Worldwide Corporate Taxes Summaries——Bulgaria（2001-2002）
Worldwide Corporate Taxes Summaries——Bulgaria（2001-2002）
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There were no significant tax or regulatory developments in the past year.
TAXES ON CORPORATE INCOME
In general, all companies are liable for the corporate income tax. Corporate income is taxed at the rate of 20%. This rate is reduced to 15% for enterprises with taxable profits of less than BGL 50,000 (about US$24,090 as of January 1, 2001). Companies undertaking certain types of activities described by law (mostly restaurant and hotel services, hairdressers, etc.)
with a turnover for the previous year below BGL 75,000 (about US$36,134 as of January 1, 2001) pay a flat business tax, the amount depending on the type and size of the business, instead of business income.In addition to the corporate tax, there is a municipalities tax at 10% of the taxable profit. The taxable base for the corporate income tax is reduced by the municipalities tax paid. Bulgarian-resident entities are taxed on a worldwide basis. Nonresident entities are taxed on their Bulgarian-source income. Nonbusiness organizations (including governmental) are taxed on their businesslike activities.
The Bulgarian Law on Commerce provides for the following types of entities.
1. Limited liability company.
2. Joint stock company, which may be public or private.
3. General partnership.
4. Limited partnership.
5. Partnership limited by shares, which may be private or public.
6. Foreign business entities may register a branch in Bulgaria.
A corporation is resident in Bulgaria for tax purposes if it is registered in Bulgaria. Foreign legal entities with headquarters abroad and registered correspondingly are nonresidents for tax purposes, but their Bulgarian branches are deemed Bulgarian-resident companies for tax purposes.
Tax on insurance and reinsurance premium/Insurance companies pay a speCIAl one-time (final) tax on insurance premiums and on any other kind of income and are not obliged to pay corporate income taxes separately for their activities other than insurance or reinsurance.
The tax base is the sum of all insurance premiums and any other income (even if not related to insurance) within a given month, reduced by the gross amount of reinsurance premiums assigned to other reinsurance companies and insurance premiums paid back to clients. If the tax base is a negative figure, it is deductible from the tax base in the subsequent months.
The rate of the speCIAl tax for insurance companies is 7%, except for life insurance companies whose income will be taxed at 2%.
The same tax is levied on premiums received by a foreign insurance company through a permanent establishment in Bulgaria.
Taxation of company expenses/Entertainment and representation expenses, sponsorships, and business gifts that do not bear the trademark of the donating company are subject to taxation at 25%. SoCIAl expenses and benefits-in-kind for the staff, as well as expenses for maintenance, repair, and usage of cars, are taxed at 20%. The taxes are final, and both the taxes
and the expenses are deductible for the purposes of the orporate income tax.
Value-added tax/VAT was introduced on April 1, 1994. In general, it follows the provisions of the Sixth EU Directive.
The tax base includes the agreed-upon price, customs, and excise duties, if any, and some other expenses (such as commission, packing, transport,insurance costs charged by the supplier to the purchaser).
The rate of tax is currently 20%. The exports of goods and a limited number of services are subject to VAT at a zero rate. Within the meaning of the VAT Act, export of goods is exportation abroad or to the free zones, free warehouses, and duty-free outlets. However, supply to customs warehouses does not qualify for export. There are three types of exempt upplies.
1. Supplies of services, which, according to the statutory “place of supply” rules, are provided outside the territory of Bulgaria.
2. Supplies of goods in customs warehouses within the scope of the respective customs procedure.
3. Supplies exempt due to their subject, such as finanCIAl services, insurance, gambling, educational and health services, transfer of ownership of land, etc.
Excise duties/The Excise Duty Act was introduced on April 1, 1994. The system is harmonized with the VAT legislation. Excise duties are not due on goods and services for export. The duties are calculated as either percentage of the producer’s sales price/customs value or as a flat amount per unit.
Excise duty is levied on a limited group of goods and services, mainly coffee and tea; cars; petrol and diesel fuel; beer, wine, and hard drinks; tobacco products; and gambling.
Property tax/Taxpayers are individuals and legal entities that are owners of immovable property, that is, land and buildings. For individuals, the property tax rate is 0.15% on the taxable value of the property, determined by the relevant method. If the owner of the real estate is a company, the tax base is the book value of the property.
A garbage collection fee is payable for immovable property too, at a rate determined by the local municipal council annually, but generally similar to the rate of the property tax.
Although branch offices are not deemed legal persons, branches of nonresident companies have separate balance sheets and, therefore, are subject to corporate income tax at the standard rate of 20% (or the reduced rate of 15%) and to other general taxes (municipalities tax, VAT, property tax).
Representative offices of foreign entities are not allowed to carry out business activities and are not subject to corporate income taxation. A representative office registered under the Foreign Investments Act may perform only those activities that are not regarded as “economic activities,” that is, marketing activities normally carried out by a representative office and auxiliary to the activities of its head office.
Representative offices do not constitute permanent establishments of the nonresident entities, unless they engage in business activities in breach of the law.
Inventory valuation/Any of the following methods is acceptable for inventory valuation: FIFO, LIFO, weighted-average cost, or specific identification of items of inventory.
Inventories at the end of the year are to be valued at the lower of their fair or book value at the balance sheet date. The difference is to be recorded as “other expenses” and is regulated for tax purposes.
Capital gains/Only realized capital gains are included in corporate income and taxed at the full corporate tax rate. Exchange rate gains and losses are to be reported in the profit and loss account and reflected in the assessment of taxable profit.
Intercompany dividends/Intercompany dividend payments between Bulgarian companies are deductible in full from the tax base of the recipient company (participation exemption, regardless of the size of the shareholding).
Dividends distributed by Bulgarian companies to foreign shareholders are subject to 15% withholding tax (see below for exceptions under double taxation treaties (DTTs]).
Foreign income/Income derived outside Bulgaria by resident legal entities and branches of nonresident is included in the taxable base for the purpose of corporate income tax, regardless of whether such income is subject to taxation abroad. In instances where the provisions of a double taxation
treaty are applicable, a tax credit or exemption for the foreign tax paid may be allowed. There is also a unilateral tax credit that cannot exceed the amount of the tax that would be payable in Bulgaria for the same type of income. Undistributed income of foreign subsidiaries of a Bulgarian-resident company is not taxed.
Stock dividends/Stock dividends do not entail withholding tax (c.f. cash dividends paid out to individuals and foreign entities).
Depreciation and depletion/DepreCIAtion is calculated in accordance with the straight-line, the progressive, or the declining-balance method.
Accounting regulations permit Bulgarian companies to establish a depreCIAtion schedule for each tangible and intangible fixed asset on the basis of the method chosen by the company. However, for tax purposes, the straight-line method or, for certain assets, the declining-balance method applies. Depletion is not specifically regulated for tax purposes.
Net operation losses/The taxpayer has the right to carry forward losses incurred in an accounting period over the following five years. Carryforward of foreign-source losses can be offset only against income from the same source. Loss carryback is not permitted.
Payments to foreign affiliates/Payments to foreign affiliates may be subjected by the tax authorities to recalculation in accordance with the arm’s-length principle. Market prices would apply, and deviations from such prices will be tolerated if within a range of plus or minus 20% (for interest payments-25% deviation). With regard to interest payable by local companies to either local or foreign persons, thin-pitalization rules also apply (they also apply to nonaffiliated companies). The tax deductibility of interest is restricted to the amount of interest income of the company,increased by 75% of its positive finanCIAl result, exclusive of interest income and expense. The thin-capitalization rule will not apply where the
debt-to-equity ratio is 1:2 or less than 1:2.Taxes/Taxes as a part of expenses are deductible in full. Municipalities tax is deductible from the taxable base for corporate tax.
Other significant items/Companies may also deduct the following costs for tax purposes.
1. The difference between tax-deductible depreciation limits and actually booked depreciation costs if the former exceed the latter, but only where depreCIAtion tax differences reverse.
2. Grants extended to Bulgarian educational and cultural institutions, within certain limits.
3. Other specific items.
There is no specific legislation on group taxation. All companies are assessed on individually assessable profits and losses. However, tax antiavoidance rules cover transfer pricing and related persons.
MAJOR TAX INCENTIVES
Agricultural producers/Companies and cooperatives performing agricultural activities enjoy full corporate income tax relief for income related to nonprocessed agricultural production, provided that they reinvest that granted-back tax in the same activities. They are liable, however, for municipal tax.
SpeCIAl tax incentive for investments in depressed regions/Entities investing in regions with a high unemployment rate (it is deemed high if it exceeds one and a half times the average unemployment rate for the country) enjoy a reduction of the corporate income tax (not the municipal tax) provided that:
· The investment is in the form of acquisition, modernization, or reconstruction of fixed tangible assets such as buildings, equipment, transmitters, electricity transmitters, and telecommunication lines; and· The funds for the investment are generated from the contributions made by shareholders for acquisition of new shares (including on incorporation)
in the company making the investments.
If the requirements for the tax reduction are met, the corporate tax is reduced by an amount representing 10% of the amount of the share contributions used in the above manner.
The incentive is enjoyed in the year of making the investment in said assets.
The sum usable for reduction is accounted for as reserves, and if greater than the corporate tax in the respective year, it can be used to reduce the corporate tax in the following five years.
Bulgarian companies are required to withhold tax on payments of dividends and liquidation proceeds; interest (including that incurred under finance lease agreements); royalties; fees for technical services; rental payments; payments made under operation leasing, franchising and factoring agreements,and capital gains payments to nonresidents. Dividends and iquidation proceeds are taxed also where payments are made to resident individuals and nonprofit organizations. (For details on dividend payments between domestic companies, see “Intercompany dividends” above.) Dividends capitalized into shares (stock dividends) are not subject to withholding tax.
The general rate is 15%. Double taxation treaties (DTTs) may reduce the rate.
Dividends/When a dividend is paid to a nonresident company, it is subject to withholding tax at a rate of 15%, unless the rate is reduced by a double taxation treaty. No differentiation is made between portfolio and substantial holdings for purposes of this dividends tax.
Interest/A 15% rate applies to interest (including interest from bank deposits) transferred abroad, unless the rate is reduced by a double taxation treaty.
Interest on borrowings by the government or the Bulgarian National Bank from international finanCIAl institutions will not be taxable,