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Doing Business in Bulgaria

Overview About Bulgaria Setting up a Business in Bulgaria Company Registration Procedures Taxation

TAXATION

The Bulgarian tax regime can be classified in two main categories:

Direct Taxation:

  • Corporate income tax
  • Personal income tax
  • Withholding taxes

Indirect Taxation:

  • VAT
  • Excise Duties

CORPORATE INCOME TAX

Under the Corporate Income Tax Act (CITA) all companies and partnerships (including non-incorporated partnerships), carrying out business in the country, are liable to a corporate income tax at a rate of 10%. Bulgarian resident entities are taxed on a worldwide basis. Foreign entities are taxed on their Bulgarian-source income. Companies are considered to be tax residents if they are registered in Bulgaria. Companies that are non-residents in Bulgaria, but operate in Bulgaria through a branch, office, agency or other form of a permanent establishment are only liable to tax on the profits generated through their Bulgarian establishment.

Annual profit must be declared no later than 31 March of the year following the taxable year. Generally, the taxable profit is determined in accordance with the financial result reported in the Profit and Loss Account ("P&L") adjusted for tax purposes. Depreciation is calculated by systematically applying the straight-line depreciation method. Depreciation norms should not exceed the following rates:

Category of Assets Assets Description Annual Depreciation norms (%)
I steady buildings, facilities, communication devices, electricity carriers, communication lines 4
II machinery, manufacturing equipment, apparatus 30-50*
III transportation vehicles, excluding automobiles; coverage of roads and airplane runways 10
IV computers, software and right of using software 50
V automobiles 25
VI all other depreciative assets 15

*Possibility to be 50% when new investment is made and the equipment is new and purchased after January 1, 2005

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TAX EXEMPTION FOR MANUFACTURING BUSINESSES

Manufacturing companies enjoy 100% exemption of the corporate income tax for investment in depressed regions, in case they meet the following conditions:

  • All the sites and assets (except for cash in bank accounts and equity) of the company are entirely located within the administrative boundaries of a depressed region
  • The company does not have any due tax or obligatory social security liabilities

Under CITA "depressed regions" are municipalities with unemployment exceeding 50% the average of the country and enumerated in a list annually approved by the Minister of Finance.

The exemption could be enjoyed if the amount of the tax credit is invested for acquiring fixed assets, necessary for the manufacturing activity, within a period of three years, following the year in which the tax credit was used. The value of the intangible assets (licenses, patents and know-how) should not accede 25% of the value of the tangible assets. At least 25% of the value of the assets must be financed by company`s own funds, including loans. The ownership of the acquired assets can not be transferred for a period of 5 years as of the date of their acquisition, except for in cases of reorganization of the company in compliance with the Commercial Law.

The company, which enjoys the exemption, could exercise it for a period of 5 subsequent years, even if as a result of decreased unemployment, the municipality is excluded from the above mentioned list.

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TAX CREDIT FOR INVESTMENT IN DEPRESSED REGIONS

Companies investing in depressed regions enjoy reduction of the corporate tax by 10% of the amount invested in acquisition, modernization or reconstruction of fixed assets including buildings, equipment, transmitters, electricity networks, telecommunication lines, machines, production facilities, transportation facilities, (excluding personal cars), road cover, computers and peripheral devices, software and the right to use software. The cost of intangible assets should not accede 25% of the acquisition costs of the fixed assets. The acquired assets could not be disposed for a period of 5 years, except in cases of reorganization of the company. The tax credit can be used for a period of 5 years.

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PERSONAL INCOME TAX

Under Personal Income Tax Act (PITA) tax liable persons are individuals  residents and non-residents, and corporate entities explicitly enumerated therein. Residents are considered individuals who reside in Bulgaria longer than 183 days for each 365 days period. Residents are liable for their world-wide income. Non-residents are considered those individuals who do not fit the above criteria for residents. Non-residents are liable only for their income derived from Bulgarian sources.

Local entities with annual turnover for the preceding year up to BGN 50 000 are taxed by a final annual (patent) tax for income resulting from sources in Bulgaria.

Incomes derived under an employment contract are taxed on a monthly basis as follows:

Monthly income Tax
up to BGN 180 non-taxable
from BGN 180 to BGN 250 20% on the excess over BGN 180
from BGN 250 to BGN 600 BGN 14 + 22% on the excess over BGN 250
above BGN 600 BGN 91 + 24% on the excess over BGN 600

The annual taxable base is the sum of all taxable incomes received during the calendar year.

The total annual income is subject to some adjustments and is then taxed in accordance with an annual progressive scale as follows:

Annual income Tax
up to BGN 2,160 non-taxable
from BGN 2,160 to BGN 3000 20% on the excess over BGN 2,160
from BGN 3,000 to BGN 7,200 BGN 168 + 22% on the excess over BGN 3,000
above BGN 7,200 BGN 1092 + 24% on the excess over BGN 7,200

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WITHHOLDING TAXES

Certain types of income from sources in Bulgaria and payable to non-resident legal entities (if not generated through a permanent establishment) or individuals are subject to withholding taxes. The types of income are defined in CITA as:

  • Dividends and liquidation quotas
  • Interest, including such under finance leases
  • Royalties
  • Technical services remuneration
  • Rents
  • Payments under operating leases, franchising and factoring
  • Remuneration under management contracts
  • Capital gains from transfer of shares in local companies, securities issued by the State, a municipality or a local entity and local real estate

The withholding tax rate is 5% on dividends and liquidation quotas and 15% on the other types of taxable income. The withholding tax rate may be reduced under an applicable double tax treaty.

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WITHHOLDING TAX EXEMPTION FOR EU CITIZENS

Dividends and liquidation shares, distributed by a local person in favor of a foreign natural or legal person, local for an EU member-country, are not subject to withholding tax under the conditions that:

  • According to the tax legislation of the respective EU member-country the person is considered as local of this country for tax purposes and by force of an agreement for avoiding the double tax levying with a third state is not considered as local person of a state out of the EU
  • The person is levied with corporate tax, without having right of choice or exemption from levying with this tax
  • The person is the actual possessor of the income and holds at least 20% of the shares/stocks of the local entity
  • By the moment of calculating of the dividends or the liquidation shares the person has owned the shares/stocks of item 3 continuously for a period not less than one year


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VALUE ADDED TAX (VAT)

The Value Added Tax Act (VAT Act) currently in force is effective as from 1 January 1999. Although Bulgaria is not a member of the European Community, the VAT legislation in many aspects follows the provisions of the Sixth Council Directive 77/388/EEC on the common system of VAT and the uniform basis for its assessment.

The standard VAT rate is 20%. Zero rate of VAT applies to exports of products, certain eligible exports of services, as well as to some other transactions.

VAT Registration

Bulgarian and foreign businesses which carry out taxable transactions with a place of supply in Bulgaria and have a taxable turnover of at least BGN 50,000 during the preceding twelve months is obliged to register for VAT purposes. Non-residents, except for branch offices, are registered for VAT through a VAT representative. Voluntary VAT registration is limited to some specific cases such as:

If the business performs both VAT taxable transactions and zero-rated transactions (i.e. export) and has a turnover of at least BGN 50,001 (as of the 1-st of April, 2006 the required turnover drops to BGN 25, 001);

  • If a company incorporated in Bulgaria has a registered and paid up share capital of at least BGN 500,000

There are special rules for the VAT registration in some cases of commercial companies' transformation and acquisition.

VAT Credit Refund

The VAT credit to be refunded can be set off against the VAT due, as well as against other liabilities to the state. The offsetting takes place during a 3-month term following the month in which the VAT credit occurred. If after this term there is still VAT to be refunded, the taxpayer may request a refund or continue offsetting it in the following months. Within three months as of the date of submitting the request for refund the tax authorities have to refund the remaining VAT after setting it off against any outstanding tax liabilities (there are indications that the second 3-month term may be reduced to 45 days).

Special preferential VAT regime for imports

As of 1 January 2003 VAT on the import of goods can be charged by the VAT registered importer if he holds a permit issued by the Minister of Finance and imports goods (with the exception of excise goods) according to a list approved by the Minister of Finance.

The importer shall exercise his right by:

  • Declaring in the filed customs declaration that he will use this regime
  • Declaring that at the time of the import he is registered for VAT and has no outstanding tax liabilities and liabilities to the obligatory social and health insurance

Where the importer has exercised his right, the customs authorities shall admit lifting the goods without effective payment or securing of the VAT.

The above special import regime is applicable to a person who simultaneously meets the following requirements:

  • Realizes an investment project approved by the Minister of Finance
  • Is registered for VAT
  • Has no outstanding tax liabilities and obligatory social and health insurance liabilities
  • Has obtained a permit by the Minister of Finance
  • The project should be eligible for state aid for regional development

The investment project shall be approved by the Minister of Finance in compliance with the following requirements:

  • Term of fulfillment of the project – up to two years
  • Size of the investment – over BGN 10 million for a period not longer than two years
  • Opening of more than 50 new jobs
  • The possibilities of the person to finance the project, as well as to construct and maintain sites providing its fulfillment

The permit shall be issued for a period of up to two years on the grounds of a written request, to which the document designates by the law are enclosed.

Excise Duties

Excise duties are levied on goods and services listed in the Excise Duties Tariff, which are:

  • Subject to transactions performed in Bulgaria, or
  • Subject to cross-border transactions from abroad to Bulgaria

Subject to excise duties are:

  • Spirit drinks, including beer and wine
  • Tobacco products
  • Fuels
  • Some types of automobiles
  • Gambling machines and other casino facilities
  • Coffee and tea
  • The Excise Duties Act provides for reimbursement of excise duties upon exportation of goods, when excise stickers have been paid but not used by producers, etc
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DOUBLE TAX TREATIES

Bulgaria is a party to fifty-three bilateral double tax treaties which provide for a relief of tax or a reduced rate of tax. Double Tax Treaties with Algeria, Egypt and Latvia have been signed, but are not effective yet. The multilateral COMECOM treaty could still apply to some former USSR countries (such as Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan) (A broad information on the withholding system of taxation on straightforward charges is provided in the Appendix below.

Procedures for claiming relief under a Double Tax Treaty Claims of benefits under a Double Tax Treaty (such as exemption from income tax withholding or a reduced rate of tax) are subject to issuance of a decision for clearance by the Bulgarian tax authorities.

Below is a list of countries, with which Bulgaria has concluded Double Tax Treaties:

Albania
Armenia
Austria
Belarus
Belgium
Canada
China
Croatia
Cyprus
Czech Republic
Denmark
Egypt
Finland
France
Georgia
Germany
Greece
Hungary
India
Indonesia
Ireland
Italy
Israel
Japan
Kazakhstan
Korea North
Korea South
Kuwait
Lebanon
Luxembourg
Macedonia
Malta
Moldova
Mongolia
Morocco
Netherlands
Poland
Norway
Portugal
Romania
Russia
Singapore
Slovakia
Slovenia
Spain
Sweden
Switzerland
Syria
Thailand
Turkey
Ukraine
Vietnam
Yugoslavia
Zimbabwe
United Kingdom
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