For our Checking In feature, we reach out to partners and heads of practice across CEE to learn how specific practice areas are faring in their jurisdictions. This time around we asked Tax experts: What are the most important changes to the Tax laws in your country since January 2020 and what has their impact been?
In our view, the most important tax update in Bulgaria since January 2020 is the implementation of mandatory disclosure rules for reportable cross-border tax arrangements based on EU Council Directive 2011/16 (DAC6). These disclosure rules require businesses and intermediaries (e.g., advisors and banks) to implement policies, procedures, and processes for the identification of reportable arrangements. Any failure to disclose a reportable arrangement may trigger significant penalties. As the first deadline for such disclosure was February 28, 2021, it is too early to assess the full impact of these new rules. It is likely that these rules would rather limit the possibilities for more aggressive cross-border tax planning.
Another important tax update relates to the changes to Bulgarian tax law triggered by the COVID-19 situation. Primarily, the changes extended the deadlines for declaring and paying corporate income tax liabilities but also included the introduction of nil or reduced VAT rates for certain supplies, the suspension of enforcement proceedings for tax liabilities, etc. Our impression is that while these changes did not effectively reduce the tax burden on businesses, they nevertheless helped various companies to improve their cash flow position in these uncertain times.
The most comprehensive tax update was the introduction of new VAT rules that will affect cross-border e-commerce. These new rules, which will come into effect on July 1, 2021, impose additional obligations on businesses for registration, reporting, and declaration of VAT. We expect that the rules will have a significant impact given that online sales enjoyed substantial growth in the COVID-19 situation. This impact, however, is likely to be adverse – businesses involved in cross-border e-commerce could face additional compliance costs.
Overall, the recent changes to Bulgarian tax law do not fundamentally change the business climate in the country, but rather go in the direction of imposing additional compliance requirements instead of relieving businesses from administrative burden.
Atanas Mihaylov, Managing Associate, Kinstellar
In response to the restrictions imposed on businesses in the wake of the COVID-19 pandemic, the government of the Czech Republic also enacted several tax-related measures in 2020 designed both to alleviate the position of business entities that were affected by the government restrictions and to provide stimuli to a declining economy. For the most part, the measures enacted to help businesses were very limited in scope and basically consisted of deferrals of deadlines for meeting certain tax obligations.
Below, I describe a major tax change that represents an attempt to boost economic growth.
In the first half of 2020, the tax on acquisitions of real estate was abolished. This tax was assessed at 4 percent of the amount paid for the real estate (i.e., the transfer value). As a result, real-estate transfers that took place on or after December 1, 2019, do not have the obligation of real estate transfer tax. This move significantly reduced the tax costs related to transfers of real estate in this jurisdiction, as notary fees charged on real estate transfers are relatively insignificant.
In practice this change has mainly affected transfers of older residential real estate, since there are other taxes to consider, depending on the type of real estate involved in the transaction. These include VAT (for transfers of real estate within five years of its construction) and corporate income tax, applied at the rate of 19 percent on capital gains from the alienation of real estate (i.e., capital gains resulting from the sale or exchange of property represented by the excess of the consideration for the sale/exchange over the acquisition cost). The fact that by carrying out transactions via share deals corporate income tax could effectively be avoided could provide an incentive for the transferor to dispose of the real estate via share deal which did not attract real estate transfer tax even before its abolition.
This is just one of the tax changes enacted in the Czech Republic since January 2020. I selected it as it has the potential of having a major impact from a macroeconomic perspective. But there have been a number of other changes in taxation that, depending on the specific situation, could have a significant impact on your tax position – which is usually the case with taxes.
Martin Svalbach, Tax Manager, PRK Partners
In the past year, the Hungarian legislator maintained its efforts to create a competitive tax environment for investment and work. The tax wedge on labor was further reduced by decreasing the social contribution tax from 17.5% to 15.5% and red tape was cut by reducing the number of social security contributions. Concurrently, the government clamped down on hidden employment schemes by introducing a special 40% tax bracket in the small entrepreneur’s tax (KATA).
Although Hungary already has the lowest corporate income tax rate (9%) in the EU, it widened its already generous development reserve incentive in 2020. The deduction may now reach the total amount of the pre-tax profits as opposed to the previous limitations.
With these changes the tax rules on employment have become simpler and more transparent and investment incentives more accessible, while the tax wedge reached the level of the CEE region, providing a competitive tax environment to invest in Hungary.
Another highlight was the introduction of bad debt relief in VAT, in the wake of a decision of the European Court of Justice which made it clear that Hungary did not comply with the EU’s VAT system in this respect. This now makes it possible (though still quite cumbersome) for Hungarian taxpayers to get a VAT refund on irrecoverable claims and could prove especially important in the turmoil that some industries are experiencing because of the COVID-19 crisis.
Tamas Feher, Partner, and Gergely Czoboly, Expert, Jalsovszky
2020 was marked in Romania, as everywhere, by the COVID-19 pandemic and thus, all major tax developments were a result of the authorities’ efforts to support the economy and the business environment.
The majority of the tax measures taken by the Government were designed to improve the cash position of the companies and included, among the most important, deferring the payment of tax liabilities until December 25 at no cost, accelerating the VAT reimbursement process by implementing on a large scale of the VAT reimbursements without a prior VAT audit, and granting compensation to cover technical unemployment costs. Similarly, entities acting in the HoReCa sector, which was among the most affected by lockdowns, were exempt from the specific HoReCa tax until December 31, 2020. In our view, such measures achieved the expected outcome as companies had additional cash resources available to cover their short-term needs.
Looking from a different angle, companies with cash resources at their disposal had the opportunity to reduce their outstanding tax liabilities. A tax amnesty has been available with respect to accessory tax liabilities outstanding as of March 31, 2020, meaning that companies paying their principal tax liabilities had ancillary ones waived. As such accessory liabilities could easily reach or even exceed the level of the principal tax liabilities, the benefit could be material. Also, a bonification was granted to companies that paid their corporate income tax or micro-enterprise tax due for the first three quarters of 2020, before the legal deadline. In this way, the state incentivized the collection of cash from companies with excess cash and used it to finance other measures.
The limited face-to-face interaction due to lockdown and other restrictions has led to an increase in digitalization in dealings between taxpayers and the tax authority. Improvements were noticed in fillings with, requests submitted to, and communications with the tax authority, which publicly committed to further improving and extending these trends. One of the important next steps is the implementation of SAF-T, which is currently in the development phase and is estimated to be launched for voluntarily testing by large taxpayers in the second part of 2021 and potentially implemented for large taxpayers starting 2022.
Roxana Popel, Head of Tax, and Andrei Tercu, Tax Director, CMS Cameron McKenna Nabarro Olswang
The most important tax updates in 2020 were the introduction of digital assets and open-end and alternative investment funds into the Serbian tax system. In addition, several tax measures were put in place as a response to the COVID-19 outbreak.
Tax treatment of digital assets and investment funds was regulated through amendments to the series of domestic tax laws. When it comes to digital assets, the most important aspects of the applicable tax regime included that, while property tax and property transfer tax will not be applicable, digital assets will be subject to inheritance and gift tax, at the rate of 2.5%. In addition, the transfer or conversion of cryptocurrency for cash will be VAT-exempt without the right for deduction of input VAT. It is also prescribed that gains generated by companies and individuals from the transfer of digital assets will be subject to capital gains tax at the rate of 15%. However, there is a tax incentive if the gains are invested into the share capital of a Serbian legal entity or investment fund.
Open-end and alternative investment funds, which do not have the status of a legal entity and which are registered in the appropriate register, are introduced as taxpayers. They generally have all the rights and obligations as other taxpayers (including the need to obtain a tax identification number, submit tax returns, pay taxes, have the right to request a deferral of tax payments). Investment funds do not pay tax on capital gains at the transfer of shares, IP rights, or immovable property. However, the transfer of the residual net value of assets after the dissolution of the fund is regarded as a taxable capital gain but only 50% of the gain is subject to tax for the recipient of assets. Open-end and alternative investment funds may be regarded as VAT payers and registered for VAT, but even in such cases, their activities, just like the activities of management companies, would be exempt from VAT without the right to input VAT deduction. The liability for payment of taxes is on the investment fund management company.
Since amendments relating to investment funds apply as of January 1, 2021, and those relating to digital assets will be applicable from July 1, 2021, the practical impact of these amendments is not yet visible in practice.
Branimir Rajsic, Senior Consultant, Karanovic & Partners
A major change (although mostly for cross-border arrangements and entailing a number of elements) is that lawmakers have finally introduced anti-BEPS measures, some of which exceed the standards and guidelines (e.g., stricter CFC rules and constructive dividends). The government also undertook extensive work on revising the double taxation treaty network, implementing MLI provisions in instances where these had not been applied by both countries in the course of depositing the convention with the OECD. Most multinationals and large Ukrainian groups with foreign elements have already done their homework in advance. For example, the extension of transfer pricing reporting, or even the principal purpose test, should not cause problems, with the caveat that the tax office and the courts will take a reasonable approach and look at the substance and not the form. The same thing is expected from certain clients in various industries, and tax compliance and thorough risk assessments appear to be key to certainty in these challenging times.
Another focus is enhancing the tools available to the tax office in tackling the misuse of practices when, in fact, a foreign company has a taxable presence in Ukraine, or has its effective place of management here.
Last but not least is a proposed VAT on electronic services that is being debated in the parliament, as well as a tax amnesty.
These new rules for corporations and individuals should bring more clarity and, although they often mean a greater administrative burden for taxpayers, they may also result in a lower tax burden – as may be the case for dividend distributions from a Ukrainian company through a controlled foreign company.
I am glad to see Ukraine following international trends but expect even more efforts from the tax office and the Ministry of Finance. Businesses should also ensure that their structures are robust and ready for a more transparent and, hopefully tax-friendly, environment.
Oleksandr Markov, Head of Tax, Redcliffe Partners