A Review of Bulgaria’s Draft Pillar Two Law

Overview

On September 26, 2023, the Bulgarian Ministry of Finance issued a draft law for the implementation of the EU Global Minimum Tax Directive (the ‘EU Directive’). The draft law is subject to a consultation until October 26, 2023.

As provided in the EU Directive, the draft law includes an income inclusion rule (IIR) and an under-taxed profits rule (UTPR). 

The IIR is effective from January 1, 2024, whilst the UTPR will generally apply from January 1, 2025.

A domestic minimum tax (intended to be a Qualified Domestic Minimum Top-Up Tax (‘QDMTT’)) is also proposed to apply from January 1, 2024.

The draft law introduces a new Part 5a into the Corporate Income Tax Act to provide for the GloBE rules. The introduction of the Pillar Two Global Minimum Tax in Bulgaria is particularly significant given their low rate of statutory corporate income tax (10% under Section 20 of the Corporate Income Tax Act). 

Whilst the draft law applies the provisions of the EU Global Minimum Tax Directive, it does not implement most of the provisions of the OECD Administrative Guidance (either the first or second set). The main exception is the inclusion of the QDMTT Safe Harbour. 

Other safe harbours included in the OECD Safe Harbours and Penalty Relief Rules reflected in the draft law were the Transitional CbCR Safe Harbour and the Simplified Calculation Safe Harbour for Non-Material Constituent Entities. 

A key point to note is that unlike any other Pillar Two law issued (draft or enacted), the Substance-Based Income Exclusion and the De-Minimis Exclusion do not apply for Bulgarian QDMTT purposes. The OECD Administrative Guidance does not require these to be included for a domestic minimum tax to be a QDMTT.

General