The European Commission said in a March 19 2009 media statement that it had formally requested Bulgaria to change some of its tax provisions.

The provisions with which the EC has taken issue are those according to which certain types of Bulgarian source income are subject to a withholding tax on a gross base when paid to non-residents while Bulgarian residents may deduct expenses related to the same income.

The EC considers that these rules may lead to higher taxation for non-resident taxpayers and therefore are incompatible with the freedom to provide services and the free movement of capital.

The request takes the form of a reasoned opinion (second step of the infringement procedure provided for in Article 226 of the EC Treaty), the EC media statement said.

"If there is no satisfactory reaction to the reasoned opinion within two months, the Commission may decide to refer the matter to the Court of Justice of the European Communities," the statement said.

According to the Bulgarian rules, certain types of Bulgarian source income of legal persons and individuals resident in other EU member states or EEA/EFTA states are subject to withholding tax on a gross basis.

However, the tax on similar income earned by Bulgarian residents is assessed on a net basis.

"This particularly concerns income from rewards and remuneration paid to scientists, artists and sportsmen, technical services fees, including any consultancy fees, income from franchise and factoring agreements, management fees, income from immovable property, interest, royalties and lease of movable property," the EC said.

The EC believed that these rules could prevent non-resident taxpayers from providing services or making investments in Bulgaria and thus restrict the freedom to provide services and the free movement of capital.

"Bulgaria thus fails to fulfil its obligations under Articles 49 and 56 of the EC Treaty and Articles 36 and 40 of the EEA Agreement," the EC said.