Controlled foreign company – Taxation of retained earnings: The case of a company in Bulgaria

By Martha Papasotiriou

With Law 4607/2019, Greece incorporated Directive 1164/2016 of the European Union regarding Controlled Foreign Companies and the conditions for taxation in Greece of their undistributed profits in the name of their shareholders, thus amending the relevant article 66 of Law 4172/2013.

In particular, provisions were introduced regarding controlled foreign companies (Controlled Foreign Companies), regarding the inclusion in the domestic company’s taxable income of undistributed income of a legal person or legal entity that is a tax resident of another country or of unreported income of a permanent establishment abroad.

Control in action

Practical application of the above provisions can be found in a recent audit by the KE.FO.ME.P. Specifically, it was established that the taxpayer was the sole shareholder of a company based in Bulgaria, which was also the sole supplier of his sole proprietorship in Greece.

The audit had accepted the relevant expenses that the taxpayer had entered in his books and sent a document, with which he requested the provision of information about the company and the transactions with the sole proprietorship, through the Directorate of International Economic Relations (D.O. S.).

From the answers of the competent tax authorities it emerged, among other things, that:

– this is a company known to the authorities, whose main economic activity is the trade in fur (processed and raw)
– the taxpayer acted as its administrator and was its sole owner for the audited period
– the address declared to the authorities is not its headquarters, but the address of the Bulgarian law firm and it itself does not have a headquarters
– had two suppliers,
– its sole customer was the sole proprietorship of the taxpayer
– He employed no staff
– There was no information about dividend distribution.

Based on the above data, the audit deemed that the conditions for the application of Article 66 of Law 4172/2013 on Controlled Foreign Companies are met, with the consequence of imputing to the applicant all of the undistributed income of the Bulgarian company.

The fine and the appeal

By Deed of Corrective Determination of Income Tax, income tax was imposed on the taxpayer, plus a solidarity contribution plus a fine.

The taxpayer filed an appeal requesting the annulment or amendment of the disputed act, however the D.E.D. rejected his claims.

It is pointed out that the applicable provisions do not apply when the controlled foreign company carries out substantial economic activity, supported by personnel, equipment, assets and facilities, as evidenced by relevant facts and circumstances.

The burden of proof

The Tax Authority bears the burden of proof that the EAE established in an EU/EEA member country does not carry out a substantial economic activity, which is supported by personnel, equipment, assets and facilities. It follows from the above that the tax authority carried out such an audit and found that there is no substantial economic activity.

These provisions were introduced to prevent tax avoidance by domestic companies by transferring their income to low-tax countries. As can be seen from the decision of the TEN, it seems that the authorities are moving in the right direction and are starting to gain experience with controls regarding Controlled Foreign Companies (CFCs), in order to fight tax evasion.

* Martha Papasotiriou is Partner/Head of Tax, Lawyer, at Andersen Tax Greece