Direct taxation
Corporate Income Tax (CIT)
| Legislative framework | Corporate Income Tax Act |
| Taxpayers | All companies and partnership (including non-incorporated partnerships), carrying out business in the country |
| Tax Income | worldwide income for resident taxpayers Bulgarian-source income for non resident taxpayers |
| Tax rate | 10% standard rate |
| Determination of profit for tax purposes | As of 1 January 2005 all corporate tax payers are obliged to apply International Financial Reporting Standards as a primary accounting basis. |
Special Rules
- Group taxation in not permitted ; tax anti-avoidance rules cover transfer pricing and related persons ;
- Carry forward of losses over the following 5 years (10 years for banks); c arry-forward of foreign source losses is possible against foreign source income originating from the same operation. Loss carry-back not permitted ;
- Thin capitalization rules If the debt/equity ratio is higher than 2:1 at the end of the respective calendar year, the maximum tax deductible interest expenses could not exceed the sum of the interest income of the tax-payer and 75% of the EBIT; If the debt-equity ratio of the tax-payer is up to 2:1, the interest costs can be deducted for tax purposes in full. The portion that is non-deductible in the current year can be carried forward and deducted in the following three years.
- In case of loss - add the excess of interest expenses over interest income to the financial result and deduct the expenses for interests, with which the financial result is increased at its tax transformation from the taxable income during the next three tax years
- Capital gains - generally included in the corporate income and taxed at the full corporate tax rate except mainly for: capital gains from shares of public companies as well as from tradable rights in shares realized on a regulated Bulgarian stock market; capital gains realized by non-residents tax-payers from sale of real estate in Bulgaria and from the sale of Bulgaria-sourced ling-term financial assets (subject to 15% withholding tax).
Tax allowance
- Expenses for donation and sponsorship are subject to a 20% lump sum tax 7 (15% in some specific cases)
- Representative and entertainment expenses taxed at a one-time 20% tax.
- Contributions made by employers for voluntary pension and health insurance and voluntary unemployment insurance and/or "Life" insurance and " Non- Life" insurance, if connected with investment fund, in favour of the employees if such contributions are up to BGN 40 per employee per month. The excess over BGN 40 is subject to the one-time tax at 20% 7
- Car maintenance and repair expenses related to administrative and management activity are subject to a 20% lump sum tax
- The remuneration as well as the social security and health care contribution to the account of the employer paid for each employee, hired under a labour contract for no less than 12 months within the same tax year and if registered as unemployed for more than 1 year, or over 50 years of age, or with reduced working ability. This tax allowance can be usedfor the year of hiring the unemployed person.
Depreciation
Straight-line depreciation method is to be applied.
Category of Assets/depreciation are devided into the following grpoups:
I - steady buildings, facilities, communication devices, electricity carriers, communication lines - annual depreciation norm % - 4
II - machinery, manufacturing equipment, apparatus -- annual depreciation norm % - 30
III - transportation vehicles, excluding automobiles; coverage of roads and aeroplane runways - annual depreciation norm % - 10
IV - computers, software and right of using software - annual depreciation norm % - 50
V - automobiles - annual depreciation norm % - 25
VI - all other depreciative assets - annual depreciation norm % - 15
Main tax incentives for investments in depressed regions
- Companies engaged in production, including production under job processing, enjoy 100% exemption of the corporate income tax in case they meet all of the following requirements:
- All business sites and premises as well as all assets of the company (accept for cash in bank accounts and shares or stakes in other countries) are entirely located within the administrative boundaries of the respective depressed region.
- In the calendar year of exemption the company does not have any due tax or obligatory social security liabilities or any interests on such liabilities.
Corporate income tax exemption could be enjoyed if the amount of the tax, accounted as reserves, is invested for acquiring assets necessary for the production activity within three years following the year of exemption. The cost of the fixed intangible assets acquired should not exceed 25% of the cost of the fixed assets. At least 25% of the asset acquisition cost has to be financed by the investors own funds, incl. bank credits. The assets acquired should not be disposed of for a period of 5 years, except for in cases of companys merger or restructuring.
If as a result of decreased unemployment, the municipality is excluded from the depressed regions list, but in the next year when the manufacturing starts the region is excluded from the depressed regions list, the company can benefit from the incentive for the next 4 years.
- Tax credit at 10% of the value of the assets acquired as part of the initial or investment for expansion of activity in a depressed region; Requirements: the acquisition cost of intangible assets should not exceed 25% of the costs of the fixed assets; the assets acquired for the purpose of the incentive-eligible investment cannot be disposed of for a period of 5 years, except in cases of company merger or restructuring
If the value of the exemptions/incentives and other state aids for regional development is over BGN 75 million, a permission from the Commission for Protection of the competition is required. If the amount of the state grants and subsidies (excluding grants provided tax incentives) does not exceed BGN 200 000 in a three year period, the tax incentives can be used under less strict conditions.
Companies in liquidation and bankruptcy or in financial difficulties as well as some industries including automotive industry, shipyards, coal mining, steel industry, manufacturing of synthetic fibers, also agriculture and fish breeding (from the date of EU accession), cannot benefit from regional incentives.
Standard tax exempt income
- Income derived from the sale or exchange of certain types of immovable property (flats, houses or villas) or means of transport,subject to certain conditions
- Income derived from the sale or exchange of movable property except for the means of transport as per the preceding bullet, as well as the sale of shares, quotas and other equity interest in a commercial company, etc.
- Compensations received as a result of statutory health and social security insurance, as well as other certain compensations
- Interest on deposits in local commercial banks and branches of foreign banks, mutual benefit funds, savings and credit cooperations, the interest and expenses on court-awarded claims, the interests and discounts on state, municipal and corporate securities as well as moratoria interests on bond relations, incomes derived from investments of the insurance reserves on "Life" insurance, marriage and children's insurance and insurance "Life", if connected with an investment fund as well as incomes derived from investment of the assets of the voluntary pension funds
- Indemnification and other similar payments for average and severe corporal damage, decease or professional disease; compensations on property insurance and compensations for alienation of rights and for losses up to the amount of the loss,
- indemnification for suffered non-proprietary damages; insurance indemnification for permanent working incapacity and the medical expenses thereof refunded by an insurer when permanent working incapacity has occurred; the sums paid by an insurer for death, the sums for marriage and child insurance when the insurance event has occurred - marriage or birth or the term of the insurance has expired
- Interest on court established receivables, which are not subject to taxation and adjudicated indemnification for expenses related to court cases
- Income in cash and in kind from social aid, received on the grounds of a normative act and unemployment indemnification and support
- Financial aid granted by social funds and organisations
- Children subsidies from the state and payments determined by court to child support
- Student grants for Bulgarian resident individuals for their education in the country and abroad
- Income in cash and in kind from social aid, received on the grounds of a legislative act
- The value of the working, uniform or representative clothing
- Prizes from the lottery and other games of fortune
- Salaries and remuneration for: members of the personnel of the diplomatic representations according to the Vienna convention forthe diplomatic relations; the members of the consular offices according to the Vienna convention for the consular relations; employees of inter-governmental and inter-state organisations according to the international contract, concluded with the respective organization,and the members of the families of the above persons, in as much as provided in the respective international contract
- Company profits distributed as new quotas and shares in commercial companies, as well as the profits distributed as an increase in existing quotas and shares' par value
- Incomes derived from transactions with public companies' stocks and trading rights on public companies' stocks, made on the regulated Bulgarian stock market
- National and state prizes awarded to authors of cultural works
- Profits, received by natural persons and sole traders - for the unprocessed plant and animal production, incl. apiculture, sericulture, fresh water fisheries from artificial basins and greenhouse production without the decorations
- Incomes derived from sale or exchange of property, obtained as inheritance, bequest, donation and restituted property, as well as the inheritance and donations
- Rentals from agricultural land
Annual taxable base
The sum of all taxable incomes received during the calendar year, reduced with:
- The amount of mandatory national insurance contributions made by the individual, and voluntary pension, health insurance and unemployment fund contributions not exceeding 10% of the taxable income, as well as premiums paid during the year on account of the persons under "Life" insurance contracts and "Life" insurance, if connected with an investment fund, not exceeding 10% of the taxable income
- Statutory deductions applicable only to non-employment contracts (e.g. 35% of the gross income for service contracts; 10% for management fees)
- Social expenses for the account of the employer, taxed under the Law on corporate income tax;
- Relieves for donations not exceeding 10% of the taxable income under some statutory conditions
| Taxation of the adjusted annual income | |
|---|---|
| Annual Income | Tax |
| Up to BGN 1440 | Non taxable |
| From BGN 1440 to BGN 1800 | 12% on the amount exceeding BGN 1440 |
| From BGN 1800 to BGN 3000 | BGN 43.20 + 22% on the amount exceeding BGN 1800 |
| From BGN 3000 to BGN 7200 | BGN 307.20 + 26% on the amount exceeding BGN 3000 |
| Over BGN 7200 | BGN 1399.20 + 29% on the amount exceeding BGN 7200 |
Incomes under an employment contract
(including fringe benefits)
The following incomes are nontaxable:
- The value of free of charge prophylactic foodstuffs, antidotes and personal safety guards pursuant to the Labour Code and other statutory instruments
- The value of the special working clothes, the free of charge working or representing clothes and uniforms which are provided under the Labour Code or other acts (e.g. those provided to state servants)
- Certain compensations under the Labour Code (e.g. business travel compensations; reassignment compensations)
- The value of travel cards for travelling from place of residence to place of work provided by the employer to the employee free of charge
- Social expenditures incurred by the employer and taxed under the Corporate Income Taxation Act (fringe benefits distributed as social expenses)
Social security system covers retirement, health and unemployment risks and obligations. Side costs to the amount of 32.2% of the gross monthly salary are on the account of the employer.
| Type of insurance | Employer (%) | Employee (%) | Total (%) |
| Health | 4.5 | 1.5 | 6.0 |
| Social | |||
| Pension insurance fund | 21.75 | 7.25 | 29.00 |
| Sickness insurance fund | 2.25 | 0.75 | 3.00 |
| Employment insurance fund | 0.70 | 0.00 | 0.70 |
| Unemployment fund | 3.00 | 1.00 | 4.00 |
| Total: | 32.20 | 10.50 | 42.70 |
The above contributions are calculated on the remuneration and other employment income of the employee for the respective month but on not more than the maximum monthly insurance base fixed annually in the Mandatory National Insurance Budget Act.
Withholding taxes
Types of income subject to 15% withholding tax rate are: Dividends and liquidation proceeds; Interest, including such under finance leases; Royalties; Technical services remuneration; Rentals; Payments under operating leases, franchising and factoring; Capital gains from sale of immovable property, stakes in local companies, securities and financial assets; Remunerations received under management contracts; Remunerations for members of the Board of Directors or controlling bodies of Bulgarian legal entities. Under some double taxation treaties technical service payments fall within the definition of royalty payments are taxed accordingly.
Withholding tax rates under double tax treaty between Kuwait and Bulgaria :
- Dividends - 5%
- I nterest 5%
- Royalties 10%
Indirect taxation
Value added tax (VAT)
The Bulgarian VAT legislation in many aspects follows the provisions of the Sixth EU VAT Directive.
Legislative Framework
Value Added Tax Act
Obligatory VAT registration
For any person (legal or physical, resident or non-resident) with a taxable turnover (excluding exports) of at least GN 50,000 during the preceding twelve months
VAT account
A VA T account has to be opened within 14 days from the date of registration under the law. VAT account can be used only for AT payments. The use of VAT accounts is obligatory for payment of VAT above BGN 1000 when customer is VAT registered.
Payment requirements
VAT payments and refunds can only be made in BGN.
VAT credit refund
If for a given month a VAT registered person has more input VAT than output VAT, the tax authorities offset the excess against any other outstanding tax liabilities of the person. If there is any remainder, the person offsets it against the output VAT he charges during a 3-month term following the month, in which the excess of input VAT occurred. If after this term there is still any remainder, the tax authorities set it off against any other outstanding tax liabilities of the person or refund it to him within 45 days as of the submission of the VAT return for the third month.
Exporters (persons with turnover from export supplies exceeding 30% of the value of their supplies in aggregate for proceeding 12 months) are entitled to a VAT credit refund within 45 days as of the date of submitting the VAT declaration for the respective month. VAT credit is also subject to recovery in case of carrying out supplies, which are exempt by virtue of international agreements, to which Bulgaria is a party .
Tax base
The tax base for supplies within Bulgaria includes:
- the price (exclusive of VAT) charged to the customer
- all other taxes and fees, including excise duties, subsidies and financing relating to a transaction
- any interest and penalties under a transaction
- transportation, package and other expenses related to supply if these are borne by the customer
The tax base for imports includes:
- the customs value
- the customs duties
- excise duties (if any) on the import goods
Place of supply
Bulgaria has adopted the EU definitions of place of supply of goods and services.
VAT exempted transactions without right to deduct VAT
- financial services
- insurance services
- Provision of legal advice by registered attorneys in accordance with the Attorneys Act and of services under the Notaries Act.
- transfer of ownership and limited property rights over land
- land processing services rendered by co-operatives by means of their own equipment, provided that the land is owned by co-operative members
- lease of buildings and parts thereof, provided these are leased out for dwelling purposes
- supply of grain as an in-kind rent for use of land
- gambling
- donations in favour of certain charity institutions
No VAt is charged on transactions with a place of supply outside Bulgaria, but no VAT deduction could be claimed for such transactions.
Zero% VAT
- for export of goods and services
- processing of imported goods that are further re-exported
- for transfer of rights over software when the place of execution is out of the territory of the country and the implemented export has been paid by the customer in full amount and received in a local bank
- for transfer of rights on films, when the place of delivery is outside the territory of Bulgaria
- for international transportation
- for public telecommunication services provided by licensed Bulgarian telecommunication operators to foreign operators
- for certain services related to carrying out international hunting tourism in Bulgaria
VAT rates
- 20% for taxable supplies, including import of goods and services
VAT incentives
Special preferential VAT regime for imports for imports of goods necessary for implementation of an investment project
Special VAT regime applies to those VAT-registered importers that hold a permit issued by the Minister of Finance and import goods (with the exception of excise goods) that are included in the list approved by the Minister of Finance.
The importer exercises 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 employee social and health insurance.
Where the importer has exercised his right, the customs authorities agree to the release of the goods without effective payment or securing of the VAT. The above special import regime is applicable to the legal person who simultaneously meets the following requirements:
- realises 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 investment project is approved by the Minister of Finance in compliance with the following requirements:
- term of fulfilment of the project - up to two years
- size of the investment - over BGN 10 million (EUR 5 million) for a period not longer than two years
- creating more than 50 new jobs
- the capability of the person to finance the project, as well as to construct and maintain sites providing for the fulfilment of the project
Such investors are also entitled to refund VAT incurred on local purchases within 10 days after filling the tax return, provided that at least 80% of the monthly VAT charges on purchases are paid through a VAT account.
