Bulgaria: The alternative choice for tax planning

Petar Varbanov

Bulgaria is an attractive location for a variety of reasons, including the landscape of political and business stability and the country's membership of the EU, NATO and WTO. The stability of the currency is supported by the currency board, pegging the Bulgarian lev to the euro at the level of 1.96. Bulgaria has one of the lowest government debts in the European Union (18.9% of GDP) and one of the lowest budget deficits (-1.5%) as of 2013. Bulgaria also benefits from a strategic location and provides direct access to: the EU market – zero tariff market with population of 500 million; the Commonwealth of Independent States (CIS) – a market which is still not very well penetrated but which has great potential; Turkey – zero tariff market with a population approaching 80 million; Middle East – a market with high purchasing power; and the North African market. Due to all the above stated positives and also low tax rates, Bulgaria has become a very friendly environment for foreign investors looking to do business in Bulgaria.

The highest rate of 15% kicked off for the year of 2006 and since 2007 the corporate income tax rate is more than stable. For more than eight accounting years the rate was frozen at 10%. Compared with Cyprus and Malta, Cyprus held the corporate income tax rate at 10% for six years from 2006 to 2012. For the past three years the rate was raised to 12.5%. Certainly the ???? is dictated by Bulgaria, however the undisputable winner is Malta with its 35% headline rate of corporate income tax for the last nine years.

Bulgarian residents include: (i) a legal person incorporated under Bulgarian law; (ii) a company incorporated under Council Regulation (EC) No. 2157/2001 and any cooperative society incorporated under Council Regulation No. 1435/2003 when the registered office of the entity is in Bulgaria and the latter is entered in a Bulgarian register; or (iii) a branch office or permanent establishment (PE) of a foreign company.

Residents are taxed on their worldwide income, while non-residents are taxed on Bulgarian-source income only. Taxable income comprises accounting profits per the profit and loss account as adjusted for tax purposes.

In terms of dividend taxation, dividend income received by a Bulgarian company from another Bulgarian company is not subject to taxation in the hands of the recipient, nor is the income taxed at the hands of the payer of the dividends. Dividends received from EU/EEA tax residents are excluded from taxable income. Non-exempt dividends are taxed as part of the overall taxable profits.

Capital gains are included in the taxable income and taxed at the normal corporate income tax rate. Gains and losses on the disposal of shares listed on the Bulgarian and EU official stock exchanges are exempt. Tax losses may be carried forward for five years to be offset against future taxable profits. The carryback of losses is not permitted.

There is no surtax or alternative minimum tax and no holding company regime exists. There is also no participation exemption except for domestic dividends and dividends received from entities resident in the EU or EEA.

As far as foreign tax credits are concerned, a tax credit or exemption may apply under a tax treaty. If no treaty relief is available, Bulgaria grants a unilateral domestic tax credit.

There are domestic tax incentives for investments and the creation of new jobs in depressed regions, as well as EU grants.

VAT is levied on the sale of goods and the provision of services. The standard rate is 20%, with a reduced rate of 9% applying to hotel accommodation services. Exports and intercommunity supplies are zero-rated. Registration is compulsory for persons with a taxable turnover exceeding BGN 50,000 ($28,000) with respect to VAT taxable supplies with a place of supply in Bulgaria in any previous 12-month period (except when the VAT has to be self-assessed by the recipient). Registration is also triggered by the receipt of services in Bulgaria provided by a taxable person not established in the country. The other thresholds for compulsory registration are BGN 20,000 for intercommunity acquisitions and BGN 70,000 for the distance selling of goods with a place of supply in Bulgaria. Registration may be made on a voluntary basis regardless of turnover. A non-resident company making supplies in Bulgaria must register for VAT through an accredited representative (except entities established for VAT purposes in an EU member state). The tax period for VAT is the calendar month; VAT returns must be filed monthly by the 14th day of the following month.

The tax rates among the competitors in the race for low tax jurisdictions are almost equal and the differences are around two to five percentage points. Malta levies VAT at 18% and Bulgaria has had a 20% rate for the past nine years, which shows pretty constant tax policy regarding the treatment of the world's favourite indirect tax. Cyprus was able to hold on the rate of VAT at 15% but since 2012 the rate has been rising and we are now obliged to pay 19% VAT.

The total social security insurance contribution is 30.7% – 31.4% (the employer's portion is 17.8%-18.5% and the employee's portion is 12.9%). The base for the contribution is the total income, capped at BGN 2,600 per month. Minimum thresholds per position and industry also apply.

The double tax treaty regime offers tax relief for companies operating cross-border in multiple countries. Non-resident companies must submit an application and provide details to prove that they are entitled to tax relief under the special double taxation treaties. The company must prove that it has its main business office in a state which has signed double tax treaties with Bulgaria, must have an income source in Bulgaria and must fulfil certain special requirements. An examination or an audit may be performed to verify the information contained in the application.

Petar Varbanov (petar.varbanov@eurofast.eu)

Eurofast Global, Sofia Office

Tel.: +359 2 988 69 78

Website: www.eurofast.eu