Taxation regime in Bulgaria falls into two principal categories:
Direct taxes:
- Corporation tax;
- Personal income tax;
- Withholding taxes.
Indirect taxes:
- Value added tax (VAT);
- Excise duties.
Corporation tax
According to the Corporate Income Tax Act (CITA), all legal entities and unincorporated associations, which carry out economic activity in Bulgaria, are subject to the levy of corporation tax at the rate of 10%. For the purposes of this Act, the unincorporated associations are treated as equivalent to legal entities.
Resident legal entities are liable to tax in respect of the profits and income accruing to them from all sources both inside and outside Bulgaria.
Non-resident legal entities are subject to corporation tax only in respect of their economic activity in Bulgaria.
Within the meaning given by CITA, "resident legal entities" are the legal entities incorporated under the Bulgarian law, the companies incorporated under Council Regulation (EC) No 2157/2001 and the co-operative societies incorporated under Council Regulation (EC) No 1435/2001, where their registered office is situated in the country and they are entered in a Bulgarian register. Legal entities which are not registered/incorporated in Bulgaria but carry out economic activity by opening a branch, an office, an agency or another form of representation within the territory of the country ("permanent establishment" within the meaning given by the CITA) are liable to corporation tax on the profits and income accruing from their permanent establishment inside Bulgaria.
The annual taxable profit must be declared in a tax return on or before 31 March of the following calendar year. The taxable profit is a positive quantity, computed on the basis of the financial result (accounting profit/loss), arrived at as the difference between income and expenditure before assessment of taxes on profit and adjusted according to the procedures established by Chapter Six of CITA. Depreciation expenses are determined to arrive at the taxable profit for tax purposes. The amount of depreciation varies by category of asset and is arrived at by systematic application of the straight-line depreciation method. The rates of depreciation are determined on a single occasion for the calendar year and may not exceed the following values:
Asset category | Asset description | Annual rate of depreciation (%) |
I | Solid buildings, incl. investment properties, plant, transmission facilities, electric power carriers, communication lines; | 4 |
II | Machinery, process equipment, apparatus; | 30 (50*) |
III | Means of transport excluding automobiles; surfacing of roads and of runways; | 10 |
IV | Computers, computer peripheral equipment, software, and right to use software; | 50 |
V | Automobiles; | 25 |
VI | Tax tangible and intangible fixed assets whereof the period of use is restricted according to contractual relationships or a legal obligation; | 100/years of legal restriction. The annual rate may not exceed 33 1/3 |
| All other depreciable assets. | 15 |
In respect of Category II assets, the annual rate of depreciation may not exceed 50%, where the following conditions exist simultaneously:
1. the assets are part of an initial investment;
2. the assets are new as produced and have not been exploited prior to their acquisition.
Retention of corporation tax by manufacturing enterprises
Taxable persons are allowed to retain 100% of the corporation tax due from them in respect of the taxable profit derived by them from manufacturing activities they carry out, including the processing of materials supplied by customers, where the following conditions exist simultaneously:
1. the taxable person carries out manufacturing activities solely in municipalities where the rate of unemployment for the year preceding the current year was 35% or more above the national average for the same period;
2. the conditions under Article 189 and Article 190 of CITA are fulfilled, that is to say:
- The taxable persons must fulfil the requirements for receiving a regional aid grant according to the State Aids Act and the Regulations for Application of the State Aids Act.
- Where the regional aids from all sources related to the initial investment exceed BGN 75 million, the retention of tax is permissible where the taxable person has been granted permission by the European Commission under the terms and according to the procedure established by the State Aids Act.
The municipalities where the rate of unemployment is 35% or more above the national average are designated annually by an order of the Minister of Finance following a motion by the Minister of Labour and Social Policy. The order is promulgated in the State Gazette.
The corporation tax retained must be invested in acquisition of assets that form part of the initial investment made within four years after the beginning of the year for which the retention is enjoyed. The value of the intangible assets forming part of the initial investment must represent not more than 25% of the value of the tangible fixed assets forming part of the initial investment. At least 25% of the value of the assets forming part of the initial investment must be self-financed or debt-financed, and the corporation tax retained as well as other resources containing any State aid element are not treated as self-financing or debt-financing.
The ownership of these assets may not be transferred within five years after the date of their acquisition.
When a municipality drops out of the list of municipalities with high unemployment as a result of an increase in employment, corporation tax retention may be enjoyed during the following five consecutive years, reckoned from the year during which the municipality was dropped from the list.
Reduction of corporation tax with respect to investments in municipalities with high unemployment
In respect of investments in municipalities where the rate of unemployment is 50% or more above the national average, the corporation tax due may be reduced by 10% of the value of the assets acquired where the conditions under Articles 189 and 190 of CITA (see above) are met. This right accrues subject to the condition that the initial investment is implemented entirely in municipalities where the rate of unemployment was 50% or more above the national average for the same period. The taxable person exercises this right for the year of acquisition of the assets. Where the amount of the reduction exceeds the corporation tax due for the relevant year, the succeeding corporation tax prepayments and annual payments are debited with the difference.
The municipalities where the rate of unemployment is 50% or more above the national average are designated annually by an order of the Minister of Finance following a motion by the Minister of Labour and Social Policy. The order is promulgated in the State Gazette.
Personal income tax
Personal Income Tax Act (PITA) applies only to income accruing to resident and non-resident natural persons. The Act regulates the taxation of income accruing to natural persons, including income from activities in a sole-trader capacity. Resident natural persons are all persons, regardless of their nationality, who have a permanent address in Bulgaria or who are present within the territory of Bulgaria for a period exceeding 183 days in any twelve-month period. Resident natural persons are liable to tax in respect of any income acquired from sources inside and outside Bulgaria. Non-resident natural persons are liable to tax only in respect of any income acquired from sources inside Bulgaria.
Income from dividends and liquidation shares, accruing to resident and non-resident natural persons, is also taxed according to the procedure established by this Act.
As of 01.01.2008 the personal income tax is flat - 10%
Withholding taxes
According to the procedure established by CITA, the tax withheld at source is withheld and remitted only where the recipient of the respective income is a resident or non-resident legal entity. The income received by a natural person is taxed according to the procedure established by ITNPA.
A tax withheld at source is levied on any dividends and liquidation shares, as distributed (apportioned) by resident legal entities in favour of:
1. any non-resident legal entities, with the exception of instances where the dividends accrue to a non-resident legal entity through a permanent establishment in the country;
2. any resident legal entities which are not merchants, including any municipalities.
This tax is final and is withheld by the resident legal entities which distribute dividends or shares in a liquidation surplus. The rate of tax is 5%.
A tax withheld at source is also levied on the following income having its source in Bulgaria, which accrue to non-resident legal entities, which are not realised through a permanent establishment in the country:
- any income from financial assets and transactions in financial assets issued by resident legal entities, the State and the municipalities;
- any interest payments, including interest within payments under a financial lease contract;
- any income from rent or other provision for use of movable property;
- any copyright and licence royalties;
- any technical assistance fees;
- any payments received under franchising agreements and factoring contracts;
- any compensations for management or control of a Bulgarian legal entity;
- any income from real estates or from transactions in real estates, including an undivided interest or a limited real right to any real estate situated in the country.
They are subject to levy of a tax withheld at source, which is final. The rate of tax is 10%.
Any income from disposition of shares in public companies, negotiable rights attaching to shares in public companies, and shares in and units of collective investment schemes do not attract a tax withheld at source where this disposition is effected on a regulated Bulgarian securities market.
Value Added Tax
The new Value Added Tax Act (VATA) came into force on 1 January 2007, the date of accession of Bulgaria to the European Union. The rate of tax is 20%, except for supplies expressly specified in the Act as subject to the zero rate; the rate of tax applicable to hotel accommodation as part of a package tour is 7%.
The following supplies are exempt:
- the supply of buildings or of parts of buildings, which are not new, including the adjacent plots of land, as well as the creation and transfer of other real rights to such buildings, parts or land (unless the supplier exercises a right of option for taxation);
- the supply of agricultural land and forestry land (provided its intended use has not been altered to "land for construction work");
- the supplies of a non-profit-making nature etc.
It should be borne in mind that the transfer of a right of ownership or other real rights, as well as the renting out of plant, machinery, equipment and structures immovably fixed to or built under the ground, is not an exempt supply.
Registration for VAT
Registration under VATA is compulsory or optional.
Compulsory registration:
Any taxable person having a taxable turnover of BGN 50,000 or more for a period not exceeding 12 consecutive months preceding the current month is obligated to submit an application for registration to the competent territorial division of the National Revenue Agency (NRA) within 14 days after the end of the tax period during which such turnover has accrued to the person. Notwithstanding the taxable turnover, the registration requirement furthermore applies to any person who is established in another EU Member State, who is not established within the territory of the country and who effects taxable supplies of goods which are assembled within the territory of Bulgaria by or to the account of this person and their recipient is not registered under VATA.
The registration requirement also applies to each non-taxable legal entity and taxable person which/who is not registered on other grounds but effects intra-Community acquisition of goods to a total value exceeding BGN 20,000. Within the meaning given by VATA, "intra-Community acquisition" is any supply of goods, dispatched or transported to Bulgaria from the territory of another EU Member State, where the recipient is a taxable person registered for VAT purposes in another EU Member State or, in other words, the import of goods to the territory of Bulgaria from the territory of another EU Member State.
A person, who is obligated to register but has not registered his/her obligation in due time, is registered ex officio by the NRA authorities upon ascertainment of the omission.
Chapter Fifteen of VATA provides for certain specific cases of compulsory registration: as a result of transformation of commercial companies, in connection with the activity of non-resident persons who are not established in the country.
Registration of the following persons is effected through the agency of an accredited representative:
- A non-resident person, who has a fixed establishment within the territory of the country from which the person carries out economic activity and who satisfies the conditions for compulsory registration or for optional registration;
- A non-resident person, who is not established within the territory of the country but effects taxable supplies made within the territory of the country and who satisfies the conditions of VATA for registration.
Registration is made at the NRA territorial directorate exercising competence over the place of registration of the accredited representative. This requirement does not apply to branches of non-residents, to which the standard procedure applies.
Compulsory registration does not apply to any persons for whom the following conditions exist simultaneously:
- They supply services electronically to recipients who are non-taxable persons, who are established or have a permanent address or usually reside within the territory of the country;
- They are not established within the territory of the Community;
- They are registered for VAT purposes for their activity referred to in Item 1 in another Member State.
Optional registration:
Any taxable person, regardless of the amount of his taxable turnover, may register under VATA at his own option.
Right to deduct credit for input tax. VAT refund
The right to deduct credit for input tax exists where the goods and services received are used for taxable supplies. The credit for input tax becomes deductible where the tax subject to deduction becomes chargeable by the payer, i.e. in the standard case for the tax period in which the supplier owes the tax to the Exchequer, the recipient will have the right to deduct this tax as credit for input tax. According to one substantial change in the Act, the credit for input tax becomes deductible even in cases where the supplier has not charged VAT. The credit for input tax furthermore becomes deductible for supplies whose place of transaction is outside the territory of the country but which would have been taxable if effected within the territory of Bulgaria.
The tax period is fixed as one month in respect of all registered persons and is concurrent with the calendar month. Upon the lapse of the tax period, a registered person must submit a VAT return showing the net tax for the tax period (i.e. the difference between the total amount of the tax chargeable from the person and the total amount of the credit for input tax in respect of which the right to deduction has been exercised during the same tax period). Where the credit for input tax exceeds the tax charged, the difference constitutes input tax claimable.
The input tax claimable is set off against other chargeable and unpaid tax liabilities and liabilities for social-insurance contributions collected by the NRA, and where there are no such liabilities or their amount is less than the amount of the input tax claimable, the registered person deducts the input tax claimable during the next three months.
The following groups of persons have the right to refund the tax paid:
- Any taxable persons who are not established within the territory of the country but who are established and registered for VAT purposes within another Member State: in respect of any goods purchased and services received by them within the territory of the country;
- Any persons who are not established within the territory of the Community but who are registered for VAT purposes in another State: on a basis of reciprocity;
- Any non-taxable natural persons, who are not established within the territory of the Community, who have effected purchases of goods for private use inclusive of tax charged: after leaving the territory of the country, subject to the condition that these goods are exported in an unaltered state.
Preferential arrangement for charging VAT on the import of goods for implementation of an investment project
VAT on imports may be charged by the person registered under VATA instead of by the customs authorities if the importer is granted authorization by the Minister of Finance [1] and imports goods for the needs of an investment project (with the exception of excisable goods) approved by the Minister of Finance.
The importer exercises this right by:
- declaring in the customs declaration as submitted that he will use this arrangement;
- declaring that at the time of effecting the import, the importer is a person registered under VATA and does not owe liquid and chargeable tax liabilities and liabilities for compulsory social and health insurance.
Where the importer has exercised this right, the customs authorities admit to release the goods without the tax being effectively remitted or secured.
The investment project is approved by the Minister of Finance where the following circumstances exist simultaneously:
- Time limit for implementation of the investment project: not exceeding two years;
- Amount of investments: exceeding BGN 10 million for a period not longer than two years;
- Creation of more than 50 new jobs;
- Capacity of the person to finance the project, as well as to construct and maintain facilities ensuring the implementation of the project.
Permission is issued for a period of up to two years on the basis of a request in writing to which the documents specified in VATA must be attached.
The conditions for granting regional aid according to the State Aids Act and the Regulations for Application of the State Aids Act should also be met.
Excise duty
Excise duty is an indirect tax which is charged on the following goods:
- alcoholic beverages, including wine and beer;
- tobacco products;
- energy products and electricity;
- automobiles;
- coffee and coffee extracts.
These goods are subject to excise duty unless placed under an excise duty suspension arrangement:
1. upon their production within the territory of the country;
2. upon their introduction into the territory of the country from the territory of another Member State;
3. upon their import into the territory of the country.
The import of excisable goods means the introduction of non-Community excisable goods into the territory of the country, as well as the introduction of Community excisable goods from third countries, which are part of the customs territory of the EU. Where, upon introduction into the territory of the country, the goods are placed under a customs procedure, their import is considered complete when they are released for free circulation.
The obligation to pay excise duty arises as from the date of release of the excisable goods for consumption.
