Bulgarian tax system overview: A detailed examination

The Bulgarian tax system is characterized by its simplicity and transparency, primarily due to the flat tax rates for both corporate and personal income. This structure contributes to a predictable and business-friendly environment. This overview delves into the key aspects of the Bulgarian tax system, including corporate taxation, tax audits, company types and formation, corporate tax specifics, personal income tax, and concluding observations.

Corporate taxation

Bulgaria levies a flat corporate income tax rate of 10% on taxable profits, one of the lowest in the EU. This rate applies to the difference between a company's revenues and its allowable business expenses. The concept of taxable profit is crucial: it's not the gross revenue that's taxed, but the profit remaining after legitimate business costs are deducted. This flat rate has been a cornerstone of the Bulgarian tax system for a considerable period, providing stability and predictability for businesses operating within the country. Modifying it requires a two-thirds parliamentary majority, making sudden tax increases unlikely. This long-standing policy signals a commitment to maintaining a competitive tax regime.

Other Tax Benefits:

Social Security Contributions are capped at BGN 4.130 per month, even if earning BGN 20,000/month, contributions are still calculated based on BGN 4.130.

Company owners are not required to take a minimum salary, providing flexibility in tax planning. Pensions are tax-free and gift/inheritance taxes are minimal or nonexistent. Dividends are taxed at 5%. Certain low-taxed expenses can be allocated to the company’s director, sometimes without invoices, under specific conditions.

Tax audits in Bulgaria

The Bulgarian tax administration, like its counterparts in other countries, conducts audits to ensure compliance with tax regulations. These audits are a standard procedure aimed at verifying the accuracy of tax declarations and ensuring that businesses are meeting their tax obligations. While audits are a regular part of the business landscape, they are not typically perceived as excessively aggressive or punitive. Maintaining meticulous and accurate records, diligently fulfilling tax obligations (such as timely filing of VAT returns and other required documentation), and ensuring proper documentation for all transactions (including contracts for services, invoices for purchases, and detailed expense records) can significantly minimize the risk of triggering an audit. It's also worth noting that large VAT refunds may be subject to increased scrutiny, a common practice internationally designed to prevent fraudulent activities like VAT carousels. This heightened attention to substantial refunds is not unique to Bulgaria and is employed in many jurisdictions as a safeguard against potential abuse of the VAT system. Companies are required to maintain accurate financial records for at least 5 years.

Corporate tax details

The 10% corporate tax rate applies to the company's taxable profit. Deductible expenses encompass a wide range of standard business operational costs, including, but not limited to, office equipment, software licenses, business-related travel expenses, and consulting fees paid to external suppliers. However, it's crucial to understand that personal expenses, undocumented expenses and certain entertainment expenses are generally not considered deductible for tax purposes.

The standard corporate tax payment deadline is the end of April of the following year. For instance, taxes on income earned in 2025 are typically due by the end of April 2026. However, companies that exceed a turnover of BGN 300,000 are required to pre-pay 80% of their estimated tax liability by the end of December of the current year. This pre-payment system ensures that larger businesses contribute to tax revenues throughout the year.

A particularly noteworthy aspect of the Bulgarian tax system is the possibility of a 0% corporate tax rate in very specific and limited circumstances. This incentive is designed to encourage investment in economically disadvantaged regions. To qualify for this 0% rate, a company must operate in a region with demonstrably high unemployment (significantly above the national average), engage primarily in manufacturing or production activities, meet specific employment criteria (number of employees and their roles), and fulfill certain investment and regional presence requirements.

Prepayment of Taxes:

Companies with an annual turnover above €150,000 (BGN 300,000) must prepay 80% of their estimated tax liability by December 31.

For all others, corporate tax is due by April 30 of the following year.

Personal income tax

Bulgaria also employs a flat 10% personal income tax rate on most income sources. This includes salaries, rental income, interest earned, and royalties. Dividends, however, are taxed at a lower rate of 5%. Pensions are generally exempt from taxation, providing a benefit for retirees. Gift and inheritance taxes are minimal in Bulgaria, further simplifying the tax landscape. Social security contributions, which fund social benefits, are capped at a monthly salary of BGN 4.130. This cap limits the burden of social contributions on higher earners.

Conclusion

The Bulgarian tax system, with its hallmark flat tax rates for both corporate and personal income, presents a relatively simple, transparent, and predictable tax environment for businesses and individuals. The absence of complex tax brackets and the straightforward deduction rules contribute to ease of compliance, reducing the administrative burden on taxpayers. While tax audits are a standard practice, they are generally not considered overly burdensome or arbitrary. The relative ease of company formation and the availability of various company structures cater to diverse business needs, making Bulgaria an attractive jurisdiction for both domestic and international businesses. However, it is always recommended to consult with a qualified tax advisor for specific guidance related to individual circumstances and business activities.