Taxation of dividends may be incompatible with EU law

The tax treatment of dividends in Bulgaria may be incompatible with EU law.

Both inbound and outbound dividends between a Bulgarian company and a company in another EU/EEA member state face a higher tax burden than dividends between two Bulgarian companies. This potentially restricts the free movement of capital, which would be incompatible with the EC Treaty and the EEA Agreement.

The Bulgarian government has now received two letters of formal notice from the European Commission about both inbound and outbound dividends. If the Commission does not receive a satisfactory response within two months, it may then issue a reasoned opinion, which is the precursor to infringement proceedings before the ECJ.

Outbound dividends

• domestic dividends paid to corporate shareholders are exempt from both withholding tax and corporate tax
• there is a 5% withholding tax on dividends paid to EU-resident companies with a shareholding of less than 15% (subject to double taxation conventions) and no withholding tax if the shareholding is 15% or more, due to the application of the Parent-Subsidiary Directive
• dividends paid to companies in the other EEA countries (Norway, Iceland and Lichtenstein) are subject to a withholding tax of 5%, regardless of the size of their shareholding

Inbound dividends

• domestic dividends paid to corporate shareholders are exempt from both withholding tax and corporate tax
• Bulgarian corporate shareholders with a shareholding below 15% have to pay 10% corporate tax on dividends received from companies resident in the EU; no corporate tax is due if the shareholding is higher
• Bulgarian corporate shareholders have to pay 10% corporate tax on dividends received from companies resident in other EEA countries, regardless of the size of the shareholding

Law: Bulgarian Corporate Income Taxation Act; Art 56 EC Treaty; Art 40 EEA Agreement