Amendment to the Double Tax Treaty with the Federal Republic of Germany

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As the first economy in Europe, the Republic of Germany is an extremely important economic and tax partner of Bulgaria. In this regard, a Double Tax Treaty (“DTT”, the “Treaty”) has been in force between the two countries since 2010. Since then, however, tax legislation internationally has undergone numerous and significant changes aimed at countering base erosion and profit shifting. The Organisation for Economic Co-operation and Development (“OECD”) has played an active role in these innovations, making systematic efforts to improve the tax environment internationally. The OECD’s work has resulted in the signing of the Multilateral Convention on the Application of Tax Treaty Measures to Prevent Base Erosion and Profit Shifting, which we wrote about earlier in the year in our newsletter. The OECD also established the BEPS project (“Base erosion and profit shifting”), a set of steps aimed at avoiding the possibility of reducing tax liabilities through aggressive tax planning.

In view of the changes over the last 12 years, and in order to bring the Bulgaria-Germany DTT into line with the standards of the BEPS project, a Protocol amending the existing Agreement was signed between the two countries on 21 July 2022. The Protocol thus signed was approved by the Council of Ministers and proposed to the National Assembly for ratification by law.

On 02.12.2022 in the State Gazette, issue 96 (“State Gazette”), was promulgated an Act on the ratification of the Protocol amending the Agreement between the Republic of Bulgaria and the Federal Republic of Germany for the avoidance of double taxation and the evasion of taxes on income and wealth.

The main purpose of this change is to bring the 2010 Bulgaria-Germany DTT in line with the “minimum standards” of the BEPS project by including new provisions. Moreover, these provisions are also reflected in the most updated version of the 2017 OECD Model Tax Treaty. Thus, the changes bring the 2010 DTТ in line with the latest OECD Model Tax Agreement. These amendments are also conditioned by the obligation of the Republic of Bulgaria as a member of the OECD Inclusive Framework to amend its double tax treaties in line with the above-mentioned “minimum standard”.

The innovations amend the Bulgaria-Germany DTT to comply with Action 6 (“Prevention of granting treaty benefits in inappropriate cases”) and Action 14 (“Mutual agreement procedure”) of the BEPS project.

Amendments in relation to Action 6 of the BEPS project

The amendments to the Treaty in accordance with Action 6 of the BEPS Plan are aimed at avoiding double non-taxation and avoiding the granting of tax benefits in inappropriate cases.

In line with the objectives of Action 6, with the amendments to the Bulgaria-Germany DTT, a new paragraph 2 has been created in Article 28. It states that “notwithstanding any other provision of the Agreement, no tax relief shall be granted in respect of an item of income or property if it can reasonably be assumed, having regard to all relevant facts and circumstances, that the obtaining of that relief is one of the main purposes of any arrangement or transaction which results directly or indirectly in that relief, unless it is established that the granting of that relief in those circumstances is consistent with the object and purpose of the relevant provisions of this Agreement.”

Amendments in relation to Action 14 of the BEPS project

Action 14 of the BEPS Plan relates to enhancing the effectiveness of dispute resolution mechanisms. It is part of the so-called “minimum standard” and stipulates the establishment of administrative processes to prevent and resolve disputes between the competent tax authorities of the countries in a timely manner.

In essence, the taxable person has the option of making an objection to a competent authority of a treaty country where he/she considers that the actions of any of those authorities result in taxation inconsistent with the provisions of the treaty. Following the changes, where a competent authority of one of the two Contracting States considers that the taxpayer’s objection to the manner in which its income is taxed is unfounded, the authority may notify or consult with the competent authority of the other Contracting State without delay. The novelties in Paragraph 2 of Article 24 of the Bulgaria-Germany Treaty strengthen the administrative interaction between the tax authorities of the two countries.

The ratification and entry into force of the amendments to the Bulgaria-Germany DTT updates the existing treaty practice between the two countries and responds to the above-mentioned actions of the OECD BEPS plan. The amendments reflect the latest developments in international tax law and help to implement the recommendations of the peer review reports of the OECD, which the Republic of Bulgaria has declared its willingness to join.

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