Understanding a country’s tax system is crucial for any company considering expanding into new locations and businesses. In 1994, numerous independent firms managed by the PKF International Limited curated a Worldwide Tax Guide (WWTG) to ensure international companies with their most frequently asked tax questions in publication form.
This article will give you information regarding Tax Treaties, rates of withholding payment of royalties, interest, dividends, and other payments, as well as basic facts and much more. While this article will provide you with much-needed information regarding tax regime in Bulgaria, it’s important to understand this article should not be seen as a complete explanation of the taxation affairs.
Fundamental Quick Facts
It’s essential to know some brief facts about Bulgaria before knowing about its tax regime. For example, Bulgaria is populated by 7.2 million people with their major religion being Christian Bulgarian Orthodox. Their monetary unit is the Bulgarian Lev (BGN), their Int. dialing code is +359 while their internet domain is .bg. The main languages spoken in Bulgaria is Bulgarian.
Bulgarian residents are taxed on their global income, while non-residents are merely taxed on their Bulgarian income. The ordinary VAT rate is 20% with a decreased rate of 9% for hotel lodging services, but the corporate income tax is a 10% flat fee on the taxable profit. As mentioned before, the withholding tax is payable on interest, dividends, royalties, and any other form of income when dispersed to a non-residential entity. An inheritance received by the person’s children, spouse, and descendants are exempt; however, diverse rates of inherited tax are implemented for other relatives.
Withholding tax when circulated to a non-residential entity is due on varied types of income including, liquidation and dividends quota; royalties, interest, franchising and factoring fees while exemptions are applicable for interest on bonds made by the EU/EEA entities. Technical and management services fees; capital gains from the relocation of real estate; income from hiring property, movable or immovable; capital gains from the removal of financial assets made by the State and municipalities or resident entities (with some exemptions); and damage or penalty payments distributed to entities tax citizens in low-tax provinces.
Foreigners can also be exempt from social security endowments in Bulgaria, but those endowments can be recognized in the person’s home country under the appropriate multilateral social security agreement. Bulgaria also has 70 international treaties to avoid double taxation. There is no exchange controls or group taxation for VAT purposes or for corporate income tax.
Bulgaria double tax treaties and rates are varied when compared to different countries. The percentage of the dividends, interests, and royalties vary per country. For example, in Albania, the dividend percentage is 5 while the interest and royalty percentage are both, but in Ireland, the dividend is 0% with an interest of 5% and 10% royalties. It’s important to research the percentages for the country you have in mind that is also included in the treaty.
Establishment of Taxable Income
Earnings include all capital and income gains. Exclusively, expenses sustained solely for business purposes are deductible while the accounting profit is modified in conformity with the regulations of the corporate income tax legislation which will be included below.
|Capital Gains and Losses||Generally, they’re included in the trading income for companies, ordinary income for people, and then taxed accordingly.|
|Inventory||Cost may be set on the foundation of the average cost method or FIFO; but, are valued at the lower of market value and cost.|
|Depreciation||The straight-line method is usually utilized. Varied assets purchased throughout the year will have different depreciation rates apportioned.|
|Dividends||Liable to 5% withholding tax when distributed to resident non-profit entities, non-residents, and individuals. Dividends shared to resident companies are not included in their taxable income except for special purpose investment companies and non-EU/EEA foreign entities.|
|Losses||Corporate tax losses can be executed over the following five years but cannot be conducted back against profits from prior years.|
|Interest Deductions||Interest paid by a company unless under the stipulation of thin capitalization is regarded as an ordinary business expense. Interest that falls under the thin capitalization rules may become tax deductible in the following five years depending on certain circumstances.|
|Foreign-Sourced Income||Bulgarian authorities impose taxes on resident companies on every profit emerging from foreign sources similarly to those from local sources.|
|Incentives – Tax Holiday||The extent of the annual corporate income tax may be partly or completely reduced by entities on their profits from manufacturing, although there are still certain limitations and conditions which include the EU state aid restrictions.|
|Exemptions from Corporate Tax||National investment funds and particular purpose investment companies and collective investment plans authorized for public offering in Bulgaria are not contingent upon corporate income tax.|
Corporate income tax is charged at a 10% flat fee on taxable profits which are permanent establishments of non-residential entities in Bulgaria, and companies and partnerships created under the Bulgarian law. The annual corporate tax return must be delivered and paid by the 31st of March the following year. Monthly or quarterly installments on advance corporation tax are due during the year.
- Capital Gains Tax: of companies are addressed as normal trading income thus are taxed with the corporation tax rate of 10%
- One-Off Tax On Certain Expenses: Particular expenses made to employees are subject to one-off tax as well as “representative” expenses, and much more with the rate of 10%. These are deductible for corporate income tax purposes
- Value Added Tax (VAT): Based on the EU VAT rules and Directive 2006/112/ EC. The rates include 20% for intra-community purchases and importation from non-EU countries, domestic supplies, and 9% for hotel lodging services with some exemptions
- Branch Profits Tax: of foreign-registered companies are taxed as domestic entities
- Real Estate Tax: Charged between 0.01% – 0.45% annually on the immovable property and the higher of the gross book
- Vehicle Tax: Charged depending on the characteristics and type of vehicle which is applicable to ships, airplanes, and cars
- Transfer Tax: Charged between 0.1% – 3% on the higher sales price and taxable value of the insurance value of cars/transferred real estate
- Donation Tax: Charged between 3.3% – 6.6% based upon value of donation
- Tourist Tax: Charged between 0.2 – 3 (roughly EUR 0.1 – 1.5) a night.
- Inheritance Tax: Charged between 0.4 % – 0.8% of inheritance which exceeds BGN 250,000 (roughly EUR 128,000) in favor of siblings and their descendants (3.3% – 6.6% for other successors). Received by children, descendants, and spouse are exempt.
Affiliated Group Transactions
Bulgarian transfer pricing regulations enquire taxpayers apply arm’s length prices in their group transactions. The requirements are levied between domestic and cross-border transactions. The five methods to determine arm’s length prices are the Comparable Uncontrolled Price Method; the Resale Minus Method; the Cost Plus Method; the Profit Split Method; and the Transactional Net Margin Method.
The personal tax rate is a 10% flat fee on taxable income for individuals and 15% for sole traders. Usually, individuals are considered Bulgarian tax residents if the center of their crucial interests are in Bulgaria and they’ve stayed in Bulgaria for more than 183 days in the span of 12 months.
- Exempt Income: include capital gains from the elimination of shares on the governed Bulgarian/EU/EEA market, income from the elimination of particular real estate, and interest on deposits in non-EU/EEA-based banks
- Deductions: certain donations and other specified conditions; health insurance endowments and mandatory social security; intentional personal insurance; and statutory deductions for rental income, freelancers, etc.
- Social Security & Health Insurance: mandatory insurance contributions between 30.7% – 31.4% paid by the employee and the employer in a particular ratio
- One-Off Taxation of Certain Income: due on income obtained by non-residential individuals from technical and management fees, capital gains, and more
- One-Off Tax Rates: may be decreased depending on the applicable tax treaty
- Lump-Sum Taxation: relevant to sole proprietorships with annual rotation less than BGN 50,000. A 5% reduction of the tax may be applied if the annual tax return is submitted electronically by March 31, the subsequent year