1. Direct Taxation of Corporations
The taxation of corporate income and profits is governed by the Corporate Income Tax Act (“CITA”). In connection with the accession of Bulgaria to the European Union since January 1st 2007, a new CITA was adopted to meet the necessity of harmonization of Bulgarian taxation legislation with the requirements of the European directives concerning direct taxation. Another reason for passing a new act in the field herein is to make perception and application of the corporate taxation easier for the taxable persons and for the revenue administration.
Apart from the corporate income tax which is charged on the corporate profits, CITA also regulates certain other taxes, such as:
• A tax alternative to corporation tax shall be levied on: gambling businesses; the income accruing to public-financed enterprises from commercial transactions, as well as from letting movable and immovable property; the vessels operation activity;
• Taxes on corporate expenses. Any expenses defined as compulsory by a statutory instrument shall be recognized for tax purposes and shall not attract a tax on expenses;
• Withholding tax on income accruing to resident and non-resident legal persons.
1.1. Taxable Persons
Taxable persons are:
• the resident legal entities;
• the non-resident legal entities which carry out economic activity in the Republic of Bulgaria through a permanent establishment or from disposition of property of such permanent establishment, or which receive income from a source inside the Republic of Bulgaria;
• the sole traders: in respect of the taxes withheld at source and in the cases specified in the Income Taxes on Natural Persons Act (when they perform activities liable to taxes alternative to corporation tax);
• the natural persons who are merchants within the meaning given by Article 1 (3) of the Commerce Act (persons who have established a business, which in accordance with its purposes and volume requires that its activities be conducted on a commercial basis): in the cases specified in the Income Taxes on Natural Persons Act ;
• the employers and the commissioning entities under contracts for management and control: in respect of the tax on the expenses on fringe benefits.
For the purposes of taxation of income from a source inside the Republic of Bulgaria, any non-resident organizationally and economically distinct formation (trust, fund and other such), which independently carries out economic activity or performs and manages investments, shall likewise be a taxable person where the owner of the income cannot be identified.
1.2. Corporate Income Tax
Corporate income tax in Bulgaria applies in a single rate of 10%.
1.2.1. Profits Subject to Tax
Bulgarian resident companies are subject to Bulgarian tax on their world-wide profits. Companies that are non-residents in Bulgaria are liable to taxes in respect of the profits gained through a permanent establishment in the Republic of Bulgaria and of the income specified in the CITA accruing from a source inside the Republic of Bulgaria.
A company is resident in Bulgaria if it is incorporated (registered) pursuant to Bulgarian legislation. Resident companies are also the companies incorporated under Council Regulation (EC) No 2157/2001, as well as any cooperative society incorporated under Council Regulation No 1435/2003, where the registered office thereof is situated in the country, and they are entered into a Bulgarian register.
Most of the taxation rules, including the major rules relating to tax incentives, apply equally to resident and non-resident corporations conducting activities through a Bulgarian permanent establishment.
1.2.2. Group Taxation. Transactions between Related Parties
There is no group taxation in Bulgaria. Each entity is taxed as a separate taxpayer.
Bulgaria has tax rules regulating the tax deductions and the taxable revenue from transactions between related parties (“the transfer pricing rules”). Transfer pricing rules apply to both domestic and international transactions between related parties. The Bulgarian transfer pricing rules are broadly similar to the generally accepted OECD standards that could be seen in the EU and OECD countries.
1.2.3. Tax reporting and Tax Payments
In Bulgaria the tax year coincides with the calendar year. The taxable persons must submit an annual tax return in a standard form regarding the tax financial result and the annual corporation tax due on or before the 31st day of March of the next succeeding year. Any taxable person, who fails to submit such a tax return or fails to submit it within the legal term or fails to state or misstates any particulars or circumstances leading to underassessment of the tax due or to undue reduction, retention of or exemption from tax, shall be liable to a pecuniary penalty of BGN 500 or exceeding this amount but not exceeding BGN 3,000.
The corporate income tax is paid through making monthly/quarterly provisional tax payments. Monthly tax prepayments are made by taxable persons who have formed a tax profit for the last preceding year. Quarterly tax prepayments are made by taxable persons who are under no obligation to make monthly tax prepayments. The monthly prepayments are generally based on the tax profit for the preceding year, adjusted for economic indicators. Monthly tax prepayments are remitted on or before the 15th day of the month to which the said prepayments apply. Quarterly tax prepayments are remitted on or before the 15th day of the month next succeeding the quarter to which the said prepayments apply. No quarterly tax prepayments are made for the fourth quarter.
An annual balancing payment is made before the 31st day of March of the next succeeding year. It is calculated as a balance between the annual tax liabilities reported in the tax return and monthly provisional installments paid.
1.3. Corporation Tax Reduction, Retention and Exemption
1.3.1. Corporation Tax Retention
Corporation tax retention is the right of a taxable person not to remit to the executive budget the amounts of corporation tax, which subsist in the patrimony of the taxable person and are spent for purposes prescribed by a law. CITA provides some specific requirements for the taxable persons in order to be entitled to take advantage of tax retention.
1.3.2. Corporation Tax Exemption
Collective investment schemes which have been admitted to public offering in the Republic of Bulgaria, and licensed investment companies of the closed-end type under the Public Offering of Securities Act are exempt from the levy of corporation tax.
Special purpose investment companies under the Special Purpose Investment Companies Act are exempt from the levy of corporation tax, too.
1.3.3. Corporation Tax Incentives
Corporation tax incentives are divided into General tax incentives and Regional incentives.
The General incentives on their part are: 1) tax incentives upon hiring of unemployed persons (such legal entities are entitled to debit the accounting financial result by the amounts paid for labor remuneration and the contributions remitted for the account of the employer to the public social insurance funds and the National Health Insurance Fund during the first twelve months after the hiring); 2) incentives for enterprises hiring people with disabilities (these taxable persons are allowed to retain 100 % of the corporation tax under certain conditions); 3) incentives for social and health security funds (such legal entities are allowed to retain 50 % of the corporation tax on their economic activity directly related to their primary activity under specific conditions).
Regional tax incentives
Bulgarian Corporate Income Tax Act was recently (in force as of 01.01.2007) heavily amended in the area of state aid. The new provisions, basically arrange specific forms of tax retention, admissible under certain conditions, as defined by law.
• Tax relief, representing state aid for regional development – it is allowed under the condition that the retained tax shall be invested in assets, necessary for the performance of initial investment. The law also requires the initial investment to be made within four years after the beginning of the year for which the tax was retained; the initial investment to be made in municipalities where the rate of unemployment for the year of retention is by 35 per cent or higher than the national average for the same period etc. The taxable entity is required to perform all its manufacturing activity only in municipalities where the rate of unemployment for the year preceding the current year is by 35 per cent or more higher than the national average for the same period. In this case the taxable person is entitled to retain 100 % of the corporate tax. A positive opinion of the European Commission is required for providing of such state aid;
• Tax relief, representing minimum state aid – it is limited within certain amounts of state aid, determined by law. The retained tax must be invested in material or immaterial fixed assets within four years after the beginning of the year for which the tax is retained. Again, a precondition for the availability of this aid is the taxable person to perform its manufacturing activity only in municipalities where the rate of unemployment for the year preceding the current year is by 35 per cent or higher than the national average for the same period. In this case the taxable person is entitled to retain 100 % of the corporate tax.
• State Aid in Agriculture - Any taxable persons – registered agricultural producers shall be allowed to retain 60 per cent of the corporate tax in respect of the taxable profit accruing thereto from activity carried out in agriculture, the manufacturing industry, production, high technologies and infrastructure, where the certain conditions are fulfilled.
The tax legislation provides for specific requirements for the different types of state aid.
1.4. Tax on Corporate Expenses
The tax rate for taxes on all kinds of expenses is 10%. With regard to the fact that the tax on expenses is recognized for tax purposes, the effective tax rate is 9%
The following expenses, supported by documents, are subject to tax on expenses:
1.4.1. Business Entertainment Expenses
Taxable persons are the persons who are subject to corporation tax levy. Therefore, the expenses of legal entities subject to alternative tax are not levied with the tax herein.
The tax is levied on the gross amount of business entertainment expenses for the respective month.
1.4.2. Benefits to the Personnel
The taxable expenses are expenses on fringe benefits provided in kind to factory and office workers and to persons hired under a management and control contracts (hired persons). These expenses furthermore include:
• the expenses on contributions (premiums) for voluntary retirement and health insurance and/or life assurance;
• the expenses on food vouchers
Expenses on fringe benefits, which are not provided in kind and which constitute income of a natural person, are taxed under the terms and according to the procedure established by the Income Taxes on Natural Persons Act.
Taxable persons are all employers or commissioning entities under management and control contracts.
No tax shall be levied on expenses on fringe benefits not exceeding the amount of BGN 60 per month per hired person, where the taxable persons do not incur any coercively enforceable public obligations at the time of incurrence of the expenses. No tax shall be levied on expenses not exceeding the amount of BGN 60 per month provided in the form of food vouchers to each hired person, if certain conditions are fulfilled.
No tax shall be levied on any expenses on fringe benefits incurred on transportation of factory and office workers, and of persons hired under a management and control contract from the place of residence to the place of work and back. The latter does not apply, if any such transportation is carried out by passenger car or by extra bus services. However, the expenses, herein, shall not be levied with tax, if the transportation of factory and office workers is carried out by passenger car to inaccessible and remote areas, and the taxable person cannot ensure the implementation of the activity thereof without incurrence of the expenses.
The taxable amount for assessment of the tax on social expenses is the expense on fringe benefits provided in kind debited with the income related to the said expense for the relevant month. The taxable amount for assessment of the tax on expenses on contributions (premiums) for voluntary retirement and health insurance, and life assurance is the excess of the said expenses over BGN 60 per month per hired person. The taxable amount for assessment of the tax on expenses on food vouchers is the excess of the said expenses over BGN 60 per month per hired person.
1.5. Withholding Tax Obligations
Subject to such a tax is only the income of resident and non-resident legal entities whereas the income of natural persons is regulated by Income Taxes on Natural Persons Act.
Corporate taxpayers are subject to the following main withholding obligations:
1.5.1. Repatriation of Profit/Dividend Withholding Tax
Bulgarian resident corporations which distribute dividends have to withhold dividend withholding tax from dividend distributions in favor of:
• non-resident legal persons, with the exception of the cases where the dividends accrue to a non-resident legal person through a permanent establishment in the country;
• resident legal persons which are not merchants, including any municipalities.
No withholding tax is levied, if the dividends are distributed in favor of: a) a resident legal entity which participates in the capital of the company as a representative of the State; b) a common fund or a foreign legal entity which is resident for tax purposes in a Member State of the European Union or in another State which is a Contracting Party to the Agreement on the European Economic Area.
The taxable amount for assessment of the tax withheld at source on dividends is the gross amount of the dividends distributed.
Since 1 January 2008 , the tax rate of the withholding tax on dividends is decreased from 7% to 5%.
1.5.2. Withholding Obligations with Respect to Payments to Non-residents
Certain items of business and investment income of non-resident legal entities earned from sources in Bulgaria are subject to flat final income tax, which is normally levied by means of withholding. The domestic rate of tax is 10%. Where the recipient of the payments resides in a country with which Bulgaria has a Double Tax Treaty, the tax rate could be reduced or an exemption could be available subject to the provisions of the respective treaty.
The following income of non-resident legal entities is subject to withholding tax:
• income from financial assets issued by resident legal persons, the Bulgarian State and the municipalities;
• income from transactions with such financial assets;
• the following income, charged by resident legal persons, resident sole traders or non-resident legal persons and sole traders through a permanent established or a fixed base in the country or paid by resident natural persons or by non-resident natural persons who have a fixed base in the country:
- interest payments, including interest within payments under a financial lease contract;
- income from rent or other provision for use of movable or immovable property;
- copyright and license royalties;
- technical assistance fees;
- payments received under franchising agreements and factoring contracts;
- compensations for management or control of a Bulgarian legal person.
• income from immovable property or from transactions in immovable property, including an undivided interest or a limited property right to any immovable property situated in the country.
The income, pointed out above, shall be subject to levy of a tax withheld at source where not accruing through a permanent establishment.
The tax shall be withheld by the resident legal persons, the sole traders or the permanent establishments in the country which charge the income to the non-resident legal persons, with the exception of the income from transactions with financial assets and the income from transactions with immovable property, including an undivided interest or a limited property right to any immovable property situated in the country.
Where the payer of the income is not a taxable person under the CITA and in respect of the income from transactions with financial assets and the income from transactions with immovable property, including an undivided interest or a limited property right to any immovable property situated in the country, the tax shall be withheld from the recipient of the income.
Income from disposition of shares in public companies, negotiable rights attached to shares in public companies, and shares in and units of collective investment schemes, shall not attract a tax withheld at source where the said disposition is effected on a regulated Bulgarian securities market.