When registering a branch of a foreign merchant in Bulgaria, the question arises in which country should the expenses for travel and business trips of the managers of the foreign merchant be accounted for.
It is essential to define the branch as a place of business activity. In most agreements for the avoidance of double taxation, to which Bulgaria is a party, it is accepted that there is a place of business activity when a branch of a company of one country is registered in the other country. Therefore, it is considered that the foreign trader conducts business in Bulgaria through his branch registered in the country, as the latter falls within the scope of the concept of place of business activity.
On the other hand, the foreign trader with a branch registered in Bulgaria is a taxable person in Bulgaria.
Accounting expenses for travel and stay of natural persons who are employed by the foreign trader or are employed by him under non-employment legal relations, including managers, members of the management or control bodies of the foreign trader, are recognized for tax purposes when the trip and the stay were carried out in connection with the activity of the taxable person.
If the travel and stay expenses were incurred by persons to whom the foreign company has delegated powers of management or control bodies of its branch in Bulgaria, the required legal relationship (employment or non-employment legal relationship) will be present. Such a connection will also be present in cases where the managers of a foreign company are sent to Bulgaria in connection with the branch’s activities.
In addition to the presence of a legal relationship and the connection of travel and stay expenses with the activity of the company’s branch, the expenses must also be proven with primary accounting documents (which define the object, purpose, report of the trip, as well as other specific documents according to the activity carried out). Only then the reported accounting costs will be treated as recognized for tax purposes.
In order for the accounting expenses to be recognized for tax purposes, it is necessary to meet the general requirements of the Law on Corporate Income Taxation, namely – they must not have been incurred under conditions leading to a deviation from taxation, as well as not represent hidden profit distribution.
For consultation regarding the tax treatment of expenses for travel and business trips, you can contact our experts.