As of 1 January 2014 a new double tax treaty between Bulgaria and Switzerland will replace the one that has been in force since 1991.
The key changes are summarised below.
Exchange of information
A new information exchange mechanism will facilitate enforcement not only of the double tax treaty but of all tax legislation in either country. It will work in an ad hoc rather than automatic way and will extend to individuals and companies that are not tax resident in either Bulgaria or Switzerland. The exchange of information may require exchange of data otherwise protected by bank confidentiality policies, but will not require either country to disclose any business, industrial, professional or trade secrets or process.
Full tax relief for dividend income
Unlike the 1991 treaty, the new treaty requires full withholding tax relief to be applied to any dividend income received as beneficiary by a company that is resident in either country and:
- has held at least 10% of the shares in the distributing company, resident in the other country, for at least one year before receiving the distribution, or
- is a pension fund, or
- is the central bank of the other country.
There will also be full relief from withholding tax on interest income in cases of qualifying intra-group interest payments. The relief will be available if there is at least 10% direct shareholding between the lender and the borrower for at least one year, or if a third company has directly held at least 10% of the shares in both the borrower and the lender for at least a year before the interest payment is made.
Full relief would be available also in cases where the interest is paid:
- for sale on credit of equipment, merchandise or services
- to a pension fund, or
- under a bank loan
Where these conditions are not met, a maximum of 5% withholding tax will be applied to the interest (compared to 10% under the 1991 treaty), as long as the recipient is the beneficial owner of the interest income.
There will be full relief from royalties withholding tax because no withholding tax on interest income accrued by non-Swiss residents is currently levied by Switzerland under its domestic legislation. If it is introduced, royalty income would be subject to a maximum of 5% withholding tax where the recipient is the beneficial owner.
Capital gains tax
No withholding tax relief would be available for capital gains realised from the disposal of shares that derive more than 50% of their value directly or indirectly from immovable property, unless the shares are traded on a regulated stock exchange.
Tax will be lived in the operator’s country of residence on any capital gains realised from the disposal of ships, aircraft and road transport vehicles operated in international traffic, and movable property pertaining to the operation of ships, aircraft and road transport vehicles operated in international traffic.
The tax residency of entities will be decided (as a tie-breaker) by their ‘place of effective management’.
A building or construction site and installation project will be treated as a permanent establishment once it lasts for more than 12 months (rather than 9 months under the 1991 treaty).
This article first appeared in lexology.com.