Tax at source for interest income on loans from a foreign entity to a Bulgarian company

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A Bulgarian company concludes a loan agreement with a foreign company, which doesn’t have a place of business activity in the country. The interest of the loan agreement is an income for the foreign entity and under the Bulgarian laws, it is a subject to tax with a tax at source, which is final. 

This is applicable in the hypothesis of loan agreements which are concluded between a Bulgarian legal entity and a foreign legal entity which doesn’t have business activity in our country. The foreign company, in its capacity as a lender, provides to the Bulgarian company a loan with a certain interest and terms, in which the Bulgarian company is obliged to repay the utilized loan and accumulated interest. For the term of the agreement the Bulgarian company reports expenses, because it shall pay loan interests to the lender, subject to a tax at the source. This tax is levied also an all type of penalties and compensations, except for the compensations of insurance contracts which are charged by local residents or sole traders or foreign legal persons and soles traders by place of business activity or an exact base in the country to foreign legal persons advantage.

In these cases the tax is deducted by the Bulgarian company (as a payer of the income), which is obliged to pay it to the budget at the end of the month, after the quarter of the income accrual. It must be noted that “the levying of the tax” does not necessarily coincide with “the payment of the income” for interests to the foreign entity. It is possible in the commercial practice to agree that the interest is due upon a given maturity date, but for whatever reason the interest was not transferred on the same date. In these cases the law doesn’t consider the actual money transfers and the factual redemption of the loan but the accrual of the income is done according to the agreed between the parties and the payer – the Bulgarian company is obliged to charge and deduct the due tax at the source. In case of long-term loan agreements, even it isn’t explicitly agreed, the applicable accounting standards require the charging of the interest for annual base at least, which is also a reason for a charging (and a payment on time) of the tax.

In the cases when a Bulgarian entity had an obligation to charge and pay a tax at the source for interest incomes, for example for a loan with a foreign legal entity without a place of business activity in the country, but it isn’t charged and paid to the budget, the local entity owes interests on the uncharged and the unpaid tax. It should be noted that the Corporate Income Tax Act provides special hypotheses and certain exceptions, which can incur different tax treatment, which should be considered for each specific case.

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