Bulgaria is a well-known tourist destination for those who are looking for a golden tan and enjoyment on the coast of the Black Sea. Moreover, it is an even more attractive strategic location for business investors. Especially, when the country’s taxation system provides investors with an opportunity to pay a 0% corporate tax.
Foreign investors choose Bulgaria for several reasons, such as fast economic growth, political and business stability, strategic geographic location, qualified workforce, and direct access to global markets (EU, EFTA, Russia, Middle East).
However, there is one reason that attracts foreign investors most. That is, low costs of doing business. In Bulgaria, businesses can enjoy (1) low corporate income tax rates (10%), (2) extremely competitive labor costs (average wage in 2015 was about 440 Euro), and (3) tax incentives for investors provided by the Bulgarian government.
In order to stimulate country’s economy and attract foreign investors, Bulgarian government introduced fiscal measures and instruments, which would not only boost development of strategic economic sectors but would also reduce high unemployment rates.
This article will discuss in detail a tax incentive which guarantees a 0% corporate income tax for businesses, namely, the remission of corporate income tax for enterprises performing activities in municipalities with a high unemployment rate. Such a remission is allowed by the Bulgarian Corporate Income Tax Act (CITA).
The remission of corporate income tax for enterprises performing activities in municipalities with a high unemployment rate was introduced in 2013. This incentive guarantees a remission of corporate income tax up to 100% to the benefit of enterprises with manufacturing activities in Bulgarian municipalities with a high unemployment rate. This incentive aims at stimulating investment in manufacturing in those areas. Being a part of a set of changes in the Bulgarian taxation system proposed by the Finance Ministry, the incentive functions in line with the European Commission Guidelines on Regional Aid for the 2014-2020.
The incentive can be applied to two types of beneficiaries which form profit in compliance with the CITA, namely, (1) local legal entities and (2) permanent establishments of foreign legal entities in Bulgaria. Five main conditions should be met for the incentive to apply. Below, we briefly discuss those conditions.
Firstly, the municipality where the enterprise is established and the manufacturing is performed should have an unemployment rate of at least 25% higher than the average unemployment rate of the country. This condition covers over 100 municipalities in Bulgaria. According to Eurostat, the average unemployment rate in May 2015 in Bulgaria was 9,7%. The Ministry of Economy and Energy announces the list of the regions with high unemployment rates annually.
Secondly, only companies that employ ten or more persons in a qualifying municipality are able to benefit from the incentive. Moreover, 50% of the employees should be occupied directly in the carried production activity.
Thirdly, during the entire fiscal period, not less than 30% of the staff should be persons who have their permanent address in the municipalities with a high unemployment rate.
Fourthly, the remitted corporate tax should be invested back for acquiring long-term tangible and intangible assets necessary for the production activity. The investment should be performed in 4 years from the beginning of the fiscal year in which the tax is remitted within the administrative boundaries of the municipality with a high unemployment rate.The eligible investment should not exceed 25% of the costs of the fixed tangible assets.
Fifthly, the company should continue activities related to the initial investmentfor at least for 5 years after the application of the incentive.
Moreover, a number of other eligibility criteria defined in the CITA should be met for the incentive to apply.
To conclude, the incentive encourages national and foreign support for Bulgarian economic sectors and stimulates investment and employment in the “depressed” regions. If a company is considering applying for the incentive, the below-mentioned checklist will come handy.
The checklist indicating the main eligibility criteria for 0 % Bulgarian corporate tax:
- The enterprise should be established and operate in regions with a high unemployment rate (25% higher than average in the country);
- The enterprise should perform manufacturing activities;
- The enterprise should employ at least 10 persons from an area with a high unemployment rate;
- At least 50 % of employees should be engaged in manufacturing activities;
- 30% of staff should be the residents of a region with a high unemployment rate;
- The remitted corporate tax should be reinvested in the same area within 4 years;
- The enterprise should continue manufacturing activities for at least 5 years after receiving the tax exemption.
OTHERWISE IT’s 10% TAX WHICH IS STILL GREAT!!!!