Bulgaria: the alternative choice for tax planning

Bulgaria/June 2015

Low Tax Jurisdictions:

The Low Tax Jurisdictions are the most widely used jurisdictions in tax planning nowadays. The strict regulatory rules and the stigma attached on jurisdictions offering offshore companies have forced many businesses to re-evaluate their tax planning.

Tax planning has become more careful and conservative by taking into account that in order to have a worldwide acceptable tax planning, where the use of offshore jurisdictions need to be constrained and the use of low tax jurisdictions to increase.

Low tax jurisdictions’ legislation allows certain advantages (tax, confidentiality, etc.) to be used mainly by non-residents. This means that a country, or jurisdiction, shall allow registration of a new company and offer them some tax benefits but will not extinguish in total the application of tax. This allows the companies – from third countries, to be settled in such a jurisdiction, sometimes resident, sometimes not (depending on the legislation), to trade on an international basis, taking advantage of the easier flow of money on the international markets. These jurisdictions often allow another company to be appointed as the Director and Shareholder of a company which allowed the development of the service known as “Nominee”. Still, the Nominee service is gaining more and more strength to reach the stage where today’s business places third individuals acting as a Managing Directors of the companies in order to be free from administrative burdens and bureaucracy. The business wants to make business, not to lose valuable time in administration procedures.

Famous Low Tax Jurisdictions:

BULGARIA – 10 %  Tax

CYPRUS – 12.5 %  Tax

MALTA- 35%  Tax

Why Bulgaria?

Bulgaria is in political and business stability. Bulgaria is a member of the European Union, 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 has a strategic location and provides direct access to the European Union market – zero tariff market with population of 500 million, CIS – still not well penetrated market with a high potential, Turkey – zero tariff market of near 80 million population, Middle East – a market with high purchasing power, North African market. Due to all the above stated positives and also law tax rates, Bulgaria becomes very friendly environment for foreign investors in doing business in Bulgaria.

Corporate taxation: Rate – 10%: 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 8 accounting years the rate was frozen at 10 percent.

Compared with Cyprus and Malta, Cyprus holds on the corporate income tax rate at 10 percent for a period of 6 years – from 2006 to 2012. Nowadays for the last three years the rate was raised to 12, 5 percent. Certainly the расе is dictated by Bulgaria however the undisputable winner is Malta with its 35% of corporate income tax for the last 9 years.

Residence – 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. Basis – Residents are taxed on their worldwide income; nonresidents are taxed on Bulgarian-source income only. Taxable income – Taxable income comprises accounting profits per the profit and loss account as adjusted for tax purposes. Taxation of dividends – 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. Nonexempt dividends are taxed as part of overall taxable profits. Capital gains – Capital gains are included in 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. Losses – Tax losses may be carried forward for five years to be offset against future taxable profits. The carryback of losses is not permitted.

Surtax – No

Alternative minimum tax – No

Foreign tax credit – A tax credit or exemption may apply under a tax treaty. If no treaty relief is available, Bulgaria grants a unilateral domestic tax credit.

Participation exemption – No (except for domestic dividends and dividends received from entities resident in the EU/EEA).

Holding company regime – No

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

Value added tax: 

Taxable transactions – VAT is levied on the sale of goods and the provision of services. Rates – The standard rate is 20%, with a reduced rate of 9% applying to hotel accommodation services. Exports and intercommunity supplies are zero-rated. Registration – Registration is compulsory for persons with a taxable turnover exceeding BGN 50,000 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 also is triggered by the receipt of services in Bulgaria provided by a taxable person not established in Bulgaria. 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 nonresident company making supplies in Bulgaria must register for VAT through an accredited representative (except entities established for VAT purposes in an EU member state). Filing and payment – 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 between the competitors in the race for low tax jurisdictions are almost equal and the differences are around 2 to 5 %. Malta with its 18 % and Bulgaria – 20 % of VAT for the last 9 years shows pretty constant tax policy regarding the treatment of the world’s favourite indirect tax. Cyprus was able to holds on the rate of the VAT to 15 % but since 2012 the percent is rising and now we are obliged to pay 19 % of VAT.

Personal taxation:

Basis – Resident individuals are taxed on their worldwide income; nonresident individuals are taxable on Bulgarian-source income only. Residence – An individual is resident if he/she has a permanent address in Bulgaria, resides in the country for more than 183 days in any 12-month period or is sent abroad by the state, state organizations or a Bulgarian enterprise; or if his/her center of vital interests is in Bulgaria. Individuals who have a permanent address in Bulgaria but whose center of vital interests is not in the country are not considered Bulgarian tax resident. Filing status – Each individual must file his/her own return; joint filing is not permitted. Taxable income – Taxable income includes income from employment, income from business or professional activities, capital gains, income from rent, interest from bank deposits etc. Capital gains – Capital gains arising from the sale of real property are generally taxable, but certain exemptions may apply. Deductions and allowances – Some deductions and allowances are available in computing taxable income, depending on the type of income. Rates – 10% (8% on interest from bank deposits).

As of 1 January 2008 Bulgaria introduced a 10 percent flat tax applicable for all income levels. Malta and Cyprus are running around 30-35 %. In Malta 35 percent income tax rate kicks in at EUR 28,501 for individuals applying married rates and at EUR 19,501 for individuals applying single rates. A new tax bracket for parents was introduced in 2012 and in this case the 35 percent income tax rate kicks in at EUR21, 201. For Cyprus top marginal rate kicks in at EUR 60,000 of taxable income.

Other taxes on corporations: 

Social security – 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.

Employee Social Security Rates:

Location 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Bulgaria 13 12,1 12,9 12,9 12,9 12,9
Cyprus 6,3 6,8 6,8 6,8 6,8 7,8 7,8
Social insurance contribution rates are due to increase every five year period. Current Cyprus social security rate is 7.8 percent (monthly maximum assessable base is EUR 4,533).
Malta 10 10 10 10 10 10 10

Employer Social Security Rates:

Location 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Bulgaria 18,1 17 17,9 18,1 18,1 18,1
Cyprus 10 10,5 10,5 10,5 10,5 11,5 11,5
Social insurance contribution rates are due to increase every five year period. Current Cyprus social security rate is 7.8 percent (monthly maximum assessable base is EUR 4,533).
Malta 10 10 10 10 10 10 10

Tax treaties and benefits:

The double tax treaty regime offers tax relief for companies operating in multiple countries. Eurofast is in position to help you benefit from the special taxation measures available under these double tax agreements. 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 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 in order to verify the information contained in the application.

Bulgaria has concluded the following tax treaties:

1.SIDDO with Austria

2.SIDDO with Azerbaijan

3.SIDDO with Albania

4.SIDDO with Algeria

5.SIDDO with Armenia

6.SIDDO with Bahrain

7.SIDDO with Belarus

8.SIDDO with Belgium

9.SIDDO with Great Britain  and Northern Ireland

10.SIDDO with Vietnam

11.SIDDO with Germany

12.SIDDO with Georgia

13.SIDDO with Greece

14.SIDDO with Denmark

15.SIDDO with Egypt

16.SIDDO with Estonia

17.SIDDO with Zimbabwe

18.SIDDO with Israel

19.SIDDO with India

20.SIDDO with Indonesia

21.SIDDO with Iran

22.SIDDO with Ireland

23.SIDDO with Spain

24.SIDDO with Italy

25.SIDDO with Jordan

26.SIDDO with Kazakhstan

27.SIDDO with Canada

28.SIDDO with Qatar

29.SIDDO with Cyprus

30.SIDDO with China

31.SIDDO with Kuwait

32.SIDDO with Latvia

33.SIDDO with Lebanon

34.SIDDO with Lithuania

35.SIDDO with Luxembourg

36.SIDDO with Macedonia

37.SIDDO with Malta

38.SIDDO with Morocco

39.SIDDO with Moldova

40.SIDDO with Mongolia

41.SIDDO with Norway

42.SIDDO with United Arab Emirates

43.SIDDO with Poland

44.SIDDO with Portugal

45.SIDDO with Romania

46.SIDDO with Russia

47.SIDDO with the USA

48.SIDDO with North Korea

49.SIDDO with Singapore

50.SIDDO with Syria

51.SIDDO with Slovakia

52.SIDDO with Slovenia

53.SIDDO with Thailand

54.SIDDO with Turkey

55.SIDDO with Uzbekistan

56.SIDDO with Ukraine

57.SIDDO with Hungary

58.SIDDO with Finland

59.SIDDO with France

60.SIDDO with Netherlands

61.SIDDO with Croatia

62.SIDDO with the Czech Republic

63.SIDDO with Switzerland

64.SIDDO with Sweden

65.SIDDO with South Africa

66.SIDDO with Yugoslavia

67.SIDDO with South Korea

68.SIDDO with Japa

Should you have any questions related to the topics of this Newsletter, do not hesitate to contact us.

Petar Varbanov, Attorney-at-law,
Legal and Tax Advisor