Income Tax in Bulgaria

Personal Income Tax

Taxation of individuals – personal income tax is payable on income from employment, self-employment, capital gains, rental income, and so forth. Where a person’s sole source of income are wages from local company operating in Bulgaria, they are not required to file annual tax return. The employer is obligated to deduct and pay the income tax and social security on a monthly basis.

A self-employed individual must file an annual tax return and make advance payments towards income tax liability. They must pay any outstanding tax due (the balance between the advance payments and the total due on the tax return) by the 30th of April of the year following the taxation period. Such individuals should register for tax purposes at the National Revenue Agency.

Taxation of individuals / personal income tax – the annual taxable base is the sum of all taxable incomes received during the calendar year. The total annual income for levying with personal income tax is subject to some adjustments and then taxed in accordance with the annual tax return.

Tax Rate

Flat income tax rate of 10%

Tax Returns

Annual income tax return must be submitted before the 30^th of April each year

Personal income tax must be paid before the 30^th of April each year

Social Security, Health Insurance and Other Taxes

Social security and health insurance rates payable by the employer and the employee are about 31% of the employee’s gross salary. These taxes and fees include incapacity, sickness, maternity, unemployment, and pension insurance benefits. Pursuant to the Bulgarian law, social security contributions are mandatory. They are calculated on the gross income of each worker or employee.

Self-employed individuals must pay themselves contributions for incapacity, general sickness and pension.

Rates

Tax	Payable by the employee	Payable by the employer	Total
Social security (Pension)	6.14%	7.66%	13.8%
Additional obligatory social security	2.2%	2.8%	5%
Sickness and maternity	1.4%	2.1%	3.5%
Unemployment Insurance	0.4%	0.6%	1%
Professional and non-professional accident insurance	From 0.4% to 1.1%		1.1% max
Health Insurance	3.2%	4.8%	8%

Exempt Income

If you want to check your health insurance or social security status in Bulgaria, you may go to page: “Useful links”.

Some forms of income in Bulgaria are tax-exempt. Such are:

· Income from the sale of a residential apartment and a car, subject to the terms specified in law;

· Subsidies for children paid by the State;

· Grants given to Bulgarian students for studies in Bulgaria and abroad;

· Prizes from lotteries and games of change;

· Prizes given by the State for cultural works;

· A profit from the sale of assets received as an inheritance or a gift;

· Working clothes and uniforms supplied free of charge to an employee;

Tax Residence

If an individual resides in Bulgaria for more than 183 days in any calendar year, they are deemed to be resident for tax purposes. Someone whose main business or financial interests are based in Bulgaria will also be deemed to be a local tax resident.

EU citizens do not require Work Permit (including those who are self-employed). Non-EU citizens must apply for Work Permit through the nearest Embassy in their home country. An employer can arrange for Work Permit to be issued in Bulgaria.

Income Determination

Individuals must pay personal income tax (PIT) on their gross income less any mandatory social security contributions they make at their own expense. Very few other deductions are possible.

Employment income

Taxable income from work on the basis of an employment contract includes the following:

· Salary, wages, or any other remuneration for work performed, including for length of service, higher professional qualifications, unhealthy or specific work conditions, as well as any additional compensation (e.g. cost-of-living adjustments, bonuses, premiums, overtime pay).

· All fringe benefits and benefits in kind provided by the employer or for the account of the employer.

· Certain compensations received by the employee on the basis of the Labour Code (in general, for some cases of termination of the employment contract, unutilised paid leave, etc.).

· Income received by managers, controllers, and members of management and supervisory boards, as well as by shareholders of limited liability and joint-stock companies holding more than 5% of the capital.

Employment income is taxed at a 10% flat tax rate.

Business income

Business income of individuals registered as sole traders form the taxable base under the provisions of the Corporate Income Tax (CIT) Act (i.e. income minus expenses plus adjustments equals taxable profit). If the turnover exceeds BGN 50,000 in 12 consecutive months, the sole trader is subject to VAT registration. VAT registration may be required regardless of the turnover in certain cases.

Patent activities of sole traders are taxed under the provisions of the Local Taxes and Fees Act.

Sole traders file annual PIT returns.

Capital gains and investment income

Bulgarian tax residents (including expatriates who are considered Bulgarian tax residents) are taxed on capital gains and investment income realised from all sources during their period of residence. Foreign tax residents are taxed only on the capital gains and investment income derived from sources in Bulgaria.

Capital gains

Capital gains are taxed on an annual basis with a 10% flat tax rate if received by Bulgarian tax residents, and with a 10% final withholding tax (WHT) if received by non-residents. Certain exemptions provided in respect of capital gains are discussed under Exempt income below.

The taxable base for income from capital gains is determined as follows:

· The taxable base for income from disposal or exchange of immovable property, including limited property rights, is the positive difference between the sales price and the acquisition price, reduced by 10% statutory deductions.

· The taxable base for income arising from disposal or exchange of vehicles, works of art, antiques etc. is the positive difference between the sales price and the acquisition price.

· The taxable base for income arising from sale or exchange of stocks, shares, compensatory instruments, investment bonds and other financial instruments, and from foreign currency transactions is the total amount of capital gains realised during the year reduced by the total amount of the capital losses incurred during the year.

Note that generally the acquisition price is determined as the 'documentarily supported acquisition price' of the property. There are special rules for determining the acquisition price in case there is no documentary evidence thereof.

Dividend income

Dividends and liquidation proceeds paid by Bulgarian and foreign entities are subject to a 5% final WHT at source. When the dividends/liquidation proceeds are paid by non-resident entities who are not obligated to withhold and remit the Bulgarian taxes, the tax is payable by the recipient themselves. The dividend income should also be reported in the annual tax return.

Interest income

Interest income from bank accounts in commercial banks and branches of banks is taxable for Bulgarian tax residents at an 8% final tax. The tax is due on the gross interest received.

If the interest is paid from a Bulgarian bank to a Bulgarian tax resident, then the tax should be withheld and remitted by the Bulgarian bank by the end of the month following the month in which the income was received.

If the interest is paid from a foreign bank to a Bulgarian tax resident and it was not taxed at source, the individual has the obligation to report the interest income and pay 8% tax in Bulgaria on an annual basis with the annual tax return. The relevant DTT provisions should also be considered.

If the interest is paid from a Bulgarian bank to a non-Bulgarian tax resident, then the income is taxable at 10% final tax. The respective Bulgarian bank is obligated to withhold, report, and remit the taxes due to the Bulgarian tax authorities by the end of the month following the quarter in which the income was received. The relevant DTT provisions should also be considered.

Rental income

Income from rent or other rights of use against consideration (except for rent from agricultural land), as well as income from annuities and leases, is subject to quarterly advance PIT at 10% and a final tax on an annual basis at the flat rate of 10%. Advance tax is not due for the fourth quarter unless the individual confirms in writing before the payer of the income one's willingness to apply an advance tax withholding for the fourth quarter.

For tax purposes, a statutory deduction of 10% of the gross income is provided.

Royalty income

Royalties are taxed on an annual basis with a 10% flat tax rate if received by Bulgarian tax residents and a 10% final WHT if received by non-residents.

Other income

The following basic types of income are also subject to PIT (the list, however, is not comprehensive).

· Income received by freelancers, individuals supplying personal services, and artisans.

· Income from sale of agricultural products.

· Monetary and in-kind prizes from various competition events.

· Compensations for lost profits and defaults of a similar nature.

· Income from incidental transactions.

Amounts redeemed early from voluntary pension, health, unemployment and/or vocational qualification and life insurance coverage, are subject to 10% final tax.

Exempt income

Some types of non-taxable income are listed below, subject to specific conditions and requirements set in the law:

· Capital gains realised by Bulgarian tax residents and residents of EU/EEA member states on disposal of one residential real estate property per year if it was in the possession of the individual for more than three years and up to two other real estate properties if they were in the possession of the individual for more than five years.

· Capital gains from transactions with securities of public companies on the Bulgarian Stock Exchange or on a regulated securities market in EU/EEA countries.

· Profits distributed in the form of new company shares or increase of the nominal value of existing shares.

· Income under voluntary pension schemes received upon retirement

· Interest and discounts on bonds.

· Some types of social benefits provided by the employer in kind and taxed at the corporate level.

· Business trip daily allowances, within certain limits.

· Certain payments and benefits provided by the employer in accordance with the Bulgarian labour code.

Property received on the grounds of inheritance, donation, or restitution is not considered income taxable under the PITA. However, other taxes and fees may be applicable.

Corporate Income Tax

Bulgarian tax residents are taxed on their worldwide income. Non-residents are taxed on their income from Bulgarian sources only, through a permanent establishment (PE) and/or via withholding tax (WHT), depending on the case.

In general, corporate income is subject to CIT at a flat rate of 10%.

Alternative tax

Income earned by organisers of gambling games for which the bet is included in the price of a phone or other telecommunication service is subject to 15% alternative tax, applied on the increase in the price of the phone or other telecommunication service (i.e. the difference between the regular price of the service and the new higher price due to the gambling game). A fixed-sum tax is applied to the operation of gaming machines.

Online gambling games are exempt from the alternative tax, as are a significant part of the other land-based gambling games (i.e. totto; lotto sports betting, including horse and dog racing; and betting on random events or related to the knowledge of facts).

Tonnage tax regime

A special alternative tax regime applies to the operation of commercial maritime vessels, as per their net tonnage, at a rate of 10%.

Residency Rule

A corporation is resident in Bulgaria for tax purposes if it is incorporated in Bulgaria.

Permanent establishment (PE)

PEs of foreign tax residents (e.g. branches) are treated as separate entities similar to Bulgarian residents for tax and accounting purposes.

The definition of a PE in the Bulgarian legislation follows, in general, the Organisation for Economic Co-operation and Development (OECD) model; however, it covers a broader scope of activities leading to a tax presence in Bulgaria. A PE is generally defined as a fixed place (own, rented, or otherwise used) through which a foreign entity partly or wholly carries out business activities in the country.

Income Determination

The taxable result is based on the statutory accounting principles relating to profit/loss and adjusted for tax purposes. Statutory accounting is maintained on an accrual basis in line with the applicable accounting standards.

Small and medium-sized companies may apply specific national standards for the financial statements of small and medium-sized companies or, optionally, International Financial Reporting Standards (IFRS). The principles provided by the standards for the financial statements of small and medium-sized companies are similar to those provided by IFRS. Certain types of companies, including banks and insurance companies, are obligated to apply IFRS.

Inventory valuation

The tax legislation follows the accounting rules for inventory valuation methods. The accounting rules may restrict the application of certain methods (e.g. last in first out [LIFO] is not allowed under IFRS).

Inventory valuation and revaluation methods applicable under accounting standards may be used for tax purposes. Companies may choose the method of inventory valuation but must apply the chosen method consistently throughout the accounting period. An inventory of assets and liabilities is carried out in each accounting period. Accounting gains and losses realised upon revaluation of inventory will not be recognised for tax purposes and will form a temporary tax difference. These gains and losses will be recognised for tax purposes in the period in which the inventory is disposed of.

Capital gains

Realised capital gains are included in corporate income and are taxed at the full CIT rate.

Note that capital gains from securities will not be subject to taxation if resulting from shares in listed companies and tradable rights in such shares on a regulated securities market in the EU/EEA. Assets distributed as dividends are deemed realised at market value, and any capital gains arising from this will be subject to tax.

Dividend income

Dividends distributed by Bulgarian companies to foreign shareholders and resident individuals are subject to 5% WHT under the domestic legislation (see the Withholding taxes section for exceptions for payments to EU/EEA tax residents and under double tax treaties [DTTs]).

Inter-company dividends

Inter-company dividend payments between Bulgarian companies and dividends distributed by EU/EEA residents to Bulgarian companies (except for dividends from special purpose investment companies or in case of ‘hidden distribution of profits’) are not included in the tax base of the recipient company.

Note that dividends distributed to a Bulgarian company by its EU or EEA subsidiary are exempt from CIT only if the distribution is not treated as a tax-deductible expense by the distributing company.

Stock dividends

No explicit regulation with respect to stock dividends exists in the Bulgarian CIT Act. Rather, the tax treatment of stock dividends follows the accounting treatment.

Interest income

Interest income is included in the financial results of the company and is subject to 10% CIT.

Royalty income

Royalty income is included in the financial results of the company and is subject to 10% CIT.

Exchange rate gains/losses

Exchange rate gains and losses are reported in the profit and loss account and reflected in the assessment of taxable profit.

Foreign income

Income derived outside Bulgaria by resident legal entities and income derived in Bulgaria by Bulgarian branches of non-residents is included in the taxable base for the purpose of CIT, regardless of whether such income is subject to taxation abroad.

In instances where the provisions of a DTT are applicable, a tax credit or exemption for the foreign tax paid may be allowed. There is also a unilateral tax credit that may not exceed the amount of the tax that would be payable in Bulgaria for the same type of income.

Undistributed income of foreign subsidiaries of a Bulgarian resident company is not taxed.

Deductions

Depreciation and depletion

For accounting purposes, depreciation is calculated in accordance with the straight-line, progressive, or declining-balance methods. Accounting regulations permit Bulgarian companies to establish a depreciation schedule for each tangible and intangible fixed asset on the basis of the method chosen by the company.

For tax purposes, only the straight-line method is permitted. For machines and equipment that are part of the initial investment, accelerated depreciation may also apply, subject to certain conditions.

For tax purposes, fixed assets are divided into the following seven categories:

Category	Assets	Maximum Rates (%)
1	Massive buildings, industrial constructions/equipment, transmission facilities/lines (including electricity)	4
2	Machinery, production facilities, apparatuses	30/50
3	Vehicles (except cars), coverage of roads and runways	10
4	Computers, peripherals to computers, software and rights to use software, mobile phones	50
5	Cars	25
6	Long-term intangibles with legal or contractual limitations on the period of use	33.33
7	Other assets	15

Under certain conditions, assets classified in Category II that are new may be depreciated at a maximum rate of 50% for tax purposes.

The depreciation rate for Category VI is determined by the period of limitations, but not more than 33⅓%.

Depletion is not specifically regulated for tax purposes.

Goodwill

Goodwill is not amortisable under Bulgarian tax law.

Start-up expenses

Start-up expenses may be recognised as deductible in the year of establishment of the company.

Interest expenses

Interest expenses are recognised as deductible expenses, subject to the thin capitalisation rules applicable in Bulgaria (see Thin capitalisation in the Group taxation section).

Bad debt

Bad debt impairment costs can be deducted upon expiration of the statute of limitation period. Also, the impairment costs can be recognised for tax purposes upon transferring the receivables. Such impairment costs are tax deductible for financial institutions in the year of recognition.

Charitable contributions

Generally, charitable contributions to certain organisations or persons, specified by law, can be deductible at up to 10% of a company’s accounting profit.

Fines and penalties

Expenses for fines and penalties for violation of the legislation are not deductible.

Taxes

CIT is not deductible for tax purposes. However, other taxes, such as one-off taxes on certain expenses (e.g. representative expenses, certain types of fringe benefits) or local taxes and fees may be recognised as deductible for CIT purposes.

Net operating losses

The taxpayer has the right to carry forward tax losses incurred in a given year over the following five years. The loss subject to carryforward is the negative amount of the financial result adjusted for tax purposes, with certain add-backs and deductions specified in the tax legislation.

Tax losses may be reversed up to the amount of the positive financial result after tax adjustments (without the effect of the loss subject to be carried forward itself).

Carryforwards of foreign-source losses may only offset income from the same source. However, EU/EEA-source losses may offset income from other sources, including Bulgarian sources.

Loss carryback is permitted in very specific cases.

Payments to foreign affiliates

Payments to foreign affiliates may be subject to recalculation by the tax authorities if such payments are not made at arm’s length.

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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.