Tax Treatment of Life Insurance and Additional Health Insurance Expenses for Selected Employees
Background
A medium-sized company provides additional health insurance and life insurance to a subset of its employees. However, these expenses do not qualify as social expenses, as they are not extended to all employees. This raises a critical tax question: should these expenses be treated as employee income taxable under the Personal Income Tax Act (PITA) or as non-deductible expenses for corporate tax purposes under the Corporate Income Tax Act (CITA)?
Legal Context
The Corporate Income Tax Act (CITA) in Bulgaria stipulates that expenses unrelated to a company’s business activities are non-deductible for tax purposes and must increase the company’s financial result. Furthermore, additional health insurance and life insurance provided only to select employees do not meet the criteria for social expenses under CITA and are therefore not subject to tax on social expenses.
The lack of universal application across all employees excludes these expenses from being classified as social expenses. This distinction brings into question the appropriate tax treatment under PITA and CITA.
The Issue
The key issue is how to tax life insurance and additional health insurance expenses provided only to selected employees. Since these do not qualify as social expenses:
- Should they be taxed as employee income under PITA, subject to income tax and social security contributions?
- Or, should they be treated as non-deductible expenses under CITA, increasing the company’s financial result?
Resolution
Two possible approaches to the tax treatment of these expenses are:
- Monetary Relations Between Employer and Employee
- If these expenses are considered part of the monetary relationship between the employer and employee, they are regarded as employee income under PITA.
- In this case, the company must pay income tax and social security contributions on these expenses.
- Non-Deductible Expenses
- An alternative approach, supported by part of the accounting community, is to treat these expenses as non-deductible under CITA, increasing the company’s financial result at the end of the year.
- This conclusion is supported by the Bulgarian Law Digest (2023, pp. 346–347), which clarifies that if additional health insurance is not extended to all employees, it does not constitute social expenses. While life insurance is not explicitly addressed, this interpretation can be applied by analogy.
Conclusion
After detailed discussions within the company and a review of relevant legislative provisions, both approaches are valid and can be applied. However, due to the lack of a definitive position from the National Revenue Agency (NRA), the company opted to treat these expenses as non-deductible under CITA, increasing its financial result.
Alternatively, should the company choose to treat these expenses as employee income, they must comply with taxation under PITA, including income tax and social security contributions.
Key Takeaways for Businesses
- Tax Compliance: Employers offering selective benefits should carefully evaluate their tax treatment under both PITA and CITA.
- Legal Interpretation: Businesses should stay updated on clarifications and case law from authorities like the NRA and rely on trusted resources like the Bulgarian Law Digest.
- Decision-Making: When in doubt, consult with tax professionals to ensure compliance and optimal tax strategies.
By addressing this common tax challenge, businesses can make informed decisions that align with their financial and legal obligations.