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D e l o i t t e & T o u c h e LLP
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BULGARIA
Taxation of Nonresident Entities
Corporate Assessments and Payments
Personal Assessments and Payments
In Bulgaria, the process of democratization is being carried out in a stable political
atmosphere. Parliament has adopted a number of new laws in the past few years that
provide the conditions for a developing market economy. The main points of the new
legislation are being worked out in collaboration with international institutions and
organizations so that the new laws will reflect the latest concepts in the field.
Deloitte & Touche, the Deloitte Touche Tohmatsu International member firm in Bulgaria,
registered its offices in Sofia in June 1992. With five partners and a professional staff of
22, the firm offers accounting, auditing, management consulting, financial advising, and tax
services to clients in the key sectors of the Bulgarian economy, including banking and
insurance, electronics, tourism, transportation, and food.
Accounting and Auditing Services: Vasco Raichev
International Services: David Saer
Management Consulting Services: John McGuinness
Tax Services: Dinko Yordanov
Telephone: +359 (2) 888643
Telecopier: +359 (2) 888769
Forms of Business Organization. The main corporate entities in Bulgaria are the joint
stock company and limited liability company. Under privatization measures, all
state-owned enterprises are to be transformed into such companies even if they are to
remain under state control. Privatization is put into effect by the transfer of shares in
state-owned enterprises to individuals or legal entities, although in some cases the property
of liquidated enterprises may be sold.
Other entities recognized in Bulgaria include the general partnership, limited partnership,
partnership limited by shares, cooperative, state-owned and municipal enterprises, and
non-profit-making organization. All these entities are liable for corporate income tax, apart
from the cooperative and the non-profit-making organization. However, if
non-profit-making organizations carry out business activities, their business income is
taxed at the rate of 40%. Any foreign person has the right to carry on business in Bulgaria
and to acquire shares or partnership interests. Representative offices may be established.
Exchange Controls. Under the foreign exchange regulations, the only payment medium
allowed in the country is the Bulgarian lev (Lv).
Profits may be repatriated without restriction as long as receipts are presented for taxes
paid. Any foreign person may open accounts or deposit foreign currency and leva in
Bulgarian banks.
Foreign employees of a company with more than 50% foreign participation may exchange
up to 70% of their remuneration for convertible currency. Individuals or legal entities
carrying on business in Bulgaria may remit the purchased currency abroad, as long as
receipts are presented for taxes paid.
Local Participation or Management Requirements. A foreign person seeking to hold an
interest that secures a majority in decision making in a Bulgarian enterprise engaged in
specified activities (including banking and insurance) must first obtain the permission of a
regulatory body. Aside from this rule, foreigners may hold a 100% interest. Foreigners
planning to work in Bulgaria must have permanent residence permits, and they must also
have work permits. Foreigners must satisfy a number of requirements to obtain work
permits.
Investment Incentives. Companies with foreign participation are exempt from corporate
income tax in relation to profits donated to Bulgarian cultural and scientific institutions,
universities, and foundations.
Foreign companies and joint ventures without state or municipal participation may deduct
the part of their investments that is made in Bulgaria. The deduction is allowed for
intangible fixed assets and some tangible fixed assets, such as industrial and commercial
buildings, machinery and equipment, and motor vehicles (except for cars).
Free Trade Zones. A number of free trade zones have been established in Bulgaria.
Foreign entities and individuals may carry out permitted trading activities in such
locations. All transactions in a free trade zone are carried out in convertible currency, but
remuneration must be paid in leva. The incentives for companies investing in free trade
zones are as follows:
Entities established under Bulgarian law are liable for corporate income tax on their
worldwide profits. Companies with more than 50% state or municipal participation must
pay taxes on profit in addition to corporate income tax.
Corporate Income Tax Rates. The basic rate of corporate income tax is 40%. A 30% rate
is levied on legal entities without state or municipal participation whose annual profits are
Lv 1 million or less. Tax is charged at a rate of 50% on commercial banks. A 70% rate
applies to the State Savings Bank of Bulgaria.
Taxable Income. Taxable profits are based on those in the financial statements, but a
number of deductions may be made from accounting profits, and the deductibility of some
expenses is limited. Various items of income are exempt.
Inventory valuation. Inventory must be valued at the lower of market value or cost.
Businesses may use the first-in, first-out method; the last-in, first-out method; the average
cost method; or the historical cost method.
Dividend income. Intercompany dividends are exempt from corporate income tax, although
tax may be withheld.
Foreign-source income. Bulgarian companies with foreign-source income may obtain
relief for tax paid on that income by means of a credit against Bulgarian tax due, provided
that Bulgaria has signed a double tax treaty with the country in question. The credit is
limited to the Bulgarian tax that would have been payable on the foreign-source income.
The profits of foreign branches of Bulgarian companies, however, are excluded from the
tax base altogether if they have been taxed in the country of origin.
Capital gains. Capital gains are included in taxable business profits. Gains from the
exchange of foreign currency are included in the tax base.
Deductions. As a general rule, business expenses may be deducted from taxable income,
up to specified limits.
Depreciation. Depreciation may be charged on tangible and intangible assets, excluding
land, forests, and cultural monuments. Enterprises can choose between four methods of
depreciation: the straight-line method, declining-balance method, progressive-balance
method, and year ordinal (digit) total method.
A different method may be applied to each group of assets, and provided that it is justified,
the relevant method can be changed. The rate of depreciation depends on an asset's useful
life.
Some limitations apply to companies with state or municipal participation in excess of
50%.
New maximum depreciation rates were introduced for selected assets on 13 August 1993,
effective retroactively from 1 January 1993. The assets can only be depreciated for tax
purposes using the straight-line method. However, the accounting depreciation method of
the enterprise may differ from the method used for tax purposes.
Interest. Limitations apply in the case of state-owned enterprises. Seventy-five percent of
interest paid on loans is deductible.
Personnel costs. Expenditure on medical care, training, and travel of personnel is
deductible if it does not exceed 10% of annual wages.
Reserves. As a rule, reserves are not an allowable deduction.
Tax Treatment of Losses. Losses may be carried forward until used, subject to a
maximum of five years. State-owned and municipal enterprises must first obtain permission
from the Ministry of Finance. Losses may not be carried back. When losses have been
reported for more than one year, the deduction is applied so as to follow the consecutive
order of the occurrence of the losses.
Taxation of Nonresident Entities
Nonresident entities are subject to tax on Bulgarian-source income at the basic rate of 40%.
Payments of dividends, interest, royalties, fees for technical services, and rents are subject
to final withholding taxes when the recipients are nonresident. Under Bulgarian legislation,
a permanent establishment may not be registered as a legal entity in Bulgaria, irrespective
of the fact that it may be liable for taxation. In this case, the five-year loss-carry forward
principle may not be applied.
Bulgaria has no group tax provisions and no antiavoidance provisions. Dividends paid
between companies generally are exempt, but this rule applies only to wholly Bulgarian
enterprises within the boundaries of the country.
Branch or Subsidiary? The same tax rate applies to branches, subsidiaries, and other legal
entities. Dividends paid by a subsidiary are subject to a 15% withholding tax, but profits
remitted abroad by a branch of a foreign entity are not subject to withholding tax.
Corporate Assessments and Payments
Enterprises liable for corporate income tax must file returns for each calendar year by 31
March of the following year. Returns must be accompanied by audited financial statements.
Bulgarian companies must make quarterly advance payments based on the profits for the
relevant period with accruals from the beginning of the year. Those that had profits of over
Lv 800,000 in the previous year must pay in monthly installments.
Bulgarian citizens are taxable on income arising in Bulgaria and on income arising outside
of and remitted to Bulgaria. Foreign citizens are subject to tax on income arising in
Bulgaria.
Tax liability depends on citizenship. In the case of both foreign and Bulgarian citizens, tax
liability has no regard for place of residence or length of stay.
Treatment of Families. Income tax is a personal charge on each individual. Income tax on
property is split between the owners according to their respective shares of income
received. Rentals from property that is a common family possession are divided equally
between the spouses, unless there is a court ruling for other shares.
Tax Rates. Taxable income is divided into two categories: employment income and
income from other sources. Employment income is subject to tax which are applied on a
monthly basis, the tax being deducted at source. Income from other sources, including
self-employment, is taxed at the annual rates. These rates are subject to adjustment for
inflation.
In 1995, a withholding tax on the remuneration of employees who do not have employment
contracts is in effect. Companies deduct 20% of the remuneration of directors, 32% of the
remuneration of foreign lecturers and consultants, and 10% of that of others.
Taxable Income. Taxable income for the purposes of general income tax comprises the
aggregate gross receipts from all sources (except employment) less the expenses deductible
under the tax law. Directors' remuneration is usually treated as income from a source other
than employment and is therefore subject to general income tax, However, when the person
appointed as director has signed an employment contract with the company, his or her
income is taxed on a monthly basis
All remuneration received under an employment contract, including bonuses and cash
benefits, is subject to tax as employment income. Taxable income for the purposes of the
tax on employment income includes vacation pay, reimbursed traveling expenses, and
payments of rent made by the employer on the employee's behalf. Benefits in kind are not
subject to tax. Employment income received by Bulgarian citizens temporarily employed
outside Bulgaria is exempt if the income has been taxed in the country in which the income
arises. Tax withheld by the employer is final.
Self-employment income. The tax base of traders and others in self-employment is the
profit disclosed by the financial statements, which is then adjusted in accordance with the
provisions of tax law. Business losses can be carried forward for five years.
Dividend income. Income from participation in corporate entities is subject to general
income tax.
Foreign-source income. Income from abroad received by scientists and artists is exempt if
it has been taxed abroad. Other foreign income may qualify for unilateral relief by way of a
credit.
Capital gains. Capital gains derived by individuals are subject to general income tax. In
the case of immovable property, a government-established basic price for the land is
deducted from the disposal proceeds. As for movable property, including shares, the
difference between the sales price and the actual cost is taken.
Other income. Taxable income also includes income from rentals of movable and
immovable property.
Exempt income. Exempt income includes:
Deductions and Reliefs. Employment income not exceeding Lv 1,850 per month is exempt
from tax. In the case of people who work by means of their own vehicles or livestock, 40%
of their income is deductible in establishing their taxable income.
In the case of income from (sources other than employment,) income not exceeding Lv
22,200 per year is exempt. In establishing taxable income, a taxpayer may deduct 30% of
his or her income as expenses in earning the income without having to provide
documentation justifying the expenses.
Personal Assessments and Payments
Taxpayers with only employment income do not have to file returns because employer
withholding constitutes a final tax; the monthly tax for a job under an employment contract
is paid by the employer. Other taxpayers must file returns showing the amount from each
source and the total income for the calendar year. Returns must be filed by 15 February in
the year following the tax year in question. The return must be accompanied by financial
statements, when applicable.
Basic Rates. Withholding taxes have been introduced for various payments from Bulgarian
sources, including payments of dividends, made to foreign persons. Such dividends are
taxed at a rate of 15%. In addition, dividends distributed to a Bulgarian company with
foreign participation are subject to withholding tax at a rate of 10%. These taxes are final.
Interest, royalties, fees for technical services, and rents are subject to a final withholding
tax of 15% when paid to foreign persons.
Foreign individuals in receipt of dividends, interest, and royalties from Bulgarian sources
are subject to withholding tax regardless of whether the recipient works in Bulgaria.
Foreign individuals in receipt of remuneration as lecturers or consultants are subject to
withholding tax of 32%.
Rates Under Double Tax Treaties. Bulgaria was a member of the Council for Mutual
Economic Assistance (COMECON) and as a rule applies the COMECON double tax
conventions in the absence of new treaties with former COMECON countries. Signatories
of the COMECON treaties included the former Czechoslovakia, Hungary, Mongolia,
Poland, Romania, and the former Soviet Union. Hungary and some states formed out of the
former Soviet Union -- particularly the Baltic states -- do not recognize the COMECON
treaties.
Bulgaria is negotiating treaties or has signed treaties that have not yet entered into force
with a number of countries, including Canada, Russia, and the United States.
Value Added Tax. Value added tax (VAT) took effect in Bulgaria on 1 April 1994,
replacing the turnover tax. All persons conducting business activities are liable for the tax
on sales of products and services. The threshold for obligatory registration for VAT is Lv
1.5 million for twelve months.
VAT is levied on the amount of the goods and services. For imported goods or services,
the tax is levied on the value of these and on the amount of customs duties, excise tax, and
burden tax. Only one standard rate of 18% is levied. A zero rate applies only for exported
goods or services. Certain goods and services, such as land, financing, insurance,
education, and health, are exempt from VAT. For the first three years some additional
goods, such as heating, fuels, basic consumer goods, clothing, and textbooks, are exempt
from VAT.
Exempt goods and services differ from zero-rated goods and services in that they are
outside the scope of VAT. The entity does not have to charge VAT on sales of exempt
goods and services, but neither can the entity recover VAT that it has been charged on
related expenditures.
Social Security Contributions. All Bulgarian and foreign employers must make social
security contributions for their Bulgarian employees. The base for contributions is total
remuneration, including bonuses, benefits in kind, and prizes. The basic rate is 35%, but
rates of 45% and 50% apply to specific types of work. An additional 7% is payable to a
special unemployment fund on behalf of Bulgarian employees; the base for this contribution
is the accrued amount of salaries and wages for the respective month. Companies with
foreign participation that employ foreign citizens for the purposes of company activities in
Bulgaria must pay social security contributions at the rate of 20% on the employees'
remuneration. Contributions have to be accounted for on a monthly basis and are tax
deductible for the employer.
Excise Duties. Excise duties are generally applied to luxury items including alcohol,
automobiles, tobacco, fuel, and jewelry. The rates generally vary between 40% and 70%.
The rate on automobiles varies between 0% and 40%, depending on the engine size (in
cubic centimeters).
For alcohol and tobacco, excise duties are paid depending on quality.
In addition, VAT is paid. Exported items are not subject to excise duties.
Customs Duties. Imports and exports are basically free from restrictions, but throughout
the year, the Council of Ministers issues special decrees regulating imports and exports.
The regulations conform with the tendencies in the world economy. Major economic trends
in Bulgaria are also taken into consideration. The quantities of some goods may be
controlled by duties, special registration requirements, quotas, import fees, and so forth.
Other goods benefit from favorable conditions. Customs duties are levied on imported
goods according to category; the categories relate to the country of origin of the goods.
Inheritance and Gift Taxes. All individuals inheriting property situated in Bulgaria are
liable for tax on the inheritance at progressive rates varying between 2% and 50% in the
case of beneficiaries who are close relatives. Rates are increased by 50% in the case of
others. There are exemptions for spouses and direct descendants.
No tax is imposed on gifts made in Bulgaria up to the sum of Lv 10,000. Above this
amount, progressive rates apply from 2% to 50%.
Miscellaneous Taxes. All owners of immovable property situated in Bulgaria are subject
to a tax on buildings, the tax base being a value determined by the government. The rates
vary between 0.2% and 0.6%.
A property tax is payable every quarter to the municipality in which the property is
situated.
Entities with state or municipal participation exceeding 50% are subject to a number of
taxes in addition to corporate income tax. These include a wages tax based on the increase
of salaries, a municipal tax, and a melioration fund tax.
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