When to contact a tax lawyer?
In the Republic of Bulgaria, the need to hire a tax lawyer arises in any situation where there is legal uncertainty, potential risk of sanctions or administrative or audit proceedings have already been initiated by the National Revenue Agency (NRA). Tax law includes not only the obligation to pay taxes due, but also a wide range of accompanying requirements related to registration regimes, declaration, accounting, obligations in transactions with foreign persons, application of international agreements, correct determination of residence and others. Violations along these lines, even when the result of an unintentional mistake, can lead to serious legal and financial consequences.
Specific situations in which it is advisable to turn to a tax lawyer or an accountant from the BSLC include:
— Necessity of VAT registration, including mandatory registration upon reaching a taxable turnover of BGN 100,000 within 12 consecutive months (Art. 96, para. 1 VAT), as well as optional voluntary registration, registration for intra-Community supplies or distance sales;
— preparation and submission of tax returns— annual (e.g. under Art. 50 ZDDFL for natural persons, art. 92 CPA for legal entities), current (e.g. monthly VAT returns), notifications and references, as well as corrections to documents already submitted;
— Consultations on Obligations to withhold and remit tax at source, especially in the case of payment of income to foreign persons — e.g. dividends, interest, royalties, remuneration for services, management or technical services (art. 195—201 ZKPO);
Disputes with the NRA, including inspection or revision, during which documents, explanations, access to information systems or inconsistencies with the declared data are detected; the lawyer should be involved in the process already at this stage in order to protect procedural rights;
— issuance of audit reportand/or revision actto which it is necessary to submit reasoned objections under Art. 117 DOPC, as well as a subsequent complaint to the Director of the Directorate “Appeal and Tax Insurance Practice” under Art. 152 DOPC and possibly - bringing a case before the relevant administrative court;
— application of International Convention for the Avoidance of Double Taxation(SIDDO), when it is necessary to determine a tax residence (the Bulgarian tax term is “resident for tax purposes”), obtaining a certificate under Art. 135 COD, application of a reduced rate or exemption from tax at source;
— protection against refusal of the NRA to recognize entitlement to a tax creditfor formal reasons — e.g. lack of issued tax document, failure to meet deadlines, discrepancies between invoices and declared deliveries (Art. 71 et seq. ZDDS);
— joint and several liabilityto third parties — managers, accountants, trustees, who are responsible for unpaid public obligations under the conditions of Art. 19 DOPA, including for hidden or dispersed assets;
— cases of administrative-criminal liabilityfor late registration, failure to submit declarations, inaccurate declaration, lack of accounting records and other violations that lead to automatic fines under Art. 178 ZKPO, art. 80 GDPR and other provisions;
— preparation for sale of shares, company transformation, liquidation or restructuringwhen tax analyses and notifications to the NRA are required;
— Preliminary planning of tax consequenceswhen changing residence, investments, real estate transactions, transfer of assets, activity through foreign companies, use of nominal owners or holding structures.
In all of the above cases, the engagement of a tax lawyer not only provides timely and justified protection, but also minimizes the risk of legal and financial consequences, incl. litigation. Legal assistance includes analysis of legislation, preparation of objections, preparation of complaints, legal representation before the National Revenue Agency, participation in legal proceedings before administrative courts, as well as tax planning based on current laws and international agreements.
How is the Bulgarian tax system structured?
The tax system of the Republic of Bulgaria is based on the principles of legality, gratuitousness and non-recoverability of tax liabilities. According to Article 60, paragraph 1 of the Constitution of the Republic of Bulgaria, citizens are obliged to pay the taxes and fees established by law in proportion to their income and property.
The system is characterized by centralized and public law regulation, in which the tax obligation arises directly by virtue of the law, without the need to enter into a legal transaction between the State and the obliged person. The method of legal regulation is authoritarian — always one party is the state, which acts through its revenue authorities within an expressly established competence.
Tax legal relations are public law relations that arise solely on the basis of a legal norm and differ from administrative ones in that their subject is always monetary obligations, formalized in written acts with a strictly defined structure.
The Bulgarian tax system includes both direct taxes (e.g. personal income tax, corporate tax) and indirect taxes (VAT, excise taxes), each of which is regulated in a separate special law:
— Value Added Tax Act (VAT);
— Corporate Income Taxation Act (Corporate Income Tax Act);
— Personal Income Taxes Act (ZDDFL);
— Local Taxes and Charges Act (ZMDT);
— Excise and Tax Warehouses Act (ZADC).
The procedural rules governing the occurrence, establishment, appeal and collection of tax liabilities are contained in the Tax and Insurance Procedure Code (DOPC).
Who is obliged to pay taxes in Bulgaria?
Bulgarian tax legislation establishes the circle of persons on whom tax obligations arise, regardless of their nationality, place of registration or type of activity. According to Art. 9, para. 2 of the Tax and Insurance Procedure Code (DOPC), taxable persons are:
- natural persons— both domestic and foreign;
- legal entitiesregistered in the Republic of Bulgaria;
- foreign legal entitieswith a source of income in Bulgaria;
- Unpersonified Unions(e.g. civil society);
- pension and insurance funds, assimilated to legal persons for the purposes of taxation.
According to Art. 4 of the Personal Income Taxes Act (ZDDFL), local natural personmeans any person who:
- has a permanent address in the country;
- stay in the country for more than 183 days within a 12-month period;
- there are center of vital interestsin Bulgaria.
Local individuals are taxable on your world incomeregardless of the country of origin. Non-resident natural personsare subject to taxation only in respect of income with a source in Bulgaria, including:
- income from renting real estate located in the territory of the country (Art. 35, para. 1, item. 3 ZDDFL);
- income from work carried out in Bulgaria (Art. 35, para. 1, item. 1 ZDDFL);
- dividends, interest, royalties, remuneration for services from a Bulgarian payer (Art. 35, para. 1, item 5 et seq. 6 ZDDFL).
Legal entities incorporated in Bulgaria are taxed according to Art. 2 of the CPOAon all earned income, including from abroad. Foreign legal entitiesare subject to taxation only for income with a Bulgarian source, including:
- income from activities through place of business(Art. 5 ZKPO);
- income subject to tax at source— dividends, interest, royalties, management fees, technical services (art. 12, art. 195 and art. 200 ZKPO);
- income from the transfer or granting of rights to property located in Bulgaria.
Tax liabilities may also arise for third parties, acting as payers or intermediaries. According to Art. 45 of the ZDDFL, each payer of income of an individual is obliged to withhold and pay the tax due, unless otherwise provided. Similarly, according to Art. 201 of the CPOA, a Bulgarian payer of income to a foreign legal entity is obliged to withhold and pay a final tax, unless an agreement is applied. In these cases, the rules of the relevant Double Taxation Avoidance Agreement(Art. 13 DOPC), which have an advantage in contravention of the law.
Types of taxes and their features
The tax system of the Republic of Bulgaria classifies taxes according to the method of collection and the legal nature of the obligation into two main types: directand indirect. Direct taxes are characterized by the fact that the taxable person coincides with the person who actually bears the tax burden. These include:
- Personal income tax, regulated by the Personal Income Taxes Act (ZDDFL), which provides a proportional rate of 10% on the annual tax base(Art. 17 ZDDFL);
- Corporate Tax, regulated by the Corporate Income Tax Act (CPA), with basic rate of 10% on tax profits(Art. 20 ZKPO);
- Local taxes, collected in accordance with the Local Taxes and Fees Act (ZMDT), among which: real estate tax, vehicle tax, tax on the acquisition of property for considerationand others.
Indirect taxes are those in which the obligation is assumed by the final consumer by including in the price of goods or services. These include:
- Value Added Tax (VAT), regulated in the Value Added Tax Act (VAT), with basic rate of 20% and reduced rate of 9% for a limited range of services(Art. 66 ZDDS);
- Excise, defined in the Excise Duties and Tax Warehouses Act (ZADC) applicable to a limited number of goods — fuels, alcohol, tobacco products. The excise tax is one-time and is due at manufacture or import.
A particular form is the patent tax, arranged in Chapter Four of ZMDT, which applies to certain small economic activities and is characterized by a fixed amount independent of the income actually received.
All taxes in Bulgaria are Proportional, that is, they are applied at a fixed rate regardless of the size of the tax base. According to the criterion of budget affiliation, they are divided into:
- Republican Taxes, received in the central budget — including taxes under the ZDFL, ZCPOA, ZDDS, ZADS;
- Local taxes, coming into the municipal budgets — regulated in the ZMDT and based on Art. 141, para. 3 of the Constitution of the Republic of Bulgaria.
Which international rules in the field of taxation does Bulgaria apply?
The Republic of Bulgaria applies a wide range of international legal norms in the field of taxation aimed at preventing double taxation, determining tax residence and countering tax abuses. These rules have the status of part of domestic law and take precedence over national laws according to Art. 5, para. 4 of the Constitution of the Republic of Bulgariawhen there is a contradiction between them.
The main instruments of international tax regulation are Double Taxation Avoidance Arrangements (SIDPOs)which Bulgaria has concluded with more than 70 countries. These agreements shall provide for:
- determination of tax residency (that is, whether you are a “resident for tax purposes”) on the basis of criteria such as permanent residence, centre of vital interests, habitual residence and citizenship;
- distribution of tax jurisdictionbetween countries, according to source of income and residence status, including specific rules for the taxation of income from work, independent and dependent activities, dividends, interest, royalties, real estate and other income;
- concept of permanent representation, in which a foreign person is considered taxable in Bulgaria in the presence of a construction site, agency contract or other type of permanent business presence (Article 5 of SIDDO);
- methods for avoiding double taxation— Bulgaria applies an exemption method or a tax credit method depending on the specific agreement;
- dispute settlement proceduresbetween the competent authorities of the countries coordinating with each other in the event of differences in the interpretation or application of the SIDS (usually regulated in Art. 25 and Art. 26).
In addition to bilateral agreements, as a Member State of the European Union Bulgaria also applies the provisions of EU law, including:
- Directive 2011/96/EU on arrangements between related companies (the so-called Parent-Subsidiary Directive)— exemption from withholding tax on dividends between legal persons from different Member States;
- Directive on administrative cooperation in the field of taxation (DAC 1-8)— automatic and spontaneous exchange of tax information, including country-by-country reporting obligations (incl. DAC6 — reporting of cross-border schemes);
- Anti-Tax Avoidance Directive (ATAD)— includes controls on controlled foreign companies (CFC rules), limiting interest deductions, preventing hybrid mismatches and other anti-evasion measures.
The application of the above international norms is carried out within the framework of Tax and Social Security Procedure Code (DOPC), which regulates the procedural aspects of the international exchange of information, the issuance of residence certificates, the application of reduced withholding tax rates and coordination with foreign revenue authorities (Chapter Sixteen DOPP, Art. 143 et seq.).
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