Corporate income tax: 10%

According to the Corporate Income Tax Act (CITA), all legal entities and unincorporated associations, which carry out economic activity in Bulgaria, are subject to the levy of corporation tax at the rate of 10%. For the purposes of this Act, the unincorporated associations are treated as equivalent to legal entities.

Resident legal entities are liable to tax in respect of the profits and income accruing to them from all sources both inside and outside Bulgaria.

Non-resident legal entities are subject to corporation tax only in respect of their economic activity in Bulgaria.

The annual taxable profit must be declared in a tax return on or before 31 March of the following calendar year. The taxable profit is a positive quantity, computed on the basis of the financial result (accounting profit/loss), arrived at as the difference between income and expenditure before assessment of taxes on profit and adjusted according to the procedures established by Chapter Six of CITA. Depreciation expenses are determined to arrive at the taxable profit for tax purposes. The amount of depreciation varies by category of asset and is arrived at by systematic application of the straight-line depreciation method.

Personal income tax: 10%

Personal Income Tax Act (PITA) applies only to income accruing to resident and non-resident natural persons. The Act regulates the taxation of income accruing to natural persons, including income from activities in a sole-trader capacity.

Resident natural persons are all persons, regardless of their nationality, who have a permanent address in Bulgaria or who are present within the territory of Bulgaria for a period exceeding 183 days in any twelve-month period.

Resident natural persons are liable to tax in respect of any income acquired from sources inside and outside Bulgaria. Non-resident natural persons are liable to tax only in respect of any income acquired from sources inside Bulgaria.

Income from employment relationships and legal relationships equivalent to employment relationships are taxed with 10% personal income tax.

Value Added Tax

• VAT – 20%
• VAT for Tourism – 9%
• VAT for EU Supplies – 0%
• VAT for Export – 0%

The new Value Added Tax Act (VATA) came into force on 1 January 2007, the date of accession of Bulgaria to the European Union. The rate of tax is 20%, except for supplies expressly specified in the Act as subject to the zero rate; the rate of tax applicable to hotel accommodation as part of a package tour is 7%.

The following supplies are exempt:

• the supply of buildings or of parts of buildings, which are not new, including the adjacent plots of land, as well as the creation and transfer of other real rights to such buildings, parts or land (unless the supplier exercises a right of option for taxation);
• the supply of agricultural land and forestry land (provided its intended use has not been altered to “land for construction work”);
• the supplies of a non-profit-making nature etc.

It should be borne in mind that the transfer of a right of ownership or other real rights, as well as the renting out of plant, machinery, equipment and structures immovably fixed to or built under the ground, is not an exempt supply.

Registration for VAT

Registration under VATA is compulsory or optional.

Compulsory registration

Any taxable person having a taxable turnover of BGN 50,000 or more for a period not exceeding 12 consecutive months preceding the current month is obligated to submit an application for registration to the competent territorial division of the National Revenue Agency (NRA) within 14 days after the end of the tax period during which such turnover has accrued to the person. Notwithstanding the taxable turnover, the registration requirement furthermore applies to any person who is established in another EU Member State, who is not established within the territory of the country and who effects taxable supplies of goods which are assembled within the territory of Bulgaria by or to the account of this person and their recipient is not registered under VATA.

The registration requirement also applies to each non-taxable legal entity and taxable person which/who is not registered on other grounds but effects intra-Community acquisition of goods to a total value exceeding BGN 20,000. Within the meaning given by VATA, “intra-Community acquisition” is any supply of goods, dispatched or transported to Bulgaria from the territory of another EU Member State, where the recipient is a taxable person registered for VAT purposes in another EU Member State or, in other words, the import of goods to the territory of Bulgaria from the territory of another EU Member State.

A person, who is obligated to register but has not registered his/her obligation in due time, is registered ex officio by the NRA authorities upon ascertainment of the omission.

Chapter Fifteen of VATA provides for certain specific cases of compulsory registration: as a result of transformation of commercial companies, in connection with the activity of non-resident persons who are not established in the country.

Registration of the following persons is effected through the agency of an accredited representative:

• A non-resident person, who has a fixed establishment within the territory of the country from which the person carries out economic activity and who satisfies the conditions for compulsory registration or for optional registration;
• A non-resident person, who is not established within the territory of the country buteffects taxable supplies made within the territory of the country and who satisfies the conditions of VATA for registration.
• Registration is made at the NRA territorial directorate exercising competence over the place of registration of the accredited representative. This requirement does not apply to branches of non-residents, to which the standard procedure applies.

Compulsory registration does not apply to any persons for whom the following conditions exist simultaneously:

• They supply services electronically to recipients who are non-taxable persons, who are established or have a permanent address or usually reside within the territory of the country;
• They are not established within the territory of the Community;
• They are registered for VAT purposes for their activity referred to in Item 1 in another Member State.

Optional registration

Any taxable person, regardless of the amount of his taxable turnover, may register under VATA at his own option.

Right to deduct credit for input tax. VAT refund

The right to deduct credit for input tax exists where the goods and services received are used for taxable supplies. The credit for input tax becomes deductible where the tax subject to deduction becomes chargeable by the payer, i.e. in the standard case for the tax period in which the supplier owes the tax to the Exchequer, the recipient will have the right to deduct this tax as credit for input tax. According to one substantial change in the Act, the credit for input tax becomes deductible even in cases where the supplier has not charged VAT. The credit for input tax furthermore becomes deductible for supplies whose place of transaction is outside the territory of the country but which would have been taxable if effected within the territory of Bulgaria.

The tax period is fixed as one month in respect of all registered persons and is concurrent with the calendar month. Upon the lapse of the tax period, a registered person must submit a VAT return showing the net tax for the tax period (i.e. the difference between the total amount of the tax chargeable from the person and the total amount of the credit for input tax in respect of which the right to deduction has been exercised during the same tax period). Where the credit for input tax exceeds the tax charged, the difference constitutes input tax claimable.

The input tax claimable is set off against other chargeable and unpaid tax liabilities and liabilities for social-insurance contributions collected by the NRA, and where there are no such liabilities or their amount is less than the amount of the input tax claimable, the registered person deducts the input tax claimable during the next three months.

The following groups of persons have the right to refund the tax paid:

• Any taxable persons who are not established within the territory of the country but who are established and registered for VAT purposes within another Member State: in respect of any goods purchased and services received by them within the territory of the country;
• Any persons who are not established within the territory of the Community but who are registered for VAT purposes in another State: on a basis of reciprocity;
• Any non-taxable natural persons, who are not established within the territory of the Community, who have effected purchases of goods for private use inclusive of tax charged: after leaving the territory of the country, subject to the condition that these goods are exported in an unaltered state.

Dividend Tax

Dividends payable by local companies to individuals and certain types of charity institutions, defined by CITA, are taxed with 5% withholding tax.

Dividends distributed by a local company to a EU/EAA member-country company is not subject to dividend tax.

Dividends received by local companies from other local companies are not subject to dividend tax.

Withholding Taxes

Certain types of income originating from Bulgaria and payable to foreign entities (if not realised through a permanent establishment) or individuals are subject to a 10% withholding tax. The types of income are defined in CITA as:

• technical services remunerations
• consulting services remunerations
• marketing services remunerations
• managment services remunerations
• dividends and liquidation proceeds
• interest, including such under finance leases
• royalties
• rents
• payments under operating leases, franchising and factoring
• capital gains from sale of immovable property, stakes in local companies, securities and financial assets.

Capital gains from transactions with shares in public companies and tradable rights in such shares realised on a regulated Bulgarian stock market are not subject to withholding tax.

Where the recipient of the payments resides in a country with which Bulgaria has a Double Tax Treaty, the tax rate could be reduced or an exemption could be available subject to the provisions of the respective treaty.

Notes

*Under Bulgarian domestic legislation, dividends distributed to non-residents are subject to 5% WHT, unless the recipient is a resident of an EU/EEA member state (in which case the recipient is not subject to WHT).

** Under Bulgarian domestic legislation, interest and royalty payments accrued to EU-resident companies, satisfying the Interest and Royalty Directive requirements, are exempt from WHT.

1. The lower rate applies to dividends paid out to a non-resident that is the direct owner of at least the equivalent of 100,000 United States dollars (USD) forming part of the capital of the company making the payment.
2. The reduced rate for royalties is available for the use of (or right to use) industrial, commercial, or scientific equipment.
3. The lower rate applies to dividends paid out to a foreign company that directly controls at least 25% of the share capital of the payer of the dividends. In the specific cases of the different countries, more requirements may be in place.
4. There is no WHT on royalties for the use of (or the right to use) scientific or cultural works.
5. The lower rate applies to dividends paid out to a foreign company that directly controls at least 15% of the share capital of the payer of the dividends.
6. There is no WHT on interest when paid to public bodies (government, the central bank, and, in several cases, certain governmental bodies).
7. 5% royalties are applicable if the Netherlands applies WHT under its domestic law.
8. Up to 10% branch tax may be imposed on PE profits.
9. The 10% rate on capital gains from securities applies in specific cases that are described in the respective treaty.
10. The zero rate on interest applies if the loan is extended by a bank and also for industrial, trade, and scientific equipment on credit.
11. The zero rate on interest applies if the interest is paid to public bodies (government, municipality, the central bank, or any financial institution owned entirely by the government), to residents of the other country when the loan or the credit is guaranteed by its government, or if the loan is extended by a company for any equipment or goods.
12. The Council of Ministers has stated its intention to renegotiate the DTTs with Malta and Finland.
13. A 5% rate on royalties applies if the Swiss Confederation introduces in its domestic law WHT on royalties paid to non-residents.
14. The 10% rate on interest applies if the interest is received from a financial institution, including an insurance company.
15. The 5% rate on royalties applies if the royalties are paid for the use of copyright for literary, art, or scientific work.
16. The lower rate applies to dividends paid out to a foreign company that directly controls at least 10% of the share capital of the payer of the dividends.
17. The zero rate applies to dividends payable by a Bulgarian resident entity to an entity resident in Malta. The 30% rate applies to dividends payable by a Maltese entity to a Bulgarian entity.
18. The 10% rate applies to dividends distributed by companies that enjoy a reduced or zero CIT by virtue of a tax incentive for investments. In all other cases, the rate is equal to one half of the applicable rate as per the national legislations of Bulgaria and Israel. Nevertheless, the WHT rate may not be less than 7.5% or more than 12.5%.
19. The 5% rate applies to interest payable to banks or other financial institutions. The zero rate applies to interest payable to certain public bodies (governments, municipalities, central banks) or to residents of the other country when the loan or credit is guaranteed, insured, or financed by a public body of that country or by the Israeli International Trade Insurance Company.
20. The rate on royalties is equal to one half of the applicable rate as per the national legislations of Bulgaria and Israel. Nevertheless, the WHT rate may not be less than 7.5% or more than 12.5%.
21. The rate on capital gains from securities is equal to one half of the applicable rate as per the national legislations of Bulgaria and Israel. Nevertheless, the WHT rate may not be less than 7.5% or more than 12.5%. However, capital gains from transfers of shares in entities whose real estate properties exceed 50% of their assets are taxed in the country in which the real estate is located.
22. The zero rate applies to dividends and interest paid to certain public governmental and local bodies as well as entities fully owned by the state.
23. The 5% rate on royalties applies if the royalties are paid for the use of copyright for literary, art, or scientific work as well as for the use of industrial, commercial, or scientific equipment.
24. There is no WHT on interest when paid to and beneficially owned by public bodies (government, local public authorities, the central bank, or any financial institution wholly owned by the government), as well as on interest derived on loans guaranteed by the foreign government or based on an agreement between the governments of the states.
25. The 7% rate on royalties applies if the royalties are paid for the use of, or the right to use, cinematograph films and films or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula, or process.
26. The zero rate applies for capital gains from shares in a Bulgarian resident company that are traded on the Bulgarian Stock Exchange.
27. In accordance with the EU Parent-Subsidiary Directive implemented in the Bulgarian legislation, dividends distributed by a Bulgarian resident company to an entity that is a tax resident in an EU member state may not be subject to Bulgarian WHT.
28. Full WHT at source may be levied on capital gains from the sale of shares in companies, the main assets of which are direct or indirect holdings in real estate situated in Bulgaria, and in some other cases (subject to the specifics stipulated in the respective treaty).
29. There is no WHT on interest when paid to public bodies (government, the central bank, governmental institutions) or any financial institution wholly owned by the government.
30. Pension funds and charities are considered resident persons.
31. The zero rate does not apply to dividends distributed to real estate investment trusts (REITs).
32. The zero rate does not apply to interest paid under a back-to-back loan.
33. The benefits of the treaty are limited to entities that satisfy certain criteria (Limitation of Benefits clause).
34. The 5% rate on royalties applies if the royalties are paid for the use of, or the right to use, any patent, design, model, plan, secret formula, process, or know-how.
35. The treaty provides for 10% WHT on capital gains unless shares were sold on a recognised stock exchange or seller owned at least 20% of the issuing company’s capital.
36. The reduced rate for interest is available for bank loans (subject to specifics in the treaty).
37. The zero rate applies to dividends paid to a pension fund, central bank, or a foreign company (other than a partnership) if the company directly controls at least 10% of the share capital of the payer for at least one year.
38. The zero rate applies to interest paid to a pension fund, a public body (i.e. the government, a political subdivision, a local authority, or a central bank), in relation to a liability for the sale on credit of goods, equipment or services, as well as to a company with a minimum direct participation of at least 10% in the payer of the interest for at least one year or where a third company holds a 10% minimum direct participation in both the payer and the recipient of the interest.
39. The use or right of use of industrial, economic, and scientific equipment has been excluded from the definition of royalty and is subject to full WHT exemption.
40. The zero rate on dividends applies on interest distributed to and beneficially owned by a company resident of a contracting state or a pension fund. The 5% rate would apply in all other cases, unless the dividends are paid out of income that is derived from immovable property by an investment vehicle that distributes most of this income annually and whose income from such property is exempted from tax (i.e. real estate investment trust). 15% WHT would apply to a dividend paid out by a real estate investment trust.
41. The zero rate applies to interest paid to certain public bodies (i.e. the government, a political subdivision, a local authority, or a central bank) under a loan extended by a bank or in relation to a sale of industrial, commercial, or scientific equipment on credit or a loan of any kind extended or guaranteed by a governmental institution for the encouragement of exports.

Under some DTTs, technical service payments fall within the definition of royalty payments and are taxed accordingly.

Excise duty

Excise duty is an indirect tax which is charged on the following goods:

• alcoholic beverages, including wine and beer;
• tobacco products;
• energy products and electricity;
• automobiles;
• coffee and coffee extracts.

These goods are subject to excise duty unless placed under an excise duty suspension arrangement:

1. upon their production within the territory of the country;
2. upon their introduction into the territory of the country from the territory of another Member State;
3. upon their import into the territory of the country.

The import of excisable goods means the introduction of non-Community excisable goods into the territory of the country, as well as the introduction of Community excisable goods from third countries, which are part of the customs territory of the EU. Where, upon introduction into the territory of the country, the goods are placed under a customs procedure, their import is considered complete when they are released for free circulation.

The obligation to pay excise duty arises as from the date of release of the excisable goods for consumption.

Double Taxation Treaties

The Bulgarian Government has concluded Double Taxation Treaties with the following countries:

Tax administration

Returns

• Annual profit must be declared no later than 31 March of the year following the taxable year. The annual balance sheet and the annual profit and loss account of all entities with foreign participation, as well as certain resident entities, subject to certain criteria (number of employees, legal form, etc.), are to be certified by a chartered accountant and submitted to the Tax Office at the place of residence of the legal person, together with the tax return.

Payment of tax

• The corporate tax pre-payments due by entities which ended the year with a taxable profit are payable monthly as follows:
• for the first quarter of the year – on the basis of 1/12 of the declared taxable profit for year before the previous year, and
• for the remaining nine months – on the basis of 1/12 of the declared taxable profit for the previous year
• The above bases are adjusted by a coefficient published in the State Budget Act for the respective year. Entities ending the previous year at a loss and entities founded in present year will pay quarterly advance tax on their taxable profit for the respective quarter.
• The monthly prepayments are to be effected latest on the 15th day of the current month. The term for the prepayments on quarterly basis is the 15th day of the month following the respective quarter. No prepayment is to be made for the last quarter of the year.
• Overpaid annual tax is set off against the tax to be paid for the following period. The difference between the annual tax declared in the tax return and the prepayment of tax for the same year must be paid by the deadline for submitting the tax return, i.e. 31 March.

Withholding tax is payable as follows:

• If the payer of the income is a tax liable person – by the latter by the end of the month following the month in which the payment of income became due or the resolution on distribution of dividends or liquidation quotas was made.
• If the payer of the income is not a tax liable person – by the recipient of the income within 30 days as of receiving the income.
• After payment of the withholding taxes the payer of the income should disclose this fact to the respective tax office, which shall then issue a certificate of tax compliance to the foreign person entitled to the income already taxed. This certificate is necessary for repatriation of the net income.