US-based and other multinational employers with subsidiaries in Bulgaria often include their Bulgarian employees in their equity plans and grant them equity awards. Implementing an international equity plan in Bulgaria for the first time can be challenging for any multinational employer, as they should ensure compliance with Bulgarian laws and regulations. Tax compliance could raise particular concerns, as Bulgarian tax law is silent on many issues and the views of the Bulgarian tax authorities lack consistency throughout the years.
Two tax compliance issues are of utmost importance for any multinational employer implementing an international equity plan in Bulgaria: (1) tax compliance obligations for the local Bulgarian subsidiary and (2) the time of occurrence of the taxable event. These two issues have been controversial over the years and have only recently been settled by the practice of the Bulgarian tax authorities.
Tax Compliance Obligations for Local Subsidiaries
Typically, Bulgarian employees work at the respective local subsidiary of the multinational employers. The equity awards, however, are granted to the Bulgarian employees by the employer’s parent company, located abroad, which is not their direct employer. This has resulted in inconsistent views taken by the Bulgarian tax authorities in several non-binding rulings:
In certain rulings, the Bulgarian tax authorities have accepted that since the Bulgarian employees are engaged by the local subsidiary, the equity awards should be considered as part of their employment income. This means that the Bulgarian subsidiary should report, withhold, and pay (to the Bulgarian tax authorities) any taxes and social security contributions due on the equity awards, while the Bulgarian employees have no obligations in this respect.
In other rulings, the Bulgarian tax authorities have accepted that since the equity awards are granted by the non-Bulgarian parent of the employer, these awards may not be regarded as part of the employment income of the employees, but are either their income from an independent economic activity or a capital gain. In such cases, there is no tax reporting, withholding, and payment obligation for the local subsidiary, but rather the respective employee has the obligation to report and pay any taxes on this income.
In recent rulings, the Bulgarian tax authorities have taken a more reasonable approach based on the International Financial Reporting Standard share-based payment (IFRS 2), which reconciles the previous contradictory interpretations. Under this approach, the equity awards are provided in exchange for employment services by the Bulgarian employees and, therefore, should be considered as employment income. The fact that the equity awards are granted by the employer’s parent company, located abroad, does not change this qualification, as under IFRS 2 the local subsidiary would nevertheless need to report the equity awards as expenses in its books. Therefore, the local subsidiary has an obligation to report, withhold, and pay (to the Bulgarian tax authorities) any taxes and social security contributions due on the equity awards.
The obligation of Bulgarian subsidiaries to report, withhold, and pay taxes and social security contributions arises only when a taxable event occurs. However, the views of Bulgarian authorities as to when a taxable event occurs have also been inconsistent. In various rulings, the tax authorities have taken the view that the taxable event occurs either at (1) the grant date (based on the argument that the employee becomes entitled to a financial asset), (2) the vesting date (e.g., for restricted stock units, or RSUs), or (3) the exercise date (e.g., for stock options). This has largely caused confusion with employers as to when they need to report and pay the due taxes and social security contributions. The view that the taxable event is on the grant date has been particularly detrimental to multinational employers, as this has resulted in the awards becoming taxable before the respective Bulgarian employees receive the benefit of the award.
However, recent non-binding rulings of the Bulgarian tax authorities seem to eliminate the possibility to tax equity awards on the grant date. As a result, income from equity awards becomes taxable when the benefit of the equity award is actually received by the respective employee. This would be the point of time when the Bulgarian employee acquires the equity, which could be either the vesting date for certain types of awards, such as RSUs, or the exercise date for other types of awards, such as stock options.
By Atanas Mihaylov, Head of Tax, Kinstellar
This article was written before the advent of the war in Ukraine and was originally published in Issue 9.2 of the CEE Legal Matters Magazine on March 1, 2022. More current articles on developments in Ukraine can be found in our #StandWithUkraine section. If you would like to receive a hard copy of the magazine, you can subscribe here.