Tax System

Bulgaria has the lowest corporate tax in Europe – 10%.

Since 2007, Bulgaria is a member of the EU and it was necessary to adjust and harmonize its legislation with the acquis communautaire of the EU. The tax regime in Bulgaria can be classified generally in two categories: direct taxation (corporate tax, income tax for individuals, withholding tax) and indirect taxation (VAT tax and excise tax) which will be extensively reviewed below.

The applicable legislation is the Corporate Income Tax Act (CITA), the Income Taxes on Natural Persons Act (ITNPA), Value Added Tax Act, Excise Duties and Tax Warehouses Act, Common Customs Tariff of the EU.

National Revenue Agency is entrusted with the management of the taxes in Bulgaria.

Direct Taxes

Corporate Income Taxes;

Bulgaria is known for the lowest corporate tax in Europe – 10% on the income. Note that special tax rate applies to companies engaged in shipping activities and companies engaged in gambling or games of chance activities. Persons that are subject to taxation are legal persons established under Bulgarian law, the non-resident legal persons which carry out economic activity in the Bulgaria through a permanent establishment, sole traders (subject to specific rules provided in ITNPA), merchants (natural persons). A company is considered to be resident in Bulgaria if it is incorporated under Bulgarian legislation, or it is incorporated under Council Regulation (EC) No 2157/2001, or it is a cooperative society incorporated under Council Regulation No 1435/2003, where its registered office is situated in the country and they are entered into a Bulgarian register.

For companies established under Bulgarian law, the whole income (including the income realized outside Bulgaria) is subject to taxation. However, for foreign companies that operate in Bulgaria, only this income realized in the country is subject to taxation and specified income accruing from a source inside Bulgaria. No group taxation is applied in Bulgaria and each company is a separate tax payer.

The corporate income tax applies to profits which are determined in accordance with the generally accepted accounting principles and adjusted where necessary for tax purposes. There is a requirement for persons subject to corporate taxes that they must apply the International Financial Reporting Standards (IFRS) adopted by the European Commission for accounting purposes and approved by the Bulgarian Council of Ministers. Companies that are classified as SME can choose to apply either the IFRS or the Bulgarian Generally Accepted Accounting Principles. The financial year ends in Bulgaria on 31 December and companies are required to file their reports (declaration and balance sheets) and pay their taxes by March 31 on the following year. The declaration and the accompanying documents are to be submitted to the National Revenue Agency. The companies are obliged to make advance payment based on the profit declared for the previous year.

The profit which is subject to taxation is determined in accordance with the accounting financial result adjusted for tax purposes for: the permanent tax differences; the temporary tax differences and specific amounts provided in the CITA. There is income and/or expenses which are not considered for tax purposes. For example, the following are not recognized for tax purposes: non-business related or not duly documented expenses, interest restricted under the thin capitalization rules, expenses for impairment of assets, dividends received from local or EU based companies. Under the thin capitalization rules, if the debt to equity ratio of a company exceeds 3:1 (some of) the interest expenses may not be tax deductible in the current year. However, they may become tax deductible in the following five consecutive years under certain conditions.

Assets that are tax depreciable are: tax tangible fixed assets; tax intangible fixed assets; the investment properties, with the exception of land; subsequent expenses associated with asset written off from the tax depreciation schedule. Depreciable assets are divided in categories and different annual depreciation rate applies which is determined once a year.

A person subject to taxation may choose to carry forward losses or not. The tax loss can be carried forward for five consecutive years to offset the taxable profit reported in these years. Losses cannot be carried back.

Under specific conditions stipulated by CITA, a person subject to corporate tax may take advantage of tax retention. Collective investment schemes, which have been admitted to public offering in the Bulgaria, and licensed investment companies of the closed-end type under the POSA, are exempt from the corporate tax. Special purpose investment vehicles under the Special Purpose Investment Companies Act are exempt from the levy of corporate tax, as well.

There are various general and regional tax incentives. General tax incentives are available for companies which hire unemployed persons and persons with disabilities.

Certain corporate expenses like business entertainment expenses, expenses incurred for social benefits of the staff, expenses relating to the use and the maintenance of company vehicles are subject to tax on expenses. The effective tax rate is 9%.

Withholding Tax;

Only the income of resident and non-resident legal entities is levied with withholding tax whereas the income of natural persons is regulated by ITNPA. Withholding is levied on dividends and shares in a liquidation surplus, as distributed (apportioned) by any resident legal person in favour of non-resident legal persons, with the exception of the cases where the dividends accrue to a non-resident legal person through a permanent establishment in the country, and in favour of any resident legal persons which are not merchants, including any municipalities. The withholding tax does not apply to non-resident legal persons that are resident for tax purposes in a Member State of the European Union or in another State which is a Contracting Party to the Agreement on the European Economic Area, with the exception of the cases of hidden profit distribution. The current rate of the withholding tax is 5%.

Part of business and investment income of non-resident legal entities earned from sources in Bulgaria are subject to flat final income tax, which is normally levied by means of withholding. Withholding tax is due on the following types of income when accrued to a non-resident entity:

  • Dividends and liquidation quotas

  • Interest, royalties, franchising and factoring fees

  • Technical (including consultancy) and management services fees

  • Income from the use of movable or immovable property

  • Capital gains from transfer of real estate

  • Capital gains from disposal of financial assets issued by resident entities or the State and municipalities (exemption for capital gains from disposal of shares on a regulated Bulgarian / EU / EEA market).

  • Services fees, remuneration for the use of right and penalty or damages payments (except for insurance compensation) accrued to entities tax resident in low tax jurisdictions.

The current tax rate is 10%. However, income raised from the disposition of shares in public companies, negotiable rights attaching to shares in public companies, and shares in and units of collective investment schemes effected on a regulated Bulgarian securities market, is not subject to withholding tax at the source.

Taxes for Natural Persons;

There is a flat rate of 10% that is levied on the income of natural persons. For tax purposes, there are resident and non-resident natural persons, who earn income from sources in Bulgaria, and resident and non-resident persons, who are obligated to withhold and remit taxes. Regardless of the nationality, Bulgarian law considers as “resident persons” persons who have permanent address in Bulgaria, or persons who are present at the territory of the country for a period exceeding 183 days in any twelve-month period, or sent abroad by the Bulgarian State, by bodies and/or organizations thereof, by Bulgarian enterprises, and the members of the family of any such person, or persons whose centre of vital interests is situated in Bulgaria.

The deadline for natural persons to file their declarations for income is 15 April on the following year. The income subject to taxation is defined as an aggregate of the total income received by a natural person during one calendar year with the exception of the income which is non-taxable by virtue of a law and the income specifically excluded from the annual income which is taxed separately under specific rules. If a person receives an income from more than one place, the income subject to taxation is calculated for each source of income separately under the terms and conditions stipulated by the applicable legislation.

Local Taxes;

Taxes such as tax on real estates and vehicles, garbage collection fee, transfer taxes are determined by and paid to each municipality.

Indirect taxes

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The VAT regime in Bulgaria is governed by the Value Added Tax Act which reflects the EU legislation and Directive 2006/112/EC of 28 November 2006 on the common system of value added tax. Subject to taxation are all persons who carry out independently economic activity. Value added tax of 20% is an indirect tax imposed on:

  • each taxable supply of goods or services effected for consideration;

  • each intra-EU acquisition effected for consideration, whereof the place of transaction is within the territory of the country, by a person registered under this Act or by a person in respect of which an obligation to register has arisen;

  • each intra-EU acquisition of new means of transport effected for consideration, whereof the place of transaction is within the territory of the country;

  • the importation of goods;

  • each intra-EU acquisition whereof the place of transaction is within the territory of the country of excisable goods.

Under the VAT Act certain persons are required to register with the National Revenue Agency, which maintains a VAT Persons Register. Particularly, taxable persons having turnover of BGN 50,000 or above are subject to compulsory registration. Other persons may voluntary register.

Zero rate of VAT applies to the following transactions:

  • supplies of goods dispatched or transported to destination outside the EU;

  • certain transactions related to international transportation;

  • supply for handling of goods;

  • supply related to duty-free goods;

  • supply of goods provided by agents, brokers and other intermediaries;

The following transactions are exempt from levying with VAT:

  • supply linked to health care

  • supply linked to welfare and social security work

  • transfer of the right of ownership of land, save for development land and land under buildings

  • creation or transfer of limited rights in rem to land and lending and leasing

  • transactions with buildings with buildings or parts thereof which are not new, with building land, as well as the creation and transfer of other rights in rem thereto, are an exempt supply.

Excise duties;

Bulgarian legislation of excise duties is harmonized with the legislation of the EU. Excise duties are levied on certain products which are listed in the Excise Duties and Tax Warehouses Act. Such products are spirits, beer, tobacco products, petrol and diesel fuel, heavy oil, certain types of cars, and electricity. Since 2005, there is a system of tax warehouse in Bulgaria and certain products like tobacco products, alcohol and energy products (subject to specific exceptions) can only be produced in such warehouses.

Excise goods may be imported, processed and stored in tax warehouses as well as transported under a deferred payment regime subject to specific eligibility and registration conditions.

Custom duties;

Bulgaria acceded to the European Union on January 1, 2007 and therefore, it harmonizes its legislation in accordance with the EU legislation and applies the Common Customs Tariff of the EU. Within the internal market, custom duties, tariffs, quotas and measures having equivalent effect are prohibited. EU Member States have common customs for third countries. Within the EU, four freedoms apply: free movement of goods, free movement of services, free movement of capital, free movement of people (which includes free movement of workers and freedom of establishment).

For more information about doing business in Bulgaria, see the complete text of our Guide.