A new tax treaty between Bulgaria and Germany has been published in the Bulgarian State Gazette, issue 6 of 18 January 2011. It replaces the previous tax treaty between the two countries (signed in 1988) and applies to income realized as from 1 January 2011.

The tax regime under the new tax treaty does not fundamentally differ from the tax regime under the previous one. The main differences, outlined below, relate to the taxation of interest, dividends and permanent establishments.

Unlike the previous tax treaty which exempts interest, the new one allows interest withholding tax of up to 5%.

However the new treaty provides for an exemption if the interest is on loans of any kind provided by a bank.

Also exempt from withholding tax is interest if payable in connection with:

The new treaty allows up to 5% withholding tax on dividends if their recipient (other than a partnership or a German Real Estate Investment Trust Company) owns at least 10% of the shares (carrying voting rights) in the company distributing the dividends. Otherwise, the tax may be up to 15%.

The withholding tax rate for dividends under the previous treaty is 15% regardless of shareholding percentage.

Based on the new treaty, a building site, construction, or an installation project constitutes a permanent establishment if it lasts more than 9 months. This time threshold is 12 months under the previous treaty.

For more information on Bulgarian taxes please visit our web site at www.deloitte.bg.