Bulgaria - Interview with Alexander Schinzing

Alexander Schinzing, assessor iuris, is a Corporate Counsel focused on UK and German business. 
He studied law and specialized in European law. 

Tax Saving Corporation a network of international attorneys and tax counsels, is an English tax and law office within the network of international tax consultants and lawyers - www.taxsavingcorp.com, focusing, in particular, on international tax planning for natural and legal persons.

What prompts German businessmen to set up companies in Bulgaria or relocate here? Are low taxes, a 2-lev initial capital, low costs and low social security contributions a sufficient condition for setting up a business here?

As an international network of tax and legal advisors we recognize that a growing number of European companies are shifting their place of business to Bulgaria. Ever increasing taxes and social contributions make low tax jurisdictions like Bulgaria a more and more attractive country. The latest increases in health insurance contributions by 0.6% to 15.5% in Germany or Value-Added-Tax by 2.5% to 20% in the United Kingdom from 2011 on are just two examples why our clients choose Bulgaria as their new place of business.

A taxation level of 10% on corporate income and income is one of the lowest in the EU. Adding 62 double-taxation-agreements with other countries and further tax exemptions as well as investment incentives make Bulgaria a business place to be.

Has this trend seen a boost in the last couple of years? Is there an increased interest by German companies? Why?

Since the accession of Bulgaria to the European Union we notice that German and UK businesses have a growing interest in the markets of the southern and eastern boundaries of the EU – from Estonia in the North to Bulgaria in the South. Next to the previous advantages, a high level of professional education and improving infrastructure are in the focus of our clients.

Political instability, corruption and significant shadow economy as well as a train wreck of justice system failures at the beginning have built up some prejudices that are hard to counteract with. Following a slow beginning we notice a growing readiness as personal positive experience spread within German business contacts and our adjunct tax advisors in Germany and the UK.

Do you have data about the number of German companies, which have put their headquarters in Bulgaria, since you are involved in this business? From which sectors are they generally?

At the end of 2009 over 5,000 companies from Germany are trading directly with and further 1,200 have established a representing office or a place of business in Bulgaria.

From the beginning of our operations in Sofia at June 2008, we record an increasing number of enquiries on basic information about the country up to incorporating companies on an almost monthly basis.

Despite Tax Saving Corporationss' core business is on incorporating worldwide, next to establishing banking licences and gambling Licences in the EU/EEC, Bulgaria took a bigger percentage of our business.

While the total number of incorporations lowered in 2009 due to the financial crises and are just starting to recover, incorporations in Bulgaria have increased more than four times in comparison with the second half of 2008.

Moreover, companies from Germany and the UK are more likely to neglect Offshore-Tax-Havens like the Seychelles and Panama and prefer competitive places in the EU, like Bulgaria and Cyprus.

Competitive production costs and improving infrastructure attract the whole scale of businesses, from internet shops to production sites.

What makes Bulgaria more attractive than other countries with low taxes such as Cyprus?

Opposite to Tax-Heavens, Bulgaria offers the full advantages of the European Internal Market: Freedom of Establishment, EU Parent & Subsidiaries' Directive, 6th directive on VAT to name just a few.

Offshore-Tax-Heavens, including also e.g. Isle of Man, Liechtenstein and - with a number of exemptions - even Switzerland, lack these agreements.

It's important to understand German Tax Law as well to see the further advantages of Bulgaria to Offshore-Tax-Heavens. German Foreign Tax Act (AStG) states, income from foreign companies in low tax locations will be taxed in Germany, if the company is dominant controlled by a German resident. Although if Bulgaria is a low tax location by terms of AStG, as an exemption this rule does not apply because Bulgaria is a member of the EU.

For Tax-Heavens in contrary, setting up a company requires a lot more substance escape than e.g. Bulgaria where an office is established in a businesslike manner.

To establish a legally compliant business entity, expenses outnumber the amount needed for an office in Sofia or Varna more than three times. Moreover these costs often can not be deducted from taxes in Tax-Heavens.

Compared with other locations in the EU, Bulgaria offers low production cost and can be reached easily by train and truck. This attracts Bulgaria for production sites and transport businesses.

How much time does it take to register a company in Bulgaria? Are regulations in Bulgaria stable enough to make this process easy?

For Germans it is very easy to adapt to Bulgarian law on an OOD, as it is very similar to German law on limited companies (GmbH). Often this is one major reason to prefer Bulgaria to other EU countries.

The regular duration for incorporating a company is fair, even if there are some delays sometimes. A company going to Sofia should consider a few weeks at present, but we look forward the registration of existing companies to the electronic register will come to an end which will speed up things.

Do companies continue to run operations from Germany even though they set up headquarters in Bulgaria?

A legally compliant business entity requires a permanent establishment; the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. A dummy firm will not meet this requirements asked by German and UK financial authorities.

Also for Double-Taxation-Agreements, a permanent establishment is the key element to locate the place of taxation (Chapter 5 DTA specimen of OECD).

Not only for taxation purposes but also to have a better touch to the market and profit from the knowledge about the country, the other way around is the better way: While the permanent establishment is setup in Bulgaria, the German company will have a representative office in Germany, UK or elsewhere in the world.

The search for qualified personnel and services is the key service to bring the permanent establishment in Bulgaria to life. To have the legal know how and experience from a multi-national view differs from simply founding companies from international tax and legal advisory firms as we are. The latter can not only manage companies by tax advisors or lawyers but also know what structures and requirements are needed to operate an OOD or EOOD on foreign markets, including multiple taxation jurisdictions, corporate and employment laws as well as drafting the corresponding contracts.

Bulgaria's government has vowed to keep taxes low despite dwindling revenues. Still it has been sending mixed signals. Does uncertainty over future changes in taxes in Bulgaria discourage German companies to move base here?

As taxation is low in Bulgaria and there are clear advantages of a young, emerging market, a slight rise of taxes alone will not destroy confidence. But Bulgaria has with Cyprus and other EU places strong competitors.

While an increase of taxes among other problems is not fully solved sufficiently, it will get more difficult to attract foreign investors to move to Bulgaria.

There is a high degree of trust and Bulgaria should face these challenges and set reliable tax rates for the future to attract foreign investors.

How important is for Bulgaria not to increase taxes, especially bearing in mind the tax hikes that its neighbors Greece and Romania have recently seen?

Taxes are not the only key reason for choosing the right place to do business. Consumer markets, legal framework, corruption and working skills are also top elements that are being considered by investors.

Many of our clients are also searching for a place where they can invest their earnings in that particular country for their sunset years, so that culture and medical infrastructure are also key points. Often our clients prefer a country, where they are familiar with the circumstances. Even if the costs and taxes are slightly higher than in a low tax country, they may have standards that they are accustomed to and still taxation is considerably lower than in Germany or UK.

Today, in a fast living world, where a large sum of revenue is made by services, especially over the internet, companies move to a country that offers the lowest taxation and best preconditions as easily and fast, as it takes to incorporate a company.

A lesson learned from Nokia in Germany was, that even a large production site will follow the taxation and subsidiaries, in this case to Romania. As the two countries are fighting comparable problems, one should have a close look on the development in Romania before raising taxes.

The need to increase public revenue is evident. Greece's struggle shows that fighting public deficit is not won only by raising taxes but it takes also the fight on clandestine employment, control of tax revenues and strict budget spending next to economy friendly circumstances.

What does Bulgaria benefit from Germans, who register companies in Bulgaria other than more revenues for its coffers?

Relocating a business to a foreign country is always a mutual venture rather than a one-way lane.

To benefit from new markets and low taxation one has to bring a whole company abroad. This includes its knowledge, employment and assets.

For many clients it is elementary to save taxes to have profits left for reinvesting into machinery or acquire new markets; a key point when going to Bulgaria as it is a hub at the Black Sea with relations to Turkey and Russia.

Again this transfers money and knowledge from the emigrating country to Bulgaria. But it is also a cultural exchange in both directions which also can open ones' eyes for a different view on things.

German companies which are going to invest in Bulgaria are often attracted by low taxes and benefits on the costs' side. From the Bulgarian view the financial opportunities are assets that are an attractive offer for an enterprise.

How do you guarantee security for the companies registered in Bulgaria? Do you work in a team with tax consultants and other experts?

A question always asked by our clients, as incorporating companies in foreign country has become a market for cheap founders as well as black sheep.

Someone who is going to relocate a company that was built up by hard work to another company needs both: A reliable, trustworthy network and experienced advisors.

As mentioned before, the tunnel vision out from the designated country will be a short glance on the whole matter that bears risks by its nature. But to have only a view from the originating country will lead into a dead end.

It is our good practice and experience to analyse the needs of the client in the originating country, if applicable together with a tax advisor or lawyer the company is used to work with.

The requirements in the designated country are described and proofed on the individual needs by the advisor there.

The client benefits from the merging of his needs and the requirements by a team of tax and legal advisors who know each other for long, even if working separated over many countries.

One can find numerous agencies specialized in foreign company formations in the internet. As a rule, however, these companies do not employ Tax Accountants specialized in international tax law. Frequently, such formation agencies are not – or only insufficiently - versed in international tax law

Often they are even not permitted to provide advice on legal or tax matters in countries as a consequence of the Legal Advice Act. Formation agencies - or even Tax Accountants – located in the forming countries often are only knowledgeable in domestic tax law. If one takes a look at the relevant internet offers, it quickly becomes apparent, that many of the providers publish incorrect or insufficient information, working according to the strategy "The cheaper the better".

We have focused on tax and legal advisory to meet the clients' needs and international requirements.

What opportunities does the European legislation hold for your clients?

Bulgaria has acceded to the EU and by doing so accepted a legal framework that has been proved over the years. Often member states and also its citizens have challenged the EU – commission and its treaties -, the member states among each other, so that a solid legal framework arouse.

The judgements of the European Council apply as common law direct to the laws of the member States.

As an example the Freedom of Establishment is granted to any legal or natural person within the EU (C-70/95 "Sodemare"). Further, the Control on foreign companies and the inclusion of the profits of controlled foreign companies in the tax base of a parent company have been ruled in a millstone decision of the Court in C-196/04 ("Cadbury Schweppes").

One more benefit is the Parent Companies and their Subsidiaries Directive (2003/123/EC) which abolishes withholding taxes on payments of dividends between associated companies of different Member States. The directive contains three main elements:

? updating the list of companies that the Directive covers;

? relaxing the conditions for exempting dividends from withholding tax (reduction of the participation threshold);

? eliminating double taxation for subsidiaries of subsidiary companies.

Councils' Directive 2005/19/EC on the common system of taxation applicable to mergers, divisions, transfer of assets and exchanges of shares is an additional step of the three directives to harmonize the Internal Market.

The transfer of the registered office is a means of exercising freedom of establishment as provided for in Articles 49 and 54 of the EU - Treaty. Where shareholders of companies entering into the transactions are treated as fiscally transparent, persons having an interest in the shareholder should not suffer taxation on the occasion of restructuring transactions.

These are just three steps towards an Internal Market that shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties.

Even if there are many obstacles are left, the Internal Market is a great advantage for all Europeans also in terms of common social standards, wealth and development.

What would you like to see the Bulgarian government do to make it even easier for you to register companies and do business here?

Still the communication is not as easy as when we are working with e.g. UK. Also the change to an electronic register took some more time than we expected and it gave us hard times to explain it to our clients. But we are confident that these are minor problems that will be solved in some time.

A bigger problem is the low performance on the Corruption Perceptions Index, where Bulgaria, Greece and Romania are on the last three places in the EU.

We are confident Bulgaria has understood is has to come back to its better results it achieved earlier on the CIP, soon.

It is important it has been recognized by the government – and the people - that corruption is a serious risk that will hinder economic development as well as democracy itself.

Does the fact that Bulgaria attracts companies improve its image in Germany?

Economic relations between Bulgaria and Germany have a long prosperous tradition. They are important for both countries and have been growing with the Bulgarian accession into the EU. Bulgaria is seen as one of the rising markets in southern Europe.

It's the little things that can make a potential partnership or cooperation with foreign companies succeed or fail and their importance is often not within the awareness of German entrepreneurs.

Essential to the development of business relationships are the attitudes of partners, mutual respect and the willingness for mutual adjustment of desires and possibilities.

One can say that the willingness to open oneself for different approach on businesses is more accepted day by day. A growing number of companies ask us for Bulgaria as place for their business; ask more about the country and the people, its culture. Even without being involved into Bulgarian - German business relations one can see, that relations are getting stronger and the interest is growing – for business, personal things and vacations likewise.

www.taxsavingcorp.com