In a case involving FCE Bank, a UK company operating in Italy via a branch, the ECJ ruled that a fixed establishment is not a separate legal entity from the company it is part of. Therefore it could not be regarded as a taxable person as a result of the costs charged to it for services performed by the head office.
Previously supplies of services between Bulgarian companies and their branches and structural entities were outside the scope of VAT only if they were performed at cost.
Bulgarian branches of EU established companies will now no longer have to self-charge VAT on invoices they receive from head office or other branches for services performed.
“Naturally, the change will mostly affect Bulgarian branches of foreign banks and insurance companies,” said Ivan Vargoulev of KPMG in Bulgaria. “Until now, for local branches not to apply VAT under the reverse charge mechanism, they had to prove that the allocations from the head office were made at cost, which sometimes required a lot of effort and paperwork.”
The amendment does not affect the cross-border supply of goods between an EU head office and a Bulgarian branch, which would still be subject to VAT.
“Even though the amendments to the VAT regulations explicitly refer to supplies of services between a company or a branch established in the EU, the logic of the FCE Bank judgment should also be applicable where the head office or the branch is established outside the EU,” said Vargoulev.
Application of the VAT Act
The Bulgarian government has also clarified the practical application of the VAT Act. This gives guidance on deducting input VAT and calculating the amount of VAT credit when a taxpayer did not initially deduct the input VAT on the purchase of goods or services. The change is effective from January 1 2013. But if the taxable use occurred before the amendment date, taxpayers have until April 30 2013 to issue a protocol to adjust the input VAT credit.
Before the amendment, taxpayers only had the right to upwardly adjust only partial input VAT deductions. They could not input VAT on purchases that were initially used solely for use in VAT exempt services.
“It was practically impossible to recover the input VAT,” said Georgi Simeonov of Deloitte in Bulgaria. “There were practical problems due to the gap in the rules. There was no practical way of knowing how to execute the right to deduction in case the input VAT deduction was not initially applied by the taxpayer.”
Self-billing changes
The government has lifted restrictions on self-billing for supplies. Previously self-billing was only allowed when both the supplier and recipient were established and VAT registered in Bulgaria.
“Furthermore, self-billing was not permitted for certain specific supplies. For example, periodic supplies, reverse-charge supplies, supplies of financial and insurance services,” said Vargoulev.
The time limit on self-billing agreements, previously 12 months, has also been removed. Requirements to include certain mandatory clauses within agreements have also been abolished.
The change implements European Directive 2010/45/EC aimed at harmonising rules on VAT invoicing across member states.
