Taxation of expenses for employee benefits in-kind

Taxation of expenses for employee benefits in-kind

KPMG's Tax News outline and highlight legislative changes and trends in the area of tax.

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The current issue of KPMG Tax News discusses the taxation of expenses for benefits in-kind introduced with the amendments to the Corporate Income Tax Act (CITA) and the Personal Income Tax Act (PITA) which were promulgated in the State Gazette on 27 September 2016 and the expected developments from а VAT perspective.

Taxation of expenses for benefits in-kind related to company assets with mixed business and personal use 

The amendments to the CITA introduce rules on taxation of expenses for benefits in-kind related to company assets provided to the employees for personal use and related expenses. Employers will have the option to either assess a 10% one-off tax on the expenses for benefits in-kind under the CITA or  include the expenses as personal income in accordance with the PITA. The option chosen has to be declared with the annual Corporate Income Tax Return for the respective year. This is required also for 2016 through submission of the annual tax return by 31 March 2017. Corresponding amendments were made to the PITA.

“Expenses for benefits in-kind” include the portion of the accounting expenses corresponding to the personal use of company assets and other expenses related to them. The assets provided for personal use could be owned or rented by the company and have to be used for business purposes as well, not solely for personal use. For tax depreciable assets, the expenses for benefits in-kind include the tax depreciation and not the accounting depreciation charge. Representative and social expenses subject to one-off tax under the CITA are excluded from the scope of expenses for benefits in-kind.

In comparison to the proposed amendments to the CITA of 12 July 2016, the promulgated changes provide for a one-off tax to be assessed on expenses for benefits in-kind also in the case when these do not affect the financial result in the year of their accrual.

For the purpose of one-off taxation of the expenses for benefits in-kind, the company’s assets are divided into three categories for which the tax base could be determined under the following options: 

  • Vehicles: alternatively (i) distance or hourly based proportion between the personal and the total use of the vehicles or (ii) a fixed 50:50 proportion 
  • Real estate property: area or hourly based proportion between the personal and the total use of the assets 
  • Other assets: alternatively (i) a fixed proportion of 20% on the total expenses related to the assets or (ii) another proportion justified by the company. 

The amendments to the CITA and PITA take effect retroactively and apply as of 1 January 2016. Companies which treated the expenses for benefits in-kind as income of the individuals subject to taxation under the PITA can apply a one-off tax on the expenses under the CITA from the month following the month of the promulgation of the amendments. 

Effective from 1 January 2016, no one-off tax is levied on expenses related to the operation of vehicles used for management purposes. The amendments provide for a transitional regime for determining the base for taxation of expenses for benefits in-kind related to vehicles, where the vehicle was used both for management and personal purposes before the promulgation of the new CITA provisions.

Draft amendments to the VAT Act  

Earlier in September 2016, the Bulgarian Ministry of Finance published a bill to amend the VAT Act which has not been submitted to the National Assembly yet. The proposed amendments are partly related to the personal use of company assets.

In contrast to the CITA amendments which introduce different criteria to determine the one-off tax base for the three asset categories, the proposed VAT mechanism for distribution of the expenses for personal use of company assets is still unclear. For example, the  proposed amendments do not allow for a fixed proportion of 50:50 to be chosen as an alternative VAT approach regarding company vehicles with mixed business and personal use. The authorities may be expecting the position of the European Commission on the Bulgarian application for derogation of Council Directive 2006/112/EC allowing limitation of the input VAT deduction for owned or rented vehicles to 50%.

The currently proposed changes in the VAT Act  concerning the personal use of company assets introduce a proportional input VAT deduction for acquisitions of immovable property with mixed use. Taxpayers would have to determine the proportion of business to private use of the properties upon their acquisition and deduct input VAT credit based on the expected business use. Another proposition concerns the introduction of annual adjustments to the initial input VAT deductions for real estate and other assets with mixed use when there are changes in their use throughout the year.

© 2017 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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