Bulgaria Country Profile - 2021

Bulgaria Country Profile - 2021

Key tax factors for efficient cross-border business and investment involving Bulgaria.

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EU Member State

Yes.

Double Tax Treaties

With: 

Albania Georgia Lithuania Slovenia
Algeria Germany Luxembourg South Africa
Armenia Greece Macedonia Spain
Austria Hungary Malta Sweden
Azerbaijan India Moldova Switzerland
Bahrain Indonesia Mongolia Syria
Belarus Iran Montenegro Thailand
Belgium Ireland Morocco Turkey
Canada Israel Netherlands UAE
China Italy Norway UK
Croatia Japan Poland Ukraine
Cyprus Jordan Portugal US
Czech Rep. Kazakhstan Qatar Uzbekistan
Denmark People's Rep. of Korea Romania Vietnam
Egypt Rep. of Korea Russia Zimbabwe
Estonia Kuwait Serbia  
Finland Latvia Singapore  
France Lebanon Slovakia  

Most important forms of doing business

Limited liability company (“OOD”, in Bulgarian: дружество с ограничена отговорност - OOД),

Joint-stock company (“AD”, in Bulgarian: акционерно дружество – “AД”).

Legal entity capital requirements

Limited liability company (OOD) - BGN 2.

Joint-stock company (AD) - BGN 50,000.

A higher statutory minimum is required for credit and financial institutions, investment intermediary companies, special investment purpose entities, insurance and health insurance companies.

Residence and tax system

A company is a tax resident in Bulgaria if it is incorporated under Bulgarian law. Resident companies are taxed on their worldwide income. Non-resident companies are taxed only on their Bulgarian source income.

Compliance requirements for CIT purposes

The fiscal year coincides with the calendar year. The annual corporate income tax (CIT) return has to be filed and the annual CIT liability has to be paid by March 31 of the following year. Only electronic filings are allowed.

Corporate income tax rate

The standard CIT rate is 10 percent.

Withholding tax rates

On dividends paid to non-resident companies

A 5 percent rate is levied on dividends and liquidation proceeds distributed to non-EU tax resident entities. Exemptions apply for dividends and liquidation proceeds paid by domestic companies to EU/EEA parent companies (no minimum participation or holding period requirements); the exemption does not apply to amounts considered hidden distributions of profits.

On interest paid to non-resident companies

A 10 percent rate applies to interest paid to a foreign entity. Exemptions apply for interest payments to EU affiliated companies under the EU Interest and Royalties Directive (subject to conditions).

On patent royalties and certain copyright royalties paid to non-resident companies

A 10 percent rate applies to royalties paid to a foreign entity. Exemptions apply for royalty payments to EU affiliated companies under the EU Interest and Royalties Directive (subject to conditions).

On fees for technical services

Yes, a 10 percent rate applies.

On other payments

A 10 percent WHT is levied on income from:

  • financial assets issued by Bulgarian legal entities/ transactions in such assets
  • franchising/factoring and management fees
  • movable property rental
  • renting out real estate property or capital gains from the disposal of such assets

Branch withholding tax

Yes (to the extent that Bulgarian WHT may be due on certain types of income accrued in favor of other parts of the entity under certain conditions); however, no Bulgarian WHT on profit repatriation.

Holding rules

Dividend received from resident/non-resident subsidiaries

Exemptions (100 percent) apply for dividends received from Bulgarian and EU/EEA subsidiaries (no minimum participation or holding period requirements), unless the distributed amount decreases the tax result of the subsidiary (either as tax deductible expenses, or as another type of downward adjustment to the tax base), irrespective of the applicable accounting treatment.

Capital gains obtained from resident/non-resident subsidiaries

An exemption (100 percent) applies to capital gains from disposal of shares traded on the Bulgarian and EU stock exchanges, as well as on stock exchanges of third countries that are considered equivalent to a regulated market and for which the European Commission has issued a decision on the equivalence of the regulatory and supervisory regime in accordance with Directive 2014/65/EC (no minimum participation or holding period requirements). In the period starting from January 1, 2021, until December 31, 2025, the exemption would extend to capital gains from the disposal of shares traded on a growth market within the meaning of the applicable Bulgarian legislation.

Tax losses

Tax losses can be carried forward for 5 years. There are no provisions regarding tax loss carry-back.

Tax consolidation rules/Group relief rules

No.

Registration duties

Registration fees vary according to the entity to be registered, from a minimum of EUR 56 to a maximum of EUR 665.

Transfer duties

On the transfer of shares

No.

On the transfer of land and buildings

Transfer tax in the range of 0.1 percent – 3 percent is levied on the value of transferred real estate property (land and buildings). The tax rate is determined annually by the relevant municipality.

Stamp duties

No.

Real estate taxes

Annual real estate tax in the range of 0.01 percent - 0.45 percent on the tax valuation of the property is determined annually by municipalities. Annual garbage collection fees on the tax valuation of the properties are also collected by municipalities.

Controlled Foreign Company rules

Yes.

Hybrid mismatches

The hybrid mismatch rules under ATAD II have been transposed into national legislation, with effect from January 1, 2020, save for the reverse hybrid mismatches rule, for which a delayed application is permissible under the directive. The rules address mismatch situations which result from double deductions, from conflicts in the characterization of financial instruments, payments and entities, and from the allocation of payments. 

Exit tax

Exit taxation rules were introduced into Bulgarian national legislation with effect from January 1, 2020, with the aim of transposing the relevant provisions of ATAD. In essence, in the event of a transfer of assets or activities outside of the country whereby Bulgaria losses, in full or in part, its taxing rights, the new rules seek to tax the unrealized capital gains built into the net assets transferred abroad. The payment of the full amount of the tax may be deferred (and paid in equal annual instalments over a five-year period) under rules laid down in the legislation, provided certain conditions are met.

Exemptions apply for a limited number of temporary transfers of assets, explicitly listed in the law.

Transfer pricing rules

General transfer pricing rules

Arm’s length principles apply.

Documentation requirement

Supporting documentation is required.

Thin capitalization rules

Thin capitalization rules apply if the average debt-to-equity ratio exceeds 3:1. The amount of non-deductible interest is calculated as total interest income plus 75 percent of the profit before all interest income, interest expenses, and taxes. Thin capitalization rules do not apply to (i) interest expenses on finance leases and bank loans, unless they are concluded between, guaranteed or secured by, or granted to the order of a related party; (ii) penalty interest; (iii) capitalized interest; and (iv) interest expenses not recognized for tax purposes under other provisions in Bulgarian law. Interest expenses disallowed under thin capitalization rules represent a temporary tax difference that may be reversed in the subsequent 5 years.

If the interest limitation rule (see below) is applicable to the taxpayer for the given year, the interest limitation rule is applied with priority (i.e. in order of application) before the thin capitalization rules.

Interest limitation rules

Yes (exceeding borrowing costs are deductible for tax purposes in the year when incurred only up to 30 percent of the taxpayer’s tax-adjusted EBITDA); the interest limitation rule applies only if the exceeding borrowing costs for the current year exceed EUR 3 million.

General Anti-Avoidance rules (GAAR)

Yes.

Specific Anti-Avoidance rules/Anti Treaty Shopping Provisions/Anti-Hybrid rules

Yes.

Advance Ruling system

Opinions issued by the tax authorities are not binding.

IP / R&D incentives

The cost value of intangible assets acquired as a result of R&D activities may be deducted in full as a current period expense in the year of recognition of the asset, provided certain specific conditions are met.

Other incentives

Tax resident companies in Bulgaria are entitled to use certain corporate tax incentives subject to conditions. Available incentives include:

  • a corporate tax exemption of up to 100 percent for manufacturing companies investing in municipalities with high unemployment levels (a decision by the EU Commission is required for large investment projects that have received state aid from all available sources exceeding the equivalent of EUR 37.5 million in local currency, or EUR 18.75 million in local currency for investments in the southwestern region of the country);
  • a job creation tax incentive;
  • a corporate tax exemption for licensed real estate investment trusts.

VAT

The standard rate is 20 percent, and the reduced rates are 9 and 0 percent.
 

Other relevant points of attention

Hidden distribution of profits ("HDP"):

Amounts accrued, paid, or distributed in any form by Bulgarian tax resident companies to shareholders, partners, or related parties, not related to the business activity of the taxpayer or exceeding the market levels, as well as certain interest expenses, are treated as a HDP and are therefore not recognized for CIT purposes. A penalty of 20 percent of the amounts qualifying as HDP may also be imposed (unless the HDP is reported in the annual CIT return). In addition, a HDP is treated as a deemed dividend and hence subject to a 5 percent WHT if accrued, paid, or distributed to a foreign tax resident entity with no option for exemption if the beneficiary is an EU/EEA tax resident.

Mandatory Disclosure Rules Updates

For country specific information and updates on the EU Mandatory Disclosure Rules please visit KPMG’s EU Tax Centre’s MDR Updates page.

Contact us

Kalin Hadjidimov

KPMG in Bulgaria

T: +359 (2) 96 97 700

E: khadjidimov@kpmg.com

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