Tax holiday, tax exemptions and special regimes
Taken into account certain limitations and conditions (including the EU state aid restrictions), a tax holiday allows companies to reduce the amount of the annual corporate income tax due on their profits derived from manufacturing activities.
Special purpose investment companies, close-ended licensed investment companies and collective investment schemes authorized for public offering in Bulgaria are exempt from corporate income tax.
There are special corporate tax regimes applicable to (1) commercial maritime shipping companies, (2) gambling businesses, and (3) other entities such as governmental institutions.
Doing business in Bulgaria
Saving taxes is one of the reasons why many businesspeople and companies have chosen to set up a company in Bulgaria. Bulgaria offers an excellent fiscal climate: a flat corporate income tax rate of 10%, a flat personal income tax rate of 10%, a dividend tax of 5% (dividends distributed to parent companies in the EU are taxed at 0%) and a wide network of double tax treaties.
Bulgaria is situated in South Eastern Europe. It is bordered by Serbia and Macedonia to the west, Greece and Turkey to the south, the Black sea to the east, and Romania to the north. The territory of the country is 110,994 square kilometres. The population is estimated at 7,37 million people. Bulgaria is a parliamentary republic and is a member of the EU, NATO, the Council of Europe and the Organization for Security and Co-operation in Europe (OSCE). The capital is Sofia, Bulgarian is the official language and Cyrillic is the official script. The currency is the lev (BGN).
Doing business in Bulgaria and enjoying Bulgaria’s fiscal friendly climate is easier than you might think. Bulgaria offers excellent opportunities to companies and entrepreneurs from within the EU to minimise taxes. According to the EU’s freedom of movement principle, you are allowed to do business anywhere in the EU. The European Court confirmed that the freedom of movement also includes moving (part of) a company to another member state for taxation purposes only.
Types of companies
There are six types of companies which are appropriate for doing business in Bulgaria. All Bulgarian companies, irrespective of the type, should be registered in (1) the commercial register of the district court located in the area where the business will be situated, (2) the local tax office, and (3) the National Statistical Institute.
Limited liability company (OOD)
A limited liability company (OOD) is a commercial company formed by one or more natural or legal persons who are liable for the company’s obligations up to the amount of their contributions to the company’s registered capital. The minimum start-up capital is BGN 2, which must be divided into shares with registered value of no less than BGN 1. In case the registered capital of the company is higher than BGN 2, a minimum of 70% of the share capital must be paid upon foundation of the company. A OOD is governed by a board of directors.
Single person limited liability company (EOOD)
An OOD of which the capital is owned by a single natural or legal person is called a single person limited liability company (EOOD). The person who owns the capital appoints a board of directors (or a managing director) to run the business. The legal requirements for the foundation of an EOOD are the same as the requirements for an OOD.
Joint stock company (AD)
A joint stock company (AD) is a company of which the capital stock is divided into shares. The company is liable for its obligations and duties with its assets. Bulgarian law requires insurance companies and banks to be registered as AD. A joint stock company can be formed by one or more natural or legal persons. There is a minimum capital requirement of BGN 50,000.
According to the Bulgarian Commercial Code, a holding company must be a joint stock company, a partnership limited by shares or a limited liability company. The purpose of a holding company is to participate, under any form, in other companies or in their management. At least 25% of the capital stock of a holding company must be invested directly in subsidiary companies. A subsidiary company is a company in which a holding company owns or controls, directly or indirectly, at least 25% of the stocks or shares and is in a position to appoint, directly or indirectly, a majority of the directors.
A company formed jointly by a Bulgarian and a foreign partner is also known as a joint venture. There are no limitations regarding the extent of the foreign participation in a joint venture. It can be established as one of the forms of the business entities mentioned in the Bulgarian Commercial Code.
A legal entity registered in another country can establish a branch in Bulgaria. However, this can be done only if the necessary legal registration in the country of domicile has been completed. A registered branch is not regarded as a legal entity.
Corporate income tax
The corporate income tax applies to companies and partnerships established under Bulgarian law and permanent establishments of non-resident entities in Bulgaria. The corporate tax rate is 10% and is calculated on the taxable profit. The taxable profit is the annual financial result adjusted for tax purposes.
The taxable income for calculating withholding tax includes seven types of income when accrued to a non-resident entity:
- capital gains resulting from transactions with real estate,
- capital gains from disposal of financial assets issued by the State/municipalities or resident entities (there is an exemption for capital gains resulting from disposal of shares on a regulated Bulgarian/EU/EEA market),
- dividends and liquidation quotas,
- income from renting out movable property or real estates,
- interest, royalties, franchising and factoring fees,
- service fees and remuneration for the use of rights (except for the actually received rights); penalties or damage fees (with the exception of insurance compensation) accrued to entities having tax residence in low tax jurisdictions,
- technical and management services fees.
The withholding tax rates are as follows:
- 5% on the gross amount of dividends and liquidation quotas (0% for distributions to EU/EEA entities)
- 5% on interest and royalties accrued to related party legal entities residing in the EU (under several conditions). Starting from the first of January 2015, Bulgaria has to implement the EU Interest and Royalties Directive: 0% withholding tax on interest and royalties paid to an associated company of another member state.
- 10% on the gross amount of all other taxable income
If tax treaties are applicable, the rates of withholding tax can be reduced.
Tax holidays, exemptions from corporate tax and special corporate tax regimes
Taken into account certain limitations and conditions (including the EU state aid restrictions), a tax holiday allows for a reduction of the amount of the annual corporate income tax due on profits from manufacturing activities.
Exemptions from corporate tax
Special purpose investment companies, close-ended licensed investment companies and collective investment schemes authorised for public offering in Bulgaria are exempt from corporate income tax.
Special corporate tax regimes
There are special corporate tax regimes for (1) commercial maritime shipping companies, (2) gambling businesses and (3) other entities, such as government institutions.
Double tax treaties
Bulgaria has concluded double tax treaties with the following countries Albania (2005), Algeria (2007), Armenia (2005), Austria (2005), Azerbaijan (2009), Belarus (2005), Belgium (2005), Canada (2005), China (2005), Croatia (2005), Cyprus (2005), Czech republic (2005), Denmark (2005), Egypt (2005), Estonia (2009), Finland (2005), France (2005), Georgia (2005), Germany (2005), Greece (2005), Hungary (2005), India (2005), Indonesia (2005), Iran (2007), Ireland (2005), Israel (2005), Italy (2005), Japan (2004), Jordan (2009), Kazakhstan (2005), Kuwait (2005), Lebanon (2005), Luxembourg (2005), Latvia (2007), Lithuania (2007), Macedonia (2005), Malta (2005), Morocco (2005), Moldova (2005), Mongolia (2005), The Netherlands (2005), Norway (2005), Poland (2005), Portugal (2005), Romania (2005), Russian Federation (2005), Spain (2005), Singapore (2005), Slovakia (2005), Slovenia (2005), South Africa (2007), South Korea (2005), Sweden (2005), Switzerland (2005), Syria (2005), Thailand (2005), Turkey (2005), Ukraine (2005), United Arab Emirates (2009), United Kingdom (2005), United States (2009), Uzbekistan (2007), Vietnam (2005), Zimbabwe (2005)