What a double taxation agreement actually does

EU membership and rights · Last reviewed: 2026-08-23

How double taxation arises

The problem starts when two states claim the same income at the same time. Usually one is the state of RESIDENCE, which as a rule claims worldwide income of its residents. The other is the state of SOURCE, which claims income arising on its territory. Someone drawing a dividend from a Bulgarian company while living elsewhere, a cross-border worker, an investor with property in two countries — all sit in that overlap.

Double taxation is not only a fairness problem; it actively deters cross-border activity. States therefore allocate taxing rights between themselves by treaty. What a treaty does is not to lower tax but to answer, in advance, which country may tax a given type of income and to what extent.

What the EU does not do here

EU countries are free to apply whatever tax rules they choose, as long as they do not breach EU law — for example by discriminating against non-nationals. Signing a tax treaty is not an obligation either: where two states have no treaty, EU rules do not create one. In practice most countries maintain a broad treaty network, but that is a fact rather than a rule, and gaps are possible. The first step is therefore always to check whether a treaty is actually in force between the two states.

On the Bulgarian side the answer sits in the treaty list published by the National Revenue Agency. In the agency's own description, these treaties are bilateral or multilateral international agreements concluded to encourage economic ties and to avoid double taxation of income and property, without creating opportunities for tax avoidance or evasion. The procedure for applying them to foreign persons is set out in Chapter XVI, Section III of the Tax and Social Insurance Procedure Code, Articles 135 to 142.

How treaties solve it: two methods

Bulgarian treaty practice relies mainly on two methods. The first is exemption with progression: income is exempt in one state but may be taken into account when setting the rate applied to other income. The second is the ordinary tax credit: the income is declared in both states, but tax paid abroad is credited against domestic tax up to a limit. Which method applies to which type of income is determined by the text of the particular treaty; there is no general rule, and claims such as „dividends always use one method“ are inaccurate.

When the two states disagree: the EU dispute mechanism

The EU's real contribution here is not to replace treaties but to resolve disputes arising when they are applied. Council Directive (EU) 2017/1852 of 10 October 2017 establishes a mechanism for disputes where two or more countries claim the right to tax the same income or profits. The verified framework: if the tax authorities fail to reach an agreement eliminating the double taxation within two years of accepting the complaint, an Advisory Commission must be set up, and it must deliver its opinion no later than six months after being established. The states may take a decision that departs from the opinion, but if they cannot agree between themselves they are bound by it.

The Directive has applied since 1 July 2019 and covers complaints submitted from that date relating to income or capital earned in tax years beginning on or after 1 January 2018. To an ordinary taxpayer that can sound abstract, but its practical meaning is concrete: a file stuck between two administrations now has a route with deadlines attached.

The order to follow in practice

1. 1

   Establish where you are resident

   Everything starts here. If both states treat you as resident, the treaty's tie-breaker rules apply tests in sequence.
2. 2

   Find the treaty in force and read the article for your income type

   Employment income, dividends, interest, royalties, property income and pensions sit in separate articles with different outcomes.
3. 3

   Obtain a certificate of residence

   The payer in the source country usually needs it before applying a treaty rate. Without it, the full domestic rate applies.
4. 4

   Follow the procedure in the right place

   For Bulgaria, the procedure for applying treaties to foreign persons is in Articles 135 to 142 of the Tax and Social Insurance Procedure Code.
5. 5

   Remember the mechanism if a dispute arises

   Unresolved double taxation between administrations has a route under Directive 2017/1852. Note the deadlines early.

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