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Improvement of the Measures Against Tax Evasion and Tax Fraud in Bulgaria

Improvement of the Measures Against Tax Evasion and Tax Fraud in Bulgaria

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One of the defects of the Bulgarian tax system and of the enforcement authorities in Bulgaria – the lack of direct access to information for the purposes of administrative cooperation (the automatic exchange of information) between the relevant authorities and legal entities – is on its way to being resolved.

In the beginning of October Bulgaria’s Council of Ministers approved a draft law amending and supplementing the Bulgarian Tax and Social Procedure Code (TSPC) mainly with respect to the automatic exchange of information, and filed it with the Bulgarian National Assembly. This law aims to implement EU Directive 2016/258, which addresses tax evasion and tax fraud and aims to increase transparency in the taxation field, including exchanges of information between the relevant tax authorities. We see this legislative step as an improvement of the tax system and an effective step against tax evasion and fraud.

The scope of the automatic exchange of information between the tax authorities of Member States – including exchanges of financial information, and of information related to advance cross-border rulings, among others – was extended through several EU Directives.

The draft law amending and supplementing the TSPC empowers tax authorities to access information, documents, and any other data (including information regarding the beneficial owner of a legal entity) gathered by the obliged persons mainly within the procedure of expanded customer due diligence pursuant to the provisions of anti-money laundering legislation. 

The amendments in the TSPC relating to the automatic exchange of financial information would allow revenue authorities to obtain information about, for instance, the beneficial owners of intermediary structures in order to more effectively detect tax evasion. Most important is that the tax authorities could rely entirely on the information collected through the application of anti-money laundering measures and thus easily establish potential cases of tax fraud and tax evasion.

Beside implementing EU legislation into Bulgarian law, the draft law also introduces some other measures in the fight against tax evasion and clarifies previously-adopted provisions. Amendments and supplements were adopted this past summer with respect to the personal liabilities of managers, members of management bodies, procurators, commercial representatives, and commercial agents of a legal entity which are subject to tax or compulsory social security contributions or are required to withhold and pay taxes or compulsory social security contributions. Indeed, it is possible to make persons personally liable if they have concealed facts and circumstances before the revenue authority or the public bailiff resulting to any obligations for taxes and/or compulsory social security contributions cannot be collected. The personal liability of such representatives is limited to the outstanding tax obligation. 

Additionally, such persons, as representatives of the taxable entity, are also liable when making payments in kind or in money in bad faith, representing a hidden distribution of profits or dividends, or when they alienate property, including an ongoing concern, for no remuneration or at prices significantly lower than the market prices or perform actions relating to burdening the patrimony to secure a third party debt and then cashing the patrimony in in favor of the third party.

The TSPC also contains measures to stop people from carrying out a series of share purchase transactions to avoid shareholder’s liability in cases of insolvency and over-indebtedness. Indeed, majority shareholders and to some extent minority shareholders shall be jointly liable for the company’s outstanding obligations for taxes and compulsory social security contributions in the event they transfer their participation (so that they cease to be majority shareholders) in bad faith – the liability being proportional to their participation in the alienated part of the capital.

We consider such amendments useful both in facilitating the collection of taxes and in improving the tax culture of tax payers. 

One deficiency which we see in adopting the draft law amending and supplementing the TSPC, however, is the fact that it currently refers to a draft Measures Against Money Laundering Act, which is currently in process of adoption. Therefore, we recommend that the amendments to the TSPC be adopted only after the Measures Against Money Laundering Act.

Once the amendments to the TSPC are adopted, we expect the tax and court practice to be changed, especially with respect to the collection of information. 

By Jivko Sedlarski, Head of Tax, Penkov, Markov & Partners 

This Article was originally published in Issue 4.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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