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16 Feb


Dear colleagues, clients and readers, before stating our opinion about the amendments to Bulgaria’s Corporate Income Tax Act, VAT Law and the Income Taxes on Natural Persons Act made on 01.01.2016, I intend to give short clarification concerning “a weekend tax” and its essence and features in reality, whereas many our clients have asked us whether it is some new tax and which Bulgarian law details it.
To put it in a nutshell, amendments have been made to many Bulgarian tax laws on the topic of what the tax treatment of the personal use of commodities, services, assets and other “property” of trading companies will be, whichever is given possession to natural persons, associated in one way or another with the above-stated trading company. Under the concrete hypothesis, we differentiate, whether these are:
•workers or employees,
•whether they are managers,
•blood relatives of the above-mentioned owners, managers, of a staff or
•completely “third” persons- employees at companies of clients, for example.

The personal use of business assets, which are ownership of a trading company, concerns many elements. We can draw up and submit an exemplary list, which however is not full and depends, to a great extent, on the business activity of a trading company. Examples of such personal use are:
•telephony (meaning conducted telephone conversations, provided Short Message Service (SMS), paid over the telephone bills for paid stay or for parking a vehicle in a blue zone, charging of vouchers through SMS and others, which are paid together with the bill due to the mobile network operator),
• office telephones (which means the very telephone receiver), especially if they are expensive,
•the use of office cars, reporting and accounting of fuel purchased for them, repairs and other expenditures associated with an automobile,
•the use of office laptops, tablets/tablet computers, computers and others.
•The use of office wi-fi and Internet connection and so on.
As far as such personal use is concerned, the National Revenue Agency (NRA) on 22.01.2016 issued an instruction filed with an outgoing Number 24-00-15 “For the tax treatment, under VAT Law, of the use and separation of commodities for the personal needs of a person liable for tax, of an owner, of workers and employees.”
In our opinion, this instruction does not exhaust the practical issues of the enforcement of amendments to the Bulgarian tax legislation, made after 01.01.2016.
Hereinafter is given the first example.
Whenever you should declare the ratio between personal and corporate use, it is not made clear, whether one calculates and declares solely personal use or one determines also the use for corporate needs in relation to personal use and how-of every business asset individually or generally. Our opinion on this issue is that by presumption, it stands to reason, that corporate assets are used for corporate needs and whereas, personal use is an exception to this business practice, only it must be calculated and declared.
Second example
The second problem of a business practice concerns the form of a formal written statement. New blanks and forms will come into force on 01.02.2016, which means that there will be no adequate form for the tax return of VAT, which is expected to be filed for the month of January year 2016, but in which one must declare this personal use.
According to the informal opinion, expressed by the jurists working at NRA, you can correct the declared personal use for the month of January during the month of February. Then, the above-stated new forms will be in force, which gives an opportunity for that.
Third example
Another issue, which remains unclear from a practical and theoretical point of view, is the problem of the acquisition of “business assets”.
Firstly, there is no clear concept and definition of what a business asset is! There is no interpretative norm for this matter. The jurists, working at NRA, are prone, to a greater extent, to give the opinion, that these business assets are all assets of group 20 and group 30 and it will be the most probable answer to this question. 30th group includes commodities and materials, which raises questions concerning the formation of personal use, like:
•a work salary or
•a social benefit
•a commercial deal for a legal person, being civil-legal one from the viewpoint of a natural person
•a donation
The question about a tax base and whether a natural person has enriched from this deal and with how much remains open. These issues have a profound effect on the Income Taxes on Natural Persons Act and Bulgaria’s Corporate Income Tax Act, as well as have a reflection in Bulgaria’s Code of Social Security and in Bulgaria’s Labor Code. Besides NRA, the competent public institutions are the National Social Security Institute and the Labor Inspectorate, because this personal use affects a complex of different legal relationships. I shall dwell on it in greater detail hereinafter in this legal expert presentation.
Fourth example
Next, I would like to pose the question about the moment of business asset acquisition. The amendments to the relevant law came into force on 01.01.2016. It means, that one will apply the rules for calculation and declaration of personal use to all business assets, acquired after this date.
I would like to put and tackle the question if the above-mentioned business asset is acquired before the date of 01.01.2016, being incorporated in the tax depreciation schedule, but still is not depreciated/amortized completely, how one should calculate and declare personal use-whether from the date of coming into effect of the amendments, or from the date of its acquisition? Our opinion is that whereas the issue concerns a business asset, to which we give the full right of tax credit, it is logical to declare from the acquisition date of the business asset, which still is not written off. In addition to it, there is second difficult point/aspect of this hypothesis. The instruction of NRA sets a 6-month deadline for filing the relevant tax return and unclear directions forwards and backwards in time follow.
The team opinion of Vesta Consult, which coincides with that of most of the jurists, working at NRA (but not with opinion stated by all of them) is as follows.
1. The above-mentioned six-month period is instructional. It is more important for the established deadline to be reasonable. In other words, it can be longer or shorter, but the important point is to be relevant to the concrete case, which is being reviewed (no matter whether it is a computer, a car, a telephone receiver or something else).
2. Filing a tax return is based on the forecast of future personal use, as the persons concerned are given the alternative opportunity, if are unable to make a proper forecast, after some period of time passes, to declare their real personal use for the past period of time. For example, you can declare 100% corporate use of a company car and after that can describe 10% personal use and 90% corporate use of this company car, by means of which the company owner accidentally went once to do some personal work at a remote place, traveling by car a great distance outside a city. The same holds true for the confused forecasted ratio. For example, a manager has a company car at his disposal by means of which, besides taking care of the line of business of a trading company, travels from his home to his workplace and vice versa. The hypothesis of a journey from one’s home to one’s workplace and vice versa is absolutely defined as personal use. If we assume, that such use in terms of kilometers is a constant value, which is for example 20% of the automobile use, you can freely declare 20% to 80% and you are entitled to make this forecast directly at the end of the year (the time limit is not compulsory, but should be reasonable). In the case reviewed above, the manager can quit his job in 1 month and it turns out that the car will be used 100% for corporate needs. Then, you can correct the already made forecast of a ratio. I would like to focus your attention on the interesting issue, that if the declared ratio is with a smaller tax base and at the moment of making a correction, you establish, that it is higher/greater, you may ask whether there will be a punitive interest rate. Our expert opinion is that most probably, then will be such.
What approach should be taken, whenever one provides a service with a business asset, which is completely amortized, but is still used and when this asset become subject to personal use? In the concrete case, the colleagues working at NRA consider, that one should determine the tax base solely on the grounds of the direct expenses, associated with use or at all, one should not declare personal use, because the business asset is written off. We do not agree completely and as a whole, we do not have a unanimous opinion on this issue. Until the Bulgarian business practice is harmonized through the instructions of NRA, we would like to advise you to be on the safe side by fulfilling market conditions at the moment of the provision of this service, under the provision of article 1, paragraphs 1 and 2 of the Commercial law, which stipulates, that traders are natural or legal persons, who make deals by profession in connection with article 63, paragraph 1 of the Commercial law, which clearly states, that commercial companies are the amalgamation of “two or more persons for making commercial deals with common means”, or in other words commercial companies are set up with a view to the realization of a corporate profit and under the provision of article 6, paragraph 3 in connection with article 9, paragraph 3 of Bulgaria’s VAT Law, the free deliveries of certain commodities or the free provision of certain services must be made equal/equalized to the paid ones. The main feature of deals closed against payment, from which at least one party is a trader, is that the same are made equal/equalized to the commercial ones with respect to the trader and should be made under market conditions.

There is an interesting sequel from the viewpoint of Bulgaria’s Corporate Income Tax Act and the Income Taxes on Natural Persons Act with regard to the gratuitous deliveries of goods and the free provision of services, which are equalized to the paid ones. As far as their recipient is concerned-a natural person, how should they be treated: whether as a social benefit, whether as an income (if it is an income – then what: employment or non-employment one and how shall one prove whichever of the two above-mentioned options) or as a donation and must a natural person stipulate them in one’s annual tax return? In this case, it will not be difficult to calculate the use of a car ex officio or telephony from an office telephone (by means of the print-out of the certificate of telephony), but I would like to bring up quite complex from a practical point of view questions concerning the declaration of the value of the personal use of an office laptop, of office Internet and of other similar things. The tax base for the self-taxation of a trader should be a market price or must be calculated on the grounds of direct expenditures.
A substantiated and widespread opinion among Bulgarian colleagues is that the so-called personal use by workers and employees of certain business assets – a company car, an office laptop, a tablet computer, a smartphone and so on, should be recorded as a part of gross employment remuneration and one must assign some value to them, as in this way, you levy usual taxes and social security taxes on them, but save the time of natural persons for their declaration as a donation or as a non-employment income. Moreover, you avoid different tax treatment. For example, if you have determined, that it is a donation or a non-employment income, public officials from the Labor Inspectorate may claim and demand to equalize the legal relationship to a concealed employment income. On these statutory grounds, we support the option for this personal use of managers and of a remaining staff to be noted down and declared as a part of the remuneration under a legal employment relationship.

You can draw up written formal contracts, as you may equalize to a donation or a rent or a financial lease. In this case, you pay a corporate tax on the performance and levy VAT on it. You must have in mind, that if your documents are not persuasive, you may face a problem, due to different treatment, during a tax audit in the future. Exactly for this reason and herein, we advise you to be on the safe side, by satisfying market conditions at the provision of this service, on the grounds of the same argumentation.

Fifth example

Last but not least, I would like to dwell on the issue of depreciation of assets. The jurists, working at NRA, advise you to adhere to a tax depreciation schedule in the following cases. Wherever and whenever, business assets are depreciated for a period of two or three years under a tax depreciation schedule, personal use must be calculated on this tax base. Wherever and whenever, depreciation under a tax depreciation schedule lasts for 6,7 or more years, personal use must be calculated on the tax base of the business assets calculated for 5-year-long depreciation (which means the higher one). It holds true for the cases of depreciation of chattels/movable assets. If the business assets in question are immovable, then one determines personal use on the grounds of an asset with 20-year-long depreciation for these business assets, which are depreciated for more than 20 years. For the sake of these assets, which are depreciated for less than 20 years, personal use is calculated on the grounds of a tax depreciation schedule with incorporated all consumables and other direct expenses.

I hope that the information given in this article will be useful to you. We reserve the right to publish and post online changes in the commented issues after getting the official opinions from NRA on the questions asked by us.

From the team of Vesta Consult

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About Марина Мучакова

Marina Muchakova is a managing member of Vesta Consult's team. She studied in the legal school in University of Sofia city "St. Kliment Ohridski" and specializes tax law. As an additional qualifications she has graduated mediation of commercial disputes, representation before arbitration courts and relations between employers and personnel, intelectual and industrial property. Languages: English- proficiency ; Russian- basic ; German- basic

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