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Since 1 January 2010 between Bulgaria and Austria a new double taxation agreement (DTA) is in force. It corresponds with the new economic and international relations and their development and is aimed at promoting them. It applies to the income tax of individuals, corporation tax, withholding tax and property tax. The inheritance tax is excluded from this Agreement, i.e. in Austria-Bulgarian inheritance cases double taxation in not excluded.
The new agreement adheres structurally and in terms of content to the OECD model convention. In comparison to the previous DTA, dated back to the year 1984, there are some substantial changes.
The first major change is the personal scope of the Agreement. Under the old agreement the nationality of the entity or person was a prerequisite for it to qualify as a resident in Bulgaria. According to the new Article 4 the domicile or habitual residence can already establish residency. Austrians with their domicile or habitual residence in Bulgaria can therefore be subject to taxation with a flat tax of ten per cent for individuals in Bulgaria (or 15 percent for sole proprietors/traders). The residence criterion was formerly decisive for the state in which freelancer´s capital gains are taxable. According to the new DTA they are to be taxed in the country of source, thus Austrian freelancers could be taxable in Bulgaria, if their activity is carried out on a permanent basis in Bulgaria.
Furthermore, the agreement also contains specific rules that govern conflict issues (for example concerning persons, entities with residence in more than one State – see Art.4 (2) DBA).
Next, the term “permanent establishment” has been expanded. Permanent establishment is justified not only by the fixed place of business through which the business of an enterprise is wholly or partly carried out, but also includes a place of management, a branch, factory, etc. (Art. 5 (2).
A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months (Article 5 (3) DBA).
Under Article 23, paragraph 2, double taxation on the part of Bulgaria is avoided through the following:
Incomes of residents in Bulgaria, which are taxed in Austria in accordance with the agreement, are not subject to taxation in Bulgaria. Where in accordance with any provision of the agreement income derived or capital owned by a resident of Bulgaria is exempt from tax in Bulgaria, Bulgarian authorities may nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital. This amount may not increase over that part of the tax credit that is attributable to the income derived from Austria.
The agreement establishes the principle for equal treatment of nationals of the States Parties (Art.24 DAB) as the guiding principle of the tax policy in the States Parties. Furthermore, the agreement provides for mechanisms, which should serve to prevent unjust taxation (see the mutual agreement procedure under Art.25 DBA). It also includes a provision providing for a comprehensive and efficient exchange of information, which is to lead to transparency concerning the conducted transactions and interstate flows of money. In this context, it is admissible even to provide such information, in cases of banking secrecy (See Art.26, paragraph 3 and 5).
The double tax agreement´s framework forms, an important foundation for current and future investments in cases of cross-border activities. A flat tax of ten percent for individuals (or 15 percent for sole proprietors) and corporations and a five percent withholding tax on dividends attracts the attention of potential investors in Bulgaria.