Bulgaria business attraction in the EU | No More Tax

No t e b o o k: Business
Cre at e d : 22/7/2016 17:10
T ag s: Bulgaria, Taxation
URL: http://www.nomoretax.eu/bulgaria-business-attraction-in-the-eu/

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Home / spotlight / Bulgaria business attraction in the EU

Bulgaria business attraction in the EU

Bulgaria business attraction in the EU
Several European countries apply an attractive corporate tax regime but tend
to neglect the personal income tax aspect. Bulgaria outcompetes other EU
member states by offering the best of both worlds and offers fabulous
opportunities for both companies and individuals. Bulgarias flat tax framework is
undoubtedly exceptional from a EU perspective.

Bulgaria is situated in South Eastern Europe and is 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.

Flat tax rates

Bulgaria applies a worldwide income tax system and residents are taxable 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 holiday, tax exemptions and special

regimes
Taken into account 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 on 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 who are liable for the companys obligations up to the amount of
their contributions to the companys registered capital. An OOD must have at least one
director and one shareholder and there are no restrictions with regard to 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 the capital is owned by a single natural or legal person is called a single
person limited liability company (EOOD). The legal requirements for the establishment of an
EOOD are similar to those of an OOD.

Joint stock company (AD)

A joint stock company (AD) is a company of which the capital is divided into shares and
which is 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 in the board of directors, one chairman, one shareholder and
there are no restrictions with regard to their nationality. The minimum registered capital
requirement is EUR 25,560 and a joint stock company is obliged to 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 which is paying the dividends is resident in a EEA member state
(EU plus Iceland, Liechtenstein and Norway). Dividends paid by a Bulgarian company to
companies and other entities resident in a EEA member state are exempt from withholding
tax, without any 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
dividends paid 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 from the first of January 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 327/month. Bulgaria has a very well developed Internet
infrastructure which 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 in a tax-efficient way:
Several EU countries offer an attractive IP holding regime but levy relatively high corporate
income 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 a EU country which doesnt 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 (the avoidance of 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 going down. 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) have to take into
account both the 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 isnt sufficient anymore. 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 the 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 a compensation for these activities. This salary
constitutes a tax deductible cost for the Bulgarian company and the receiving individual pays
10% Bulgarian personal income tax on that income in Bulgaria. Bulgaria has concluded
double tax treaties with other EU member states and hence, the country of residence will
exempt this personal income derived from Bulgarian sources (because taxes were already
paid in Bulgaria). In the case of a Belgian resident for example, this means the individual
pays a 10% flat tax on his/her Bulgarian-sourced income and avoids the annoying Belgian
progressive income tax rates of up to 50% in the highest income tax bracket. In other
words, transforming 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 on top of 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

Some individuals are willing to become a Bulgarian taxpayer by relocating to Bulgaria,

depending on their professional and personal situation. The advantage of such a relocation
is that also social security contributions become payable in Bulgaria. The advantage of
Bulgarias 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).

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