With its business-friendly environment, skilled workforce and access to the European market as a European Union (EU) member state and Schengen Zone member, it makes sense that Bulgaria is an attractive location for foreign-owned businesses.

If you are setting up a company or branch of a foreign-owned business in Bulgaria, it is vital you understand the relevant tax regulations. Staying up to date will mean avoiding penalties and inconveniences, so your business can continue running smoothly for many years to come.

In this article, we will discuss:

1. Tax in Bulgaria: The Basics
2. Direct taxes in Bulgaria
3. Indirect taxes in Bulgaria

To get true peace of mind and ensure you are well-versed on the very latest regulations affecting your business, get in touch. We will organize you a consultation with one of Leinonen Bulgaria’s tax and accounting experts, who specialize in the nuances of foreign-owned business in Bulgaria.

Tax in Bulgaria: The Basics

Taxable Profits in Bulgaria

Taxable profits are profits made from:

• Business operations
• Investing
• Chargeable gains
• Financing, leasing, etc.

Bulgaria-based international businesses are subject to paying taxes on profits from both Bulgaria and abroad, but businesses with a branch or office in Bulgaria are subject to paying tax only on profits made from its operations there.

Direct and Indirect Taxes in Bulgaria

There are two main categories of taxes that may apply to foreign-owned businesses in Bulgaria – direct and indirect.

Direct taxes are:

• Personal income tax on the revenue of individuals
• Corporate tax on annual tax returns
• Withholding tax

Indirect taxes are:

• Excise duties
• Value Added Tax (VAT)

Who is Considered a Bulgarian tax Resident?

Bulgarian tax residents are people:

• Who have a permanent address in Bulgaria
• Who reside in Bulgaria for more than 183 days across a 12 month period
• Who are sent abroad by the Bulgarian government or Bulgarian entities
• Who have their centre of vital interests in Bulgaria

What is the tax Year in Bulgaria?

The tax year in Bulgaria corresponds with the calendar year.

Double Taxation Agreements (DTAs)

Profit generated by a permanent establishment in Bulgaria is not subject to further tax in the home country in most DTAs. At present, Bulgaria has signed double taxation treaties with more than 65 countries, including Sweden, Poland, Belgium, the United Kingdom, and more.

For example, this applies to foreign investors who derive income from two different jurisdictions. Along with the double tax treaties, Bulgaria has also signed several exchange of information protocols. These allow for a clearer image of the legal entities requesting double taxation relief.

Direct Taxes in Bulgaria

Personal Income Tax

What is the Personal Income tax Rate in Bulgaria?

Personal income tax for Bulgarians sits at a flat rate of 10%, whether the person lives and works in Bulgaria or abroad. The tax rate for non-resident individuals is also 10%, but they are only taxed on income from sources in Bulgaria.

What About Dividends and Liquidation Quotas?

These are subject to a 5% tax rate when paid to either resident or non-resident individuals.

Corporate Income Tax

What do Companies in Bulgaria pay Corporate Income tax on?

Bulgarian local companies are taxed on their worldwide income in Bulgaria, while non-resident companies are taxed only on income generated within Bulgaria.

What is the Corporate Income tax Rate in Bulgaria?

Similarly to personal income tax, corporate income tax in Bulgaria is a 10% flat rate.

Who Pays Corporate Income tax in Bulgaria?

Taxable entities in Bulgaria are both companies incorporated under Bulgarian law, and non-resident companies generating income from sources in Bulgaria or through a permanent establishment.

When are Corporate Income tax Returns due?

Corporate tax returns are required by 31 March of the following year.

How is Corporate Income Tax in Bulgaria Paid?

Annual corporate income tax is deducted in advance instalments paid during the year. The amount is determined on the basis of the profit forecast for the current year. If net sales stay below BGN 300,000, advance payments are not required.

Above this threshold, companies must pay monthly or quarterly tax instalments. Companies whose net sales revenue exceeded BGN 3,000,000 in the year before the previous year must pay monthly instalments.⁴ Newly established companies do not have to pay advance corporate tax instalments for the year of incorporation, and losses may be carried forward consecutively for up to five years.

Tax on Corporate Expenses

Bulgaria imposes 10% annual tax on the following expenses:

• Business entertainment expenses
• Fringe benefits for employees and hired persons (e.g., expenses on supplementary voluntary social insurance, health insurance, and food vouchers)
• Expenses associated with own assets, leased assets, or assets provided for use by staff, workers, employees, and hired persons

Withholding Taxes

Withholding tax is 10% of salaries, to be paid to the state by the company paying the salaries.

Are There any Reductions or Exemptions for Withholding Taxes in Bulgaria?

Yes – outbound dividends and liquidation quotas paid to legal entities in the European Economic Area (EEA) are exempt. Those issued to non-EEA entities or to natural persons are subject to a 5% withholding tax. Dividends issued by local non-profits or other such associations are also subject to a 5% withholding tax, and withholding tax paid from interest and royalties is 5% for associated entities from the EU.

A DTA can be applied if it provides more favourable taxation of income acquired from a source in Bulgaria.

Taxable Persons

• Non-resident legal entities, except where dividends are provided to a non-resident legal person through a permanent establishment in the country
• Non-commercial legal persons that reside in Bulgaria
• Non-resident legal entities who receive income from a Bulgarian source, except in case of permanent establishment, royalties, and license fees

Withholding tax also applies to:

• Franchising and factoring
• Income for management services provided to a Bulgarian company
• Rent income
• Capital gains

Non-taxable Persons

• A local legal person participating in the company’s capital as a representative of the state
• A contractual fund
• Legal persons who are tax residents in an EEA country

Terms of Payment

Withholding tax is paid to the NRA Regional Directorate of the relevant region (where the taxpayer is registered or subject to being registered).

Subjects under Article 194 of Bulgaria’s Corporate Income Tax Act (CITA) must pay withholding tax on dividends and liquidation quotas:

• in three months from the beginning of a new month after the resolution to distribute assets is made, if the beneficiary resides in a country that has a DTA with Bulgaria (e.g., if decision is made on July 10, due date will be October 31)
• in one month from the beginning of a new month after the decision is made in all other cases (e.g., if decision is made on July 10, due date will be August 31)

Subjects under CITA Article 195 must pay withholding tax on income of a non-resident:

• in three months from the beginning of a new month after the resolution to distribute assets is made, if the beneficiary resides in a country that has a DTA with Bulgaria (e.g., if decision is made on July 10, due date will be October 31)
• in one month from the beginning of a new month after the decision is made in all other cases (e.g., if decision is made on July 10, due date will be August 31)

Transfer Pricing

Transfer pricing rules apply and are applicable to all transactions between related parties. Guidelines recommend preparing and maintaining all relevant transfer pricing documentation. Taxpayers must prove that their transactions are negotiated according to arm’s length prices. If tax officials conclude that prices are not at arm’s length, they may recalculate profits and impose additional levies.

Indirect Taxes in Bulgaria

Excise Duties

The following groups are subject to excise duties:

• Alcoholic beverages
• Tobacco products
• Energy products and electricity

Some luxury products and other goods fall under excise tax, which is paid on the import of dutiable products or on the first sale of local products.

Customs Duties

International EU customs legislation applies directly in Bulgaria.

Value Added Tax (VAT)

Legislation surrounding VAT in Bulgaria is generally the same as EU VAT legislation. VAT applies to all goods and services executed in either Bulgaria or another EU member state.

VAT Rates

The standard VAT rate in Bulgaria is 20%, but reduced rates can be applied to certain goods and services, for example:

• 9% VAT rate can be applied to things like hotels and delivery of books and periodicals
• 0% VAT rate can be applied to intra-community supplies and international transport

Some of the categories for reduced VAT rates contain restrictions (e.g., delivery of publications entirely or mainly intended for advertising are not subject to the reduced rate). For specific advice, speak to an expert on accounting and foreign-owned business in Bulgaria.

Taxable Persons

All Bulgarian tax residents – see previous section. Any foreign persons only have tax liability for income generated from sources in Bulgaria.

Terms of Payment

• A tax period is one calendar month, unless otherwise specified
• Tax statements must be submitted by the 14^th day of the month following the tax period relevant to the statement
• If tax is payable, it should be paid to the relevant NRA Regional Directorate within the tax filing term specified above

VAT Registration

Registration under the Value Added Tax Act is mandatory in certain circumstances, including when a company’s taxable revenue equals or exceeds BGN 100,000 over any 12 consecutive months, or if turnover for intra-community acquisitions exceeds BGN 20,000 in the current year.

The registration procedure takes 14 days after the application is submitted. It must state the grounds for registration, and be submitted together with information about the monthly taxable turnover for 12 consecutive months.

VAT Exemptions

The list of VAT exemptions is the same as in the EU directives.

Some examples of VAT-exempt goods and services are:

• Education
• Financial services
• Health, dental, hospital, and social welfare
• Gambling
• Welfare services
• International passenger transport
• Public broadcasting

Special Regimes for VAT Registration

• When an unregistered company provides or purchases services from another EU member state, the application must be submitted seven days before the service is rendered or received
• EU single One Stop Shop (OSS) VAT return for every taxable person not based in the country who provides digital, telecommunication, or radio and television broadcasting to recipients who are non-liable tax persons residing in Bulgaria – this regime was formerly known as MOSS

VAT Reporting

As discussed in ‘terms of payment’, companies registered for VAT in Bulgaria should declare and pay their VAT monthly by the 14^th of the following month. All sales invoices (including overseas) and credit notes received within the current month must be included. Purchase invoices may be included within the next 12 months.

VAT Refunds

The Bulgarian Tax Authority is required to refund recoverable VAT within four months (three months for offsetting and 30 days for effective refunding) after the declaration is submitted. A shorter procedure of VAT reimbursement is provided for intra-community dispatch and supply of goods.

Intra-community supplies of goods and services to recipients registered for VAT purposes in other EU member states should be included in VAT Information Exchange System (VIES) declarations.

VAT rules and regulations change often, and serious penalties apply for violating the VAT Act. To get peace of mind and make sure your business stays compliant, consult with a Bulgarian tax expert.

Get Informed on Tax in Bulgaria With Leinonen

Leinonen Bulgaria has been an indispensable ally to foreign-owned businesses in Bulgaria for over 16 years. Our close knit team of 11 local experts on accounting, payroll and tax in Bulgaria are here to support your next business venture.

Organize a consultation today to get true peace of mind and boost your success in the Bulgarian market.