The basic principles for the taxation of business profits are detailed in the Corporate Income Tax Act (CITA). The current taxes and levies imposed by the CITA are:
- corporate income tax
- lump sum tax levied on certain types of expenses accrued by local tax residents
- withholding tax.
According to the provisions of the CITA currently in effect, the corporate income tax rate is 10 percent. Corporate entities, including subsidiaries of foreign companies incorporated under the Bulgarian Commercial Act are considered Bulgarian tax residents. Upon registration in Bulgaria, these legal entities are subject to tax on their worldwide income, regardless of whether or not it is generated in Bulgaria. There is no withholding tax or income tax on undistributed profits.
Non-resident companies are subject to tax on income and profits derived only from Bulgarian sources.
Generally, a taxpayer’s tax base is the entity’s financial result according to its income statement, further adjusted for corporate income tax purposes. These adjustments represent either items that increase the financial result for tax purposes, usually through an add-back of non-deductible expenses, or items that decrease the financial result for tax purposes. The latter are usually specific income items that are exempt from taxation, or tax incentives provided by the Government. There are expenses which are permanently non-deductible for tax purposes and expenses which represent a temporary tax difference, and therefore are non-deductible for tax purposes in the year when accrued for accounting purposes but can be claimed in a subsequent period.
Permanent tax differences
The major permanent tax differences include:
- xpenses not related to the business activity of the company; costs incurred by an entity in favor of employees, managers, shareholders, etc. (private costs), as well as expenses for services that do not benefit the tax liable persons are not recognized for tax purposes
- service costs and other costs accrued at levels that differ from market levels
- penalties, fines and other sanctions for violation of the law
- expenses which are not substantiated with proper documents
- expenses for VAT charged in relation to items that are not tax deductible
- expenses for VAT accrued by a supplier or by the revenue authorities with respect to a performed supply (unless the VAT expense is accrued in relation to an adjustment to the input VAT credit, in relation to supplies for no consideration or supplies performed upon VAT deregistration)
- expenses classified as hidden distribution of profit
- expenses for bribery and/or conceiling bribery of a local or foreign public official
- expenses in relation to waste and shortage of inventory (except when these are due to force majeure, technological losses, expiry of durability term, etc.)
- expenses in relation to shortage of current and non-current assets (except when those expenses are due to force majeure, certain amount of shortage of goods in commercial outlets with direct physical access of the customers to the merchandise)
- revenues accrued in relation to waste and shortage of assets up to the amount of the tax non-deductible expenses incurred for the same reason (insurance cover received, receivables in respect of shortage, theft and litigation)
- income from dividends distributed by Bulgarian tax resident entities and by foreign entities that are tax residents in an EU/EEA Member State
- expenses for travel and accommodation of shareholders or partners when these are performed by individuals in their capacity of shareholders/partners.
Temporary tax differences
The major temporary tax differences comprise the following:
- revenue and/or expenses in relation to subsequent revaluation/impairment of assets is taxable, respectively tax deductible, in the year when the respective asset is disposed of, respectively written off
- expenses in relation to provisions for payables or unused annual paid leave of employees (including salaries and social security and health insurance contributions) are treated as tax non-deductible in the year when accrued, except when they are capitalized as tax depreciable assets in accordance with the applicable accounting legislation. Such expenses are recognized as tax deductible in the year when the payable is settled or when the employees effectively use their paid leaves
- interest expenses exceeding the threshold established by the thin capitalization rule (see Section “Thin capitalization” below).
The total amount of accounting depreciation charged to the income statement of an entity is added back to the entity’s financial result for tax purposes, while the annual depreciation charge as per the Tax Depreciation Schedule (TDS) is reported as a decrease to the entity’s financial result. Hence, only the depreciation charge established under the rules of the TDS will be recognized as an expense for income tax purposes. Specific rules exist for idle assets.
Tax depreciation must be accrued by multiplying the cost of acquisition of the respective depreciable asset by the tax depreciation rate. The CITA sets out the maximum annual tax depreciation rates for groups of assets to be used in the TDS. These maximum allowed annual tax depreciation rates are as follows:
- for computers, computer peripherals, software and software licences, cell phones: 50 percent
- for machinery and production equipment: 30 percent. The rate can be increased up to 50 percent for new manufacturing machines and equipment in certain specific cases defined in the law
- for automobiles: 25 percent
- for transport vehicles other than automobiles, roads and runways: 10 percent
- for buildings (including those held as investment properties), facilities, installations, electrical wiring and lines of communication, etc.: 4 percent
- up to 33.33 percent for long-term intangible and tangible assets where legal or contractual restrictions apply on the term of their use
- for all other tax depreciable assets where specific rates are not provided: 15 percent.
Interest expenses accrued by tax liable persons in relation to certain types of debt finance are tax deductible up to the limits set out in the CITA and known as thin capitalization rules. Certain interest expenses however are not subject to thin capitalization. These include interest in relation to finance lease and bank loans received from non-related lessors/banks (unless the loan is guaranteed or secured by a related party, in which case the interest on them would be subject to thin capitalization). Penalty interest for late payment of taxes, interest expenses capitalized in the value of an asset, in accordance with the accounting legislation or other interest charges that are not tax deductible on other grounds do not count towards the interest expenses subject to thin capitalization.
No thin capitalization would apply where the debt/equity ratio of the tax liable person is smaller than three to one.
The maximum amount of interest expenses subject to thin capitalization that would be tax deductible in the year when accrued is equal to the interest income accrued for the year plus 75 percent of the profits before all interest income and interest expenses. If interest expenses subject to thin capitalization are accrued in excess of this amount, the excess must be added back to the financial result when determining the tax base. This adjustment represents a temporary tax difference and is reclaimable in the following five tax years up to the above-mentioned threshold calculated in those subsequent years.
When calculating their tax financial result, tax liable persons are entitled to subtract tax losses incurred in previous periods. Tax losses may be subtracted from the positive financial result over the following five years up to the amount of the positive tax financial result in those future periods.
Foreign-source losses can be carried forward solely against foreign-source income deriving from the same operation unless the losses and the income were generated in an EU/EEA Member State and the tax credit method applies or upon termination of the foreign source in another EU/EEA Member State when the exemption with progression method applies.
Lump sum taxes
A lump sum tax at a rate of 10 percent is levied on certain types of expenses accrued by Bulgarian tax resident entities as follows:
- representation expenses related to the company’s business activity
- expenses for in-kind benefits provided to the company’s personnel (e.g. subsidized canteen, food allowances, organized holiday, holiday allowances, subsidized vacation facilities, sports and recreational activities, etc.)
- contributions to voluntary insurance exceeding BGN 60 per month for each hired person
- vouchers for food provided in accordance with the provisions of the law and exceeding the amount of BGN 60 per month for each hired person (there is a list of requirements, which must be fulfilled by both the persons entitled to receive vouchers for food and the persons acting as operators for issuance and payment with vouchers for food)
- expenses related to maintenance, repair and exploitation of transport vehicles when these are used for the company’s management activity.
The lump sum tax on expenses is recognized as a tax deductible expense for the company and is paid on an annual basis.
Sources of income
The profits and income of non-resident taxpayers are taxed in Bulgaria provided that they originate or are deemed to originate from Bulgaria. The following types of gains/income derived by foreign entities without a permanent establishment in Bulgaria, when accrued by a local tax resident entity, are considered to have their source in Bulgaria including:
- interest including interest relating to finance lease
- fees for technical services, i.e. services of an advisory nature and services for installation and maintenance of tangible assets
- franchise and factoring fees
- fees for management and control of local legal entities
- income from securities issued by local legal entities, the Government or municipalities.
Gains of foreign entities without a permanent establishment in Bulgaria from trading in shares and securities issued by local legal entities, the Government or municipalities as well as from transactions with real estate properties in Bulgaria are also considered to have their source in Bulgaria.
Gains made by foreign legal entities from the disposal of property belonging to a permanent establishment of that legal entity in Bulgaria or the permanent establishment itself, are deemed to be of Bulgarian source and, as such, are taxable in Bulgaria.
As of 1 January 2011, the following types of income generated by foreign legal entities established in jurisdictions with a preferential tax regime listed in the CITA (i.e. offshore companies) are also considered to have a Bulgarian source:
- fees for services or rights unless it is proved that such services or rights have been actually provided by the foreign entity
- penalties and indemnities of all types, except those accrued under insurance contracts.
A withholding tax at a rate of 10 percent (5 percent for dividend distributions and liquidation quotas) is to be deducted by the payer when Bulgarian source income (see Section 6.1.3 above) is accrued by a local tax resident entity to non-resident taxpayers without a permanent establishment in Bulgaria, unless a Double Tax Treaty (DTT) provides for lower withholding tax rates. A reduced withholding tax rate of 5 percent is applied on income from interest and royalties when accrued to associated companies tax resident in an EU/EEA Member State (see Section “Interest and royalties” below). No withholding tax is due on dividends and liquidation quotas distributed by local entities to companies that are tax resident in an EU/EEA Member State (see Section 18.104.22.168 below). When foreign entities without a permanent establishment in Bulgaria realize capital gains from trading in Bulgarian securities or real estate properties, a withholding tax of 10 percent is to be levied on the capital gain and remitted to the Bulgarian state budget by the entity realizing the gain, unless a DTT provides for exemption or lower withholding tax rates.
Foreign companies that are tax residents in the EU/EEA, and who may not utilize the withholding tax paid in Bulgaria as a tax credit in their country of tax residence, may choose an option to recalculate the withholding tax paid in Bulgaria so that the amount would equal the corporate income tax due if the income were derived by tax residents of Bulgaria. Hence, the tax base of non-residents could be reduced by the expenses attributable to the respective income whose source is Bulgarian. The difference between the withholding tax paid and the recalculated corporate income tax due may be reimbursed up to the amount that could not be used as a tax credit by the non-resident in their state of residence. This right is exercised by the foreign tax resident by filing a tax return by 1 December of the year following the tax year when the income was accrued.
Interest and royalties
In accordance with Council Directive 2003/49/EC on a common system of taxation applicable to interest and royalty payments made between associated companies of different EU Member States (the Interest and Royalty Directive), interest or royalty payments arising in an EU Member State are exempt from any taxes imposed on those payments in that state, whether by deduction at source or by assessment, provided that the beneficial owner of the interest or royalties is a company of another EU Member State or a permanent establishment of an EU Member State situated in another EU Member State.
Following the provisions of the Treaty concerning the accession of Bulgaria to the EU, a transitional period for the application of the Interest and Royalties Directive was agreed whereby Bulgaria has reserved its right to tax interest and royalty income arising in the country by applying the maximum withholding tax rate of 5 percent from 1 January 2011 until 31 December 2014. Additional conditions should also be fulfilled by the foreign company in order to be able to benefit from the reduced withholding tax rate.
Capital gains and losses
Generally, capital gains are included in an entity’s profit subject to corporate income tax, except in the following cases:
- capital gains realized by non-resident taxpayers from the sale of real estate property situated in Bulgaria or from the sale of shares, securities and other long-term financial assets sourced in Bulgaria, that are in turn subject to a 10-percent withholding tax
- liquidation proceeds attributable to non-resident taxpayers and local individuals exceeding the value of their initial investment, that are taxed at the rate of zero percent for residents of EU/EEA Member States or 5 percent for all other non-residents;
- capital gains realized from the sale of shares in collective investment schemes, shares and rights of public companies traded on the Bulgarian or EU stock exchange within the meaning of the Bulgarian Markets in Financial Instruments Act,
- transactions with financial instruments concluded in accordance with the procedure for redemption by collective investment schemes which have been admitted to public offering in Bulgaria or in another EU/EEA Member State, and
- transactions with financial instruments concluded according to the procedure for tender offering under the Bulgarian Public Offering of Securities Act, or transactions of a similar type in another EU/EEA Member State which are not subject to tax.
Dividends and liquidation quotas
Dividends and liquidation quotas distributed by local legal entities and unincorporated entities to local individuals, local unincorporated entities and foreign persons are subject to a 5-percent withholding tax, unless an applicable DTT provides for a lower withholding tax rate.
No withholding tax is due in Bulgaria on liquidation quotas and outbound dividends distributed by Bulgarian entities to those tax resident companies in the EU/EEA without any participation or holding requirements, except for cases of hidden profit distribution.
Dividends distributed by local legal and unincorporated entities to local legal entities are tax-exempt except when they fall under the Special Investment Purpose Entities Act. In the case of dividends received as a result of a profit distribution made by such companies, for example a real estate investment trust, the dividend is taxed at the shareholder level in the same way as any other revenue received – at the corporate income tax rate of 10 percent.
Payment due dates and filing deadlines
Companies subject to corporate income tax must file an annual return for each calendar year together with the company’s annual activity report under the Statistics Act. Annual corporate tax returns must be filed and income tax liabilities must be finally settled by all taxpayers for a calendar year by 31 March of the following year. Tax liable persons who have not performed economic activities and have not reported income or expenses during the fiscal period are relieved from filing annual activity reports.
Advance corporate tax payments are due either on a monthly or on a quarterly basis and are calculated on the basis of the entity’s forecast taxable profit for the current year. Both (i) tax liable persons whose net sales revenue for the previous year does not exceed BGN 300,000 and (ii) newly established companies (except when the establishment is a result from a corporate restructuring in accordance with the Commercial Act) do not have an obligation to remit advance corporate tax installments. Persons liable for tax with a net sales revenue for the previous year exceeding BGN 3,000,000 are obliged to make monthly advance corporate tax installments.
Advance corporate tax installments for the current year are reported based on the annual corporate tax return of the previous year.Withholding tax is payable by the end of the month following the calendar quarter in which the income has been accrued or the decision for distribution of dividends/liquidation quotas has been made. The persons obliged to withhold and pay tax have to report the withholding tax due for the relevant calendar quarter by submitting a standard return by the end of the month following the respective quarter. Local companies accruing income to foreign tax resident entities not exceeding BGN 500,000 per year for which a reduced withholding tax rate was applied under an existing DTT should submit to the revenue authorities a standard tax return reporting the amount of income accrued and the withholding tax relief granted. The deadline for submission of the tax return is 31 March of the year following the reporting year.
The lump sum tax on expenses is payable by 31 March of the year following the reporting year.
Relief from tax
Foreign tax credits
Domestic tax law provides unilateral relief to taxpayers whereby a tax credit may be allowed for taxes paid abroad.
Bulgaria has entered into a number of DTTs with other countries. For a detailed overview of the withholding tax rates applicable under the DTT network, see Appendix B.
Branch vs. subsidiary
Permanent establishments, including branches, are subject to tax on profits derived from Bulgarian sources. Effectively, there is no difference between the taxation of branches and subsidiaries, with respect to business profits.
The repatriation of after-tax profits generated by a branch is not subject to withholding tax.
The concept of a consolidated company tax return is not accepted under the Bulgarian legislation. Companies may not transfer their tax losses to other companies within a corporate group.
Partnerships are treated as incorporated entities for tax purposes. In other words, partnerships are non-transparent entities.
When taxable income cannot be reliably determined, it is assessed by the revenue authorities on the basis of a number of factors including the type of activities undertaken, duties and fees paid, bank account transfers, capital, turnover, profits of entities with similar activities, etc.
Instead of being subject to a corporate income tax, state budget enterprises are taxed on their proceeds generated from their activities as well as from leasing of property. Specific taxation rules also apply to gambling companies.
Transfer pricing rules allow the revenue authorities to adjust the tax base where transactions are not made on an arm’s length basis or where transactions aiming at tax evasion have been performed. Therefore, when the transfer pricing rules are applied by the revenue authorities, additional income may be assessed or an expense may be disallowed.
The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations have not been officially adopted for tax purposes in Bulgaria. However, in practice, the Bulgarian transfer pricing methods are to a great extent harmonized with the OECD methods.
This right to adjust profits extends to transactions involving Bulgarian branches and their foreign head offices as well as to foreign tax residents deriving income from a Bulgarian source that is subject to withholding tax in Bulgaria and Bulgarian tax resident entities which incur expenses subject to lump sum taxes in Bulgaria.
In addition, it is the obligation of the taxpayer and not the revenue authorities to prove that the transactions are performed at an arm’s length price. Any deviation from that price must be supported.
Anti-avoidance provisions relating to business transformations
Generally, according to the provisions of the CITA, transposing Council Directive 2009/133/ EC on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States (the Mergers Directive), business transformations between Bulgarian entities or involving entities of other EU Member States must be tax neutral, meaning that no corporate tax effects must arise on the date when the business transformation is performed.
However, the CITA includes certain provisions related to tax avoidance achieved through business combinations. It states that a business transformation will not be considered tax neutral if its purpose is to evade tax payment. Tax avoidance is also considered to exist in cases when the business transformation is not carried out for valid economic reasons or its purpose is to conceal the disposal of assets. In this case, following the general provisions of the CITA, it is possible that taxable gains may be realized upon disposal of the assets at market prices.
Hidden distribution of profits
According to the provisions of the Bulgarian CITA, amounts accrued, paid or distributed in any form by Bulgarian tax resident companies to shareholders, partners or another related party must be evidenced as part of the business activity of the local company. In addition, they must be determined at market levels. If these circumstances are not proven, the respective amount may be classified as a hidden distribution of profits.
Furthermore, interest expenses accrued by taxpayers are considered a hidden distribution of profit provided that at least three of the following four conditions are met:
- the amount of the loan facility for which interest expenses are accrued exceeds the equity of the payer of the interest as at 31 December of the previous fiscal year
- the repayment of the principal as well as the related interest due is not limited in time
- the repayment of the principal and the related interest or the amount of the interest due is made conditional upon the amount of the profits realized by the borrowing entity
- the repayment of the principal is made conditional upon satisfying the claims of other creditors or upon distribution of dividends.
If certain amounts accrued, paid or distributed by local taxpayers are considered hidden profit distribution, these would be treated as dividend distribution. The respective amount would not be recognized as deductible for corporate income tax purposes and a penalty could be imposed at a rate of 20 percent of the amount classified as hidden profit distribution. Additionally, a 5-percent withholding tax could be levied if the deemed dividend is distributed to a foreign tax resident entity.
Corporate tax incentives
A corporate income tax incentive is granted to enterprises employing people with disabilities. Agricultural producers are also entitled to a corporate tax rebate up to 60 percent in the form of state aid for profits derived directly from the sale of raw agricultural products. This incentive can be applied until 31 December 2013. The corporate income tax incentives are granted in two forms – a corporate income tax exemption and/or a tax reduction.
Production companies investing in municipalities with an unemployment rate exceeding the average unemployment rate for Bulgaria by 35 percent, are entitled to up to a 100-percent corporate income tax exemption. In order to benefit from the tax exemption, a number of criteria have to be met.
In addition, a decision by the EU Commission is required for large investment projects where the total amount of tax incentives exceeds EUR 37.5 million.
Other tax incentives include:
- tax neutral capital gains and/or losses resulting from the disposal of qualifying financial instruments, performed on the Bulgarian stock exchange or on a stock exchange in an EU/EEA Member State
- reduction of the taxable profit by the wage, social and health insurance payments made by an employer on their behalf for employers who hire persons officially registered as unemployed for a specified period.
Taxation of individuals
Personal income tax
There are four criteria for determining the residence of an individual in Bulgaria for personal income tax purposes, of which three are mainly of significance for expatriates moving to Bulgaria: the permanent address, the 183-day rule and the center of vital interests.
Individuals who have a permanent address in Bulgaria or who are physically present in Bulgaria for more than 183 days in the course of a 12-month period are considered Bulgarian residents for tax purposes. The respective individual becomes a Bulgarian resident in the calendar year when his/her stay in the country exceeds 183 days. The days of departure and arrival are treated as separate days of physical presence in Bulgaria.
An additional criterion for tax residence is the center of vital interests. Accordingly, individuals who have closer economic and personal relations to Bulgaria than to another country would be considered Bulgarian tax residents regardless of the duration of their physical presence in the country. The personal income tax legislation also specifies that the center of vital interests has priority over the permanent address criterion, i.e. if an individual has a permanent address in Bulgaria but his/her center of vital interests is abroad, he/she must not be considered a Bulgarian resident for tax purposes.
Bulgarian tax resident individuals are subject to tax on their worldwide income whereas non-resident individuals are subject to tax on their income derived from Bulgarian sources. Different residence rules may be provided for in applicable DTTs.
Income subject to tax
Individuals are subject to the following taxes on income:
- Employment income is levied at a flat 10-percent personal income tax rate. The tax on employment income is withheld by the employer at source on a monthly basis. Certain statutory tax deductions may be claimed against the gross income. (As of 1 January 2008, management income is considered equivalent to employment one for personal income tax purposes.)
- Income received by partners in a partnership, cooperators and shareholders holding more than 5 percent of a company’s capital in return for their personal involvement/ work in the entity is treated as equivalent to employment income.
- Non-employment income (e.g. income received under civil contracts) is also subject to a flat 10-percent tax rate. Certain statutory tax deductions may be claimed against gross income (e.g. income received under civil contracts). The due tax is withheld and paid on a quarterly basis by the payer of the income if a legal entity duly registered under Bulgarian law. No tax is to be withheld and paid for the fourth quarter of the year. In certain instances, the remittance obligation may also fall on the individual recipient themselves if (i) the payer is an individual or an entity not registered under Bulgarian law and (ii) the recipient of the income under a civil contract is a self-insured person for social security purposes (in this case, the status of the entity is of no importance). Under this scenario, the personal income tax on that income must be remitted on a quarterly basis.
- In case of receipt of rental income, no remittance obligation arises for the payer of the income if he/she is an individual. The full responsibility for payment of the due tax charge is borne by the recipient of the income. Advance quarterly personal income tax installments should be made in case of receipt of such income (with the exception of the fourth quarter). The final assessment is performed at year-end with the annual Bulgarian personal income tax return. When the payer of the rental income is an entity or a self-insured person, then they have the obligation to calculate, withhold and remit at source on a quarterly basis (without the fourth quarter) the due tax charge on the income. This does not waive the obligation of the recipient of income to file an annual Bulgarian personal income tax return at the end of the year. A different treatment is applied in the case of payment of rental income by Bulgarian entities to condominiums. In these circumstances, a final one-off tax will be calculated, deducted and remitted by the payer of the income and no obligation for filing of annual Bulgarian personal income tax arises for the recipient of the income.
- A 10-percent withholding tax applies to interest, rents, royalties, capital gains, management income, income received under franchise and factoring contracts, leasing installments under contracts according to which the ownership rights over immovable property are transferred, scholarships for studying in Bulgaria and abroad, indemnity for benefits lost, fees for technical services accrued to non-resident individuals as well as income accrued by local legal entities to foreign sportspeople, scientists and artists. A lower withholding tax rate of 5 percent is levied on dividends paid by Bulgarian entities to non-residents. Should there be an applicable DTT in force, the rate of the withholding tax on the above mentioned types of income may be reduced. The tax base is the gross amount of income received. As of 1 January 2010, Bulgarian legislation allows EU and EEA4 nationals subject to Bulgarian withholding tax to calculate the tax base and the due tax following the same rules applicable to local residents, i.e. the application of deductions from gross income is possible through the filing of an annual Bulgarian personal income tax return. (Except Iceland and Liechtenstein.)
- A withholding tax of 10 percent is due on interest income accrued on deposit accounts in Bulgarian and EU/EEA-based banks.
- A one-off tax of 5 percent is levied on Bulgarian individuals receiving dividends from foreign entities.
- A one-off tax of 10 percent/7 percent is levied on early withdrawal of accrued voluntary social security/insurance contributions depending on the circumstances.
Specific rules apply with regard to taxation of capital gains arising from disposal of movable and immovable property.
It is also specified that no withholding tax is due on payments to residents of other EU Member States regardless of the fact that the types of income may fall in the scope discussed above should this income be exempt for Bulgarian tax residents (e.g. interest on non-deposit accounts).
Certain payments decrease an individual’s taxable income, including mandatory health insurance and social security contributions (made both to the local and foreign mandatory insurance systems), as well as personal voluntary pension, life and health insurance contributions to either local insurance funds or those registered under the jurisdiction of other EU and EEA Member States as of 1 January 2009. The deductibility of such voluntary contributions is limited up to certain maximum thresholds.
Statutory deductions are provided for the recipients of different types of non-employment income (e.g. 25 percent for freelancers; 40 percent for royalties, inventions and products of science or art; 10 percent for rental income; 10 percent for capital gains received from the disposal of immovable property).
Deductions for donations to a list of special beneficiary organizations are also allowed provided certain conditions are met. As of 1 January 2010, donations to EU organizations with an equivalent status to those listed in the local legislation will also be deemed tax deductible.
Furthermore, provided that certain conditions are met, individuals may also deduct from their taxable income the value of the mandatory personal social security contributions paid during the year for accumulating additional length of service for pension (up to five years for the period of university education and/or in case of insufficient length of service upon pension).
As of 1 January 2009, the Bulgarian personal income tax legislation introduced a tax allowance for young families who have a mortgage. With this allowance, the total taxable base of the tax liable person may be decreased with the interest installments paid on the first BGN 100,000 of the mortgage taken. There are certain requirements that have to be met in order for a young family to qualify for this allowance, e.g. at least one of the spouses must be under the age of 35 when the mortgage is entered into, the property must be the main residence of the family for the tax year and the mortgage agreement is in the name of at least one spouse. The fulfillment of these criteria must be evidenced with the provision of certain documents. The tax payer is obliged to demonstrate that the necessary conditions have been met within the tax return form and will be responsible if that is not the case.
Exempt income includes bank interest on non-deposit bank accounts, state pensions, scholarships, certain state welfare payments, benefits/income received from the Bulgarian mandatory social security and health insurance system, an equivalent foreign institution or under a voluntary social pension plan, provided that the latter is registered in Bulgaria or in another EU/EEA Member State. Capital gains may also be tax exempt provided certain conditions are met.
Accommodation and daily allowances paid on behalf of the employer/assignor to individuals under employment, management and civil contracts are treated as non-taxable income provided that certain conditions are met.
Relief from tax
A tax credit may be used for foreign taxes paid provided the relevant conditions are met. Relief from tax may also be sought under the provisions of an existing DTT depending on the specific method, i.e. tax credit or tax exemption with progression.
Tax rates and payment dates
The annual general flat tax rate applied for taxation of an individual’s income is 10 percent. Individuals who derive income from sources other than, or in addition to, income under an employment contract for which the employer has performed an annual reconciliation as at the year-end (including dividends received from foreign entities, which are taxed with a one-off tax but have to be reported anyways) must file an annual tax return by 30 April of the following calendar year. A tax return must also be filed if the individual owns shares/ allotment in foreign entities/permanent establishments/immovable property regardless of whether a transaction has been made with them during the respective tax year. In addition, such tax returns must be prepared by individuals who withdraw accumulated voluntary personal contributions prior to the expiration of the term under an insurance policy as well as in instances where an individual has received/granted a loan from/to non- financial institutions or individuals (where certain conditions are met).
The outstanding personal income tax as reported in the annual Bulgarian personal income tax return, if any, must also be paid within this filing deadline.
If the annual personal income tax return is filed by 10 February of the following calendar year and the tax is paid by that date, a deduction of 5 percent from the outstanding tax liability is granted. Individuals may also be entitled to a 5-percent deduction from their tax liabilities if the tax return is filed electronically (through an electronic signature). However, it should be pointed out that the two deductions are not cumulative, i.e. they may not be applied simultaneously.
Sole traders determine their taxable base and make advance payments in accordance with the rules for corporate taxation. The tax rate applied to this type of income is 15 percent.
Individuals performing certain activities (e.g. hotel accommodation, restaurant services, taxicab transportation, and other services) whose turnover for the previous year is below BGN 50,000 are instead subject to a lump sum license tax which is regulated by the Local Taxes and Fees Act.
Certain fringe benefits, such as canteen or food expenses like food vouchers provided to employees/assignees (under certain conditions), transportation cards, use of the employer’s sports facilities or rest/holiday homes, are not taxable in the possession of the employee if provided as a social expense by the employer. However, pension and health insurance contributions are due on the amount of the fringe benefits provided.
Social expenses paid in cash are taxable as part of the individual’s employment income as indicated above.
Other fringe benefits are treated as taxable for personal income tax purposes. The tax treatment of the specific benefit should be considered on a case-by-case basis.
The burden of payroll-related contributions is not split between the employer and the employee via a single unified ratio. Instead, the ratios vary depending on the fund to which contributions are made and are as follows:
- 55:45 with respect to pension and additional mandatory pension insurance contributions
- 60:40 with respect to all other funds (health insurance, unemployment, general illness and maternity).
It is expected that the contributions of both parties and all funds will be equalized, i.e. in a ratio of 50:50. This was planned for the year 2010 but has been delayed for now.
It is an obligation of the employer to withhold from employees’ remuneration and to remit to the state budget the amount of the mandatory social security and health insurance contributions at the general rates presented below.
|Contributions||On behalf of employees||On behalf of the employers||Total|
|Social security contributions||9.70%||13.10%*||22.80%**|
|Health insurance contributions||3.20%||4.80%||8.00%|
The total amount of social security contributions withheld on behalf of employers varies within the range of 13.00-13.7 percent depending on the economic activity being performed by the respective entity.
** 5 percent of the mandatory social security contributions for individuals born after 31 December 1959 are payable to private pension funds licensed to provide additional mandatory pension insurance.
The above contributions are determined as a percentage of the gross employment income, up to the monthly ceiling of BGN 2,200, or BGN 26,400 annually. The minimum monthly insurable income varies depending on the type of economic activity performed by the company and the qualifications of the employee.
EU social security
Following Bulgaria’s EU accession on 1 January 2007, the EU social security regulations (1408/71; 574/72) aimed at enhancing free movement of employees and prevention of double insurance of EU citizens entered into force and have precedence over the provisions of the local social security legislation and the already existing Social Security Agreements with other Member States. As of 1 May 2010, the new social security regulation 883/2004 is applicable in Bulgaria to EU citizens. As of 1 January 2011, it also became applicable to non-EU country nationals in most EU countries and it is currently also applicable with respect to cross-border situations with Switzerland and EEA countries.
Persons and territories covered
The EU social security regulations are applied on the territory of the Member States of the European Union and the EEA, which comprises Iceland, Norway and Liechtenstein, together with Switzerland for cross-border situations with Bulgaria. Furthermore, it should be pointed out that the EU provisions on social security do not apply to all individuals moving within the EU and the EEA. Generally, the following individuals would be covered under the regulations:
- mployed workers
- self-employed persons
- civil servants
- unemployed under certain conditions
- family members and heirs, regardless of nationality
- third country nationals
In view of the above, no coverage under the EU social security regulations is provided to persons who are no longer insured under a social security system in any of the Member States and who are not considered immediate family to an employed or self-employed person or a pensioner. These individuals are deemed non-active persons.
The main principle of the EU social security regulations is to ensure that individuals fall under the jurisdiction of only one MemberState at a time. Usually, this is the MemberState where the person is physically performing his/her work or where he/she acts as a self-employed person. However, certain exceptions exist in instances where (i) the persons are moving within EU Member States on short-term assignments, (ii) they are simultaneously working in more than one state and (iii) they are simultaneously employed in one state and self-employed in another. In these cases, special rules apply with respect to determining the relevant social security system.
The EU social security regulations also aim to avoid discrimination in social security matters, i.e. individuals temporarily or permanently moving to an EU country for social security purposes must be treated no differently than local citizens of that MemberState.
Property transfer, gift, inheritance and tourist taxes
Local taxes and fees are determined and collected by municipalities within the ranges set in the Local Taxes and Fees Act.
The tax for the transfer of immovable property and automobiles is in the range of 0.1 – 3 percent and is levied on the value of the property. Transfer tax is also levied upon acquisition of real estate property or limited ownership rights related thereto as a result of the elapse of a prescribed time.
Property tax and garbage collection fees
Owners of immovable property situated in Bulgaria are liable to property tax. The tax is levied on the assessed value of the property, depending on its area in square meters and its location and for non-residential property owned by companies – on the higher of the assessed value and the book value of the property. The tax is levied at a rate within a range of 0.01 – 0.45 percent. A 50-percent tax rebate is allowed if the property is the principal residential property of an individual taxpayer.
Owners of immovable property also pay garbage collection fees. Garbage collection fees are determined by the respective municipality.
Gift and inheritance taxes
Certain individuals inheriting property situated in Bulgaria are subject to inheritance tax. The tax rates depend on the value of the property and the relationship of the beneficiary to the testator or donor. No inheritance tax is levied provided that the beneficiary is a spouse or immediate family member. A gift tax is levied on donated property, as well as on property transferred without consideration. No gift tax is levied on property donated to spouses and immediate family members.
The inheritance and gift tax rates are as follows:
- in a range of 0.4 – 0.8 percent for property inherited by/donated to brothers, sisters and their children
- in a range of 3.3 – 6.6 percent for inheritance/gifts (donations) between unrelated persons.
A tourist tax is effective from 1 January 2011. It is due from suppliers of overnight accommodation services on a monthly basis within the range of BGN 0.20 – 3.00 for each overnight stay. The applicable tourist tax rate is determined by the respective municipality. The deadline for payment of the tourist tax is the 15th of the month following the month when the overnight accommodation has been supplied.
The tourist tax due on an annual basis may not be less than 30 percent of the amount calculated for full capacity of the accommodation facility.
Value added tax
The Bulgarian VAT legislation is generally harmonized with the EU VAT Directives. The current VAT Act became effective on 1 January 2007 and adopted the EU VAT rules based on the general principles of the Sixth VAT Directive and Directive 2006/112/EC. The latest amendments of the VAT Act came into effect on 1 January 2013.
Generally, VAT is due on any supply of goods or services with a place of supply in Bulgaria made by taxable persons in the course of their economic activities. “Supply” normally means goods or services provided in exchange for consideration. However, certain transactions carried out for no consideration are also considered to be supplies, for example, the private use of business assets.
The following transactions are generally subject to Bulgarian VAT:
- supply of goods or services with a place of supply in Bulgaria
- intra-Community acquisition of goods
- import of goods into Bulgaria.
Tax regime and place of supply of goods
The location of goods at the time of the supply determines the VAT treatment. If the goods are located in Bulgaria, then the supply is subject to 20 percent Bulgarian VAT.
However, if goods are dispatched or transported, the place of supply is the place where the goods are located at the time when dispatch or transport of the goods to the customer begins.
Special rules apply for the supply of electricity, gas, heat or cooling energy which are treated as goods for VAT purposes.
If a Bulgarian VAT registered person sells goods to a customer who is registered for VAT in another EU Member State and the goods are physically transferred from Bulgaria (either by the supplier or by the customer) to another EU Member State, the supply is regarded as a zero-rated (exempt with credit) intra-Community supply. Documents, as prescribed by law, evidencing the physical movement of the goods from Bulgaria must be obtained in order to support the zero rating.
The acquisition of goods arriving in Bulgaria from another EU country by a taxable person or by a non-taxable legal entity when the goods are supplied by a taxable person identified for VAT in another EU Member State represents an intra-Community acquisition. VAT registered recipients of intra-Community acquisitions need to reverse charge VAT within the statutory term.
The export of goods to customers outside the EU is zero-rated, provided that certain transportation and documentation requirements are fulfilled.
The import of non-Community goods from outside the EU is subject to Bulgarian VAT and is payable by the importer to the customs authorities. Under specific conditions, import VAT may be “reverse charged” if the importer is granted authorization to apply such a regime in connection with the implementation of an investment project.
Supply of goods with installation
Goods coming from other EU Member States and delivered under supply and install arrangement are subject to VAT reverse charge by the Bulgarian recipient if (i) the supplier is established in another MemberState and is not established in Bulgaria, and (ii) the recipient is identified for VAT in Bulgaria.
Place of supply and taxation of services
The place of supply rules with regard to services follow the principles laid down by Directive 2006/112/EC as regards the place of supply of services.
Generally, supplies of services fall into two regimes – B2B services, i.e. services provided by one taxable person to another and B2C services i.e. service provided by a taxable to a non-taxable person. The place of supply under the two regimes is determined by different sets of rules.
B2B regime of services
Under the B2B regime of services, the place of supply follows the place where the recipient is established or has a fixed establishment which receives the services. Thus, for cross-border supplies of services where the supplier is not established in the country of the recipient, VAT is usually due by the recipient through the reverse charge mechanism.
Exceptions to this rule include:
- The supply of services connected to immovable property is taxable where the property is located.
- The supply of admission to cultural, artistic, sporting, scientific, educational, entertaining, etc. events is taxable where the event takes place.
- The supply of services connected to short-term6 hiring of vehicles is taxable in the country where the vehicle is placed at the disposal of the client.
Services provided to taxable persons but used for non-business purposes by the owner or the employees should be treated as services provided to non-taxable persons (B2C).
B2C regime of services
Services provided to non-taxable persons are generally taxed at the place where the supplier is established. As exceptions to this, the following services provided to non- taxable persons are considered to have their place of supply in Bulgaria:
- services connected to immovable property located in Bulgaria
- services related to cultural, artistic, sporting, scientific, educational, entertaining, etc. events taking place in Bulgaria
- services related to valuation, expert examination or work on a movable tangible property taking place in Bulgaria
- short-term hiring of vehicles if the vehicle is placed at the disposal of the client in Bulgaria
- electronic communication services, radio and television broadcasting when the supplier is established outside the Community, the recipient is established in Bulgaria and the service is effectively used in the territory of the country
- electronically supplied services when the supplier is established outside the Community and the recipient is established in Bulgaria
- transport of goods within the Community, including forwarding, courier and postal services, when the transport begins in Bulgaria
- intermediary services when the underlying transaction has a place of supply in Bulgaria.
The standard rate of VAT, which applies to most taxable supplies, is 20 percent. Two reduced rates are applicable for specific supplies.
Zero VAT rate
Zero VAT rate applies to specific supplies such as:
- intra-Community supplies of goods
- supplies of goods transported or dispatched outside the European Community (exports)
- international transport of passengers and goods
- certain supplies related to international transport
- supplies of non-Community goods placed under a special customs regime (such as temporary warehousing, customs warehousing, inward processing, temporary importation with full exemption from duties)
- services consisting in work on goods (such as processing or repair) when the recipient of the services is a person established outside the country and the goods are imported within the Community in order to be processed and after that re-exported
- services rendered by agents, brokers and other intermediaries acting in the name and on behalf of a third person in relation to certain export transactions.
The application of the zero VAT rate needs to be substantiated by certain documents required by the law.
9-percent VAT rate
A reduced rate of 9 percent applies to accommodation in hotels, sheltered housing and other places for accommodation.
Exempt supplies include:
- supplies related to health care
- supplies related to welfare and social security
- supplies related to education, sports and physical education
- supplies related to culture and religions
- non-profit activities of eligible institutions
- certain transfers of land and buildings (with the option of charging VAT)
- insurance services
- financial services
- supply of goods or services for which credit for input tax has not been used because of legislative provisions.
Registration for VAT purposes
VAT can be charged only by VAT registered persons. VAT registration cannot be retrospective, unless it is performed at the initiative of the revenue authorities when the taxpayer fails to submit a registration application on time.
Mandatory VAT registration for local supplies
Mandatory VAT registration applies for taxable persons, local or foreign, who perform taxable supplies with place of supply in Bulgaria (excluding supplies for which the VAT is to be reverse charged by the recipient) exceeding the registration threshold of BGN 50,000 for a period of 12 consecutive months. Zero-rated supplies count toward the VAT registration threshold. The taxable person must complete an application for registration 14 days from the end of the tax period when the registration threshold was reached.
Mandatory VAT registration for providing/receiving of services
Subject to mandatory VAT registration are all taxable persons who (i) receive services from suppliers established abroad or (ii) provide B2B services to another EU Member State. A claim for VAT registration needs to be filed with the revenue authorities not later than 7 days before the tax on the supply becomes due.
The registration for providing/receiving services is a specific registration which does not entitle the taxpayer to deduct input VAT.
Mandatory VAT registration for supply of goods with assembly and installation
A taxable person, registered for VAT purposes in another MemberState who supplies goods with assembly and installation to a non-taxable recipient, is obliged to register 7 days before the chargeable event takes place, irrespective of the threshold reached.
Mandatory VAT registration for intra-Community acquisitions
A taxable person or a non-taxable legal entity that is not VAT registered on other grounds would be subject to mandatory VAT registration when performing intra-Community acquisitions if their total amount during a calendar year exceeds BGN 20,000 (no threshold applies for intra-Community acquisitions of new means of transport and excise goods). The VAT registration needs to be effected no later than 7 days prior to the acquisition with which the threshold is exceeded. The movement of own goods from an EU country where the taxpayer is identified for VAT purposes to Bulgaria creates an identical registration obligation.
Entities that are VAT registered on this ground are obliged to charge and pay output VAT upon the intra-Community acquisition but are precluded to deduct input VAT. Furthermore, entities registered under this regime are not obliged to charge output VAT on the subsequent sale of goods.
Any taxable person not meeting the requirements for mandatory VAT registration has the right to register voluntarily without fulfilling threshold requirements.
VAT registration procedure
Persons not registered for general tax purposes in Bulgaria may not register under the VAT Act. The general tax registration for local companies is automatic after registration with the Commercial Register is obtained. Foreign unestablished persons need to obtain a tax number for this purpose.
In order to register for VAT (under the mandatory or voluntary procedures), an entity must file an application with the relevant territorial directorate of the National Revenue Agency (NRA). The application must state the grounds for registration and must be submitted together with information about the monthly taxable turnover for the preceding 12 consecutive months.
Foreign persons who are obliged to or wish to register might do it only by securing the services of a fiscal representative in Bulgaria. The fiscal representative is jointly and severally liable for the Bulgarian VAT liabilities of the foreign person.
This does not apply for foreign persons from EU countries who may register without appointing a fiscal representative. If, however, they decide to appoint such, the representative would not be jointly liable for the foreign person’s VAT liabilities.
Persons applying for VAT registration need to designate an email address for official communications with the tax office.
Voluntary deregistration following a mandatory registration is possible when, during the last 12 consecutive months before the current month, the taxable turnover of the registered person does not exceed BGN 50,000. However, voluntarily registered persons cannot apply for deregistration before the expiration of 24 months from the beginning of the calendar year following the year of registration.
Mandatory deregistration should be pursued in certain cases.
Obligations of VAT registered persons
Format of the VAT registration number
The format of a Bulgarian VAT registration number for legal entities is as follows:
BG 123456789, where 123456789 represents the unified identification code from the Commercial Register or the general tax number.
VAT registered persons must maintain detailed accounting records which must be adequate for the determination of their VAT liabilities. The VAT Act does not provide for the form or the level of detail of the accounting information that has to be kept. The Accountancy Act, however, regulates this matter for foreign persons that have a permanent establishment in the country.
Each VAT registered person must submit VAT returns accompanied by purchase and sales ledgers. The tax period under the Bulgarian VAT Act is the calendar month.
The purchase and sales ledgers have to be prepared in prescribed formats and include detailed information about all transactions having relevance to VAT. The sales ledger lists all tax documents on the basis of which output VAT is applied or not applied (i.e. includes exempt and zero-rated transactions and reverse charged VAT). The purchase ledger contains all tax documents on the basis of which input VAT is claimed or not claimed (including reverse charged VAT).
The VAT return must be prepared on the basis of the information from the purchase and sales ledgers for the respective month. The deadline for submission of the VAT return and ledgers is the 14th day of the month following the reference tax period. If, for a given month, either the Sales or the Purchases ledgers contain more than five entries, the VAT records must be submitted electronically with a qualifying electronic signature.
European Sales List – VIES return
VAT registered persons have to file a VIES return if some or all of the following types of sales have been performed in a given month:
- intra-Community supplies of goods
- triangulation operations (if the supplier acts as an intermediary)
- taxable services provided to taxable persons established in other member states (including cases of received advance payments on such services).
A VIES return is to be filed together with the VAT return. The deadline for submission of the VIES return is the 14th day of the month following the relevant tax period. VAT registered entities filing VIES returns must file these electronically along with the VAT return and Sales and Purchase ledgers using a qualifying electronic signature.
The Intrastat system in Bulgaria is regulated by the Intra-Community Trade Statistics Act and applies to the collection of data of intra-Community trade in goods, including the movement of goods as a result of dispatches from and arrivals to the territory of Bulgaria to/from other EU Member States.
Persons registered for VAT purposes in Bulgaria which carry out intra-Community trade with goods have to file an Intrastat return if they have exceeded either of the following thresholds from intra-Community trade:
- BGN 240,000 for dispatches
- BGN 240,000 for receipts.
Entities must submit Intrastat returns every month starting from the month when the relevant threshold was exceeded in the current year.
The Intrastat returns are to be filed with the NRA by the 14th of the month following the month when the receipt/dispatch occurred.
Recovery of input VAT
A Bulgarian VAT registered person is entitled to recover input VAT in respect of taxable supplies from another VAT registered person or in respect of imported goods if they are used for the purposes of:
- taxable supplies liable to Bulgarian output VAT
- zero-rated (exempt with credit) supplies such as the dispatch of goods to other EU Member States and the export of goods to third countries
- supplies with place of supply outside Bulgaria, insofar as input VAT would be deductible in relation to such supplies being made in Bulgaria.
The input VAT claim must be supported with an invoice and also with a so-called reverse charge protocol (when the VAT is to be charged by the recipient of a supply) and/or with a Single Administrative Document (SAD) (in the case of import). The invoices and protocols must be issued in compliance with the Bulgarian VAT Act.
A VAT registered person is not generally entitled to recover input VAT on:
- purchases used for the performance of VAT exempt supplies
- purchases used for the performance of free-of-charge supplies (there are certain exceptions) or transactions outside the scope of the independent economic activity of the taxable person
- purchases of passenger cars and motorcycles; fuel, repair and maintenance of such cars and motorcycles; excluding the acquisition of a passenger car or a motorcycle used for certain qualifying activities such as resale, leasing, security and taxi/courier service. If the passenger cars and motorcycles are used not solely for qualifying services, the tax payers should be entitled to full input VAT deduction if the qualifying services represent more than 50 percent of the revenue generated by the tax payer in the last 12 months
- purchases used for representation or entertainment purposes.
A VAT registered person is entitled to a pro-rata VAT deduction in respect of purchases which are used to perform both supplies qualifying for deduction and exempt supplies. The pro-rata deduction is based on the ratio of taxable supplies to total supplies calculated for the previous calendar year and adjusted on the basis of the current year’s ratio calculated with the December VAT return.
Registered persons may claim a VAT deduction within 12 months from the end of the month in which the output VAT for the supply became chargeable. No specific limitation applies to supplies subject to reverse charge, but notifications to the tax office are needed for deductions claimed after this 12-month period.
Reimbursement of VAT
If, in a given month, the input VAT deduction declared by the registered person exceeds the amount of output VAT charged, the excess amount is subject to reimbursement.
The VAT for reimbursement is offset against VAT payables in the following two months. If, after the two-month period, there is still an outstanding balance for reimbursement, it is due for refund by the revenue authorities within 30 days together with any other VAT for reimbursement declared in the monthly VAT returns in this two-month period.
Accelerated refunds are available to registered persons who, during the last 12 months, have performed the following supplies amounting to 30 percent or more of their total taxable turnover for the same period:
- zero-rated supplies and
the following supplies having their place of supply in another EU Member State where the customer is VAT registered
- intra-Community transport of goods, forwarding, courier, postal and cargo handling and direct agency services related to such transport
- valuations of and work on movable goods.
The term for the VAT refund is 30 days from the date of filing the VAT return.
The VAT is usually refunded after a tax review or tax audit by the revenue authorities, which could defer the refund until after the audit is completed. The tax audit could last up to five months. However, refund of VAT is allowed within five days despite any ongoing audit after a collateral in the form of cash deposit, government securities or irrevocable bank guarantee in favor of the revenue authorities. If any refund is postponed until the completion of the audit, the authorities owe interest for the period of delay.
VAT refund to persons identified for VAT in the EU and businesses outside the EU
Bulgaria has implemented the general provisions of the EU Directives in respect of VAT refunds to entities (i) established and registered for VAT purposes in other EU Member States (Directive 2008/9/EC), or (ii) established outside the Community (13th Directive 86/560/EEC).
Refunds of input VAT incurred by foreign EU entities are available for purchases/imports made in Bulgaria, provided that input VAT deduction would have been available if the foreign entity was identified for VAT purposes in Bulgaria.
The maximum period of time for which VAT reclaims can be made cannot exceed one calendar year. The minimum period cannot be less than three months unless this period comprises the remainder of the calendar year.
Refund under the 13th Directive
The 13th Directive refunds are based on reciprocity – the condition is that the country in which the person is established refunds VAT or similar tax to Bulgarian companies.
Bulgaria has reciprocity agreements with the following countries: Canada, Croatia, FYR of Macedonia, Iceland, Norway, Republic of Korea and Switzerland.
Taxable persons have a right to a refund if, during the year for which refund is claimed:
- they have neither a seat of their business nor a fixed establishment in Bulgaria and
during the same period they have not performed transactions with place of supply withinBulgaria except:
- international transport and ancillary to it services
- supplies of goods and services for which the tax is due by the recipient.
The application must be made in the Bulgarian language and filed with the authorities by an appointed Bulgarian agent. The name and address of the person has to be written in the official language of the country where the person is established.
Applications must be accompanied by:
- a declaration that the person claiming refund is not established on the territory of the country
- a certificate issued by the competent tax authorities from the country in which the person is established, which proves that the person performed the economic activity during the calendar year when the right to reclaim VAT has arisen (this certificate must be translated inBulgarian by a certified translator and legalized)
- the original invoices/SADs on the basis of which the VAT refund is claimed
- written power of attorney.
Applications must be sent to the territorial director of the Territorial Directorate of the National Revenue Agency – Sofia, located at 21 Aksakov Street, 1000 Sofia.
The right to reclaim VAT on purchases made in 2012 must be exercised by 30 June 2013.
Refund under Directive 2008/9/EC
Taxable persons have a right to refund of Bulgarian VAT if during the period when VAT was incurred:
- they have neither a seat of their business nor a fixed establishment in Bulgaria and
who during the same period have not performed transactions with a place of supplyBulgaria except:
- zero-rated supplies
- transport and ancillary services
- supplies of goods and services for which the tax is due by the recipient.
Refund is claimed by home state applications filed electronically with the local revenue authorities in the MemberState where the respective person is established.
Applications to refund Bulgarian VAT and all accompanying documents must be completed in Bulgarian or English. Applications must be accompanied by:
- codified description of the economic activities of the person
- codified description of the goods and services purchased in Bulgaria
- copies of invoices and SADs are not required but these should be detailed in the application.
The right to refund is exercised personally or through an authorized representative.
The home state applications are referred to the Bulgarian Revenue Agency which has four months to issue its decision for accepting or denying the claim. If additional documents are requested, the term for issuing the decision is extended by up to eight months from the submission of the claim. Following a positive decision, the claimed VAT must be reimbursed within 10 days to a bank account indicated by the person. The Bulgarian Revenue Agency owes interest for any delay after the 10-day term.
The right to reclaim VAT on purchases made in 2012 must be exercised by 30 September 2013.
Penalties can be imposed by the revenue authorities in various cases of non-compliance, most notably for failure to charge output VAT, late charging of output VAT or failure to submit application for VAT registration.
Penalties in these cases are generally set at the amount of the underlying VAT not charged as a result of the failures (except for late charging of VAT – if the delay is within one month, the potential penalty is 25 percent of the underlying VAT).
In addition to this, penalty interest on the unaccrued output VAT liability may be calculated for the period of non-payment. The penalty interest rate varies with the prime rate of the Bulgarian National Bank and is 10.03 percent per year as at the beginning of 2013.
In the case of a failure to apply the reverse charge mechanism, the penalty amounts to 5 percent of the underlying VAT, provided that the taxable person is entitled to input VAT deduction. The penalty is 2 percent of the underlying VAT if the reverse charge mechanism is applied with a one-month delay.
Following Bulgaria’s EU accession, the EU Customs Regulations 2913/92/EEC and 2454/93/EEC became directly applicable in the country. Furthermore, as a member of the European Union, Bulgaria became a part of the Customs Union of the EU, which has two major consequences:
- non-Community goods imported in Bulgaria from countries or territories not forming part of the customs territory of the EU are generally subject to the same customs duties and formalities as those applicable to goods imported in any other EU Member State
- Community goods in free circulation in the EU move from Bulgaria to other EU Member States and vice versa without application of customs formalities and without customs duty payment obligations.
Community and non-Community goods
Community goods are:
- goods fully produced or manufactured within the customs area of the EU
- goods imported from outside the customs area of the EU and released in the EU customs territory for free circulation
- goods produced or manufactured within the customs area of the EU from the abovementioned categories of goods.
Non-Community goods are goods that do not meet the criteria for Community goods. If Community goods are exported outside the customs territory of the EU, they lose their Community status. If Community goods are exported and subsequently re-imported within the customs territory of the EU, they will be treated as non-Community goods (i.e. subject to customs duties) unless it is proved that:
- the goods imported are the same as those previously exported and
- while outside the EU, the goods were not subject to any operations except for such aimed at preserving their good condition.
When entering the customs territory of the EU, all goods must be declared to the customs authorities and assigned a customs-approved treatment or use. If the goods are to be imported, the clearance procedure can be initiated either at the border Customs Office (i.e. where the goods initially enter the EU customs territory) or at the local Customs Office (i.e. where the goods will be used). In the second case, when entering the customs territory of the EU, the goods must be cleared by a border customs office for transit procedure. Usually, the Bulgarian customs authorities require that the importer is also the owner of the goods subject to import.
Usually, the customs value of the goods is their transaction value i.e. the price paid or payable for the goods. Certain adjustments to this price might be necessary (e.g. freight and insurance costs following the entry of the goods into Bulgaria must be excluded from the customs value). Alternative methods may be used, for example, where there is no sale, or where the relationship between the parties influences the sale price (e.g. related party transactions).
Classification of goods
The applicable Integrated Tariff of the European Community (TARIC) is based on the Community Combined Nomenclature and on the international Harmonized System used by many industrialized nations in the world. The respective classification of the goods within the tariff determines the rate of duty applicable upon import and whether any special preferential treatment is available.
Origin of goods
The origin of imported goods and the route they take to the EU have considerable influence on their customs duty liability. If they originate in, and are directly consigned from a country which has a preferential agreement with the EU, the duty rate is reduced significantly or possibly to 0 percent. The EU has such agreements with other country groupings such as the African, Caribbean and Pacific states, Overseas Countries and Territories, Mashreq and Maghreb. Suspension of the full rate of duty may be available from specified countries at certain times of the year for particular goods. Similarly, a quota may be in force which allows predetermined quantities of goods of certain tariff headings to be imported at lower than full duty rates.
Charges at importation
Customs duties are mainly charged on the customs value of the goods (ad valorem), although many agricultural products are also liable to specific duties, assessed according to weight or quantity, under the Common Agricultural Policy of the EU. A few items are subject to compound duties, i.e. a mixture of value-based and specific duties. The rate and type of duty applicable to an item is determined by its classification.
VAT is also charged on import. Any such VAT paid may be recovered as input tax provided that (i) the importer is registered for VAT purposes in Bulgaria, (ii) the goods are for use in their VAT taxable business activities, (iii) the importer has a proper import customs declaration issued in their name which is properly recorded in their VAT ledgers and (iv) the import VAT was effectively paid to the budget.
Goods to be exported must also be declared to the customs authorities. Only persons established on the territory of the EU can be considered exporters for customs purposes.
From a VAT perspective, the export of goods to a destination outside the EU can be zero- rated provided (i) the goods are transported outside the EU by or on behalf of the supplier or by or on behalf of the customer if not established in Bulgaria and (ii) the exporter can produce the necessary evidence for export.
Other procedures with economic impact
A number of other procedures with economic impact including temporary importation and exportation, inward and outward processing, customs warehousing and processing under customs control cover the movement, warehousing and processing of goods under specific circumstances.
The opening and discharging of the above procedures follows a number of rules and requirements and is administered by the customs authorities.
The Excise Duty and Tax Warehouses Act (EDTWA), which follows the concepts laid down in the EU excise duty legislation, was ratified by the Bulgarian Parliament and became effective on 1 July 2006. The Act was amended several times following Bulgaria’s EU accession, the latest changes came into effect from 1 January 2013.
Taxable persons for the purposes of excise duties are licensed warehouse keepers, importers of excisable goods and other designated persons listed by the EDTWA.
Excise duty is charged on the following goods: alcohol and alcoholic beverages, tobacco products, energy products and electricity. Excise duty is usually charged on the basis of weight, volume and quantity of products. Exceptions are tobacco products for which the excise duty is calculated based on quantity and product or weight (specific duty) and as a percent of the product’s price.
Standard tax rates for various groups of products are explicitly determined in the law. Products for which no tax rate is specified in the law are taxed at the rate of equivalent products.
The excise goods are subject to excise duty at the time they are produced or enter the territory of Bulgaria. The obligation for payment of the duty occurs when the respective goods are released for consumption. The accrual and payment of excise duty can be postponed, if the goods are produced, stored or moved under an excise duty suspension arrangement regime (EDSAR). Usually, the goods are considered eligible for EDSAR if produced or stored in a licensed tax warehouse. At the same time, certain excisable goods (alcohol, tobacco and some energy products) cannot be produced outside the territory of such a warehouse. Furthermore, the goods can move under EDSAR into and out of the territory of Bulgaria in the following cases:
- movement of excisable goods between Bulgarian tax warehouses
- movement of excisable goods between Bulgarian and EU tax warehouses
- movement of excisable goods from a Bulgarian tax warehouse to an exit customs office in case of export
- imported goods transported to Bulgarian tax warehouse
- other movements specifically listed in the EDTWA.
The movement of goods under EDSAR within the EU is monitored by the computerized Excise Movement and Control System (EMCS).
Insurance Premium Tax (IPT)
Insurance Premium Tax (IPT) at the rate of 2 percent was introduced in Bulgaria from 1 January 2011. The tax is charged on all insurance premiums covering risks located in Bulgaria with the exception of premiums collected on certain types of life and international transport related premiums. Taxable persons are all local insurers as well as foreign insurers acting in Bulgaria under the right of establishment or the freedom to provide services (FOS insurers).
The tax basis is the gross premium received by the insurer adjusted for certain discounts and/or parafiscal fees. The tax event is the moment when the premium payment is collected by the insurer. IPT should be paid on a monthly basis.
On the reporting side, IPT liabilities are reported by standard tax returns each calendar quarter. In addition, FOS insurers are required to file one additional return for the first month in which they have collected taxable premium income in Bulgaria.
FOS insurers can use a fiscal representative who will be jointly and severally responsible with them. Alternatively, they may settle their IPT liabilities directly or assisted by a local service provider as all reporting documentation is in the Bulgarian language.