Introduction to the Bulgarian Tax System

Bulgarian Taxes are designed to ensure clarity and fairness in the taxation process for both individuals and corporate entities. Understanding the intricate details of this system is crucial for compliance and optimal financial planning. This guide provides a comprehensive overview of Bulgarian taxation, covering individual and corporate taxes, special tax regimes, and international tax considerations.

Individual Taxation in Bulgaria

Tax Residency and Global Income

Under Bulgarian law, individuals classified as tax residents are subject to taxation on their worldwide income. Non-residents are taxed solely on their Bulgarian-sourced income. Several criteria determine tax residency in Bulgaria:

  • Permanent address in Bulgaria
  • Physical presence in Bulgaria for more than 183 days within twelve months
  • Assignment abroad by the Bulgarian government
  • Center of economic interest in Bulgaria

Taxable Income

Taxable income for residents includes earnings from various sources:

  • Employment
  • Business activities and freelance work
  • Rental income
  • Capital gains
  • Other income sources specified by law

Tax Rates and Deductions

The personal income tax rate in Bulgaria is a flat 10%. Various deductions and allowances are available, including:

  • Contributions to voluntary insurance and retirement pension plans
  • Donations
  • Tax incentives for young families, children, and disabled individuals
  • Electronic payment incentives

Social Security Contributions

Mandatory social insurance contributions cover social security and health insurance:

  • Total contribution rate: 32.7% – 33.4% (split between employer and employee)
  • Social security: 24.7% – 25.4% (employer: 14.12% – 14.82%, employee: 10.58%)
  • Health insurance: 8% (employer: 4.8%, employee: 3.2%)
  • Contribution base: Total income, capped at BGN 3,400 per month, with minimum thresholds per position and industry sector

Corporate Taxation in Bulgaria

Corporate Income Tax

Corporate entities in Bulgaria are subject to a flat corporate income tax rate of 10%. This applies to the global income of resident companies and the Bulgarian-sourced income of non-resident companies. Specific exemptions include:

  • Collective investment schemes
  • National and alternative investment funds
  • Organizers of gambling games

Withholding Taxes

Bulgaria imposes a 5% withholding tax on dividends and liquidation proceeds paid to both local and foreign entities. Other types of income subject to withholding tax include:

  • Royalties, interest, technical services, rent, franchise fees, factoring fees, scholarships, and directors’ remuneration: 10%
  • Exemptions and reliefs under Double Taxation Treaties (DTTs)

Participation Exemption

Dividend income from local or EU/EEA-based companies is exempt from taxation, subject to anti-avoidance rules.

International Tax Considerations

Bulgaria is a signatory to 70 Double Taxation Treaties, which provide mechanisms to prevent double taxation and offer tax relief for international businesses.

Real Estate and Capital Gains Tax

Real Estate Tax

Real estate property tax is imposed on property owners at rates ranging from 0.01% to 0.45% of the property’s tax value, depending on the municipality.

Capital Gains Tax

Capital gains in Bulgaria are taxed as follows:

  • Bulgarian Tax Residents: 10% flat tax rate.
  • Non-Residents: 10% final withholding tax (WHT).

Certain exemptions are available.

Determining the Taxable Base

  1. Immovable Property (Real Estate)

    • Calculation:
      • Subtract the acquisition price from the sales price.
      • Reduce the result by 10% for statutory deductions.

  2. Vehicles, Art, Antiques, etc.

    • Calculation:
      • Subtract the acquisition price from the sales price.

  3. Stocks, Shares, and Financial Instruments

    • Calculation:
      • Total your capital gains for the year.
      • Subtract any capital losses incurred during the same year.

Important Note

The acquisition price is typically the ‘documentarily supported acquisition price’ of the property. Special rules apply if there is no documentary evidence to determine the acquisition price.

Dividend income

Dividends and liquidation proceeds paid by Bulgarian and foreign entities are subject to a 5% final WHT at source. When the dividends/liquidation proceeds are paid by non-resident entities who are not obligated to withhold and remit the Bulgarian taxes, the tax is payable by the recipient themselves on an annual basis. The dividend income paid by non-resident entities should also be reported in the annual tax return. 

Investment Incentives and Residency

Investment-Based Residency

Bulgaria offers temporary and permanent residency for foreign investors under specific conditions:

  • Temporary Residence: Investment of BGN 250,000 in a Bulgarian company in an economically disadvantaged region, creating at least five jobs for Bulgarian nationals.
  • Permanent Residence: Various investment options, including shares or bonds of Bulgarian companies, rights under concession contracts, collective investment schemes, and significant deposits in Bulgarian companies.

Conclusion

Navigating Bulgaria’s tax system requires an understanding of the various regulations and their applications. This guide offers a detailed overview, ensuring compliance and informed financial planning. For complex tax matters, consulting with a tax professional or legal expert is advisable to ensure adherence to Bulgarian tax laws and optimize tax liabilities.

For personalized assistance and more detailed advice on navigating the Bulgarian tax system, contact us.