Bulgaria – business attraction in the EU
Several European countries apply an attractive corporate tax regime but need to pay more attention to the personal income tax. Bulgaria outcompetes other EU member states by offering the best of both worlds and fabulous opportunities for companies and individuals. Bulgaria’s flat tax framework is undoubtedly exceptional from an EU perspective.
Bulgaria is in South Eastern Europe, 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 capital is Sofia, Bulgarian is the official language, and Cyrillic is the official script. Bulgaria has a population of 7.4 million people, and the official currency is the lev (BGN), which is pegged to the euro at the fixed rate of EUR 1 for BGN 1,95583. In 2025, Bulgaria will adopt the euro. Sinds April 1st 2024, it is part of Schengen.
Flat tax rates
Bulgaria applies a worldwide income tax system, and residents are taxable based on their worldwide income. Bulgarian companies are subject to a flat tax rate of 10%, and the taxable profit is the annual financial result adjusted for tax purposes. Bulgaria also levies a flat personal income tax rate of 10%.
Tax holidays, tax exemptions and special regimes
Considering 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 to 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.
Popular company types
Limited liability company (OOD)
A limited liability company (OOD) is a commercial company established by one or more natural or legal persons liable for the company’s obligations up to the amount of their contributions to the company’s registered capital. An OOD must have at least one director and shareholder, and there are no restrictions on their nationality. The minimum registered capital is EUR 1, which must be divided into shares with a registered value of no less than EUR 0.50. An OOD which exceeds at least two of the following three criteria is obliged to have its financial statements audited:
- Fixed assets – EUR 750,000;
- Annual turnover – EUR 1,250,000;
- Average workforce employees – 50 employees
Single-person limited liability company (EOOD)
An OOD of which a single natural or legal person owns the capital is called a single-person limited liability company (EOOD). The legal requirements for establishing an EOOD are similar to those of an OOD.
Joint stock company (AD)
A joint stock company (AD) is one in which the capital is divided into shares and liable for its obligations and duties with its assets. Bulgarian legislation requires insurance companies and banks to be registered as an AD. A joint stock company must have at least three members on the board of directors, one chairperson, and one shareholder, and there are no restrictions on their nationality. The minimum registered capital requirement is EUR 25,560, and a joint stock company must have its financial statements audited.
Bulgaria as a holding location
Dividends received by a Bulgarian holding company are tax exempt, without any further conditions, if the subsidiary paying the dividends is a resident of an EEA member state (EU plus Iceland, Liechtenstein and Norway). Dividends paid by a Bulgarian company to companies and other entities resident in an EEA member state are exempt from withholding tax without further conditions. In all other cases, outbound dividends are subject to a final % withholding tax rate of 5% (for example, dividends paid to entities outside the EEA or to natural persons/shareholders). Capital gains from the disposal of shares in subsidiaries are subject to the flat corporate income tax rate of 10% on the level of the Bulgarian holding company.
Other withholding tax rates
A withholding tax rate of 5% applies to interest and royalties paid to associated legal entities residing in the EU. However, starting on January 1st, 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). A withholding tax rate of 10% applies to the gross amount of other kinds of outbound payments. If tax treaties are applicable, lower withholding tax rates can apply according to the treaty.
Bulgaria as an outsourcing destination
Bulgaria offers a low-cost business environment, including low rental prices and employees with an average net salary of EUR 800 per month. Bulgaria has a well-developed Internet infrastructure offers fabulous opportunities to outsource activities to a Bulgarian subsidiary. The EU Parent-Subsidiary Directive enables the parent company to repatriate the low-taxed profits tax-efficiently.
Several EU countries offer an attractive IP holding regime but levy relatively high corporate taxes on pure trading income. Other EU countries such as Malta and Cyprus levy low corporate income taxes on trading income but have an island image. Bulgaria is a good alternative within the EU and offers a flat corporate income tax rate of only 10%, applicable to all types of income. A Bulgarian company can function as a subsidiary of a non-EU parent company. As such, one achieves a minimum tax leakage in Europe (10% corporate tax and 5% withholding tax) and a tax-efficient repatriation of the profits.
It is also possible to avoid the 5% withholding tax on dividends by interposing an intermediate holding company in an EU country which doesn’t levy withholding tax on dividend payments, such as the UK or Hungary. A cost-benefit analysis will determine if such an intermediate holding vehicle is a smart solution (avoiding the 5% Bulgarian withholding tax on dividends versus the additional cost of an intermediate holding vehicle in the UK or Hungary, for example).
Recent developments
From a tax point of view, European residents face an ambiguous situation in the European Union. On the one hand, the average corporate income tax rate is decreasing. On the other hand, the average personal income tax rate is on the rise (or stagnates in the best-case scenario). Hence, residents of high-tax countries (and their tax advisors) must consider corporate and personal income tax leakage. As certain high-tax countries are increasing taxes at the personal income tax level, optimizing at the corporate income tax level alone isn’t sufficient.
For example, in the case of cross-border dividend payments originating from a Bulgarian company, non-Bulgarian resident shareholders (natural persons) suffer a triple tax leakage: (1) Bulgarian corporate income tax, (2) withholding tax, and (3) personal income tax, with component (3) being the most annoying one for residents of certain high-tax countries. One of the solutions is to avoid excessive personal income taxes in the country of residence in combination with a tax-efficient corporate structure. The provisions on the fundamental freedoms (free movement of goods, free movement of workers, freedom of establishment, freedom to provide services, free movement of capital and payments and the freedom to move and reside within the European Union), the modern means of transportation and the acceptable distances within Europe allow for such treaty-shopping solutions. More importantly, Bulgaria is one of the countries which will play a key role in the coming era of ‘relocation’ tax planning, and multiple Bulgarian solutions are available…
Bulgarian solutions for EU residents
Salary split. A non-Bulgarian resident can (i) become professionally active in Bulgaria and (ii) receive a (high) salary from a Bulgarian company as compensation for these activities. This salary constitutes a tax-deductible cost for the Bulgarian company, and the receiving individual pays 10% of the Bulgarian personal income tax on that income in Bulgaria. Bulgaria has concluded double tax treaties with other EU member states. Hence, the country of residence will exempt this personal income derived from Bulgarian sources (because taxes were already paid in Bulgaria). For a Belgian resident, for example, the individual pays a 10% flat tax on their Bulgarian-sourced income and avoids the annoying Belgian progressive income tax rates of up to 50% in the highest income bracket. In other words, transforming the taxable business income of a Bulgarian company into a deductible cost (salary) allows a resident of a high-tax country to pay only 10% tax at the corporate and personal tax level combined. In such a scenario, social security contributions are still to be paid in the country of residence, and other (non-Bulgarian) income derived from within the country of residence will be taxed according to the normal rules. In most cases, this other (non-Bulgarian) taxable income is added to the Bulgarian-sourced income, meaning higher income tax rates will apply immediately if the country of residence applies a progressive personal income tax system (like Belgium does).
Residence permit. Depending on their professional and personal situation, some individuals are willing to become Bulgarian taxpayers by relocating to Bulgaria. The advantage of such a relocation is that social security contributions also become payable in Bulgaria. The advantage of Bulgaria’s social security system is that the social security contributions payable are limited. In other words, social security contributions have a low monthly upper limit compared to other EU member countries (contributions are calculated on a fixed gross salary).
If you want more info on Bulgaria, contact us; we are the specialists in Bulgaria. Mail us at: info@dehoon-dhp.com
ntributions are calculated on a fixed gross salary).
