On January 8, 2016 the UK HM Revenue & Customs issued a media release announcing that on December 15, 2015 the Convention between the United Kingdom of Great Britain and Northern Ireland and the Republic of Bulgaria for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains (Hereafter: the new DTA) entered into force.
The DTA will replace the Convention between the Government of the People’s Republic of Bulgaria and the Government of the United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation with respect to taxes on income and capital gains, which was signed at London on September 16, 1987.
Based on Article 28 of the new DTA (“Entry into force”) the fact that the new DTA entered into force on December 15, 2015 means that the provisions of the DTA shall have effect:
(a) in Bulgaria:
(i) in respect of taxes withheld at source, for amounts paid or credited on or after January 1, 2016;
(ii) in respect of other taxes, for taxable years beginning on or after January 1, 2016;
(b) in the United Kingdom:
(i) in respect of income tax and capital gains tax, for any year of assessment beginning on or after April 6, 2016;
(ii) in respect of corporation tax, for any financial year beginning on or after April 1, 2016;
(iii) in respect of taxes withheld at source, for amounts paid or credited on or after January 1, 2016.
Below we will discuss some of the provisions of the new DTA of which we think they might interest our readers.
Taxes covered
Based on Article 2, Paragraph 3 of the new DTA (“Taxes Covered”), the existing taxes to which the Convention shall apply are:
(a) in Bulgaria:
(i) the personal income tax;
(ii) the corporate income tax;
(b) in the United Kingdom:
i) the income tax;
ii) the corporation tax; and
iii) the capital gains tax;
Paragraph 4 of Article 2 of the new DTA subsequently arranges that the new DTA shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes.
Permanent Establishment
Paragraph 3 of Article 5 of the new DTA (“Permanent Establishment”) arranges that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than 12 months.
Immovable property
Article 6, Paragraph 1 of the DTA (“Income from Immovable Property”) arranges that income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.
With respect to immovable property Article 13, Paragraph 1 of the new DTA (“Capital Gains”) arranges that gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.
Article 13, Paragraph 2 of the new DTA subsequently arranges that gains derived by a resident of a Contracting State from the alienation of shares, other than shares in which there is substantial and regular trading on a Stock Exchange, or comparable interests, deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.
Associated enterprises
Article 9, Paragraph 2 of the new DTA (“Associated Enterprises”) contains a so-called appropriate adjustment clause.
Dividends
With respect to the withholding taxes a Source State is allowed to withhold over dividend distributions Article 10, Paragraph 2 of the New DTA (‘Dividends”) determines the following:
“However, dividends paid by a company which is a resident of a Contracting State:
(a) may also be taxed in that State and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:
(i) 5 per cent of the gross amount of the dividends, except as provided in subparagraph a) (ii);
(ii) 15 per cent of the gross amount of the dividends where those dividends are paid out of income (including gains) derived directly or indirectly from immovable property within the meaning of Article 6 by an investment vehicle which distributes most of this income annually and whose income from such immovable property is exempted from tax;
(b) shall, notwithstanding the provisions of subparagraph (a), be exempt from tax in that State if the beneficial owner of the dividends is:
(i) a company which is a resident of the other Contracting State (other than where the dividends are paid by an investment vehicle as mentioned in subparagraph (a) (ii)); or
(ii) a pension scheme.”
Article 10, Paragraph 3 subsequently arranges that the provisions of paragraph 2 of Article 13 of the new DTA shall not apply in the case of a dividend which is a hidden profit distribution under the laws in force in Bulgaria.
Article 10, Paragraph 7 of the new DTA contains an anti-abuse clause, which reads as follows: “No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid to take advantage of this Article by means of that creation or assignment.”
Interest
Article 11, Paragraph 2 of the new DTA (“Interest”) maximizes the withholding tax that a Source State is a allowed to withhold over interest payments to 5 per cent of the gross amount of the interest if the beneficial owner of the interest is a resident of the other Contracting State.
Artilce 11, Paragraph 3 of the new DTA subsequently arranges that a Source State is not allowed to withhold withholding taxes over interest payments beneficially owned by a resident of the other Contracting State to the extent that such interest is paid:
(a) with respect of indebtedness arising as a consequence of the sale on credit of any equipment, merchandise or services;
(b) on any loan of whatever kind granted by a financial institution;
(c) to a pension scheme;
(d) to the Government of that other State, a political subdivision or local authority thereof or to the central bank of that other State; or
(e) between companies, where one company holds directly at least 10 per cent of the capital of the other company for at least one year prior to the payment of the interest or where both companies are held by a third company which holds directly at least 10 per cent of the capital of both aforementioned companies for at least one year prior to the payment of the interest.
Article 11, Paragraph 8 of the new DTA contains an anti-abuse clause, which reads as follows: “No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.”
Royalties
Article 12, Paragraph 2 of the new DTA (“Royalties”) maximizes the withholding tax that a Source State is a allowed to withhold over royalties to 5 per cent of the gross amount of the royalties if the beneficial owner of the royalties is a resident of the other Contracting State.
Article 12, Paragraph 7 of the new DTA contains an anti-abuse clause, which reads as follows: “No relief shall be available under this Article if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the royalties are paid to take advantage of this Article by means of that creation or assignment.”
Other
The New DTA contains an Article 22 (“Limitation of relief”). Furthermore the new DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 24), the Exchange of Information (Article 25) and regarding the Assistance in the Collection of Taxes (Article 26).
Click here to be forwarded to the text of the new DTA as available on gov.uk, which will open in a new window.
Are you looking for an other DTA? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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