Some Issues in Labor Mobility of Workers in the EU

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Part 1: Tax Aspects

The Case

Bulgarian citizens are employed for less than 183 days in the year by a company, that is registered in Member State A, which sends them on a project to carry out construction and installation activities of furniture in Member State B.

In such a situation, some of the following questions may arise:

  1. Do Bulgarian workers remain taxable persons in the Republic of Bulgaria?
  2. Is the employer an obligated person under the Bulgarian tax legislation?
  3. How should workers approach their responsibilities?

Applicable legislation:

  • Double Taxation Avoidance Conventions (the Convention/s) between Bulgaria and the relevant Member State;
  • Personal Income Tax Act (PITA).

Guidelines for answering the questions:

  1. Firstly, the definition of “resident person” should be clarified. On supranational regulation, according to standard type of the Conventions between Bulgaria and other states for the avoidance of double taxation “resident” of one of the Contracting States is: 1) in the case of Bulgaria – a person that is liable to tax according to the Bulgarian domestic law or 2) in the case of Member State B – a person that is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. However, a person is not a resident of one of these states, if that person shall be liable to tax only due to income from sources, he/she has in that state or his/her capital situated therein.

If, notwithstanding the above criteria, a natural person may be treated as a resident of both  the states, then his/her status shall be deemed to be a resident of that state in which he/she has a permanent home available to him/her; if he/she has a permanent home available to him/her in both the states, he/she shall be deemed to be a resident only of the state with which his personal and economic relations are closer (center of vital interests).

Next, the concept of “place of business” should be clarified. In the present case, in view of the specific nature of the work to be performed by the workers, the definition given in the Convention applies, namely that the place of business, a building site or a construction, installation or assembly project constitutes a permanent establishment only if it lasts more than 12 months.

Therefore, it can be concluded that according to the supranational regulation, the Bulgarian workers remain taxable subjects of Bulgaria for these six months of work abroad.

Regarding the national regulation in Bulgaria, according to the Bulgarian PITA, a “resident  natural person”, regardless of his/her citizenship, is a person who has a permanent address in Bulgaria and / or who resides in the territory of Bulgaria for more than 183 days in each 12-month period, and / or whose center of vital interests is located in Bulgaria. Local individuals are liable for taxation on income from sources in the Republic of Bulgaria and abroad. “Employment relations” are legal relations related to the employment by a foreign person when the work is performed on the territory of the country, as well as the legal relations for employment of a local natural person by a foreign person when the work is performed outside the territory of the country.

  1. There are no grounds for the employer from Member State A to incur tax liabilities in Bulgaria, nor should he register for tax purposes in Bulgaria for the liabilities of his employees in the country. On the other hand, depending on the employer’s local law, it is possible for him to withhold payroll tax.
  2. Workers shall declare the tax due from the received remunerations abroad by themselves with the tax return under Art. 50 of the PITA. Resident natural persons of Bulgaria should attach to their annual tax return evidence of the amount of taxes paid abroad and compulsory social security contributions as a result of work outside the territory of the country. For income from a source abroad, the taxation of which according to the current tax agreement is applied by the method of avoiding double taxation “exemption with progression”, local individuals may not provide evidence of the amount of tax paid.

Expect a sequel on the topic of labor mobility through the prism of social security aspects.

The present article is only informative and presents just some of the possible problems. The present article does not constitute tax or legal advice. For a full understanding of the issues discussed above and before taking action in this regard, do not hesitate to contact us.

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