DTA is an abbreviation for the Double Taxation Agreement (DTA).
Agreements for the avoidance of double taxation are bilateral or multilateral international treaties, which are concluded with the aim of promoting economic ties between states and avoiding double taxation on income and property, without creating opportunities for tax evasion or avoidance. The rules of international law set out in the Vienna Convention on the Law of Treaties, which was ratified by Bulgaria in 1987, apply to these agreements.
Agreements for the avoidance of double taxation do not create new obligations for taxpayers, but rather allocate taxing rights between the contracting states.
Bulgaria has 70 double taxation agreements in force, covering 71 countries (the double taxation agreement with the Federal Republic of Yugoslavia applies to the Republic of Serbia and Montenegro). Pursuant to Article 5(4) of our Constitution, such agreements, once ratified in accordance with the established procedure, promulgated and brought into force, form part of our country’s domestic law and take precedence over any provisions of our domestic legislation that conflict with them.
Some of the key principles underpinning the operation of the double taxation agreements concluded by Bulgaria are as follows:
- ensuring a certain level of certainty regarding the rules applicable to cross-border transactions, with a view to promoting investment, trade, and the movement of technology and personnel;
- granting the source country the right to tax certain categories of income and profits, often at a reduced rate;
- the reduction or elimination of double taxation by providing a method for avoiding double taxation;
- providing for the possibility of initiating a mutual agreement procedure where the actions of one or both Contracting States result or will result in taxation that is inconsistent with the provisions of the DTA;
- preventing opportunities for tax avoidance or evasion by:
- ensuring rules for the allocation of profits that take account of the arm’s length principle;
- preserving the right of the Contracting States to apply the provisions of their domestic legislation relating to transfer pricing or aimed at combating tax avoidance;
- to facilitate the exchange of information between the contracting states.
Generally, double taxation conventions apply only to direct taxes – that is, taxes on income and on property. In Bulgaria, the taxes to which double taxation conventions apply are, in general:
- personal income tax,
- corporate income tax,
- patent duty.
The DTAA sets out two main methods for avoiding double taxation:
- standard tax credit – most commonly applied to passive income: dividends, interest, royalties and licence fees;
- progressive tax relief – this applies to all other types of income.
Other methods include the ‘full tax credit’, ‘standard tax credit’ and ‘fictitious tax credit’.
The Double Taxation Conventions provide answers to the following questions:
- When a person is deemed to be a resident of one or the other State under the agreement;
- How should the income of a resident of one State arising in the other State be taxed?
A Double Taxation Agreement may apply to persons who are residents of either of the two contracting states under the Agreement and to income arising in either of the two contracting states under the Agreement. The following scenarios are possible:
- If the recipient of the income is a person resident in Bulgaria
1.a. income derived from another country under a double taxation agreement, which is not taxed in that country but in the country where the recipient is resident – Bulgaria
1.b. income derived from another country under a double taxation agreement, which is taxable in that country, whilst in the country where the recipient is resident – Bulgaria – the double taxation agreement shall apply
2. If the recipient of the income is a resident of another country under a double taxation agreement
2.a. income derived from Bulgaria which is not taxed in Bulgaria but in the country where the recipient is resident
2.b. income derived from Bulgaria, which is to be taxed in Bulgaria, whilst the double taxation agreement is to apply in the country where the recipient is resident
In order to clarify the application of the Double Taxation Convention and domestic legislation, the following questions should be answered:
- In which country is the recipient of the income a resident?
- What is the nature of the income?
- What tax is payable on this income under local legislation?
- Is there a double taxation agreement between Bulgaria and the other country?
- Is this type of income covered by the Double Taxation Agreement?
- What does the Double Taxation Convention stipulate regarding the taxation of this type of income?
- In which country will tax be payable, and in which country will the double taxation agreement apply?
- 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 the other country?
In Bulgaria, the National Revenue Agency (NRA) issues the Certificate of Local Resident. This is issued following the submission of an Application for the Issuance of a Certificate of Local Resident Status (Form No. Okd-273) to the relevant regional office of the NRA where the person is registered. The issued Certificate of Local Person certifies the status of ‘local person’.
