Tax Optimization Is an Art

A not-for-profit organization is a type of organization that does not earn profits for its owners. All of the money earned by or donated to a not for profit organization is used in pursuing the organization’s objectives. Typically not-for-profit organizations are charities or other types of public service organizations. They cannot distribute corporate income to shareholders.

The Law defines that not-for-profit are two types – associations and foundations, according to their device as legal persons. The Association is a union of physical or legal entities for achieving non-profit goal. The Foundation is a legal person without membership composition, performing community service or activity for private benefit. The Foundation can also support projects which are implemented abroad.

Not-for-profit organizations are subject to income tax for the taxable benefit they accumulate. Income from donations and sponsorship is not regarded as business income and cannot be subject to corporate tax.

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Investing in companies with special investment purpose (CSIP) is increasing its popularity. CSIPs are on the whole the Bulgarian equivalent of Real Estate Investment trusts. They are joint stock companies that invest funds raised by issuing securities in real estate or in receivables. The company may issue debt securities registered for trading on a regulated market and borrow bank. The CSIP may take bank loans in the amount of 20 percent of book value of assets, if the loan is for a period not exceeding 12 months. The capital of a CSIP may not be less than BGN 500 000.

The main tax advantage is the avoidance of double taxation. The tax regime of the CSIPs in Bulgaria is equivalent to that of the other countries in the European Union. CSIPs do not pay taxes on profits and shareholders pay only 5% tax on dividends received.

Although the CSIPs are established as joint-stock companies, they don`t have their typical structure. They have no employees, offices or branches and can only perform a very narrow range of activities. For everything else they have to use service companies. They cannot hold or reinvest profits – all income generated is automatically redistributed to investors in the form of dividends. This significant difference to joint-stock companies is the reason CSIPs are not taxed on profits.

Mutual funds
Mutual funds are based on a collective investment strategy. By investing into a mutual fund, individuals are actually investing with other people, that enables them to participate in a wider range of investments and to reduce their investment costs. Mutual funds are traditionally composed of stocks, bonds, and other types of securities. That`s why the value of the mutual fund market works in direct correlation with the stock market.

The two main advantages of mutual funds are that they are professionally managed and allow customers to diversify their portfolios.

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The basic principle on taxation in Bulgaria is that if an individual is resident in Bulgaria he may be required to pay taxes on his worldwide income. If he is a non-resident, he is still liable for tax on income received in Bulgaria but not for income generated abroad.

A person can be considered as resident in several countries. Whether he is a resident or not is determined for each tax year. If a person is present in Bulgaria for 183 days, he is treated as a Bulgarian resident. A person who has been resident in Bulgaria for a number of years is likely to continue to be regarded as Bulgarian resident despite temporary periods of absence from Bulgaria.

In order to eliminate the possibility two or more countries to charge tax on the same income or profit countries agree to use the special mechanism of Double Tax Conventions, which allows allocating jurisdiction between the Parties (two countries) in relation to profits and income from various types of activity. Double Tax Conventions define who is a resident person, where the place of business is and what the source of income is.

There is also specific order for taxation of foreign and local individuals on income from dividends and liquidation quotas, replacement of shares in company restructuring, additional voluntary provision of health insurance, sale and exchange of movable property.

An individual who is working full-time abroad, transfers his place of residence to a different country and his place of interests ceases to be in Bulgaria shall not be regarded as a resident.

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Heirs at law or by will are required to pay inheritance tax except from the surviving spouse and heirs in direct line. Bulgaria-domiciled individuals are subject to inheritance tax on inherited property both located in Bulgaria and abroad. A foreign domiciled person is subject to inheritance tax only on property situated in Bulgaria.

The inherited property includes:

  • – Movable property;
  • – Immovable property;
  • – Proprietary rights;
  • – Proprietary claims and liabilities.

The law also provides for property that is non-taxable.
The individuals subject to inheritance tax are obliged to file a declaration of the inherited objects within 6 months of the inheritance becoming effective.

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The pension system in Bulgaria is based on “three pillars”.

The first pillar includes mandatory state pension insurance. That is the State Social Security, which gives entitlement to retirement pension at a certain age and working experience. In order to receive such pension compulsory contributions have been made in the amounts specified in the Budget Act of the State Social Insurance.

The second pillar covers supplementary mandatory pension insurance in pension funds. There are two types of pension funds:

  • – Professional pension funds – include mandatory contribution for workers in the first and second category labor which is paid entirely by the employer;
  • – Universal pension funds – include mandatory contribution for those born after 31st December 1959 that is divided between the employer and the insured person.

The third pillar includes voluntary pension insurance in pension funds. It is not required by the law but any person older than 16 years can make contributions to it.
Supplementary pension insurance is encouraged by the government and thus the law provides for preferential tax treatment for this type of activity.

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Dividends and liquidation shares distributed by local entities for the benefit of foreign legal entities and local entities that are not traders are subject to withholding tax. The same applies for income of foreign legal entities which is from a source in Bulgaria, when it is not generated through a permanent establishment in the country. Withholding tax is not levied on income from disposal of financial instruments.

The rate of income tax on dividends and liquidation quotas is 5%. The rate of income tax on income of foreign legal entities which is from a source in the country is 10%.

Persons that have withheld and paid withholding tax and those that have accrued income are obliged to submit a tax return.

Foreign entities in their capacity as taxpayers are given the choice of recalculation and subsequent recovery of the withholding tax in Bulgaria. The amount of tax refund is the difference between the tax paid by the foreign entity for the income from source of and corporate tax rates which would be payable if the benefits are received by local entities.

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Payment of rental income is made by a business entity or a self-employed person. Taxable income from rents or from equivalent consideration for use of movable or immovable property is defined as gross income less 10 per cent “recognized expenses”. A 10 per cent tax is withheld from the decreased income.

The person who has acquired rental income or other similar contribution for use of the rights or property owes advance tax on the difference between taxable income and social and health contributions that the person is required to make on their own behalf.

The tax is paid by the 15th of the month following the quarter of acquisition of income. And no advance tax is paid on rental income acquired during the fourth quarter of the fiscal year. This tax is dealt with in the final tax bill as determined in the annual return of the individual who has received it.

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Local and foreign companies conducting business activity in Bulgaria are obliged to submit an annual tax return. It should be filed by 31st of March of the following year in the territorial directorate of the National Revenue Agency. If the firms have not reported income or expenses during the year, they are not required to file an annual tax return.

The annual tax declaration of local individuals has to include:
– Acquired income during the year;
– Income subject to license tax;
– Income from dividend and liquidation quotas;
– Income from shares in companies abroad;
– Delivered and received cash loans.

Foreign individuals are required to submit annual tax return for:
– Income received during the year;
– Income subject to patent tax.

People who have received only employment income as well as non-taxable income or income subject to final tax are not obliged to file an annual tax return.

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An important factor to determine if a person is employed or self-employed is whether the person performing the activity is a “person in the business on its own account”. The individuals who are freelancers performing registered crafting activity, all sole traders, owners or partners in commercial companies, individuals, member of unincorporated associations and registered agricultural or tobacco producers are self-employed.

Monthly tax on self-employed persons for income from labor relationship is defined as taxable income charged for the month and shall be reduced by the advance payments made through the company contributions which the self-employed is obliged to make at their own expense. The amount of tax due is calculated by multiplying the difference by the tax rate of 10%.

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Employment income tax is payable by individuals, who receive income from committing activities as a sole trader. According to law there are two cases:

1) For individuals resident and ordinarily resident in Bulgaria – tax is due on total remuneration received in and outside of Bulgaria
2) For individuals not resident in Bulgaria – tax is due on total remuneration received for duties performed in Bulgaria

To a sole trader is valid the principle of “accounting” for determining the total annual income – it is formed by the income relating to that year regardless when paid.

Income from employment is the only type of income, which is assessed not only on an annual base but also on a monthly tax base. The monthly tax base is defined as the taxable income accrued for the month is reduced by the deducted by the employer contributions required to be borne by the individual under the Social Security Code and the Health Insurance Act or any similar compulsory insurance abroad.

There are two tax rates. The monthly tax base after the reduction of its tax relief shall be multiplied by tax rate of 10 percent and for the income obtained as a seafarer – tax rate is 1 percent.
The obligation for the determination, withholding and payment of income tax on income from employment rests entirely with the employer.

The advance tax on income from employment shall be paid to the state budget on account of the territorial directorate of the National Revenue Agency as follows:

• until the 10th of the month following the month in which the tax was withheld;
• end of the month following the month in which partial payments are made.

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