The question arises whether such a specific transfer of property as a liquidation share (if the company is registered for VATA) should be treated as a taxable supply under the VATA at all and, if so, how is the taxable amount to be determined.

In several of its interpretative guidelines on the matter, the National Revenue Agency (NRA) has approached the issue (perhaps predictably) from a rather formal perspective and naturally in the interest of public revenue collection maximization, by putting forward the view that the transfer of property as a liquidation share is to be treated as an ordinary supply of goods against consideration.

In this sense, the understanding of the NRA suggests that if the transactions involves a transfer as a liquidation share of a new building or constructible land, VAT should be charged and, accordingly, if the subject of the transfer is an old building (put into operation more than 5 years before the transaction) or a land plot adjacent to an old building, the transaction will be exempt from the requirement for the payment of VAT. 

In determining the taxable amount in accordance with NRA’s stated position, the market value of the property to be transferred as a liquidation share, determined on the basis of a market valuation drawn up by a licensed valuer, should be the starting point.

This approach of the tax authorities in treating the liquidation share paid in kind is also reflected at the corporate tax level, insofar as the company transferring the property as liquidation share will, in the event of a positive difference between the market value and the book value, have grounds to incur corporate tax.

However, the NRA’s understanding of the treatment of the transfer of property as a liquidation share is not shared by the case law of the court, which rightly held that when carrying on an activity outside the scope of independent economic activity, business entities do not act as taxable persons within the meaning of the VATA. The mere holding of shares in a trading company is generally not treated as the carrying on of an independent economic activity and, accordingly, income from an independent economic activity – dividend and liquidation share should remain outside the scope of VAT, whether in cash or in kind, leaving it outside the scope of the VAT Act.

In fact, with regard to dividends, there is also the settled case law of the European Court of Justice according to which no VAT should be charged on the payment of a dividend. By analogy, it is logical to assume that the payment of a liquidation share, whether in cash or in kind by way of a transfer of property, should also be treated in the same way from the point of view of VATA, because the receipt of a liquidation share constitutes a realisation of company rights – the shareholder receives property corresponding to his share in the capital.

The transfer of a property as a liquidation share could result in an obligation for the company to repay part of the tax credit enjoyed on the acquisition of the property by the company if, according to the depreciation programme chosen, the asset in question is not yet fully depreciated at the date of its transfer as a liquidation share to the partner. However, the need for such an adjustment in the case of a company is irrelevant to the treatment of the liquidation share from a VATA perspective.

Under the Constitution, Bulgaria is a state governed by the rule of law, which implies that all citizens, but also all public authorities and institutions, must comply with the laws and execute the decisions of the Bulgarian courts. We can only hope that the tax authorities will follow the case law and accept the court’s arguments on the specific nature of the liquidation share, be it in cash or in kind, leaving it outside the scope of the VATA.

Milena Gaidarska