Bulgarian interim government combats tax evasion

Preface

After the elections that took place on 04.04.2021, the Bulgarian parliament failed to appoint new government. As result, a caretaker government was formed on 12.05.2021, led by the prime Minister Mr Stefan Yanev. The next elections are scheduled for 11.07.2021. In the meantime, the interim government has made some significant changes in the country’s policies, which are now having great impact on the social and economic life in Bulgaria. Below, we will outline the most important changes that the caretaker government has pledged to seriously approach.

Collection of tax revenue – the new approach

Today we lay a new beginning of the communication between the revenue administration and the Bulgarian citizens and businesses – Minister Assen Vassilev

The new government has made 180 degree turn in the policy of revenue collection. So far, the following has been made clear:

Bulgaria’s tax agency goes after the big companies

Caretaker Minister of Finance Mr Assen Vassilev has stated that his team will examine the dealings of all big firms that benefited from public procurement from the previous government. This should also include companies with large cash reserves and unpaid debts to the NRA.

From our experience about the actions of the NRA so far, we can conclude that companies with unpaid debts or cash reserves of more than 100 000 BGN are being automatically marked as “hugely suspicious“. Those with more than one million BGN will be under special surveillance by the relevant authorities.

Change in the NRA’s management and administration

The caretaker government has made some key changes in the management of virtually all state offices. The director of NRA Mrs Galya Dimitova, has been dismissed for systematic poor performance of her duties. She was replaced by Mr Rumen Spetsov. So were replaced the chief of the Customs, of the Bulgarian Investment Agency, the Registry Agency, etc.

It now appears that all dealings of the dismissed directors will be reviewed and if any irregularities are found, the Prosecutor’s office will be alerted.

What is the Penal Code saying

Whoever avoids the announcement or the payment of large amounts (1534 EUR or more) of tax liabilities shall be punished by imprisonment of one to six years and a fine of up to 1023 EUR.

When the tax liabilities are particularly large (6135 EUR or more), the penalty is imprisonment for three to eight years and confiscation of part or all of the property of the offender.
Art. 255 of the Bulgarian Penal Code (summarized translation)

Yes, this may sound ridiculous, but the unpaid tax levels that trigger criminal responsibility in Bulgaria are indeed ridiculously low. Only 1534 EUR in unpaid taxes can result in jail sentence. 6135 EUR or more is considered as “heavy crime”.

Penal responsibility for unpaid taxes

The interim government is deeply determined to combat tax evasion and to engage criminal responsibility for all individuals with tax “irregularities”. The Bulgarian penal code has ridiculously low trigger threshold of only 1534 EUR for engaging criminal responsibility, so the “big companies” that are now being targeted are extremely vulnerable.

Personal material responsibility for unpaid taxes by directors and shareholders

Many have branded the 2017 legal amendments of Art.19 in the Tax Processual Code as being “draconic”. And indeed, the law (art.19) now foresees virtually unlimited responsibility for the shareholder(s) and the director(s) of Bulgarian limited liability companies for unpaid taxes. In other words, although it is still called “limited liability”, a Bulgarian company with tax debts is in no way with limited liability. This is so because the shareholders and the directors of the company are now co-liable for the unpaid taxes of the entity. So if the LTD goes bankrupt, the shareholders and directors may be left with all tax debts on their shoulders. Getting rid off the company (ie selling it) doesn’t help either, as in this case, the co-responsibility will be engaged even if the company is not dissolved. Harsh? Definitely. And the caretaker government, in full compliance with the law, is fully determined to implement these legal norms.

Confiscation of “illegally acquired property” (read money on which tax is not paid) – now in full speed

Any criminal proceedings for tax evasion will automatically trigger procedure by the Commission for combatting the corruption and confiscation of illegally acquired property (wealth). The funny thing is that even if the criminal charges are dropped (or the accused in tax evasion declared NOT guilty), the confiscation procedures will proceed. And if there are any discrepancies in the wealth of the “defendant” and the taxes paid, the difference will be confiscated. And as these proceedings (for confiscation) are not in the scope of the penal framework, the “presumption of innocence” is not applicable. In other words, it will be on the defendant to prove that his wealth is “legal” rather than on the Confiscation Commission to prove that the wealth is acquired illegally.

We can now see the pace at which the Commission is working after the caretaker government was appointed. Only on 16.06.2021, the Commission announced that it has filed confiscation claims for more than 7 million BGN (3,6 million Euro).

The Magnitsky sanctions and the Bulgarian determination to “comply” at all cost and to prevent future “shame”

Some will call it compliance, others may call it “bending over”. The harsh reality is that after the the US Department of the Treasury’s Office of Foreign Assets Control sanctioned recently three Bulgarians for corruption in Bulgaria plus other 64 entities, the Bulgarian government didn’t question the legality of such an act. On the contrary, the Bulgarian National Bank froze all bank accounts of all related parties and even of entities that were not on the US sanction list.

It is now obvious that the current government is fully determined to sanction all related parties to the persons and entities on the US list. It is also not a secret that all companies with large revenues that are even remotely related to Russia will be examined under the microscope for any tax and other irregularities.

So what should you do to avoid unpleasant surprises

Get your taxes in order. This is our most important advice. Unfortunately getting everything in order is not always possible. If you are dealing with Russian companies with substantial revenues or have even the slightest exposure to Russian persons or projects, be sure to be ultra compliant. Almost the same applies to Chinese companies and persons, although to a lesser extend.

In all cases, if you need support, please contact our offices asap.