Bulgarian Tax On Foreign Bonds Under Fire From EC

by Ulrika Lomas, Tax-News.com, Brussels

23 February 2009

The European Commission on February 19, sent a formal request to Bulgaria to end discriminatory tax treatment of foreign governmental, municipal and corporate bonds.

The European Commission has formally requested Bulgaria to change its tax provisions in regard to which income from Bulgarian governmental, municipal and corporate bonds is exempt from tax, whereas no such exemption is granted for similar bonds issued abroad. The Commission considers that these rules are incompatible with the EC Treaty, which guarantees the free movement of capital. The request takes the form of a reasoned opinion (second step of the infringement procedure provided for in Article 226 of the EC Treaty). If there is no satisfactory reaction to the reasoned opinion within two months, the Commission may decide to refer the matter to the European Court of Justice.

According to the Bulgarian rules, interest and discounts (differences between the market price of a bond and its nominal value) from Bulgarian governmental, municipal and corporate bonds are tax exempt. Interest and discounts from governmental, municipal and corporate bonds issued in other EU Member States or EEA/EFTA states are not eligible for such an exemption and are subject to income tax in Bulgaria at a rate of 10%.

The Commission is of the opinion that these rules may dissuade Bulgarian taxpayers from investing in bonds issued in other Member States and thus restrict the free movement of capital. Bulgaria thus fails to fulfil its obligations under Article 56 of the EC Treaty and Article 40 of the EEA Agreement.

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