This country-specific Q&A provides an overview to tax laws and regulations that may occur in Bulgaria.
This Q&A is part of the global guide to Private Client. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/private-client-2nd-edition/
Which factors bring an individual within the scope of tax on income and capital gains?
Bulgarian taxes on income and capital gains have two triggers – tax residence and source of income.
Residents are taxed on their worldwide income.
An individual is considered to be a Bulgarian tax resident if he/she:
- has a permanent address in Bulgaria, or
- has stayed in Bulgaria for more than 183 days in total in any given 12-month period, or
- Under this criterion the person is considered a tax resident only for the tax year for which his/her total stay in Bulgaria (including the days of arrival and departure) exceeds 183 days.
- is dispatched abroad by the Bulgarian State, by its authorities and/or organizations, by Bulgarian enterprises, or by their family members, or
- has his/her centre of vital interests in Bulgaria.
Non-residents are taxed only on certain categories of income derived from Bulgarian sources. Income derived from Bulgarian sources includes but is not limited to:
- income from work carried out in Bulgaria;
- income from dividends and liquidation shares from participation in legal entities resident in Bulgaria;
- income from the use, sale, exchange or other transfer of immovable property located within the territory of Bulgaria.
What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?
Generally, individuals are taxed on their income and capital gains at a flat 10 % rate regardless of income. Special rates apply to some types of income, for example:
- interest on bank accounts – 8%;
- dividends – 5%.
The taxable year in Bulgaria is the calendar year starting on 1 January and ending on 31 December. The annual income tax return has to be submitted by 30 April of the following year. The tax has to be paid by the same deadline.
Individuals can benefit from a 5% tax credit reducing the tax due provided that they submit their tax return online before 31 January of the following year and pay the tax due by the same deadline. The tax credit is limited to BGN 500 in total.
Where an individual’s only source of income are wages from a business operating in Bulgaria, such individual is not required to file an annual tax return since the employer is obligated to deduct and pay the income tax along with applicable social security contributions on a monthly basis.
Are withholding taxes relevant to individuals and, if so, how, in what circumstances and at what rates do they apply?
In Bulgaria, withholding tax (referred to as final tax) is levied on individuals, both resident and non-resident.
Withholding tax on the income of residents is triggered by the category of the income. The categories of income subject to withholding tax are detailed in the law and include but are not limited to dividends, interest on bank accounts, income deriving from the exchange of shares, etc.
Withholding tax on the income of non-residents is triggered by the source of the income, as well as by its category. Source is determined by reference to the payer, e.g. a resident person or a Bulgarian permanent establishment / fixed base, trade representative office in the country. Categories of income subject to withholding tax include but are not limited to interest, royalties, income from management and supervision or from participation in the managing and supervisory bodies of companies; rental income, service fees, franchising and factoring fees, etc.
Of note is that withholding tax is also levied on penalties and compensations of any nature (except for compensations under insurance contracts) sourced in Bulgaria and accruing to the benefit of non-residents established in preferential tax regime jurisdictions.
The applicable rates of withholding tax are 5 % (dividends), 8 % (interest on bank accounts), 10 % (on other income chargeable to withholding tax).
Non-residents paying withholding tax are entitled to ask for a recalculation of the tax paid on all Bulgarian sourced income and have it calculated as if it had been derived by a resident. The reason is that, as a general rule, non-residents pay withholding tax on a gross basis, while residents paying tax on the same categories of income are levied on a net basis. The recalculation regime is applicable only to individuals resident in an EU or EEA Member State.
Is there a wealth tax and, if so, which factors bring an individual within the scope of that tax, at what rate or rates is it charged, and when must tax returns be submitted and tax paid?
Bulgaria does not have a wealth tax.
Is tax charged on death or on gifts by individuals and, if so, which factors cause the tax to apply, when must a tax return be submitted, and at what rate, by whom and when must the tax be paid?
Gift tax is levied on all properties acquired by a gift or otherwise gratuitously, as well as on liabilities extinguished on the basis of debt forgiveness.
The acquirer is liable to pay the tax unless otherwise agreed by the parties. The alienator is liable to pay the tax where the acquirer is abroad. The tax base is the value of the property as determined at the time of the transfer. The tax rate depends on the relationship between the alienator and the acquirer and is determined by the municipal authorities within the limits set forth in the law:
- Gifts between spouses and lineal relatives are exempt. Other exemptions include donations to medical-treatment facilities, public-financed educational, cultural and scientific research organizations, non-profit legal entities, as well as customary gifts;
- Gifts to siblings and their children are taxed at a rate from 0.4% to 0.8%;
- In all other cases, the tax rate is from 3.3% to 6.6%.
The person liable to tax must submit a tax return to the municipal authorities and pay the tax within 2 months of the acquisition. As of 1 January 2019 the tax will be payable upon acquisition of the property.
Inheritance tax is levied on the estate of a decedent. The persons liable to tax are the legal or testamentary heirs and the legatees. Inheritance tax is paid on all Bulgarian and overseas properties of deceased Bulgarian nationals, as well as on the Bulgarian properties of deceased foreign nationals.
The tax base is the value of the share of the inheritance as determined at the opening of the inheritance:
- Inheritance shares below BGN 250 000 are exempt.
- Ordinary household furnishings, small farm implements, libraries and musical instruments are also exempt from tax if the estate devolves to lineal descendants, spouses and siblings.
The tax rate depends on the heir’s relationship to the deceased:
- Inheritance received by the surviving spouse (civil partner excluded) and lineal descendants is exempt.
- Inheritance received by siblings and their children is taxed at a rate from 0.4% to 0.8%.
- In all other cases the applicable tax rate is from 3.3% to 6.6 %.
Within 6 months of the opening of the inheritance, the persons liable to tax are required to submit a tax return at the municipality of the last residence of the deceased. The amount of the tax due is then determined by the municipality officials and the tax liable persons are notified accordingly. The tax has to be paid within 2 months of the notification.
Are tax reliefs available on gifts (either during the donor’s lifetime or on death) to a spouse, civil partner, or to any other relation, or of particular kinds of assets (e.g. business or agricultural assets), and how do any such reliefs apply?
For tax relief on gifts to a spouse, civil partner, and to any other relations please refer to the answer of question 5 above.
Do the tax laws encourage gifts (either during the donor’s lifetime or on death) to a charity, public foundation or similar entity, and how do the relevant tax rules apply?
Bulgarian tax law encourages gifts to non-profit legal entities.
Non-profit legal entities receiving subsidies from the central budget, as well as non-profit legal entities designated for the pursuit of public-benefit activities are exempt from tax in respect of any properties received and provided through a gift or inheritance. The same exemption applies to EU/EEA non-profit legal entities provided that they certify their status as conducting activity for the public benefit with official documents from their country of origin.
Donors to non-profit legal entities designated for the pursuit of public-benefit activities also enjoy tax relief:
- Individuals are entitled to a tax deduction of up to 5% on their annual taxable income;
- Legal entities are entitled to a tax deduction of up to 10% on their profit before taxation.
How is real property situated in the jurisdiction taxed, in particular where it is owned by an individual who has no connection with the jurisdiction other than ownership of property there?
Real estate properties (rights in rem inclusive) in Bulgaria are subject to two main taxes:
Tax on onerous acquisition of property. The person liable to pay the tax is the transferee, unless otherwise agreed by the parties to the contract. The transferor is liable to pay the tax where the transferee is abroad. The tax base is the higher of either the transfer price or the taxable value of the property determined by the municipality.
The tax rate is from 0.1% to 3%.
The tax is payable upon the transfer of the property.
Property tax is payable yearly for real estate properties in Bulgaria irrespective of the owner’s nationality and the use of the property. Tax is paid by:
- owners of taxable real estate properties;
- owners of buildings constructed on state or municipal land;
- persons holding an in rem right to use;
- persons who have been allocated the management of state or municipal real estate properties.
Where ownership is held jointly by several persons, each person is liable to tax in proportion to their respective share.
The tax base is a tax assessment determined by the municipal authorities on the basis of the information provided by the owner of the property in a tax return which must be submitted within 2 months of acquisition (6 months if the property has been acquired through inheritance).
The rate of the tax is from 0.1 to 4.5 per mille.
Tax credits are available as follows:
- properties used as a main residence qualify for a 50% tax credit;
- properties used as a main residence by a person with a 50 to 100 % working incapacity qualify for a 75% tax credit.
The tax is payable from 1 March of the year for which it is due in two equal instalments – until 30 June and until 30 October. Individuals that pay the full amount by 30 April benefit from a 5% tax credit.
Real estate properties in Bulgaria are also subject to a waste management fee, which is a municipal fee for the maintenance and cleaning of the public areas and for the collecting, removal and processing of waste.
Are taxes other than those described above imposed on individuals and, if so, how do they apply?
No other direct taxes are imposed on individuals.
Is there an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction?
There are no special regimes for individuals who have recently arrived in or are only partially connected with Bulgaria. Individuals are either residents or non-residents for the purposes of income taxes.
What steps might an individual be advised to consider before establishing residence in (or becoming otherwise connected for tax purposes with) the jurisdiction?
Residence is not prone to sudden, single step, changes. Becoming a Bulgarian resident is a process during which a person should establish sufficient links to Bulgaria and cut (lower the intensity of) any existing links to such person’s prior residence state as a potential change of residence is going to affect the taxing rights of that state. Therefore, it should be done carefully so that a person does not end up in the net of two different tax systems and absent a tax treaty be subjected to double taxation.
This is why, before establishing residence in Bulgaria, individuals are advised to consider whether or not there is a tax treaty between Bulgaria and their current state of residence, as well as the treaty’s applicability to their particular situation (some of the older Bulgarian tax treaties apply to Bulgarian nationals only thereby denying access to treaty relief to non-Bulgarian nationals). Hence, individuals considering Bulgarian residence as an option should consult a tax adviser beforehand.
What are the main rules of succession, and what are the scope and effect of any rules of forced heirship?
The rules of succession are governed by the Succession Act. The distribution of a person’s estate upon death is carried out in accordance with the rules of the law or in accordance with the decedent’s last will subject to the rules of forced heirship.
In the case of intestacy the law divides the successors into four levels:
- ascendants at the first degree;
- ascendants at the second and higher degree, as well as collateral relatives at the first degree and their descendants up to the sixth degree;
- collateral relatives at third to sixth degree.
Each preceding level excludes the next. The surviving spouse is not included into any of the levels, but inherits along with the first three levels. If there are no successors from the first three levels the surviving spouse inherits the whole estate and excludes the fourth level.
In the case of a will, the forced heirs include the surviving spouse and the lineal descendants of the deceased or, in the absence of such descendants, the lineal ascendants of the deceased. They are entitled to a forced portion of the estate of the deceased. A person is, therefore, not allowed to make a disposition upon death which adversely affects the forced portions. Forced portions depend on the capacity and number of heirs and are determined by the law.
The surviving spouse and children and their descendants are entitled to equal portions of:
- One third each, where there is only one child;
- One quarter each, where there are two children;
- One sixth each, where there are three or more children.
Where the deceased is not survived by a spouse but is survived by children and their descendants, the descendants are entitled to the following portions:
- Half of the estate, where there is only one child;
- Two thirds of the estate, where there are two or more children.
Where the deceased is not survived by children or their descendants but is survived by a spouse, the spouse is entitled to:
- Half of the estate, where the spouse inherits alone;
- One third of the estate, where the spouse inherits alongside a surviving parent(s).
The reserved share of surviving parents is one third of the estate.
Is there a special regime for matrimonial property or the property of a civil partnership, and how does that regime affect succession?
Civil partnerships (either registered or non-registered) are not recognized in Bulgaria and therefore have no effect on the partners’ properties. In the absence of a civil marriage, the surviving partner is not a forced heir and therefore is entitled to a share of the estate of the deceased partner only if specifically provided so in a will.
Matrimonial property is subject to three possible regimes subject to registration with a centralized public electronic register:
Regime of community of property
This regime is applicable where the spouses:
- are underage;
- are not of full capacity;
- have not made a different choice with respect to their matrimonial property regime.
Property acquired during the marriage as a result of a joint contribution (e.g. provision of financial means, childcare, household work) is owned jointly by the spouses. The regime of community property does not apply to property acquired by a spouse before the date of the marriage, as well as to property acquired by inheritance, gift, as a sole trader in the exercise of commercial activity; movables intended for normal personal use or for the exercise of a profession or craft; property acquired entirely with property of one of the spouses.
Upon death, the surviving spouse is entitled to half of the common property. This means that only the remaining half of the common property is subject to succession. The regime terminates upon termination of the marriage, e.g. upon death, divorce, annulment.
Regime of separation of property
Property acquired during the marriage is personal property to each spouse and each spouse is entitled to dispose of it without the consent of the other. Any alienation of the family home is nevertheless subject to the rules applicable to community property.
The spouses share the family expenses. In the event of divorce, each spouse is entitled to receive a portion of the value of the property acquired by the other spouse during the marriage in so far as he/she has contributed by work, childcare, household work or otherwise.
Property rights are governed by means of a marriage agreement. It can be signed before the date of the marriage or at any time thereafter.
What factors cause the succession law of the jurisdiction to apply on the death of an individual?
In terms of the Bulgarian International Private Law Code three factors could potentially trigger the application of succession laws on the death of an individual.
Firstly, this the habitual residence of the decedent. Succession of movables is governed by the laws of the state in which the deceased had his/her habitual residence at the time of death. Habitual residence as used in the Code is an independent concept of the concept of tax residence.
The second factor is the situs of immovable property. Succession of immovable property is governed by the laws of the country in which the immovable property is situated.
Finally, a person is entitled to select the law of the country of his/her nationality as the law governing his/her succession. The election is made by a will and must not effect adversely any forced shares designated by the rules of forced heirship under the law that would apply normally.
How does the jurisdiction deal with conflict between its succession laws and those of another jurisdiction with which the deceased was connected or in which the deceased owned property?
In case of a conflict of laws regard must be had to Regulation Brussels IV (EU/650/2012) which is applicable in Bulgaria and according to which, as a general rule, the law applicable to the succession as a whole shall be the law of the country where the deceased had his/her habitual residence at the time of death.
In what circumstances should an individual make a Will, what are the consequences of dying without having made a Will, and what are the formal requirements for making a Will?
A person is advised to make a will if he/she wishes to have his estate disposed upon death in accordance with his/her wishes. A person’s ability is to make a will is determined by age (18+), legal capacity (full) and the acts in making the will (reasonable). A testamentary disposition (will) may take the form of a notary attested will or it may be handwritten by the testator.
A notary attested will is executed by a notary in the presence of two witnesses. The procedure involves a verbal expression of the will of the testator and its exact recording in writing by the notary. Immediately thereafter, the notary must read the will to the testator and to the witnesses. These steps must be noted correctly in the will, which must be signed by the testator, the witnesses and the notary.
A handwritten will must be written by hand and signed by the testator. The law forbids the use of any technical means (such as by way of example a computer, a typewriter, etc.) for the writing of a handwritten will. In addition, it must state the date and place where it has been written. The signature must be placed after the testamentary dispositions.
The above rules make it clear that a testamentary disposition is a strictly formal act pursuant to Bulgarian law. Thus, a will which is not made in accordance with the law is void and has no legal effect whatsoever.
In the absence of a will the distribution of the estate of the decedent is governed by the law.
How is the estate of a deceased individual administered and who is responsible for collecting in assets, paying debts, and distributing to beneficiaries?
In the case of intestacy, as well as in the case of a testamentary disposition, the successors (or at least the one accepting the succession) must take care of collecting in assets, paying debts, and distributing the estate.
In the case of a testamentary disposition, the testator is entitled to appoint an executor of his will who will basically simply facilitate the execution of the will and will not have the right to alienate any property pertaining to the estate of the deceased unless need be and with the approval of the competent court.
The division of the estate can take place either voluntarily through a contract between the heirs or through specialized a judicial procedure.
Do the laws of your jurisdiction allow individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth and, if so, which structures are most commonly or advantageously used?
The use of domestic structures to hold, administer and regulate succession to private family wealth is not common.
However, in principle, a private benefit foundation could be constituted in order to hold, administer and regulate succession to private family wealth. By its nature, such a foundation allows for the use of property for a specific goal under the management of designated persons.
The concept of trust is not recognized under the Bulgarian law.
How is any such structure constituted, what are the main rules that govern it, and what requirements are there for registration with or disclosure to any authority or regulator?
The rules on private foundations are provided for in the Bulgarian Non-Profit Legal Entities Act.
A foundation is established by a unilateral constituent act of the founder whereby property is provided gratuitously to the foundation for the accomplishment of specific non-for-profit goals. A foundation may be established by an inter vivos gift (notary form is required) or upon death by means of a will. There is no minimum threshold for the constitutive gift to be valid. There are also no limitations on the type of property that can be provided to a foundation. The founder determines the scope and type of activity that will be carried out by the foundation.
Private benefit foundations have a governing body (either collective or individual). However, more complicated two tier management systems are also possible. Most private benefit foundations in Bulgaria have a single director. The founder is entitled to reserve certain rights for himself or for a third person and hence ensure that his consent is required for all material decisions, such as dissolution, changes to bylaws, election of new management body members, changing the scope and type of activities or the aim of the foundation.
What information is required to be made available to the public regarding such structures and the ultimate beneficial ownership or control of such structures or of private assets generally?
Private benefit foundations are registered with a public register, which contains data on name, address, governing body, representative powers, goals, property, scope and type of activity. Nevertheless, beneficiaries are not disclosed in the register.
However, the Bulgarian Law on Measures Against Money Laundering requires any legal person or entity entered in the Commercial Register or the BULSTAT Register to disclose its beneficial owner/s by 31 May 2019. The duty encompasses disclosures about natural and legal persons acting as owners of foreign trusts, trust funds and other similar entities operating on the territory of Bulgaria.
How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
Private benefit foundations are liable to corporate income tax on any income from trade or business. However, corporate tax is not due on any income derived from gifts provided to the foundation for the accomplishment of its goals.
Gifts by and in favour of private benefit foundations are subject to gift tax. Property passing onto such a foundation as a result of a testamentary disposition is levied with inheritance tax (see question 5 above).
There are no special tax rules for settlors, founders, trustees, directors and beneficiaries of private benefit foundations. Hence, the general tax rules apply.
Are foreign trusts, private foundations etc recognised?
Foreign trust, private foundations and the like are governed by the law of the state in which they are established. Therefore, they are recognized in Bulgaria.
How are such foreign structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?
Such foreign structures and their settlors, founders, trustees, directors and beneficiaries are not treated differently than any other foreign entity or individual deriving income from a source in Bulgaria or through a permanent establishment / fixed base there. General rules apply.
Foreign trusts and other transparent entities where the beneficial owner of the income cannot be identified are treated as taxable persons.
To what extent can trusts, private foundations etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?
As legal entitles private benefit foundations may be used to shelter assets from creditors. However, any transfer of property made to impede a creditor or to put a property out of such creditor’s reach and which is therefore harmful to the creditor can be challenged in court at which point the corporate veil could be pierced.
What provision can be made to hold and manage assets for minor children and grandchildren?
Normally, parents are responsible for the management of the property of minors with certain activities being regulated by the regional courts (for example the sale of real estate properties). However, a private benefit foundation could be created to hold and manage assets for minor children and grandchildren (see questions 19,20,21 above).
Are individuals advised to create documents or take other steps in view of their possible mental incapacity and, if so, what are the main features of the advisable arrangements?
Generally, any document created by a person that is afterwards found to be mentally incapacitated, could be challenged. Guardianship (full or partial) is governed by the law. Therefore, the answer would be no, individuals are not advised to create documents or take other steps in view of their possible mental incapacity.
What forms of charitable trust, charitable company, or philanthropic foundation are commonly established by individuals, and how is this done?
Such non-profit organisations take the form of either an association or a foundation. The procedure for their establishment is more or less the same as the one applicable to private benefit non-profit organizations. However, public benefit non-profit organisations are subject to stricter rules in terms of registration, management structure and accounting. Certain tax exemptions apply.
What important legislative changes do you anticipate so far as they affect your advice to private clients?
The Corporate Income Taxation Act has been changed in order to implement the Anti-Tax Avoidance Directive (Council Directive (EU) 2016/1164 of 12 July 2016). The changes reflect the implementation of the rules on interest deduction limitation and controlled foreign companies. The changes will come into force as of 01.01.2019.