The new income tax treaty between Bulgaria and the Netherlands was signed on 14 September 2020. Once in force and effective, the new treaty will replace the 1990 tax treaty between the two countries.

Taxes Covered

The treaty covers Bulgarian personal income tax, corporate income tax, and patent tax and covers Dutch income tax, wages tax, company tax, and dividend tax. The treaty also covers certain taxes in the Caribbean part of the Netherlands, including income tax, wages tax, and the Government share in the net profits of the exploitation of natural resources levied pursuant to the Mining Act BES, the Mining Decree BES, or the Petroleum Act Saba Bank BES.

For the purpose of the treaty, the Caribbean part of the Netherlands consists of the island territories of Bonaire, Sint Eustatius, and Saba (BES Islands), but excludes Aruba, Curaçao, and Sint Maarten. Further, with respect to the Caribbean part of the Netherlands, the treaty applies only to resident individuals.

Residence

If a person other than an individual is considered resident in both Contracting States, the competent authorities of both States will determine its residence for the purpose of the treaty through mutual agreement based on its place of head or main office, its place of effective management, the place where it is incorporated or otherwise constituted, and any other relevant factors. If no agreement is reached, such person will not be entitled to claim any benefits under the treaty, except the benefits of Articles 24 (Nondiscrimination) and 25 (Mutual Agreement Procedure).

Offshore PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise of a Contracting State carries on activities in the territorial sea of the other Contracting State or in any area beyond and adjacent to its territorial sea within which that other Contracting State exercises jurisdiction or sovereign rights (offshore activities), unless the activities in question are carried on in the other State for a period or periods of less than in the aggregate 30 days in any 12-month period.

Withholding Tax Rates

• Dividends - 0% if the beneficial owner is a company that has held at least 10% of the paying company's capital throughout a 365-day period that includes the date of payment or the beneficial owner is a pension fund; otherwise, 15%
• Interest - 5%, with an exemption provided where:
  • the recipient of the interest is a Contracting State or a political subdivision or local authority thereof, a public body or the Central Bank of a Contracting State;
  • the interest is paid in connection with a loan granted, approved, guaranteed, or insured by a Contracting State, the Central Bank of a Contracting State, or any agency or entity (including a financial institution) controlled by a Contracting State;
  • the recipient of the interest is Atradius Dutch State Business NV (or its legal successor) in respect of loans granted, approved, guaranteed, or insured by the Netherlands or the recipient of the interest is the Netherlands' Finance Company for Developing Countries (de Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden NV) (or its legal successor);
  • the recipient of the interest is a pension fund;
  • the interest is paid in connection with a loan granted by a bank or an insurance company;
  • the interest is paid in connection with the sale on credit of any industrial, commercial, or scientific equipment;
  • the interest is paid in connection with the sale on credit of any merchandise by one enterprise to another enterprise.
• Royalties - 5%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

• Gains from the alienation of immovable property situated in the other State;
• Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State; and
• Gains from the alienation of shares or comparable interests if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived more than 75% of their value directly or indirectly from immovable property in the other State, other than immovable property in which the company carries on its active business, with an exemption where:
  • the gains are derived in the course of a merger or division;
  • the gains are derived from the alienation of shares listed on a recognized stock exchange; or
  • the gains are derived by a pension fund.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation relief

Bulgaria applies the credit method for the elimination of double taxation and the Netherlands may apply the exemption or credit method depending on the type of income and the applicable provisions of its domestic law.

Entitlement to Benefits

Article 23 (Entitlement to Benefits) provides that a benefit under the treaty will not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that relief was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit would be in accordance with the object and purpose of the relevant provisions of the treaty.

Article 23 also includes the provision that the benefits of the treaty will be denied where an enterprise of a Contracting State derives income from the other State and:

• The first-mentioned State treats the income as attributable to a permanent establishment of that resident in a third jurisdiction;
• The profits attributable to the permanent establishment are exempt from tax in the first-mentioned State; and
• The tax paid on the income in the third jurisdiction is less than 60% of the tax that would have been paid in the first-mentioned State had the income not been attributable to the permanent establishment.

The above limitation will not apply, however, if the item of income derived from the other State emanates from, or is incidental to, the active conduct of a business carried on through the permanent establishment (other than the business of making, managing, or simply holding investments for the enterprise's own account, unless these activities are banking, insurance or securities activities carried on by a bank, insurance enterprise or registered securities dealer, respectively). Further, benefits may still be granted to a resident of a Contracting State if, in response to a request by such resident, the competent authority of the other State determines that granting such benefits is justified.

Entry into Force and Effect

The treaty will enter into force on the last day of the month following the month in which the ratification instruments are exchanged and will apply from 1 January of the year following its entry into force. Once the new treaty is in force and effective, the 1990 tax treaty between the two countries will cease to have effect.