India–Bulgaria tax treaty — rates, PE and MLI

The rates, at a glance

Every figure below is taken from the article named beside it, not from a rates table. Read the condition in the same row before you use the rate — in this treaty the condition is usually the whole answer.

Income	Rate	The condition attached to it	Article
Dividends	15%	A single rate. There is no reduced rate for a qualifying holding, so the size of the shareholding is irrelevant under this treaty. The 15 per cent cap applies only where the recipient is the beneficial owner…	Article 11, paragraph 2
Interest	15%	Article 12(3) exempts interest at source altogether where it is derived and beneficially owned by (a)(i) the Government, a political sub-division or a local authority of the other State, or (a)(ii) the Central…	Article 12, paragraph 2
Royalties	15% on copyright royalties for literary, artistic or scientific works other than cinematograph films and films or tapes used for radio or television broadcasting; 20% on royalties	A split rate, which is unusual and easy to misapply. The 15 per cent limb is narrow — it covers only copyright of literary, artistic or scientific work, and expressly excludes cinematograph films and films or…	Article 13, paragraph 2
Fees for technical services	20%	Article 13(4) defines fees for technical services as "payments of any amount to any person other than payments to an employee of the person making payments, in consideration for the services of a managerial…	Article 13, paragraph 2(b)

Status

In force	The Convention was signed at Sofia on 26 May 1994 ("done in duplicate at Sofia on this 26th day of May of one thousand nine hundred and ninety-four in Hindi, Bulgarian and English languages, all the texts being equally authentic. In case of divergence between any of the two texts, the English text shall prevail."). Entry into force is governed by Article 30, under which each State notifies the other of completion of its procedures and the Convention "shall enter into force on the date of the latter of these notifications". The notification records that the Convention "has come into force on the 23rd June, 1995", in accordance with Article 30. Article 30(a) gives it effect in India "in respect of income arising in any 'previous year' beginning on or after the first day of April next following the calendar year in which the Convention enters into force", and correspondingly for wealth held on the last day of such a previous year. Force in 1995 therefore means the previous year beginning 1 April 1996 (assessment year 1997-98) is the first Indian year covered. In Bulgaria it takes effect for years of income beginning on or after 1 January 1996.
Given effect by	Notification No. GSR 205(E), dated 9 May 1996, issued by the Central Government in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), directing that all the provisions of the annexed Convention shall be given effect to in the Union of India. The copy read carries no departmental file number. A footnote to the notification records that for the earlier Limited Agreement with Bulgaria see GSR 184(E), dated 15 April 1977.
Modified by the MLI	No synthesised text was found for this treaty in the source searched.
Principal purpose test	There is no principal purpose test in this Convention. The only beneficial-ownership screens are those in Articles 11(2), 12(2) and 13(2), and the special-relationship adjustments in Articles 12(7) and 13 (excess payments fall outside the cap).

Dividends

Rate	15%
Where this comes from	Article 11, paragraph 2

A single rate. There is no reduced rate for a qualifying holding, so the size of the shareholding is irrelevant under this treaty. The 15 per cent cap applies only where the recipient is the beneficial owner; the cap does not affect taxation of the company on the profits out of which the dividends are paid (Article 11(2), last sentence). Article 11(4) turns off the cap where the holding is effectively connected with a PE or fixed base, and Article 7 or Article 15 then applies.

Interest

Rate	15%
Exemptions	Article 12(3) exempts interest at source altogether where it is derived and beneficially owned by (a)(i) the Government, a political sub-division or a local authority of the other State, or (a)(ii) the Central Bank of the other State — the Protocol confirms that for India this means the Reserve Bank of India; and (b) where beneficially owned by a resident of the other State and derived in connection with a loan or credit extended or endorsed by the Foreign Trade Bank (Bulgaria) or the Export-Import Bank of India, in each case only so far as the interest is attributable to financing exports and imports; by any institution of a Contracting State in charge of public financing of external trade; or by any other person provided the loan or credit is approved by the Government of the State where the interest arises.
Where this comes from	Article 12, paragraph 2

The government-approval limb in Article 12(3)(b)(iv) is the practically important one: it turns approval of the loan by the source-State Government into a complete source exemption, which is worth more than the 15 per cent cap.

Royalties

Rate	15% on copyright royalties for literary, artistic or scientific works other than cinematograph films and films or tapes used for radio or television broadcasting; 20% on royalties
Where this comes from	Article 13, paragraph 2

A split rate, which is unusual and easy to misapply. The 15 per cent limb is narrow — it covers only copyright of literary, artistic or scientific work, and expressly excludes cinematograph films and films or tapes used for broadcasting. Equipment rental, patents, trade marks, designs, secret formulae and know-how all fall in the 20 per cent limb. The definition in Article 13(3) covers use of, or the right to use, industrial, commercial or scientific equipment, so equipment hire is a royalty here.

Fees for technical services

Rate	20%
Make-available requirement	No
Where this comes from	Article 13, paragraph 2(b)

Article 13(4) defines fees for technical services as "payments of any amount to any person other than payments to an employee of the person making payments, in consideration for the services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel". There is no make-available condition: the article does not require that technology, knowledge or skill be transferred to the payer. FTS sits at the 20 per cent limb of Article 13(2), the same rate as general royalties.

Capital gains on shares

Treatment	Source-State taxation of share gains is preserved. Article 14(4) allows the State where the immovable property is situated to tax gains on shares of a company whose property consists directly or indirectly principally of immovable property in that State. Article 14(5) is the wider rule: gains from the alienation of shares other than those in paragraph 4 in a company which is a resident of a Contracting State may be taxed in that State — so India may tax gains on shares of an Indian company held by a Bulgarian resident. Only gains on property outside paragraphs 1 to 5 are reserved to the residence State (Article 14(6)).
Grandfathering	None. The Convention contains no grandfathering date and no transitional or reduced-rate regime for shares acquired before any date.
Conditions	No shareholding threshold and no holding-period condition; Article 14(5) applies to any shares in a company resident in the taxing State.
Where this comes from	Article 14, paragraph 5

Permanent establishment

Construction or installation PE	More than six months (Article 5(2)(i)) — and the six months is counted for the site, project or activities "together with other such sites, projects or activities, if any", which aggregates separate contracts
Service PE	No general service PE. The only services-based deeming rule is confined to mineral oils: the proviso to Article 5(2) deems a PE where an enterprise "provides services or facilities in connection with or supplies plant and machinery on hire, used or to be used in the prospecting for, or extraction or production of mineral oils in the State", with no time threshold at all.
Agency PE	Yes, and it is wide. Article 5(4) creates a PE through a dependent agent who (a) habitually exercises authority to conclude contracts, (b) habitually maintains a stock from which he regularly delivers, or (c) habitually secures orders wholly or almost wholly for the enterprise, or for the enterprise together with other enterprises under common majority participation. Article 5(5) preserves the independent-agent exception where the agent acts in the ordinary course of his business.
Where this comes from	Article 5, paragraph 2(i), 4

The exclusion list in Article 5(3) has a sting in the tail: the closing words provide that sub-paragraphs (a) to (g) "shall not be applicable where the enterprise maintains any other fixed place of business in the other Contracting State for any purposes other than the purposes specified in the said sub-paragraphs". An enterprise with a real fixed place in the other State therefore loses the preparatory-and-auxiliary shelter for its other places. The list also includes warehousing for others and installations for exploration or exploitation of natural resources as positive PE examples in Article 5(2)(g) and (h).

Anti-abuse: limitation of benefits, and the MLI

LOB	There is no limitation of benefits article in this Convention.
PPT	There is no principal purpose test in this Convention. The only beneficial-ownership screens are those in Articles 11(2), 12(2) and 13(2), and the special-relationship adjustments in Articles 12(7) and 13 (excess payments fall outside the cap).

This page carries the treaty as notified in the Gazette. The notified text shows no MLI modification, and the MLI position has not been checked from this source.

The protocols, in order

A treaty read without its protocols is a wrong answer.

A Protocol was signed at Sofia on the same day as the Convention, 26 May 1994, and is annexed to the same notification. It is expressed to "form an integral part of the Convention". It does three things: it expands Article 7 so that profits attributable to a permanent establishment include profits directly or indirectly attributable to it, in particular profits from sales in that State of goods of the same or similar kind as those sold through the PE, and it bars deduction (and disallows crediting) of internal royalties, fees, commissions and, except for banks, interest between a PE and its head office; it confirms that the "Central Bank" in Article 12(3)(a)(ii) means, in the case of India, the Reserve Bank of India; and it reads into Article 26(3) that a Contracting State may not tax a resident of the other State more heavily or more burdensomely than it would tax a resident of a third State.
No amending notification or later protocol appears on the face of the notification read. The document notes only the earlier Limited Agreement, GSR 184(E) dated 15 April 1977, which this Convention displaces in the comprehensive field.

The words themselves

Quoted from the treaty as notified.

if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed 15 per cent of the gross amount of the dividends

Article 11, paragraph 2 of the treaty as notified.

(a) 15 per cent of the gross amount of the royalties relating to copyrights of literary, artistic or scientific works, other than cinematograph films or films or tapes used for radio or television broadcasting; and

Article 13, paragraph 2(a) of the treaty as notified.

(b) 20 per cent of the gross amount of the royalties in all other cases or fees for technical services.

Article 13, paragraph 2(b) of the treaty as notified.

a building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, projects or activities (together with other such sites, projects or activities, if any) continue for a period of more than six months

Article 5, paragraph 2(i) of the treaty as notified.

Gains from the alienation of shares, other than those mentioned in paragraph 4 of a company which is a resident of a Contracting State may be taxed in that State.

Article 14, paragraph 5 of the treaty as notified.

What to watch

The royalty rate is not one number. Article 13(2) splits at 15 per cent for copyright in literary, artistic or scientific work and 20 per cent for everything else, and the 15 per cent limb expressly excludes cinematograph films and films or tapes used for radio or television broadcasting. Software, patents, trade marks, know-how and equipment hire are all in the 20 per cent limb, as are fees for technical services.
Interest questions are usually answered by Article 12(3), not by the 15 per cent cap. Government, political sub-division, local authority and central bank interest is exempt outright, as is export-import financing through the Exim Bank of India or Bulgaria's Foreign Trade Bank, and — the widest limb — any loan or credit approved by the Government of the source State.
There is no service PE. Services performed in India by a Bulgarian enterprise create a PE only through a fixed place, the agency limb, the six-month construction site, or the mineral-oils deeming proviso to Article 5(2), which has no time threshold and catches supply of plant and machinery on hire for prospecting, extraction or production of mineral oils.
The closing words of Article 5(3) disapply the whole preparatory-and-auxiliary exclusion list once the enterprise maintains any other fixed place of business in that State for purposes outside that list. That is a materially harsher rule than the OECD pattern and should be checked before relying on a liaison or storage presence.
Article 14(5) leaves India free to tax gains on shares of an Indian company. There is no grandfathering, no threshold and no reduced rate, so the treaty gives no capital gains shelter on share sales; domestic law rates apply.
The Protocol is operative law, not commentary. Its Article 7 paragraph imports a limited force-of-attraction rule for sales of the same or similar kind through the PE, and denies deduction for notional royalties, fees, commissions and (except for banks) interest between head office and PE.

What this page does not tell you. This page is built from the notified Gazette text alone. The MLI position is not checked from this source and no synthesised text has been consulted, so readers should verify separately whether the Convention has been modified by the Multilateral Instrument. The copy read carries no departmental file number for GSR 205(E). The earlier Limited Agreement referred to in the footnote, GSR 184(E) of 15 April 1977, was not part of the document read and its terms are not described here. Bulgaria's domestic tax names in Article 2 are given as at 1994 and have since changed; nothing on this page tracks that. No competent-authority exchange of letters under Article 12(3)(b)(iii) or (iv) is reproduced.

The India–Bulgaria tax treaty