Bulgarian Ombudsman lodges Constitutional Court challenge to tax on bank deposit interest

Written by on March 13, 2013 in Bulgaria, Business, News - No comments

Bulgarian Ombudsman Konstantin Penchev has asked the Constitutional Court to overrule provisions in the Personal Income Tax Act providing for taxation of income from bank deposits that had been paid in advance, with Penchev arguing that the law is unconstitutional because of its retroactive element.

The contested provision says that such income is considered to have been acquired on the maturity of the deposit or on the date of its termination.

The controversial plan for the tax on deposit interest was first reported in a local Sofia newspaper in September 2012. The report was rejected as untrue by the Finance Ministry at the time but the legislation was tabled in Parliament and the second reading approved in November.

The 10 per cent tax on deposit interest, in effect from January 1 2013, is levied only on fixed-term deposits and is payable at the end of the month following the quarter in which the interest was due. Banks are responsible for withholding the tax and paying it to the national Budget.

The tax is levied on deposits held in Bulgarian banks, but also banks in other European Union member states and European Economic Area countries, as well as Switzerland, with which Bulgaria signed in 2012 an amended agreement to disclose banking information.

The Ombudsman’s office said on March 13 2013 that the law was unconstitutional under article 4, paragraph 1 of Bulgaria’s constitution, because it retroactively taxed interest income from deposits made in advance under a contract between the bank and the client before the entry into force of the provisions enacting the new tax.

Penchev said that it was unacceptable for the state to intervene in this way in an existing contractual relationship and rearrange it in its favour.

He also cited a Constitutional Court ruling in June 1996, that a manifestation of the constitutional principle of the rule of law was the rule against retroactivity in tax provisions.

Penchev quoted an April 2001 ruling by the Constitutional Court that when a retroactive law impinges on rights acquired and was not motivated as being to the benefit of overriding public interest with a clear desire to deal with the consequences, it could not be described as anything other than expropriation.

The provisions were contrary to the principle of legal certainty, a fundamental principle of EU law, the Ombudsman’s office said. According to this principle, people should be aware of norms in order to plan their actions according to those rules. The purpose of the principle was that citizens should not be placed in a position of uncertainty because of unknown or changing effects of legislative rules.

 

(Photo: Clive Leviev-Sawyer)

 

 

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