Bulgaria: Tax

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in Bulgaria.

It will cover witholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities.

This Q&A is part of the global guide to Tax. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/tax-second-edition/

  1. How often is tax law amended and what are the processes for such amendments?

    Tax law is quite often amended in Bulgaria. All basic tax laws are amended at the end of every calendar year and several times throughout the year.

    Every amendment is done by the Parliament.

  2. What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?

    The principal procedural obligations of a taxpayer depend on its kind, e.g. corporation or an individual. In general, all taxpayers should maintain records and submit tax returns.

    The accounting and commercial information, as well as any other information and documents which are significant for the taxation and the obligatory insurance contributions, shall be kept by the liable person in the following terms:

    1. pay ledger – 50 years;
    2. accounting registers and financial reports – 10 years;
    3. documents for tax-insurance control – 5 years after the expiration of the prescription term of the tax due which they are related to;
    4. all other tax documents – 5 years.

    All taxpayers are obliged to submit annual tax returns after the expiration of every calendar year. The deadline for corporations is 31st of March of the following year and for individuals is 30th of April.

    VAT registered taxpayers are obliged to submit VAT tax returns and accounting registers until 14th of the month inclusive, following the month, to which they refer.
    A number of other specific tax declarations should also be filed.

  3. Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?

    The key regulatory authorities are the National Revenue Agency and the Customs Agency. It is not easy to deal with any of them. Usually any kind of issue cannot be resolved without initiating a lawsuit.

  4. Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?

    All tax disputes are capable of adjudication by a court. Which shall be the competent court depends on the issue.

    For instance, if a tax assessment act is appealed:

    • the tax assessment act is subject to appeal before the first court instance which is the regional administrative court;
    • the judgment of the regional administrative court could be appealed before the Supreme Administrative Court.

    The duration of the proceedings depends on the kind of the tax dispute. For instance, if a tax assessment act is appealed usually it takes between one and two years.

  5. Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?

    Every different kind of tax has a set date for payment. If it is not paid on time it becomes enforceable. There are no provisionally dates for payment.

    Amounts of tax in dispute are also enforceable unless the preliminary execution is not stopped by the court or by a competent body from the tax administration as a result of a special proceeding requested by the taxpayer.

  6. Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government?

    Yes, taxpayer data are recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government. The Tax-Insurance Procedure Code envisages special procedures for disclosure of taxpayer data to third parties, including other parts of the Government or foreign authorities. Most often a permission of a court is required. Only explicitly listed in the law public bodies are authorized to receive taxpayer data without court permission.

  7. Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?

    Yes, the Common Reporting Standard is implemented in the Bulgarian law since 1st of January, 2016. Bulgaria is committed to first exchange in 2017. For the moment Bulgaria does not intend to maintain a public Register of beneficial ownership.

  8. What are the tests for residence of the main business structures (including transparent entities)?

    Under the Bulgarian Corporate Income Tax Act, the following are considered local legal entities:

    • legal entities established under Bulgarian law;
    • companies established under Regulation (ЕC) No. 2157/2001 of the Council; and
    • co-operative societies established under Regulation (ЕC) No. 1435/2003 of the Council, which have their registered office within the country and are entered in a Bulgarian register.

    Under the definitions of the double taxation treaties, the tests for determining the residence of incorporated businesses could be the place of effective management or the place of incorporation.

  9. Can the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?

    Yes, when performing an audit, the Bulgarian tax authorities check all tax issues within the scope of said audit including the policing of cross border transactions within an international group.

    Usually the tax authorities examine the distribution of dividends, fees paid for law added value services, transfer pricing issues. The Bulgarian tax authorities usually strictly examine who is the beneficial owner of the income.

  10. Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?

    There is still not precise CFC regime.

    Under the “thin capitalisation” rules, if the debt-to-equity ratio of the company exceeds 3:1, (some of) the interest expenses may not be tax deductible in the current year.

    Bulgarian transfer pricing rules conform with the OECD standards. For the moment it is not possible to obtain an advance pricing agreement.

  11. Is there a general anti-avoidance rule (GAAR) and, if so, how is it applied by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only, etc?

    There is still not general anti-avoidance rule (GAAR) under the meaning of the Anti-BEPS Directive. Anyway, the Bulgarian Corporate Income Tax Act stipulates that where one or more transactions, including those between unrelated persons, have been effected under conditions that lead to tax evasion, the tax base shall be determined without taking into consideration the said transactions, or certain conditions thereof, or the legal form thereof, and what is taken into consideration shall be the tax base that would have been achieved if a customary transaction of the respective type had taken place at arm’s length prices and sought to achieve the same economic result, without leading to tax evasion.

    The said rule is always observed by the tax authorities during an audit. The enforcement of the GAAR is quite often litigated by companies who have made their tax structuring in advance.

  12. Are there any plans for the implementation of the OECD BEPs recommendations and if so, which ones?

    All OECD BEPs recommendations will be implemented in Bulgaria.

  13. How will BEPS impact on the government’s tax policies?

    In the beginning the tax authorities will need serious education on the new regime. Their lack of experience will lead to a number of lawsuits on the implementation of the BEPS rules.

    The collection of taxes will increase as a final result.

  14. Does the tax system broadly follow the recognised OECD Model?

    Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.

    If so, what are the current rates and are they flat or graduated?

    Yes, the Bulgarian tax system broadly follows the recognised OECD Model.

    Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties.

    Yes, all the above mentioned income is subject to tax (excluding pensions).
    If so, what are the current rates and are they flat or graduated?

    Incorporated businesses are subject to a flat corporate tax rate of 10 %. Certain exemptions apply to some collective investment schemes or special investment vehicles. There are also special tax regimes regarding taxation of commercial maritime shipping companies and gambling businesses.

    Individuals are subject to a flat personal income tax rate of 10 % for their employment income.

    Transactions are subject to the following VAT rates:

    • 20% regular tax rate;
    • 9% reduced rate for hotel accommodation; and
    • 0% for exports and certain other exempt activities such as: Deliveries, connected with healthcare; Deliveries, connected with social care and insuring; Deliveries, connected with education, sport and physical training; Deliveries, connected with culture; Deliveries, connected with religions; Deliveries of a non-economic nature; some Deliveries, related to land and buildings; Deliveries of financial services; Deliveries of insurance services; Gambling; and some others.

    Royalties and interest are subject to 10% withholding tax when distributed to non-residents.
    Royalties and interest accrued to EU and EEA resident entities are exempt under certain conditions, in compliance with the Interest and Royalties Directive.

    Income from land is included in the taxable profit of the company, ie they are considered as income from a company’s regular business activity, and are subject to adjustments in accordance with the applicable fiscal and accounting rules. The applicable tax rate is the standard corporate rate of 10 %.

    Income from land received by individuals who are not professionally engaged in commercial activities is exempt from tax.

    Capital gains are included in the taxable profit of the company, ie they are considered as income from a company’s regular business activity, and are subject to adjustments in accordance with the applicable fiscal and accounting rules. The applicable tax rate is the standard corporate rate of 10 %. Some capital gains are exempt, ie capital gains on publicly traded shares on the Bulgarian Stock Exchange or on a stock exchange under Directive 2004/39/EC.

    There are certain stamp duties collected for services provided by state or municipal authorities which depend on the costs for the cervices.

  15. Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?

    Yes. The tax base is the accounting profit pursuant to the commercial accounts and subject to adjustments. Tax adjustments include the following:

    • non-business related or not duly documented expenses;
    • hidden profit distribution expenses;
    • interest restricted under the thin capitalisation rules;
    • expenses for impairment of assets; and
    • dividends received from local or EU-based companies.

    According to tax depreciation rules, maximum annual tax depreciation rates are between 4% and 50%, depending on the type of asset. In general, profits are taxed on an accrual basis.

  16. Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?

    Businesses in Bulgaria generally adopt a corporate form. There are five different types of corporate structures in accordance with the Commercial Act:

    • Unlimited Partnership;
    • Limited Partnership;
    • Limited Liability Company;
    • Joint Stock Company; and
    • Limited Partnership with Shares.

    The key differences relate to the number of members and the kind of liability of the members. For instance, Unlimited Partnerships require the personal participation of their members. Limited Partnerships require the personal participation only of their unlimitedly liable members. The members of Limited Liability Companies and Joint Stock Companies participate and are liable only to the extent of their capital participation. All entities listed above are taxed as separate legal entities.

    Bulgarian law does not envisage the existence of transparent entities, ie, where the income is considered to be the income of its members. One specific entity is the consortium, because of the contribution of its members and the distribution of the profit, which is mostly used for public procurements, but it is not a classic transparent entity.

  17. Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?

    The liability to business taxation is based upon a concept of fiscal registration. Under the Bulgarian Corporate Income Tax Act, the following are considered local legal entities:

    • legal entities established under Bulgarian law;
    • companies established under Regulation (ЕC) No. 2157/2001 of the Council; and
    • co-operative societies established under Regulation (ЕC) No. 1435/2003 of the Council, which have their registered office within the country and are entered in a Bulgarian register.

    Under the definitions of a double taxation treaty, the tests for determining the residence of incorporated businesses could be the place of effective management or the place of incorporation.

  18. Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?

    No. Bulgaria does not any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres. Financial services are exempt from VAT.

  19. Are there any particular tax regimes applicable to intellectual property, such as patent box?

    No, this is not applicable in Bulgaria.

  20. Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?

    This is not applicable in Bulgaria.

  21. Are there any withholding taxes?

    Yes. Withholding tax is due by foreign entities on incomes derived from the country:

    The income from financial assets issued by local legal entities, the State and the municipalities shall be income from a source within the country.

    The income originating from transactions in financial assets shall be income from a source within the country.

    The income from dividends and liquidation shares in local legal entities shall be income from a source within the country.

    The following types of income assessed by local legal entities, local sole proprietors or foreign legal entities and sole proprietors through a permanent establishment or a fixed base within the country, or paid by local natural persons or foreign natural persons, having a fixed base within the country, in favour of foreign legal entities, shall be income from a source within the country:

    1. interest, including interest comprised in financial leasing contributions;
    2. income originating from rent or any other granting of the use of movable property;
    3. royalties;
    4. remuneration for technical services;
    5. remuneration under franchising contracts and factoring contracts;
    6. remuneration under contracts for management and supervision of a Bulgarian legal entity.

    The income originating from agriculture, forestry, game husbandry and fish industry inside the territory of the country shall be income from a source within the country.

    The following income shall also be deemed to be from a source within the country:

    1. income from renting or other grant of use pertaining to immovable property, including ideal share of immovable property located within the country;
    2. income from disposal of immovable property, including ideal shares thereof or limited property rights thereupon, that is located within the country.
  22. Are there any recognised environmental taxes payable by businesses?

    Yes, there is environmental tax: the producers or importers of products (or the entity performing an intra-community acquisition) whose usage incurs large amounts of waste have to pay a product fee based on the type of waste.

    They can avoid paying the product fee if they collect or recycle certain amounts of the waste produced by their products, either on their own or through a licensed collective waste management organization.

  23. Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?

    Dividends are subject to 5% withholding tax when distributed to non-residents (except for EU/EEA entities). The withholding tax rate may be reduced under an applicable tax treaty.

    Dividends distributed to EU and EEA resident entities are exempt, in compliance with the Parent-Subsidiary Directive.

  24. From the perspective of an international group seeking to re-locate activities from the UK in anticipation of Brexit, what are the advantages and disadvantages offered by the jurisdiction?

    In recent years Bulgaria has developed as an attractive place for foreign investments in the area of industry and production.

    Bulgaria has a strategic location in the center of Southeastern Europe and the main roads of Europe to the Middle East and Asia pass through.

    According to its location Bulgaria provides access to the following markets:

    • South-East Europe – a 122 million inhabitant, high growth market
    • EU – Bulgaria offers the lowest cost, zero tariff access to a 500 million inhabitant market
    • CIS, Middle East and North Africa

    Bulgaria offers a combination of political and macroeconomic stability and incentives for doing business:

    • Stable parliamentary democracy; EU, NATO and WTO member
    • Bulgaria’s currency is fixed to the Euro under a currency board arrangement
    • Lowest tax rate and one of the lowest labor costs in the EU coupled with special incentives for investors
    • EU funding – more than €8 bn in EU funds over the next years

    According to Cushman & Wakefield’s rating for 2015, Bulgaria is the best outsourcing destination in Europe. In the world ranking our country takes third place.

    Bulgaria accommodates about 50 companies producing components and systems for the global automotive industry. The parts in eight of every ten cars in Europe, are produced in Bulgaria.

    The most attractive and well developed sectors in Bulgaria are:

    The Business Process Outsourcing Sector:

    • More than 30 000 people work in this Sector
    • 3% of GDP was generate by this Sector in 2016
    • 8 000 € annual starting salaries per Employee

    Advantages:

    • Bulgaria offers qualified and cost-effective workforce and advantageous rents of commercial space
    • BPO sector generates over € 964 million in revenues and thus Bulgaria is the best outsourcing destination in Europe
    • The average BPO company in Bulgaria provides services in more than 25 languages

    The IT Sector:

    • More than 17 500 specialists work in the Sector
    • 1.86 % of GDP was generate by the Sector in 2016
    • 20 600€ annual wages per Employee

    Advantages:

    • Established traditions and experience in the sector
    • One of the fastest growing sectors of the economy
    • The revenues of Bulgarian IT Companies grew by 11%
    • Over 4 300 students get a degree in IT each year
    • Bulgarian Internet speed is one of the fastest in the world

    The Electronics Sector:

    • More than 45 000 people work in the Sector
    • 6 000 € annual wages per Employee

    Advantages:

    • Availability of experienced engineers
    • Qualified assembly workforce at affordable cost
    • Easy access to EU, Russian and Middle East markets
    • More than 75% of the production of Electronics manufactured in Bulgaria is exported
    • Bulgarian universities are working together with companies in the sector to create qualified workforce

    The Machine Building Sector:

    • More than 200 000 people, working in the Sector
    • 18% of GDP was generate by the Sector for 2016
    • 5 000 € annual wages per Employee

    Advantages:

    • Established traditions and experience in the sector
    • Continuous growth between 2000 and 2016
    • Qualified work force at affordable price
    • Easy access to markets
    • Networks of technical universities and colleges
    • Available physical infrastructure

    Bulgaria is first in the world for the production of lavender. For the past three years, our country has managed to surpass France from the first place and France is historically a leader in this field.

    The largest exporter of sunflower seeds worldwide in 2013. Our market share in exports of this commodity in the planet is 17.8%.

    The advantages of investment in Bulgaria are many, but there are 5 main reasons to make an investment in Bulgaria:

    1. Political and business stability

    • EU, NATO & WTO member
    • Currency board
    • Low budget deficit and government debt

    2. Competitive cost of doing business

    • 10% Corporate and Personal tax rates
    • Competitive cost of labor
    • Favorable office rents and low cost of utilities

    3. Access to markets

    • European Union / EFTA
    • Russia
    • Turkey/Middle East
    • Educated & skilled workforce
    • 80 000 students abroad
    • 25% of the population hold university degree
    • 46% of the population speak at least one foreign language

    5. Government incentives

    • Social security benefits
    • Tax benefits
    • Vocational education benefits