Simple Tax Guide for Americans in Bulgaria
US Expat Taxes - Bulgaria
At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and green card holders working in Bulgaria for over 4 years. Our clients mainly live in Sofia, Plovdiv and Varna.
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.
We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS.
The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in Bulgaria for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.
Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax; we look forward to working with you.
Below we include information on the Bulgarian Tax System for the American Expatriates.
Bulgaria personal income tax rate is a flat 10%. Bulgarian residents are liable for income tax on their worldwide income, with tax credits available for overseas taxes paid. If income is derived from a country with which a double taxation treaty exists, the elimination of double taxation is effected in accordance with that tax treaty.
Income received from all sources during the year is taxable with some exceptions. These include income from the sale of one or two properties under certain conditions, scholarships for education in the country and abroad, and income from interests and deposits in local commercial banks and branches of foreign banks.
The taxable annual income includes all cash and non-cash incomes, after deducting exempt income. For every income source (employment, trading, real estate disposals, etc) a special regime exists for determining the tax base. The taxable income is the sum of the tax bases from all income sources.
A 10% flat tax rate applies, except for the net income of sole proprietors which is taxed separately by way of a 15% final flat tax.
The only personal allowance granted under the Bulgarian tax regime is the annual BGN 7,920 allowance available to disabled individuals.
Taxation must be paid in advance on income from civil contracts, royalties, management fees and freelance arrangements. Tax payable in advance on employment income is determined by the nature of the employer. If the income payer is a company, it must withhold the tax and pay it by the 10th day of the month following the month in which the income was earned. If the payer is an individual, the tax should be paid by the recipient by the 15th day of the month following the quarter in which the income was earned. Advance payments are deducted from the annual tax due which should be paid by 30 April of the following year.
Taxable incomes arising from contributions to voluntary health and life insurance policies are taxed at 7% or 10%.
Taxable income from dividends and liquidation distributions are taxed at 5%.
Inheritance tax is levied on property situated in Bulgaria or abroad that is inherited by Bulgarian citizens. It is also levied on property in Bulgaria inherited by non-residents.
The rate is 0.4% - 0.8% when inherited from relatives in the lateral line or 3.3% - 6.6% where not acquired from relatives. In some cases, (e.g. gifts to spouse and relatives in the direct line) the inheritance is exempt from tax.
Gift tax is levied on property acquired as a gift, or in any other way, for no consideration. In general, the tax rates applicable for inheritance tax also apply to gift tax and the tax is payable by the transferee. In cases when the transferee in title to the property lives abroad, the tax is payable by the party transferring the property. In some cases, exemption from taxation is stipulated.
Basis - Resident individuals are taxed on their worldwide income; nonresident individuals are taxable only on Bulgariansource income.
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 organisations or a Bulgarian enterprise; or if his/her centre of vital interests is in Bulgaria. Individuals who have a permanent address in Bulgaria but whose centre of vital interests is not in the country are not considered Bulgarian tax residents.
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, etc.
Capital gains - Capital gains arising from the sale of real property are generally taxable (certain exemptions may apply).
Deductions and allowances - Some deductions and allowances are available in computing taxable income, depending on the type of the income.
Real property tax - An annual real estate tax is levied on the owner of immovable property at a rate between 0.01% and 0.25% of the tax value of the property.
Inheritance tax - Inheritance tax is levied at a rate of 0.40% - 6.60% depending on the relationship of the beneficiary. Tax rate is determined by each municipality.
Net wealth/net worth tax - No
Social security - The total social security insurance contribution is 29.00% - 29.70% (the employer's portion is 16.90% - 17.60% and the employee's portion is 12.10%). The base for the contribution is the total income but no more than BGN 2,000 per month.
Minimum thresholds per position and industry also apply.
Tax year - Tax year in Bulgaria is the calendar year
Filing and payment - An individual must file an annual tax return by 30 April of the year following the calendar year. Income from employment is taxed via withholding at source; an individual who receives only employment income during the calendar year is not required to file an annual tax return if on 31 December of the year the individual has only 1 employer that has performed an annual tax reconciliation for the employment income received (including income from other employers).
Penalties - Interest penalties apply for late payment of tax, and administrative penalties apply in various circumstances.
Bulgaria Corporate Tax Rate
Bulgaria corporate tax rate is 10%.
The income tax of companies registered in Bulgaria is dependent on the nature of their activities.
The profits of local legal entities and business activities of foreign legal entities carried on within the Republic of Bulgaria are subject to a 10% corporation tax.
Corporate tax is payable by 31 March following the end of the tax year. There are also advance payments which can be monthly or quarterly depending on the result of the preceding year. If the preceding year produced a taxable profit, the following year's payments would be due on a monthly basis and should be paid by the 15th day of each month. The basis for assessment is the prior year's result, adjusted by a co-efficient determined by the State. If the prior year resulted in a tax loss, the following year's payments would be based on the ongoing quarterly profit and should be paid by the 15th day of the month following the quarter. Taxable persons, whose net income from sales in the preceding year is not more than BGN 200 000 are exempt from quarterly payments.
The following costs are also subject to a 10% tax:
- The expenses of representation relating to the activity
- Social expenses provided in kind to those employed under management and supervision contracts (employees)
- Expenses connected with the operation of vehicles where managerial activity is performed therewith.
The amount of this tax reduces the profit before taxation.
Tax on expenses should be paid by the 15th day of the month, following the month of expenditure.
Alternative taxes substitute the corporation tax and apply to:
- Gambling Companies - From 2010, the tax rate is 15% based on the earnings from pledges or the nominal value of the pledges printed on slip-forms, tickets and other documents, depending on the type of gambling. This tax is final and payable monthly. The tax on gambling games and casinos is calculated with reference to the number of devices used and is paid quarterly. The receipts from auxiliary and subsidiary activities within the meaning of the Gambling Law are subject to a rate of tax of 12%.
- Budget Enterprises - The tax rate is 3% (for municipalities - 2%) and is payable on trading income and income from the rental of personal and real property. This tax is final and payable monthly.
- Certain entities or individuals performing nautical commercial navigation may choose whether to pay corporation tax or an alternative tax in connection with operating ships. The alternative tax is payable in monthly instalments at a rate of 10% and is based on the net tonnage of the ship and the number of the days in operation.
CAPITAL GAINS TAX
Capital gains are included in the taxable income of a company. Quoted shares sold on the Bulgarian or an EU Stock Exchange are exempt.
BRANCH PROFIT TAX
Overseas companies earning profits in Bulgaria, including profits from branches, are subject to the same tax rates as resident companies.
FRINGE BENEFITS TAX
Social expenses provided in kind to employees are taxable at a 10% rate on the employer. Exemptions include:
- vouchers for food up to BGN 60 per month per person - contributions to voluntary pension, health and unemployment insurance schemes - transportation for workers from home to their place of work.
Those social expenses which are not in kind and constitute income of a natural person are otherwise taxable.
Compulsory social and health security contributions vary from 24% to 28.5% depending on what is insured. It can cover sickness, maternity, unemployment benefit and old age pensions. Generally, contributions are based on earnings and levied on both the employer and employee. The employer pays 60% and the employee 40% of the total amount due.
The employer also pays contributions for 'Labour accidents and occupational disease' of between 0.4% and 1.1% depending on the economic activity of the enterprise as well as 0.1% to the fund for 'Guaranteed claims by workers and employees' up to a maximum of BGN 2,000.
Non-residents who hold a long-term stay permit must pay health insurance at 8%.
DETERMINATION OF TAXABLE INCOME
Tax deductible depreciation is available on all assets costing over BGN 700 used in the enterprise concerned for more than one accounting period. The applicable rate varies according to the type of asset from 4% (for buildings, equipment, transmission devices, energy carriers, communication lines) up to 50% (for computers and software).
Enterprises may change their tax depreciation rates every calendar year but only within a maximum allowable range depending on the asset's type. The rates of depreciation included the business accounts are ignored for the purposes of taxation.
Inventories (raw materials, goods, production and production in progress) are valued at the lower of their delivery value and net realisable value. Expenses arising from devaluation are ignored for the purposes of taxation. Defined value, FIFO, average value or LIFO are all acceptable methods of valuation for tax purposes.
Dividends received from companies resident in Bulgaria and other EEA states are exempt from taxable income.
The tax loss for the current year may be carried forward for the next five years. The amount utilised each year cannot exceed the tax profit for that year. Losses from foreign sources are deducted only from the profits arising from the same source with the exception of losses or sources of income from another EU Member State.
Losses may not be carried forward in the case of certain corporate reconstructions.
FOREIGN SOURCE INCOME
Resident companies are taxed on their worldwide income and there are no special rules relating to the taxation of overseas income. Foreign legal entities are subject to corporate tax on profits realised from trading profits carried on by permanent establishments within the Republic of Bulgaria.
Incentives are given to encourage investment in municipalities with high unemployment, agricultural production, the development of the fund market and donations to charity.
FOREIGN TAX RELIEF
Tax credits are available with respect to foreign tax paid on overseas income by resident individuals. The credit is limited to the amount of the Bulgarian corporation tax and income tax payable on that income. If Bulgaria has signed a double taxation treaty with the country where the income is sourced, the rules of the treaty apply.
There are no special rules relating to corporate groups.
RELATED PARTY TRANSACTIONS
For taxation purposes, related party transactions should be at market value, otherwise the taxable profit or income is adjusted by the difference.
A 5% withholding tax is levied on dividends and distributions arising on the liquidation of resident companies to foreign legal entities, except where the dividends are realised by a permanent establishment in Bulgaria.
Dividends and similar distributions are exempt from withholding tax where paid to companies and other legal entities resident in an EEA member state.
From 2010, individuals who are resident in another EU or EEA member state may be exempt, in some cases, from withholding tax on Bulgarian source income.
In addition, residents of EU or EEA countries which have received income (other than dividends and distributions) from sources in Bulgaria subject to withholding tax may opt for recalculation of the withholding tax so as to pay 10% tax on a net basis, i.e. the tax which would have been payable had the profit been derived by a Bulgarian tax resident. The income and the pertinent expenses are to be determined in accordance with the IFRS.
Recipients are entitled to a tax refund up to the amount of the tax on which they are unable to claim credit in their home territory.
If a taxpayer chooses to adopt the net basis of calculation, this must be applied to the total income of the taxpayer from all source in Bulgaria received during the calendar year. The recalculation option is exercised through filing a tax return with the Bulgarian tax authorities by 31 December of the following year.
This facility is not available to resident of EEA countries with which Bulgaria has not concluded a double tax treaty or the concluded tax treaty does not contain 'exchange of information' or 'assistance in the tax collection' clauses (e.g. Iceland and Liechtenstein).
In applying the new alternative basis of taxation, rent from movable property is deemed to be royalty income
Transactions and payments between local and foreign persons can be made freely according to Bulgarian legislation.
Direct investments made by Bulgarian residents in foreign countries, as well as given credits between local and foreign persons, need to be declared to the Bulgarian National Bank (BNB). Residents are required to give the BNB information about their receipts from and liabilities to foreign persons every quarter.
Transfers and payments to foreign countries through commercial banks are made only after declaring the reason for the transaction.
Types of Corporations in Bulgaria
In Bulgaria, the following are accepted forms of incorporation:
A limited liability company (with the suffix OOD)
- At least 1 shareholder or more is required to set up the company. The shareholders may be individuals or companies.
- The minimum share capital is BGN 5,000, with the minimum nominal value of BGN 10 a share.
- At least 70% of the capital must be paid up before registration.
The owners of the company are liable only for the amount of capital invested.
- An annual shareholders' meeting must be convened at least once a year.
- A director must be appointed for the company. A liability company with a single shareholder (with the suffix EOOD)
- This is an OOD company owned by one individual, who may be a foreign resident.
- The single shareholder may serve also as a director of the company. A consolidated company (with the suffix AD)
- At least 1 shareholder or more is required to set up the company.
- The minimum share value is BGN 1.
- The company must have a minimum registered capital of BGN 50,000. For banks, the minimum capital requirements are BGL 10 million.
- At least 25% of the registered capital must be paid up before registration.
- The company is managed by a board of management, or at two levels by 'a supervisory board' and a 'board of management'.
A consolidated company with a single shareholder (with the suffix EAD)
- The company is owned and controlled by a single shareholder.
- It is compulsory to file an annual balance sheet with the tax authorities.
Bulgaria Sales Tax / Value Added Tax (VAT) Rates
The standard tax rate of Value Added Tax (VAT) in Bulgaria is 20%.
From 1 January 2007, the Bulgarian VAT system has followed the one adopted by other EU Member States. VAT is charged when goods or services are provided from Bulgaria. Exempt transactions include health care, social care and insurance, education, sport and culture, financial and insurance services and gambling etc. Some transactions related to land and buildings are exempted from taxation but, if the supplier chooses, they may be treated as taxable.
Transactions are exempt where the place of execution is outside Bulgaria. No tax is charged but the recipient has the right to claim tax credits on the related goods and services.
The standard tax rate is 20%. A reduced rate of 7% applies solely to the service of accommodation, provided by a hotel-keeper, when it is part of organised tourism. A zero tax rate is applicable to exports, as well as to transactions exempted from VAT under international agreements to which Bulgaria is a party. In all other cases of taxation, including the import of goods from countries which are not members of the EU, the tax rate of 20% is applicable.
A reverse charge applies in the case of Intra-community supplies. Changes to the Bulgarian VAT Act apply from 1 January 2010 in accordance with Directives 2008/8/ EEC and 2008/117/EEC to 2006/112/EEC. The scope of services on which a reverse charge applies has been expanded because of changes to the deemed place of supply:
- If the service is provided to a business, the place of supply is where the recipient of the service carried on its economic activity. If, however, the recipient is using the service for his personal benefit or for the private needs of his workers and employers, the place of supply is the place where the service has been supplied - If the service is provided to a private individual, the place of supply is where the supplier carries on its economic activity.
Exceptions from this principle are limited and include services related to estate property, passenger transport, cultural, sports, scientific, educational and entertainment services.
The rules for VAT registration have also changed. Where a person provides taxable supplies of services with a place of supply in another member state, or receives taxable supplies of services subject to a reverse charge, a requirement to register for VAT arises. Registration must be made within seven days of the relevant payment or the tax event whichever occurs first. VAT registrants under such conditions do not have the right to deduct input VAT and therefore have the option to register voluntarily for all taxable supplies for a period of 24 months.
Foreign persons established in countries that have established mutual assistance arrangements with Bulgaria may register for VAT under the general terms of the VAT Act, and can, upon their discretion, appoint VAT representatives. Such VAT representatives are not jointly liable for the VAT liabilities of the foreign persons concerned, as they are in other cases.