How a “loan” can become an “income with VAT”?

gold-coins-novacon.bulgariaDuring tax audits the way the company activities were financed is often reviewed. Borrowed funds, which were used to finance the company, are covered by loans and additional financing (regardless of the legal form, we will treat them as “loans”).

Generally, the following prerequisites are necessary so that tax complications are avoided:

  1. Loans must be supported by relevant documents (loan contract or protocol of the shareholders’ for additional funding; bank statement, which clearly shows the date of receipt of the loan amount, etc.)
  2. The lender must be able to prove the origin of funds, used for granting the loan.

If the above conditions are not met, the tax auditors might decide that the received funds are not borrowed, but are “hidden” settlement for a commercial deal (transaction) – i.e. the whole loan amount can be treated as an income (taxable at both 10% corporate tax and, if the company is VAT registered, at 20% VAT).

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