out in Art. 3 of the Corporate Income Taxation Act. The following entities are considered as tax residents in Bulgaria: 1. legal entities established under the Bulgarian law; 2. companies established under Regulation (ЕC) No. 2157/2001 of the Council, and cooperative societies established under Regulation (ЕC) No. 1435/2003 of the Council where they have their registered office within the country and are entered in a Bulgarian register."

As a consequence we can imagine that Bulgarian fiscal agency, if there is no significant presence of the company in the country to trigger the PE definition, should not be able to claim that a foreign entity is resident in Bulgaria and - as a consequence - it would be feasible (without too much substance in BG to trigger a PE) to have an offshore entity fiscal resident in another state which includes registration as one criteria to be fiscal resident there.

For example: Romanian SRL owned by a bulgarian resident. For the romanian code a SRL is resident in romania if incorporated there OR managed from there. This means a romanian srl will never be resident in bulgaria but will definitely be resident in Romania.

Now let's mix this the CFC provisions. CFC provisions have been recently amended in Bulgaria but they still regard (correct me if i am wrong) the companies and NOT individuals.

From the above please correct me if i am wrong:

An IOM company, resident in IOM based on registration, will not be resident in BG even if managed from there without a PE (and this REGARDLESS of the presence of a DTA).

An Hong Kong company, resident in Hong Kong based on registration, will not be resident in BG even if managed from there without a PE (and this REGARDLESS of the presence of a DTA) and will not be a CFC if individually owned.

A Romanian company, resident in Romania based on registration, will not be resident in BG even if managed from there without a PE (and this REGARDLESS of the presence of a DTA) and will not be a CFC if individually owned.

An Hungarian company, resident in Hungary based on registration, will not be resident in BG even if managed from there without a PE (and this REGARDLESS of the presence of a DTA) and will not be a CFC if individually owned.

now moving a bit "hardcore":

A Cyprus company, NON resident in Cyprus since managed from BG, will not be resident in BG even if managed from there without a PE (and this REGARDLESS of the presence of a DTA) and will not be a CFC if individually owned.

I would be very glad to get the opinion from any international tax expert eventually present in the forum.

Many thanks

 

[Marzio]

if there is no significant presence of the company in the country to trigger the PE definition, should not be able to claim that a foreign entity is resident in Bulgaria

Your presence doing business in BG would be enough: Bulgaria - Corporate - Corporate residence

 

[ElBotellon]

Your presence doing business in BG would be enough: Bulgaria - Corporate - Corporate residence

I am not sure that it would be automatic, particularly for countries having a DTA (see the cases with countries having a DTA) which would define in a relatively narrow way the definition of PE. Honestly to me the PE definition seems extremely vague.

 

[Marzio]

"A PE is generally defined as a fixed place through which a foreign entity partly or wholly carries out business activities in the country." It's voluntarely vague so that your example would fit into the PE defintion but lets say for a momento that what you are proposing works.

For the Bulgarian tax office your offshore company is not tax resident in BG.

Then what?

If you distribute dividends to yourself you would have to pay 10% personal income tax in BG.

 

[pastet89]

"A PE is generally defined as a fixed place through which a foreign entity partly or wholly carries out business activities in the country." It's voluntarely vague so that your example would fit into the PE defintion but lets say for a momento that what you are proposing works.

For the Bulgarian tax office your offshore company is not tax resident in BG.

Then what?

If you distribute dividends to yourself you would have to pay 10% personal income tax in BG.

The dividend tax rate is 5% in Bulgaria. I am from Bulgaria.

@ElBotellon
Not sure if I understood your question correctly.

However, based on my recent couple of months consulting experience with accountants and lawyers in Bulgaria, your statement

"An foreign company, resident in foreign country based on registration, will not be resident in BG even if managed from there without a PE (and this REGARDLESS of the presence of a DTA) " is not true. That's why we use nominee directors for the offshore companies to assume the company is being managed from outside.

Unfortunately I do not understand the second part "and will not be a CFC if individually owned." What is your eventual goal?

 

[Marzio]

I am from Bulgaria.

Well so you know that capital gain tax is 10%

Bulgaria - Individual - Income determination

Detailed description of income determination for individual income tax purposes in Bulgaria

taxsummaries.pwc.com

 

[pastet89]

Well so you know that capital gain tax is 10%

Bulgaria - Individual - Income determination

Detailed description of income determination for individual income tax purposes in Bulgaria

taxsummaries.pwc.com

10% as a personal income or as a corporate income. But if I pay from my company to myself a dividend I pay 5% and the company does not withhold anything else. So the total in this case is 5%.

 

[Marzio]

I know what you are talking about but the whole point of this thread is not to make a company tax resident in Bulgaria.

 

[ElBotellon]

The dividend tax rate is 5% in Bulgaria. I am from Bulgaria.

@ElBotellon
Not sure if I understood your question correctly.

However, based on my recent couple of months consulting experience with accountants and lawyers in Bulgaria, your statement

"An foreign company, resident in foreign country based on registration, will not be resident in BG even if managed from there without a PE (and this REGARDLESS of the presence of a DTA) " is not true. That's why we use nominee directors for the offshore companies to assume the company is being managed from outside.

Unfortunately I do not understand the second part "and will not be a CFC if individually owned." What is your eventual goal?

Why you claim is not true? look at Estonia Bulgaria DTA Art.4, or Georgia Bulgaria art.4. In case of double residence the country of incorporation prevails. On top of that if in the bulgarian CITA (corporate income tax act) the residency is defined as entities incorporated under bulgaria law, this escludes companies not incoporated in bulgaria from being resident in bulgaria.

This does not exclude the possibility that a PE of a foreign company could be taxed in bulgaria but this would exclude the residence which would require such entity to be taxed on its worldwide income.

The aim is to check if bulgaria is a good place from where you can lawfully manage foreign companies without a significant risk of determining the tax residency of foreign companies.

 

[pastet89]

Why you claim is not true? look at Estonia Bulgaria DTA Art.4, or Georgia Bulgaria art.4. In case of double residence the country of incorporation prevails. On top of that if in the bulgarian CITA (corporate income tax act) the residency is defined as entities incorporated under bulgaria law, this escludes companies not incoporated in bulgaria from being resident in bulgaria.

This does not exclude the possibility that a PE of a foreign company could be taxed in bulgaria but this would exclude the residence which would require such entity to be taxed on its worldwide income.

The aim is to check if bulgaria is a good place from where you can lawfully manage foreign companies without a significant risk of determining the tax residency of foreign companies.

It is not true that you can manage a foreign company from Bulgaria without being tax liable in Bulgaria if Bulgaria has a DTA with the other country.

From the DTA with Estonia (but they all are identical):

Art. 4 is just for the definition of tax resident. The whole idea of DTA is that the entity might be a tax resident of both countries and it explains where and how to pay taxes in this case.

Please check the following below though:

Art. 5.:
"Place of economic activity" is:
1) Place of management
2) ....
3) ....

And further down in art. 5 it is even specified that the country is perceived as place of economic activity if you act on behalf of the company by signing contracts. So in this case even a POA and remote ND can not save you.They would save you if we were talking about a typical offshore jurisdiction without DTA. That's the difference.

Art. 7:
Profits of economic activity of companies are taxed in the country of its PE, except the case in which the company has economic activity in the other country via place of economic activity. Now refer to art 5. and see the multiple definitions of "place of economic activity". The first of them as quoted by me is place of company management. Even with POA.

There is nothing special about Bulgaria in terms of DTAs and place of management/tax liability. You can not manage a remote company from Bulgaria without paying local taxes if Bulgaria has a DTA with the other country. This is confirmed by one lawyer and one accountant, independent from each other, from the many consultations I did the last months. But if you do not trust me, you can check it yourself with Bulgarian lawyer. In any case, it is even clearly written in the DTA.

If it was true that you can manage any (or at least Estonian) foreign company from Bulgaria without being tax liable, why would people here go for banana republics on sunny islands when opening offshore companies? Everyone would go for U.A.E. or some EU country like Liechtenstein/Luxembourg, etc...

 

[ElBotellon]

It is not true that you can manage a foreign company from Bulgaria without being tax liable in Bulgaria if Bulgaria has a DTA with the other country.

From the DTA with Estonia (but they all are identical):

Art. 4 is just for the definition of tax resident. The whole idea of DTA is that the entity might be a tax resident of both countries and it explains where and how to pay taxes in this case.

Please check the following below though:

Art. 5.:
"Place of economic activity" is:
1) Place of management
2) ....
3) ....

And further down in art. 5 it is even specified that the country is perceived as place of economic activity if you act on behalf of the company by signing contracts. So in this case even a POA and remote ND can not save you.They would save you if we were talking about a typical offshore jurisdiction without DTA. That's the difference.

Art. 7:
Profits of economic activity of companies are taxed in the country of its PE, except the case in which the company has economic activity in the other country via place of economic activity. Now refer to art 5. and see the multiple definitions of "place of economic activity". The first of them as quoted by me is place of company management. Even with POA.

There is nothing special about Bulgaria in terms of DTAs and place of management/tax liability. You can not manage a remote company from Bulgaria without paying local taxes if Bulgaria has a DTA with the other country. This is confirmed by one lawyer and one accountant, independent from each other, from the many consultations I did the last months. But if you do not trust me, you can check it yourself with Bulgarian lawyer. In any case, it is even clearly written in the DTA.

If it was true that you can manage any (or at least Estonian) foreign company from Bulgaria without being tax liable, why would people here go for banana republics on sunny islands when opening offshore companies? Everyone would go for U.A.E. or some EU country like Liechtenstein/Luxembourg, etc...

with all due respect i believe you did not read my message carefully.

i claimed clearly that a offshore company (incorporated outside BG) would not be tax resident in BG, while still taxable in presence of a PE (permanent establishment). Please try to read again my message since you are assuming that I claimed total absence of taxation, while i am saying absence of worldwide taxation, limiting it only to the eventual presence of a PE and to the income connected to such PE.

in terms of methodology could you please quote the exact words of the treaty and not your interpretation? because art.4 it clearly says:
"Where by reason of the provisions of paragraph 1 a person is a resident of both Contracting States, then he shall be deemed to be a resident only of the State under whose law he is established; this does not apply to a natural person. "

So the tax residency is based on registration, not POEM. Which implies a PE can be taxed but the company cannot be taxed on worldwide income in BG.

many thanks

 

[pastet89]

Sorry

I warned in the same beginning I am not sure I understand your question and goals.
Yes it seems that as per art. 4 the company is tax resident of the other country where is its PE.
However, I do not think this implies it cannot be taxed on worldwide income in Bulgaria.
It's best to check with a local lawyer. I would be extremely surprised if they tell you the opposite. But if this is the case, please give an update on this thread or send me a PM as I would be glad to learn that and look into this possibility as well.