INTRODUCTION

Double Taxation Conventions (DTCs) play a key role in the economic growth and development of the country and are negotiated and concluded both to support local individuals and legal entities, as well as to stimulate international trade and bilateral investments.

The main objective of the DTCs is to create a legal framework to strengthen economic realtions between countries through eliminating double taxation and creating a favourable environment for mutual investments, while providing, as far as possible, reliable mechanisms to counter tax evasion or avoidance.

Double Taxation Conventions allocate taxing rights among Contracting States, thus ensuring legal certainty and removing obstacles to cross-border economic and business activities. DTCs are international treaties that play an essential role in promoting tax compliance and increasing tax predictability through regulated procedures for exchange of information, assistance in tax collection and mutual agreement procedures.

The benefits of DTCs have been long established. Initially aimed primarily at preventing double taxation of the same income by two different countries, over the years they have evolved and extended their scope to other relevant aspects by introducing rules on non-discrimination, exchange of information, provision of assistance in tax collection, mutual agreement procedures, fight against tax abuse, elimination of double economic taxation, etc.

The main effects of the DTCs, described briefly, determine the exceptional need for the existence and maintenance of a wide treaty network of the Republic of Bulgaria which creates the necessary legal framework and prerequisites for stimulating investments and cross-border business.

For decades, the Republic of Bulgaria has pursued a policy of expanding and maintaining its treaty network that supports the competitiveness of Bulgarian companies and facilitates their participation in international trade, as well as encourages inbound investments in the country. At the same time, the DTCs facilitate the access of Bulgarian enterprises to international financing or technology under more favourable conditions.

Currently, the Republic of Bulgaria has concluded 70 DTCs with the following countries: Albania, Algeria, Armenia, Austria, Azerbaijan, Bahrain, Belarus, Belgium, Canada, China, Croatia, Cyprus, Czech Republic, Democratic People’s Republic of Korea, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Jordan, Kazakhstan, Kuwait, Latvia, Lebanon, Lithuania, Luxembourg, Malta, Moldova, Mongolia, Morocco, Netherlands, North Macedonia, Norway, Pakistan, Poland, Portugal, Qatar, Romania, Russian Federation, Saudi Arabia, Singapore, Slovakia, Slovenia, South Africa, Spain, South Korea, Sweden, Switzerland, Syria, Thailand, Türkiye, Ukraine, United Arab Emirates, United Kingdom, USA, Uzbekistan, Vietnam, Yugoslavia^[1] and Zimbabwe.

Latest developments in the field of international taxation related to globalisation and digitisation of the world economy and the introduction of minimum effective taxation, changes in international tax standards arising from the base erosion and profit shifting project (hereinafter referred to as the BEPS Plan) of the Organisation for Economic Co-operation and Development (OECD), as well as the country’s desire to expand its treaty network to encourage mutual investments with new and significant partners, require the development of a new comprehensive policy of the Republic of Bulgaria when concluding bilateral double taxation conventions.

The OECD BEPS Plan includes a package of tax measures that should be implemented in the Bulgarian legal system through both domestic legislation and international tax treaties. These are measures aimed at preventing existing tax avoidance and non-payment practices and the use of aggressive tax planning and tax evasion schemes.

This document contains the main guidelines and principles of the policy of the Republic of Bulgaria in the negotiation and conclusion of new double taxation conventions, as well as in the amendment of existing conventions. The policy of the Republic of Bulgaria in negotiating DTCs is consistent with the growth trends of the Bulgarian economy and the current development of international tax rules adopted by the EU Member States and the OECD.

This document is divided into six sections:

Section I — Policy Objective;

Section II — Basic Principles;

Section III — Priorities;

Section IV — Criteria to Determine and Select States with which to Sign a New DTC;

Section V — Double Taxation Conventions;

Section VI — Annual Operational Plans.

 

I. POLICY OBJECTIVE

The policy regarding double taxation conventions is an important and integral part of the state tax policy of the Republic of Bulgaria and represents the basis for putting into practice the government priorities for economic growth and development, ensuring the competitiveness of the Bulgarian economy and supporting investment and innovation.

The main objective of the policy of the Republic of Bulgaria regarding the DTCs is to continue to support economic growth and development, to stimulate trade, investment and innovation, including in relation to new or emerging industries and sectors of the economy.

In the context of averting the consequences of the COVID-19 pandemic, Bulgarian business needs tax certainty to enable adequate investment decisions that are vital to support the economic recovery after the pandemic.

The establishment of legal and tax certainty in the international tax framework of Bulgaria is of utmost importance for facilitating cross-border trade and investment and for achieving economic growth. In this regard, the DTC policy is aimed at ensuring legal certainty and tax predictability for the Bulgarian businesses operating internationally and strengthening Bulgaria’s position as an attractive place for investment. At the same time, this policy reflects the changing economic and business environment, aiming at removing barriers hindering foreign investments and creating conditions for increasing the competitiveness of Bulgarian companies on foreign markets, while respecting the principles of certainty, predictability and clarity for all countries.

As a small open market economy, the Republic of Bulgaria benefits from the globalisation of the world economy. Therefore, the DTCs are particularly important for facilitating economic relations and ensuring mutual economic benefits in the future for Bulgaria and its key partners.

In order to facilitate the attractiveness of the Bulgarian economy as a destination for foreign direct investment, Bulgaria focuses its efforts to maximise the potential benefits of future double taxation conventions. In this regard, it is important to have a prioritisation with a view to identifying and engaging with potential partners. Prioritisation is also important with regard to the renegotiation of conventions in force with existing partners through the conclusion of new agreements or amending protocols. This process is a key to modernising, improving and expanding the current legal framework and aligning it with current developments in international taxation.

The policy of the Republic of Bulgaria in the field of tax conventions is related to the expansion, maintenance and improvement of the Bulgarian treaty network in order to develop the potential of economic, trade and investment opportunities between Bulgaria and the partnering States.

Bulgaria’s approach in the DTC negotiations involves seeking balanced agreements that benefit the whole economy, with some emphasis on specific sectors of the Bulgarian economy.

Each convention signed is aimed at achieving efficiency in eliminating double taxation and ensuring a favourable competitive position of Bulgarian individuals and legal entities worldwide. Any amendment or renegotiation of an existing Bulgarian DTC shall be made with a view to stimulating and promoting business and investments, as well as to updating specific provisions of the DTC in order to bring them into line with the latest international standards. On the other hand, Bulgaria’s tax conventions are intended not only to eliminate double taxation, but also to prevent the misuse of DTCs to achieve tax non-taxation and evasion or avoidance.

The OECD’s BEPS measures are also at the heart of the country’s DTC policy, as their main objective is to prevent abuse of tax conventions.

The introduction of minimum effective taxation under the OECD Pillar 2^[2] arrangement may require amendments to the existing tax treaty network of Bulgaria.

 

 II. BASIC PRINCIPLES

The DTC policy is based on the following key principles:

1. The Republic of Bulgaria is open to conclude a bilateral double taxation convention with any other country or jurisdiction. However, due to constraints in the administrative capacity to negotiate tax treaties, priorities and criteria for prioritisation are set up.
2. The Republic of Bulgaria will not conclude new DTCs with countries that are included in the European Union list of non-cooperative jurisdictions for tax purposes.

This list includes countries/jurisdictions that do not meet certain international standards for transparency and good governance and for avoidance of harmful tax competition.

3. The Republic of Bulgaria will not conclude new DTCs with countries that have harmful tax regimes identified as such by the Forum on Harmful Tax Practices of the OECD and the Code of Conduct Group (Business Taxation) of the Council of the EU.
4. The Republic of Bulgaria shall endeavour to include in its new DTC provisions that are in line with the minimum standards of the OECD’s BEPS Plan. This also applies to cases of amendment/update of existing tax treaties.

 

III. PRIORITIES

The Republic of Bulgaria will continue to expand and improve its network of double taxation conventions in the following priority areas:

Priority 1 – Countries with which Bulgaria has concluded a DTC, but these need to be amended

The first key priority is the amendment of the concluded DTCs containing outdated provisions from the point of view of the different political and economic system in the period of their conclusion, the change of the Bulgarian tax system over the last 30 years and the intensive reform of the international tax rules over the last decade (this category includes the conventions concluded/negotiated before and shortly after 1990).

Priority 2 – G20 Member States

The G20 member states are Australia, Argentina, Brazil, Great Britain, Germany, India, Indonesia, Italy, Canada, China, Mexico, the Russian Federation, Saudi Arabia, USA, Türkiye, France, South Korea, South Africa and Japan.

The Republic of Bulgaria has already concluded a DTC with 16 countries that are members of the G20. Given the economic importance and geographical scope of these countries, an important objective is that Bulgaria concludes tax conventions with all G20 Member States.

Bulgaria has not concluded a DTC with the following G20 Member States: Australia, Argentina, Brazil and Mexico.

Priority 3 – OECD and EU Member States

The third key priority is to ensure that Bulgaria has concluded double taxation conventions with all OECD and EU member states, given that our country is in the process of joining the OECD and is a member of the European Union.

There are 38 OECD members.

The Republic of Bulgaria has already concluded a DTC with 31 countries that are members of the OECD.

Bulgaria has not concluded a DTC with the following OECD Member States: Australia, Iceland, Colombia, Costa Rica, Mexico, New Zealand and Chile.

The Republic of Bulgaria has concluded DTCs with all 26 Member States of the European Union.

Priority 4 – Preventing opportunities for tax treaty abuse

The fourth key group of countries are those with which Bulgaria has concluded DTCs that are in force, but they do not follow OECD minimum standards under the BEPS Plan.

The Republic of Bulgaria, as a member of the Inclusive Framework of the OECD’s BEPS Plan, complies with the minimum standards under Action 6 ‘Prevention of tax treaty abuse’ and Action 14 ‘Making Dispute Resolution Mechanisms More Effective’, which are reflected in our DTCs.

The OECD recommendations provide for the possibility to choose a bilateral or multilateral approach to implement the new provisions of the 2017 OECD Model Tax Convention on Income and on Capital in respect of the minimum standards under Action 6 and Action 14 in the tax treaties (in force or future).

Under BEPS Action 6 ‘Prevention of tax treaty abuse’, Contracting States are entitled not to grant a tax treaty relief if one of the main purposes or one of the main objectives of a given transaction or arrangement is to obtain such treaty relief.

The policy of the Republic of Bulgaria is aimed at including specific measures against treaty abuse in all new and existing Bulgarian DTCs, as well as at covering the minimum standard for prevention of treaty abuse.

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the ‘Multilateral Convention’) is crucial in this regard, since it allows participating jurisdictions to modify the application of their tax conventions without renegotiating each tax convention separately. However, the Multilateral Convention has not been signed by all jurisdictions with which Bulgaria has concluded a DTC. Also, some countries have not included the DTC with the Republic of Bulgaria in their lists of agreements, therefore the respective DTC with that country will not become a Covered Tax Agreement under the Multilateral Convention. In this case, the Multilateral Convention will not have effect with regard to such agreements.

The Republic of Bulgaria plans to amend, with a view to introducing the OECD minimum standards, those DTCs that have not been amended when the Multilateral Convention enters into effect for Bulgaria.

Priority 5 – Countries outside the scope of Priorities 2 and 3 that have the potential to become important economic partners of Bulgaria

This group includes countries that have so far not been among our country’s traditional significant economic partners, but which demonstrate a willingness and potential for developing mutually beneficial bilateral relations. The conclusion of tax treaties with such countries provides a better competitive position for Bulgarian business entities, stimulates and promotes business and investments, creates opportunities for the development of new sectors. 

 

IV. CRITERIA TO DETERMINE AND SELECT STATES WITH WHICH TO SIGN A NEW DTC

The decision of the Republic of Bulgaria to start negotiations with a country/jurisdiction for the conclusion of a new DTC, with the exception of the countries identified in priority areas 1, 2 and 3 depends on the following criteria:

• Economic relations with the respective country/jurisdiction (intensity, volume and nature of imports and exports, potential for development, investments, economic sectors of cooperation, national or international economic projects, intensity of temporary labour migration, etc.);
• Political considerations (political system and stability, bilateral arrangements, bilateral relations – history and perspectives, priorities and initiatives for strengthening bilateral cooperation, membership in regional and international organisations, presence of Bulgarian community (diaspora), etc.);
• Characteristics of the legal and tax system of the respective country/jurisdiction (type of legal system, features of corporate and commercial law, features of taxation of individuals and legal entities, system of withholding tax, tax preferences (reliefs) and preferential tax regimes regarding specific incomes and/or persons, etc.);
• Positive statements received from the Ministry of Economy and Industry and the Ministry of Foreign Affairs, including information on the level and prospects of bilateral relations with the respective jurisdiction, which is also part of the analysis described above;
• ‘Offshore’ jurisdiction status (analysis and assessment of preferential tax regimes, harmful tax practices, listings in various lists such as lists of non-cooperative tax jurisdictions or with preferential tax regimes, rating assessed by the Global Forum for Transparency and Exchange of Information for Tax Purposes, etc.).
• Scope of the tax treaty network of the respective country/jurisdiction (number of treaties and partners, specific provisions, withholding policy, signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting and the Convention on Mutual Administrative Cooperation in Tax Matters, special features of the DTC Model of the relevant jurisdiction, etc.);
• Administrative considerations in the negotiation and implementation of DTCs (availability of administrative capacity and level of qualification, budgetary constraints, tax treaty negotiation schedule and work load of the tax treaty team, necessary resources to meet the legal requirements for negotiation, potential possibilities for administering the implementation of a new DTC, etc.);
• Level of exchange of information for tax purposes (effective exchange of information, potential for development and need for deepening, ratings, etc.);
• Other jurisdiction-specific considerations.

 

V. DOUBLE TAXATION CONVENTIONS

According to the provision of Article 5(4) of the Constitution of the Republic of Bulgaria, international treaties ratified under a constitutional procedure, promulgated and entered into force for the Republic of Bulgaria, are part of the domestic legislation of the country and take precedence over those provisions of the domestic law which are conflict with them. This means that the tax conventions, being international treaties, take precedence over domestic rules.

5.1. Models of DTC

There are two main models of tax conventions that are used as a basis for negotiating and concluding new DTCs or for amending existing DTCs – the OECD Model Tax Convention on Income and Capital and the United Nations Model Tax Convention. A case of double taxation arises when one State (the State of residence) taxes its residents on their worldwide income, including for their income from foreign sources, and at the same time another State, in which the income (the source country) is generated, imposes a tax on that income.

The OECD Model Tax Convention allocates in a sufficiently balanced manner the right to taxation between the country of residence and the source country. The OECD Model Tax Convention was developed in 1963 and has so far undergone a number of revisions, with the last one being in 2017. Today, more than 3000 tax treaties around the world are based on this model.

The United Nations Model Tax Convention is similar to that of the OECD, but gives wider taxing rights to the source country. The UN Model was drafted in 1980 and is designed to regulate tax relations between developed and developing countries. This model extends the scope of income that may be taxed in the source country, and the unbalanced use of such approach could also lead to a negative impact on interstate trade and investment.

The Republic of Bulgaria in its treaty practice follows as the main model the OECD Model Tax Convention. However, in certain cases, a deviation from this Model is allowed – for example in the case of adoption of clauses from the UN Model, in specific situations according to the agreed balance; when using alternative clauses proposed in the OECD Model Commentary, as well as when negotiating specific clauses outside the two DTC Models, with a specific treaty partner.

The policy of the Republic of Bulgaria regarding the choice of clauses in the DTC is directly dependent on the specific treaty partner, the interests of Bulgaria, the nature and scale of the most intensively developing economic relations between the countries, the relative economic advantages of Bulgaria, the prospects for the development of economic relations in certain areas, as well as the development of the negotiations themselves.

5.2. Negotiation process

The DTC policy sets out the most general principles adhered to by the negotiating teams when negotiating bilateral DTCs of the Republic of Bulgaria. The negotiation process on a case-by-case basis depends both on the features of the tax legislation of each of the partners and on the characteristics of the economic relations, and on the fact that negotiation of a new treaty is only possible when a compromise between the two contracting states is reached, including mutual concessions.

In negotiations for a DTC, each provision of the agreement is analysed, as all provisions are linked in a synergistic entirety, with particular importance and priority given to certain safeguard clauses aimed at preventing treaty abuse.

When preparing for the negotiations for a specific DTC, the Republic of Bulgaria drafts a Bulgarian Model to serve as a basis for negotiation, which is approved by the Council of Ministers. The Bulgarian draft is submitted to the treaty partner, which in its turn is also provides a draft of the respective DTC.

Each negotiated convention is the result of a balance reached between the two counter-proposals of the partners.

In its treaty practice, the Republic of Bulgaria normally proposes for discussion the following clauses, deviating from the OECD Model Tax Convention:

• With regard to Article 4 of the OECD Model Tax Convention

Due to the specific features of its domestic legislation, Bulgaria proposes as a “tie-breaker rule” for persons other than individuals the criterion ‘place of incorporation’.

• With regard to Article 7 of the OECD Model Tax Convention

Bulgaria proposes that the provision of Article 7 of the OECD Model ‘Business Profits’ be negotiated in the version in force before 2010.

• With regard to Article 8 of the OECD Model DTC Tax Convention

Bulgaria proposes that Article 8 of the OECD Model ‘International Transport’ be supplemented to cover international road and rail transport.

• With regard to Article 10 of the OECD Model DTC Tax Convention

Bulgaria proposes a specific provision limiting the application of tax relief to dividends if such income is classified as a ‘hidden distribution of profits’ – a term used in the Bulgarian legislation for income accrued or paid to related parties without economic justification.

Bulgaria proposes to include into the scope of the definition of the term ‘dividends’ income from liquidation shares.

• With regard to Article 12 of the OECD Model Tax Convention

Bulgaria proposes to negotiate minimum rates for taxation at source on royalties.

Bulgaria proposes to include in the scope of the definition of the term ‘royalties’ payments of any kind for the use of, or the right to use, industrial, commercial or scientific equipment.

• With regard to Article 23 of the OECD Model Tax Convention

Bulgaria eliminates the double taxation on the income of its residents by applying only the tax credit method in accordance with Article 23 B of the OECD Model.

• With regard to Article 25(5) of the OECD Model DTC Tax Convention

Bulgaria refrains from including an arbitration clause in its tax treaties.

 

VI. ANNUAL OPERATIONAL PLAN

The policy of the Republic of Bulgaria regarding double taxation conventions is implemented through the preparation of annual operational plans by the National Revenue Agency.

Each operational annual plan shall include specific actions under the priority policy areas.

 

CONCLUSION

The policy of the Republic of Bulgaria regarding double taxation conventions offers a long-term perspective for the development of DTCs in accordance with international tax standards and OECD best practices.

The DTC policy is an important and integral part of the state tax policy of the Republic of Bulgaria and is the basis for realising government priorities for economic growth and development, ensuring the competitiveness of the Bulgarian economy and supporting investments and innovations.

The annual operational plans are the basis for the practical implementation of the policy, outlining the activities needed to achieve the objectives set for the priority areas identified.

 

[1] The DTC between the Republic of Bulgaria and the Federal republic of Yugoslavia applies in respect of Serbia and Montenegro.

[2] Pillar 2 is an element of the reform of the international taxation rules, according to the historic agreement reached on 8 October 2021 by almost 140 countries of the OECD/G20 Inclusive Framework.