Let us consider the following situation from a tax perspective: a Bulgarian individual is the owner of a commercial company registered under the laws of Dubai, United Arab Emirates, and receives remuneration from that company under a management contract. How and where should this income be taxed?
Bulgaria has had a Double Taxation Agreement (DTA) in force with the United Arab Emirates since 2009. The DTA is a bilateral international treaty concluded with the aim of promoting economic ties between the countries and avoiding double taxation on income and property, without creating opportunities for tax evasion or avoidance.
In order to clarify the application of the Double Taxation Convention and domestic legislation, the following questions should be answered:
1. In which country is the recipient of the income a resident?
Classifying an individual as resident or non-resident is of paramount importance in determining their tax liabilities, since, pursuant to Articles 6 and 7 of the Personal Income Tax Act /PIT Act, resident individuals are liable for tax on income derived from sources within the Republic of Bulgaria and abroad, whilst foreign individuals are liable only for tax on income derived from sources within the Republic of Bulgaria. Pursuant to Article 4(1) of the Personal Income Tax Act, a resident individual, irrespective of nationality, is a person:
- who has a permanent address in Bulgaria, or
- who stays in Bulgaria for more than 183 days in any 12-month period, or
- which has been sent abroad by the Bulgarian State, its authorities and/or organisations, or by Bulgarian enterprises, and the members of his or her family, or
- whose centre of vital interests is in Bulgaria.
As can be seen from the provision cited, the criteria on the basis of which a natural person is classified as resident are listed as alternatives; that is to say, it is sufficient for the person to fall within one of the scenarios set out above to be regarded as resident within the meaning of Bulgarian legislation. An exception is provided for only in the cases set out in Article 4(5) of the Income Tax Act, namely: a natural person is not considered resident if they have a permanent address in Bulgaria but the centre of their vital interests is not located in the country. In this regard, it should be borne in mind that the centre of vital interests is deemed to be in Bulgaria where the individual’s interests are closely linked to the country. In determining these, consideration may be given to family, property, the place from which the individual carries out their employment, professional or business activities, and the place from which they manage their property (Article 4(4) of the Income Tax Act). In this specific case, the individual resides in Bulgaria, spends only part of their time in Dubai in connection with the company’s activities there, their family is in Bulgaria, they own property in Bulgaria and manage their business from Bulgaria. In this regard, we consider that the individual will be defined as a resident of Bulgaria, which means that they will be subject to taxation under the Income Tax Act, both on income from sources within the country and from abroad.
2. What is the nature of the income?
An individual resident in Bulgaria receives income from his company in Dubai under a management contract. He does not carry out any work under an employment contract.
3. Is this type of income covered by the Double Taxation Convention? What does the Double Taxation Convention stipulate regarding the taxation of this type of income?
In accordance with Article 15(1) of the Double Taxation Agreement, subject to the provisions of Articles 16, 17, 18, 19 and 20 of this Agreement, salaries, wages and other similar remuneration received by a resident of one Contracting State in respect of an employment shall be taxable only in that State, unless the work is performed in the other Contracting State. If the work is so performed, the remuneration thus received may be taxed in that other State.
Pursuant to Article 15(2). of the Double Taxation Convention, notwithstanding the provisions of paragraph 1 of this Article, remuneration received by a resident of one Contracting State for work performed in the other Contracting State shall be taxable only in the first-mentioned State if: (a) the recipient is present in the other Contracting State for a period or periods not exceeding a total of 183 days in the relevant tax year, and (b) the remuneration is paid by an employer or on behalf of an employer, who is not a resident of the other Contracting State, and (c) the remuneration is not paid on behalf of a permanent establishment or a fixed base which the employer has in the other Contracting State.
Under Article 18 of the DTA, directors’ fees and other similar payments, received by a resident of one Contracting State in his capacity as a member of the board of directors or of another similar body of a company which is a resident of the other Contracting State, may be taxed in that other State.
This means that income from a company management contract, where the contracting party is resident in Dubai, paid to an individual resident in Bulgaria may be subject to tax in Dubai.
4. In which country will tax be payable, and in which country will the Double Taxation Convention apply?
In the event that income paid under a company management contract to a resident of Dubai is subject to tax in Dubai, the Double Taxation Agreement will apply in Bulgaria.
5. What documents must the recipient of the income obtain in the country where the income was received and the tax paid, in order to be able to apply the Double Taxation Agreement in Bulgaria?
The recipient of the income should obtain a certificate or other similar document from the Dubai tax authorities confirming the gross amount of the income paid and the amount of tax paid.
6. Should income from Dubai be declared in Bulgaria?
An individual resident in Bulgaria receives income under a management contract for a commercial company registered under the laws of Dubai, United Arab Emirates, and this income is taxed there. In Bulgaria, for the relevant tax year, they must complete Annex No. 9 – Application of methods to avoid double taxation for income declared in Annexes Nos. 1, 2, 3, 4, 5 and 6 of the Annual Tax Return under Article 50 of the Income Tax Act.
