The Bulgarian parliament approved the Bill Amending and Supplementing the Corporate Income Tax Act in its first reading on 20 January 2022. The main measure of the bill provides for the implementation of the reverse hybrid mismatch rules of the EU Anti-Tax Avoidance Directive as amended (ATAD2). This includes that where one or more foreign entities are affiliated undertakings and collectively hold directly or indirectly 50% or more of the voting rights, the share capital, or the right to profits of a hybrid entity incorporated or established in Bulgaria that is not considered a taxable person in Bulgaria but is considered a taxable person in the jurisdiction(s) of the foreign entity(s), then such hybrid entity will be considered a taxable legal entity in Bulgaria. In such cases, the profit and income of the hybrid entity shall be taxed in accordance with the law to the extent it is not otherwise taxed in Bulgaria or under the law of another jurisdiction. However, the reverse hybrid rule will not apply to a collective investment scheme, subject to certain conditions.
In addition to the reverse hybrid rules, the bill also provides for the correction of Bulgaria's transposition of the ATAD CFC rules. The current legislation transposing this ATAD in Bulgaria includes an undue exemption for subsidiaries (CFCs) that are subject to "alternative forms of taxation", which is not allowed under ATAD. The bill corrects this to provide that all taxable persons in Bulgaria that are subject to corporation tax and have CFCs, regardless of the form of taxation of these CFCs, fall within the scope of the specific rules for determining the tax result in the case of a CFC. Lastly, the bill contains provisions clarifying the tax treatment of sales contracts with leaseback provisions. This includes the explicit provision that such sales contracts are classified as operating leases according to International Accounting Standards.
Subject to approval in a second and final reading, the measures of the bill will apply from 1 January 2022.