It often happens that a Bulgarian company with a VAT registration in Bulgaria also operates in another EU member state and has a VAT number from that country. If the company pays a value added tax (VAT) and a corporate tax in this country, a number of questions arise related to its tax treatment in Bulgaria:
– should invoices issued by the foreign VAT number be reflected in the financial statements under Bulgarian accounting legislation?
– should income and expenses related to activities in another EU member state be reflected in the annual tax return for corporate tax due?
According to the Corporate Income Tax Act (CITA), local legal entities are taxed under this act on their profits and income from all sources in Bulgaria and abroad, i.e. local legal entities are taxed under the corporate law on their worldwide profit, which also includes profit from a place of business activity abroad. Within the meaning of the Corporate Income Tax Act, a local legal entity is a person established under the Bulgarian legislation and entered in a Bulgarian register.
The tax base for determining the corporate tax is the taxable profit. The tax financial result (tax profit/tax loss) is the accounting financial result, transformed according to the procedure of the Corporate Income Tax Act with tax permanent differences, with tax temporary differences and with other amounts in the cases provided for by law. Accounting financial result is the profit (loss) on the income statement for a certain period before accrual of tax expenses on the profit.
In the event that, pursuant to an agreement between Bulgaria and another country for the avoidance of double taxation of income and property, a Bulgarian company establishes a place of business activity in that other country, it will be subject to corporate tax on its financial results, including those formed by that place of business. The income and expenses reported by a place of business activity are part of the total income and expenses of the company in Bulgaria and should participate in determining the total accounting and tax result. At the same time, profits attributable to a place of business activity will be taxed in full under the tax legislation of the other country.
When forming the aggregated tax financial result from sources in Bulgaria and abroad, the provisions of the Corporate Income Tax Act regarding the transformation of the accounting financial result from the activity both in Bulgaria and abroad are applied. In this regard, it is important to have analytical reporting that allows for easier determination of the accounting and, hence, the tax financial result, respectively the corporate tax due under the Corporate Income Tax Act for the place of business activity in the other country.
For taxes charged and paid in another country, the methods for eliminating double taxation provided for in the agreement shall be applied. The “progression exemption” method is often applicable. Exemption from double taxation is realized by completing an appendix to the annual tax return for the corporate tax due. When applying the “progression exemption” method, no evidence is required from the foreign tax administration regarding the amount of taxes paid abroad.
In case of a company operating in Bulgaria and another country and in case of doubts regarding its tax treatment, you can contact our experts.